Document:

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                                                                    EXHIBIT 10.2

                             SECOND AMENDMENT TO THE
                            PER-SE TECHNOLOGIES, INC.
                       EMPLOYEES' RETIREMENT SAVINGS PLAN

         THIS SECOND AMENDMENT is made as of May 1, 2001 by PER-SE TECHNOLOGIES,
INC., a corporation duly organized and existing under the laws of the State of
Delaware (hereinafter called the "Primary Sponsor").

                                   WITNESSETH

         WHEREAS, the Primary Sponsor last amended and restated the Per-Se
Technologies, Inc. Employees' Retirement Savings Plan (the "Plan") by indenture
dated January 20, 2000; and

         WHEREAS, pursuant to Treasury Regulation Section 1.411(d)-4, the
Primary Sponsor desires to amend the Plan to eliminate the various forms of
distribution available under the Plan.

         NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan,
effective as of August 1, 2001, as follows:

         1.       By deleting the existing Plan Section 6.11.

         2.       By deleting the existing Plan Section 7.4.

         3.       By deleting the existing Plan Section 9.2 and substituting
therefor the following new Section 9.2:

                  "9.2     Payment of a Member's benefits under the Plan shall
                           be made in the form of a lump sum payment in cash."

         4.       By deleting the existing Plan Section 9.3 and substituting
therefor "[Reserved]".

         5.       By deleting the existing Plan Section 9.4 and substituting
therefor the following new Section 9.4:

                  "9.4     Notwithstanding any provision of the Plan to the
                           contrary,

                           (a)      if a Member's vested Accrued Benefit exceeds
                  $5,000, it shall not be distributed before the Member's Normal
                  Retirement Age or death without the consent of the Member; and

                           (b)      the payments to be made to a Member shall
                  satisfy the incidental death benefit requirements under Code
                  Section 401(a)(9)(G) and the regulations thereunder."

Except as specifically amended hereby, the Plan shall remain in full force and
effect as prior to this Second Amendment.

         IN WITNESS WHEREOF, the Primary Sponsor has caused this Second
Amendment to be executed on the day and year first above written.

                                      PER-SE TECHNOLOGIES, INC.

                                      By:      /s/ PHILIP M. PEAD
                                         --------------------------------------
                                               Philip M. Pead
                                               President and
                                               Chief Executive Officer

ATTEST:

By:   /s/ ROBERT Q. JONES, JR.
   ------------------------------
      Robert Q. Jones, Jr.
      Assistant Secretary

      [CORPORATE SEAL]<PAGE>   1
                                                                    EXHIBIT 10.1

                              EMPLOYMENT AGREEMENT

         This Employment Agreement is made as of the 14th day of May, 2001 (the
"Agreement") by and between Service Merchandise Company, Inc., a Tennessee
corporation (the "Company"), and Jane F. Gilmartin (the "Executive").

                                    RECITALS

         WHEREAS, the Company desires to provide for the employment of the
Executive in accordance with the terms and conditions provided herein; and

         WHEREAS, the Executive wishes to perform services for the Company in
accordance with the terms and conditions provided herein.

         NOW, THEREFORE, in consideration of the premises hereof and of the
mutual promises and agreements contained herein, the parties hereto, intending
to be legally bound, hereby agree as follows:

         1.       Employment. The Company hereby agrees to employ the Executive,
                  and the Executive hereby agrees to perform services for the
                  Company, on the terms and conditions set forth herein.

         2.       Term. The term of employment of the Executive by the Company
                  hereunder shall commence effective as of May 14, 2001 (the
                  "Effective Date"), and shall end on May 13, 2003 (the "Initial
                  Term"), unless further extended or sooner terminated as
                  hereinafter provided. Commencing on May 14, 2003 and on each
                  anniversary thereafter (each such date, an "Anniversary
                  Date"), the term of the Executive's employment shall
                  automatically be extended for one additional year unless, not
                  later than the December 31, immediately preceding an
                  Anniversary Date, either party shall have given notice to the
                  other party that it does not wish to extend this Agreement (a
                  "Notice of Non-Renewal"). References herein to the "Term" of
                  this Agreement shall refer to both the Initial Term and any
                  extended term of the Executive's employment hereunder.
                  Notwithstanding the foregoing, if a Change of Control (as
                  defined in Section 6) occurs during the

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                  Term, in no event shall the Term end prior to the end of the
                  twenty-fourth (24th) month following the month in which such
                  Change of Control occurs.

         3.       Position and Duties.

                  (a)      The Executive shall serve as President and Chief
                  Merchandising Officer of the Company and shall have such
                  responsibilities, duties and authority as are generally
                  consistent and customary with such position. Executive shall
                  report solely to the Chief Executive Officer of the Company.
                  The Executive shall also serve, if requested by the Board of
                  Directors (the "Board"), as a director or officer of any of
                  the Company's present or future direct or indirect
                  subsidiaries.

