Exhibit 10.7

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THIS NOTE MAY NOT BE
SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE PROPOSED TRANSACTION DOES
NOT REQUIRE REGISTRATION OR QUALIFICATION UNDER FEDERAL OR STATE SECURITIES
LAWS, OR UNLESS THE PROPOSED TRANSACTION IS REGISTERED OR QUALIFIED AS REQUIRED.

This instrument and the rights and obligations evidenced hereby are subordinate
in the manner and to the extent set forth in that certain Amended and Restated
Subordination and Intercreditor Agreement (as amended, supplemented or otherwise
modified from time to time, the "Subordination Agreement") dated as of April 30,
2002, among KBB Retail Assets Corp. f/k/a F.A.O. Schwarz, Quality Fulfillment
Services, Inc. ("QFS"), FAO, Inc., f/k/a The Right Start, Inc. (the "Parent"),
FAO Schwarz, Inc. f/k/a Toy Soldier, Inc. (the "Company") (collectively with
Parent, the "Obligors") and Wells Fargo Retail Finance, LLC (the "Senior
Lender"), to the indebtedness (including interest) owed by the Obligors pursuant
to that certain Amended and Restated Loan and Security Agreement dated as of
April 30, 2002, as amended, between the Obligors and the Senior Lender, as such
Loan and Security Agreement has been and hereafter may be amended, supplemented
or otherwise modified from time to time (the "Wells Loan Agreement") and to
indebtedness refinancing the indebtedness under that agreement as contemplated
by the Subordination Agreement; and each holder of this instrument, by its
acceptance hereof, irrevocably agrees to be bound by the provisions of the
Subordination Agreement.

FAO SCHWARZ, INC.

AMENDED AND RESTATED SUBORDINATED NOTE DUE JANUARY 6, 2005

$15,459,859   King of Prussia, Pennsylvania Note No. FAO-2   December 16, 2002

        FOR VALUE RECEIVED, the undersigned, FAO Schwarz, Inc., a Delaware
corporation (the "Company"), promises to pay to KBB RETAIL ASSETS CORP., or
registered assigns, the principal sum of FIFTEEN MILLION FOUR HUNDRED FIFTY-NINE
THOUSAND EIGHT HUNDRED FIFTY-NINE DOLLARS, as such principal sum may be reduced
through prepayments, plus any accrued and unpaid interest thereon as provided
for herein (or so much of such aggregate amount as shall not have been prepaid)
on January 6, 2005. This Note is being issued as payment under the terms of the
Asset Purchase Agreement dated November 19, 2001 (the "Agreement"; capitalized
terms used in this Note without definition shall have the meanings ascribed to
such terms in the Agreement) by and among the Parent, the Company, KBB Retail
Assets Corp., Quality Fulfillment Services, Inc. and Royal Vendex KBB N.V.
Payments are to be made to the address of the registered holder of this Note as
set forth on the records of the Company in lawful money of the United States of
America. The Company promises to pay interest on the principal amount of this
Note, in cash, semi-annually on each June 1 and December 1, commencing June 1,
2003 (each such date an "Interest Payment Date"), at a rate of 8% per annum, to
the holder of record of this Note on the Company's records (the "Holder") at the
close of business on the date that is 10 business days prior to such Interest
Payment Date (the "Record Date"). This Note amends and restates that certain
Subordinated Note No. FAO-1 due January 6, 2005 in the initial aggregate
principal amount of $17,098,100 which principal amount was subsequently reduced
to $14,828,637 then increased to $14,830,637 (the "Original Note"). Cash
interest was paid on the Original Note on June 1, 2002. The increase in the
aggregate principal amount of the Original Note by $629,222 pursuant to this
Note represents payment of interest due on December 1, 2002 on each of the
Original Note and that certain Subordinated Note No. QFS-1 due January 6, 2005
in the aggregate principal amount of $899,900.

1

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

        Interest on the unpaid principal amount of this Note will accrue from
the most recent date to which interest has been paid or, if no interest has been
paid, from December 1, 2002. Interest will be computed on the basis of a 360-day
year consisting of twelve 30-day months and paid semi-annually. The Company
shall pay principal of and interest on this Note in such coin or currency of the
United States of America as at the time of payment shall be legal tender. The
Company may, however, pay principal of or interest on this Note by wire transfer
of federal funds, or interest on this Note by its check payable in such legal
tender.

