Document:

Exhibit 10.13 Management Agreement

 Exhibit 10.13 

MANAGEMENT AGREEMENT 

by and among 

U.S. TIMBERLANDS KLAMATH FALLS, L.L.C., and U.S. TIMBERLANDS SERVICES COMPANY, L.L.C.

 Dated as of July 25, 2003 

  

  

  

  

  

 1

MANAGEMENT AGREEMENT

 This agreement (as the same may be amended, modified or supplemented from
  time to time, this "Agreement") is made as of July 25, 2003 (the “Effective
  Date”), by and among U.S. Timberlands Klamath Falls, L.L.C. ("USTK"), a
  Delaware limited liability company, and U.S. Timberlands Services Company, L.L.C.
  (the “Servicer”), a Delaware limited liability company. 

 RECITALS 

 WHEREAS, USTK is the owner of certain real property and timber in the
  States of Washington, Oregon and California; WHEREAS, the Servicer is
  in the business of managing timberlands and has the management and administrative
  personnel available to assist USTK in the conduct of its business; WHEREAS,
  the Servicer presently serves, for purposes of the Delaware limited liability
  company act (the “Delaware LLC Act”), as the manager of USTK pursuant
  to USTK’s Second Amended and Restated Operating Agreement, dated as of
  November 19, 1997 (the “Existing USTK Operating Agreement”); WHEREAS,
  contemporaneously with the execution of this Agreement, the Existing USTK Operating
  Agreement is being amended and restated pursuant to that certain Third Amended
  and Restated Operating Agreement of USTK, dated as of the date hereof (the “Amended
  and Restated USTK Operating Agreement”), and pursuant to the Amended and
  Restated USTK Operating Agreement, USTK will, for purposes of the Delaware LLC
  Act, be managed by a Board of Directors; WHEREAS, notwithstanding the
  fact that the Servicer will no longer act as USTK’s manager for purposes
  of the Delaware LLC Act pursuant to the USTK Operating Agreement, USTK and the
  Servicer desire that the Servicer continue to manage USTK’s timber and
  timberland assets, and to provide services to USTK, on the terms and conditions
  hereinafter set forth; WHEREAS, U.S. Timberlands Yakima, LLC, a Delaware
  limited liability company and an affiliate of USTK (“USTY”), is party
  to that certain Indenture, dated as of September 14, 2001 (as the same may be
  amended, modified or supplemented from time to time, the “Indenture”),
  by and among USTY, BNY Midwest Trust Company, an Illinois corporation, as trustee,
  and MBIA Insurance Corporation, a New York stock insurance company (the “Insurer”),
  as insurer; WHEREAS, pursuant to the Indenture, USTY issued that certain
  Series 2003-1 Note, dated February 25, 2003, in the aggregate principal amount
  of $32,000,000 (the “Series 2003-1 Note”); WHEREAS, it is a
  condition subsequent to the issuance of the Series 2003-1 Note that the parties
  hereto enter into this Agreement; and WHEREAS, it is a condition subsequent
  to the issuance of the Series 2003-1 Note that, following the consummation of
  the Privatization (as defined in the Indenture), USTK will become an indirect
  subsidiary of USTY pursuant to the Klamath Falls Transfer (as defined in the
  Indenture). 

 NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
  and agreements contained herein, and for other good and valuable consideration,
  the adequacy and receipt of which are hereby acknowledged, the parties hereto,
  intending to be legally bound, hereby agree as follows:

 2

 DEFINITIONS AND RULES OF CONSTRUCTION 

 Definitions. Unless otherwise defined herein, all capitalized
  terms shall have the following meanings: 

 “Acquisition Packages” shall have the meaning specified in
  Section 4.03. 

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

 “Annual Action Plan” shall mean a plan of activities and
  a budget prepared by the Servicer each calendar year for the operation of the
  Timberland Investment and shall include any matter reasonably requested by USTK
  including the matters set forth in Section 3.02 (c). 

 “Annual Determination Date” shall have the meaning specified
  in Section 8.02. “Annual Valuation” shall have the meaning
  specified in the Indenture. “Appraisal” shall have the meaning
  specified in the Indenture. 

 3

 “Approved Appraiser” means any of (i) Cascade Appraisal Services,
  Inc., (ii) Wesley Rickard, Inc. or (iii) any other professional third-party
  appraisal firm familiar with the timber industry and reasonably acceptable to
  USTK in consultation with the Servicer. 

 “Audit Control Party” shall have the meaning specified in
  Section 9.03. 

 “Business Day” shall mean a day on which commercial banks
  in the State of New York and Illinois are authorized to be open for business
  or are not required to be closed. 

 “Confidential Information” shall mean any information provided
  to the Servicer by or on behalf of USTK and any information provided to USTK
  by the Servicer that is identified by the provider as confidential, provided
  that such term does not include any information (i) which was already in the
  possession of the receiving party, (ii) which was obtained by the receiving
  party from a third person who, insofar as is known to the receiving party, was
  not prohibited from transmitting the information by an obligation of confidentiality
  to the provider or (iii) which is or at any time becomes publicly known (through
  no act or omission of the receiving party or any person acting on behalf of
  the receiving party). 

 “Control Party” shall have the meaning specified in the Indenture.
  “Debtor Relief Law” shall have the meaning specified in the
  Indenture. “Determined Value” shall have the meaning specified
  in Section 8.02 (b). “Disposition Package” shall have the meaning
  specified in Section 5.03. 

 “DOL” shall mean the United States Department of Labor and
  any successor department or agency. 

 “Effective Date” shall have the meaning specified in the
  prologue of this Agreement. 

 “Environmental Laws” shall mean all applicable federal, state
  or local statutes, laws, ordinances, codes, rules, regulations, judgments, permits,
  licenses, agreements, and governmental restrictions (including consent decrees
  and administrative orders) relating to public health and safety and protection
  of the environment or to emissions, discharges, releases or threatened releases
  of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances
  or wastes into the environment including, without limitation, ambient air, surface
  water, ground water, or land, or otherwise relating to the manufacture, processing,
  distribution, use, treatment, storage, disposal, transport, or handling of pollutants,
  contaminants, chemicals, or industrial, toxic or hazardous substances or wastes.

 “ERISA” shall mean the Employee Retirement Income Security
  Act of 1974, as amended from time to time.

 4

 “ERISA Affiliate” shall mean, as to any Person, any partnership,
  trade or business (whether or not incorporated) which, together with such Person,
  is treated as a single employer within the meaning of Section 414(b), (c), (m)
  or (o) of the Internal Revenue Code. 

 “Event of Default” shall have the meaning specified in the
  Indenture. 

 “Finance Corp.” shall have the meaning specified in the Indenture.

 “Fixed Operating Expenses” shall have the meaning specified
  in the Indenture. 

 “GAAP” shall mean generally accepted accounting principles
  that are (i) consistent with the principles promulgated or adopted by the Financial
  Accounting Standards Board and its predecessors, as in effect from time to time,
  and (ii) consistently applied with past financial statements of USTK adopting
  the same principles. 

 “GIS Data” shall mean the data contained in the geographical
  information system of the Servicer which relates to the Timberland Investment.

 “Governmental Authority” shall mean any country or nation,
  any political subdivision, state or municipality of such country or nation,
  and any entity exercising executive, legislative, judicial, regulatory or administrative
  functions of or pertaining to government of any country or nation or political
  subdivision thereof. 

 “Hazardous Materials” shall mean any flammable or explosive
  material, radioactive material, hazardous waste, hazardous material or toxic
  substance as the foregoing terms may be defined from time to time under the
  Comprehensive Environmental Response, Compensation and Liability Act of 1980,
  as amended, the Resource Conservation and Recovery Act, the Hazardous Materials
  Transportation Act, Model Toxic Controls Act, any regulations adopted to implement
  the foregoing acts, or any other applicable similar statute or ordinance, whether
  federal, state, local or other. 

 “Higher and Better Use” shall mean the sale of all, or portions
  of, the Timberland Investment made in accordance with Article V of this Agreement,
  if such sale is not made in the ordinary course of USTK’s business, and
  following a determination by the Servicer and an Approved Appraiser or such
  other real estate professional as may be acceptable to the Insurer that such
  portion of the Timberland Investment subject to sale is more valuable if sold
  as real estate for development than if sold or held as timber property.

 “Indebtedness” shall have the meaning specified in the Indenture.

 5

 “Indemnified Amounts” shall have the meaning specified in
  Section 19.01. 

 “Indemnified Party” shall have the meaning specified in Section
  19.01. 

 “Indenture” shall have the meaning assigned to such term
  in the Recitals of this Agreement. 

 “Initial Timberland Investment” shall mean the timberland
  investments and real property (primarily land, timber and improvements) owned
  by USTK in the States of Washington, Oregon and California on the date of execution
  of this Agreement (subject to all encumbrances of record and including, without
  limitation, the timber that is currently subject to timber sales in the ordinary
  course of USTK's business). “Investment Guidelines” shall mean
  the guidelines set forth in Exhibit A for the selection of Qualified Timberland
  Investments for potential acquisitions and the management of Timberland Investments.
  USTK may change the Investment Guidelines, but such changes shall be prospective
  only, beginning with the next calendar year, provided, however, that USTK may
  change the Investment Guidelines, upon thirty (30) days prior written notice
  to the Servicer, the Insurer and the Control Party (i) if the overall business
  circumstances of either USTK or the Timberland Investment has changed materially
  since the execution of this Agreement or (ii) upon the acquisition of a Qualified
  Timberland Investment. 

 “Investment Vehicle” shall mean an entity that is a Subsidiary
  or other Affiliate of USTK created specifically for the purpose of acquiring
  a Qualified Timberland Investment (or for holding all or a portion of the Timberland
  Investment of USTK) or is created specifically for the purpose of investing
  in another entity that directly or indirectly holds or owns timberlands that
  are believed to meet the Investment Guidelines. 

 “Klamath Holdings” shall mean UST Klamath Falls Holdings,
  LLC, a Delaware limited liability company. “Long-Term Management Plan”
  shall mean a plan concerning all actions reasonably necessary and appropriate
  to the management of the Timberland Investment, including, without limitation,
  a strategy designed to meet the Investment Guidelines over a minimum of three
  (3) years, forest inventory data, market assessments, evaluation of Higher and
  Better Use opportunities, community relations plan and an exit strategy for
  the investment. 

 “Material Adverse Effect” shall mean, with respect to any
  event or circumstance, a material adverse effect on (i) the business, properties,
  operations, management, profits, prospects, or condition (financial or otherwise)
  of USTK or the Servicer or (ii) the ability of any party hereto to perform its
  respective obligations hereunder or under any other Transaction Document to
  which it is a party; or (iii) the validity or enforceability of, or the ability
  to collect amounts payable under, any of the Transactions Documents as they
  relate to USTK or the Servicer. 

 6

 “Monthly Payment Date” shall have the meaning specified in
  the Indenture. 

 “Multiemployer Plan” shall mean a “multiemployer plan”
  as defined in Section 4001(a)(3) of ERISA to which, either U.S. Timberlands
  Company, L.P. or an ERISA Affiliate of U.S. Timberlands Company, L.P. is making,
  is obligated to make or has within the last six years made or been obligated
  to make contributions on behalf of participants who are or were employed by
  any such entity. 

 “Noteholders” shall have the meaning specified in the Indenture.

 “Notes” shall have the meaning specified in the Indenture.

 “Operating Expenses” shall mean expenses of the Servicer
  incurred in connection with the services provided to USTK which arise from those
  items identified as “Operating Expenses” on Schedule VI to the Indenture.

 “PBGC” shall mean the Pension Benefit Guaranty Corporation,
  or any other Governmental Authority succeeding to the functions thereof.

 “Person” shall mean any individual, corporation, partnership,
  joint venture, association, limited liability company, joint-stock company,
  trust, unincorporated organization, Governmental Authority or any other entity
  of similar nature. 

 “Plan” shall mean any plan, program, arrangement, agreement,
  practice or contract that provides or is intended to provide benefits or compensation
  to or on behalf of one or more employees or former employees of U.S. Timberlands
  Company, L.P. or an ERISA Affiliate of U.S. Timberlands Company, L.P., whether
  formal or informal, whether or not written, including, but not limited to, any
  employee benefit plan as defined in Section 3(3) of ERISA, any employee pension
  benefit plan and any retiree welfare plan. “Qualified Timberland Investment”
  shall mean a direct investment in commercial timberlands in the United States
  which investment meets the criteria described in the Investment Guidelines or
  is an investment by USTK in an entity that directly or indirectly owns commercial
  timberlands which timberlands meet the Investment Guidelines. 

 “Qualified Transaction” shall mean (a) the acquisition by
  USTK of a Qualified Timberland Investment, (b) the disposition by USTK of all
  or a portion of the Timberland Investment (other than sales of timber in the
  ordinary course of business) in accordance with Article V of this Agreement
  or (c) the receipt by USTK of debt or equity financing (other than from an Affiliate
  of USTK or the Servicer), including in connection with a refinancing of any
  existing indebtedness. 

 7

 “Quarterly Valuation” shall have the meaning specified in
  the Indenture. 

 “Reportable Event” shall mean any of the reportable events
  set forth in Section 4043(b) of ERISA and the regulations issued from time to
  time thereunder (other than a reportable event not subject to the provisions
  for 30-day notice to the PBGC under such regulations). 

 “Secured Parties” shall have the meaning specified in the
  Indenture. 

 “Servicer Default” shall mean the occurrence of one of the
  events defined as such in Section 20.01 hereof. 

 “Services” shall mean the services that the Servicer is authorized
  and directed to perform under this Agreement for USTK and under the Investment
  Guidelines. 

 “Servicing Fee” shall have the meaning specified in Section
  8.02.

 “Subsidiary” of a Person shall mean (a) any corporation more
  than 50% of the outstanding securities having ordinary voting power of which
  shall at the time be owned or controlled, directly or indirectly, by such Person
  or by one or more of its Subsidiaries or by such Person and one or more of its
  Subsidiaries, or (b) any partnership, association, limited liability company,
  joint venture or similar business organization more than 50% of the ownership
  interests having ordinary voting power of which shall at the time be so owned
  or controlled. 

 “Timber Laws” shall have the meaning specified in the Indenture.

 “Timber Plan Report” shall mean a report, delivered by December
  1 of each year and updated each fiscal quarter, detailing plans for the following
  12 months of operations and including all significant management activities
  to be performed in regard to the harvesting, planning, maintenance, reforestation
  and other requirements for managing the Timber Property (as defined in the Indenture)
  owned by USTK. 

 “Timber Plans” means the internal plans of USTK which relate
  to its plans for harvesting of Timber (as defined in the Indenture) during the
  year following the delivery of such plans to the Insurer pursuant to Section
  3.02(o) of the Indenture. 

 “Timberland Investment” shall mean the Initial Timberland
  Investment, less any dispositions of the same that may occur from time to time,
  together with any Qualified Timberland Investments made by or on behalf of USTK
  by the Servicer while this Agreement is in effect.

 8

 “Timberlands Entity” shall have the meaning specified in
  Section 21.03. 

 “Transaction Documents” shall have the meaning specified
  in the Indenture. 

 “Transaction Value” shall mean, with respect to a Qualified
  Transaction: (a) in the case of the acquisition of a Qualified Timberland Investment,
  the purchase price paid by USTK in such transaction, (b) in the case of the
  disposition of all or a portion of the Timberland Investment, the gross proceeds
  received by USTK in connection with such disposition and (c) in the case of
  the receipt of debt or equity financing, the gross proceeds received by USTK
  in connection with such financing (including any such proceeds used to refinance
  existing indebtedness). 

 “Trustee” shall have the meaning specified in the Indenture.

 “Unmatured Servicer Default” shall mean any event which,
  with the giving of notice or the passage of time or both, would constitute a
  Servicer Default. 

 “Yakima Holdings” shall mean UST Yakima Holdings, LLC, a
  Delaware limited liability company. 

 Rules of Construction.  

      All defined terms in this Agreement shall have
  the defined meanings when used in any certificate or other documents made or
  delivered pursuant thereto unless otherwise defined therein. 

      As used in this Agreement and in any certificate
  or other document made or delivered pursuant hereto or thereto, accounting terms
  not defined in this Agreement or in any such certificate or other document,
  and accounting terms partly defined in this Agreement or in any such certificate
  or other document to the extent not defined, shall have the respective meanings
  given to them under GAAP. To the extent that the definitions of accounting terms
  in this Agreement or in any such certificate or other document are inconsistent
  with the meanings of such terms under GAAP, the definitions contained in this
  Agreement or in any such certificate or other document shall control. 

      The words “hereof,” “herein,”
  “hereunder” and words of similar import when used in this Agreement
  shall refer to this Agreement as a whole and not to any particular provision
  of this Agreement; Section and Exhibit references contained in this Agreement
  are references to Sections and Exhibits in or to thisAgreement unless otherwise
  specified; and the term "including" shall mean "including without limitation."

     The definitions contained in this Agreement are
  applicable to the singular as well as the plural forms of such terms and to
  the masculine as well as to the feminine and neuter genders of such terms. 

      Terms used and not otherwise defined herein
  shall have the meanings given to such terms in the Indenture. 

9

 ENGAGEMENT OF THE SERVICER 

     Engagement of the Servicer. USTK hereby engages the Servicer to perform the duties enumerated hereunder and to perform such other duties or take such other actions as are specifically requested by USTK. The
Servicer hereby accepts such engagement and agrees to render the Services set forth herein pursuant to the terms and conditions set forth in this Agreement.

     Duties of the Servicer. The Servicer shall take all actions required or appropriate as it shall determine in its reasonable business judgment, including, without limitation, the following:

      The Servicer shall maintain such books and records
  of account as are customarily maintained by servicers in the business of managing
  and servicing timber properties. 

      The Servicer shall use all commercially reasonable
  efforts to cause collections to be made on all payments due to USTK and otherwise
  monitor amounts payable. USTK shall provide the Servicer with all documents,
  letters and other materials received by it in this regard. Except in the case
  of bad faith, gross negligence or willful misconduct on the part of the Servicer,
  the Servicer shall not be liable for any errors or miscalculations on its part
  in connection with amounts owed to or payable by USTK; its duties in this regard
  shall be advisory only and ultimate responsibility therefor shall remain with
  USTK. 

      The Servicer shall make remittance of any payments
  and collections received by it in connection with the Timberland Investment
  as instructed in writing by USTK. 

      Promptly after any officer, employee or representative
  of the Servicer, who would normally be aware of this Agreement in the ordinary
  course of his or her duties, shall have received knowledge of the occurrence
  of any Servicer Default or an event which, upon the passage of time, would become
  a Servicer Default, the Servicer shall give notice thereof to USTK in accordance
  with Section 22.01. 

 10

      The Servicer shall cause tax and insurance payments
  to be made promptly when due from and to the extent of funds held by the Servicer
  for such purposes. 

      The Servicer shall prepare the Annual Action
  Plan and the Long-Term Management Plan in accordance with Sections 3.02 and
  3.03, respectively. 

      The Servicer shall: (i) directly manage the
  Timberland Investments consistent with the Annual Action Plan and the Long-Term
  Management Plan and the Transaction Documents; (ii) arrange for and supervise
  all timber and log sales, road and bridge construction, road maintenance, reforestation,
  competition control, thinning (pre-commercial and commercial), insect and disease
  control efforts, fire prevention and suppression, access management, manage
  use by recreation interests, manage cattle grazing and develop alternative forest
  products sales; (iii) obtain all necessary permits and other governmental approvals
  to operate, manage, improve and/or develop the Timberland Investment; (iv) endeavor
  to obtain relief from or abatements from assessments made by governmental bodies
  with jurisdiction over the Timberland Investment, as appropriate; (v) negotiate,
  conclude and execute agreements and arrangements on behalf of USTK to operate,
  manage, improve and/or develop the Timberland Investment, including, without
  limitation, agreements or other arrangements with forestry consultants, biologists,
  geologists, watershed and other specialists, contractors, engineers, loggers,
  road contractors, architects, and other consultants; (vi) negotiate, execute
  and implement timber sale and log sale contracts, easements, leases or conservation
  agreements; (vii) use all commercially reasonable efforts to protect the Timberland
  Investment from physical loss, no matter what the cause (including, without
  limitation, forest fires, insect damage, flood damage, and other casualty);
  (viii) take such actions to avoid the Timberland Investment from being made
  subject to any non-consensual liens or to obtain releases from such liens (including,
  without limitation, liens by loggers and others providing lienable services
  with respect to the Timberlands); and (ix) take such other action as may be
  reasonable under the circumstances and, in all cases, that are fully consistent
  with the Annual Action Plan in effect at the time. 

      The Servicer shall be solely responsible to
  provide the necessary personnel, offices, supplies, support, vehicles and all
  other equipment necessary to properly discharge all of its obligations under
  this Agreement. The Servicer may utilize the services and expertise of third
  parties when necessary or advisable to properly discharge its obligations, subject
  to the requirements and obligations contained in Section 11.01. 

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      The Servicer shall endeavor to identify available
  Qualified Timberland Investments opportunities that are consistent with the
  Investment Guidelines and as further set forth in Article IV. 

      The Servicer shall diligently pursue the sale
  of Timberland Investments approved for disposition as set forth in Article V.

      The Servicer shall take all necessary actions
  to maintain USTK in good standing in all jurisdictions in which USTK does business
  and is required to qualify to do business or otherwise register, including making
  all required filings with governmental jurisdictions. 

     Prohibited Activities. Except as set forth in Section 5.01, the Servicer shall not sell, assign, mortgage, pledge, hypothecate, assign, dispose, create or suffer to exist a lien on or otherwise encumber the
Timberland Investment without the consent of USTK and unless such action is permitted by the Transaction Documents.

      Operating Expenses. Upon request, USTK
  shall transfer to the Servicer in a timely manner funds necessary to pay Operating
  Expenses, consistent with the Annual Action Plan; provided that the Servicer
  submits (on or before the next Monthly Payment Date): (a) an accounting to USTK
  which itemizes each Operating Expense and allocates Operating Expenses shared
  by USTK and the Servicer on the basis of actual use to the extent practicable
  and, to the extent such allocation is not practicable, on a basis reasonably
  related to actual use or the value of services rendered; and (b) a statement
  which identifies the amount of funds necessary or prudent to be reserved for
  scheduled capital improvements, pending acquisitions of Qualified Timberland
  Investments, working capital requirements or other expected upcoming requirements
  of the Annual Action Plan or Long-Term Management Plan. 

      Securities of USTK. USTK shall retain
  full authority to exercise or abstain from exercising any option, warrant, privilege
  or right, including without limitation voting rights, with respect to any securities
  of any entity which securities were acquired by USTK in connection with a Qualified
  Timberland Acquisition or otherwise, and nothing in this Agreement shall be
  deemed to create any rights in the Servicer with respect to such matters.

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ANNUAL ACTION PLAN AND LONG-TERM MANAGEMENT
  PLAN 

      Current Annual Action Plan. For the period
  commencing on the Effective Date and continuing through December 31, 2003, the
  Servicer shall continue to provide Services in accordance with the Annual Action
  Plan in effect for the year 2003. 

     Annual Action Plan. On or before (but
  in no circumstance more than ten (10) Business Days before) November 15, 2003,
  and each successive November 15th that this Agreement remains in effect, the
  Servicer shall submit to USTK the proposed Annual Action Plan. USTK will prepare
  and deliver to the Servicer, in a timely manner (but in no event later than
  fifteen (15) Business Days after receiving the proposed Annual Action Plan)
  any and all of its written comments which shall be incorporated into the Annual
  Action Plan. If USTK fails to comment on the proposed Annual Action Plan by
  12 p.m. EST on the fifteenth (15th) Business Day following receipt
  of the proposed Annual Action Plan, the proposed Annual Action Plan shall be
  deemed approved as submitted. Notwithstanding the foregoing, USTK's written
  approval of the Annual Action Plan shall be required if the proposed Annual
  Action Plan projects net annual cash flow to be below the projected net cash
  flow of the prior calendar year (which shall be based on actual cash flow through
  the third quarter coupled with projected cash flow through year-end) by more
  than ten percent (10%) from the amount set forth in the Annual Action Plan,
  as initially approved. 

