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                                                                    EXHIBIT 10.7


                               SECURITY AGREEMENT

         THIS SECURITY AGREEMENT (this "Agreement") is made as of August 9,
1999, by and between CHURCHILL WEAVERS, INC., a Kentucky corporation (the
"Company"), and WACHOVIA BANK, N.A., a national banking association ("Wachovia")
organized under the laws of the United States of America, acting as collateral
agent under this Agreement for the Secured Parties (in its capacity as
collateral agent, together with any successor collateral agent appointed
pursuant to the Intercreditor Agreement (defined below), the "Collateral
Agent").

RECITALS:

                  In order to secure the Wachovia Obligations, the Bank of
America Obligations and the Prudential Obligations as the same have been
guaranteed by the Company under the terms of its Subsidiary Guaranty (defined
below) (collectively, the "Company Obligations"), the Company has executed this
Agreement, which grants to the Collateral Agent a perfected and first priority
security interest in the Collateral owned by it, subject to the terms of this
Agreement and of the Intercreditor Agreement; and

                  The Collateral Agent, Wachovia, Bank of America, and
Prudential (individually a "Party" and collectively the "Parties") and the
Borrower (defined below) have entered into that certain Intercreditor Agreement
dated as of the date hereof (as amended or otherwise modified from time to time,
the "Intercreditor Agreement") and have agreed that the Company Obligations and
all other Secured Obligations shall be equally and ratably secured pursuant to
this Agreement, the Factoring Balances Agreement, the Mortgages and any other
security agreement in favor of the Collateral Agent for the benefit of the
Secured Parties (collectively, the "Collateral Documents"); the Parties desire
that Wachovia shall be the Collateral Agent to act on behalf of all Parties
regarding the Collateral, all as more fully provided in the Intercreditor
Agreement; and the Parties have entered into the Intercreditor Agreement to,
among other things, further define the rights, duties, authority and
responsibilities of the Collateral Agent and the relationship between the
Parties regarding their interests in the Collateral.



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AGREEMENTS:

         NOW, THEREFORE, in consideration of the premises, and for other good
and valuable consideration, the receipt and sufficiency of which the parties
hereto hereby acknowledge, the parties hereto agree as follows:



DEFINITIONS

         In addition to the definitional provisions contained in Section 5.10
hereof, as used in this Agreement, the terms defined in the Preamble and
Recitals hereto shall have the respective meanings specified therein, and the
following terms shall have the following meanings:

                  "Account Debtor" means the Person who is obligated with
respect to payment on any of the Collateral.

                  "Actionable Default" has the meaning set forth in the
Intercreditor Agreement.

                  "Approved Depository" means either (a) the Collateral Agent or
(b) another depository bank which is acceptable to the Collateral Agent, with
whom the Collateral Agent has entered into an agreement satisfactory to it and
pursuant to which, among other things, the Approved Depository: (i) agrees to
waive any right of setoff with respect to the Collateral, the Cash Collections
and the Cash Deposits; (ii) acknowledges and agrees that the Collateral Agent
has a security interest in the Collateral, and that it is the bailee of the
Collateral Agent with respect thereto; and (iii) agrees that, upon notice from
the Collateral Agent of an Actionable Default, it will act strictly in
accordance with the instructions of the Collateral Agent with respect to deposit
balances of the Company held by it, including, without limitation, any
instructions of the Collateral Agent to remit such balances to it, and not in
accordance with any instructions of the Company, or any other Person.

                  "Bank of America" means Bank of America, N.A.

                  "Bank of America Credit Agreement" means that certain
Revolving Credit Agreement dated as of even date with this Agreement, between
Bank of America and the Borrower, as it may be hereafter amended or modified
from time to time.

                  "Bank of America Loan Documents" means (i) the Bank of America
Credit Agreement and the promissory notes issued in connection therewith, (ii)
the Subsidiary Guaranty in favor of Bank of America, and (iii) all other
instruments, documents and agreements executed and delivered in connection the
foregoing item (i), as the foregoing may be hereafter amended or modified from
time to time.



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                  "Bank of America Obligations" means all indebtedness,
liabilities and obligations now or hereafter owed by the Borrower to Bank of
America under the terms of the Bank of America Loan Documents.

                  "Borrower" means Crown Crafts, Inc., a Georgia corporation and
its successors and assigns.

                  "Cash Collections" means all cash, checks, drafts, items and
other instruments for the payment of money received by the Company from proceeds
of Collateral.

                  "Cash Deposits" means all deposits of Cash Collections with
depository banks, including with the Approved Depositaries.

                  "CITCSI" means The CIT Group/Commercial Services, Inc.

                  "Collateral" means and includes, with respect to the Company,
all of its presently existing or hereafter acquired or created accounts,
accounts receivable, contract rights, notes, drafts, instruments, acceptances,
chattel paper, general intangibles, investment property, leases, writings
evidencing a monetary obligation or a security interest in or a lease of goods,
equipment, fixtures, inventory and all other goods and personal property of all
items and types; all rights to receive the payment of money or other
consideration under the Factoring Balances Agreement and under present or future
contracts (including, without limitation, all rights to receive payments under
presently existing or hereafter acquired or created letters of credit), or by
virtue of merchandise sold, leased, licensed, assigned or otherwise disposed of,
services rendered or to be rendered, loans and advances made or other
considerations given, by or set forth in or arising out of any present or future
chattel paper, note, draft, lease, acceptance, writing, bond, insurance policy,
instrument, document or general intangible, and all extensions and renewals of
any thereof; all rights under or arising out of present or future contracts,
agreements or general interests in merchandise which gave rise to any or all of
the foregoing, including all goods; all claims (including commercial tort
claims) or causes of action now existing or hereafter arising in connection with
or under any agreement or document or by operation of law or otherwise; all
collateral security of any kind (including real property) given by any person
with respect to any of the foregoing; all returned, rejected or repossessed
goods, the sale or lease of which shall have given or shall give rise to any of
the foregoing and together with all returned or repossessed goods and all books,
records, computer tapes, computer programs, computer hardware, and ledger books
arising therefrom or relating thereto, all whether now owned or hereafter
acquired or arising; and all cash and non-cash proceeds and products of the
foregoing.