        Subject to Section 1, the Company shall prepay principal as set forth in
Section 3.

        This Note is secured by a guaranty dated the date hereof from Parent
(the "Guaranty") dated as of January 6, 2002, as amended from time to time and
secured by a security agreement dated as of January 6, 2002, each of which was
amended by that certain Amended and Restated Interim Operating Agreement, of
even date herewith, by and among the Company, the Parent, the Holder and QFS.
This Note is one of the subordinated notes totaling $15,459,859 in aggregate
principal amount issued as payment under the Agreement (the "Notes"). If the
Company shall (i) fail to pay principal or interest when due, (ii) fail
generally to pay its debts as they mature, (iii) have any complaint,
application, or petition filed by or against it initiating any matter in which
the Company is or may be granted any relief from the its debts pursuant to Title
11, U.S.C., as amended from time to time, or any other insolvency statute or
procedure or make a general assignment for the benefit of its creditors (a
"Bankruptcy Event"), (iv) experience or suffer to exist an "Event of Default"
(as defined in the Wells Loan Agreement) which Event of Default (as defined in
the Wells Loan Agreement) is continuing and has not been waived within ten days
after written notice thereof to the Company, or (v) fail to comply with any
other provision of this Note or the Agreement which failure shall continue for
five days after written notice thereof from the Holder (each of (i) through
(v) above, an "Event of Default"), the aggregate outstanding amount of this
Note, including any accrued and unpaid interest, shall be immediately due and
payable, and in addition thereto, and not in substitution therefor, the Holder
shall be entitled to exercise any one or more of the rights and remedies
provided by law. Failure to exercise any right or remedy under this Note or
available under applicable law shall not constitute a waiver of such option or
such other remedies or of the right to exercise any of the same in the event of
any subsequent Event of Default. The Company and all makers, sureties,
guarantors, endorsers and other persons assuming obligations pursuant to this
Note hereby waive presentment, protest, demand, notice of dishonor and all other
notices and all defenses and pleas on the grounds of any extension of the time
of payments or the due dates hereof, in whole or in part, before or after
maturity, with or without notice. No renewal or extension of this Note, no
release of any obligor and no delay in enforcement of this Note or in exercising
any right or power hereunder shall affect the liability of any obligor
hereunder.

        1. Ranking. This instrument and the rights and obligations evidenced
hereby are subordinate in the manner and to the extent set forth in the
Subordination Agreement to the indebtedness (including interest) owed by the
Company pursuant to the Wells Loan Agreement and to indebtedness refinancing the
indebtedness under the Wells Loan Agreement (the "Wells Indebtedness") as
contemplated by the Subordination Agreement, and to any other secured
indebtedness of the Company for borrowed money permitted by the Wells Loan
Agreement, and each Holder of this Note, by acceptance hereof, agrees to be
bound by the provisions of the Subordination Agreement. In the event that any
provisions of this Note are deemed to conflict with the Subordination Agreement,
the provisions of the Subordination Agreement shall govern.

        2. Covenants.

        2.1 Payment of Note. The Company shall pay the principal of and interest
on this Note on the dates and in the manner provided herein. Principal and
interest shall be considered paid on the date due if the Company shall have
delivered such amounts to the address of the Holder on its

2

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

books and records or to such other address or by wire transfer instruction set
forth in writing and delivered to the Company, in each case in accordance with
the notice provisions of this Note.

        To the extent lawful, the Company shall pay interest (including
post-petition interest in any proceeding under any bankruptcy law) on
(i) overdue principal at the rate borne by this Note compounded semiannually and
(ii) overdue installments of interest at the same rate, compounded semiannually.

        2.2 Corporate Existence. Except as set forth in this Section 2.2, the
Company will do or cause to be done all things necessary to preserve and keep in
full force and effect its corporate existence in accordance with its
organizational documents, rights (charter and statutory), licenses and
franchises; provided however, that the Company shall not be required to preserve
any such right, license or franchise, if the Board of Directors of the Company
shall determine in good faith, which determination shall be evidenced by a board
resolution, that the preservation thereof is no longer desirable in the conduct
of the business of the Company and that the loss thereof is not adverse in any
material respect to the Holder. Notwithstanding the other provisions of this
Note, the Company shall be permitted to merge with or into any other entity if
(a) the continuing corporation upon completion of the merger shall be a
wholly-owned subsidiary of the Parent or (b) the merger is with and into a
wholly-owned subsidiary of the Company; provided such merger is effected for the
purposes of reincorporating the Company in another state or (c) the merger is
with and into Parent; and, in each case, the surviving corporation of such
merger expressly assumes the performance of the obligations of the Company under
this Note.