                  (b)      During the Term, and excluding any periods of
                  vacation and sick leave to which the Executive is entitled,
                  the Executive shall devote reasonable attention and time
                  during normal business hours to the business and affairs of
                  the Company and, to the extent necessary to discharge the
                  responsibilities assigned to the Executive under this
                  Agreement, use the Executive's reasonable best efforts to
                  carry out such responsibilities faithfully and efficiently. It
                  shall not be considered a violation of the foregoing for the
                  Executive to serve on corporate, industry, civic or charitable
                  boards or committees, so long as such activities do not
                  significantly interfere with the performance of the
                  Executive's responsibilities as an employee of the Company in
                  accordance with this Agreement.

         4.       Compensation.

                  (a)      Base Salary. During the Term, the Executive shall
                  receive an annual base salary ("Annual Base Salary") of
                  $520,000. The Annual Base Salary shall be payable in
                  accordance with the Company's regular payroll practice for its
                  senior executives, as in effect from time to time. During the
                  Term, the Annual Base Salary shall be reviewed by the
                  Compensation Committee of the Board for possible

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                  increase at least annually. Any increase in the Annual Base
                  Salary shall not limit or reduce any other obligation of the
                  Company under this Agreement. The Annual Base Salary shall not
                  be reduced after any such increase, and the term "Annual Base
                  Salary" shall thereafter refer to the Annual Base Salary as so
                  increased.

                  (b)      Annual Bonus; Retention Program. During the Term, the
                  Executive shall be entitled to receive an annual bonus
                  ("Annual Bonus") pursuant to the Company's annual bonus plan,
                  as in effect from time to time, and shall be entitled to
                  participate as a Tier II Employee in the Company's 2001
                  Retention Program for Key Employees (the "Program"), which
                  Program was approved by order (the "Order") of the U.S.
                  Bankruptcy Court for the Middle District of Tennessee (the
                  "Court") entered on March 28, 2001, respectively, in
                  connection with the Company's Chapter 11 case (the "Case").

                  (c)      Make-Whole Payment. Executive shall be entitled to
                  receive a payment equal to $2,500,000 (the "Make-Whole
                  Payment"). $1,250,000 of the Make-Whole Payment shall be paid
                  to the Executive in cash, by wire transfer at the first
                  available time for wire transfers following approval of this
                  Agreement by the Court and receipt of this Agreement,
                  fully-executed by the Executive. The remaining portion of the
                  Make-Whole Payment shall be paid pursuant to draws by the
                  Executive under an irrevocable letter of credit in accordance
                  with the terms thereof, including the credit draw certificate
                  (the letter of credit and draw certificate are referred to
                  herein as the "Letter of Credit"). The Make-Whole Payment, or
                  any portion thereof, will not be included in any salary
                  continuation calculation under sections 5 or 6 of this
                  Agreement. In the event the Executive voluntarily terminates
                  her employment, or is duly terminated for Cause (as
                  hereinafter defined in Section 5) prior to the expiration of
                  the Initial Term, any portion of the Make-Whole Payment
                  previously received by the Executive will be paid back to the
                  Company. Notwithstanding the foregoing, any remaining portions
                  of the Make-Whole Payment, not yet paid, shall be due in full
                  upon the termination, for any reason, of the employment of Sam
                  Cusano as Chief Executive Officer of the Company.

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                  (d)      Other Benefits. During the Term, the Executive shall
                  be entitled to participate in other employee benefit plans,
                  programs and arrangements of the Company, other than Annual
                  Bonus plans (covered by Section 4(b) above) (the "Benefit
                  Plans"), now or hereinafter in effect, that are applicable to
                  the Company's employees generally or to its executive
                  officers, as the case may be, subject to and on a basis
                  consistent with the terms, conditions and overall
                  administration of the Benefit Plans. During the Term, the
                  Company shall provide to the Executive all of the fringe
                  benefits and perquisites that are provided to senior
                  executives of the Company, and the Executive shall be entitled
                  to participate in and receive any other fringe benefits or
                  perquisites that become available to the Company's senior
                  executives. The Company shall provide to the Executive a car
                  allowance in the amount of $10,000 per annum. The value of the
                  benefit received by the Executive pursuant to the previous
                  sentence shall be subject to applicable withholding pursuant
                  to Section 13.

                  (e)      Vacation and Other Leaves. The Executive shall be
                  entitled to vacation in an amount equal to the greater of
                  three (3) weeks or that provided in accordance with the
                  Company's vacation policy (and to compensation in respect of
                  earned but unused vacation days) and all paid holidays and
                  personal leave days that are available generally to executive
                  officers of the Company.