                  "Collateral Reserve Account" means any non-interest bearing,
demand deposit account which the Company is or may be required to open and
maintain with the Collateral Agent pursuant to the requirements of Section
3.1.11.

                  "Default Rate" means the highest rate of interest charged
under the Wachovia Credit Agreement after the occurrence of a "default" or
"event of default" thereunder, or if the Wachovia Credit Agreement has been
terminated, under the Bank of America Credit Agreement


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or if the Bank of America Credit Agreement has been terminated, under the
Prudential Note Agreement.

                  "Enforcement Costs" means all reasonable expenses, charges,
costs and fees whatsoever (including, without limitation, attorneys' fees and
expenses) of any nature whatsoever paid or incurred by or on behalf of the
Collateral Agent in connection with (a) the collection or enforcement of any or
all of the Secured Obligations or this Agreement (including, without limitation,
attorneys fees incurred prior to the institution of any suit or other
proceeding), (b) the creation, perfection, collection, maintenance,
preservation, defense, protection, realization upon, disposition, sale or
enforcement of all or any part of the Collateral, (c) the monitoring,
inspection, administration, processing, servicing of any or all of the Secured
Obligations and/or the Collateral, (d) the preparation of this Agreement, the
Collateral Documents, and the preparation and review of lien and record
searches, reports, certificates, and/or other documents or information relating
from time to time to the taking, perfection, inspection, preservation,
protection and/or release of a Lien on the Collateral, the value of the
Collateral, or otherwise relating to the Collateral Agent's or any Secured
Party's rights, powers and remedies under this Agreement or with respect to the
Collateral, and (e) all filing and/or recording taxes or fees and all stamp and
other similar taxes and fees payable or determined to be payable in connection
with the execution and delivery of this Agreement and any and all liabilities
with respect to or resulting from any delay in paying or omission to pay such
taxes or fees, the Company hereby agreeing to indemnify and save the Collateral
Agent and the Secured Parties harmless from and against such liabilities.

                  "Event of Default" has the meaning set forth in the
Intercreditor Agreement.

                  "Extraordinary Event of Default" means any Event of Default
consisting of (i) the Company's failure to pay any of the Secured Obligations
when due, whether at maturity, by acceleration, or otherwise (after giving
effect to any applicable cure or grace period); (ii) the Company giving any
material representation, warranty or other statement of fact contained herein or
any other Transaction Document, and the same shall be false or misleading in any
material respect when given; or (iii) the Company: being unable to pay its debts
generally as they become due; filing a petition to take advantage of any
insolvency statute; making an assignment for the benefit of its creditors;
commencing a proceeding for the appointment of a receiver, trustee, liquidator
or conservator of itself or of the whole or any substantial part of its
property; filing a petition or answer seeking reorganization or arrangement or
similar relief under the federal bankruptcy laws or any other applicable law or
statute; becoming subject to an order, judgment or decree of a court of
competent jurisdiction appointing a custodian, receiver, trustee, liquidator or
conservator of the Company or of the whole or any substantial part of its
properties and such order, judgment or decree continues unstayed and in effect
for a period of thirty (30) days; approving a petition filed against the Company
seeking reorganization or arrangement or similar relief under the federal
bankruptcy laws or any other applicable law or statute of the United States of
America or any state, which petition is not dismissed within thirty (30) days;
becoming subject to the assumption by a court of competent jurisdiction of
custody or control of the Company or of the whole or any substantial part of its
properties, which control is not relinquished within thirty (30) days; subject
to the commencement of any proceeding or petition



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against the Company seeking reorganization, arrangement or similar relief under
the federal bankruptcy laws or any other applicable law or statute of the United
States of America or any state which proceeding or petition remains undismissed
for a period of thirty (30) days; or taking any action to indicate its consent
to or approval of any such proceeding or petition.

                  "Factoring Balances Agreement" means the Assignment of
Factoring Balances Agreement dated on or about the date of this Agreement among
the Company, the Collateral Agent, and CITCSI.

                  "Governmental Authority" means any nation or government, any
state or other political subdivision or agency thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.

                  "Laws" means all ordinances, statutes, rules, regulations,
orders, injunctions, writs, or decrees of any Governmental Authority.

                  "Lien" means, with respect to any asset, any mortgage, deed to
secure debt, deed of trust, lien, pledge, charge, security interest, security
title, preferential arrangement which has the practical effect of constituting a
security interest or encumbrance, or encumbrance or servitude of any kind in
respect of such asset to secure or assure payment of any indebtedness or any
guarantee, whether by consensual agreement or by operation of statute or other
law, or by any agreement, contingent or otherwise, to provide any of the
foregoing. For the purposes of this Agreement, the Company shall be deemed to
own subject to a Lien any asset which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such asset.

                  "Material Adverse Effect" means, with respect to any event,
act, condition or occurrence of whatever nature (including any adverse
determination in any litigation, arbitration, or governmental investigation or
proceeding), whether singly or in conjunction with any other event or events,
act or acts, condition or conditions, occurrence or occurrences, whether or not
related, a material adverse change in, or a material adverse effect upon, any of
(a) the financial condition, operations, business or properties of the Borrower
and its Subsidiaries, taken as a whole, (b) the rights and remedies of the
Secured Parties or the Collateral Agent under any of the Transaction Documents
or Collateral Documents or the ability of the Company to perform its respective
obligations under any of the Transaction Documents or Collateral Documents, or
(c) the legality, validity or enforceability of any of the Transaction Documents
or Collateral Documents.