      The Servicer shall be permitted to deviate from
  the Annual Action Plan to the extent that it deems reasonably necessary; provided
  that the Servicer shall give prior written notice to USTK, the Insurer and the
  Control Party of any material deviation. The Control Party shall have sole discretion
  to approve such material deviation, provided that if such consent is not received
  by the Servicer (following telephonic confirmation of the Control Party’s
  receipt of such notice by the Servicer) within 15 business days, such consent
  will be deemed received. 

      The Annual Action Plan shall include all significant
  management activities that are planned or that will likely be required to be
  performed during the year with respect to the Timberland Investment (including,
  without limitation, timber and log levels and strategy, road construction and
  maintenance activities, reforestation and other silvicultural activities, timber
  inventories, Higher and Better Use strategies and activities) and any other
  activities planned on behalf of USTK (including without limitation efforts to
  make additional Qualified 

 Timberland Investments on behalf of USTK). The budget included within the
  Annual Action Plan shall include a cash flow projection for the year. At USTK's
  discretion, the Annual Action Plan shall separately set forth the plan and budget
  for the Initial Timberland Investment from that of other discrete management
  blocks of the Timberland Investment. 

     Long-Term Management Plan. On or before (but in no circumstance more than ten (10) Business Days before) December 31st of each year that this Agreement is in effect, the Servicer shall submit to USTK
the Long-Term Management Plan.

 13

 ACQUISITIONS 

     Authority. Notwithstanding anything to the contrary in this Agreement, the Servicer shall not acquire Qualified Timberland Investments: (a) if such acquisition would violate, conflict with, or result in a breach
of any provision of the Indenture, and (b) without the prior written consent of USTK and in the manner chosen by USTK, including, without limitation, through an Investment Vehicle.

Procedure for Acquiring Qualified Timberland Investments.

      If and as directed to do so from time to time
  by USTK, the Servicer shall use all commercially reasonable efforts to identify
  available Qualified Timberland Investments and generate Qualified Timberland
  Investment opportunities that are consistent with the Investment Guidelines
  for consideration by USTK, which acquisition, in the view of the Servicer would
  be accretive in value to the current Timberland Investment of USTK. 

      In the event that the Servicer is able to identify
  a Qualified Timberland Investment opportunity, the Servicer shall notify USTK
  of the opportunity and make available to USTK whatever pre-bid information the
  Servicer can obtain about the Qualified Timberland Investment. Within ten (10)
  Business Days of receiving notice from the Servicer, USTK shall: (i) notify
  the Servicer in writing to prepare an Acquisition Package; (ii) notify the Servicer
  in writing to proceed with the acquisition in accordance with any conditions
  or limitations imposed by USTK (the “Acquisition Approval Letter”);
  or (iii) notify the Servicer in writing that it has no interest in pursuing
  the Qualified Timberland Investment opportunity. If USTK indicates a lack of
  interest in pursuing the Qualified Timberland Investment or fails to respond,
  the Servicer shall do nothing further with respect to the matter on USTK's behalf.

      Prior to the consummation of an approved Qualified
  Timberland Investment, the Servicer shall: (i) conduct such due diligence as
  would be exercised by a prudent institutional investor investing the funds of
  another including, without limitation, obtaining title searches, environmental
  assessments to exclude properties containing Hazardous Materials and validation
  of timber inventory data; and (ii) obtain title insurance (when applicable),
  opinions of counsel and such other documents as requested and as may be reasonable
  under the circumstances or as required by the Transaction Documents.

 14

      Acquisition Package. The term “Acquisition
  Package” means a written proposal submitted to USTK by the Servicer which
  shall include any matter reasonably requested by USTK including, without limitation,
  the nature of the transaction, the proposed structure of the acquisition, the
  property constituting the Qualified Timberland Investment (its location and
  characteristics), the identity of the seller, a pro forma management plan and
  budget (including cash flow projection and rate of return analysis), an analysis
  of the risks and opportunities of the Qualified Timberland Investment (including
  a discussion of how it will meet the Investment Guidelines) and all backup data,
  calculations and assumptions that support the proposed purchase price and all
  financial analysis and projections. In the event that the Qualified Timberland
  Investment requires a purchase of securities issued by an entity holding a direct
  or indirect interest in timberlands, the Acquisition Package shall also include
  information concerning the securities issued by the entity (e.g., placement
  materials, organizational documents and other instruments affecting the rights,
  value and transferability of the securities) and an evaluation by the Servicer
  of the experience, skill, resources (including available financial data) of
  whatever entity that will manage the timberlands in which the interest is being
  indirectly acquired by USTK. 

     Review of Acquisition Package. If the Servicer prepares an Acquisition Package in accordance with Section 4.03, USTK (within a reasonable time of receiving the Acquisition Package) shall: (a) notify the Servicer
in writing to pursue the Qualified Timberland Investment opportunity consistent with any conditions or limitations imposed by USTK; or (b) notify the Servicer in writing that it has no interest in pursuing the Qualified Timberland Investment
opportunity. If USTK indicates that it is not interested in pursuing the Qualified Timberland Investment opportunity or fails to respond, the Servicer shall do nothing further with respect to the matter on USTK's behalf.

     Consummation of Approved Acquisitions. The Servicer shall use all commercially reasonable efforts to negotiate and consummate the acquisition of Qualified Timberland Investments at the price agreed to by USTK and
on substantially the same terms and conditions as agreed to by USTK. The Servicer shall enter into, make and perform all contracts, agreements and other undertakings and to do all things necessary, advisable, incidental or convenient to the carrying
out of the foregoing; provided, that USTK is given a reasonable opportunity to review and approve each document before it is executed.

     Management of the Acquisition. Upon closing of a direct acquisition of a Qualified Timberland Acquisition, the Servicer shall manage the acquired timberland as a part of the Timberland Investment in accordance
with projections made in the Acquisition Package, and shall, within sixty (60) days after closing, amend the Annual Action Plan in effect (for the balance of the calendar year to reflect the acquisition) and deliver the same to USTK, the Insurer and
the Control Party. The Servicer need not prepare a Long-Term Management Plan for the Qualified Timberland Acquisition until the next December 31st following closing or one hundred-twenty (120) days following closing, whichever is later,
and will deliver the same to USTK, the Insurer and the Control Party.

     Funds for Closing. At a minimum of thirty (30) days prior to each closing of an acquisition of a Qualified Timberland Investment, the Servicer shall notify USTK as to the amount of funds necessary for closing.

      Oversight of Indirect Investments. To
  the extent permitted under the rights afforded the holder of the securities,
  or as otherwise obtained in acquiring the securities, the Servicer shall periodically
  review the management performance of the entity managing a Qualified Timberland
  Investment that was acquired through an acquisition of securities and advise
  USTK as to the performance of the managing entity. 

 15

 SALES AND DISPOSITIONS 

     Authority. The Servicer shall not sell or dispose of any Timberland Investments without the prior written consent of USTK and, to the extent required by the Indenture, the Control Party and the Insurer; provided,
however, that nothing contained herein shall prohibit the Servicer from selling or disposing of timber in accordance with the Annual Action Plan or in the ordinary course of business, so long as such sale or disposal is permitted by the Indenture.

Procedure for the Disposition.

      The Servicer may, from time to time, in its
  discretion, recommend the sale and disposition of all, or portions of, the Timberland
  Investment by submitting to USTK a Disposition Package. Within a reasonable
  time of receiving the Disposition Package, USTK shall notify the Servicer of
  its approval or disapproval of the disposition. If USTK fails to respond, the
  Disposition Package shall be considered disapproved. If disapproved, the Servicer
  shall continue to manage the affected portion of the Timberland Investment in
  accordance with the approved Annual Action Plan. If approved, the Servicer shall
  conduct a search for and identify a potential buyer or buyers and proceed to
  dispose of the Timberland Investment. 

      Following receipt by the Servicer of any bona
  fide offer to purchase the Timberland Investment, or any part of it, the Servicer
  shall promptly inform USTK in writing, and provide the Servicer’s preliminary
  evaluation of the risks and opportunities of the disposition in light of the
  Investment Guidelines, current and projected economic conditions and the needs
  of USTK. In addition, following receipt by the Servicer of an expression of
  interest to purchase the Timberland Investment, or any part of it, the Servicer
  shall notify USTK and, if requested by USTK, the Servicer shall preliminarily
  evaluate the risks and opportunities of the disposition in light of the Investment
  Guidelines, current and projected economic conditions and the needs of USTK.
  In either case, if USTK wishes to consider the disposition possibility more
  seriously, USTK may request that the Servicer prepare such additional analyses
  as may be necessary to fully evaluate the option. 

      Disposition Package. The term “Disposition
  Package” means a written proposal submitted to USTK by the Servicer which
  shall identify the Timberland Investment that the Servicer believes should be
  disposed of, the reasons for the disposition recommendation (including the risks
  and opportunities of the disposition), potential purchasers/bidders, assessment
  of the risks and opportunities of continuing to hold the Timberland Investment,
  expected disposition expenses, the Servicer's proposed strategy for marketing
  and effectuating the disposition, the recommended sales price (including appraisals
  or other data, calculations and assumptions supporting such recommendation)
  and any other matter reasonably requested by USTK. 

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     Consummation of the Disposition. The Servicer shall use all commercially reasonable efforts to pursue the sale of Qualified Timberland Investments approved for disposition by USTK (in accordance with the
conditions and limitations placed on the disposition by USTK), including, as applicable, but without limitation: (a) conducting a search for and identifying a potential buyer or buyers, (b) preparing and negotiating a purchase and sale agreement,
(c) preparing and negotiating such other documents, instruments and certificates for the transfer of title to the buyer as may be customary or otherwise required (including without limitation all deeds, bills of sale, assignments of leases and other
rights, affidavits of authority, and the like) and (d) coordinating the closing of such sale. The Servicer shall give USTK a reasonable opportunity to review the form of all documents effectuating the disposition in advance of their execution by the
Servicer.

     Proceeds from the Disposition. All net cash proceeds from the disposition of the Timberland Investment, or any part of it, shall be placed in the bank accounts of, and as directed by, USTK.

 INVESTMENT VEHICLE 

     Establishment of Investment Vehicle. If, from time to time, USTK determines that it wishes to acquire or otherwise invest in a Qualified Timberland Investment through an Investment Vehicle and so notifies the
Servicer, the Servicer shall cause the Investment Vehicle to be created, in the form and jurisdiction requested by USTK.

      Services to Investment Vehicle. If and
  as requested by USTK, the Servicer shall provide to the Investment Vehicle the
  same Services (or some of them, as directed by USTK) on the same basis that
  the Servicer provides the Services to USTK under this Agreement. The Investment
  Vehicle and the Servicer shall execute such documents as may be reasonably necessary
  to confirm the scope of the Services to be provided by the Servicer to the Investment
  Vehicle. The Investment Vehicle and USTK, or either of, shall have the right
  to enforce the obligations owed the Investment Vehicle under this Agreement.

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LIMITATIONS ON THE AUTHORITY OF THE SERVICER

 Limitations on Authority. 

      Nothing in this Agreement shall be deemed to
  authorize the Servicer (in its capacity as agent for USTK under this Agreement)
  to commence (either in USTK's name or its own) any action or proceeding before
  any court, administrative agency or other governmental body or to file any counter-claims,
  cross-claims or third-party claims in any such action or proceeding, without
  first obtaining USTK's written approval. USTK shall timely respond to any requests
  to do so. 

      Nothing in this Agreement shall be deemed to
  authorize the Servicer to take any action that would constitute a breach of
  any provision of USTK's operating agreement, as it may be amended from time
  to time, or to breach or otherwise compromise USTK's ability to comply with
  any of the provisions of the Transaction Documents or any other contract, agreement,
  easement, lease, license or any other binding legal commitment of which the
  Servicer is aware. 

     Power of Attorney. The Servicer shall have the authority to execute all documents necessary to manage the Timberland Investment as provided for in this Agreement, including applications for all required permits
and licenses, execution of timber and log sale contracts, timber deeds, leases, easements, licenses and similar instruments in the ordinary course of USTK's business and necessary governmental filings (including, without limitation, tax statements,
payments and filings). Upon request of the Servicer, USTK shall execute such limited forms of powers of attorney as may reasonably be needed from time to time to facilitate the Servicer's execution of the foregoing documents in furtherance of
providing the Services to USTK under this Agreement.

 FEES, COMPENSATION AND EXPENSES 

      Reimbursements.The Servicer may, but
  shall not be required to, advance the funds necessary to pay any Operating Expense,
  rather than requesting a transfer of such funds from USTK pursuant to Section
  2.04 of this Agreement. USTK shall reimburse the Servicer for all Operating
  Expenses to the extent that the Servicer has not received funds for such Operating
  Expenses pursuant to Section 2.04 of this Agreement, such reimbursement to be
  made no later than the Monthly Payment Date following the request for such reimbursement.

      Annual Management Fee. Commencing on
  the date of determination of the Determined Value of the Timberland Investment
  as of December 31st of the preceding calendar year (the “Annual
  Determination Date”) and continuing until the next Annual Determination
  Date, the Servicer's annualized management fee for the Services it renders pursuant
  to this Agreement shall be equal to two percent (2%) of the Determined Value
  of the Timberland Investment for the preceding calendar year less the Fixed
  Operating Expenses reimbursed pursuant to Section 8.01. The management fee will
  be paid in monthly installments in advance on each Monthly Payment Date, using
  the Fixed Operating Expenses reimbursed pursuant to Section 8.01 during the
  previous month for purposes of calculating the amount of such installment (such
  monthly payment being referred to as the “Servicing Fee”). For the
  period commencing on the Effective Date and continuing through the next Annual
  Determination Date, the annual management fee will be based on the value of
  the Initial Timberland Investment determined by the closing valuation ($200,000,000)
  and shall be equal to two percent (2%) of such amount, calculated on an annualized
  basis. 

 18

      The Determined Value shall be the fair market
  value of the Timberland Investment as of each December 31st as determined
  by the Approved Appraisers and set forth in the Appraisal or the Annual Valuation,
  as applicable. In the event that either the Appraisal or Annual Valuation is
  not delivered in accordance with the Indenture, an Approved Appraiser shall
  establish the fair market value of the Timberland Investment (which shall be
  the Determined Value used to compute the annual management fee under this Section
  8.02). 

      If a portion of the Timberland Investment is
  disposed of (excluding sales of timber in the ordinary course of USTK's business)
  during the year, the annual management fee shall be computed for the period:
  (i) prior to the disposition (pro-rated to the date of closing) using the Determined
  Value as of the prior December 31st (subject to whatever increases
  or decreases are appropriate to account for dispositions or acquisitions closed
  since December 31st); and (ii) for the period subsequent to the disposition
  (pro-rated to the date of closing) by reducing the Determined Value as determined
  by the fair market value of the timberland disposed of as appraised by an Approved
  Appraiser. 

      If a portion of the Timberland Investment is
  acquired during the year, the annual management fee shall be computed for the
  period: (i) prior to the acquisition (pro-rated to the acquisition closing date)
  using the Determined Value as of the preceding December 31st (subject
  to whatever increases or decreases are appropriate to account for dispositions
  and acquisitions closed since December 31st), and (ii) subsequent
  to the acquisition (pro-rated to the acquisition closing date) by adding the
  amount paid for the Qualified Timberland Investment (except where the disposition
  is for other than cash, in which event the increase attributable to the Qualified
  Timberland Investment will be based on the market value of the Qualified Timberland
  Investment as appraised by an Approved Appraiser).

      Transaction Fee.In addition to the fee
  set forth in Section 8.02 of this Agreement, USTK shall pay the Servicer, upon
  the consummation of any Qualified Transaction, a transaction fee equal to one
  percent (1%) of the Transaction Value of such Qualified Transaction. 

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 BOOKS AND RECORDS 

     Maintenance of Books and Records. The Servicer shall maintain the books and records of USTK in accordance with GAAP.

     Inspection of USTK’s Books and Records. Within two (2) Business Days of receiving notice (describing with reasonable particularity the books and records to be reviewed) from USTK, the Servicer shall make
available for review by USTK or its agents all books and records pertaining to the Timberland Investment.

     Audits. The Servicer shall at any time and from time to time during regular business hours upon reasonable prior written notice, permit, the Insurer, so long as the Insurer is the Control Party, and otherwise the
Trustee (the “Audit Control Party”), or its agents or representatives, access to:

      the Servicer’s offices and properties in
  order to inspect the records pertaining to the Timberland Investment and examine
  and make copies and abstracts of all books, correspondence and records of the
  Servicer and USTK as appropriate to verify the Servicer’s and USTK’s
  compliance with this Agreement, any other Transaction Documents to which either
  the Servicer or USTK is a party and any other agreement contemplated hereby
  or thereby, and the Audit Control Party and/or its agents and representatives
  may examine and audit the same, and make photocopies and computer tape or other
  computer replicas thereof (as appropriate), and the Servicer agrees to render
  to the Audit Control Party and/or its agents and representatives, at USTK’s
  cost and expense, such clerical and other assistance as may be reasonably requested
  with regard thereto, including without limitation, any necessary assistance
  with the Audit Control Party’s visual inspection of the Timberland Investment;
  and the Servicer’s officers or employees in order to discuss matters relating
  to the Timberland Investment or the Servicer’s or USTK’s performance
  hereunder or under any other Transaction Document to which either the Servicer,
  UST Services or USTK is a party and any other agreement contemplated hereby
  or thereby with any of the officers or employees of the Servicer and UST Services
  having knowledge of such matter.

 20

 Expenses incurred in the course of each such audit shall be at the sole expense
  of USTK; provided that so long as no Event of Default has occurred and is continuing,
  and in the reasonable judgment of the Insurer there are no material findings
  during any such audit or evaluation, the Insurer shall conduct such audits and
  evaluations no more than quarterly during the first year after the Effective
  Date, semi-annually during the second year after the Effective Date and annually
  each year thereafter. The Audit Control Party and its agents and representatives
  shall also have the right to discuss the Servicer’s and USTK’s affairs
  with the officers and employees of the Servicer, UST Services and the Servicer’s
  independent accountants (to the extent that such independent accountants have
  been or are currently retained by the Servicer) and to verify under appropriate
  procedures the validity, amount, quality, quantity, value and condition of,
  or any other matter relating to, the Timberland Investment. 

     Confidentiality. The Servicer’s obligations under Sections 9.03 shall be contingent upon the prior execution by the Insurer, the Control Party, the Trustee, the Audit Control Party or their respective agents
or representatives (as applicable) of an agreement which maintains the confidentiality of Confidential Information and which shall be substantially in the form attached hereto as Exhibit B.

     GIS Data. The Servicer hereby acknowledges and agrees that all books, records and information regarding the Timberland Investment, including, without limitation, the GIS Data which is maintained by the Servicer,
is the property of USTK. On the Effective Date and each September 14th occurring thereafter during the term of the Indenture, the Servicer shall deliver to the Insurer and the Control Party a copy of the GIS Data in readable electronic
format. USTK hereby acknowledges that the Servicer shall be entitled to retain a copy of all books, records and information regarding the provision of the Services hereunder.

 STANDARD OF CARE 

     Standard. In the performance of all of the Services, the actions of the Servicer shall be based on its best professional judgment and experience, and such actions shall be in full accordance with the provisions
of this Agreement, including without limitation, the Annual Action Plan, the Long-Term Management Plan and the Investment Guidelines (as modified from time to time). The Servicer acknowledges and represents that it possesses special expertise in
managing timberland investments and agrees to discharge all of its responsibilities under this Agreement using the care, skill, prudence and diligence that a prudent timber and timberland expert familiar with the circumstances would exercise in
dealing with the property of another. The Servicer will act with respect to this Agreement in a timely, efficient and professional manner and the Servicer will require its contractors, agents and others acting on its behalf to do the same.

     No Guarantees of Financial Results. Nothing in this Agreement (nor any information required to be generated by the Servicer under this Agreement for USTK or any other Person) shall be deemed to make the Servicer
a guarantor of the financial results of the Timberland Investment, including, without limitation, the acquisition of Qualified Timberland Investments or the disposition of all, or any portion of, the Timberland Investment.

 21

 AGENTS AND CONTRACTORS 

     Agents and Contractors. At the Servicer's discretion, the Servicer may provide some of the Services under this Agreement either directly or indirectly through Affiliates, agents, or independent contractors,
provided that: (a) the Servicer shall use the same degree of care and diligence in the selection and oversight of such third parties as would be exercised by a prudent person experienced in the business of managing and operating commercial
timberlands for another person; (b) the use of any such third party shall not relieve the Servicer from its obligations for proper performance of the Services; and (c) the terms of any such third party’s appointment shall be in writing (a copy
of which shall be maintained by the Servicer in its files), shall not obligate either USTK or its property and shall require said third party to make its books and records relating to the Timberland Investment available for inspection by USTK, the
Audit Control Party upon the same terms as the books and records are available under Article IX. The Servicer shall be responsible for directing and supervising all such third parties with the same degree of care and skill as would be used by a
prudent person experienced in the business of managing and operating commercial timberlands.

 LAWS, RULES, REGULATIONS AND ORDINANCES

     Compliance. The Servicer shall abide by all federal, state, local and other laws, rules, regulations or ordinances applicable to its actions in rendering the Services under this Agreement and shall require the
same of all third-parties that the Servicer elects to employ to assist in performing the Services.

     Acquisitions. The Servicer will not acquire a Qualified Timberland Investment for USTK: (i) that is in violation of any federal, state, local or other law, rule, regulation or ordinance relating to any
environmental condition (including, without limitation, the presence of Hazardous Material) which would have a material impact on the value of the Qualified Timberland Investment; (ii) if the Servicer is aware of a reasonable likelihood that
Hazardous Material is present thereon (unless the Servicer secures USTK's advance written waiver of this requirement); or (iii) if the Servicer is aware of a reasonable likelihood that the Qualified Timberland Investment has been used by any person
for the generation, manufacture, storage or disposal of any Hazardous Material, other than in the ordinary and lawful course of timberland management activities.

      Management. The Servicer shall use it
  best efforts to insure that Hazardous Materials are not permitted on the Timberland
  Investment, other than in the ordinary, customary and lawful course of timberland
  management activities.

 22

CONFIDENTIALITY 

      The Servicer. During the term of this
  Agreement and at all times thereafter, the Servicer shall maintain the confidentiality
  of all Confidential Information; provided that the Servicer may disclose Confidential
  Information to: (a) the Servicer’s directors, officers, employees, agents,
  attorneys and Affiliates; (b) the Servicer’s professional advisors, agents
  and subcontractors, provided that the Servicer shall simultaneously disclose
  the confidential nature thereof and request that such person hold confidential
  the Confidential Information substantially in accordance with the terms of this
  Section 13.01; (c) any federal or state regulatory authority having jurisdiction
  over the Servicer; (d) any of the Secured Parties; or (e) any other Person to
  the extent reasonably necessary to comply with any law, rule, regulation, order,
  subpoena or other legal process applicable to the Servicer or as appropriate
  in connection with any litigation to which the Servicer is a party, provided
  that the Servicer shall promptly notify USTK in writing of any such disclosure.

     USTK. During the term of this Agreement and at all times thereafter, USTK shall maintain the confidentiality of all Confidential Information; provided that USTK may disclose Confidential Information to: (a) its
directors, officers, employees, agents, attorneys and Affiliates; (b) its professional advisors, agents and subcontractors, provided that USTK shall simultaneously disclose the confidential nature thereof and request that such person hold
confidential the Confidential Information substantially in accordance with the terms of this Section 13.02; (c) any federal or state regulatory authority having jurisdiction over USTK; (d) any of the Secured Parties; or (e) any other Person to the
extent, reasonably necessary to comply with any law, rule, regulation, order, subpoena or other legal process applicable to USTK or as appropriate in connection with any litigation to which USTK is a party, provided that USTK shall promptly notify
the Servicer and/or UST Services (as applicable) in writing of any such disclosure.