                  (f)      Expenses; Attorneys' Fees. During the Term, the
                  Executive shall be entitled to receive prompt reimbursement
                  for all reasonable and customary expenses incurred by the
                  Executive in performing his services hereunder, including all
                  expenses of travel and accommodations while engaged in
                  business of the Company, provided that such expenses are
                  incurred and accounted for in accordance with the policies and
                  procedures established by the Company. Until the end of the
                  Initial Term, and any extension thereof resulting from a
                  Change of Control (as defined in Section 6), the Company shall
                  provide to the Executive, at the Company's expense, a
                  furnished two-bedroom apartment with housekeeping services,
                  and shall reimburse the Executive for all reasonable travel
                  incurred by the Executive for travel between New York City and
                  Nashville. The Company shall reimburse the Executive for legal
                  fees and expenses in the amount of $15,000 incurred in
                  connection with the negotiation and execution of

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                  this Agreement. The value of the benefit received by the
                  Executive pursuant to the previous two sentences shall be
                  subject to applicable withholding pursuant to Section 13.

                  (g)      Services Furnished. During the Term, the Company
                  shall furnish the Executive with office space, secretarial
                  and/or administrative assistance, office supplies, support
                  services and such other facilities and services as shall be
                  suitable to the Executive's position and adequate for the
                  performance of his duties hereunder.

         5.       Compensation on Termination of Employment (Except Within Two
                  Years Following a Change of Control).

         This Section 5 shall apply to termination of the Executive's employment
during the Term and prior to a Change of Control (as hereinafter defined in
Section 6) and to termination of the Executive's employment more than two (2)
years following a Change of Control. This Section 5 shall not apply to
termination of Executive's employment during the Change of Control Period (as
hereinafter defined in Section 6):

                  (a)      Disability. If the Executive's employment with the
                  Company is terminated by the Executive or the Company due to
                  the Executive's inability to perform Executive's duties as a
                  result of physical or mental incapacity as defined in the
                  Company's long-term disability insurance policy
                  ("Disability"), the Executive shall be paid such amounts, if
                  any, as the Executive is entitled to receive under the
                  Company's disability insurance policies then in effect for
                  Company officers, but shall be entitled to no further
                  compensation or benefits (unless previously accrued under the
                  Company's benefit plans).

                  (b)      Other Termination Not Giving Rise to Salary
                  Continuation. If the Executive's employment shall be
                  terminated for Cause (as hereinafter defined) or if the
                  Executive dies or if the Executive terminates Executive's
                  employment for any reason other than for a material breach of
                  this Agreement by the Company, the Company shall pay the
                  Executive any installments of Executive's Annual Base Salary
                  as then in effect that would otherwise be due through the date

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                  on which Executive's employment is terminated. The Company
                  shall then have no further obligations to the Executive under
                  this Agreement except that in the event of termination by
                  death, the Executive's estate or beneficiaries, as the case
                  may be, shall be paid such amounts as may be payable to the
                  Executive under the Company's insurance policies and/or other
                  benefit plans. For the purposes of this Agreement, the Company
                  shall have "Cause" to terminate the Executive's employment
                  upon (i) the willful engaging by the Executive in misconduct
                  materially injurious to the Company, (ii) acts of dishonesty
                  or fraud by the Executive, or (iii) the willful violation by
                  the Executive of the provisions of Section 8 or Section 9
                  hereof

                  (c)      Termination Giving Rise to Salary Continuation. If
                  the Company shall terminate the Executive's employment with
                  the Company or shall provide a Notice of Non-Renewal for any
                  reason other than due to the Executive's death or Disability
                  or for Cause, or if the Executive terminates this Agreement
                  because of a material breach of this Agreement by the Company,
                  then, subject to the compliance by the Executive with the
                  provisions of Sections 8 and 9 hereof, the Company shall pay,
                  as salary continuation, to the Executive an amount equal to
                  two (2) times the Executive's maximum Annual Base Salary paid
                  during the prior five (5) year period (inclusive of the
                  highest Annual Bonus paid or payable to the Executive during
                  the prior five (5) year period, but excluding unearned bonuses
                  negotiated by Executive at the time of the Executive's
                  employment with the Company), payable in a lump sum, but no
                  other compensation or benefits (unless accrued under the
                  Company's benefit plans prior to the date of termination of
                  employment or as provided in Section 4(e) hereof) shall be
                  paid to the Executive.

