Exhibit 10.5

AMENDED AND RESTATED INTERIM OPERATING AGREEMENT

        THIS AMENDED AND RESTATED INTERIM OPERATING AGREEMENT is made as of
December 16, 2002 (this "Agreement") by and among FAO SCHWARZ, INC. f/k/a Toy
Soldier, Inc., a Delaware corporation ("Buyer"), FAO, INC., f/k/a The Right
Start, Inc., a Delaware corporation ("Parent"), KBB RETAIL ASSETS CORP., f/k/a
F.A.O. Schwarz, a New York corporation ("Seller"), and ROYAL VENDEX KBB N.V., a
Netherlands corporation ("Shareholder"). All capitalized terms contained herein
and not otherwise defined in this Agreement shall have those meanings ascribed
to them in the Purchase Agreement (as defined below).

        WHEREAS, Parent, Buyer, Seller, Quality Fulfillment Services, Inc.
("QFS") and Shareholder are parties to that certain asset purchase agreement
dated November 19, 2001 (the "Purchase Agreement"), pursuant to which, among
other things, Buyer purchased the Assets of Seller and QFS upon the terms and
subject to the conditions set forth therein; and

        WHEREAS, Section 2.6(a) of the Purchase Agreement provides for the
execution and delivery by Seller, QFS, Shareholder and Buyer of an operating
agreement, pursuant to which Buyer shall provide operational and management
services to Seller and QFS for certain of Seller's retail toy stores (the "Other
Operated Stores") pursuant to the terms of the operating agreement in the form
annexed to the Purchase Agreement as Exhibit 2.6(a)(xi) (the "Other Operating
Agreement"); and

        WHEREAS, the terms of the Other Operating Agreement do not address
Seller's needs with respect to the operation of Seller's store located at 840
North Michigan Avenue, Chicago, Illinois (the "Chicago Store");

        WHEREAS, Buyer, Parent, Seller and Shareholder entered into that certain
Interim Operating Agreement dated as of January 6, 2002 (the "Original Interim
Operating Agreement");

        WHEREAS, Seller has delivered notice that it will retake possession of
the Chicago Store on January 20, 2003 (the "Termination Date") for turnover to
the landlord of the Chicago Store (the "Landlord") and Buyer has agreed to
surrender the Chicago Store in the condition required under the terms of this
Agreement on the Termination Date;

        WHEREAS, Seller desires to have the Buyer operate the Chicago Store
through a date chosen by Buyer in the week of January 6, 2003, and wind up
operations and deliver the Chicago Store in broom clean condition, free of
fixtures, Chicago Inventory (as defined below), other personalty, signage and
improvements identified by Seller or Shareholder for removal (the "Removal
Improvements"), on or before the Termination Date; and

        WHEREAS, Seller and Buyer desire to amend and restate the Original
Interim Operating Agreement:

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

1. PROVISION OF SERVICES

1.1Standard of Operations. Commencing on the date hereof and continuing until a
date chosen by Buyer during the week of January 6, 2003 (the "Store Closing
Date"), Buyer shall manage and operate the Chicago Store in a manner consistent
with the standards of quality with respect to the Transferred Stores and
Facilities. Buyer shall notify Seller and Shareholder in

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writing of the actual Store Closing Date at least three (3) business days in
advance. Buyer shall apply substantially the same policies, practices and
procedures as apply generally to the Transferred Stores and Facilities with
respect to day-to-day operations, management, accounting, purchasing, control of
operating expenses and general administration, including marketing, promotional
activities and other matters, subject to the applicable terms of this Agreement.
Exceptions to general policies, practices and procedures may be made by Buyer to
deal with specific circumstances affecting the Chicago Store if, in Buyer's
reasonable judgment, there is an adequate business justification for doing so.
In conducting the operations of the Chicago Store prior to the Termination Date,
Buyer shall cooperate and diligently assist Seller and Shareholder in all
actions required in connection with the removal of personalty (other than the
Chicago Inventory, which is the property of Buyer and shall be removed by Buyer
promptly following the Store Closing Date), fixtures, signage and the Removal
Improvements and the closure of the Chicago Store. Buyer shall be permitted to
mark down, clear and liquidate inventory in the Chicago Store.