 CONFLICTS OF INTEREST

     No Benefits. Other than the Servicing Fee and reimbursable fees and expenses provided for in this Agreement, neither the Servicer nor any of its Affiliates, officers or directors, employees, agents or other
representative shall directly or indirectly receive any benefit from any activity contemplated by this Agreement (except as disclosed in advance by the Servicer and approved by USTK in writing).

     Disclosure of Interests. The Servicer shall disclose to USTK any investment or economic interest of the Servicer, its Affiliates, officers, directors or employees, in any property which may be enhanced by any
action taken (or omitted) under this Agreement. In addition, the Servicer shall disclose to USTK in writing any planned investment in commercial timberlands located in the United States by the Servicer or any of its Affiliates.

     Separate Contracts. Notwithstanding anything to the contrary in Section 14.02, neither the Servicer nor any of its Affiliates shall be precluded from receiving compensation, fees or reimbursements pursuant to
separate contracts with USTK, nor shall the Servicer be prevented from hiring any Affiliate to perform Services hereunder (in lieu of hiring any unaffiliated person to perform such Services) so long as the fees and expenses of such Affiliate are
reasonably appropriate, customary and on terms similar to that which could be negotiated on an arm's-length basis, and such hiring and fees are disclosed to USTK in writing.

 23

     Services to Others. The Servicer may now or in the future maintain or manage properties and provide discretionary or non-discretionary management services for other accounts and clients. Depending upon investment
objectives, policies and guidelines, cash availability and other factors, the Servicer may render advice or take action with respect to such other accounts and clients which are similar to or differ from the advice rendered or the timing or nature
of the actions contemplated by this Agreement; and accordingly, transactions for such other accounts and clients may or may not be consistent with the transactions contemplated by this Agreement. It is understood that the Servicer, its members,
officers, directors, Affiliates, agents, representatives and employees, and any other account, client or Affiliate of the Servicer, may have, acquire, increase, decrease or dispose of positions in investments, including, without limitation, other
timberland investments, at or about the time that Servicer is acquiring or disposing of positions in the same or similar investments with respect to Qualified Timberland Investments. When opportunities occur which are consistent with the investment
objectives and guidelines of more than one account or client, it is the policy of the Servicer to not favor one account or client over another, and to allocate such investment opportunities to the particular accounts or clients involved based on
their respective investment objectives, policies and guidelines, and cash availability.

 REPORTING REQUIREMENTS

     Activity Reports. Within forty-five (45) days (or within ninety (90) days for audited reports) after the end of each of the first three quarters of each calendar year and within ninety (90) days after the end of
each calendar year, the Servicer shall furnish to USTK, the Control Party and the Insurer a report summarizing activity during such quarter or for the year then ended, including the following: (a) Timberland Investments purchased, disposed of and
managed by the Servicer during the period; (b) a list of successful and unsuccessful acquisitions or dispositions together with an explanation of all unsuccessful efforts; (c) balance sheets, cash flow, income statements; (d) budget variance
analysis; (e) a cash reconciliation; and (f) bank account balances (including status and projections of budgeted reserve) for the Timberland Investment. Each annual report shall also describe the status of all pending acquisitions and dispositions
and any changes to the Long-Term Management Plan for the Timberland Investment recommended by the Servicer.

     Auditing. Reports as provided for in Section 15.01 may be audited by independent auditors chosen by USTK. All such audits shall be at USTK's expense.

Other Reports and Information.

      The Servicer shall provide USTK with such other
  reports and information as USTK may reasonably request, including an annual
  presentation to USTK and its advisors which shall provide a review of the current
  status of the Timberland Investment (from a portfolio perspective), the perceived
  present and future investment environment, the types and amount of Qualified
  Timberland Investments to seek and the underlying rationale for the same, goals
  for discharging other management responsibilities, such as circumstances affecting
  the Timberland Investment being monitored by the Servicer, and steps during
  the upcoming year that are anticipated as necessary to further the Investment
  Guidelines. 

      The Servicer shall provide USTK with: (i) the
  Quarterly Valuation; (ii) all information necessary to facilitate USTK in the
  preparation of the Appraisal and the Annual Valuation, as applicable; (iii)
  all of the reports required to be delivered by Section 21.10 of this Agreement;
  and (iv) any other report required to be delivered by USTK under the Transaction
  Documents.

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 INSURANCE

     Insurance. The Servicer may self-insure against any and all risks, losses and liabilities relating to or arising out of this Agreement and the performance of the Services by the Servicer, including without
limitation the errors and omissions of its employees; provided, however, that the foregoing shall not prohibit the Servicer from obtaining any insurance that it deems necessary or desirable in the conduct of its business, whether related or
unrelated to this Agreement.

     Notwithstanding the foregoing, the Servicer shall at its own expense, at all times during the performance of the Services hereunder, carry, maintain and provide USTK, the Trustee and the Insurer upon request with
appropriate evidence of any and all workers’ compensation, state disability, and occupational disease insurance required by applicable law of the state(s) in which the Services are to be performed. USTK shall not be responsible or liable to the
Servicer or any of the Servicer’s employees, agents, contractors and other representatives, including the Servicer’s insurance carrier(s), for any workers’ compensation, state disability or occupational disease coverage or benefits
provided or to be provided to any of the Servicer’s employees, agents, contractors and other representatives. The Servicer hereby waives any and all claims and any other rights that it, its agents (including insurance carriers) or any of the
Servicer’s employees, agents, contractors and other representatives have or may have against USTK for any workers’ compensation, state disability and occupational disease coverage or benefits, or any sums paid or to be paid by the Servicer
relating to any claims by any of the Servicer’s employees, agents, contractors and other representatives against USTK.

      Third Parties to Provide Insurance. The
  Servicer shall require those entering into contracts, leases, or easements with
  respect to the Timberland Investment to maintain insurance covering the timberlands
  affected by their contract, lease or easement and covering any and all risks,
  losses and liabilities relating to or arising out of the operations of such
  persons on the Timberland Investments of the types and with policy limits that
  are reasonable and customarily required by managers and operators of timberlands
  or public forest product companies with investments in timberland comparable
  or larger in size to the Timberland Investment hereunder, and to name USTK or
  Investment Vehicle, as appropriate, as an additional insured under such policies.

 25

      No Other Casualty Insurance. Other than
  the insurance coverage identified in Sections 16.01 and 16.02 of this Agreement,
  consistent with industry practice, the Servicer will not maintain general insurance
  against fire or other similar casualty damage to standing timber that constitutes
  a portion of the Timberland Investment. The Servicer shall obtain such other
  property damage, or hazard insurance, general and excess liability coverage,
  and other insurance as may be deemed necessary or desirable in the reasonable
  judgment of the Servicer to protect the interest of USTK (or Investment Vehicle)
  in the Timberland Investment and to protect USTK (and the Investment Vehicle)
  against liability arising out of ownership of the Timberland Investment, which
  insurance shall be reasonable and customary among managers and operators of
  timberlands or public forest product companies with investments in timberland
  comparable or larger in size to the Timberland Investment. Where USTK (or an
  Investment Vehicle) is the sole owner of the timberland comprising the Timberland
  Investment, any such insurance policy shall name USTK (or the Investment Vehicle,
  if appropriate) and, during the term of the Indenture, the Trustee as additional
  insureds, and any such property damage policy shall name USTK (or, if appropriate,
  the Investment Vehicle) and, during the term of the Indenture, the Trustee as
  loss payees. The Servicer shall, or cause others to, provide the Investment
  Vehicle with certificates of such insurance at least annually. 

 REPRESENTATIONS AND WARRANTIES OF THE SERVICER

 The Servicer hereby represents, warrants and covenants to USTK as follows:

      Experience. The Servicer has the requisite
  and appropriate skill, expertise and personnel necessary to perform the Services
  in the manner and with the care and skill contemplated by this Agreement. 

      Due Organization and Good Standing. The
  Servicer is duly organized, validly existing and in good standing under the
  laws of the State of Delaware, and has full power, authority and legal right
  to own its properties and conduct its business as such properties are presently
  owned and such business is presently conducted, and to execute, deliver and
  perform its obligations under this Agreement. The Servicer is duly qualified
  to do business and is in good standing as a foreign limited liability company,
  and has obtained all necessary licenses and approvals in each jurisdiction in
  which the nature of its activities requires such qualification or licensing.

      Due Authorization and No Conflict. The
  execution, delivery and performance by the Servicer this Agreement have in all
  cases been duly authorized by the Servicer by all necessary company action,
  and do not contravene with (a) the Servicer’s organizational documents,
  (b) any law, rule or regulation applicable to the Servicer, (c) any contractual
  restriction contained in any indenture, loan or credit agreement, lease, mortgage,
  deed of trust, security agreement, bond, note, or other agreement or instrument
  binding on or affecting either the Servicer or its property or (d) any order,
  writ, judgment, award, injunction or decree binding on or affecting either the
  Servicer or its property, and do not result in or require the creation of any
  lien upon or with respect to any of their respective properties. 

      Governmental and Other Consents. All
  approvals, authorizations, permits, consents, orders or other actions of, and
  all registration, qualification, designation, declaration, notice to or filing
  with, any Person or of any governmental body or official required in connection
  with (a) the execution and delivery of this Agreement, (b) the performance of
  and the compliance with the terms hereof and (c) the operation of the Timberland
  Investment or the harvesting of timber as and to the extent contemplated in
  the Timber Plans, have been obtained and are in full force and effect. 

 26

      Enforceability. This Agreement has been
  duly and validly executed and delivered by the Servicer and constitutes the
  legal, valid and binding obligation of the Servicer, enforceable against the
  Servicer in accordance with its terms, except as enforceability may be subject
  to or limited by Debtor Relief Law or by general principles of equity (whether
  considered in a suit at law or in equity).

     No Litigation. Except as set forth in Exhibit C, there are no proceedings or investigations pending or, to the best of the Servicer’s knowledge, threatened against the Servicer before any court, regulatory
body, administrative agency, or other tribunal or governmental instrumentality.

      Accuracy of Information.All certificates,
  reports, financial statements and similar writings furnished by the Servicer
  hereunder or on behalf of USTK under the Transaction Documents to USTK, the
  Noteholders, the Trustee, or the Insurer at any time pursuant to any requirement
  of, or in response to any request of any such party under this Agreement or
  any other Transaction Document or any transaction contemplated hereby or thereby,
  have been, and all such certificates, reports, financial statement and similar
  writings hereafter furnished by the Servicer to such parties will be, true and
  accurate in every respect material to the transactions contemplated hereby on
  the date as of which any such certificate, report, financial statement or similar
  writing was or will be delivered, and shall not at the time the same are so
  furnished, be otherwise misleading in light of the circumstances under which
  such information was furnished (except that all certificates, reports, financial
  statements and similar writings prepared by a party other than the Servicer
  (or an Affiliate) are true and accurate only to the extent of the Servicer’s
  knowledge). 

     Subsidiaries. The Servicer owns all of the membership interests of U.S. Timberlands Services Yakima, LLC, a Delaware limited liability company (the “Servicer Sub”). Except for the Servicer Sub, the
Servicer has no Subsidiaries and does not own or hold, directly or indirectly, any capital stock or equity security of, or any equity interest in, any Person.

     No Default Under Other Agreements. No event of default has occurred and is continuing with respect to any note, indenture, loan agreement, mortgage, lease, deed or other agreement to which the Servicer is a party
or by which it or its property is bound, except for any default that could not reasonably be expected to have a Material Adverse Effect. The Servicer is in full compliance with this Agreement and no Servicer Default or event permitting the
termination of this Agreement by any party hereto has occurred.

      Ownership. U.S. Timberlands Holdings
  Group, LLC directly owns (both beneficially and of record) at least 75% of the
  outstanding membership interests of the Servicer. Such membership interests
  are validly issued, fully paid and nonassesable and there are no options, warrants
  or other rights to acquire interests in the Servicer. 

 27

     Taxes. The Servicer has filed or caused to be filed all federal, state and local tax returns which are required to be filed by it, and has paid or caused to be paid all taxes shown to be due and payable on such
returns or on any assessments received by it, other than any taxes or assessments the validity of which are being contested in good faith by appropriate proceedings and with respect to which the Servicer has set aside adequate reserves on its books
in accordance with GAAP and which proceedings have not given rise to any lien. There are no claims for taxes being asserted against the Servicer.

     Compliance with Law. The Servicer is in compliance with all applicable laws, ordinances, orders, rules and regulations of any Governmental Authority having relevant jurisdiction, including, without limitation,
all Timber Laws, except for any noncompliance that could not reasonably be expected to have a Material Adverse Effect.

      ERISA.Neither the Servicer nor any of
  its ERISA affiliates currently maintains or contributes to, or has at any time
  maintained or contributed to, a Benefit Plan or a Multiemployer Plan.

     Insurance. The Servicer maintains, or there is maintained on behalf of the Servicer, insurance as is reasonably customary and advisable for companies in its business.

 SECTION 17.15

     No Material Adverse Change. There has
  been no material adverse change in the financial condition, operations and/or
  business of the Servicer, nor any other event or circumstance that has had a
  Material Adverse Effect with respect to the Servicer, since December 31, 2001.

 REPRESENTATIONS AND WARRANTIES OF USTK

 USTK hereby represents, warrants and covenants to the Servicer as follows:

     Due Organization and Good Standing. USTK is duly organized, validly existing and in good standing under the laws of the State of Delaware, and has full power, authority and legal right to own its properties and
conduct its business as such properties are presently owned and such business is presently conducted, and to execute, deliver and perform its obligations under this Agreement. USTK is duly qualified to do business and is in good standing as a
foreign limited liability company, and has obtained all necessary licenses and approvals in each jurisdiction in which the nature of its activities requires such qualification or licensing.

      Due Authorization and No Conflict. The
  execution, delivery and performance by USTK of this Agreement have in all cases
  been duly authorized by USTK by all necessary company action, and do not contravene
  (a) USTK’s organizational documents, (b) any law, rule or regulation applicable
  to USTK, (c) any contractual restriction contained in any indenture, loan or
  credit agreement, lease, mortgage, deed of trust, security agreement, bond,
  note, or other agreement or instrument binding on or affecting USTK or its property
  or (d) any order, writ, judgement, award, injunction or decree binding on or
  affecting USTK or its property, and do not result in or require the creation
  of any lien upon or with respect to any of its properties. 

 28

     Governmental and Other Consents. All approvals, authorizations, permits, consents, orders or other actions of, and all registration, qualification, designation, declaration, notice to or filing with, any person
or of any governmental body or official required in connection with (a) the execution and delivery of this Agreement, (b) the performance of and the compliance with the terms hereof and (c) the operation of the Timberland Investment, have been
obtained and are in full force and effect.

     Enforceability. This Agreement has been duly and validly executed and delivered by USTK and constitutes the legal, valid and binding obligation of USTK, enforceable against USTK in accordance with its terms,
except as enforceability may be subject to or limited by Debtor Relief Law or by general principles of equity (whether considered in a suit at law or in equity).

     No Litigation. There are no proceedings or investigations pending or, to the best of USTK’s knowledge, threatened against USTK before any court, regulatory body, administrative agency, or other tribunal or
governmental instrumentality, except for proceedings or investigations that could not reasonably be expected to have a Material Adverse Effect.

     No Default Under Other Agreements. No event of default has occurred and is continuing with respect to any note, indenture, loan agreement, mortgage, lease, deed or other agreement to which USTK is a party or by
which it or its property is bound, except for any default that could not reasonably be expected to have a Material Adverse Effect.

     Taxes. USTK has filed or caused to be filed all federal, state and local tax returns which are required to be filed by it, and has paid or caused to be paid all taxes shown to be due and payable on such returns
or on any assessments received by it, other than any taxes or assessments the validity of which are being contested in good faith by appropriate proceedings and with respect to which USTK has set aside adequate reserves on its books in accordance
with GAAP and which proceedings have not given rise to any lien. There are no claims for taxes being asserted against USTK.

     Compliance with Law. USTK is in compliance with all applicable laws, ordinances, orders, rules and regulations of any Governmental Authority having relevant jurisdiction, including, without limitation, all Timber
Laws, except for any noncompliance that could not reasonably be expected to have a Material Adverse Effect.

     ERISA. None of USTK or its ERISA Affiliates currently maintains or contributes to, or has at any time maintained or contributed to, a Benefit Plan or a Multiemployer Plan.

     Insurance. USTK maintains insurance as is reasonably customary and advisable for companies in its business.

 29

 INDEMNIFICATION

     Indemnification of USTK. The Servicer shall defend, indemnify and hold harmless USTK, its assigns, any Investment Vehicle, and their employees, officers and directors, agents, contractors and other
representatives from any and all claims, obligations, penalties, liability, loss, damages, costs, fees and expenses (including without limitation attorneys and expert fees (testifying and non-testifying)), actions, suits, judgments and injuries
arising out of or resulting from: (a) any acts or omissions of the Servicer that (i) are a breach by the Servicer of any obligation under this Agreement or (ii) that are grossly negligent or a willful act or omission of the Servicer, its employees,
officers and directors, agents, contractors or other representatives; (b) reliance on any representation or warranty or statement made by the Servicer in connection with this Agreement or any Transaction Document that shall have been incorrect in
any material respect when made; (c) any investigation, litigation or proceeding related to this Agreement which is commenced by a third party; and (d) the use, possession, ownership or operation by the Servicer or any of its Affiliates of any of the
Collateral that constitutes real property or any environmental liability allegedly arising out of or in connection with such real property. The provisions of this Section 19.01 shall survive the termination of this Agreement.

     Indemnification of the Servicer. USTK shall defend, indemnify and hold harmless the Servicer, its employees, officers and directors, agents, contractors and other representatives from any and all liability, loss,
damages, costs, fees and expenses (including without limitation attorneys and expert fees (testifying and non-testifying)) arising out of or resulting from the failure of USTK to fund the acquisition of a Qualified Timberland Investment when
required to do so under Article 4 of this Agreement, or from USTK's failure to take some other action required of it under this Agreement.

 Further Indemnification.Without limiting the foregoing in any way,
  the Servicer shall defend, indemnify and hold harmless the Indemnified Parties
  from: 

      any and all federal, state, local, or other
  tax or tax-related liability (including without limitation, liability for back
  withholding, penalties, interest, and attorneys’ fees) incurred by any
  of them attributable to or relating in any way to any compensation or other
  amounts paid or not paid to any of the Servicer’s employees, agents, contractors
  and other representatives in consideration of their services pursuant to this
  Agreement or otherwise; and 

      any and all liability, loss, damages, settlements,
  costs, fees and expenses (including without limitation attorneys and expert
  fees (testifying and non-testifying)) arising out of or resulting from any claim(s)
  or demand(s) by or on behalf of any of the Servicer’s employees, agents,
  contractors or other representatives against any or all of the Indemnified Parties:
  (i) seeking compensation or employee or other benefits of any kind from any
  of the Indemnified Parties; (ii) based on an alleged relationship with any of
  the Indemnified Parties of master and servant or employer and employee, including
  without limitation claims under any federal, state, local, or other employment,
  equal employment opportunity, wage and hour or labor law, regulation, common
  law theory or other source of law; or (iii) alleging misrepresentation, breach
  of warranty or agreement, negligence, recklessness, intentional wrongdoing,
  strict liability, injury or death to person(s) or loss of or damage to property
  arising out of or related to any act or omission of the Servicer or any of its
  employees, agents, contractors or other representatives, including without limitation
  any such act or omission that is a breach by the Servicer of any obligation
  under this Agreement. 

 30

 EVENTS OF DEFAULT

     Events of Default. The occurrence of any of the following events shall constitute a “Servicer Default” hereunder:

      Any failure by the Servicer to make any payment,
  transfer or deposit required to be made hereunder on or before the date such
  payment, transfer or deposit is required to be made and such failure continues
  unremedied for a period of three (3) Business Days after written notice thereof
  to the Servicer. 

      Any failure on the part of the Servicer to observe
  or perform any required covenant or agreement relating to the Services or otherwise
  required to be performed hereunder (other than the covenant described in Section
  20.01(a), above), provided that such failure continues unremedied for a period
  of fifteen (15) days after written notice thereof to the Servicer. 

      Any representation or warranty made by the Servicer
  under this Agreement or other information or report delivered pursuant hereto
  shall prove to have been false or incorrect in any material respect when made.

      A decree or order of a court or agency or supervisory
  authority having jurisdiction in the premises in an involuntary case under any
  present or future Debtor Relief Law or the appointment of a conservator or receiver
  or liquidator or other similar official in any insolvency, readjustment of debt,
  marshaling of assets and liabilities or similar proceedings, or for the winding-up
  or liquidation of its affairs, shall have been entered against the Servicer
  and such decree or order shall have remained in full force undischarged or unstayed
  for a period of sixty (60) consecutive days. 

 31

      The Servicer shall consent to the appointment
  of a conservator or receiver or liquidator or other similar official in any
  insolvency, readjustment of debt, marshaling of assets and liabilities or similar
  proceedings of or relating to the Servicer or UST Services or of or relating
  to all or substantially all of the Servicer’s property. 

      The Servicer shall admit in writing its inability
  to pay its debts generally as they become due, file a petition to take advantage
  of or otherwise voluntarily commence a case or proceeding under any applicable
  Debtor Relief Law, make an assignment for the benefit of its creditors or voluntarily
  suspend payment of its obligations. 

      A final judgment or judgments shall be rendered
  against the Servicer for the payment of money in excess of $750,000 in the aggregate,
  other than that portion of the final judgment covered by insurance, and such
  judgments shall not be discharged or execution thereon stayed pending appeal
  or review within thirty (30) days after entry of judgment, or, in the event
  of such stay, such judgment shall not be discharged within ten days after such
  stay expires.

      The Servicer shall fail to pay any principal
  of or interest on any Indebtedness having a principal amount of $50,000 or greater
  when the same becomes due and payable (whether by scheduled maturity, required
  prepayment, acceleration, demand or otherwise) and such failure shall continue
  after the applicable grace period, if any, specified in the agreement or instrument
  relating to such Indebtedness; or any other default under any agreement or instrument
  relating to any such Indebtedness or any other event, shall occur and shall
  continue after the applicable grace period, if any, specified in such agreement
  or instrument if the effect of such default or event is to accelerate, or to
  permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness
  shall be declared to be due and payable or required to be prepaid (other than
  by a regularly scheduled required prepayment) prior to the stated maturity thereof.

      The Servicer shall cease to be able to discharge
  its duties under this Agreement, or shall experience a material adverse change
  in its business, assets, liabilities, operations, or financial condition or
  cease to conduct its business in the ordinary course. 

      The failure to comply with the Annual Action Plan
  as it relates to the harvesting of timber in any material respect. 

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      John M. Rudey, U.S. Timberlands Holdings Group,
  LLC and/or entities controlled by John M. Rudey shall cease to own at least
  75% of the issued and outstanding membership interests of the Servicer. 

      The failure of the Servicer to maintain positive
  cash flow during any two (2) consecutive fiscal quarters. 

 ADDITIONAL COVENANTS

     Notice to the Trustee. As long as the Indenture is in effect, the Servicer shall deliver to the Control Party, the Insurer and the Trustee duplicate original copies of all notices, statements, communications and
instruments delivered or required to be delivered to USTK pursuant to this Agreement.

     Amendments, Modifications and Termination. As long as the Indenture is in effect, the Servicer shall not enter into any agreement amending, modifying or terminating this Agreement, without the prior written
consent, which shall not be unreasonably withheld or delayed, of the Control Party, the Insurer and the Trustee and any such amendment, modification, termination, selection or consent without such consent by the Control Party, the Insurer and the
Trustee shall be void.