                  "Mortgages" means each mortgage, deed of trust, deed to secure
debt and other Lien or security instrument relating to real property granted by
the Company in favor of the Collateral Agent to secure the Secured Obligations
from time to time.

                  "Person" means and includes an individual, a corporation, a
limited liability company, a partnership, an unincorporated association, a trust
or any other entity or organization, including, but not limited to, a
Governmental Authority.


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                  "Prudential" means The Prudential Insurance Company of
America.

                  "Prudential Note Agreement" means that certain Note and
Private Shelf Facility Agreement dated as of October 12, 1995, between
Prudential and the Borrower, as it has been and as it may be hereafter amended
or modified from time to time.

                  "Prudential Note Documents" means (i) the Prudential Note
Agreement, (ii) those certain $25,000,000 aggregate principal amount 10.77%
Series A Senior Notes due 2005 issued by the Borrower to Prudential, (iii) those
certain $25,000,000 aggregate principal amount 10.06% Series B Senior Notes due
2005 issued by the Borrower to Prudential, and (iv) the Subsidiary Guaranty in
favor of Prudential, as the foregoing have been and as they may be hereafter
amended or modified from time to time.

                  "Prudential Obligations" means all indebtedness liabilities
and obligations now or hereafter owed by the Borrower to Prudential under the
terms of the Prudential Note Documents.

                  "Secured Obligations" means all Company Obligations,
including, without limitation, all amounts at any time due or to become due from
the Company to each of the Secured Parties severally, and all Secured Parties
collectively, in connection with the performance of the Company's obligations
hereunder, under the Transaction Documents and under the Collateral Documents,
including, without limitation, principal, interest, premium, make-whole amount
(if any), fees, letter of credit reimbursement obligations, the undrawn amounts
of outstanding letters of credit, and other amounts due thereunder (including
Enforcement Costs), together with all amounts due to the Collateral Agent under
this Agreement, the Collateral Documents or the Intercreditor Agreement,
including, without limitation, fees, expenses and indemnities owing to the
Collateral Agent or any Secured Party, whether now or hereafter arising or
existing.

                  "Secured Parties" means, individually and collectively, as the
context shall require, (i) each of the Parties, and (ii) any other Person which
shall have become a "Secured Party" pursuant to Section 22 of the Intercreditor
Agreement, so long as such Person shall hold Secured Obligations of the Company.

                  "Subsidiary Guaranty" means each Subsidiary Guaranty Agreement
dated as of even date herewith executed by the Company in favor of each Secured
Party, as each may be hereafter amended or modified from time to time.

                  "Transaction Documents" has the meaning set forth in the
Intercreditor Agreement and includes, with limitation, the Guaranty.

                  "Wachovia Credit Agreement" means that certain Credit
Agreement dated as of even date herewith between the Borrower and Wachovia, as
it may be hereafter amended or modified from time to time.

                  "Wachovia Loan Documents" means (i) the Wachovia Credit
Agreement and the promissory notes issued in connection therewith, (ii) each
letter of credit issued by Wachovia for


<PAGE>   7

the account of the Company from time to time and each letter of credit
application and reimbursement agreement executed by the Company relating
thereto, (iii) each banker's acceptance and other similar drafts accepted for
payment by Wachovia from time to time, (iv) the Subsidiary Guaranty in favor of
Wachovia, and (v) all other instruments, documents and agreements executed and
delivered in connection with the foregoing items (i), (ii), and (iii), as the
foregoing may be hereafter amended or modified from time to time.

                  "Wachovia Obligations" means all indebtedness, liabilities and
obligations now or hereafter owed by the Borrower to Wachovia under the terms of
the Wachovia Loan Documents.

ARTICLE

                  SECTION Grant of Security Interest. As security for the
Secured Obligations, the Company hereby assigns, pledges and grants to the
Collateral Agent, for the benefit of the Secured Parties, and agrees that the
Collateral Agent shall have a first priority (except as expressly provided
herein or under the Transaction Documents) perfected and continuing security
interest in all of the Collateral.

                  SECTION Release. Except as provided in Section 3.1.10 below
and Section 9 of the Intercreditor Agreement, the Collateral Agent shall have no
right or obligation to release and/or terminate this Agreement, except upon both
the performance of this Agreement and the indefeasible payment and/or
performance of all Secured Obligations and the expiration and termination of any
and all commitments or obligations (whether or not conditional) of the Secured
Parties to the Company. Each of the Secured Parties agrees that it shall notify
the Collateral Agent in writing promptly upon (i) the termination of any
commitment or other obligations relating to financial accommodations with
respect to the Secured Obligations owed to such Secured Party, and (ii) the
payment in full of the Secured Obligations owed to such Secured Party. When all
Secured Parties have so notified the Collateral Agent, the Collateral Agent
shall reasonably cooperate with the Company to provide for such release and/or
termination of this Agreement and the security interests granted herein.

ARTICLE

REPRESENTATIONS AND WARRANTIES

                  SECTION Representations and Warranties. The Company represents
and warrants to the Collateral Agent as follows:

                  Place(s) of Business and Location of Collateral. Set forth on
Exhibit A attached hereto and made a part hereof are (i) the address of the
Company's chief executive office and principal place of business, (ii) each of
its other places of business, (iii) each place owned or leased by the Company
where the Collateral or any books or records relating thereto are located, and
(iv) the Company's Federal Identification number.

                  Corporate Existence and Power. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, is


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duly qualified to transact business in every jurisdiction where, by the nature
of its business, such qualification is necessary, except where the failure to
qualify would not have or reasonably be expected to cause a Material Adverse
Effect, and has all corporate powers and all governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted, except where the failure to have any such licenses, authorizations,
consents and approvals could not have or reasonably be expected to cause a
Material Adverse Effect.