        2.3 Taxes. The Company shall pay prior to delinquency, all taxes,
assessments and governmental levies, except as contested in good faith and by
appropriate proceedings or in cases in which such failure to pay would not have
a material adverse effect on the Company or other rights of the holder of this
Note.

        2.4 Investment Company Act. The Company shall not become an investment
company subject to registration under the Investment Company Act of 1940, as
amended.

        2.5 Transactions with Related Persons. The Company shall not directly or
indirectly, conduct any business or enter into any contract, agreement, loan,
advance, guarantee, understanding or other transaction or series of related
transactions pursuant to which the Company shall receive or render value
exceeding $750,000, with any Related Person of the Company (a "Related Person
Transaction") unless (i) the terms of such Related Person Transaction are
(A) set forth in writing and (B) no less favorable to the Company than those
that would have been obtained in an arms length transaction with an unrelated
third party.

        2.6 Restriction on Layering Debt and Issuing Disqualified Stock. The
Company shall not (a) incur any indebtedness that is subordinate or junior in
right of payment to the Wells Indebtedness and senior in any respect (including
by virtue of being secured in any manner) in right of payment to this Note or
(b) issue any class of capital stock that is mandatorily redeemable prior to the
final maturity date of this Note. Notwithstanding the foregoing, Company shall
be permitted to incur indebtedness that is secured by a lien (including purchase
money indebtedness) to the extent permitted under the Wells Loan Agreement and
to enter into leases that may be capitalized in accordance with GAAP and, to the
extent that any such incurrence is permitted by the Wells Loan Agreement, such
incurrence or entrance into leases shall not be deemed a violation of this
Section 2.6.

        2.7 Usury. The Company agrees (to the extent it may lawfully do so) that
it will not at any time insist upon, plead or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law or any usury law or
other law that would prohibit or forgive the Company from paying all or a
portion of the principal of or interest on this Note as contemplated in this

3

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

Note, wherever enacted, now or at any time later in force, or that may
materially affect the covenants or the performance of this Note in any manner
inconsistent with its provisions. The Company expressly waives all benefit or
advantage of any such law, and will not hinder, delay or impede the execution of
any power granted to the Holder, but will suffer and permit the execution of
every such power as though no such law had been enacted. If a court of competent
jurisdiction prescribes that the Company may not waive its rights to take the
benefit or advantage of any stay or extension law or any usury law or other law
in accordance with the prior sentence, then the obligation to pay interest on
the Note shall be reduced to the maximum legal limit under applicable law
governing the interest payable in connection with the Note, and any amount of
interest paid by the Company that is deemed illegal shall be deemed to have been
a prepayment of principal (without penalty or premium) on this Note.

        2.8 Reports. Unless such reports are readily accessible by the public,
electronically and without cost, the Company shall deliver copies of all
quarterly and annual financial reports and of the information, documents, and
other reports (or copies of such portions of any of the foregoing as the
Securities and Exchange Commission (the "Commission") may by rules and
regulations prescribe) that the Company is required to file with the Commission
pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC Reports") to the
Holder. If the Company is not subject to the requirements of Section 13(a) or
15(d) of the Exchange Act or shall cease to be required by the Commission to
file SEC Reports pursuant to the Exchange Act, the Company shall nevertheless
continue to cause SEC Reports, comparable to those that it would be required to
file pursuant to Section 13(a) or 15(d) of the Exchange Act if it were subject
to the requirements of either such section, to be delivered to the Holder within
the same time periods as would have applied (including under the preceding
sentence) had the Company been subject to the requirements of Section 13(a) or
15(d) of the Exchange Act.

        2.9 Restricted Payments. The Company shall not directly or indirectly
purchase, redeem, retire or otherwise acquire for value any indebtedness of the
Company for borrowed money or evidenced by notes, debentures, bonds or other
similar instruments that is subordinate (whether by agreement or otherwise) in
right of payment to the Notes, except at final maturity or in accordance with
the mandatory redemption or repayment provisions set forth in the original
documentation governing such indebtedness.