1.2Contracts. Buyer shall have authority to enter into in Buyer's name, at
Buyer's cost and for Buyer's sole benefit such purchasing, service and other
contracts or agreements, which are in the ordinary course of business, as are in
Buyer's reasonable professional judgment necessary for the operation, supply and
maintenance of the Chicago Store as required by this Agreement.

Buyer shall also have authority to enter into such contracts as may be necessary
in connection with the surrender and turnover of the Chicago Store as
contemplated under this Agreement, including, without limitation, contracts for
the demolition and removal of improvements located in and about the Chicago
Store, provided such contracts have been approved in advance by Seller or
Shareholder.

1.3Maintenance. Buyer, at its own expense, shall be responsible for maintaining
the Chicago Store in good condition and repair. All repairs and maintenance work
shall be completed in accordance with the terms of the real property lease for
the Chicago Store (the "Lease").

1.4Operating Expenses. Throughout the Term hereof, Buyer shall pay all expenses
incurred in connection with the operation and close down of the Chicago Store,
including payments due under the Lease. Notwithstanding any provision to the
contrary contained in this Agreement, Seller reserves the right at any time and
from time to time, upon written notice to Buyer (each, a "Rent Payment Option
Notice"), to pay the base rent, additional rent and any other charges and costs
accruing under the Lease (the "Rent") directly to the Landlord. Buyer hereby
agrees, upon receipt of a Rent Payment Option Notice, to promptly deliver any
information needed by Seller in connection with the payment of Rent (i.e., sales
data used to calculate percentage rent) so as to enable Seller to pay the Rent
to Landlord on a timely basis in accordance with the terms of the Lease. Seller
shall have the right upon no less than thirty (30) days written notice to revoke
a Rent Payment Option Notice and direct Buyer to resume paying Rent to the
Landlord in accordance with the terms of the Lease.

1.5Recordkeeping. Buyer agrees to maintain all books of record, accounts and
other financial and operating data with respect to the Chicago Store during the
Term hereof. Seller shall have the right to audit Buyer's books and record,
accounts, financial and operating data upon prior notice to Buyer.

2. LANDLORD NEGOTIATIONS

2.1[Intentionally Omitted]

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3. PERSONNEL

3.1Personnel. Subject to the applicable terms of the Purchase Agreement, Buyer
is solely responsible for hiring, supervising, directing the work of, promoting,
discharging and determining the compensation and other benefits of all personnel
working in the Chicago Store. Buyer shall be solely liable for the wages,
salaries, benefits and other compensation of its personnel, including but not
limited to management personnel such as district or regional managers that it
chooses to employ to oversee the Chicago Store. Notwithstanding any foregoing
provision to the contrary, all severance, retention and bonus payments to
employees of the Chicago Store must be approved in advance by Seller or
Shareholder in order to be eligible for inclusion in Expenses (as defined
below).

4. INVENTORIES

4.1Inventories. Buyer has purchased the Inventories of the Chicago Store from
Seller in exchange for that certain Subordinated Note in the aggregate principal
amount of $1,500,000 dated as of January 6, 2002 which Subordinated Note shall
be cancelled and replaced as of the date hereof by an Amended and Restated
Subordinated Note in the aggregate principal amount of $1,000,000 in the form
attached hereto as Exhibit A (as amended as of the date hereof, the "Amended and
Restated Chicago Subordinated Note"). Buyer represents and warrants that it has
refreshed the Inventories held in the Chicago Store on the same basis as it has
refreshed its other stores and Buyer shall, at its sole cost and expense,
including distribution expenses, supply such additional current merchandise as
is needed for sale in the Chicago Store through December 24, 2002.