                    Corporate and Governmental Authorization; No Contravention.
The execution, delivery and performance by the Company of this Agreement (i) are
within the Company's corporate powers, (ii) have been duly authorized by all
necessary corporate action, (iii) require no action by or in respect of or
filing with, any Governmental Authority, other than the filing of UCC-1
financing statements, and any similar filings required to perfect or protect the
Lien granted hereunder, (iv) do not contravene, or constitute a material default
under, any provision of applicable Laws or of the certificate or articles of
incorporation or by-laws of the Company or of any agreement, judgment,
injunction, order, decree or other instrument binding upon the Company, and (v)
do not result in the creation or imposition of any Lien on any asset of the
Company, other than under this Agreement or any of the Collateral Documents.

                    Binding Agreements. This Agreement constitutes the valid and
binding agreement of the Company enforceable in accordance with its terms
provided that the enforceability hereof is subject to general principles of
equity and to bankruptcy, insolvency and similar laws affecting the enforcement
of creditors' rights generally.

                    Title to Collateral. The Company has good and marketable
title to its properties and assets which are included among or give rise to the
Collateral. Such properties and assets are subject to no Lien of any kind,
except for the Liens of the Collateral Agent pursuant to this Agreement and the
Collateral Documents, the liens of CITCSI arising under its Factoring Agreement
with the Company permitted by this Agreement, or permitted by the Transaction
Documents, and the Company has legal, enforceable and uncontested rights to use
freely such property and assets.

                    Bona Fide Rights of Payment. Each right of payment
constituting a part of the Collateral arises or will arise under a contract
between the Company and each Account Debtor, or from the bona fide sale or
delivery of goods to or performance of services for, such Account Debtor. No
Governmental Authority is an Account Debtor with respect to any portion of the
Collateral.

                    Recitals. The Recitals to this Agreement are true,
accurately reflect the matters set forth herein and are hereby incorporated into
and made a part of this Agreement.

                    SECTION Survival of Representations and Warranties. All
representations and warranties contained in or made under or in connection with
this Agreement shall survive the execution of this Agreement and the incurring
of any particular Secured Obligations.


<PAGE>   9

ARTICLE

COVENANTS AND AGREEMENTS OF THE COMPANY

                  SECTION Covenants. So long as any of the Secured Obligations
(or commitments therefor, if any) shall be outstanding, the Company agrees with
the Collateral Agent, for itself and the Secured Parties, as follows:

                  Conduct of Business and Maintenance of Existence, Compliance
with Laws, Etc. The Company will (i) do or cause to be done all things necessary
to preserve and to keep in full force and effect its corporate existence and
material rights and its franchises, trade names, patents, trademarks and permits
which are necessary for the continuance of its business, and (ii) comply with
all applicable Laws and observe the valid requirements of Governmental
Authorities, the noncompliance with or the nonobservance of which would
materially interfere with the performance of its obligations hereunder, or the
Collateral Agent's interest in the Collateral.

                  Business Names and Addresses. Within the previous 5 years, the
Company has not conducted business under or been legally known by any name and
will not change its name to any other name other than those disclosed on Exhibit
A attached hereto and made a part hereof.

                  Certain Notices. The Company will notify the Collateral Agent
and each Secured Party: (a) not less than 30 days prior to (i) any change in the
name or corporate structure under which the Company conducts its business, and
(ii) the opening of any new place of business or any change in any of the places
where the books and records concerning the Collateral, or any part thereof, are
kept (and will provide to the Collateral Agent prior to any such change all
financing statement requested by it in connection with such new place of
business or location of books and records, as well as any other security
instrument that the Collateral Agent may require be executed by the Company in
order to constitute a Lien upon any new Collateral that may be located (as
permitted under Section 3.1.9 hereof) in said new place of business or books and
records); and (b) promptly, of (i) the commencement of any litigation affecting
any of the Collateral or the title thereto or rights therein, other than arising
out of disputes with Account Debtors pertaining to the Collateral, in an
aggregate amount not in excess of $25,000 not covered by insurance, or (ii) the
occurrence of any material casualty or other loss affecting any material portion
of the Collateral.


                  Maintenance of the Collateral; Insurance. The Company will
maintain the Collateral in good working order, saving and excepting ordinary
wear and tear, and will not permit anything to be done to the Collateral which
may materially impair the value or use thereof. The Collateral Agent and each
Secured Party, or representatives designated by the Collateral Agent or such
Secured Party, respectively, shall be permitted to enter the premises of the
Company and examine, audit and inspect the Collateral at any reasonable time and
from time to time without notice. The Company will promptly furnish to the
Collateral Agent and each


<PAGE>   10

Secured Party all such additional information regarding the Collateral as the
Collateral Agent or such Secured Party may from time to time reasonably request.
The Company shall maintain insurance on the Collateral consisting of goods with
such companies, in such amounts and against such risks as are consistent with
industry standards, with loss payable to the Collateral Agent as its interests
may appear. Such insurance shall not be cancelable by the Company, unless with
the prior written consent of the Collateral Agent, or by the Company's insurer,
unless with at least (i) 10 days advance written notice to the Collateral Agent
in the event of a cancellation for nonpayment of premiums or other amounts, or
(ii) 30 days advance written notice to the Collateral Agent in all other events.

                    Recordings and Filings. The Company shall: (a) execute and
deliver all financing documents (including, without limitation, UCC-1 and UCC-3
statements) required to be filed, registered or recorded in order to create, in
favor of the Collateral Agent, a first priority (subject to the express
provisions hereof), perfected Lien in the Collateral, to the extent such Lien
can be perfected under the UCC, in form and in sufficient number for filing,
registration, and recording in each office in each jurisdiction in which such
filings, registrations and recordations are required, and (b) deliver such
evidence as the Collateral Agent may deem satisfactory that all necessary filing
fees and all recording and other similar fees, and all taxes and other expenses
related to such filings, registrations and recordings will be or have been paid
in full.