        2.10 Asset Sales. The Company shall not, whether in a single transaction
or a series of related transactions occurring within any twelve-month period,
sell, lease, convey, dispose or otherwise transfer any assets (including by way
of a sale and leaseback transaction), other than sales, leases, conveyances,
dispositions or other transfers in the ordinary course of business, if the
assets:

        (x) have a fair market value in excess of $500,000 or

        (y) are sold or otherwise disposed of for net proceeds in excess of
$500,000 or

        (z) include the Company's rights under the Schwarz Agreement (each of
the foregoing, an "Asset Sale"), unless, in each case:

        (a) no Event of Default exists or would occur as a result of the Asset
Sale;

        (b) the Company receives consideration at the time of such Asset Sale at
least equal to the fair market value of the assets sold or otherwise disposed
of; and

        (c) at least 75% of the consideration therefor received by the Company
is in the form of cash.

4

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

        3. Prepayment of this Note.

        3.1 Prepayment Triggered in Fiscal 2003. If the Consolidated EBITDA of
the Parent and its Subsidiaries exceeds $25 million for the Parent's fiscal year
ending on the first Saturday after January 31, 2004 (or, if Parent does not have
a fiscal year ending on such date, for the 12-month period ending January 31,
2004), the Company shall prepay a portion of the outstanding principal balance
of this Note in an amount equal to (i) 20% of the aggregate principal amount
outstanding on this Note as of January 6, 2003 (the "Prepayment Amount"), plus
accrued and unpaid interest thereon to the date of prepayment, on or before
June 6, 2004 and (ii) in an amount equal to the Prepayment Amount plus accrued
and unpaid interest thereon to the date of prepayment, on or before June 6,
2005.

        3.2 Prepayment Triggered in Fiscal 2004. If no prepayment obligation has
been triggered under Section 3.1 and the Consolidated EBITDA of the Parent and
its Subsidiaries exceeds $25 million for the Parent's fiscal year ending on the
first Saturday after January 31, 2005 (or, if Parent does not have a fiscal year
ending on such date, for the 12-month period ending January 31, 2005), the
Company shall prepay a portion of the outstanding principal balance of this Note
in an amount equal to 20% of the aggregate principal amount outstanding on this
Note as of January 6, 2004, plus accrued and unpaid interest thereon to the date
of prepayment, on or before June 6, 2005.

        3.3 Prepayment Triggered by Securities Offering. In the event that the
Company or Parent shall receive net cash proceeds from the closing of a sale of
debt or equity securities of the Company or Parent (the "Cash Proceeds"), in
excess of $5,000,000, the Company shall, within 30 calendar days after such
receipt, prepay an aggregate principal amount of Notes, together with any
accrued and unpaid interest thereon to the date of prepayment, equal to the
amount of such Cash Proceeds, less any such Cash Proceeds which are used to
prepay amounts due under that certain Subordinated Note due January 6, 2005,
dated as of January 6, 2002, in the aggregate initial principal amount of
$899,900 (the "QFS Note"). Notwithstanding the foregoing, the Company shall not
be required to prepay the Notes from any proceeds from the closing of a sale of
debt or equity securities of the Company or Parent to the extent that the
issuance resulting in such Cash Proceeds was effected solely to fund a merger,
consolidation or asset acquisition and the Cash Proceeds of such issuance are so
used within 30 days of receipt.

        3.4 Prepayment Triggered by Asset Sale. In the event that the Company
shall receive net cash proceeds from an Asset Sale ("Asset Sale Proceeds"), the
Company shall, within 30 calendar days after such receipt, prepay an aggregate
principal amount of Notes, together with any accrued and unpaid interest thereon
to the date of prepayment, equal to the amount of the Asset Sale Proceeds, less
any such Asset Sale Proceeds which are used to repay the Wells Indebtedness or
indebtedness under the QFS Note.