                  (d)      Healthcare Coverage. If the Executive's employment
                  with the Company is terminated by the Company for any reason
                  other than due to the Executive's death or Disability or for
                  Cause, the Company will reimburse the Executive for the
                  premium paid by the Executive for continued coverage for the
                  Executive (and any dependents of the Executive covered by the
                  Company's healthcare plans at the time the Executive's
                  employment was terminated) under the Company's healthcare plan
                  pursuant to "COBRA" (or any other mandatory healthcare
                  continuation law then in effect), such coverage then being

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                  substantially similar to that provided by the Company to its
                  senior executives and their eligible dependents. The Executive
                  will be entitled to reimbursement for such coverage for the
                  period commencing with the date of termination of employment
                  and ending on the earlier of (i) the second anniversary of
                  termination of employment, or (ii) the date the Executive
                  becomes eligible to receive any healthcare coverage from
                  another employer of the Executive or Executive's spouse, or
                  any governmental entity, that does not contain any exclusion
                  or limitation with respect to any pre-existing condition of
                  the Executive or Executive's covered dependents. If the
                  Executive (or Executive's dependents covered at the time of
                  termination of employment) elects not to continue coverage
                  under COBRA (or any other mandatory healthcare continuation
                  law then in effect) or is not eligible to continue coverage
                  under such healthcare continuation law, and is otherwise
                  eligible under this Section 5(d), the Company will reimburse
                  the Executive for the cost of purchasing substantially similar
                  coverage or a supplement required to achieve substantially
                  similar coverage under another arrangement approved by the
                  Company for the same period; however, such reimbursement shall
                  be limited to the then current premium charged to others by
                  the Company for substantially similar coverage under COBRA (or
                  other mandatory healthcare continuation law then in effect).
                  Any amount payable to the Executive shall be subject to
                  withholding of applicable taxes as provided in Section 13
                  hereof. In the event of Executive's death following
                  termination giving rise to the benefit described in this
                  Section 5(d), but before the expiration of such benefits,
                  Executive's dependents shall be entitled to such benefits.

         6.       Compensation on Termination of Employment Within Two Years
                  Following A Change of Control.

         This Section 6 shall apply to termination of Executive's employment
         during the "Change of Control Period" (as defined in this Section 6).
         This Section 6 shall not apply to termination of Executive's employment
         prior to a Change of Control or more than two (2) years following a
         Change of Control:

                  (a)      Definition of Certain Terms.

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                           (i)      "Good Reason" shall mean the occurrence or
                           continuation, without consent of Executive, after a
                           Change of Control, of any of the following events
                           within the Change of Control Period:

                                    (A)      the assignment to Executive of any
                                    duties inconsistent with the customary
                                    powers and duties that Executive held
                                    immediately prior to the Change of Control,
                                    or an adverse change in the status, position
                                    or conditions of Executive's employment or
                                    the nature of Executive's responsibilities
                                    in effect immediately prior to such Change
                                    of Control, or any removal of Executive
                                    from, or any failure to re-elect Executive
                                    to, any of such positions;

                                    (B)      a reduction by the Company in
                                    Executive's Annual Base Salary as in effect
                                    immediately prior to such Change of Control;

                                    (C)      the relocation of Executive's
                                    principal office to a location outside a 35
                                    mile radius from Executive's principal
                                    office immediately prior to such Change of
                                    Control, except for required travel on the
                                    Company's business to an extent
                                    substantially consistent with Executive's
                                    business travel obligations immediately
                                    prior to such Change of Control;

                                    (D)      the failure by the Company to
                                    continue in effect any benefit or
                                    compensation plan in which Executive
                                    participates immediately prior to the Change
                                    of Control which is material to Executive's
                                    total compensation, including but not
                                    limited to any stock or stock option,
                                    employee stock ownership, bonus, insurance,
                                    disability and vacation plans which the
                                    Company currently has or any substitute or
                                    additional plans adopted prior to the Change
                                    of Control, unless an equitable arrangement
                                    (embodied in an ongoing substi-

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                                    tute or alternative plan or plans) has been
                                    made with respect to such plan, or the
                                    failure by the Company to continue
                                    Executive's participation therein (or in
                                    such substitute or alternative plan) on a
                                    basis not materially less favorable, both in
                                    terms of the amount of benefits provided and
                                    the level of Executive's participation
                                    relative to other participants, as in
                                    existence immediately prior to such Change
                                    of Control;

                                    (E)      the termination, for any reason, of
                                    the employment of Sam Cusano as Chief
                                    Executive Officer of the Company; or

                                    (F)      the failure of the Company to
                                    obtain an agreement from any successor to
                                    assume and agree to perform this Agreement
                                    as contemplated herein.

                           (ii)     A "Change of Control" shall be deemed to
                           have taken place if (i) any person or entity,
                           including a "group" as defined in Section 13(d)(3) of
                           the Securities and Exchange Act of 1934, other than
                           Company or a wholly-owned subsidiary thereof or any
                           employee benefit plan of Company or any of its it
                           subsidiaries, becomes the beneficial owner of the
                           Company securities having 20% or more of the combined
                           voting power of the then outstanding securities of
                           the Company that may be cast for the election of
                           directors of the Company (other than as a result of
                           an in issuance of securities initiated by the Company
                           in the ordinary course of business); or (ii) as the
                           result of, or in connection with, any cash tender or
                           exchange offer, merger or other business combination,
                           sale of assets or contested election, or any
                           combination of the foregoing transactions, less than
                           a majority of the combined voting power of the then
                           outstanding securities of the Company or any
                           successor corporation or entity entitled to vote
                           generally in the election of the directors of the
                           Company or such other corporation or entity after
                           such transaction is held in the aggregate by the
                           holders of the Company's securities entitled to vote
                           generally in the election of directors of the Company
                           immediately prior