                    Defense of Title and Further Assurances. At its expense the
Company will defend the title to the Collateral (or any part thereof), and
promptly upon request execute, acknowledge and deliver any financing statement,
renewal, affidavit, assignment, continuation statement, security agreement,
certificate, or other document the Collateral Agent may reasonably require in
order to perfect, preserve, maintain, continue, protect and/or extend the Lien
granted to the Collateral Agent under this Agreement and its priority under the
UCC. The Company will (i) comply in all material respects with all license
agreements relating to any Collateral and, upon the request of the Collateral
Agent, use commercially reasonable efforts to obtain and furnish to the
Collateral Agent any consents from licensors to effect the purposes of this
Agreement, (ii) deliver to the Collateral Agent in pledge all instruments
evidencing the obligation to pay any of the Collateral not maintained or pledged
with the Collateral Agent, and (iii) from time to time do whatever the
Collateral Agent may reasonably request by way of obtaining, executing,
delivering, and/or filing financing statements, and other notices and amendments
and renewals thereof, and will take any and all steps and observe such
formalities as the Collateral Agent may reasonably request, in order to create
and maintain a valid Lien upon the Collateral, subject to no other Liens, except
as permitted hereby or by the Transaction Documents. The Company agrees that a
photocopy of a fully executed financing statement shall be sufficient to satisfy
for all purposes the requirements of a financing statement as set forth in
Article 9 of the applicable Uniform Commercial Code. The Company will comply in
all material respects with all federal, state and local laws and regulations
affecting the Collateral.

                    Security, etc. The Company agrees that the Collateral Agent
may at any time take such steps as the Collateral Agent deems reasonably
necessary to protect the Collateral


<PAGE>   11

Agent's Lien upon and interest in, and to preserve the Collateral, whether at
the business premises of the Company or elsewhere.

                  Other Liens. The Company will not permit any Liens on or with
respect to all or any part of the Collateral, except as expressly permitted
hereby and by the Transaction Documents.

                    Location of Collateral. Except as expressly permitted
elsewhere in this Agreement or except as may be permitted by the Transaction
Documents, without prior written consent of the Collateral Agent, the Company
will not transfer, or permit the transfer of any of the Collateral except (i) to
a location for which the security interest in favor of the Collateral Agent
therein shall remain perfected, (ii) to any other location so long as the
Company shall give the Collateral Agent written notice thereof and deliver
executed financing statements as reasonably requested by the Collateral Agent in
connection therewith within 30 days of such transfer, and (iii) for Collateral
with a book value of less than $50,000 to another location.

                    Disposition of Collateral. Without the prior written consent
of the Collateral Agent, acting at the direction of the requisite Secured
Parties pursuant to Section 6 of the Intercreditor Agreement, the Company will
not sell, discount, allow credits or allowances, transfer, assign, extend the
time for payment on, convey, lease, assign, transfer or otherwise dispose of the
Collateral, or any part thereof, except, prior to an Event of Default, (i) sales
of inventory, discounts, co-op advertising, credits or credit allowances and
payment extensions in the ordinary course of business in accordance with the
customary business practices of the Company in effect on the date hereof, (ii)
sales of accounts receivables to CITCSI from time to time so long as the
Factoring Balances Agreement remains in effect, and (iii) as otherwise expressly
permitted by the Transaction Documents. Upon the permitted sale, exchange or
other disposition of any of the Collateral, the Lien created and provided for
herein, without break in continuity and without further formality or act, shall
continue in and attach to any proceeds thereof, including, without limitation,
any accounts, contract rights, general intangibles, shipping documents,
documents of title, bills of lading, warehouse receipts, dock warrants, dock
receipts, equipment and cash or non-cash proceeds, and in the event of any
unauthorized sale, shall continue in the Collateral itself.

                    Depository Accounts; Collections. (a) Promptly after receipt
of notice from the Collateral Agent following the occurrence of an Event of
Default (regardless of whether it is an Actionable Default), the Company will
use its best efforts to cause all depositary banks in which Cash Collections are
deposited to become Approved Depositaries.

                  (b) With respect to all Account Debtors other than CITCSI,
promptly after receipt of notice from the Collateral Agent following the
occurrence of an Event of Default (regardless of whether it is an Actionable
Default): (i) the Company shall (x) deposit all Cash Collections either with the
Collateral Agent or an Approved Depository and (y) cause each Account Debtor to
remit all cash, checks, drafts, items and other instruments for the payment of
money which it now has or may at any time hereafter receive as proceeds of the
Collateral to the Collateral Agent; and (ii) the Collateral Agent shall have the
right in its sole discretion to direct all


<PAGE>   12

Approved Depositaries to remit all Cash Deposits held by them to the Collateral
Agent as often as the Collateral Agent may require and the Approved Depositaries
are hereby authorized and directed to do so by the Company upon the Collateral
Agent's direction. All amounts received by the Collateral Agent under this
Section 3.1.11(b) shall be deposited in a Collateral Reserve Account established
by the Company upon the request of the Collateral Agent. During the existence of
an Event of Default, the Company shall not be entitled to draw on the funds held
by any Approved Depository without the prior written consent of the Collateral
Agent. Any Cash Collections received by the Company after receipt of the notices
set forth in this Section 3.1.11(b) shall be deemed to be held in trust for the
benefit of the Collateral Agent and the Secured Parties as a part of the
Collateral until forwarded to the Collateral Agent for deposit in the Collateral
Reserve Account as required above. Unless and until an Actionable Default is in
existence and subject to the provisions of Section 6 of the Intercreditor
Agreement, the Collateral Agent will transfer on each Business Day collected
amounts in the Collateral Reserve Account to the Company's operating account.
During the existence of an Actionable Default, and subject to the provisions of
Section 6 of the Intercreditor Agreement, (1) the Collateral Agent will apply
collected amounts in the Collateral Reserve Account to the Secured Obligations
pursuant to Section 7 of the Intercreditor Agreement, and (2) the Collateral
Agent may, additionally, at any time in its sole discretion or if requested in
writing by the requisite Secured Parties pursuant to Section 6 of the
Intercreditor Agreement, direct Account Debtors (other than CITCSI) to make
payments on the Collateral, or portions thereof, directly to the Collateral
Agent, and such Account Debtors are hereby authorized and directed to do so by
the Company upon the Collateral Agent's direction, and the funds so received
shall be also deposited in the Collateral Reserve Account, or, at the election
of the Collateral Agent, upon its receipt thereof, be applied directly to
repayment of the Secured Obligations as set forth in the Intercreditor
Agreement.