        3.5 Prepayment on Change of Control. No more than 30 days following a
Change of Control, the Company shall prepay the entire principal amount
outstanding under this Note. As used herein, (x) the term "Change of Control"
means the occurrence of any of the following: (i) the adoption of a plan
relating to the liquidation or dissolution of Parent or the Company, (ii) any
Person or group (as such term is used in Section 13(d)(3) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial owner (as defined in Rules 13d-3 and
13d-5 under the Exchange Act (or any successor rules)), directly or indirectly,
of more than 50% of the total voting stock of Parent or the Company, other than
in connection with a merger, consolidation or acquisition of assets in which
Kayne Anderson Investment Management affiliates do not sell, transfer or
otherwise dispose of any equity security or convertible debt security of Parent
or the Company or (iii) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing Directors and (y) the term
"Continuing Director" means, as of any date of determination, any

5

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

member of the Board of Directors of the Company who (i) was a member of such
Board of Directors on January 6, 2002 or (ii) was nominated for election or
elected to such Board of Directors with the affirmative vote of a majority of
the Continuing Directors who were members of such Board at the time of such
nomination or election.

        3.6 Prepayment by Indemnity Credit or Due to Failure to Transfer Leases.
In the event (i) the Holder shall be required to make any payments pursuant to
Article 13 of the Agreement and the Holder elects in accordance with the terms
of the Agreement to have such payment obligation satisfied by means of a
reduction in the principal amount of the Notes and so notifies the Company in
writing (an "Indemnity Credit Prepayment Notice") or (ii) the Holder shall fail
to transfer any leases for Operated Stores in accordance with the Operating
Agreement among the Company, Parent, F.A.O. Schwarz, Quality Fulfillment
Services, Inc. and Royal Vendex KBB N.V. dated as of January 6, 2002, by the
date set for such transfer (the "Lease Transfer Deadline"), on the fifth
Business Day following the receipt of such Indemnity Credit Payment Notice by
the Company or the passing of such Lease Transfer Deadline (the "Deemed
Prepayment Date"), the Company shall be deemed to have prepaid an amount which,
after addition of the accrued and unpaid interest thereon through the Deemed
Prepayment Date, is equal to (A) in the case of an indemnity obligation, the
amount specified in the Indemnity Credit Prepayment Notice which shall be not
more than 50% of the amount of such indemnity obligation or (B) in case of the
passing of a Lease Transfer Deadline, the amount calculated under the Operating
Agreement. Any such prepayment shall be noted on the schedule of prepayments and
adjustments attached to this Note, however, failure to make such notation shall
have no effect on the actual principal amount of this Note at any time
outstanding. On and after any such prepayment, interest shall cease to accrue on
the principal amount of this Note so prepaid.

        3.7 Notice to Holder. If any event occurs that requires the Company to
prepay all or a portion of this Note, the Company shall send notice of such
event to the Holder not less than 10 days prior to the date such prepayment is
required at such Holder's address of record by first class mail, postage
prepaid. Such notice will identify the event, the aggregate principal amount of
this Note to be prepaid, the prepayment date, the paragraph of this Note under
which the prepayment is to be made and that, provided the prepayment amount is
timely paid, the aggregate principal amount of this Note to be prepaid shall
cease to accrue interest from and after the prepayment date.

        3.8 Effect of Notice. Once notice of prepayment is mailed, that portion
of the principal amount of this Note to be prepaid shall become due and payable
on the prepayment date and, provided the prepayment amount is timely paid, the
aggregate principal amount of this Note to be prepaid shall cease to accrue
interest from and after the prepayment date.

        3.9 Application of Prepayment. Any prepayment of this Note shall be
applied first to pay any accrued and unpaid interest on this Note to the date of
prepayment and thereafter to the remaining principal balance of this Note.

        4. Payment Suspension. Notwithstanding anything in this Note to the
contrary, to the extent that the Company and the Holder dispute the amount of
any indemnity payment alleged to be due from the Holder to the Company pursuant
to and in accordance with the Agreement, then the Company may suspend payment
under the Notes (other than any payment due by reason of the prior occurrence of
an Event of Default) up to the net amount of such indemnity payments in dispute
under the Agreement until such dispute is resolved and such suspension shall not
be deemed an Event of Default.

        5. Transfer; Registration; Replacement. Upon surrender of this Note for
registration of transfer or assignment, duly endorsed, or accompanied by a
written instrument of transfer or assignment duly executed, by the registered
Holder hereof or such Holder's attorney duly authorized in writing, a new Note
for a like principal amount shall be issued to, and, at the option of the
Holder, registered in the name of, the transferee or assignee. The Company may
deem and treat the person in whose name this

6

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

Note is registered as the Holder and owner hereof for the purpose of receiving
payments and for all other purposes whatsoever, and the Company shall not be
affected by any notice to the contrary.