     Corporate Separateness. The Servicer acknowledges that the Noteholders and the Insurer are entering into the transactions contemplated by the Transaction Documents in reliance upon USTK’s identity as a legal
entity that is separate from the Servicer, U.S. Timberlands Company, L.P. and any Affiliates thereof, other than Klamath Holdings and Finance Corp. (each a “Timberlands Entity”). Therefore, from and after the date of execution and delivery
of this Agreement, the Servicer will take all reasonable steps including, without limitation, all steps that USTK or the Insurer may from time to time reasonably request to maintain USTK’s identity as a separate legal entity and to make it
manifest to third parties that USTK is an entity with assets and liabilities distinct from those of any Timberlands Entity and not just a division of a Timberlands Entity. Without limiting the generality of the foregoing and in addition to the other
covenants set forth herein, the Servicer (i) will not hold itself out to third parties as liable for the debts of USTK nor purport to own the Timberland Investment and other assets acquired by USTK and (ii) will take all other actions necessary on
its part to ensure that USTK is at all time in compliance with the covenants set forth in Section 3.02 (i) of the Indenture.

     Compliance with Laws, Etc. The Servicer will comply with all applicable laws, rules, regulations and orders with respect to it, its business and properties, including, without limitation, all Timber Laws, ERISA,
the Internal Revenue Code and all Environmental Laws, and all Transaction Documents to which it is a party, except for such noncompliance which would not have a Material Adverse Effect.

      Preservation of Legal Existence. The
  Servicer will preserve and maintain its legal existence, rights, franchises
  and privileges in the jurisdiction of its organization, and qualify and remain
  qualified in good standing as a foreign organization, and maintain all necessary
  licenses and approvals, in each jurisdiction where it is necessary to maintain
  such existence, rights, franchises, privileges, qualifications, licenses and
  approvals in order to operate its business. 

 33

 	SECTION 21.06 [Reserved.]

     Keeping of Records and Books of Account. The Servicer will maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing the Timberland
Investment in the event of the destruction or loss of the originals thereof) and keep and maintain, all documents, books, records and other information reasonably necessary or advisable for the operation of the Timberland Investment.

[Reserved]

     Taxes. The Servicer will file or cause to be filed, and cause each of its Affiliates with whom it shares consolidated tax liability to file, all federal, state and local tax returns which are required to be filed
by it. The Servicer will pay or cause to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, other than any taxes or assessments, the validity of which are being contested in good faith by appropriate
proceedings and with respect to which the Servicer or the applicable Affiliate shall have set aside adequate reserves on its books in accordance with GAAP.

[Reserved].

     Reporting Requirements. As long as the Indenture is in effect, the Servicer will maintain a system of accounting in accordance with sound accounting practice and will furnish promptly to the Insurer, each
Noteholder and the Trustee and their duly authorized representatives such information respecting the business and financial condition of the Servicer as may be reasonably requested and, without any request, will furnish the Control Party, the
Insurer and the Trustee:

      as soon as available, and in any event within
  45 days after the close of each calendar quarter, (i) an unaudited summarized
  income statement of the Servicer for such quarterly period and the year to date,
  and for the corresponding periods of the preceding year, in reasonable detail,
  prepared by the Servicer and certified by the chief financial officer of the
  Servicer and (ii) a Timber Plan Report; 

      as soon as available, and in any event within
  45 days after the close of each calendar quarter, a certificate signed by the
  managing member, the chairman, president or chief financial officer of the Servicer
  containing computations proving compliance with Section 20.01(j) and (k) of
  this Agreement and stating that no Unmatured Servicer Default or Servicer Default
  exists hereunder as of the date of such certificate, or if such an Unmatured
  Servicer Default or Servicer Default exists, the nature thereof shall be specified;

      promptly after knowledge thereof shall have
  come to the attention of the Servicer, written notice of any threatened or pending
  litigation, governmental proceeding or labor dispute which could reasonably
  be expected to result in a Material Adverse Effect;

     promptly after the occurrence thereof, notice
  of any Unmatured Event of Default, Event of Default, Unmatured Servicer Default
  or Servicer Default. 

 34

     Change in Business. The Servicer will not make any change in the character of its business.

     ERISA Matters. The Servicer will not (a) engage or permit any ERISA Affiliate to engage in any prohibited transaction for which exemption is not available or has not previously been obtained from the DOL; (b)
permit to exist any accumulated funding deficiency, as defined in Section 302(a) of ERISA and Section 412 (a) of the Internal Revenue Code, or funding deficiency with respect to any Benefit Plan other than a Multiemployer Plan; (c) fail to make any
payments to any Multiemployer Plan that the Servicer or any ERISA Affiliate may be required to make under the agreement relating to such Multiemployer Plan or any law pertaining thereto; (d) terminate any Benefit Plan so as to result in any
liability; or (e) permit to exist any occurrence of any Reportable Event described in Title IV of ERISA which represents a material risk of liability of the Servicer or any ERISA Affiliate under ERISA or the Internal Revenue Code.

 NOTICE

     Notice. Any notice to be given under this Agreement may be given either personally or by mail, facsimile or overnight courier. If mailed, notice shall be deemed to be effective three (3) days after deposited in
registered or certified mail with postage thereon prepaid addressed when mailed to:

USTK at:

U.S. Timberlands Klamath Falls, L.L.C. P.O. Box 10 6400 Hwy 66 Klamath Falls, OR 97601 Facsimile number: (541) 880-5472

The Servicer at:

U.S. Timberlands Services Company, L.L.C. 625 Madison Avenue Suite 10-B New York, NY 10022 Facsimile number (212) 758-4009

The Insurer at:

MBIA Insurance Corporation 113 King Street Armonk, New York 10504

 Attention: Insured Portfolio Management, Structured Finance

Facsimile number: (914) 765-3810 

 The Trustee at: 

 BNY Midwest Trust Company 2 North LaSalle Street, Suite 1020 Chicago, IL 60602
  Attention: Structured Finance Group, 

 If given in any other manner, such notice shall be deemed to be effective
  (a) when given personally, (b) when given by facsimile (if followed by a copy
  delivered by registered or certified mail) or (c) one (1) day after given to
  a recognized national overnight courier to be delivered.

 35

 TERM AND TERMINATION

     Term. This Agreement will begin on the Effective Date and will continue in effect for a term of thirty (30) days, which term shall be automatically renewed for successive thirty (30) day terms unless USTK
delivers written notice to the Servicer at least ten (10) days prior to the end of a term that such term will not be renewed or unless otherwise terminated in accordance with Sections 23.02 and 23.03 below or terminated by USTK upon ten (10) days
prior written notice to the Servicer.

     Termination by Servicer. The Servicer may resign as servicer and terminate this Agreement at any time and from time to time by delivering ninety (90) days prior written notice to USTK and during the term of the
Indenture, the Insurer the Trustee and each Noteholder. The resignation of the Servicer shall not become effective until a successor servicer shall have been engaged.

     Termination of Servicer. Each of USTK and the Insurer shall have the right to terminate this Agreement, on five (5) Business Days prior written notice, upon the occurrence of, and during the continuance of,
either a Servicer Default or an Event of Default under the Indenture; provided that USTK may not terminate this Agreement without obtaining the consents required to be obtained by it in accordance with the Transaction Documents.

      Duties through Termination. Upon receiving
  (or giving) notice of termination, the Servicer shall continue to manage the
  Timberland Investment in accordance with this Agreement until the effective
  date of the termination; except if USTK terminates this Agreement and wishes
  to assume responsibility itself for all the Services performed by the Servicer
  under this Agreement (in which case the pro-rated fees owed the Servicer for
  partial years under Section 8.02 shall still be determined using the tenth day
  following receipt of notice). In any case, between the time of notice of termination
  and the effective date of the termination, the Servicer shall meet with USTK
  and its designee in order to plan a smooth transition of the Services from the
  Servicer to USTK or a new servicer. 

 36

      On the date of termination, the Servicer shall
  provide USTK with access to all books, records, the GIS Data in readable electronic
  format and other documents pertaining to the Timberland Investment and all other
  information necessary to perform the Services. By the thirtieth Business Day
  following termination, the Servicer shall deliver all books, records and other
  documents relating to the Timberland Investment to USTK or its designee, along
  with a full accounting to USTK covering the period between the date of the last
  report provided to USTK and the effective date of the termination. 

 Rights and Obligations after Termination. Notwithstanding termination
  of this Agreement, the obligations under Articles XIII, XVII, XVIII and XIX
  shall survive and continue with respect to the Timberland Investment and to
  any pending acquisitions or dispositions of Qualified Timberland Investments
  by USTK or an Investment Vehicle. After the effective termination date, the
  Servicer shall continue to cooperate with USTK to facilitate the smooth transition
  of the management of the Timberland Investment to USTK or another servicer or
  advisor, including without limitation attending such post-termination meetings
  as USTK may reasonably request. 

 MISCELLANEOUS

     Section Headings. The section headings in this Agreement are for convenience only and shall not be deemed to alter any provision of this Agreement.

     Governing Law and Venue. This Agreement, including all rights and obligations of the parties hereto shall be governed by the laws of the State of Oregon (without regard to any conflicts of law provisions). Each
party agrees and irrevocably consents to the non-exclusive jurisdiction of the state and federal courts located in the state of Oregon. Each party hereby waives and agrees not to assert in any proceeding brought against it relating to this Agreement
that it is not personally subject to the jurisdiction of any such court, that it is immune from any legal process, that the forum is inconvenient, or that this Agreement may not be enforced by any such court.

     Entire Agreement. This Agreement contains a final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof, superseding all prior oral or written
understandings, including, without limitation, the Management Agreement.

     Counterparts. This Agreement may be executed in any number of separate counterparts by the parties hereto, and each counterpart when so executed shall be deemed to be an original and all such counterparts taken
together shall constitute one and the same agreement.

     Severability. Should one or more provisions of this Agreement be held to be unenforceable, the remaining provisions shall remain in full force and effect.

 37

     Independent Contractor. In the performance of this Agreement, the Servicer and its employees, agents, contractors and other representatives shall be considered for all purposes acting as independent contractors
and not as an agent, employee, partner or joint venturer with USTK.

      The Servicer acknowledges and agrees that it
  is and will remain solely responsible for paying the wages of, providing benefits
  (if any) to, or otherwise compensating any and all of the Servicer’s employees,
  agents, contractors and other representatives for any and all services that
  they may provide pursuant to this Agreement. USTK shall under no circumstances
  have any obligation to pay or provide any wages, fee, employee benefit or other
  compensation of benefit of any kind to any Servicer’s employees, agents,
  contractors or other representatives, regardless of whether or not any such
  personnel are in fact compensated by Servicer. 

      Without limiting the foregoing in any way, the
  Servicer shall be solely responsible for: (i) the payment of any and all applicable
  federal, state, local, and other taxes relating to any compensation or other
  amounts paid by Servicer to any of its employees, agents, contractors and other
  representatives, (ii) the costs of any and all workers’ compensation and
  occupational disease insurance and benefits applicable to any of Servicer’s
  employees, agents, contractors and other representatives, and (iii) the costs
  of any and all state disability coverage and benefits for any of Servicer’s
  employees, agents, contractors and other representatives. 

     Assignability. The Servicer may not assign any of its rights or delegate any of its obligations hereunder or transfer any interest herein without the prior written consent of USTK and, so long as the Indenture is
in effect, the Control Party and the Insurer. USTK may assign at any time its rights and obligations hereunder and interests herein to any other Person without the consent of, but upon ten (10) days prior notice to, the Servicer. Without limiting
the foregoing, the Servicer acknowledges that USTK, pursuant to the Indenture, shall assign to the Trustee, for the benefit of the Secured Parties all of its rights, remedies, power and privileges hereunder. The Servicer agrees that the Trustee, as
the assignee of USTK, shall, subject to the terms of the Indenture, have the right to enforce this Agreement and to exercise directly all of USTK’s rights and remedies under this Agreement (including, without limitation, the right to give or
withhold any consents or approvals of USTK to be given or withheld hereunder) and the Servicer agrees to cooperate fully with the Trustee and the Secured Parties in the exercise of such rights and remedies.

      No Petition. Notwithstanding any prior
  termination of this Agreement, the Servicer shall not, prior to the date which
  is one year and one day after the termination of the Indenture acquiesce, petition
  or otherwise invoke or cause any other Person to invoke the process of any Governmental
  Authority for the purpose of commencing or sustaining a case against USTK under
  any federal or state bankruptcy, insolvency or similar law or appointing a receiver,
  liquidator, assignee, trustee, custodian, sequestrator or other similar official
  of USTK or any substantial part of its property or ordering the winding-up or
  liquidation of the affairs of USTK. The provisions of this Section 24.08 shall
  survive the termination of this Agreement. 

 38

 	IN WITNESS WHEREOF, USTK and the Servicer have caused this Agreement to be executed, all as of the day and year first above written.

 U.S. TIMBERLANDS KLAMATH FALLS, L.L.C. 

  

   

By:
_____________________

  Name: John M. Rudey Title: President 

 U.S. TIMBERLANDS SERVICES COMPANY, L.L.C. 

  

   

By:
_____________________

  Name: John M. Rudey Title: President 

 39

 EXHIBIT A - INVESTMENT GUIDELINES

Investment Objective.

The Timberland Investments that are subject to this agreement are to be "commercial timberlands." The investment objective is to generate and maintain on a sustainable basis sufficient cash flow from the Timberland Investments to service and retire
the debt of USTK, while maintaining distributions to USTK members at levels generally made within the timberland investment sector, as those distribution levels may be affected from time to time by market conditions, and building sufficient capital
to make additional Qualified Timberland Investments to maximize the efficient use of the existing management capabilities of the Servicer. The balance of these investment objectives will be established and approved each year by USTK’s approval
of the Annual Action Plan and by the annual reviews and updates of the Long-Term Management Plan.

"Commercial timberland" consists primarily of interests in timber-producing real estate and in contracts and cutting rights for the production and harvest of forest products. Commercial timberland may include ownership of timber cutting rights,
timber leases, other long-term arrangements and lands that could be considered for Higher and Better Use upon disposition. USTK will only review and consider investments in the United States.

Investment Guidelines.

The Timberland Investment will be managed and dispositions and acquisitions of Qualified Timberland Acquisitions will be considered from the perspective that they will contribute to the stability and sustainability of the overall Timberland
Investment. Timberlands to be held or acquired will generally have adequate or better than average stocking for the location and price, at least average productivity for the region or subregion, ready legal and physical access and above-average
markets for products. Servicer will also seek out under-valued timberlands which, although they may lack all of the foregoing attributes, represent a better value compared to other commercial timberlands available in the marketplace. Preference for
timberland acquisitions will be for the Pacific Northwest or California where existing infrastructure of the Servicer may be used to manage the timberland on an accretive basis. Investments elsewhere in the United States will be considered, but it
must be demonstrated that economies of management will not be lost, or the acquisition price of the timberland can offset the additional costs of entering a new market area or region.

40

 EXHIBIT B - FORM CONFIDENTIALITY AGREEMENT
   

 	CONFIDENTIALITY AGREEMENT

 AGREEMENT made as of this ____ day of 

  ______________
, 200_ by and among U.S. Timberlands Services Company, LLC (the “Servicer”), a Delaware limited liability company, and the undersigned
(hereinafter the "Undersigned").

 	WITNESSETH:

WHEREAS, pursuant to the terms of the Management Agreement dated as of 
_________
 (as the same may be amended, modified or supplemented from time to time, the "Management Agreement"), by and among the
Servicer and U.S. Timberlands Klamath Falls, L.L.C. ("USTK"), a Delaware limited liability company, the Servicer is required to permit certain persons to inspect its books and records; and WHEREAS,
pursuant to the terms of the Management Agreement, the Servicer’s obligation to provide such persons with access to its books and records is conditioned upon the execution by such persons of this Agreement.

NOW, THEREFORE, the parties hereto agree as follows:

	1.

        	All terms not defined in this Agreement shall
      have the meanings set forth in the Management Agreement.

    
	2.

        	The term "Confidential Information" as used herein
      shall include all written and oral data, memoranda, details and information
      pertaining to the Servicer’s and USTK’s business, financial status,
      operating manuals, operating results, operations, production methods, customers,
      suppliers, processes, techniques, copyright, trademark, trade dress, patents,
      proprietary information, know-how, equipment and systems, whether of a technical,
      engineering, operational, financial or economic nature, furnished by the
      Servicer at the request of the Undersigned. Confidential Information shall
      not include information which (i) was already in the possession of the Undersigned,
      (ii) was obtained by the Undersigned from a third person who, insofar as
      is known to the Undersigned, was not prohibited from transmitting the information
      by an obligation of confidentiality to the provider or (iii) is or at any
      time becomes publicly known (through no act or omission of the Undersigned
      or any person acting on behalf of the Undersigned).

    

41

	3.

        	The Undersigned shall maintain the confidentiality
      of all Confidential Information; provided that the Undersigned may disclose
      Confidential Information to: (i) its directors, officers, employees, agents,
      attorneys and Affiliates; (ii) any federal or state regulatory authority
      having jurisdiction over the Undersigned; (iii) the Secured Parties; (iv)
      any nationally recognized rating agency involved in rating one or more Notes
      issued under the Indenture or any reinsurer with respect to such Notes;
      or (v) any other person to the extent, reasonably necessary to comply with
      any law, rule, regulation, order, subpoena or other legal process applicable
      to the Undersigned or as appropriate in connection with any litigation to
      which the Undersigned is a party, provided that the Undersigned shall promptly
      notify the Servicer in writing of any such disclosure pursuant to clause
      (v) above.

    
	4.

        	The Undersigned acknowledges that it is aware,
      and will advise its representatives who are informed as to the matters which
      are the subject of this letter, that the United States securities laws prohibit
      any person who has material, nonpublic information concerning a company,
      such as the Confidential Information, from purchasing or selling securities
      of such company or from communicating such information to any other person
      under circumstances in which it is reasonably foreseeable that such person
      is likely to purchase or sell such securities.

    
	5.

        	It is further understood and agreed that no failure
      or delay by a party hereto in exercising any rights, power or privilege
      under this Agreement shall operate as a waiver thereof. No waiver of any
      breach or default under this Agreement shall be considered valid unless
      in writing and signed by the party giving such waiver, and no waiver shall
      be deemed a waiver of any subsequent breach or default of the same or similar
      nature.

    
	6.

        	If any provision of this Agreement shall be held
      invalid or unenforceable, such invalidity or unenforceability shall attach
      only to such provision, only to the extent it is invalid or unenforceable,
      and shall not in any manner affect or render invalid or unenforceable any
      other severable provision of this Agreement, and this Agreement shall be
      carried out as if any such invalid or unenforceable provision were not contained
      herein.

    
	7.

        	This Agreement shall be governed in accordance
      with the internal laws of the State of Washington, without regard to conflicts
      of law principles.

    
	8.

        	This Agreement sets forth the full understanding
      of the parties with respect to the subject matter hereof and the provisions
      hereof may not be modified, terminated or waived except in writing. This
      Agreement shall terminate five (5) years from the date hereof.

    

42

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and date above written.

U.S. TIMBERLANDS SERVICES COMPANY, LLC

     By:	 	 	 	 	 	  	 	 	 	 	Name: Thomas C. Ludlow  	 	 	 	 	Title: Vice President and Chief Financial Officer

 	 	 	NAME:

By: Name: Title:

43

 EXHIBIT C - PROCEEDINGS 

1. Charles Bowers v. John M. Rudey, Robert F. Wright, George R. Hornig,

Aubrey L. Cole, William W. Wyman, Alan B. Abramson, U.S. Timberlands Company L.P., and U.S. Timberlands Services Company, LLC, CA No. 19577 (the Court of Chancery of the State of Delaware in and for New Castle County).

2. Harry R. Eberlin, Harry R. Eberlin as Custodian for Mallory M. Eberlin,

Harry R. Eberlin as Custodian for Harrison H. Eberlin and the Jule Partnership, LTD., v. John M. Rudey, Robert F. Wright, George R. Hornig, Aubrey L. Cole, William W. Wyman, Alan B. Abramson, U.S. Timberlands Company L.P., and U.S. Timberlands
Services Company, LLC, CA No. 19584 (the Court of Chancery of the State of Delaware in and for New Castle County).

3. Harold Hirt v. U.S. Timberlands Services Company, LLC, John M. Rudey,

Aubrey L. Cole, George R. Hornig, William W. Wyman, Alan B. Abramson, Robert F. Wright and U.S. Timberlands Company, L.P., CA No. 19575-NC (the Court of Chancery of the State of Delaware in and for New Castle County).

4. Dr. Marc G. Tisch as custodian for Mica Stauber Tisch v. John M. Rudey,

Robert F. Wright, George R. Hornig, Aubrey L. Cole, William A. Wyman, Alan B. Abramson, U.S. Timberlands Company, L.P. and U.S. Timberlands Services Company, LLC, CA No. 19608-NC (the Court of Chancery of the State of Delaware in and for New Castle
County).

5. Harold Obstfeld v. John M. Rudey, Robert F. Wright, George R. Hornig,

Aubrey L. Cole, William W. Wyman, Alan B. Abramson, U.S. Timberlands Company L.P., and U.S. Timberlands Services Company, LLC, CA No. 19632 (the Court of Chancery of the State of Delaware in and for New Castle County).

6. Gary Kosseff v. John M. Rudey, Robert F. Wright, George R. Hornig, Aubrey

L. Cole, William W. Wyman, Alan B. Abramson, U.S. Timberlands Company L.P., and U.S. Timberlands Services Company, LLC, CA No. 19613-NC (the Court of Chancery of the State of Delaware in and for New Castle County).

7. Leslie Susser v. John M. Rudey, Robert F. Wright, George R. Hornig, Aubrey

L. Cole, William W. Wyman, Alan B. Abramson, U.S. Timberlands Company L.P., and U.S. Timberlands Services Company, LLC, CA No. 19592 (the Court of Chancery of the State of Delaware in and for New Castle County).

8. Ann Cutler v. John M. Rudey, Robert F. Wright, George R. Hornig, Aubrey

L. Cole, William W. Wyman, Alan B. Abramson, U.S. Timberlands Company L.P., and U.S. Timberlands Services Company, LLC, CA No. 19578 (the Court of Chancery of the State of Delaware in and for New Castle County).