5. MONTH-END RECONCILIATION

5.1Month-End Reconciliation. Buyer shall deliver a monthly profit and loss
report to Seller detailing Expenses (as hereinafter defined) and Net Sales (as
hereinafter defined) generated at the Chicago Store substantially in the form
attached hereto as Exhibit B (the "Monthly Store Operations Report"). The
Monthly Store Operations Report shall also disclose Annual Net Sales (as
hereinafter defined) for the applicable fiscal month. In the event Expenses
exceed Net Sales during any fiscal month (the "Monthly Shortfall"), Seller shall
reimburse Buyer for the Monthly Shortfall within ten (10) business days of its
receipt of the Monthly Store Operations Report. Seller shall have the right to
request reasonably detailed supporting documentation in connection with any
Monthly Store Operations Report, which documentation shall be promptly delivered
by Buyer for Seller's review, however, payment of the Monthly Shortfall shall
not be subject to Seller's approval of such supporting documentation. Seller
anticipates reviewing the Monthly Store Operations Report on a quarterly basis
and expressly reserves all rights under this Section 5.1, including the right to
dispute the information contained in any Monthly Store Operations Report,
notwithstanding the fact that one (1) or more months may have elapsed following
payment of the applicable Monthly Shortfall reflected in any particular Monthly
Store Operations Report disputed by Seller. In the event Seller disputes any
information contained in the Monthly Store Operations Report (the "Disputed
Item(s)"), Seller shall notify Buyer of such Disputed Item(s) in writing (the
"Dispute Notice") in the manner required under this Agreement. Buyer shall,
within ten (10) business days of receipt of any Dispute Notice either (i) amend
the applicable Monthly Store Operations Report and refund Seller's overpayment
of the Monthly Shortfall or (ii) provide Seller with additional supporting
documentation and other related information with respect to the Disputed
Item(s). In the event Buyer and Seller are unable to resolve the Disputed
Item(s) in a mutually satisfactory manner upon the request of Buyer or Seller,
such dispute shall be submitted to arbitration in accordance with

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Section 14.9 hereof. In the event Net Sales exceed Expenses during any fiscal
month (the "Sales Overage"), Buyer shall be entitled to retain and use the Sales
Overage to offset future Monthly Shortfall amounts subject to Buyer's obligation
to reimburse Seller for any payment of Rent provided in the next sentence hereof
and reconciliation following the end of each fiscal year of Buyer (the "Fiscal
Year"). Notwithstanding any foregoing provision to the contrary, following
delivery of a Rent Payment Option Notice, in the event any Sales Overage exists
during any fiscal month in which Seller has paid the Rent, Buyer shall promptly
reimburse Seller for the Rent paid by Seller up to the amount of the Sales
Overage. Any excess funds remaining from any Sales Overage following
reimbursement of any Rent paid by Seller shall thereafter be returned to Seller
within thirty (30) days following the end of any Fiscal Year, together with a
reconciliation statement for the applicable Fiscal Year. Any late payments shall
accrue interest on a daily basis at a rate of eight percent (8%) per annum. For
purposes of this Agreement, the term "Expenses" shall mean (i) the expenses
incurred exclusively in connection with Buyer's ordinary operation of the
Chicago Store (which shall, in the case of the non-allocated charges, be limited
to the actual out-of-pocket expenses incurred and paid or to be settled in cash
by Buyer—i.e., actual cost of goods sold, cash payments under the Lease, actual
costs and expenses associated with operation and management of the Chicago Store
and all out-of-pocket costs of compliance with the Lease plus the Chicago
Store's pro-rata portion of royalties due for the use of the FAO name and
interest on the Amended and Restated Chicago Subordinated Note) as well as the
expenses associated with the closing down of the Chicago Store provided such
expenses were approved in advance by Seller or Shareholder in accordance with
the terms of this Agreement plus (ii) one twelfth of six and one-half percent
(6.5%) of Annual Net Sales, which amount represents the allocable amount of
certain variable overhead costs associated with the operation of all of the
stores and locations being transferred to Buyer by Seller and QFS (i.e.,
warehouse, shipping and labor costs, corporate and home office expenses and
other charges) and the term "Annual Net Sales" shall mean total sales revenues
generated by the Chicago Store for the trailing twelve (12) month period net of
customer merchandise returns. Buyer acknowledges and agrees that Shareholder may
exercise Seller's rights under this Section 5.1, on Seller's behalf and the term
"Net Sales" shall mean the total sales revenue generated by the Chicago Store
during any fiscal month during the Term, net of customer merchandise returns.