                  (c) With respect to CITCSI, promptly after receipt of notice
from the Collateral Agent following the occurrence of an Extraordinary Event of
Default (regardless of whether it is an Actionable Default): (i) the Company
shall (x) deposit all Cash Collections from CITCSI either with the Collateral
Agent or an Approved Depository and (y) cause CITCSI to remit all cash, checks,
drafts, items and other instruments for the payment of money which it now has or
may at any time hereafter receive as proceeds of the Collateral to the
Collateral Agent; and (ii) the Collateral Agent shall have the right in its sole
discretion to direct all Approved Depositaries to remit all Cash Deposits held
by them to the Collateral Agent as often as the Collateral Agent may require and
the Approved Depositaries are hereby authorized and directed to do so by the
Company upon the Collateral Agent's direction. All amounts received by the
Collateral Agent under this Section 3.1.11(c) shall be deposited in a Collateral
Reserve Account established by the Company upon the request of the Collateral
Agent. During the existence of an Extraordinary Event of Default, the Company
shall not be entitled to draw on the funds from CITCSI held by any Approved
Depository without the prior written consent of the Collateral Agent. Any Cash
Collections received by the Company from CITCSI after receipt of the notices set
forth in this Section 3.1.11(c) shall be deemed to be held in trust for the
benefit of the Collateral Agent until forwarded to the Collateral Agent for
deposit in the Collateral Reserve Account as required above. Unless and until an
Actionable Default arising as a result of an Extraordinary Event of Default is
in existence and subject to the provisions of Section 6 of the Intercreditor
Agreement, the Collateral Agent will transfer on each Business Day collected
amounts from CITCSI in the



<PAGE>   13

Collateral Reserve Account to the Company's operating account. During the
existence of an Actionable Default arising from an Extraordinary Event of
Default, and subject to the provisions of Section 6 of the Intercreditor
Agreement, (1) the Collateral Agent will apply collected amounts from CITCSI in
the Collateral Reserve Account to the Secured Obligations pursuant to Section 7
of the Intercreditor Agreement, and (2) the Collateral Agent may, additionally,
at any time in its sole discretion or if requested in writing by the requisite
Secured Parties pursuant to Section 6 of the Intercreditor Agreement, direct
CITCSI to make payments on the Collateral, or portions thereof, directly to the
Collateral Agent, and the CITCSI is hereby authorized and directed to do so by
the Company upon the Collateral Agent's direction, and the funds so received
shall be also deposited in the Collateral Reserve Account, or, at the election
of the Collateral Agent, upon its receipt thereof, be applied directly to
repayment of the Secured Obligations as set forth in the Intercreditor
Agreement.

ARTICLE

RIGHTS AND REMEDIES UPON DEFAULT

                  SECTION Rights and Remedies, etc.

                    General Rights and Remedies. If any Actionable Default is in
existence, then, in each and every such case, the Collateral Agent may, at its
option exercised from time to time, and at the written direction of the
requisite Secured Parties will, subject to and as provided in Section 6 of the
Intercreditor Agreement, at any time thereafter while such Actionable Default is
continuing, exercise any rights, powers and remedies available to the Collateral
Agent under this Agreement, the Intercreditor Agreement and applicable Laws.

                    Enforcement Costs; Application of Proceeds. The Company
agrees to pay to the Collateral Agent all Enforcement Costs paid or incurred by
the Collateral Agent. This agreement shall survive the termination of this
Agreement and the Lien on the Collateral. All Enforcement Costs, together with
interest thereon from the date of any demand therefor until paid in full at a
per annum rate of interest equal at all times to the Default Rate, shall be paid
by the Company to the Collateral Agent whenever demanded by the Collateral
Agent.

                    Any proceeds of the collection of the sale or other
disposition of the Collateral will be applied by the Collateral Agent in
accordance with the terms of Section 7 of the Intercreditor Agreement. If the
sale or other disposition of the Collateral fails to satisfy all of the Secured
Obligations, the Company shall remain liable to the Collateral Agent and the
Secured Parties for any deficiency. Any surplus from the sale or disposition of
the Collateral shall be paid to the Company or to any other party entitled
thereto or shall otherwise be paid over in a manner permitted by law, after
payment in full of all Secured Obligations and the Enforcement Costs related to
any such payment.

                    Uniform Commercial Code and Other Remedies. Upon the
occurrence of an Event of Default (and in addition to all of its rights, powers
and remedies under this Agreement), the Collateral Agent shall have all of the
rights, powers and remedies of a secured party under the Georgia Uniform
Commercial Code and other applicable laws. Upon such occurrence and

<PAGE>   14


demand by the Collateral Agent, the Company shall assemble the Collateral and
make it available to the Collateral Agent, at a place reasonably convenient for
such purpose as designated by the Collateral Agent. Upon an Actionable Default,
the Collateral Agent or its agents may enter upon the Company's premises to take
possession of the Collateral, to remove it, to render it unusable, or to sell or
otherwise dispose of it. Any written notice of the sale, disposition or other
intended action by the Collateral Agent with respect to the Collateral which is
sent by regular mail, postage prepaid, to the Company at the addresses set forth
for notices herein, or such other address of the Company which may from time to
time be shown on the Collateral Agent's records, at least 10 days prior to such
sale, disposition or other action, shall constitute reasonable notice to the
Company.