44

TABLE OF CONTENTS

	 	
      Page

    
	 	
      

    	
      

    
	Article I DEFINITIONS AND RULES OF CONSTRUCTION	3
	   SECTION 1.01 Definitions	3
	   SECTION 1.02 Rules of
      Construction	9
	Article II ENGAGEMENT OF THE SERVICER	10
	   SECTION 2.01 Engagement
      of the Servicer	10
	   SECTION 2.02 Duties of
      the Servicer	10
	   SECTION 2.03 Prohibited
      Activities	12
	   SECTION 2.04 Operating
      Expenses	12
	   SECTION 2.05 Securities
      of USTK	12
	Article III ANNUAL ACTION PLAN AND LONG-TERM
      MANAGEMENT PLAN	13
	   SECTION 3.01 Current
      Annual Action Plan	13
	   SECTION 3.02 Annual Action
      Plan	13
	   SECTION 3.03 Long-Term
      Management Plan	13
	Article IV ACQUISITIONS	14
	   SECTION 4.01 Authority	14
	SECTION 4.02 Procedure for Acquiring Qualified
      Timberland Investments	14
	   SECTION 4.03 Acquisition
      Package	15
	   SECTION 4.04 Review of
      Acquisition Package	15
	SECTION 4.05 Consummation of Approved Acquisitions	15
	   SECTION 4.06 Management
      of the Acquisition	15
	   SECTION 4.07 Funds for
      Closing	15
	   SECTION 4.08 Oversight
      of Indirect Investments	15
	Article V SALES AND DISPOSITIONS	16
	   SECTION 5.01 Authority	16
	   SECTION 5.02 Procedure
      for the Disposition	16
	   SECTION 5.03 Disposition Package	16
	   SECTION 5.04 Consummation
      of the Disposition	17
	   SECTION 5.05 Proceeds
      from the Disposition	17
	Article VI INVESTMENT VEHICLE	17
	   SECTION 6.01 Establishment
      of Investment Vehicle	17
	   SECTION 6.02 Services
      to Investment Vehicle	17
	Article VII LIMITATIONS ON THE AUTHORITY
      OF THE SERVICER	18
	   SECTION 7.01 Limitations
      on Authority	18
	   SECTION 7.02 Power of
      Attorney	18
	Article VIII FEES, COMPENSATION AND EXPENSES	18
	   SECTION 8.01 Reimbursements	18
	   SECTION 8.02 Annual Management
      Fee	18
	   SECTION 8.03 Transaction
      Fee	19
	Article IX BOOKS AND RECORDS	20
	   SECTION 9.01 Maintenance
      of Books and Records	20
	SECTION 9.02 Inspection of USTK’s
      Books and Records	20
	   SECTION 9.03 Audits	20
	   SECTION 9.04 Confidentiality	21

45

	   SECTION 9.05 GIS Data	21
	Article X STANDARD OF CARE	21
	   SECTION 10.01 Standard	21
	   SECTION 10.02 No Guarantees
      of Financial Results	21
	Article XI AGENTS AND CONTRACTORS	22
	   SECTION 11.01 Agents
      and Contractors	22
	Article XII LAWS, RULES, REGULATIONS AND
      ORDINANCES	22
	   SECTION 12.01 Compliance	22
	   SECTION 12.02 Acquisitions	22
	   SECTION 12.03 Management	22
	Article XIII CONFIDENTIALITY	23
	   SECTION 13.01 The Servicer	23
	   SECTION 13.02 USTK	23
	Article XIV CONFLICTS OF INTEREST	23
	   SECTION 14.01 No Benefits	23
	   SECTION 14.02 Disclosure
      of Interests	23
	   SECTION 14.03 Separate
      Contracts	23
	   SECTION 14.04 Services
      to Others	24
	Article XV REPORTING REQUIREMENTS	24
	   SECTION 15.01 Activity
      Reports	24
	   SECTION 15.02 Auditing	24
	   SECTION 15.03 Other Reports
      and Information	24
	Article XVI INSURANCE	25
	   SECTION 16.01 Insurance	25
	   SECTION 16.02 Third Parties
      to Provide Insurance	25
	   SECTION 16.03 No Other
      Casualty Insurance	26
	Article XVII REPRESENTATIONS AND WARRANTIES
      OF THE SERVICER	26
	   SECTION 17.01 Experience	26
	   SECTION 17.02 Due Organization
      and Good Standing	26
	   SECTION 17.03 Due Authorization
      and No Conflict	26
	   SECTION 17.04 Governmental
      and Other Consents	26
	   SECTION 17.05 Enforceability	27
	   SECTION 17.06 No Litigation.
      Except as set forth in Exhibit C	27
	   SECTION 17.07 Accuracy
      of Information	27
	   SECTION 17.08 Subsidiaries	27
	   SECTION 17.09 No Default
      Under Other Agreements	27
	   SECTION 17.10 Ownership	27
	   SECTION 17.11 Taxes	28
	   SECTION 17.12 Compliance
      with Law	28
	   SECTION 17.13 ERISA	28
	   SECTION 17.14 Insurance	28
	Article XVIII REPRESENTATIONS AND WARRANTIES
      OF USTK	28
	   SECTION 18.01 Due Organization
      and Good Standing	28
	   SECTION 18.02 Due Authorization
      and No Conflict	28
	   SECTION 18.03 Governmental
      and Other Consents	29
	   SECTION 18.04 Enforceability	29
	   SECTION 18.05 No Litigation	29
	   SECTION 18.06 No Default
      Under Other Agreements	29

46

	   SECTION 18.07 Taxes	29
	   SECTION 18.08 Compliance
      with Law	29
	   SECTION 18.09 ERISA	29
	   SECTION 18.10 Insurance	29
	Article XIX INDEMNIFICATION	30
	   SECTION 19.01 Indemnification
      of USTK	30
	   SECTION 19.02 Indemnification
      of the Servicer	30
	   SECTION 19.03 Further
      Indemnification	30
	Article XX EVENTS OF DEFAULT	31
	   SECTION 20.01 Events
      of Default	31
	Article XXI ADDITIONAL COVENANTS	33
	   SECTION 21.01 Notice
      to the Trustee	33
	   SECTION 21.02 Amendments,
      Modifications and Termination	33
	   SECTION 21.03 Corporate
      Separateness	33
	   SECTION 21.04 Compliance
      with Laws, Etc.	33
	   SECTION 21.05 Preservation
      of Legal Existence	33
	   SECTION 21.06 Servicer	34
	   SECTION 21.07 Keeping
      of Records and Books of Account	34
	   SECTION 21.08 [Reserved]	34
	   SECTION 21.09 Taxes	34
	   SECTION 21.10 [Reserved]	34
	   SECTION 21.11 Reporting
      Requirements	34
	   SECTION 21.12 Change
      in Business	35
	   SECTION 21.13 ERISA Matters	35
	Article XXII NOTICE	35
	   SECTION 22.01 Notice	35
	Article XXIII TERM AND TERMINATION	36
	   SECTION 23.01 Term	36
	   SECTION 23.02 Termination
      by Servicer	36
	   SECTION 23.03 Termination
      of Servicer	36
	   SECTION 23.04 Duties
      through Termination	36
	   SECTION 23.05 Rights
      and Obligations after Termination	37
	Article XXIV MISCELLANEOUS	37
	   SECTION 24.01 Section
      Headings	37
	   SECTION 24.02 Governing
      Law and Venue	37
	   SECTION 24.03 Entire
      Agreement	37
	   SECTION 24.04 Counterparts	37
	   SECTION 24.05 Severability	37
	   SECTION 24.06 Independent
      Contractor	38
	   SECTION 24.07 Assignability	38
	   SECTION 24.08 No Petition	38

47Exhibit 10.1

                              AMENDED AND RESTATED
                  LIMITED LIABILITY COMPANY OPERATING AGREEMENT

                                       OF

                          BIORAL NUTRIENT DELIVERY, LLC

                      Dated effective as of October 1, 2003

THE  MEMBERSHIP  SHARES IN BIORAL  NUTRIENT  DELIVERY,  LLC (THE  "SHARES")  ARE
SUBJECT TO THE  RESTRICTIONS  ON TRANSFER  SET FORTH IN THIS  AGREEMENT  AND THE
OTHER TERMS AND  CONDITIONS OF THIS  AGREEMENT.  NEITHER THE SHARES NOR ANY PART
THEREOF  MAY BE OFFERED  FOR SALE,  PLEDGED,  HYPOTHECATED,  SOLD,  ASSIGNED  OR
TRANSFERRED  AT ANY TIME EXCEPT IN COMPLIANCE  WITH THE TERMS AND  CONDITIONS OF
THIS AGREEMENT AND (I) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER ANY
APPLICABLE  STATE  SECURITIES  LAWS OR IN A  TRANSACTION  WHICH IS  EXEMPT  FROM
REGISTRATION UNDER SUCH SECURITIES LAWS OR WHICH IS OTHERWISE IN COMPLIANCE WITH
SUCH  SECURITIES LAWS AND (II) PURSUANT TO AN EFFECTIVE  REGISTRATION  STATEMENT
UNDER THE SECURITIES  ACT OF 1933, AS AMENDED (THE  "SECURITIES  ACT"),  OR IN A
TRANSACTION WHICH IS EXEMPT FROM REGISTRATION  UNDER THE SECURITIES ACT OR WHICH
IS OTHERWISE IN COMPLIANCE WITH THE SECURITIES ACT.

<PAGE>
<TABLE>
<CAPTION>

                                             TABLE OF CONTENTS

                                                                                                      Page
                                                                                                      ----
<S>                                                                                                  <C>
Section 1.1       Name..................................................................................1
                  ----

Section 1.2       Formation.............................................................................1
                  ---------

Section 1.3       Principal Business Office.............................................................2
                  -------------------------

Section 1.4       Registered Office and Agent...........................................................2
                  ---------------------------

Section 1.5       Term of the Company...................................................................2
                  -------------------

Section 1.6       Fiscal Year...........................................................................2
                  -----------

Section 2.1       Purpose...............................................................................2
                  -------

Section 2.2       Powers................................................................................2
                  ------

Section 3.1       Membership Shares.....................................................................3
                  -----------------

Section 3.2       Percentage Interest...................................................................4
                  -------------------

Section 3.3       Capital Contributions.................................................................4
                  ---------------------

Section 3.4       Partition.............................................................................4
                  ---------

Section 3.5       No Interest on Capital................................................................4
                  ----------------------

Section 3.6       Withdrawal............................................................................4
                  ----------

Section 3.7       Distributions of Class B Shares.......................................................5
                  -------------------------------

Section 3.8       Substitute and Additional Members.....................................................6
                  ---------------------------------

Section 3.9       Company Reorganization................................................................7
                  ----------------------

Section 3.10      MM Option.............................................................................7
                  ---------

Section 4.1       Allocation of Profits and Loss........................................................7
                  ------------------------------

Section 4.2       Distributions.........................................................................8
                  -------------

Section 4.3       Capital Accounts......................................................................8
                  ----------------

Section 4.4       Book/Tax Disparities; Section 754 Elections; etc......................................8
                  ------------------------------------------------

Section 4.5       Certain Tax-Related Definitions.......................................................9
                  -------------------------------

Section 4.6       Regulatory Allocations, Qualified Income Offset and Minimum Gain Chargebacks..........9
                  ----------------------------------------------------------------------------

Section 5.1       Management by the Board of Directors.................................................10
                  ------------------------------------

Section 5.2       Officers.............................................................................11
                  --------

Section 5.3       Class B Share Incentive Plan.........................................................11
                  ----------------------------

Section 5.4       Reliance by Third Parties............................................................12
                  -------------------------

                                                    -i-
<PAGE>

Section 5.5       Other Business Interests.............................................................12
                  ------------------------

Section 6.1       Books, Records and Financial Statements..............................................12
                  ---------------------------------------

Section 6.2       Company Audits.......................................................................12
                  --------------

Section 6.3       Tax Matters Partner..................................................................13
                  -------------------

Section 6.4       Taxation as Partnership..............................................................13
                  -----------------------

Section 7.1       Liability............................................................................13
                  ---------

Section 7.2       Exculpation..........................................................................13
                  -----------

Section 7.3       Indemnification......................................................................14
                  ---------------

Section 7.4       Expenses.............................................................................14
                  --------

Section 7.5       Insurance............................................................................15
                  ---------

Section 8.1       Transfers of Membership Shares.......................................................15
                  ------------------------------

Section 8.2       Managing Member Right of First Refusal...............................................16
                  --------------------------------------

Section 9.1       Dissolution..........................................................................16
                  -----------

Section 9.2       Liquidation..........................................................................17
                  -----------

Section 9.3       Termination..........................................................................17
                  -----------

Section 9.4       Claims of the Members................................................................17
                  ---------------------

Section 10.1      Separability of Provisions...........................................................17
                  --------------------------

Section 10.2      Counterparts.........................................................................17
                  ------------

Section 10.3      Entire Agreement.....................................................................17
                  ----------------

Section 10.4      Governing Law........................................................................18
                  -------------

Section 10.5      Arbitration..........................................................................18
                  -----------

Section 10.6      Remedies.............................................................................18
                  --------

Section 10.7      No Third Party Beneficiaries.........................................................19
                  ----------------------------

Section 10.8      Amendments...........................................................................19
                  ----------

Section 10.9      Interpretation.......................................................................19
                  --------------

Section 10.10     Captions.............................................................................19
                  --------

Section 10.11     Notices..............................................................................19
                  -------

Section 11.1      Certain Defined Terms................................................................20
                  ---------------------

SCHEDULES

Schedule A  Names, Contact Information and Membership Shares Held by the Members

Schedule B  2003 Class B Membership Share Option Plan

                                                   -ii-

</TABLE>

<PAGE>

                              AMENDED AND RESTATED
                LIMITED LIABILITY COMPANY OPERATING AGREEMENT OF
                          BIORAL NUTRIENT DELIVERY, LLC

         This AMENDED AND RESTATED LIMITED LIABILITY COMPANY OPERATING AGREEMENT
(this  "Agreement")  of  Bioral  Nutrient  Delivery,  LLC,  a  Delaware  limited
liability company (the "Company") is entered into as effective of the 1st day of
October,  2003,  by  BioDelivery  Sciences   International,   Inc.,  a  Delaware
corporation, as the managing member of the Company.

         WHEREAS,  the  Company is governed by that  certain  Limited  Liability
Company  Agreement,  dated  January 8, 2003 (as amended on March 31,  2003,  the
"Agreement"),  by and  among  the  Managing  Member  and the  Persons  listed on
Schedule A thereto,  which Persons hold Class B Shares (as defined below) in the
Company (the "Class B Members" and,  collectively  with the Managing  Member and
any future member of the Company  admitted in accordance  with the provisions of
this Agreement, the "Members");

         WHEREAS,  pursuant to Section 10.8 of the Agreement,  amendments to the
Agreement may be made only by the Managing Member;

         WHEREAS,  in light of certain  changes  to the  Company,  the  Managing
Member  desires to amend and  restated,  in its  entirety,  the Agreement in the
manner provided for herein.

         NOW,  THEREFORE,  in light of the foregoing and intending to be legally
bound,  the Managing  Member  hereby  amends and  restates the  Agreement in its
entirety as follows:

                                   ARTICLE I
                        FORMATION; DURATION AND PURPOSES

         Section 1.1 Name. The name of the limited liability company that is the
subject of this Agreement  shall be Bioral Nutrient  Delivery,  LLC. Each Member
acknowledges  that the word  "Bioral" is a registered  trademark of the Managing
Member.

Section 1.2  Formation.

         (a)  Pursuant to the Act,  the Members  hereby  form the  Company.  The
Company's  existence will commence upon the filing of a certificate of formation
of the Company (the "Certificate") by an authorized person (as such term is used
in  Section  18-201  of  the  Act)   designated  by  the  Managing  Member  (the
"Organizer") in the office of the Delaware Secretary of State. The execution and
filing  of such  Certificate  with the  Delaware  Secretary  of State is  hereby
authorized and approved by the Members. The rights,  liabilities and obligations
of any Member with respect to the Company shall be determined in accordance with
the Act, the Certificate and this Agreement. To the extent anything contained in
this  Agreement  modifies,  supplements  or  otherwise  affects  any such right,
liability,  or obligation  arising under the Act, this Agreement shall supersede
the Act to the extent not restricted thereby.

<PAGE>

         (b) The Organizer,  any Officer (as defined below) and any other Person
appointed by the Board of Directors  (as defined  below)  shall  hereinafter  be
authorized to cause the Company to be qualified,  or registered under assumed or
fictitious  name  statutes or similar  laws,  in any  jurisdiction  in which the
Company  transacts  business.  Such Person,  as an authorized  person within the
meaning of the Act, shall execute,  deliver and file any  certificates  (and any
amendments and/or  restatements  thereof) necessary or desirable for the Company
to qualify to do business in any  jurisdiction  in which the Company may wish to
conduct business.

         Section 1.3 Principal Business Office. The principal business office of
the  Company  shall  be  located  at c/o  UMDNJ  - New  Jersey  Medical  School,
Administrative Building 4, 185 South Orange Avenue, Newark, New Jersey 07103, or
at such other location as may hereafter be determined by the Board of Directors.

         Section 1.4  Registered  Office and Agent.  The name and address of the
registered  agent of the  Company  for  service of process on the Company in the
State of Delaware is National Registered Agents, Inc., 9 East Loockerman Street,
Suite 1B, Dover,  Delaware,  19901,  County of Kent.  The name of the registered
agent of the Company at such address is National  Registered Agents, Inc. At any
time,  the Board of Directors  may  designate  another  registered  agent and/or
registered office for the Company.

         Section 1.5 Term of the Company. The term of the Company shall commence
on the date of the filing of the Certificate and shall be perpetual,  unless the
Company is sooner  terminated  and dissolved  pursuant to the terms  hereof.  No
Member may withdraw from the Company  without the prior  written  consent of the
other Members, other than as expressly provided in this Agreement.

         Section 1.6 Fiscal  Year.  The fiscal year of the Company  shall end on
December 31st of each year.

                                   ARTICLE II
                        PURPOSE AND POWERS OF THE COMPANY

         Section  2.1  Purpose.  The  Company  is formed for the  objective  and
purpose of, and the nature of the business to be  conducted  and promoted by the
Company is,  engaging in any lawful act or activity for which limited  liability
companies  may be formed  under  the Act as may be  determined  by the  Managing
Member and engaging in any and all activities necessary,  convenient,  desirable
or incidental to the foregoing.  The initial purpose of the Company is to obtain
an  exclusive  world-wide   perpetual   sub-license  to  the  Managing  Member's
proprietary encochleation drug delivery technology for non-pharmaceutical use in
the processed  food and beverage and personal care product  industries  for both
human and animal consumption.

         Section 2.2 Powers.  In furtherance of its purposes,  the Company shall
have the power and is hereby  authorized to take any and all actions  necessary,
appropriate,   proper,  advisable,  incidental  or  convenient  to  or  for  the
furtherance of the purposes set forth in Section 2.1, including, but not limited
to, the power to conduct  its  business,  carry on its  operations  and have and
exercise  the powers  granted to a limited  liability  company by the Act in any
state,

                                       2
<PAGE>

territory,  district  or  possession  of the United  States,  or in any  foreign
country that may be necessary, convenient or incidental to the accomplishment of
the purpose of the Company.

                                  ARTICLE III
                            MEMBERS; MEMBERSIP SHARES

Section 3.1 Membership Shares.

         (a) Generally.  The limited  liability company interests of the Company
shall be classified in two classes of shares (each such interest in the Company,
a  "Membership  Share"  and  collectively,  the  "Membership  Shares"):  Class A
Membership  Shares  (each,  a "Class A Share"  and  collectively,  the  "Class A
Shares")  and  Class  B  Membership   Shares  (each,   a  "Class  B  Share"  and
collectively,  the "Class B Shares"). There shall be no limitation on the number
of Membership Shares which may be issued and/or outstanding at any time, subject
to the approval of the Board of Directors as to the timing of any such  issuance
and amount thereof.

         (b)  Class A  Shares.  The  Class  A  Shares  will be held  only by the
Managing Member and will grant the Managing Member the management and governance
rights contained in this Agreement.  The Managing Member, as a holder of Class A
Shares,  will be  entitled  to its pro rata  portion  (based  on its  Percentage
Interests) of distributions declared and paid by the Board of Directors.

         (c) Class B Shares.  The  Class B Shares  will be held by the  Managing
Member  and the  Class B  Members  in  accordance  with the  provisions  of this
Agreement.  The Class B Members will have no management,  governance or approval
rights whatsoever  relating to the business and operations of the Company.  Each
Class B Member will be entitled to its pro rata portion (based on its Percentage
Interests) of distributions declared and paid by the Board of Directors.

         (d) Other  Securities.  The Board of Directors is  authorized  to issue
additional  Membership  Shares,  or any  other  class or type of debt or  equity
securities  of the  Company  (including  options,  warrants or rights to receive
Class B Shares or any other  class or type of debt or equity  securities  of the
Company,   including  convertible   securities)  that  the  Board  of  Directors
designates,  at  such  times  and on  such  terms  as  the  Board  of  Directors
determines.  Any  such  action  shall  be  memorialized,  as  applicable,  in an
amendment and/or restatement to this Agreement executed by the Managing Member.

         (e) Inclusions to "Membership  Shares." For purposes of this Agreement,
a Member's  aggregate  "Membership  Shares" shall  include the entire  ownership
interest  of a Member in the  Company at any time,  including  (a) the rights of
such  Member  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 the terms and  provisions  of this  Agreement,  (b) all income,
profits,  Available  Net Cash,  fees or  payments  of  whatever  nature  and all
distributions  to  which  any  Member  would  be  entitled,  now or at any  time
hereafter,  of whatsoever description or character;  and (c) all of any Member's
present  and  future  rights to and in its  Capital  Account,  whether by way of
liquidating  distributions  or  otherwise,  and all of such

                                       3
<PAGE>

Member's right to receive or share in any surplus of the Company in the event of
the dissolution of the Company.

         Section 3.2 Percentage  Interest. A Member's percentage interest of the
outstanding Membership Shares (the "Percentage Interest") shall be calculated by
dividing  the number of  Membership  Shares held by such Member  (regardless  of
class) by the aggregate number of Membership Shares  outstanding  (regardless of
class).  The number and class of Membership Shares and the resulting  Percentage
Interest of the Members  shall be reflected on Schedule A hereto or on the books
and records of the transfer agent of the Company,  which transfer agent shall be
selected (and removed and replaced,  as the case may be) by the Managing  Member
in its sole  discretion.  Schedule A hereto or such books and  records  shall be
amended  from time to time to reflect  the  issuance  of  additional  Membership
Shares and the  admission of new Members,  in each case in  accordance  with the
provisions of this Agreement.

         Section 3.3 Capital Contributions. No Member shall be obligated to make
contributions  of cash or  other  property  to the  Company  (each,  a  "Capital
Contribution").  A Member may make a Capital  Contribution  or loan funds to the
Company with the prior written consent of the Managing Member, which consent may
be granted or withheld in the sole  discretion of the Managing  Member,  for any
reason or no reason.

         Section 3.4  Partition.  Each Member  waives any and all rights that it
may have to maintain an action for partition of the Company's property.

         Section 3.5 No Interest on Capital.  No Member shall be entitled to any
interest on any capital, if any, contributed by it to the Company.

         Section 3.6 Withdrawal.

         (a) Except in  connection  with a Transfer  to a  Permitted  Transferee
(each as  defined in Section  8.1  below) or a  Transfer  to which the  Managing
Member consents  pursuant to Section 8.1 hereof in which the transferee has been
admitted  as a  Substitute  Member  (as  defined  below)  and  has  assumed  the
obligations of a Member or as otherwise  described  herein, no Member shall have
the right to withdraw from the Company  without the prior written consent of the
Managing  Member  (which  consent  may be withheld  in  Managing  Member's  sole
discretion,  for any reason or no reason).  Effective on the date of a permitted
withdrawal,  such withdrawing  Member shall be deemed to have withdrawn from the
Company and shall no longer be a Member for purposes of this Agreement. From and
after the effective date of such withdrawal, the withdrawing Member shall not be
entitled to receive any  distributions  from the Company unless the  withdrawing
Member was a Member on the record date therefor.

         (b) If a Member  withdraws  from the  Company in  violation  of Section
3.6(a),  such Member shall not be entitled to any  distribution  or payment with
respect to his, her or its Membership  Shares in the Company and shall be liable
to the Company for breach of this Agreement.

                                       4
<PAGE>

         Section 3.7 Distributions of Class B Shares.

         (a) As of October 1, 2003, the Managing  Member holds 7,085,862 Class B
Shares and has the right to acquire, from time to time in the future,  4,185,000
Class B Shares underlying the MM Option (as defined in Section 3.10 below) (such
11,270,862   Class  B  Shares,   collectively,   the  "MM   Class  B   Shares").
Notwithstanding  any  provision of this  Agreement to the contrary (and assuming
the exercise,  from time to time, of the MM Option as provided for herein),  the
MM Class B Shares (or rights to purchase or other  securities  convertible  into
such Class B Shares) may be  distributed  to or sold by the  Managing  Member to
current  and/or future  stockholders  of the Managing  Member or other  Persons,
including,  without limitation,  as a dividend or other distribution or upon the
distribution  by the  Managing  Member  and  subsequent  exercise  of  rights to
purchase such MM Class B Shares.

         (b) At the request of the Managing  Member,  the Company shall register
the MM Class B Shares  (and/or  the  rights to  purchase  the MM Class B Shares)
distributed  to the Managing  Member's  stockholders  or other Class B Shares or
other securities of the Company (in this context, collectively, the "Registrable
Securities")  with the  Securities  and Exchange  Commission  ("SEC")  under the
Securities  Act of 1933,  as amended  (together  with the rules and  regulations
promulgated thereunder, the "Securities Act") and/or the Securities Exchange Act
of 1934,  as  amended  (together  with the  rules  and  regulations  promulgated
thereunder, the "Exchange Act"), it being understood and agreed that neither the
MM Class B Shares nor any other debt or equity  securities of the Company shall,
without the approval of the Managing Member in its sole discretion, be traded or
listed for quotation on any public market or exchange.