If total Expenses exceed Net Sales during a Fiscal Year of Buyer by an amount
less than Two Hundred Thousand Dollars ($200,000) (such excess being defined as
the "Aggregate Annual Threshold Shortfall"), Buyer shall receive an incentive
payment equivalent to the difference between the Two Hundred Thousand Dollars
($200,000) and the Aggregate Annual Threshold Shortfall (the "Incentive
Payment"). Buyer expressly acknowledges and agrees that any Rent paid directly
by Seller shall be deemed included in total Expenses and factored into the
calculation of the Aggregate Annual Threshold Shortfall, notwithstanding the
fact that such amounts were not actual out-of-pocket expenses incurred and paid
in cash by Buyer. In the event Net Sales for a Fiscal Year of Buyer are
equivalent to the total Expenses for such Fiscal Year (the "Break Even Point")
Buyer shall receive an Incentive Payment equivalent to Two Hundred Thousand
Dollars ($200,000). Each Incentive Payment shall be paid within forty-five
(45) days of the end of the relevant Fiscal Year provided no unresolved Dispute
Notice is outstanding with respect to the applicable Fiscal Year at that time.
In the event of an outstanding Dispute Notice, the Incentive Payment shall be
remitted to Buyer within fifteen (15) days of resolution of the Disputed
Item(s). At such time that the Break Even Point is exceeded (such excess, the
"Net Profit"), such Net Profit shall be shared equally between Buyer and Seller
until the Seller shall have received Two Hundred Thousand Dollars

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($200,000) (the "Second Break Even Point"). Buyer shall be entitled to retain
all Net Profits in excess of the Second Break Even Point.

6. LICENSE OF FAO NAMES

6.1License.

(a)Seller has retained, as of the closing of the Purchase Agreement (and Buyer
acknowledges that Seller possesses), a royalty free, non-transferable,
nonexclusive license, for the duration of the Term hereof and solely in
connection with matters related to the Chicago Store as contemplated under this
Agreement, to use the names "FAO Schwarz," any derivatives thereof, and any
trademarks, service marks or trade names used by Seller in the operation of the
Chicago Store prior to such closing (the "FAO Names").

(b)Seller agrees to use the FAO Names in accordance with reasonable written
guidelines delivered by Buyer to Seller and in accordance with the amended and
restated Schwarz Agreement.

7. DISPOSITION OF THE CHICAGO STORE

7.1Closure Store. Immediately following the Store Closing Date and prior to the
Termination Date, Buyer shall transfer all of the then-existing Inventories at
the Chicago Store ("Chicago Inventory"), out of the Chicago Store. Buyer shall
work diligently with Seller and Shareholder to coordinate removal of all other
personalty, signage, fixtures and Removal Improvements from the Chicago Store
and, on or before the Termination Date, Buyer shall deliver the Chicago Store to
Seller in broom clean condition free from Chicago Inventory, other personalty,
signage, fixtures and Removal Improvements.

Seller shall pay all reasonable expenses incurred by Buyer in connection with
the sale, transfer and liquidation of the Chicago Inventory and the closure of
the Chicago Store as contemplated by this Agreement provided such expenses were
approved in advance by Seller or Shareholder in accordance with the terms of
this Agreement. Buyer shall use commercially reasonable efforts to minimize such
expenses. Seller represents and warrants to Buyer that Seller has obtained
Landlord's consent to closure of the Chicago Store. Seller agrees to take action
reasonably requested by Buyer to evidence Buyer's ownership of the Chicago
Inventory.

7.2Final Store Operations Report. Buyer shall deliver a final Monthly Store
Operations Report for the period from the date of the immediately prior Monthly
Store Operations Report up to and including the Termination Date (the "Final
Monthly Store Operations Report"), together with a year-to-date reconciliation
statement for the Fiscal Year (or portion thereof) (the "Final Year End
Statement"). Seller's review and dispute rights with respect to the Final
Monthly Store Operations Report as well as well as the Final Year End Statement
shall mirror Seller's rights described in Section 5.1 hereof with respect to
Monthly Store Operations Reports and Fiscal Year statements. In the event the
Final Monthly Store Operations Report and/or the Final Year End Statement
(collectively, the "Final Statements") evidences any amounts due from Seller or
Buyer, notwithstanding any other provision of this Agreement to the contrary,
the party from whom such amounts are due shall remit the balance payable within
ten (10) business days of receipt of the Final Statements.

8. TERMINATION

8.1Term. This Agreement shall automatically terminate on the Termination Date.

