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CREDIT AGREEMENT

dated as of
July 23, 2003

among

ZALE DELAWARE, INC.,
ZALE CORPORATION,
DDCC, INC., and
TXDC, L.P., as
Borrowers

The LENDERS Party Hereto,

FLEET NATIONAL BANK
as Administrative Agent and Issuing Bank

FLEET RETAIL FINANCE, INC.
as Collateral Agent

and

FLEET SECURITIES INC.
as Arranger

and

BANK ONE, NA
CONGRESS FINANCIAL CORPORATION (SOUTHWEST)
as Co-Syndication Agents

and

JPMORGAN CHASE BANK
BANK OF AMERICA, N.A.
as Co-Documentation Agents

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CREDIT AGREEMENT dated as of July 23, 2003 (this “Agreement”) among

		ZALE DELAWARE, INC., a corporation organized under the laws of the State of Delaware having a place of business at 901 W. Walnut Hill Lane, Irving, Texas 75038-1003 (“Zale Delaware”),
		ZALE CORPORATION, a corporation organized under the laws of the State of Delaware having a place of business at 901 W. Walnut Hill Lane, Irving, Texas 75038-1003 (“Zale”),
		DDCC, INC., a corporation organized under the laws of the State of Delaware having a place of business at 101 Convention Center Drive, Suite 850 Las Vegas, Nevada 89109 (“DDCC”), and
		TXDC, L.P., a limited partnership organized under the laws of the State of Texas, having a place of business at 901 W. Walnut Hill Lane, Irving, Texas 75038-1003 (“TXDC”), as BORROWERS; and
		the LENDERS party hereto; and
		FLEET NATIONAL BANK, as Administrative Agent and Issuing Bank, a national banking association having a place of business at 40 Broad Street, Boston, Massachusetts 02109; and
		FLEET RETAIL FINANCE, INC., as Collateral Agent for the Lenders, a Delaware corporation, having a place of business at 40 Broad Street, Boston, Massachusetts 02109; and
		BANK ONE, NA and CONGRESS FINANCIAL CORPORATION (SOUTHWEST) as Co-Syndication Agents; and
		JP MORGAN CHASE BANK and BANK OF AMERICA, N.A. as Co-Documentation Agents

in consideration of the mutual covenants herein contained and benefits to be derived herefrom.

ARTICLE I
DEFINITIONS

     SECTION 1.1. Defined Terms. As used in this Agreement, the following terms have the meanings specified below:

     “Account” means any right to payment for goods sold or leased or for services rendered, whether or not earned by performance, or any right to payment for credit extended for goods sold or leased or services rendered.

     “ACH” means automated clearing house transfers.

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     “Activation Notice” has the meaning set forth in Section 2.21(b).

     “Adjusted LIBO Rate” means, with respect to any LIBOR Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate.

     “Administrative Agent” means Fleet, in its capacity as administrative agent for the Lenders hereunder.

     “Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

     “Agents” means collectively, the Administrative Agent and the Collateral Agent.

     “Agreement” has the meaning set forth in the preamble.

     “Alternate Base Rate” means, for any day, the higher of (a) the annual rate of interest then most recently announced by Fleet at its head office in Boston, Massachusetts as its “Base Rate” and (b) the Federal Funds Effective Rate in effect on such day plus ½ of 1% (0.50%) per annum. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability of the Administrative Agent to obtain sufficient quotations thereof in accordance with the terms hereof, the Alternate Base Rate shall be determined without regard to clause (b) of the first sentence of this definition, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in Fleet’s Base Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in Fleet’s Base Rate or the Federal Funds Effective Rate, respectively.

     “Applicable Lending Office” means with respect to each Lender, its domestic lending office in the case of a Loan that is a Base Rate Loan and its LIBOR lending office in the case of a LIBOR Loan.