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                           to such transaction; or (iii) the following
                           individuals cease for any reason to constitute a
                           majority of the number of directors then serving:
                           individuals who, as of the Effective Date, constitute
                           the Board and any new director (other than a director
                           whose initial assumption of office is in connection
                           with an actual or threatened election contest,
                           including but not limited to, a consent solicitation,
                           relating to the election of directors of the Company)
                           whose appointment or election by the Board or
                           nomination for election by the Company's
                           shareholders, was approved or recommended by a vote
                           of at least two-thirds of the directors of the
                           Company then still in office who were directors of
                           the Company on the Effective Date or whose
                           appointment, election or nomination for election was
                           previously so approved or recommended; provided,
                           however, that a "Change of Control" shall not be
                           deemed to have taken place if any of the events
                           specified (i), (ii) or (iii) of this paragraph occur
                           in connection with the substantial consummation of a
                           confirmed plan of reorganization under Chapter 11 of
                           the Bankruptcy Code prosecuted by the Company.

                           (iii)    "Change of Control Period" shall mean the
                           two (2) year period following a Change of Control.

                           (iv)     "Change of Control Severance Benefits" shall
                           mean all of the following payments:

                                    (A)      any installments of Executive's
                                    Annual Base Salary through the date of
                                    termination of employment at the rate in
                                    effect at the time the Notice of Termination
                                    is given,

                                    (B)      the Special Termination Payment;
                                    and

                                    (C)      the Medical Benefits.

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                           (v)      "Change of Control Date" shall mean the date
                           on which a Change of Control occurs.

                           (vi)     "Medical Benefits" shall mean the
                           reimbursement for continued medical coverage for
                           Executive and Executive's dependents described in
                           Section 5(d) hereof.

                           (vii)    "Notice of Termination" shall refer to
                           written notice described in Section 6(d) indicating
                           the specific termination provision of this Agreement
                           relied upon, setting forth in reasonable detail the
                           facts and circumstances claimed to provide the basis
                           for termination of Executive's employment under the
                           provision so indicated and stating the date of
                           termination.

                           (viii)   "Special Termination Payment" shall mean an
                           amount payable in a single lump sum equal to the
                           product of (x) an amount equal to the Executive's
                           maximum Annual Base Salary paid in any year of the
                           five (5) year period preceding the date of
                           termination (inclusive of the Annual Bonus paid to
                           Executive during the 12-month period preceding the
                           date of termination or the Annual Bonus earned by the
                           Executive with respect to the fiscal year immediately
                           preceding the date of termination, whichever Annual
                           Bonus is higher, but excluding unearned bonuses
                           negotiated by Executive at the time of Executive's
                           employment with the Company), multiplied by (y) the
                           number three (3), except that in the event that the
                           Change in Control is the result of a liquidation of
                           the Company, the amount specified in (x) will be
                           multiplied by (y) the number two (2) instead of the
                           number three (3).

                  (b)      Termination Not Giving Rise To Special Termination
                  Payments or Medical Benefits. If Executive's employment is
                  terminated during the Change of Control Period for Cause (as
                  defined in Section 5(b), or on account of Disability (as
                  defined in Section 5(a)), or if Executive dies during the
                  Change of Control Period, or if Executive terminates
                  Executive's employment during the Change of Control

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                  Period without Good Reason, the Company shall pay to Executive
                  any installments of Executive's Annual Base Salary as then in
                  effect that would otherwise be due through the date on which
                  Executive's employment is terminated. The Company shall then
                  have no further obligations to the Executive under this
                  Agreement (unless accrued under the Company's benefit plans)
                  except that in the event of termination by death, the
                  Executive's estate or beneficiaries, as the case may be, shall
                  be paid such amounts as may be payable to the Executive under
                  the Company's insurance policies and/or other benefit plans,
                  and except that in the event of termination by Disability, the
                  Executive shall be paid such amounts as Executive is entitled
                  to receive under the Company's disability insurance policies
                  and plans then in effect covering the Executive.

                  (c)      Termination Giving Rise to Change of Control
                  Severance Benefits. If the Executive's employment is
                  terminated or a Notice of Non-Renewal is given by the Company
                  during the Change of Control Period for any reason other than
                  Cause, death of the Executive or Disability, or if the
                  Executive terminates his employment during the Change of
                  Control Period for Good Reason, then Executive shall be
                  entitled to receive the Change of Control Severance Benefits,
                  all of which (except the Medical Benefits) shall be paid to
                  Executive within ten (10) days following the date of
                  termination.