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9. COVENANTS, LIABILITY AND INDEMNITY

9.1Buyer hereby covenants that it shall operate the Chicago Store in accordance
with the terms of the Lease and comply with all terms and conditions of the
Lease. Parent and Buyer, jointly and severally, agree to indemnify Seller and
Shareholder from and against any costs, claims or damages (including reasonable
attorneys' fees and reasonable actual costs) ("Losses") arising out of (i) any
breach of Buyer's covenant in this Section 9.1, (ii) events resulting from or
occurring in connection with Buyer's operation of the Chicago Store in a manner
that does not comply with the terms of the Lease (except as otherwise
contemplated under Section 9.2(iii) hereof), this Agreement and/or any
occurrence covered under the insurance policies required to be maintained by the
tenant under the terms of the Lease, (iii) events resulting from or occurring in
connection with Buyer's wrongful or intentional misconduct and (iv) Buyer's or
Parent's breach of their respective, representations, warranties and obligations
under this Agreement.

9.2Seller and Shareholder, jointly and severally, agree to indemnify Buyer and
Parent against (i) any losses to the extent provided and in accordance with the
terms of Section 5.1, (ii) any COBRA liabilities with respect to Chicago Store
employees, (iii) Losses arising from litigation brought by the Landlord in
connection with execution or performance of this Agreement by Buyer or Seller or
in connection with Seller's negotiations with Landlord concerning the closure of
the Chicago Store and termination of the Lease, (iv) Losses arising out of
events resulting from or occurring in connection with Seller's wrongful or
intentional misconduct and (v) Losses arising out of Seller's or Shareholder's
breach of their respective representations, warranties or obligations under this
Agreement.

10. RELATIONSHIP OF PARTIES

10.1Independent Contractors. The parties are independent contractors under this
Agreement. Except as expressly set forth herein, neither party has the authority
to, and each party agrees that it shall not, directly or indirectly contract any
obligations of any kind in the name of or chargeable against the other party
without such party's prior written consent.

10.2No Assignment of Lease. Nothing set forth in this Agreement is intended to
be, or shall be deemed to be, an assignment of any of Seller's interests in the
Lease or a sublease or license to Buyer to use or occupy the Chicago Store.

11. NOTICES

11.1Notices. All notices or other communications hereunder shall be deemed to
have been duly given and made if in writing and (a) if served by personal
delivery upon the party for whom it is intended, on the day so delivered; (b) if
mailed by registered or certified mail, return receipt requested, on the third
business day following such mailing; (c) if deposited for delivery by a
reputable courier service, on the business day following deposit with such
courier; or (d) if sent by electronic facsimile transmission, on the day the
facsimile is transmitted electronically, or if not a business day, the next
succeeding business day to the

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person at the address set forth below, or such other address as may be
designated in writing hereafter, in the same manner, by such person:

    To Seller or Shareholder:                   Royal Vendex KBB N.V.
De Klencke 6, NL-1083
Postbus 7997, 1008 AD
Amsterdam, The Netherlands
Attention: Drs. Jan de Planque (RA)                   with a mandatory copy to:
                  Kronish Lieb Weiner & Hellman LLP
1114 Avenue of the Americas
New York, NY 10036
Attention: Mark Lipschutz, Esq.
Fax no.: (212) 479-6275
E-mail address: mlipschutz@kronishlieb.com                   To Buyer or Parent:
                  FAO, Inc.
2520 Renaissance Boulevard
King of Prussia, PA 19406
Attention: Jerry Welch/Legal
Fax no.: (610) 278-7804
E-mail address: jgroner@faoinc.com
                          kroyer@faoinc.com                   with a mandatory
copy to:                   Fulbright & Jaworski L.L.P.
865 South Figueroa Street, 29th Floor
Los Angeles, CA 90017
Attention: Victor Hsu
Fax no.: (213) 680-4518
E-mail address: vhsu@fulbright.com    

12. GOVERNING LAW; SUBMISSION TO JURISDICTION; SERVICE OF PROCESS

12.1Any Proceeding arising out of or relating to this Agreement ("Proceeding")
may be brought in the courts of the State of New York, County of New York, or,
if it has or can acquire jurisdiction, in the United States District Court for
the Southern District of New York, and each of the parties irrevocably submits
to the exclusive jurisdiction of each such court in any such Proceeding, waives
any objection it may now or hereafter have to venue or to convenience of forum,
agrees that all claims in respect of the Proceeding shall be heard and
determined only in any such court and agrees not to bring any Proceeding arising
out of or relating to this Agreement in any other court. The parties agree that
either or both of them may file a copy of this paragraph with any court as
written evidence of the knowing,

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voluntary and bargained agreement between the parties irrevocably to waive any
objections to venue or to convenience of forum. Each party hereto agrees that
service of process in any Proceeding may be made upon it in any manner permitted
by the laws of the state of New York or the federal laws of the United States or
as follows: (i) by personal service or (ii) by certified or registered mail to
the party for which intended at its address for notice pursuant to Section 11.
Service of process upon any party in any manner referred to in the preceding
sentence shall be deemed in every respect effective service of process upon such
party.