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     “Applicable Margin” means the rates for Base Rate Loans and LIBOR Loans set forth below:

Initially, the Applicable Margin shall be at Level II (notwithstanding that the Excess Availability requirements for another Level may have been satisfied). The Applicable Margin shall be adjusted quarterly as of the first day of each fiscal quarter of the Borrowers, commencing February 1, 2004, based upon the average Excess Availability for the immediately preceding fiscal quarter.

     “Appraised Inventory Liquidation Value” means the product of (a) the Cost of Eligible Inventory, minus the Shrink Reserve multiplied by (b) that percentage determined from the then most recent appraisal of the Borrowers’ Inventory undertaken at the request of the Administrative Agent, to reflect the appraiser’s estimate of the net recovery on the Borrowers’ Inventory in the event of an in-store net orderly liquidation of that Inventory.

     “Arranger” means FSI.

     “Assignment and Acceptance” means an assignment and acceptance entered into by a Lender and an assignee (with the consent of each party whose consent is required by Section 9.4), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent.

     “Base Rate Loan” means any Loan to the Borrowers bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II.

     “Blocked Account Agreements” has the meaning set forth in Section 2.21(b).

     “Board” means the Board of Governors of the Federal Reserve System of the United States of America.

     “Borrowers” means Zale, Zale Delaware, DDCC, TXDC and any other Subsidiary of Zale which becomes party to this Agreement by signing a joinder agreement to this Agreement and the Loan Documents, as applicable, with the other parties hereto and thereto, in form and substance satisfactory to the Administrative Agent.

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     “Borrowing” means (a) the incurrence of Loans of a single Type, on a single date and having, in the case of LIBOR Loans, a single Interest Period, or (b) a Swingline Loan.

     “Borrowing Base” means at any time of calculation, an amount equal to

     (a)  the lesser of

	(i) the Inventory Advance Rate multiplied by the difference between the Cost of Eligible Inventory and the Shrink Reserve

     or

	(ii) eighty-five percent (85%) of the Appraised Inventory Liquidation Value

     plus

     (b)  eighty-five percent (85%) of the Borrowers’ Eligible Credit Card Receivables

     minus

     (c)  the Reserves (other than the Shrink Reserve).

     “Borrowing Base Certificate” has the meaning set forth in Section 5.1(f).

     “Breakage Costs” has the meaning set forth in Section 2.19(b).

     “Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in Boston, Massachusetts, New York, New York or Dallas, Texas are authorized or required by law to remain closed, provided, that, when used in connection with a LIBOR Loan, the term “Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.

     “Capital Expenditures” means, for any period, (a) the additions to property, plant and equipment and other capital expenditures of the Borrowers that are (or would be) set forth in a consolidated statement of cash flows of the Borrowers for such period prepared in accordance with GAAP and (b) Capital Lease Obligations incurred by the Borrowers during such period.

     “Capital Lease Obligations” means of any Person, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

     “Cash Collateral Account” means an interest-bearing account established by the Borrowers with the Collateral Agent at Fleet under the sole and exclusive dominion and control of the Collateral Agent designated as the “Zale Cash Collateral Account”.

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     “Cash Control Event” means that Excess Availability is less than $50,000,000 for five (5) consecutive days. For purposes of Section 2.21(f), the occurrence of a Cash Control Event shall be deemed continuing, notwithstanding that Excess Availability may after the Cash Control Event exceed $50,000,000, unless and until Excess Availability exceeds $50,000,000 for five (5) consecutive days, in which case a Cash Control Event shall no longer be deemed to be continuing for purposes of Section 2.21(f).

     “Cash Receipts” has the meaning set forth in Section 2.21(b).

     “CERCLA” means the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9601 et seq.

     “Change in Control” means, at any time, (a) occupation of a majority of the seats (other than vacant seats) on the board of directors of Zale by Persons who were neither (i) nominated by the board of directors of Zale or (ii) appointed by directors so nominated; or (b) the acquisition of fifty percent (50%) or more of the capital stock of Zale by any Person or group of Persons, or (c) the failure of Zale or another Borrower to own directly 100% of the capital stock or other ownership interest of Zale Delaware, DDCC, and TXDC.