        6. Miscellaneous.

        6.1 Organization and Authority. The Company represents and warrants that
the Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has all necessary power to
issue and perform its obligations under this Note.

        6.2 Authorization. The Company represents and warrants that the
execution and delivery of this Note, and the performance of the terms hereof,
have been duly authorized by all necessary corporate action on the part of the
Company and will not conflict with or result in a breach of the certificate of
incorporation or bylaws of the Company. The Company represents and warrants that
this Note constitutes a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms except as limited by bankruptcy
and insolvency laws and other laws affecting the rights of creditors generally.

        6.3 Definitions.

        (a) "Consolidated EBITDA" shall mean consolidated earnings from
continuing operations (excluding extraordinary items), before interest, taxes,
depreciation and amortization, each as determined in accordance with GAAP.

        (b) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended (or any successor act), and the rules and regulations promulgated
thereunder.

        6.4 Notices. All notices to be given under this Note shall be in writing
and shall be given either personally, by reputable private delivery service, by
regular first-class mail or certified mail return receipt requested, by fax, or
email, addressed to the parties at the addresses shown below, or at any other
address designated in writing by one party to the other party. All notices shall
be deemed to have been given upon delivery in the case of notices personally
delivered, or at the expiration of two business days following delivery to the
private delivery service, or three business

7

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

days following the deposit thereof in the United States mail, with postage
prepaid or on the first business day of receipt in the case of notices sent by
fax or email.

 
   
If to Holder:   At its address set forth on the
records of the Company which, until
changed as set forth herein shall be:
 
 
c/o Royal Vendex KBB N.V.
De Klencke 6, NL-1083
Postbus 7997, 1008, AD
Amsterdam, The Netherlands
Attention: Marcel Smits/Eric ter Hark
Tel: 31.20.5490.596
Fax: 31.20.6461.954
Email: eric.ter.hark@vendexkbb.nl
 
 
with required copy to (which, in and of
itself, shall not constitute notice):
 
 
Kronish Lieb Weiner & Hellman LLP
1114 Avenue of the Americas
New York, New York 10036
Attention: Mark Lipschutz
Tel: (212) 479-6355
Fax: (212) 479-6275
Email: mlipschutz@klwhllp.com
If to Company to:
 
 
 
 
FAO Schwarz, Inc.
2520 Renaissance Blvd.
King of Prussia, PA 19406
Attention: Legal
Tel: (610)278-7800
Fax: (610)278-7804
Email: jgroner@faoinc.com
 
 
with required copy to (which, in and of
itself, shall not constitute notice):
 
 
Fulbright & Jaworski L.L.P.
865 South Figueroa Street, 29th Floor
Los Angeles, CA 90017
Attention: Victor Hsu, Esq.
Tel: (213) 892-9326
Fax: (213) 680-4518
Email: vhsu@fulbright.com

        6.5 Amendment; Successors and Assigns. This Note may not be modified or
amended, nor may any rights hereunder be waived, except in a writing signed by
the party against whom enforcement of the modification, amendment or waiver is
sought. This Note shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns. The Company's
obligations under this Note may not be assigned or transferred by the Company

8

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

without the prior written consent of the registered Holder hereof or thereof,
except in connection with a merger permitted by Section 2.2.

        6.6 Governing Law. This Note shall be governed by, and shall be
construed and enforced in accordance with, the internal laws of the State of New
York, without regard to conflicts of laws principles.

        [Remainder of Page Intentionally Left Blank]

9

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

        IN WITNESS WHEREOF, the undersigned has caused this Note to be duly
executed on its behalf as of the date first hereinabove set forth.

 
 
FAO SCHWARZ, INC.

 

 

By:

/s/  JERRY R. WELCH      

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

Name:  Jerry R. Welch
Title:  President and Chief Executive Officer

10

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

Schedule of Principal Prepayments and Adjustments

Date

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

  Amount of Principal
Prepayment or
Adjustment

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

  Aggregate Principal Amount
of Note after
Prepayment or Adjustment

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

         

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

 

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

 

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

         

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

 

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

 

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

         

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

 

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

 

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

         

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

 

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

 

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

         

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

 

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

 

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

         

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

 

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

 

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

11

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