13. SPECIFIC PERFORMANCE

13.1Specific Performance. The parties hereto agree that if any of the provisions
of this Agreement were not performed in accordance with their specific terms or
were otherwise breached, irreparable damage would occur, no adequate remedy at
law would exist and damages would be difficult to determine, and that, in the
event of a breach or threatened breach of this Agreement, the parties shall be
entitled to specific performance, injunctive or other equitable relief, in
addition to any other remedy available at law or in equity, without posting bond
or other undertaking.

14. MISCELLANEOUS

14.1Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be adjusted
rather than voided, if possible, in order to achieve the intent of the parties
to this Agreement to the extent possible, without invalidating or adjusting the
remaining provisions hereof, and any such prohibition, unenforceability or
adjustment in any jurisdiction shall not invalidate, render unenforceable or
adjust such provision in any other jurisdiction.

14.2Descriptive Headings. The descriptive headings of the several sections and
paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.

14.3Counterparts. This Agreement may be executed in one or more counterparts,
each of which will be deemed to be an original copy of this Agreement and all of
which, when taken together, will be deemed to constitute one and the same
agreement. The exchange of copies of this Agreement and of signature pages by
facsimile transmission shall constitute effective execution and delivery of this
Agreement as to the parties and may be used in lieu of the original Agreement
for all purposes. Signatures of the parties transmitted by facsimile shall be
deemed to be their original signatures for all purposes.

14.4Assignment and Delegation. No party to this Agreement may assign any of its
rights or obligations under this Agreement without the prior written consent of
the other parties hereto. Notwithstanding the foregoing, Buyer and Parent each
expressly acknowledge and agree that no consent shall be required in connection
with any assignments or transfers associated with the winding-up of Seller's and
Shareholder's activities in the United States.

14.5Entire Agreement. This Agreement, including the Schedules contains the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all prior agreements and understandings, oral or written, with
respect to such matters.

14.6Parties in Interest. This Agreement shall inure to the benefit of and be
binding upon the parties and their respective successors and permitted assigns.
Nothing in this Agreement, express or implied, is intended to confer upon any
Person other than Seller, Shareholder,

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Parent or Buyer or their respective successors or permitted assigns any rights
or remedies under or by reason of this Agreement.

14.7Amendment and Waiver. Any provision of this Agreement may be amended or
waived if, and only if, such amendment or waiver is in writing and signed, in
the case of an amendment, by the parties hereto, or in the case of a waiver, by
the party against whom the waiver is to be effective. No failure or delay by any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.

14.8Parent's Obligations. Where in this Agreement provision is made for an
action to be taken or not taken by Buyer, Parent undertakes to cause Buyer to
take or not take such action, as the case may be.

14.9Arbitration. In the event of any dispute between Seller and Buyer with
respect to matters under this Agreement, Seller and Buyer agree that: (a) upon
the request of either Seller or Buyer, the dispute shall be submitted to KPMG
for expedited disposition, which submission to KPMG shall occur within five
(5) business days of Seller's or Buyer's written notice to the other party
requesting arbitration (the "Arbitration Notice"); (b) following delivery of the
Arbitration Notice by either party, Seller and Buyer shall each compile such
documentation and information as may be needed by KPMG to render a decision with
respect to the disputed matter (the "Supporting Documents"), which Supporting
Documents shall be delivered to KPMG together with the written request for
KPMG's arbitration of the matter in dispute (the "KPMG Notice") within the time
period provided hereinabove in Section 14.9(a); (c) following submission of the
matter to arbitration, upon request from KPMG, Seller and/or Buyer shall
promptly deliver such additional documentation and information as may be needed
by KPMG (the "Additional Documents"); (d) KPMG shall render a decision no later
than ten (10) business days (or as soon as reasonably practicable thereafter)
following its receipt of (i) the KPMG Notice and (ii) the Supporting Documents
and, if applicable, the Additional Documents; (e) the decision of KPMG shall be
final and all actions necessary to implement the decision of KPMG shall be
undertaken as soon as possible, but in no event later than ten (10) business
days after the rendering of such decision; (f) judgment upon the dispute or any
award rendered may be entered in any court having jurisdiction thereof; and
(g) all fees payable to KPMG for services rendered in connection with its
arbitration of the dispute shall be paid by the party suffering the adverse
decision of KPMG.