     “Change in Law” means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.23(b), by any lending office of such Lender or by such Lender’s or the Issuing Bank’s holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement.

     “Charges” has the meaning set forth in Section 9.13.

     “Closing Date” means the date on which the conditions specified in Section 4.1 are satisfied (or waived by the Agents).

     “Code” means the Internal Revenue Code of 1986, as amended from time to time.

     “Collateral” means any and all “Collateral” as defined in any applicable Security Document.

     “Collateral Agent” means FRF, in its capacity as collateral agent under the Security Documents.

     “Commercial Letter of Credit” means any Letter of Credit issued for the purpose of providing the primary payment mechanism in connection with the purchase of any materials, goods or services by a Borrower in the ordinary course of business of such Borrower.

     “Commitments” means, with respect to each Lender, the commitment of such Lender hereunder in the amount set forth opposite its name on Schedule 1.1 or as may subsequently

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be set forth in the Register from time to time, as the same may be reduced from time to time pursuant to Section 2.15.

     “Commitment Percentage” means, with respect to each Lender, the percentage of the Commitments of all Lenders hereunder in the amount set forth opposite its name on Schedule 1.1 or as may subsequently be set forth in the Register from time to time, as the same may be reduced pursuant to Section 2.15.

     “Commitment Fee” has the meaning set forth in Section 2.12.

     “Concentration Accounts” has the meaning set forth in Section 2.21(a).

     “Consignment A/R Reserve” means an amount equal to six percent (6%) of the Borrowers’ Eligible Credit Card Receivables.

     “Consolidated EBITDA” means Consolidated Net Income for any period plus (a) without duplication, the sum of the following expenses of Zale and its Subsidiaries for such period, in each case to the extent included in determining said Consolidated Net Income: (i) depreciation expense, (ii) amortization expense, (iii) interest expense, (iv) total U.S. and foreign federal, state, provincial and local income tax expense, (v) charges relating to the valuation of inventory by application of the LIFO (last in/first out) method of inventory valuation, (vi) non-cash compensation expense arising out of the grant or exercise of stock options or other equity based compensation, (vii) expense arising from the write-off of excess goodwill and (viii) all other non-cash charges less (b) without duplication, the sum of (i) income earned during such period relating to the valuation of inventory by the application of the LIFO method of inventory valuation, (ii) interest income for such period, (iii) non-cash gains for such period and (iv) total U.S. and foreign federal, state, provincial and local income tax benefits provided during such period.

     “Consolidated Net Income” means the consolidated net income (or loss) of Zale and its Subsidiaries, determined in accordance with GAAP, after eliminating therefrom all extraordinary items of income or loss.

     “Consolidated Tangible Net Worth” means the difference between Consolidated Total Assets and Consolidated Total Liabilities, and less the sum of: (a) the total book value of all assets of Zale and its Subsidiaries properly classified as intangible assets under GAAP, including such items as goodwill, the purchase price of acquired assets in excess of the fair market value thereof, trademarks, trade names, service marks, brand names, copyrights, patents and licenses, and rights with respect to the foregoing; plus (b) all amounts representing any write-up in the book value of any assets of Zale or its Subsidiaries resulting from a revaluation thereof subsequent to April 30, 2003.

     “Consolidated Total Assets” means all assets of Zale and its Subsidiaries determined on a consolidated basis in accordance with GAAP.

     “Consolidated Total Interest Expense” means for any period, the aggregate amount of interest required to be paid or accrued by Zale and its Subsidiaries during such period on all Indebtedness of Zale and its Subsidiaries outstanding during all or any part of such

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period in accordance with GAAP (including payments consisting of interest in respect of Capital Lease Obligations or Synthetic Leases).