         (c) The Members agree that, in connection with any such registration of
the Registrable Securities under the Securities Act, the Company shall:

                  (i) File with the SEC a registration statement with respect to
         such Registrable  Securities (a  "Registration  Statement") and use its
         reasonable best efforts to cause that Registration  Statement to become
         effective as soon as possible;

                  (ii)  When   required   by  the   Managing   Member,   and  as
         expeditiously as possible, prepare and file with the SEC any amendments
         and  supplements  to the  Registration  Statement  and  the  prospectus
         included in the  Registration  Statement (the  "Prospectus")  as may be
         necessary to comply in all material respects with the provisions of the
         Securities  Act and/or  the  Exchange  Act  (including  the  anti-fraud
         provisions  thereof) and to keep the Registration  Statement  effective
         for so long as the Managing Member may require;

                  (iii)  When   required  by  the   Managing   Member,   and  as
         expeditiously  as  possible,   furnish  to  the  Managing  Member  such
         reasonable numbers of copies of the prospectus or information statement
         included with the  Registration  Statement,  including any  preliminary
         prospectus,  in conformity with the  requirements of the Securities Act
         and the Exchange Act, and such other  documents as the Managing  Member
         may reasonably  request in order to facilitate the public  distribution
         or sale of the Registrable Securities owned by the Managing Member;

                                       5
<PAGE>

                  (iv) As  expeditiously  as  possible,  use its best efforts to
         register  or  qualify  the  Registrable   Securities   covered  by  the
         Registration  Statement  under the  securities or Blue Sky laws of such
         states as the Managing Member shall reasonably request,  and do any and
         all other acts and things that may be  necessary or desirable to enable
         the Managing  Member to facilitate the public  distribution  or sale of
         the Registrable Securities owned by the Managing Member;

                  (v) Promptly  provide a transfer  agent and  registrar for all
         such  Registrable  Securities not later than the effective date of such
         Registration Statement;

                  (vi) As expeditiously as possible  following the effectiveness
         of such  Registration  Statement,  notify  the  Managing  Member of any
         request  by  the  SEC  for  the  amending  or   supplementing  of  such
         Registration Statement or prospectus;

                  (vii) Use its reasonable best efforts to obtain the lifting of
         any stop order that might be issued  suspending  the  effectiveness  of
         such Registration Statement at the earliest possible moment; and

                  (viii) Use its reasonable best efforts to file with the SEC in
         a timely manner all reports and other documents required of the Company
         under the Securities Act and the Exchange Act (at any time after it has
         become subject to such reporting requirements).

         Section 3.8 Substitute and Additional Members.

         (a) Additional  members may be admitted to the Company (the "Additional
Members")  upon the issuance of Membership  Shares to such  Additional  Members,
including,  without limitation,  upon the distributions  contemplated by Section
3.7 hereof. No Additional Member and no Person who is the transferee or assignee
of all or a portion of the Membership Shares of a Member (a "Substitute Member")
shall be entitled to any of the rights and benefits  under this Agreement of the
transferor or assignor of such interest (other than the right to  distributions)
unless and until:

                  (i) the  Additional  Member or the Substitute  Member,  as the
         case may be, shall execute and  acknowledge  any instrument  reasonably
         deemed  by the  Managing  Member to be  necessary  to  effectuate  such
         admission,  which  instrument shall include  representations  that such
         Additional  Member or  Substitute  Member or their  Affiliates is not a
         Prohibited Owner; and

                  (ii) the Additional  Member or the Substitute  Member,  as the
         case may be, shall  accept and assume in writing (in a form  determined
         by the Board of Directors) all of the terms, conditions and obligations
         of this Agreement applicable to the Membership Shares being acquired by
         it.

         (b) As promptly as is reasonably  practicable after the admission of an
Additional Member or a Substitute Member in the Company,  the Managing Member or
its designee shall amend this Agreement (including Schedule A annexed hereto) or
cause  the  books and  records  of the  Company  administered  by the  Company's
transfer agent to reflect the addition

                                       6
<PAGE>

of the  Additional  Member,  or the  addition of the  Substitute  Member and the
deletion of the Member  substituted  therefor,  and to set forth the  respective
designations,  preferences and rights, as established by the Managing Member, of
the  Membership  Shares of such  Additional  Member or  Substitute  Member.  The
Managing  Member shall cause any such  amendment to be dated and effective as of
the date  upon  which any such  Additional  Member or  Substitute  Member  first
acquired the Membership Shares in question.

         Section 3.9 Company Reorganization. If the Managing Member, in its sole
discretion,  determines  that  conditions  are  favorable  for  the  Company  to
reorganize as a  corporation,  the Company may be  reorganized  as a corporation
and, in connection therewith, its equity interests (including but not limited to
the  Class B Shares)  may be  reclassified  as  shares  of stock (or  securities
convertible  into,  or  options  to  purchase,  such  shares  of  stock) in such
corporation on such terms and conditions as are approved by the Managing Member,
provided that the relative  rights and  preferences  of the Class B Shares shall
not be materially modified. Each Member (including the Class B Members) or other
direct or indirect  holder of Membership  Shares will be required to execute and
deliver  such  instruments  or  documents  as may be  necessary  or advisable in
connection with any such reorganization.

         Section 3.10 MM Option.

         (a) The Company hereby grants to the Managing Member an option (the "MM
Option") to purchase, in whole or in part, and from time to time in any amounts,
for the period beginning January 8, 2003 and ending January 8, 2008 (the "Option
Period"),  an  aggregate  of  4,185,000  Class  B  Shares  at a  purchase  price
throughout the Option Period of $0.01 per Class B Share.

         (b) The MM Option shall be  exercised by the Managing  Member by giving
written  notice  thereof to the Company,  which notice shall state the amount of
Class B Shares  desired to be acquired by the Managing  Member and the aggregate
purchase price for such Class B Shares.  In connection with each exercise of the
MM Option  during the Option  Period,  the  Managing  Member shall tender to the
Company the aggregate  purchase  price for the Class B Shares  acquired no later
than five (5) days following its delivery of the written notice  contemplated by
this Section 3.10(b).

         (c) Upon  payment by the  Managing  Member for the  applicable  Class B
Shares,  an appropriate  amendment to Schedule A hereto shall be made reflecting
the number of Class B Shares  issued to the  Managing  Member and the  resulting
changes to the Percentage  Interests of each Member.  The Managing  Member shall
not be entitled to any preferential  return on any capital  contributed by it to
the Company in  connection  with the  exercise or exercises of the MM Option and
shall only be entitled to a pro rata increase in its Percentage Interest.

                                   ARTICLE IV
                  ALLOCATION OF PROFITS AND LOSS; DISTRIBUTIONS

         Section 4.1 Allocation of Profits and Loss.

         (a) Profits. Profits shall be allocated:

                                       7
<PAGE>

                  (i)  First  to each  Member  in an  amount  equal  to the Loss
         allocated to such Member pursuant to Section 4.1(b)(ii) hereof, then

                  (ii)  Second,  to each  Member in an amount  equal to the Loss
         allocated to such Member pursuant to Section 4.1(b)(i) hereof, then

                  (iii) Third,  to the Members pro rata in  proportion  to their
         respective Percentage Interests.

         (b) Loss. Loss shall be allocated:

                  (i)  First,   among  Members  with  positive  Capital  Account
         balances, until such balances have been reduced to zero, and then

                  (ii) Second,  to the Members,  pro rata in proportion to their
         respective Percentage Interests.

         Section 4.2 Distributions.  Available Net Cash, if available,  shall be
distributed by the Company at such time and in such amounts as shall be approved
by the Board of Directors, in its sole and absolute discretion, in the following
order of priority:

         (a) First, to each Member,  an amount sufficient for such Member to pay
his, her or its federal  income taxes,  if any, in respect of their share of the
Profits (as defined  below) of the  Company (in excess of prior  allocations  to
each Member of Loss (as  defined  below) of the  Company),  based on the highest
applicable  federal  income tax rate on  individuals  in effect at the time that
Profits are allocated to the Members; then

         (b) Second, to the Members, pro rata, to the extent such Members have a
positive  Capital  Account  balance,  an amount equal to such Member's  positive
Capital Account balance; and

         (c)  Thereafter,  to the  Members,  pro  rata in  proportion  to  their
respective  Percentage  Interests.  Distributions  to which a Member is entitled
pursuant to this Section 4.2(c) shall be reduced by any distributions which such
Member received pursuant to Section 4.2(a) and (b) above.

         Section 4.3 Capital  Accounts.  The Board of Directors  shall establish
and maintain  capital  accounts  ("Capital  Account")  for each Member.  Capital
Accounts   shall  be   maintained  in   accordance   with  Treasury   Regulation
ss.1.704-1(b)(2)(iv) and shall be interpreted and applied in a manner consistent
therewith.  If the Board of  Directors  shall  determine  that it is  prudent to
modify the manner in which the Capital  Accounts are computed in order to comply
with Treasury Regulation  ss.1.704-1(b)(2)(iv),  the Board of Directors may make
such modification.

         Section 4.4 Book/Tax Disparities; Section 754 Elections; etc.

         (a) In the case of contributed  property,  items of income, gain, loss,
deduction and credit,  as determined for federal  income tax purposes,  shall be
allocated in a manner

                                       8
<PAGE>

consistent  with the  principles of Section 704(c) of the Code by using a method
described  in  Treasury  Regulation  ss.1.704-3(d)  selected  by  the  Board  of
Directors,  in its sole discretion,  to take into account the difference between
the agreed  value of such  property  and its  adjusted  tax basis at the time of
contribution or adjustment, as the case may be.

         (b) All items of income, gain, loss, deduction and credit recognized by
the Company for federal  income tax  purposes  and  allocated  to the Members in
accordance with the provisions hereof shall be determined  without regard to any
election  under  Section 754 of the Code which may be made by Board of Directors
on behalf of the Company; provided,  however, that such allocations,  once made,
shall be  adjusted  as  necessary  or  appropriate  to take into  account  those
adjustments permitted by Section 734 and 743 of the Code.

         Section 4.5 Certain Tax-Related Definitions.

         (a) For purposes of this Agreement,  the terms "Profit" or "Loss" mean,
for each fiscal  year or other  period,  an amount  equal to the  Company's  net
taxable  income or loss for such year or period,  determined in accordance  with
Section 703(a) of the Code (for this purpose, all items of income, gain, loss or
deduction required to be stated separately  pursuant to Section 703(a)(1) of the
Code shall be included in taxable income or loss),  adjusted as follows: (i) any
income of the Company that is exempt from federal  income tax and not  otherwise
taken into  account in  computing  Profit or Loss shall be added to such taxable
income or loss;  (ii) any  expenditures  of the  Company  described  in  Section
705(a)(2)(B)  of the Code or treated as described  in such  Section  pursuant to
Treasury  Regulation Section  1.704-1(b)(2)(iv)(i)  and not otherwise taken into
account in  computing  Profit or Loss,  shall be  subtracted  from such  taxable
income or loss;  and (iii) in the event the Carrying Value (as defined below) of
any Company property is adjusted pursuant to Section 1.704-1(b)(2)(iv)(f) of the
Treasury  Regulations or other pertinent sections of such Treasury  Regulations,
the  amount of such  adjustment  shall be taken into  account  for  purposes  of
computing Profit and Loss. Notwithstanding any other provisions, any items which
are specially  allocated pursuant to Section 4.6 shall not be taken into account
in computing Profit or Loss.

         (b) For  purposes  of  computing  Profit and Loss,  the term  "Carrying
Value" shall mean (A) with respect to contributed property,  the agreed value of
such property,  (B) with respect to property the book value of which is adjusted
pursuant to Treasury Regulation ss. 1.704-1(b)(2)(iv)(d), (e) or (f), the amount
determined  by the  Board  of  Directors,  and (C)  with  respect  to any  other
property, the adjusted basis of such property for federal income tax purposes as
of the time of determination.

         Section 4.6 Regulatory Allocations, Qualified Income Offset and Minimum
Gain  Chargebacks.  The provisions of this Agreement are intended to comply with
Code  Section 704 and Treasury  Regulations  ss.ss.  1.704-1(b)  and 1.704-2 and
shall be interpreted  and applied in a manner  consistent  with such Section and
such  Regulations.  Notwithstanding  anything to the contrary in this Agreement,
the Members  shall make such  allocations  as may be required in order to comply
with Code Section 704 and Treasury  Regulations  ss.ss.  1.704-1(b)  and 1.704-2
including  any  allocations  necessary  to satisfy  the  requirements  for (i) a
"qualified  income  offset";  (ii) a  "minimum  gain  chargeback";  and  (iii) a
chargeback of "minimum gain  attributable to partner  nonrecourse  debt" as such
terms are defined in Treasury Regulation ss.ss. 1.704-1(b) and 1.704-2.

                                       9
<PAGE>

                                   ARTICLE V
                                   MANAGEMENT

         Section 5.1 Management by the Board of Directors.

         (a) Powers.  Subject to the  oversight by the  Managing  Member and the
other rights of the Managing Member contained in this Agreement,  the management
and control of the  business  and  affairs of the  Company  shall be vested in a
board of directors (the "Board of Directors"),  which shall have the power to do
any and all acts  necessary,  convenient or incidental to or for the furtherance
of the  purposes  of the  Company,  including  all powers  provided  for in this
Agreement,  the  Act or  otherwise.  Any  Officer  or  employee  of the  Company
authorized  by the  Board of  Directors  shall  have the  authority  to bind the
Company.  Without  limiting  the  generality  of the  foregoing,  the  Board  of
Directors shall establish overall policies for the Company, set long-range plans
and objectives  and direct the conduct of the Company's  Officers and employees.
No action shall be taken, sum expended,  decision made or obligation incurred by
the Company with respect to any matter  regarding the Company unless such matter
has been expressly approved by the Board of Directors as provided for herein.

         (b)  Composition.  The  Board of  Directors  shall  consist  of six (6)
individuals (each, a "Director" and collectively, the "Directors"), each of whom
shall be appointed  from time to time by the Managing  Member and shall serve at
the pleasure of the Managing Member. The Managing Member shall have the right to
remove any Director or all  Directors at any time,  with or without  cause.  Any
vacancy  existing  on the Board of  Directors  shall be  filled by the  Managing
Member. The initial Directors shall be:

                             Susan G. Bonitz, Ph.D.
                                   Mauro Bove
                               Christopher Chapman
                           Susan Gould-Fogerite, Ph.D.
                      Francis E. O'Donnell, Jr., M.D., and
                                L.M. Stephenson.

         (c) Meetings. The Board of Directors shall meet no less frequently than
quarterly and additionally at the request of the Managing  Member,  such request
to be made upon no less than three (3) business days notice by telephone, e-mail
or facsimile  transmission,  which notice may be waived in each  instance.  Each
such meeting shall be held at such date,  time and place as the Managing  Member
may determine. One or more Directors may participate in any meeting of the Board
via telephone  conference call or other electronic device by which all Directors
may hear such Directors. A Director may attend a meeting by proxy, provided that
his  proxyholder  presents a written  proxy at the meeting  which  empowers  the
proxyholder  to take any  action  that the  Director  could  take if  personally
present. A proxyholder must be another Director.

         (d) Voting and other Actions. Each Director shall have one vote and may
also cast one vote on behalf of any  Director  for whom he or she holds a proxy.
All actions of the Board shall require the affirmative vote of a majority of the
Directors.  No Director shall be liable to the Company or to the Managing Member
for any loss or damage sustained by the

                                       10
<PAGE>

Company or the  Managing  Member,  unless the loss or damage shall have been the
result of fraud, deceit, or intentional misconduct.

         (e) Action by Written Consent Without a Meeting. Any action that may be
taken at a meeting of the Board of Directors may be taken without a meeting if a
consent in writing  setting  forth the action so taken is signed by the required
number of Directors or by the Managing Member, as applicable.  All such consents
shall be filed with the minutes of the Company  and shall be  maintained  in the
Company records.

         (f)  Compensation.  Except as  determined  and approved by the Managing
Member or as provided for in Section 5.3 hereof, Directors shall not be entitled
to compensation for acting as such, provided that a Director shall be reimbursed
by the Company for reasonable out-of-pocket expenses incurred to attend meetings
of the Board of Directors.

         (g) Agency. No Director is an agent of the Company,  nor can a Director
bind, or execute any instrument on behalf of, the Company.

         Section 5.2 Officers.

         (a) Generally.  The day-to-day operations of the Company shall be under
the control of the officers of the Company duly  appointed  from time to time by
the Board of Directors and subject to the supervision and direction of the Board
of  Directors  (the  "Officers").  The Officers of the Company  shall  include a
president or chief executive  officer, a secretary and a chief financial officer
or  treasurer  and may  include  a chief  operating  officer,  one or more  vice
presidents  and such other  Officers as the Board of Directors  may from time to
time  consider  appropriate.   Such  Officers  shall  exercise  such  duties  as
customarily pertain to such offices as determined by the Board of Directors.

         (b) Appointment.  The Officers of the Company appointed by the Board of
Directors  shall hold office until their  successors  are chosen by the Board of
Directors. Any Officer may be removed at any time by the Board of Directors. Any
vacancy  occurring in any office of the Company  shall be filled by the Board of
Directors.

         (c)  Compensation.  Except as  determined  and approved by the Managing
Member or as provided for in Section 5.3 hereof,  Officers shall not be entitled
to compensation for acting as such during the first twelve (12) months following
the formation of the Company,  provided that Officers shall be reimbursed by the
Company for reasonable  out-of-pocket  expenses  incurred in connection with the
duties  assigned to them by the Board of Directors.  Promptly  following the one
(1) year  anniversary  of the  formation of the Company,  the Board of Directors
shall  determine  and  agree  with  each  Officer  on  a  reasonable  amount  of
compensation for services rendered or to be rendered to the Company.

         (d) The initial Officers of the Company shall be as follows: Francis E.
O'Donnell,  Jr., Chief  Executive  Officer and President;  and James A. McNulty,
Secretary, Treasurer and Chief Financial Officer.

         Section 5.3 Class B Share  Incentive  Plan. The Managing  Member hereby
establishes the 2003 Class B Share Option Plan for the Company,  a copy of which
is attached

                                       11
<PAGE>

hereto as  Schedule B (the  "Option  Plan").  Pursuant to the Option  Plan,  the
Company  may issue to  Directors  and  Officers  of the  Company and third party
individuals  or  entities  providing  services  to the  Company  ("Consultants")
options to purchase up to an aggregate of no more than 1,000,000 Class B Shares.
The Option Plan shall be administered by the Board of Directors  pursuant to the
terms of the Option Plan.

         Section 5.4  Reliance by Third  Parties.  Any Person  dealing  with the
Company, the Directors or any Officer or employee of the Company may rely upon a
certificate signed by the Managing Member as to:

         (a)  the  identity  of any of the  Managing  Member,  any  Director  or
Officer;

         (b)  the  persons  who  are  authorized  to  execute  and  deliver  any
instrument or document on behalf of the Company; or

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

         Section 5.5 Other Business Interests.  Any Member, Director or Officer,
or any  Affiliate  of any Member,  may engage in or possess an interest in other
business  ventures of every kind and description,  independently or with others,
and may  dedicate  such time to such  ventures as such  Persons  deem,  in their
discretion,  necessary.  None of the Company or the other Members shall have any
rights in or to such  ventures or the income or profits  therefrom  by virtue of
this Agreement.  Without  limiting the generality of the foregoing,  the Members
acknowledge that: (i) Francis E. O'Donnell, a Director and the initial President
and Chief  Executive  Officer of the Company,  is also  Chairman,  President and
Chief Executive  Officer of the Managing Member as well as the managing director
of The Hopkins  Capital  Group,  a group of  affiliated  of entities  engaged in
business  development  activities,  and  (ii)  James  A.  McNulty,  the  initial
Secretary,  Treasurer and Chief  Financial  Officer of the Company,  is also the
Secretary, Treasurer and Chief Financial Officer of the Managing Member.

                                   ARTICLE VI
                         BOOKS AND RECORDS; TAX MATTERS

         Section  6.1 Books,  Records  and  Financial  Statements.  At all times
during the  continuance  of the  Company,  the Company  shall  maintain,  at its
principal  place of  business,  separate  books of account for the Company  that
shall show a true and accurate  record of all costs and expenses  incurred,  all
charges made, all credits made and received and all income derived in connection
with the operation of the Company's  business.  Such books of account,  together
with a  certified  copy of  this  Agreement  (including  any  amendments  and/or
restatements hereof)and of the Certificate,  shall at all times be maintained at
the  principal  place of business of the Company and shall be open to inspection
and  examination  at  reasonable  times by each  Member and its duly  authorized
representative  for any purpose  reasonably related to such Member's interest in
the Company.

         Section 6.2 Company  Audits.  At any time at the sole discretion of the
Board of Directors, the financial statements of the Company may be audited by an
independent  certified  public  accountant,  selected by the Board of Directors,
with such audit to be accompanied by a

                                       12
<PAGE>

report of such accountant containing its opinion. The cost of such audit will be
an expense of the Company.  A copy of any such audited financial  statements and
accountant's reports will be made available for inspection by the Members.

         Section  6.3  Tax  Matters  Partner.  The  Managing  Member  is  hereby
designated as "Tax Matters Partner" of the Company for purposes of ss.6231(a)(7)
of the Code and shall  have the power to manage  and  control,  on behalf of the
Company,  any  administrative  proceeding at the Company level with the Internal
Revenue  Service  relating to the  determination  of any item of Company income,
gain, loss, deduction or credit for federal income tax purposes.

         Section 6.4 Taxation as Partnership.  The Company shall be treated as a
partnership for U.S. federal income tax purposes.

                                  ARTICLE VII
                   LIABILITY, EXCULPATION AND INDEMNIFICATION

         Section 7.1 Liability.

         (a) Except as otherwise provided by the Act, the debts, obligations and
liabilities  of the Company,  whether  arising in contract,  tort or  otherwise,
shall be solely the debts,  obligations and liabilities of the Company,  and the
Organizer,  the Members,  the  Directors,  the Officers and the employees of the
Company (each a "Covered Person" and collectively  "Covered  Persons") shall not
be  obligated  personally  for any such debt,  obligation  or  liability  of the
Company solely by reason of being a Covered Person.

         (b) Except as  otherwise  expressly  required by law, a Member,  in its
capacity as a Member of the  Company,  shall have no  liability 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  distributions
wrongfully distributed to it.

         Section 7.2 Exculpation.

         (a) No Covered Person shall be liable to the Company, any Member or any
other  Person who has an interest  in the Company for any loss,  damage or claim
incurred by reason of any act or omission  performed  or omitted by such Covered
Person in good  faith in  connection  with the  formation  of the  Company or on
behalf of the Company and in a manner reasonably believed to be within the scope
of the authority conferred on such Covered Person by this Agreement, except that
a Covered Person shall be liable for any such loss,  damage or claim incurred by
reason of such Covered Person's gross negligence or willful misconduct.

         (b) A Covered Person shall be fully  protected in relying in good faith
upon the records of the Company and upon such information,  opinions, reports or
statements  presented  to the Company or the Board of Directors by any Person as
to matters the Covered Person reasonably believes are within such other Person's
professional or expert competence and who has been selected with reasonable care
by or on behalf of the  Company,  including  information,  opinions,  reports or
statements  as to the value  and  amount of the  assets,  liabilities,  profits,
losses or any other facts  pertinent to the  existence and amount of assets from
which distributions to Members might properly be paid.

                                       13
<PAGE>

         Section 7.3 Indemnification.

         (a) Covered  Persons.  To the full extent  permitted by applicable law,
each Covered  Person shall be entitled to  indemnification  from the Company for
any loss,  damage or claim  incurred by such Covered Person by reason of any act
or omission  performed or omitted by such Covered Person in good faith on behalf
of the Company and in a manner reasonably believed to be within the scope of the
authority  conferred on such Covered  Person by this  Agreement,  except that no
Covered  Person  shall be  entitled  to be  indemnified  in respect of any loss,
damage or claim incurred by such Covered Person by reason of gross negligence or
willful  misconduct with respect to such acts or omissions;  provided,  however,
that any  indemnity  under this  Section 7.3 shall be provided out of and to the
extent of Company  assets only,  and no Member shall have personal  liability on
account thereof.