                    Power of Attorney. The Company hereby irrevocably designates
and appoints the Collateral Agent its true and lawful attorney either in the
name of the Collateral Agent or in the name of the Company, effective upon the
occurrence and during the existence of an Actionable Default, to ask for,
demand, sue for, collect, compromise, compound, receive, receipt for and give
acquittance for any and all sums owing or which may become due upon any part of
the Collateral or under any insurance maintained in accordance with the
Collateral Documents and, in connection therewith, to take any and all actions
as the Collateral Agent may deem necessary or desirable in order to realize upon
the Collateral or under any insurance maintained in accordance with the
Collateral Documents, including, without limitation, power to endorse in the
name of the Company any checks, drafts, notes or other instruments received in
payment of or on account of the Collateral or under any insurance maintained in
accordance with the Collateral Documents, or to sign the Company's name on any
invoice or bill of lading relating to the Collateral, on notices of assignment,
on public records, on verifications of Collateral and on notices to Account
Debtors, or on any proof of claim in bankruptcy proceeding against an Account
Debtor and any other obligor with respect to the Collateral, to send requests
for verification from Account Debtors, to notify the post office authorities to
change the address for delivery of the Company's mail to an address designated
by the Collateral Agent and to receive, open and dispose of all mail addressed
to the Company. Notwithstanding the foregoing, the Collateral Agent shall not be
under any duty to the Company to exercise any such authority or power or in any
way be responsible for the collection of the Collateral or under any insurance
maintained in accordance with the Collateral Documents. The foregoing power of
attorney, being coupled with an interest, is irrevocable until the Secured
Obligations have been fully satisfied and any commitments therefor terminated.
The Collateral Agent may file one or more financing statements disclosing its
Lien in any or all of the Collateral without the Company's signature appearing
thereon. The Company also hereby grants to the Collateral Agent a power of
attorney to execute any such financing statement, or amendments and supplements
to financing statements, on behalf of the Company without notice thereof to the
Company, which power of attorney is coupled with an interest and is irrevocable
until the Secured Obligations have been fully satisfied and this Agreement
terminated.

ARTICLE

MISCELLANEOUS


<PAGE>   15

                  SECTION Course of Dealing; Amendment. No course of dealing
between the Company and the Collateral Agent shall be effective to amend, modify
or change any provision of this Agreement and this Agreement may not be amended,
modified, or changed in any respect except by an agreement in writing signed by
the Collateral Agent (at the direction of the requisite Secured Parties, as
required by the Intercreditor Agreement) and the Company. The Collateral Agent
shall have the right at all times, subject to the rights of the Secured Parties
under the Intercreditor Agreement, to enforce the provisions of this Agreement
in strict accordance with the terms hereof and thereof, notwithstanding any
conduct or custom on the part of the Collateral Agent in refraining from so
doing at any time or times. The failure or delay of the Collateral Agent at any
time or times to enforce the rights under such provisions, strictly in
accordance with the same, shall not be construed as having created a custom in
any way or manner contrary to specific provisions of this Agreement or as having
in any way or manner modified or waived the same.

                  SECTION Waiver, Cumulative Remedies. Subject to the rights of
the Secured Parties under the Intercreditor Agreement and the Company under the
Collateral Documents and the Transaction Documents, the Collateral Agent may, on
behalf of the Secured Parties:

                  at any time and from time to time, execute and deliver to the
Company a written instrument waiving, on such terms and conditions as the
Collateral Agent may specify in such written instrument, any of the requirements
of this Agreement or any Event of Default hereunder and its consequences,
provided, that any such waiver shall be for such period and subject and limited
to such conditions as shall be specified in any such instrument and to the
instance for which the waiver is given. In the case of any such waiver, the
Company and the Collateral Agent shall be restored to their former positions
prior to such Event of Default and shall have the same rights as they had
hereunder. The rights, powers and remedies provided in this Agreement are
cumulative, may be exercised concurrently or separately, may be exercised from
time to time and in such order as the Collateral Agent shall determine, and are
in addition to, and not exclusive of, rights, powers and remedies provided by
applicable Laws.

                  proceed against any of the Collateral without proceeding
against the Company or other Person obligated under any of the Secured
Obligations;

                  without reducing or impairing the Secured Obligations of the
Company and without notice, release or compromise with any guarantor or other
Person liable for all or any part of the Secured Obligations;

                  without reducing or impairing the Secured Obligations of the
Company and without notice thereof: (i) fail to perfect the Lien in any or all
Collateral or to release any or all the Collateral or to accept substitute
Collateral, (ii) allow all or any of the Secured Obligations to arise after the
date of this Agreement, (iii) waive any provision of this Agreement, (iv)
exercise or fail to exercise rights of set-off or other rights, (v) accept
partial payments or extend from time to time the maturity of all or any part of
the Secured Obligations, and (vi) take or fail to take any action under this
Agreement or against any one or more Persons obligated under the Secured
Obligations.


<PAGE>   16

The Company hereby waives and releases all claims and defenses against the
Collateral Agent and the Secured Parties and/or with respect to the payment of
or the enforcement of the Secured Obligations and the Collateral Agent's rights
in the Collateral on account of any of the foregoing, except as to the
Collateral Agent's and the Secured Parties' gross negligence or willful
misconduct.

                  SECTION Notices. All notices, requests and demands to or upon
the parties to this Agreement shall be deemed to have been given or made when so
given or made in accordance with the Intercreditor Agreement, with notices,
requests and demands to or upon the Company being made or given care of the
Borrower.

                  SECTION Management and Administration by Collateral Agent. The
Collateral Agent shall not have any duty to the Company to pay for insurance,
taxes, or other charges incurred in the custody, preservation, use or operation
of, or in connection with the management of, any Collateral on which a Lien is
granted in connection with this Agreement; provided, however, that the
Collateral Agent may (in its sole discretion) pay such expenses. All such
payments shall be part of the Secured Obligations and shall bear interest
payable on demand by the Company from the date of any demand therefor until paid
in full at the Default Rate.