                  (d)      Notice of Termination. Any termination of Executive's
                  employment by the Company or by Executive pursuant to this
                  Section 6 shall be communicated by written notice of
                  termination (the "Notice of Termination") to the other party
                  hereto, which shall indicate the specific termination
                  provision in the Agreement relied upon, shall set forth in
                  reasonable detail the facts and circumstances claimed to
                  provide a basis for termination of Executive's employment and
                  shall state the date of termination.

         7.       Certain Reduction in Payments by the Company.

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                  (a)      Definition of Certain Terms.

                           (i)      A "Payment" shall mean any payment or
                           distribution in the nature of compensation to or for
                           the benefit of Executive, whether paid or payable
                           pursuant to this Agreement or otherwise.

                           (ii)     An "Agreement Payment" shall mean a Payment
                           paid or payable on account of termination of
                           employment during the Change in Control Period
                           pursuant to Section 6 of this Agreement (disregarding
                           the reduction provided by Section 7(b)).

                           (iii)    "Net After Tax Receipt" shall mean the
                           Present Value (as defined below) of all Payments that
                           are contingent on a Change of Control within the
                           meaning of Section 280G of the Internal Revenue Code
                           of 1986, as amended (the "Code"), net of all taxes
                           imposed on Executive with respect thereto under
                           Sections I and 4999 of the Code, determined by
                           applying the highest marginal rate under Section I of
                           the Code which applied to Executive's taxable income
                           for the immediately preceding taxable year.

                           (iv)     "Present Value" shall mean such value
                           determined in accordance with Section 280G(d)(4) of
                           the Code.

                  (b)      Limitation on Agreement Payments. It is intended that
                  all Agreement Payments hereunder, together with all other
                  Payments to Executive contingent upon or in connection with a
                  Change of Control, are reasonable compensation for Executive's
                  service to Company and its subsidiaries. Notwithstanding the
                  foregoing, should Company determine, based upon the opinion of
                  the independent accounting advisors of Company immediately
                  prior to the Change of Control ("Accounting Firm"), which
                  opinion shall be based on generally accepted accounting
                  principles ("GAAP"), that the Agreement Payments and other
                  Payments, together with any other amounts

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                  received by Employee that must be included in such
                  determination, would result in the payment of an "excess
                  parachute payment" as defined in Section 280G of the Code,
                  then Company will reduce the Agreement Payments to the minimum
                  extent necessary so that no portion of the aggregate Payments
                  would result in the payment of an "excess parachute payment;"
                  provided, however, that such reduction will be made if, but
                  only if, the value of all such Payments (without regard to the
                  foregoing reduction) would result in Net After Tax Receipts
                  which are less than the Net After Tax Receipts that would
                  result after taking into account any such reduction.

                  (c)      Opinion of Accounting Firm. Company may reduce the
                  Agreement Payments pursuant to this Section 7 only if within
                  thirty (30) days of Executive's termination it provides
                  Executive with an opinion of the Accounting Firm, which
                  opinion shall be based on GAAP, that Executive will be
                  considered to have received "excess parachute payments" as
                  defined in Section 280G of the Code if Executive were to
                  receive the full amounts owing pursuant to the terms of this
                  Agreement and that the reduced amount proposed to be paid by
                  the Company will result in Net After Tax Receipts that are
                  equal to or greater than the Net After Tax Receipts which
                  would result from reduction in the Agreement Payments by any
                  other amount.

         8.       Unauthorized Disclosure.

                  (a)      During the period in which the Executive is employed
                  by the Company, the Executive shall not, without the prior
                  written consent of the Board, or a person authorized thereby,
                  disclose to any person, other than a person to whom disclosure
                  is necessary or appropriate in connection with the performance
                  by the Executive of Executive's duties as an officer of the
                  Company, or its subsidiaries or its affiliates, any
                  confidential information obtained by Executive while in the
                  employ of the Company with respect to any of the Company's
                  products, improvements, formulae, designs or styles,
                  processes, customers, methods of marketing or distribution,
                  systems, procedures, plans, proposals, policies or methods of
                  manufacture, the disclosure of which Executive knows, or
                  should have reason to know, will be

                                       14

<PAGE>   15

                  materially damaging to the Company or its subsidiaries or its
                  affiliates, nor shall Executive intentionally make any
                  materially false statements regarding the Company or its
                  subsidiaries or its affiliates or take any unreasonable action
                  which Executive knows, or should have reason to know, will be
                  materially damaging to the Company or its subsidiaries or its
                  affiliates; provided, however, that confidential information
                  shall not include any information known generally to the
                  public (other than as a result of unauthorized disclosures by
                  the Executive) or any information of a type not otherwise
                  considered confidential by persons engaged in the same
                  business or a business similar to that conducted by the
                  Company. Following the termination of the Executive's
                  employment with the Company for any reason, the Executive
                  shall not disclose any confidential information of the type
                  described above or take any action of type described above
                  except as may be required in the opinion of the Executive's
                  counsel in connection with any judicial or administrative
                  proceeding or inquiry. The provisions of this Section 8 shall
                  be binding upon the Executive's heirs, successors and legal
                  representatives.