         (b)  Notice of  Claims.  Any  Covered  Person  seeking  indemnification
hereunder (an "Indemnitee")  shall promptly,  and within 30 days after notice to
it (notice to Indemnitee being the filing of any action, receipt of any claim in
writing or similar form of actual  notice) of any claim as to which it asserts a
right to indemnification,  notify the party from whom  indemnification is sought
(an  "Indemnitor") of such claim.  Indemnitee shall bill Indemnitor for any such
claims no more frequently than on a monthly basis, and Indemnitor shall promptly
pay (or cause to be paid)  Indemnitee upon receipt of any such bill. The failure
of Indemnitee to give the notification to Indemnitor  contemplated above in this
Section  7.3(b) shall not relieve  Indemnitor  from any  liability or obligation
that it may have  pursuant  to this  Agreement  unless the  failure to give such
notice within such time shall have been materially  prejudicial to it, and in no
event shall the failure to give such  notification  relieve  Indemnitor from any
liability it may have other than pursuant to this Agreement.

         (c) Third Party Claims. If any claim for  indemnification by Indemnitee
arises out of an action or claim by a Person other than  Indemnitee,  Indemnitor
may, by written notice to Indemnitee,  undertake to conduct the defense  thereof
and to take all other  steps or  proceedings  to defeat or  compromise  any such
action or claim, including the employment of counsel;  provided, that Indemnitor
shall  reasonably  consider  the  advice  of  Indemnitee  as to the  defense  or
compromise of such actions and claims,  and  Indemnitee  shall have the right to
participate,  at its own  expense,  in such  proceedings,  but  control  of such
proceedings shall remain  exclusively with Indemnitor.  Indemnitee shall provide
all reasonable  cooperation to Indemnitor in connection  with such  proceedings.
Counsel  and  auditor  costs  and  expenses  and  court  costs  and  fees of all
proceedings  with  respect  to any  such  action  or  claim  shall  be  borne by
Indemnitor. If any such claim is made hereunder and Indemnitor does not elect to
undertake the defense thereof by written notice to Indemnitee,  Indemnitee shall
be entitled to control such  proceedings and shall be entitled to indemnity with
respect thereto pursuant to the terms of this Section 7.3(b). To the extent that
Indemnitor  undertakes the defense of such claim by written notice to Indemnitee
and diligently pursues such defense at its expense, Indemnitee shall be entitled
to   indemnification   hereunder  only  to  the  extent  that  such  defense  is
unsuccessful  as  determined  by a  final  judgment  of  a  court  of  competent
jurisdiction, or by written acknowledgment of the parties.

         Section 7.4  Expenses.  To the fullest  extent  permitted by applicable
law,  expenses  (including legal fees) incurred by a Covered Person in defending
any claim,  demand,  action,  suit or  proceeding  shall,  from time to time, be
advanced by the Company prior to the final

                                       14
<PAGE>

disposition of such claim,  demand,  action,  suit or proceeding upon receipt by
the Company of an  undertaking  by or on behalf of the  Covered  Person to repay
such amount if it shall be determined that the Covered Person is not entitled to
be indemnified as authorized in Section 7.3 hereof.

         Section 7.5 Insurance. The Company may purchase and maintain insurance,
to the extent and in such amounts as the Board of Directors  shall,  in its sole
discretion, deem reasonable, on behalf of Covered Persons and such other persons
as the Board of Directors  shall  determine,  against any liability  that may be
asserted  against or expenses  that may be incurred by any person in  connection
with the  activities of the Company or such  indemnities,  regardless of whether
the Company would have the power to indemnify such person against such liability
under the  provisions of this  Agreement.  The Company may enter into  indemnity
contracts with Covered  Persons and such other Persons as the Board of Directors
shall determine and adopt written procedures  pursuant to which arrangements are
made for the  advancement  of  expenses  and the  funding of  obligations  under
Section   7.4   hereof  and   containing   such   other   procedures   regarding
indemnification as are appropriate.

                                  ARTICLE VIII
                        TRANSFERS OF MEMBERSHIP INTERESTS

         Section 8.1 Transfers of Membership Shares.

         (a) Generally.

                  (i) Except as contemplated by Section 3.7 hereof, no Member or
         Securityholder  may,  at any  time,  directly  or  indirectly,  assign,
         transfer,  sell,  exchange,   syndicate,  lien,  encumber,  pledge,  or
         hypothecate  (collectively,  a  "Transfer")  all or any  portion of its
         Membership  Shares,  or any  direct or  indirect  beneficial  or equity
         interest therein, or in the Company (collectively,  "Equity Interests")
         to any Person without the prior written consent of the Managing Member,
         which consent may be granted or withheld in the Managing  Member's sole
         discretion,  for any reason or no reason;  provided,  however, that any
         Member or  Securityholder  who is an individual may Transfer all or any
         portion of such Equity  Interest to any  Permitted  Transferee  without
         such prior approval.

                  (ii) Any  individual  Member  or  Securityholder  making  such
         Transfer to a Permitted Transferee shall provide written notice thereof
         to the Managing Member within ten (10) days of the applicable Transfer.
         It is agreed that failure to provide such notice to the Managing Member
         shall make the purported  Transfer to the Permitted  Transferee void ab
         initio.

                  (iii)  With   respect  to  Transfers   other  than   Permitted
         Transfers,  the  Managing  Member may  condition  its  approval  of any
         proposed Transfer of Membership Shares upon its receipt from the Member
         proposing  to make  such  Transfer  (the  "Transferring  Member")  of a
         written notice to the Managing Member (a "Transfer  Notice")  detailing
         all of the material terms of such proposed Transfer, including the name
         of proposed third party  transferee or lender and the economic  benefit
         to be derived by the Transferring Member from such transaction.

                                       15
<PAGE>

                  (iv) If a Class B Member  Transfers  all or any portion of its
         Membership Shares to a Permitted  Transferee or with the consent of the
         Managing  Member as provided for above,  the transferee may be admitted
         to the Company as a Substitute  Member in  accordance  with Section 3.8
         hereof.  If a Transfer of Membership  Shares is made in accordance with
         the  provisions  of this Section  8.1, the Managing  Member shall amend
         Schedule A hereto to record the admission of the Additional Member.

         (b) Override on Transfers. Notwithstanding the fact that a Transfer may
be (or may have  been  effected)  to a  Permitted  Transferee  or may have  been
approved by the  Managing  Member  pursuant to this  Section 8.1, no Transfer of
Membership  Shares  shall  be  permitted  if  such  Transfer  (i)  violates  any
applicable law, including federal or state securities laws or regulations,  (ii)
causes the  Company to be treated as a  "publicly  traded  partnership"  for tax
purposes  or (iii)  would  constitute  a  Transfer  of a  Membership  Share to a
Prohibited  Owner,  in which case any such  purported  Transfer shall be void ab
initio.

         Section 8.2 Managing Member Right of First Refusal. In the event that a
Transferring  Member is  proposing  to sell or assign all or any  portion of its
Membership  Shares to any  Person,  such  Transferring  Member  shall  deliver a
Transfer  Notice to the Managing  Member no later than thirty (30) days prior to
the contemplated closing of such sale or assignment. For a period of thirty (30)
days following receipt its receipt of such Transfer Notice,  the Managing Member
may  exercise  a right to  purchase  all or a portion of the  Membership  Shares
described in such Transfer  Notice on the same terms and conditions as set forth
therein.  Managing  Member's purchase right shall be exercised by written notice
signed by the Managing  Member (the "Managing  Member  Notice") and delivered to
such Transferring  Member.  The Managing Member shall effect the purchase of the
Transferring  Member's  Membership  Shares,  including  payment of the  purchase
price,  not more than thirty (30) days after  delivery  of the  Managing  Member
Notice,  and at such time the Transferring  Member shall sell to the Company the
Membership  Shares free and clear of any liens or encumbrances and shall execute
such  documentation as the Managing Member may reasonably  propose in connection
with such sale.  Upon the purchase by the Managing  Member of Membership  Shares
pursuant to this  Section  8.2,  such  Membership  Shares shall be owned for all
purposes by the Managing  Member (who may make such acquired  Membership  Shares
available  for  issuance  pursuant  to Section  3.7  hereof)  and the  resulting
Percentage Interests of the remaining Members shall be amended accordingly.

                                   ARTICLE IX
                    DISSOLUTION, LIQUIDATION AND TERMINATION

         Section 9.1 Dissolution.

         (a) The Company shall dissolve, and its affairs shall be wound up, only
upon the written consent of the Managing Member.

         (b) The Company  shall not be dissolved by the  admission of Additional
Members or Substitute Members in accordance with the terms of this Agreement.

                                       16
<PAGE>

         Section 9.2 Liquidation.  Upon dissolution of the Company, the Managing
Member  shall  carry out the  winding up of the  Company  and shall  immediately
commence  to wind up the  Company's  affairs;  provided,  however,  that (i) the
Managing  Member shall have all of the powers set forth in Section  18-803(b) of
the Act during the period of the winding up of the Company's  affairs and (ii) a
reasonable  time shall be allowed for the orderly  liquidation  of the assets of
the Company and the satisfaction of liabilities to creditors so as to enable the
Managing Member to minimize the normal losses attendant upon a liquidation.  The
Members  shall  continue to share in profits  and losses of the  Company  during
liquidation  in the same  proportions,  as specified  in Section 4.1 hereof,  as
before  liquidation,  provided  that  allocations  of profits,  losses and items
thereof  shall be made in a manner that results in the capital  account  balance
(as described in Treasury Regulation  1.704-1(b)) of each Member is equal to the
distribution to be made to such Member pursuant to Section 9.3(c).  The proceeds
of liquidation shall be distributed in the following order and priority:

         (a) first,  to  creditors  of the  Company,  including  Members who are
creditors,  to the extent  otherwise  permitted by law, in  satisfaction  of the
liabilities  of the  Company  (whether  by payment  or the making of  reasonable
provision for payment thereof); and

         (b)  thereafter,  to the  Members,  pro  rata in  proportion  to  their
respective Percentage Interests.

         Section 9.3  Termination.  The Company shall  terminate when all of the
assets  of the  Company,  after  payment  of or due  provision  for  all  debts,
liabilities and obligations of the Company,  shall have been  distributed to the
Members in the manner  provided  for in this Article IX and the  certificate  of
formation shall have been canceled in the manner required by the Act.

         Section 9.4 Claims of the Members. Upon dissolution of the Company, the
Members  shall  look  solely to the  Company's  assets  for the  return of their
capital contributions,  and if the assets of the Company remaining after payment
of or due provision for all debts,  liabilities  and  obligations of the Company
are insufficient to return such capital contributions, the Members shall have no
recourse against the Company or any other Member.

                                   ARTICLE X
                                  MISCELLANEOUS

         Section  10.1  Separability  of  Provisions.  Each  provision  of  this
Agreement  shall be considered  separable and if for any reason any provision or
provisions  herein are determined to be invalid,  unenforceable or illegal under
any existing or future law,  such  invalidity,  unenforceability  or  illegality
shall not impair the  operation  of or affect those  portions of this  Agreement
which are valid, enforceable and legal.

         Section 10.2 Counterparts.  This Agreement and any amendment or joinder
hereto may be executed in any number of counterparts  and by facsimile,  each of
which,  when taken  together,  shall be deemed an original of this Agreement and
one and the same Agreement.

         Section 10.3 Entire  Agreement.  This Agreement  constitutes the entire
agreement  between the parties hereto with respect to the subject matter hereof,
and supersedes all prior understandings or agreements between the parties.

                                       17
<PAGE>

         Section 10.4 Governing  Law. This  Agreement  shall be governed by, and
construed  under,  the laws of the  State of  Delaware  (without  regard  to the
conflict of laws principles of such State).

         Section 10.5 Arbitration.

         (a) Any  controversy,  claim,  or dispute arising out of or relating to
this  Agreement,  including  any  alleged  breach  or  threatened  breach of the
provisions  contained  in this  Agreement,  will,  upon demand of a party to the
controversy,  claim, or dispute,  be resolved timely by arbitration  held in New
York, New York, and administered by the American Arbitration Association ("AAA")
in  accordance  with the  Commercial  Arbitration  Rules of the AAA and,  to the
maximum extent applicable,  pursuant to the Federal  Arbitration Act, 9 U.S.C. 1
et seq.

         (b) An award rendered in any such proceeding  shall be final,  binding,
and  non-appealable,  and  judgment  thereon may be entered in any court  having
competent jurisdiction. With respect to a controversy, claim or dispute in which
the claim or amount in controversy does not exceed $100,000, a single arbitrator
will be impaneled,  who will be chosen by the AAA and have authority to render a
maximum award of $100,000,  including  all damages of any kind and costs,  fees,
interest and the like. With respect to a controversy,  claim or dispute in which
the claim or amount in controversy exceeds $100,000, the dispute will be decided
by a majority vote of three  arbitrators,  each of whom shall be selected by the
AAA. All arbitrators will be knowledgeable in the subject matter of the dispute.

         (c) The arbitrator(s) may grant any remedy or relief they deem just and
equitable, including any provisional and injunctive remedies available at law or
in equity (in which case the party  receiving such relief may apply to the court
of competent  jurisdiction  for  enforcement  of such  provisional or injunctive
order, without prejudice to the continued arbitration of the matter);  provided,
however,  that the AAA may,  upon the  demand of any  party to the  controversy,
claim,  or  dispute,  administratively  appoint  a single  "provisional  relief"
arbitrator  on an expedited  basis to consider any request for, and grant,  such
provisional or injunctive  remedy;  and, provided further,  that the arbitrators
shall award reasonable attorneys' fees and expenses to the prevailing party. The
arbitrators  will resolve all disputes in accordance  with the laws of the State
of Delaware.  The arbitrators  will make specific,  written findings of fact and
conclusions  of law.  The  arbitrators'  findings of fact will be binding on all
parties and will not be subject to further review.

         Section  10.6  Remedies.  The rights and remedies of the Company and of
the Members hereunder shall not be mutually exclusive, i.e., the exercise of one
or more of the  provisions  hereof  shall not preclude the exercise of any other
provisions  hereof.  Except as otherwise  provided  for herein,  it is expressly
understood  and agreed by the Members that,  notwithstanding  any other remedies
which may be available at law or in equity to the Company, the Members or any of
their  respective  Affiliates,  the  remedies  available  to such Persons upon a
failure by any other such Person to perform any of its obligations hereunder, or
upon a breach of any agreement,  covenant or representation hereunder,  shall be
limited to those remedies which are expressly set forth in this  Agreement,  and
all  remedies  which  are not set  forth  herein,  whether

                                       18
<PAGE>

at law,  equity or  otherwise,  are  hereby  waived by the  Members in their own
capacities and on behalf of their Affiliates.

         Section 10.7 No Third Party  Beneficiaries.  Nothing in this Agreement,
expressed  or implied,  is  intended  to confer any rights or remedies  upon any
Person,  other than the Members and,  subject to the  restrictions on assignment
contained herein, their respective successors and assigns.

         Section 10.8  Amendments.  This  Agreement  may be  modified,  altered,
supplemented  or amended in any manner only with the  approval  of the  Managing
Member. Any administrative  alteration to Schedule A hereto (i.e.,  correcting a
spelling or  typographical  error or updating of a Member's  address and contact
information  or reflecting  the  admission of  Additional  Members or Substitute
Members  following the issuance or Transfer of  Membership  Shares in accordance
with the terms of this  Agreement)  shall not be  deemed  an  amendment  to such
schedule  or to this  Agreement  for  purposes of this  Section  10.8 and may be
effectuated by the Officers at the direction of the Board of Directors.

         Section 10.9 Interpretation. Whenever appropriate in the context, terms
used in this Agreement in the singular also include the plural,  and vice versa,
and each  masculine,  feminine or neuter  pronoun  shall also  include the other
genders.  Unless otherwise  expressly stated herein,  all references to the term
"including"  shall be deemed to be  interpreted as meaning  "including,  without
limitation".  Unless otherwise  expressly  stated herein,  all references to the
phrase  "applicable  law"  shall be deemed to  include  provisions  of rules and
regulations  promulgated  under  applicable law.  Except as otherwise  expressly
provided herein,  all references herein to any contract,  agreement,  law, rule,
regulation or other document shall refer to such contract, agreement, law, rule,
regulation or other document as amended from time to time.

         Section  10.10  Captions.  The  captions  of  articles,   sections  and
schedules of this  Agreement  are for  convenience  only,  and neither limit nor
amplify the provisions of the Agreement itself.

         Section 10.11 Notices. All notices,  demands,  approvals,  consents and
requests to be sent to the Company,  or any Member  pursuant to the terms hereof
shall be in writing and shall be deemed to have been  properly  given or served,
if  personally  delivered,  sent by  recognized  messenger  or next day  courier
service,  or sent by United  States mail to the  addresses  listed on Schedule A
hereto,  and will be deemed received,  unless earlier  received:  (a) if sent by
express,  certified or registered  mail (and if by registered  mail, with return
receipt requested),  when actually received or delivery refused;  (b) if sent by
messenger or courier, when actually received or refused, provided it is received
or refused on the same  Business  Day; (c) if delivered by hand,  on the date of
delivery or refusal;  and (d) if sent by first-class  mail, seven (7) days after
it was mailed,  unless  returned  to sender for any reason by the United  Stated
Postal  Service,  but not at the request of the  addressee.  Rejection  or other
refusal  to accept or the  inability  to deliver  because of changed  address of
which no notice was given shall be deemed to be receipt of the notice, demand or
request sent.

                                       19
<PAGE>

                                   ARTICLE XI
                                   DEFINITIONS

         Section 11.1 Certain Defined Terms.  When used in this  Agreement,  the
following terms have the indicated  meanings.  All other  capitalized  terms are
defined elsewhere in this Agreement.

         "Affiliate"  or  "Affiliates"  of a  specified  Person  is a Person  or
Persons that (i)  directly or  indirectly,  through one or more  intermediaries,
Controls, is Controlled by or is under common Control with the Person specified,
or (ii) in the case of a natural person, is a spouse, natural brother or sister,
linear ancestor or linear  descendant of any such specified  person, or (iii) in
the case of a natural person,  is a legal  representative or trustee of any such
specified  persons,  or  (iv)  is  an  officer,  director,   trustee,  employee,
shareholder,  member, partner,  principal or trust for the benefit of any entity
or Person  referred to in the preceding  clauses (i),  (ii) or (iii);  provided,
however,  for the purposes of this Agreement,  that no Member shall be deemed an
Affiliate of any other  Member or any officer or agent of the Company  solely by
virtue of the  relationship  of those  parties  to each other  pursuant  to this
Agreement.

         "Available  Net Cash"  means,  for any  fiscal  period,  any  operating
receipts of the Company  (including the cash proceeds received by the Company in
connection with any Capital Event) after payment of (i) any amounts  required to
pay costs and  expenses of the Company,  including  normal  operating  expenses,
taxes and professional or other fees, (ii) any payments of any Indebtedness, and
(iii)  amounts of any reserves as may  reasonably  be determined by the Board of
Directors. For purposes of this definition,  the term "Indebtedness" means, with
respect  to the  Company,  (a) all  indebtedness  for  borrowed  money,  (b) the
deferred  purchase  price of  assets  or  services  which,  in  accordance  with
generally accepted accounting principles, would be reflected as a liability, (c)
the  maximum  amount of all  letters  of credit  issued  for the  account of the
Company, (d) all capitalized lease obligations, and (e) obligations to guarantee
the debt of another Person.

         "Business Day" shall mean any day other than a Saturday,  Sunday or any
day on which national banks in New York, New York are not open for business.

         "Capital Event" means any event not occurring in the ordinary course of
business  of  the   Company,   pursuant  to  which  the  Company   receives  any
consideration  with respect to its assets or the  disposition  thereof or of any
interest  therein,  and  including,  without  limitation,  any sale,  financing,
refinancing,  exchange, redemption, conversion or liquidation of all or any part
of the assets of the Company  (including equity interests owned by the Company).
For the  avoidance  of doubt,  the  reorganization  contemplated  by Section 3.9
hereof shall not be deemed a Capital Event.

         "Code" shall mean the Internal  Revenue  Code of 1986,  as amended,  or
corresponding provisions of future laws.

         "Control" shall mean the possession,  direct or indirect,  of the power
to direct or cause the  direction  of the  management  and policies of a Person,
whether through (i) the

                                       20
<PAGE>

ownership  of  voting  shares,  (ii)  general  partnership  or  managing  member
interests, (iii) common directors or trustees, or (iv) by contract or otherwise.

         "Government  Lists" shall mean (i) the Specially  Designated  Nationals
and Blocked  Persons List  maintained by the Office of Foreign  Assets  Control,
U.S. Department of the Treasury or (ii) any other list of terrorists,  terrorist
organizations or narcotics  traffickers  maintained pursuant to any of the rules
and  regulations of Office of Foreign  Assets  Control,  U.S.  Department of the
Treasury,  or (iii) any similar list  maintained  by the U.S.  Department of the
Treasury,  U.S. Department of State, the U.S. Department of Commerce,  any other
federal or state agency or pursuant to any  Executive  Order of the President of
the United States.

         "Patriot Act Offense"  means any  violation of the criminal laws of the
United  States of  America  or any of the  several  states,  or that  would be a
criminal  violation if committed within the jurisdiction of the United States of
America or any of the several states, relating to terrorism or the laundering of
monetary  instruments,  including  any offense under (a) the Bank Secrecy Act of
1970,  (b) the Money  Laundering  Control  Act of 1986,  or (c) the  Uniting and
Strengthening  of America by Providing  Appropriate  Tools Required to Intercept
and Obstruct  Terrorism  (USA PATRIOT ACT) Act of 2001, in each case as the same
may be  amended  from time to time,  and the rules and  regulations  promulgated
thereunder  and  corresponding  provisions of future laws. The term "Patriot Act
Offense"  also  includes  the  crimes of  conspiracy  to  commit,  or aiding and
abetting another to commit, a Patriot Act Offense.

         "Permitted Transferee" means, as to any Member or Securityholder who is
a natural  person,  but in any event solely in the furtherance of such Member or
Securityholder's  estate  planning:  (a) the  spouse,  brother,  sister,  lineal
ancestor or lineal  descendent of such Member or  Securityholder,  (b) the legal
representative  or  trustee of such  Member,  Securityholder  or any  individual
specified  in clause (a) of this  definition,  or (c) any  partnership,  limited
liability  company,  trust or other  entity  (i)  organized  solely for the sole
benefit of any individual specified in clause (a) of this definition or group of
such related individuals and (ii) controlled by such Member or Securityholder or
such Member or Securityholder's Permitted Transferee.

         "Person" means any legal person, including any individual, corporation,
limited liability company, partnership, joint venture, association,  joint-stock
company, trust, unincorporated organization, governmental entity or other entity
of similar nature.

         A "Prohibited  Owner" means a proposed  Additional Member or Substitute
Member or other  transferee or assignee of a Membership  Share, or such Person's
direct  or  indirect  shareholders,   members,  partners,  controlling  parties,
beneficiaries  or other owners of interests  in such  transferee,  to the extent
that any such Person is, are or has been (a) included on any Government  List or
(b) a Person who has been  determined by a Governmental  Authority to be subject
to the  prohibitions  contained in Executive Order 13224 (September 23, 2001) or
any similar  provisions  contained in the rules and regulations of the Office of
Foreign Assets Control or (c) indicted for any Patriot Act Offense or (d) to the
actual knowledge of the Company or any Member or their respective Affiliates, at
the time of transfer or other transaction, as applicable, under investigation by
any federal, state, local or foreign governmental authority for alleged criminal
behavior  or (e) a Person  which,  directly  or  indirectly,  is  engaged in the
business of drug or nutrient delivery or any other business which the Company is
engaged at the time of the proposed Transfer.

