PURCHASE AND SERVICING AGREEMENT (this "Agreement"), dated as of July 15, 1999, among ZALE FUNDING TRUST, a Delaware statutory business trust (the "Issuer"), ZALE DELAWARE, INC., a Delaware corporation (the "Seller"), and JEWELERS NATIONAL BANK, a national banking association ("JNB" or the "Servicer").

WITNESSETH:

WHEREAS, the Issuer, the Seller and the Servicer desire to enter into a receivables financing facility pursuant to which, inter alia, (1) the Issuer will purchase Receivables with a combination of net cash proceeds received by the Issuer from the issuance and sale of one or more Series of Notes, cash collections on the Purchased Receivables and increases to the value of the Certificate of Beneficial Interest, (2) the repayment of all Series of Notes will be secured by a security interest in substantially all of the assets of the Issuer, including the Purchased Receivables, and (3) the Servicer will service the Purchased Receivables, in each case in accordance with the terms and conditions set forth in the Transaction Documents;

WHEREAS, this Agreement will replace the Purchase and Servicing Agreement (the "Prior Agreement"), dated as of July 1, 1994, as amended, among the Issuer, the Seller, Jewelers Financial Services, Inc., as prior Servicer (the "Prior Servicer") and Diamond Funding Corp. as seller of original Receivables.

NOW, THEREFORE, in consideration of the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby expressly acknowledged, the parties hereto hereby agree as follows:

ARTICLE I

DEFINITIONS

Section 1.01. Definitions. Capitalized terms used but not otherwise defined in this Agreement are used in this Agreement with the meanings assigned to such terms in the Glossary of Terms attached as Annex I to this Agreement.

ARTICLE II

PURCHASE OF RECEIVABLES; CONSIDERATION AND PAYMENT

Section 2.01. Purchase of Receivables.

(a) The Seller hereby sells, assigns, transfers and conveys to the Issuer, on each Purchase Date, on the terms and subject to the conditions specifically set forth herein, all of its right, title and interest, in, to and under

(i) all Eligible Receivables (other than (A) Eligible Receivables arising under Removed Accounts, (B) following a New Accounts Termination Date, Eligible Receivables under newly originated Accounts which the Seller has elected to exclude pursuant to subsection 2.12 (c) hereof and (C) following the imposition by either Rating Agency of an Aggregate Addition Limit, Eligible Receivables in newly originated Accounts which either Rating Agency has elected to exclude pursuant to subsection 2.12 (d)) of the Seller now existing and hereafter originated by the Originator and all payment and enforcement rights (but not any obligations) to, in and under the related Credit Card Agreements,

(ii) all Collections in respect of such Receivables credited to the related Account and all monies due or to become due with respect to the foregoing and all collateral security therefor,

(iii) all proceeds of the foregoing, including without limitation Insurance Proceeds relating thereto and

(iv) all Recoveries (collectively, the "Trust Assets").

Subject to subsections 2.12 (c) and 2.12 (d), after the Initial Cut-off Date, all the Seller's right, title and interest in and to all Eligible Receivables (other than Eligible Receivables arising under Removed Accounts) newly originated by the Originator, including, without limitation, all Eligible Receivables set forth in the most recent Daily Report shall be sold, assigned, transferred and conveyed to the Issuer by the sale, assignment, transfer and conveyance set forth in the immediately preceding sentence without any further action by the Seller.

(b) All sales of Receivables hereunder shall be without recourse to, or representation or warranty of any kind (express or implied) by, the Seller, except as otherwise specifically provided herein. The foregoing sale, assignment, transfer and conveyance does not constitute and is not intended to result in a creation or assumption by the Issuer of any obligation of the Seller or any other Person in connection with the Accounts, the Receivables, the Credit Card Agreements or any other agreement relating thereto, including without limitation any obligation to Obligors. It is understood and agreed that no purchases of Receivables hereunder shall occur after the Purchase Termination Date.

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