                  (b)      Company agrees to refrain from making derogatory or
                  defamatory statements about or concerning Executive.

         9.       Non-Competition. During the period in which the Executive is
                  employed by the Company and for a period of two (2) years
                  following any termination giving rise to salary continuation
                  payments pursuant to Section 5(c) or to Change of Control
                  Severance Benefits pursuant to Section 6(c), the Executive
                  will not (a) directly or indirectly own, manage, operate,
                  control or participate in the ownership, management, operation
                  or control of, or be connected as an officer, employee,
                  partner, director or otherwise with, or have any financial
                  interest in, or aid or assist anyone else in the conduct of,
                  any business which is in substantial competition with any
                  business conducted by the Company or by any group, division or
                  subsidiary of the Company in any area where such business is
                  being conducted at the time of such termination (provided that
                  ownership of five percent (5%) or less of the voting stock of
                  any publicly held corporation shall not constitute a violation
                  hereof) or (b) directly or indirectly employ, solicit for
                  employment, or advise or recommend to any other persons that
                  they

                                       15

<PAGE>   16

                  employ or solicit for employment any employee of the Company
                  or any of its subsidiaries or affiliates.

         10.      Specific Performance. The Executive acknowledges and agrees
                  that, in the event of a breach of Section 8 or Section 9
                  hereof by the Executive, the Company would be irreparably
                  harmed and that monetary damages would be an inadequate remedy
                  in favor of the Company. Accordingly, the Executive and the
                  Company agree that in the event of such a breach, the Company
                  shall be entitled to injunctive relief against the Executive.

         11.      Binding Agreement. This Agreement and all obligations of the
                  Company hereunder shall be binding upon the successors and
                  assigns of the Company. This Agreement and all rights of the
                  Executive hereunder shall inure to the benefit of and be
                  enforceable by the Executive's personal or legal
                  representatives, executors, administrators, successors, heirs,
                  distributees, devisees and legatees.

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

If to the Executive:

Ms. Jane F. Gilmartin
631 The Plain Road
Westbury, New York  11590

with a copy to:

Steven G. Leventhal
15 Remsen Avenue
Roslyn, New York  11576

                                       16

<PAGE>   17

If to the Company:

Service Merchandise Company, Inc.
7100 Service Merchandise Drive
Brentwood, Tennessee  37027
Attn:  General Counsel

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

         13.      Withholding of Taxes.  The Company may withhold from any
                  amounts payable under this Agreement, all federal, state, city
                  or other taxes as shall be required pursuant to any law or
                  government regulation or ruling.

         14.      Governing Law.  This Agreement shall be construed according to
                  the laws of Tennessee, without giving effect to the principles
                  of conflicts of laws of such State.

         15.      Amendment, Modification, Waiver.  This Agreement may not be
                  amended except by the written agreement of the parties hereto.
                  No provisions of this Agreement may be modified, waived or
                  discharged unless such waiver, modification or discharge is
                  agreed to in writing signed by Executive and the Company. No
                  waiver by either party hereto at any time of any breach by the
                  other party hereto or compliance with any condition or
                  provision of this Agreement to be performed by such other
                  party shall be deemed a waiver of similar or dissimilar
                  provisions or conditions at the same or at any prior or
                  subsequent time. However, notwithstanding anything in this
                  Agreement to the contrary, if in the opinion of the Company's
                  accountants, which opinion shall be in accordance with GAAP,
                  any provision of this Agreement would preclude the use of
                  "pooling of interest" accounting treatment for a Change of
                  Control transaction that (i) would otherwise qualify for such
                  accounting treatment and (ii) is contingent upon qualifying
                  for such accounting treatment, then to

                                       17

<PAGE>   18

                  the extent any provision of this Agreement disqualifies the
                  transaction as a "pooling of interest" transaction (including,
                  if applicable, the entire Agreement), such provision(s) shall
                  be null and void as of the date hereof.

         16.      Binding Effect. This Agreement is personal in nature and
                  neither of the parties hereto shall, without the consent of
                  the other, assign, transfer or delegate this Agreement or any
                  rights or obligations hereunder except as expressly provided
                  for herein. Without limiting the generality of the foregoing,
                  Executive's right to receive payments hereunder shall not be
                  assignable, transferable or delegable, whether by pledge,
                  creation of a security interest or other-wise, other than by a
                  transfer by his will or by the laws of descent and
                  distribution and, in the event of any attempted assignment or
                  transfer contrary to this paragraph, the Company shall have no
                  liability to pay any amount so attempted to be assigned,
                  transferred or delegated.