                  SECTION Waiver of Jury Trial; Consent to Jurisdiction. THE
COMPANY (A) AND THE COLLATERAL AGENT IRREVOCABLY WAIVE, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF THIS AGREEMENT TO THE EXTENT PERMITTED BY LAW, (B) SUBMITS TO THE
NONEXCLUSIVE PERSONAL JURISDICTION IN FULTON COUNTY, GEORGIA, OF THE COURTS
THEREOF AND THE UNITED STATES DISTRICT COURTS FOR THE NORTHERN DISTRICT OF
GEORGIA, FOR THE ENFORCEMENT OF THIS AGREEMENT, (C) WAIVES ANY AND ALL PERSONAL
RIGHTS UNDER THE LAW OF ANY JURISDICTION TO OBJECT ON ANY BASIS (INCLUDING,
WITHOUT LIMITATION, INCONVENIENCE OF FORUM) TO JURISDICTION OR VENUE WITHIN THE
STATE OF GEORGIA FOR THE PURPOSE OF LITIGATION TO ENFORCE THIS AGREEMENT, AND
(D) AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT IN THE MANNER PRESCRIBED
IN THE INTERCREDITOR AGREEMENT FOR THE GIVING OF NOTICE TO THE COMPANY. NOTHING
HEREIN CONTAINED, HOWEVER, SHALL PREVENT THE COLLATERAL AGENT FROM BRINGING ANY
ACTION OR EXERCISING ANY RIGHTS AGAINST ANY COLLATERAL AND AGAINST THE COMPANY
PERSONALLY, AND AGAINST ANY ASSETS OF THE COMPANY, WITHIN ANY OTHER STATE OR
JURISDICTION.

                  SECTION Severability. In case one or more provisions contained
in this Agreement shall be invalid, illegal or unenforceable in any respect
under any Laws, the validity, legality and enforceability of the remaining
provisions contained herein shall remain effective and binding on the parties
thereto and shall not be affected or impaired thereby.

                  SECTION Assignment, Etc. The Collateral Agent shall have the
right to divulge to any actual or potential purchaser, assignee, transferee or
participant of the Collateral and/or the


<PAGE>   17

Secured Obligations, or any part thereof all information, reports, financial
statements and documents obtained in connection with this Agreement or
otherwise. Notwithstanding anything contained herein, any confidentiality
restriction agreed to by any person shall continue to be binding upon such
person.

                  SECTION Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the Company and the Collateral Agent and their
respective successors and assigns, except that the Company shall not have the
right to assign its rights or obligations hereunder or any interest herein
without the prior written consent of the Collateral Agent.

                  SECTION APPLICABLE LAW. THE COMPANY ACKNOWLEDGES AND AGREES
THAT THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF GEORGIA.

                  SECTION Definitional Provisions. Unless otherwise defined
herein, as used in this Agreement and in any certificate, report or other
document made or delivered pursuant hereto, accounting terms not otherwise
defined herein, and accounting terms only partly defined herein, to the extent
not defined, shall have the respective meanings given to them under generally
accepted United States accounting principles consistently applied to the
Company. Unless otherwise defined herein, all terms used herein which are
defined by the Georgia Uniform Commercial Code shall have the same meanings as
assigned to them by the Georgia Uniform Commercial Code unless and to the extent
varied by this Agreement. The words "hereof", "herein" and "hereunder" and words
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and article,
section, subsection, schedule and exhibit references are references to articles,
sections or subsections of, or schedules or exhibits to, as the case may be,
this Agreement unless otherwise specified. The captions, headings and titles to
this Agreement and its sections, subsections and other parts are only for the
convenience of the parties and are not part of this Agreement. As used herein,
the singular number shall include the plural, the plural the singular and the
use of the masculine, feminine or neuter gender shall include all genders, as
the context may require. Reference to this Agreement or to any one or more of
the instrument, agreement or document previously, simultaneously or hereafter
executed and delivered by the Company, any guarantor and/or any other Person,
singly or jointly with another Person or Persons, evidencing, securing,
guarantying or otherwise in connection with any of the Secured Obligations
and/or in connection with this Agreement shall mean the same as the foregoing
may from time to time be amended, restated, substituted, extended, renewed,
supplemented or otherwise modified.

                  SECTION Continuing Enforcement of the Transaction Documents.
If, after receipt of any payment of all or any part of the Secured Obligations
of the Company to the Collateral Agent or any of the Secured Parties, the
Collateral Agent is or any such Secured Parties are compelled or agree, for
settlement purposes, to surrender such payment to any person or entity for any
reason, then this Agreement and the other Collateral Documents, and the
applicable Transaction Documents shall continue in full force and effect or be
reinstated, as the case may be. The provisions of this Section 5.11 shall
survive the termination of this Agreement and the other Collateral Documents,
and the Transaction Documents and shall be and remain



<PAGE>   18

effective notwithstanding the payment of the Secured Obligations, the
cancellation of the Security Agreement or any other Collateral Documents, or the
Transaction Documents, the release of any security interest, lien or encumbrance
securing the Secured Obligations or any other action which the Collateral Agent
or any of the Secured Parties may have taken in reliance upon its receipt of
such payment.



<PAGE>   19



         IN WITNESS WHEREOF, the Company has executed and delivered this
Agreement as of the day and year first written above.



                                             "COMPANY"

                                             CHURCHILL WEAVERS, INC. (SEAL)



                                             By: /s/ Michael Bernstein
                                                --------------------------------

                                              Name: Michael Bernstein

                                              Title: President





ACCEPTED AND AGREED TO AS OF

THE DATE FIRST WRITTEN ABOVE:



WACHOVIA BANK, N.A., (SEAL)

as Collateral Agent for the

Secured Parties



By: /s/ R.E.S. Bowen
   --------------------------------

   Name: R.E.S. Bowen

   Title: Assistant Vice President