14.10Authority. Buyer and Parent hereby warrant and represent that no third
party or lender consents are required in connection with the execution, delivery
and performance of this Agreement and all related documents including, without
limitation, the Amended and Restated Chicago Subordinated Note except as have
been obtained on or prior to the date hereof.

14.11Acknowledgements.

(a)Parent hereby acknowledges and agrees that, upon issuance, each of the
Amended and Restated Chicago Subordinated Note and the Amended Acquisition Note
(as defined below) shall be deemed to be "Subordinated Notes" under the terms of
that certain Guaranty dated as of January 6, 2002, a copy of which is attached
hereto as Exhibit C, entitled to the benefits thereof and entitling the holders
thereof to the benefits of such guaranty and the associated Parent Security
Agreement dated as of January 6, 2002, a copy of which is attached hereto as
Exhibit D.

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(b)Buyer hereby acknowledges and agrees that, upon issuance, each of the Amended
and Restated Chicago Note and the Amended Acquisition Note shall be deemed
"Subordinated Notes" under the terms of that certain Buyer Security Agreement
dated as of January 6, 2002, a copy of which is attached hereto as Exhibit E,
entitled to the benefits thereof and entitling the holders thereof to the
benefits of such security agreement.

(c)KBB and QFS hereby acknowledge that the amendment and restatement as of the
date hereof, of that certain Subordinated Note due January 6, 2005, by Company
for the benefit of KBB in the aggregate principal amount of $17,098,100 (reduced
to $14,830,637 by its terms) (the "Original KBB Subordinated Note"), to increase
the aggregate principal amount of such Original KBB Subordinated Note to
$15,459,859 (as so amended, the "Amended Acquisition Note") shall, for all
intents and purposes, be deemed payment in full of the interest payment due on
December 1, 2002 on each of the Original KBB Subordinated Note and that certain
Subordinated Note due January 6, 2005, by Company for the benefit of QFS, and
shall cure any default for failure to make such payments prior to such date.

(d)KBB hereby acknowledges that the Buyer's execution and delivery as of the
date hereof, of the Amended and Restated Chicago Subordinated Note satisfies the
obligations due under the Subordinated Note in the aggregate principal amount of
$1,500,000 dated as of January 6, 2002 (the "Subordinated Note"), prior to its
amendment and restatement and that the aggregate principal amount outstanding
due from Buyer to Seller under the Subordinated Note has been reduced from
$1,500,000 to $1,000,000, which amount shall be due and payable by Buyer in
accordance with the terms of the Amended and Restated Chicago Subordinated Note.

The provisions of this Section 14.11 shall survive the expiration or earlier
termination of the term of this Agreement.

14.12Warrants. The Company agrees to issue warrants to KBB in the form attached
hereto as Exhibit F simultaneously herewith.

[Remainder of Page Intentionally Left Blank]

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        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their duly authorized officers as of the date first
above written.

    KBB RETAIL ASSETS CORP.
 
 
By:
/s/  ERIC TER HARK      

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      Name: Eric Ter Hark       Title: Director of Corporate Development        
      ROYAL VENDEX KBB N.V.               By: /s/  ERIC TER HARK      

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      Name: Eric Ter Hark       Title: Director of Corporate Development        
      QUALITY FULFILLMENT SERVICES, INC.               By: /s/  ERIC TER
HARK      

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      Name: Eric Ter Hark       Title: Director of Corporate Development        
      FAO SCHWARZ, INC.               By: /s/  RAYMOND P. SPRINGER      

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      Name: Raymond P. Springer       Title: Executive Vice President          
    FAO, INC.               By: /s/  RAYMOND P. SPRINGER      

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      Name: Raymond P. Springer       Title: Executive Vice President

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