         17.      Entire Contract. This Agreement, together with the Letter of
                  Credit and the Company's Employee Policy Manual, constitutes
                  the entire agreement and supersedes all other prior
                  agreements, employment contracts and understandings, both
                  written and oral, express or implied with respect to the
                  subject matter of this Agreement, including, without
                  limitation, any employment agreement or any severance or
                  indemnification, by and between the Company and the Executive,
                  all of such agreements being rendered null and void by this
                  Agreement.

         18.      Termination. This Agreement shall be terminable only upon the
                  occurrence of any one of the following events: (a) expiration
                  of the Term without Executive's employment having been
                  previously terminated; (b) the termination of Executive with
                  payment in full of all the payments/benefits described in
                  Sections 5 or 6 hereof as appropriate; or (c) the Company (or
                  its successor in interest) and Executive so agree in writing;
                  provided, however, that the provisions of Sections 8 and 9
                  hereof shall survive without limitation.

                                       18

<PAGE>   19

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

                                       SERVICE MERCHANDISE COMPANY, INC.

                                       By: /s/ C. Steven Moore
                                          --------------------------------------
                                       Its: Chief Administrative Officer

Accepted and Agreed:

/s/ Jane F. Gilmartin
-----------------------------
  May 16, 2001
------------------
Jane F. Gilmartin

                                       19

<PAGE>   20

                          LETTER OF CREDIT PROVISIONS

         This Irrevocable Letter of Credit is established, at the request of
Service Merchandise Company, Inc. (the "Company"), in favor of Jane F. Gilmartin
(the "Beneficiary") in the amount of $1,250,000.00 (such amount, as it may be
reduced from time to time pursuant to the terms hereof, the "Stated Amount")
pursuant to the Employment Agreement dated as of May 14, 2001 between the
Company and the Beneficiary (the "Employment Agreement").

         The term "beneficiary" includes any successor by operation of law of
the named beneficiary, including without limitation, any heirs and assigns.

         We hereby undertake to promptly honor your sight draft(s) drawn on us,
including our credit number, for all or any part of this credit, subject to the
terms specified in this Letter of Credit, if presented at our office specified
below on or before the expiry date or any automatically extended expiry date.

         Except as expressly stated herein, this undertaking is not subject to
any agreement, condition or qualification. The obligation of the Fleet National
Bank under this Letter of Credit is the individual obligation of Fleet National
Bank and is no way contingent upon reimbursement with respect thereto.

         Subject to the other terms hereof, the Beneficiary may draw upon this
Letter of Credit prior to its Expiry Date (as defined below) in accordance with
the following schedule:

<TABLE>
<CAPTION>
         From and After
         --------------
         <S>                      <C>
         June 1, 2001             $156,250.00
         July 1, 2001             $312,500.00, less amounts previously drawn
         August 1, 2001           $468,750.00, less amounts previously drawn
         September 1, 2001        $625,000.00, less amounts previously drawn
         October 1, 2001          $781,250.00, less amounts previously drawn
         November 1, 2001         $937,500.00, less amounts previously drawn
         December 1, 2001         $1,093,750.00, less amounts previously drawn
         January 1, 2002          $1,250,000.00, less amounts previously drawn.
</TABLE>

         Notwithstanding the foregoing, if, prior to the Expiry Date, either (i)
the Company is liquidated; (ii) the Beneficiary is terminated by the Company,
other than for Cause; or (iii) the employment of Sam Cusano as Chief Executive
Officer of the Company is terminated, for any reason, any amounts remaining
under this Letter

<PAGE>   21

of Credit may be immediately drawn by the Beneficiary. In the event of the
foregoing, the Beneficiary shall note the event giving rise to the draw in the
Sight Draft, as further defined below.

         A draw on this Letter of Credit may only be made by the Beneficiary by
the presentment to us at our offices located at One Fleet Way, Attn: Letter of
Credit Dept., Scranton, PA 18507 of your sight draft, drawn on us and
referencing Irrevocable Letter of Credit Number 151270967 and setting forth the
amount being drawn, accompanied by a executed and dated statement of the
Beneficiary stating that the Beneficiary has not voluntarily terminated the
Beneficiary's employment with or been duly terminated for Cause by Service
Merchandise Company, Inc. on the draw date (the "Sight Draft"). Each draw upon
this Letter of Credit shall reduce the then Stated Amount by the amount of such
draw. If the Beneficiary so requests, we will wire transfer amounts drawn under
the Letter of Credit to a bank account designated by the Beneficiary.

         This Letter of Credit shall expire at 5:00 p.m., New York City time, on
January 31, 2002 to the extent not fully drawn prior to then.

         This credit is subject to and governed by the laws of the State of New
York and the 1993 Revision of the Uniform Customs and Practice for Documentary
Credits of the International Chamber of Commerce (Publication No. 500).

                                       Very truly yours,
                                       Fleet National Bank

                                       /s/ Mark Forti
                                       --------------------------------
                                       Authorized Signature

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