     “Consolidated Total Liabilities” means all liabilities of Zale and its Subsidiaries determined on a consolidated basis in accordance with GAAP.

     “Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. The terms “Controlling” and “Controlled” have meanings correlative thereto.

     “Cost” means the cost of Inventory as reported on the Borrowers’ financial stock ledger using the retail method of accounting based on practices which are in effect on the date of this Agreement.

     “Credit Card Notifications” has the meaning set forth in Section 2.21(b)(ii).

     “Credit Extensions” means as of any day, the sum of (a) the principal balance of all Loans then outstanding, and (b) the then amount of the Letter of Credit Outstandings.

     “Customer Credit Reserve” means 50% of the aggregate face value at such time of (a) outstanding gift certificates and gift cards of the Borrowers entitling the holder thereof to use all or a portion of the certificate to pay all or a portion of the purchase price for any Inventory, and (b) outstanding merchandise credits of the Borrowers.

     “DDCC” has the meaning set forth in the preamble.

     “DDAs” means any checking or other demand deposit account maintained by the Borrowers.

     “Default” means any event or condition that constitutes an Event of Default or that upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

     “Distribution Minimum Excess Availability Amount” means Excess Availability of $75,000,000 or more.

     “Documentation Agents” means JPMorgan Chase Bank and Bank of America, N.A.

     “Dollars” or “$” means lawful money of the United States of America.

     “Dutch Auction Tender Offer” means the offer by Zale to purchase up to 6,400,000 shares of its common stock, or such lesser number of shares as are to be tendered, at a price per share not greater than $48 nor less than $42 as such offer may be amended, modified, supplemented or extended from time to time (including, but not limited to, any increase in size thereof permitted by Rule 13e-4(f)(1)(ii)) pursuant to the Dutch Auction Tender Offer Documents.

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     “Dutch Auction Tender Offer Documents” means, collectively, the Tender Offer Statement on Schedule TO, dated July 1, 2003, and the exhibits thereto, as the same may be amended, modified, supplemented or extended from time to time in a manner acceptable to the Administrative Agent.

     “Eligible Credit Card Receivables” means (a) Accounts of the Borrowers due in four (4) Business Days or less on a non-recourse basis from major credit card processors and (b) Eligible Private Label Credit Card Receivables, in each case to the extent that it constitutes Collateral.

     “Eligible Inventory” means, as of the date of determination thereof, items of Inventory of the Borrowers that are finished goods (including, but not limited to, unmounted gemstones and shanks or mounts for which no stone has been mounted to the extent such goods are listed in the stock ledger or inventory systems), merchantable and readily saleable to the public in the ordinary course deemed by the Administrative Agent in accordance with its customary credit and collateral considerations and policies to be eligible for inclusion in the calculation of the Borrowing Base. Without limiting the foregoing, unless otherwise approved in writing by the Administrative Agent, none of the following shall be deemed to be Eligible Inventory:

	(a) Inventory that is not owned solely by the Borrowers, or is leased or on consignment or such Borrowers do not have good and valid title thereto;
	(b) Inventory that is not located at a warehouse facility or store that is owned or leased by a Borrower unless it is in-transit between warehouse facilities and stores leased or owned by a Borrower;
	(c) Inventory that represents (i) goods damaged, defective or otherwise unmerchantable, except in the case of each of the foregoing to the extent that the Administrative Agent has determined a recoverable value and (ii) goods that do not conform in all material respects to the representations and warranties contained in this Agreement or any of the Security Documents;
	(d) Inventory that is not located in the United States of America (excluding, except as otherwise specifically provided, territories and possessions thereof), Puerto Rico or the Dominion of Canada;
	(e) Inventory that is not subject to a perfected first-priority security interest in favor of the Collateral Agent for the benefit of the Secured Parties;
	(f) Inventory which consists of samples, labels, bags, packagin