                                       21
<PAGE>

         "Securityholder"  means any Person holding a direct or indirect  equity
interest in a Member.

         "Treasury  Regulations"  means the income tax  regulations  promulgated
under the Code, as such  regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).

                            [signature page follows]

                                       22
<PAGE>

         IN WITNESS  WHEREOF,  the  undersigned,  intending to be legally  bound
hereby, has duly executed this Amended and Restated Limited Liability  Operating
Agreement as of the date first set forth above.

                            BIODELIVERY SCIENCES INTERNATIONAL, INC.

                                   /s/ Francis E. O'Donnell, Jr.
                            By:  __________________________________________
                                   Name:  Francis E. O'Donnell, Jr., M.D.
                                   Title: President and Chief Executive Officer

                                       23
<PAGE>
<TABLE>
<CAPTION>

                                                           SCHEDULE A

                              Names, Contact Information and Membership Shares Held by the Members

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

             Name/Contact Information                     Number/Class of Membership Shares             Percentage Interest
--------------------------------------------------- ----------------------------------------------- ----------------------------
<S>                                                 <C>                                             <C>
BioDelivery Sciences International, Inc.
c/o UMDNJ - New Jersey Medical School
Administrative Building 4                                          708,586/Class A                            94.972%
185 South Orange Avenue                                           7,085,862/Class B
Newark, New Jersey 07103
--------------------------------------------------- ----------------------------------------------- ----------------------------

Raphael Mannino
c/o UMDNJ - New Jersey Medical School
Administrative Building 4
185 South Orange Avenue                                            125,000/Class B                            1.523%
Newark, New Jersey 07103
--------------------------------------------------- ----------------------------------------------- ----------------------------

Susan Gould-Fogerite
c/o UMDNJ - New Jersey Medical School
Administrative Building 4                                           75,000/Class B                            0.914%
185 South Orange Avenue
Newark, New Jersey 07103
--------------------------------------------------- ----------------------------------------------- ----------------------------

Donald L. Ferguson
c/o Land Dynamics, Inc.
11719 Old Ballas Road
St. Louis, MO 63141                                                 75,000/Class B                            0.914%
--------------------------------------------------- ----------------------------------------------- ----------------------------

Ellenoff Grossman & Schole LLP
370 Lexington Avene, 19th Floor                                     37,500/Class B                            0.457%
New York, NY 10017
--------------------------------------------------- ----------------------------------------------- ----------------------------

James A. McNulty
4419 W. Sevilla Street                                              20,000/Class B                            0.244%
Tampa, FL 33629
--------------------------------------------------- ----------------------------------------------- ----------------------------

Susan G. Bonitz
21 Sleepy Hollow Drive                                              20,000/Class B                            0.244%
Flemington, NJ 08822
--------------------------------------------------- ----------------------------------------------- ----------------------------

Mauro Bove
Via Sudafrica 20                                                    20,000/Class B                            0.244%
00144 Rome Italy
--------------------------------------------------- ----------------------------------------------- ----------------------------

Christopher Chapman
800 Falls Lake Drive                                                20,000/Class B                            0.244%
Mitchellville, MD 20720
--------------------------------------------------- ----------------------------------------------- ----------------------------

Samuel S. Duffey
P.O. Box 3379                                                       20,000/Class B                            0.244%
Sarasota, Florida
--------------------------------------------------- ----------------------------------------------- ----------------------------

TOTAL                                                     708,586 Class A/7,498,362 Class B                    100%
--------------------------------------------------- ----------------------------------------------- ----------------------------

</TABLE>

<PAGE>

                                   SCHEDULE B

                          BIORAL NUTRIENT DELIVERY, LLC

         1. Purposes of the Plan. The purposes of the Bioral Nutrient  Delivery,
LLC 2003 Class B Share Membership Option Plan are to attract and retain the best
available  personnel for  positions of  substantial  responsibility,  to provide
additional  incentive to Directors,  Officers,  Consultants and Employees of the
Company,  and to promote  the  success of the  Company's  business.  All Options
granted under the Plan are Non-Qualified Stock Options.  This Plan is adopted by
the Managing Member as of January 8, 2003.

         2. Definitions.  As used herein, the following definitions shall apply.
All  capitalized  terms used but not  defined  herein  shall  have the  meanings
ascribed  such  terms  in  that  certain  Limited  Liability  Company  Operating
Agreement  of the  Company,  dated  January 8, 2003,  by the  parties  signatory
thereto,  as members of the Company (as the same may be amended and/or  restated
from time to time, the "Operating Agreement").

         "Applicable Laws" means the requirements relating to the administration
of stock or unit  option  plans  under the laws of the State of  Delaware,  U.S.
federal and state securities laws, and the Code.

         "BDSI"  means  BioDelivery  Sciences  International,  Inc.,  a Delaware
corporation.

         "Beneficial  Owner"  has the  meaning  set  forth in Rule  13d-3 of the
Exchange Act.

         "Board" means the Board of Directors of the Company.

         "Change in Control" means (i) any Person becomes the Beneficial  Owner,
directly indirectly of securities of the Company representing 51% or more of the
combined  voting power of the Company's then  outstanding  securities;  (ii) any
consolidation  or merger of the Company  with or into any other  corporation  or
other  entity  or  person  in which the  members  of the  Company  prior to such
consolidation  or merger  own less than  fifty  percent  (51%) of the  Company's
voting power  immediately  after such  consolidation  or merger,  excluding  any
consolidation  or merger  effected  exclusively  to change the  domicile  of the
Company;  (iii) a sale of all or substantially all of the assets of the Company,
or (iv) a liquidation or dissolution of the Company.

         "Class B Shares"  means the Class B  Membership  Shares of the Company,
the  holders  of  which  have the  rights  afforded  them  under  the  Operating
Agreement.

         "Code" means the  Internal  Revenue  Code of 1986,  as amended,  or any
successor statute or statutes thereto.  Reference to any particular Code section
shall include any successor section.

         "Company"  means Bioral  Nutrient  Delivery,  LLC , a Delaware  limited
liability company.

         "Director" means a Director of the Company.

                                       1
<PAGE>

         "Employee" means any person, including a Officer who is an employee (as
defined in  accordance  with  Section  3401(c) of the Code) of the  Company.  An
Employee  shall not cease to be an  Employee in the case of any leave of absence
approved by the Company.

         "Fair Market Value" means, as of any date, the value of a Class B Share
as determined in good faith by the Board.

         "Holder"  means a person  who has been  granted or awarded an Option or
who holds Class B Shares acquired pursuant to the exercise of an Option.

         "Non-Qualified Stock Option" means a stock option that does not qualify
as an "incentive stock option" within the meaning of Section 422 of the Code.

         "Option"  means an option  granted,  pursuant to the Plan,  to purchase
Class B Shares.

         "Option  Agreement" means a written agreement between the Company and a
Holder  evidencing the terms and conditions of an individual  Option grant.  The
Option Agreement is subject to the terms and conditions of the Plan.

         "Parent" means any entity which owns  securities  possessing 50 percent
or more of the  total  combined  voting  or  approval  power of all  classes  of
securities in the Company.

         "Person" has the meaning given under  Exchange Act Section  13(d),  and
shall  include a  "group,"  as defined  in Rule  13d-5  promulgated  thereunder.
However,  a  "person"  shall  not  include:  (i) the  Company  or its  Parent or
Subsidiaries;  (ii) a trustee or other fiduciary  holding  securities under this
Plan or any employee benefit plan of the Company, its Parent or Subsidiaries; or
(iii) BDSI or any entity which is controlled by BDSI or is under common  control
with BDSI.

         "Plan"  means this  Bioral  Nutrient  Delivery,  LLC 2003 Class B Share
Option Plan.

         "Subsidiary"  means any  entity in which the  Company  owns  securities
possessing 50 percent or more of the total combined  voting power of all classes
of securities in such entity.

3. Class B Shares  Subject To The Plan.  Subject to the provisions of Section 12
of the Plan, the maximum  aggregate number of Class B Shares which may be issued
upon exercise of Options is 1,000,000 Class B Shares. If an Option is cancelled,
expires or becomes  unexercisable  without  having been  exercised in full,  the
unpurchased Class B Shares which were subject thereto shall become available for
future  grant or sale under the Plan (unless the Plan has  terminated).  Class B
Shares  which are  delivered  by the Holder or withheld by the Company  upon the
exercise of an Option under the Plan,  in payment of the exercise  price thereof
or tax withholding thereon, may again be optioned, granted or awarded hereunder,
subject to the limitations of this Section 3.

         4. Administration of the Plan.

         (a)  Administration By the Board. The Plan shall be administered by the
Board in accordance with the provision of this Plan.

                                       2
<PAGE>

         (b) Powers of the Board. Subject to the provisions of this Plan and the
approval of any relevant authorities,  the Board shall have the authority in its
sole discretion:

                  (i) to determine the Fair Market Value;

                  (ii) to select the  Employees to whom Options may from time to
         time be granted hereunder;

                  (iii) to determine  the number of Class B Shares to be covered
         by each such award granted hereunder;

                  (iv) to approve forms of agreement for use under the Plan;

                  (v) to  determine  the  terms  and  conditions  of any  Option
         granted  hereunder  (such  terms and  conditions  include,  but are not
         limited to, the exercise price, the time or times when Options may vest
         or be  exercised  (which  may be based on  performance  criteria),  any
         vesting  acceleration  or waiver of  forfeiture  restrictions,  and any
         restriction  or  limitation  regarding  any  Option  or  Class  B Share
         relating  thereto,  based in each case on such factors as the Board, in
         its sole discretion, shall determine);

                  (vi) to  determine  whether  to offer to  buyout a  previously
         granted Option as provided in Section 10(g) hereof and to determine the
         terms and  conditions  of such  offer  and  buyout  (including  whether
         payment is to be made in cash or Class B Shares);

                  (vii) to prescribe,  amend and rescind  rules and  regulations
         relating to the Plan;

                  (viii) to allow Holders to satisfy withholding tax obligations
         by electing to have the Company  withhold from the Class B Shares to be
         issued upon  exercise of an Option that number of Class B Shares having
         a Fair Market Value equal to the minimum amount required to be withheld
         based on the  statutory  withholding  rates for  federal  and state tax
         purposes that apply to  supplemental  taxable  income.  The Fair Market
         Value of the Class B Shares to be withheld  shall be  determined on the
         date that the amount of tax to be  withheld  is to be  determined.  All
         elections  by Holders to have Class B Shares  withheld for this purpose
         shall be made in such form and under such  conditions  as the Board may
         deem necessary or advisable;

                  (ix) to amend the Plan or any Option granted under the Plan as
         provided in Section 14; and

                  (x) to construe and interpret the terms of the Plan and awards
         granted  pursuant to the Plan and to  exercise  such powers and perform
         such acts as the Board deems necessary or desirable to promote the best
         interests of the Company which are not in conflict with the  provisions
         of the Plan.

                                       3
<PAGE>

         (c)  Effect  of  Board  Decision.  All  decisions,  determinations  and
interpretations of the Board shall be final and binding on all Holders.

         5.  Eligibility.  Options may be granted only to  Directors,  Officers,
Employees and Consultants.  If otherwise eligible, a Director, Officer, Employee
or Consultant who has been granted an Option may be granted additional Options.

         6.  Limitations.  Neither the Plan nor any Option  shall  confer upon a
Holder any right with respect to continuing the Holder's status as a Director or
the Holder's employment or consulting  relationship with the Company,  nor shall
they  interfere in any way with the  Holder's  right or the  Company's  right to
terminate such directorship,  employment or consulting relationship at any time,
with or without cause.

         7. Term of Plan.  The Plan  shall  become  effective  upon its  initial
adoption by the Board and shall continue in effect until it is terminated  under
Section  14  hereof.  No  Options  may be issued  under the Plan after the tenth
(10th) anniversary of the date first listed above in this Plan.

         8.  Term of  Option.  The term of each  Option  shall be  stated in the
applicable Option Agreement;  provided,  however, that the term shall be no more
than ten (10) years from the date of grant thereof.

         9. Option Exercise Price and Consideration.

         (a) Except as provided in Section  12, the  exercise  price per Class B
Share for the Class B Shares to be issued upon  exercise  of an Option  shall be
such price as is determined by the Board.

         (b) The  consideration  to be paid for the  Class B Shares to be issued
upon exercise of an Option, including the method of payment, shall be determined
by the Board. Such consideration may consist of (i) cash or (ii) check.

         10. Exercise of Option.

         (a) Vesting; Fractional Exercises. Except as provided in Section 12, an
Option  granted  hereunder  shall  become  vested  and  exercisable  at the rate
specified  in the Option  Agreement.  In the absence of a specified  rate in the
Option  Agreement,  the Option shall become vested and  exercisable at a rate of
fifty  percent  (50%) per year over two (2)  years  from the date the  Option is
granted,  subject to the  condition  that the Holder  continue to be a Director,
Officer,  Consultant  or an  Employee.  An  Option  may not be  exercised  for a
fraction of a Class B Share.

         (b) Deliveries upon Exercise. All or a portion of an exercisable Option
shall be deemed exercised upon delivery of all of the following to the Secretary
of the Company or his or her office:

                   (i)  A  written  or  electronic  notice  complying  with  the
         applicable rules established by the Board stating that the Option, or a
         portion thereof, is exercised.

                                       4
<PAGE>

         The notice shall be signed by the Holder or other person then  entitled
         to exercise the Option or such portion of the Option;

                   (ii) Such  representations and documents as the Board, in its
         sole discretion, deems necessary or advisable to effect compliance with
         Applicable  Laws.  The Board  may,  in its sole  discretion,  also take
         whatever  additional  actions  it  deems  appropriate  to  effect  such
         compliance,  including, without limitation,  placing legends on Class B
         Share  certificates  and issuing  stop  transfer  notices to agents and
         registrars;

                   (iii)  In the  event  that  the  Option  shall  be  exercised
         pursuant  to  Section  10(f) by any  person or  persons  other than the
         Holder,  appropriate  proof of the right of such  person or  persons to
         exercise the Option; and

         (c) Conditions to Delivery of Evidence of Ownership.  The Company shall
not be required to issue or deliver any  certificate or  certificates  (or other
evidence  of  ownership,  including  an  amended  Schedule  A to  the  Operating
Agreement,  certified by the Managing  Member as to the number of Shares held by
each  Member) for Class B Shares  purchased  upon the  exercise of any Option or
portion thereof prior to fulfillment of all of the following conditions:

                  (i) The completion of any registration or other  qualification
         of such  Class B Shares  under any state or federal  law,  or under the
         rulings or regulations of the Securities and Exchange Commission or any
         other  governmental  regulatory body which the Board shall, in its sole
         discretion, deem necessary or advisable;

                  (ii) The obtaining of any approval or other clearance from any
         state or federal governmental agency which the Board shall, in its sole
         discretion, determine to be necessary or advisable;

                  (iii) The lapse of such  reasonable  period of time  following
         the exercise of the Option as the Board may establish from time to time
         for reasons of administrative convenience;

                  (iv) The receipt by the Company of full payment for such Class
         B Shares, including payment of any applicable withholding tax, which in
         the sole  discretion  of the Board may be in the form of  consideration
         used by the Holder to pay for such Class B Shares under  Section  9(b);
         and

                  (v) The Holder's  execution of a Joinder  Agreement or similar
         instrument (the form of which shall be determined by the Board) whereby
         the  Holder  agrees  to the  terms  and  conditions  of  the  Operating
         Agreement.

         (d)  Termination of  Relationship  as a Service  Provider.  If a Holder
ceases to be a Director, Officer, Employee or Consultant other than by reason of
the  Holder's  disability  or death,  such Holder may exercise his or her Option
within such period of time as is specified in the Option Agreement to the extent
that the  Option is  vested  on the date of  termination.  In the  absence  of a
specified time in the Option Agreement,  the Option shall remain exercisable for

                                       5
<PAGE>

three  (3)  months  following  the  Holder's  termination.  If,  on the  date of
termination,  the Holder is not vested as to his or her entire Option, the Class
B Shares covered by the unvested portion of the Option  immediately  cease to be
issuable  under the Option and shall again become  available for issuance  under
the Plan. If, after termination,  the Holder does not exercise his or her Option
within the time period specified  herein,  the Option shall  terminate,  and the
Class B Shares covered by such Option shall again become  available for issuance
under the Plan.

         (e) Disability of Holder. If a Holder ceases to be a Director, Officer,
Employee or Consultant as a result of the Holder's  disability,  as such term is
defined in Section  22(e)(3) of the Code, or, in the case of a Consultant  which
is an entity,  the bankruptcy or dissolution of such Consultant,  the Holder may
exercise  his or her Option  within such period of time as is  specified  in the
Option  Agreement to the extent the Option is vested on the date of termination.
In the absence of a specified  time in the Option  Agreement,  the Option  shall
remain  exercisable for three (3) years following the occurrence of the Holder's
disability,  bankruptcy or  dissolution,  as the case may be. If, on the date of
disability, bankruptcy or dissolution, the Holder is not vested as to his or her
entire Option,  the Class B Shares covered by the unvested portion of the Option
shall  immediately  cease to be issuable under the Option and shall again become
available  for issuance  under the Plan.  If, after  disability,  bankruptcy  or
dissolution,  the Holder  does not  exercise  his or her Option  within the time
specified herein, the Option shall terminate,  and the Class B Shares covered by
such Option shall again become available for issuance under the Plan.

         (f) Death of Holder. If a Holder dies while still acting as a Director,
Officer, Employee or Consultant,  the Option may be exercised within such period
of time as is specified in the Option Agreement,  by the Holder's estate or by a
person who acquires the right to exercise the Option by bequest or  inheritance,
but only to the extent  that the  Option is vested on the date of death.  In the
absence of a specified  time in the Option  Agreement,  the Option  shall remain
exercisable for three (3) years following the Holder's death. If, at the time of
death,  the  Holder is not vested as to his or her  entire  Option,  the Class B
Shares covered by the unvested portion of the Option shall  immediately cease to
be issuable under the Option and shall again become available for issuance under
the Plan.  The Option may be  exercised by the executor or Board of the Holder's
estate or, if none, by the  person(s)  entitled to exercise the Option under the
Holder's  will or the laws of descent or  distribution.  If the Option is not so
exercised within the time specified herein, the Option shall terminate,  and the
Class B Shares covered by such Option shall again become  available for issuance
under the Plan.

         (g) Buyout Provisions.  The Board may at any time offer to buyout for a
payment in cash or Class B Shares, an Option previously  granted,  based on such
terms and conditions as the Board shall  establish and communicate to the Holder
at the time that such offer is made.

         11.  Non-Transferability  of Options.  Except as otherwise  provided in
this  Section 11,  Options  may not be sold,  pledged,  assigned,  hypothecated,
transferred,  or disposed of in any manner  other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the Holder,
only by the Holder.  A Holder may transfer an Option to a  partnership  or trust
solely  benefiting the holder or immediate family members,  or to an inter vivos
or testamentary trust from which the option or underlying class b shares will be
transferred after the holder's death.

                                       6
<PAGE>

         12. Adjustments Upon Changes In Capitalization, Merger or Asset Sale.

         (a) In the  event  that the  Board  determines  that  any  distribution
(whether  in the  form of  cash,  Class B  Shares,  other  securities  or  other
property), recapitalization,  reclassification,  Membership Share split, reverse
Membership  Share  split,  reorganization,   merger,  consolidation,   split-up,
spin-off, combination, repurchase, liquidation,  dissolution, or sale, transfer,
exchange or other  disposition of all or substantially  all of the assets of the
Company,  or exchange of Membership  Shares or other  securities of the Company,
issuance  of  warrants  or other  rights  to  purchase  Class B Shares  or other
securities of the Company,  or other similar corporate  transaction or event, in
the Board's sole discretion,  affects the Class B Shares such that an adjustment
is determined  by the Board to be  appropriate  in order to prevent  dilution or
enlargement of the benefits or potential  benefits intended by the Company to be
made  available  under the Plan or with  respect to any  Option,  then the Board
shall, in such manner as it may deem equitable, adjust any or all of:

                  (i) the number and kind of Class B Shares (or other securities
         or  property)  with  respect  to which  Options  Class B Shares  may be
         granted or awarded  (including,  but not limited to, adjustments of the
         limitations  in  Section 3 on the  maximum  number  and kind of Class B
         Shares  which may be issued and  adjustments  of the maximum  number of
         Class B Shares that may be purchased by any Holder  pursuant to Section
         6(b));

                  (ii) the number and kind of shares of Class B Shares (or other
         securities or property) subject to outstanding Options; and

                  (iii) the exercise price with respect to any Option.

         (b) In the event of a Change in Control, all Options shall become fully
vested and exercisable.

         13. Time of Granting Options. The date of grant of an Option shall, for
all purposes,  be the date on which the Board makes the  determination  granting
such Option,  or such other date as is  determined  by the Board.  Notice of the
determination  shall be given to each  Director or Employee to whom an Option is
so granted within a reasonable time after the date of such grant.

         14. Amendment and Termination of the Plan.

         (a)  Amendment  and  Termination.  The Board may at any time  wholly or
partially amend, alter, suspend or terminate the  Plan.

         (b) Effect of  Amendment  or  Termination.  No  amendment,  alteration,
suspension  or  termination  of the Plan shall  impair the rights of any Holder,
unless  mutually  agreed  otherwise  between  the Holder  and the  Board,  which
agreement  must  be in  writing  and  signed  by the  Holder  and  the  Company.
Termination  of the Plan shall not affect the Board's  ability to  exercise  the
powers granted to it hereunder with respect to Options  granted or awarded under
the Plan prior to the date of such termination.

                                       7
<PAGE>

         15.  Inability  to Obtain  Authority.  The  inability of the Company to
obtain authority from any regulatory body having  jurisdiction,  which authority
is deemed by the  Company's  counsel to be necessary to the lawful  issuance and
sale of any Class B Shares hereunder, shall relieve the Company of any liability
in respect of the  failure to issue or sell such Class B Shares as to which such
requisite authority shall not have been obtained.

         16.  Right to Issue of Class B Shares.  The  Board,  during the term of
this Plan, shall at all times maintain the right to issue such number of Class B
Shares as shall be sufficient to satisfy the requirements of the Plan.

         17. Investment  Intent.  The Board may require a Holder, as a condition
of exercising any Option,  (i) to give written  assurances  satisfactory  to the
Board as to the Holder's  knowledge  and  experience  in financial  and business
matters and/or to employ a purchaser  representative  reasonably satisfactory to
the company who is  knowledgeable  and  experienced  in  financial  and business
matters and that he or she is capable of evaluating,  alone or together with the
purchaser representative, the merits and risks of exercising the Option, (ii) to
give written  assurances  satisfactory  to the Board  stating that the Holder is
acquiring the Class B Shares  subject to the Option for the Holder's own account
and not with any present  intention  of selling or  otherwise  distributing  the
Class B Shares and (iii) that the Class B Shares are subject to the restrictions
of transfer contained in the Operating  Agreement.  The foregoing  requirements,
and any assurances given pursuant to such requirements,  shall be inoperative if
as to any particular  requirement,  a  determination  is made by counsel for the
company that such  requirement  need not be met in the  circumstances  under the
then applicable securities laws.

         18. Governing Law. The validity and  enforceability  of this Plan shall
be  governed  by and  construed  in  accordance  with the  laws of the  State of
Delaware  (including the Limited  Liability Company Act of the State of Delaware
(6 Del. C.ss.18-101,  et seq.), as amended from time to time), without regard to
otherwise governing principles of conflicts of law.

                                       8
<PAGE>

         IN WITNESS  WHEREOF,  the  undersigned  Managing  Member of the Company
certifies that the foregoing sets forth the Bioral Nutriment Delivery,  LLC 2003
Incentive Plan as duly adopted by the Managing Member on January 8, 2003.

                           BIODELIVERY SCIENCES INTERNATIONAL, INC.

                           By:  __________________________________
                                Name:  Francis E. O'Donnell, Jr.
                                Title:    President and Chief Executive Officer

                                       9

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