NYB 1069844.3
EXHIBIT 10.3


                          AMENDED EMPLOYMENT AGREEMENT

         THIS EMPLOYMENT AGREEMENT, dated as of March 30, 1998 and amended as of
August 31, 1999, by and between  Factory 2-U Stores,  Inc.  ("Factory  2-U"),  a
Delaware corporation,  the name of which formerly was Family Bargain Corporation
and which is the successor by merger to General  Textiles,  and Michael Searles,
who currently resides in Rancho Santa Fe, California ("Executive").

                              W I T N E S S E T H


         WHEREAS, on March 30, 1998, General Textiles, Factory 2-U and Executive
entered into an agreement  setting forth the terms of Executive's  employment by
General Textiles for a term beginning on March 30, 1998 (the "Effective  Date");
and

         WHEREAS,  Factory  2-U and  Executive  desire  to amend  the  agreement
entered  into  on  March  30,  1998  (that  agreement,  as  amended,  being  the
"Agreement") so the Agreement will be as set forth below.

         NOW,  THEREFORE,  in consideration of the promises and mutual covenants
contained  herein and for other good and  valuable  consideration,  the  parties
agree as follows:

     1. Term of  Employment.  Except  upon  earlier  termination  as provided in
Section 9 hereof,  Executive's  employment  under this Agreement  shall be for a
five year term  commencing on the Effective  Date and  terminating  on March 29,
2003 (the "Employment Term").

     2.  Positions.  (a) Executive  shall serve as President and Chief Executive
Officer of Factory  2-U.  Executive  shall  report to the Board of  Directors of
Factory 2-U (the "Board") and shall have such duties and  authority,  consistent
with his  position  as the Chief  Executive  Officer of Factory  2-U as shall be
assigned to him from time to time by the Board.

     (b)  During  the  Employment  Term,  Executive  shall,  without  additional
compensation,  also (i) serve on the Board of  Directors  of, and  perform  such
executive and  consulting  services for, or on behalf of, such  subsidiaries  or
affiliates of Factory 2-U as the Board may, from time to time, request.  Factory
2-U  and  such   subsidiaries  and  affiliates  are  hereinafter   referred  to,
collectively,   as  the  "Company"   and,   individually,   as  a   "Constituent
Corporation."  For purposes of this Agreement,  the term "Affiliate"  shall have
the meaning ascribed thereto in the Securities  Exchange Act of 1934, as amended
(the "Act").

     (c) During the Employment Term, Executive shall devote substantially all of
his  business  time and  efforts to the  performance  of his  duties  hereunder;
provided,  however,  that Executive shall be permitted,  to the extent that such
activities do not materially  interfere  with the  performance of his duties and
responsibilities  hereunder,  to manage his personal financial and legal affairs
and  to  serve  on  corporate,   civic,  or  charitable  boards  or  committees.
Notwithstanding  the foregoing,  the Executive  shall not serve on any corporate
board of directors or similar body if such service  would be  inconsistent  with
his fiduciary  responsibilities  to any

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<PAGE>

Constituent  Corporation  and in no event shall Executive serve on any such
board or other body unless  approved by the Board,  which  approval shall not be
unreasonably withheld.

     3. Base Salary.  During the Employment  Term,  Factory 2-U shall pay to the
Executive a base salary at the annual rate of not less than six hundred thousand
dollars  ($600,000).  Base salary shall be payable in accordance  with the usual
payroll  practices of Factory 2-U.  Executive's  base salary shall be subject to
annual  review  by the  Board  or its  designee  and may be  increased,  but not
decreased,  from time to time. The base salary,  as determined as aforesaid from
time to time, shall constitute "Base Salary" for purposes of this Agreement.

     4. Annual  Bonus.  Executive's  annual bonus will be targeted at 50% of the
Base Salary.  The Board and the  Executive  will agree on annual  targets,  with
final discretion residing with the Board. If the targets are exceeded, the Board
may  increase  the bonus.  If the targets  are not met,  the Board may reduce or
withhold the bonus  entirely.  The Board will  annually  review  whether a merit
increase of the annual bonus is warranted.

     5. Equity  Compensation.  (a) Factory 2-U has granted to Executive  options
under its  incentive  stock  option plan ("ISO  Plan")  entitling  Executive  to
acquire a total of 76,520  shares of Factory  2-U's  common  stock at $6.534 per
share (which is equal to the closing  market price of such common stock on March
30,  1998,  the date on which the  Executive  became an employee of the Company,
adjusted  to take  account of the  recapitalization  which  caused each share of
common stock to become .30133 shares of common  stock).  Those  incentive  stock
options  vest  in  increments  of  15,304  shares  on  each  of the  first  five
anniversaries  of the Effective  Date.  In addition,  Factory 2-U has granted to
Executive  nonqualified  stock  options to  acquire a total of 13,880  shares of
Factory  2-U's  common  stock at $5.2733  per share.  Those  nonqualified  stock
options  vest  in  increments  of  2,776  shares  on  each  of  the  first  five
anniversaries of the Effective Date.

     (b) Promptly  following the Effective  Date,  the Executive  purchased from
Factory 2-U, at a purchase price of $1,000 per share,  one thousand four hundred
(1,400) shares of Factory 2-U's Series B preferred stock.  Those shares have now
become  242,662  shares of Factory  2-U common  stock (the  "Executive  Stock").
Factory 2-U loaned to  Executive,  upon the terms and subject to the  conditions
set forth in  Exhibit A hereto,  an  amount  equal to the cost  incurred  by the
Executive for the acquisition of the Executive Stock.  Whenever  interest is due
with regard to that loan, Factory 2-U shall pay to the Executive,  as additional
compensation, the amount which, after payment of taxes, is equal to the interest
payment minus any resulting tax deductions.

     (c)  Executive  granted to Factory  2-U an option (the  "Buy-back  Option")
entitling Factory 2-U to acquire the Executive Stock from Executive in the event
that Executive's

                                       2

<PAGE>


employment under this Agreement is terminated for any reason other than pursuant
to Section 9(a)(i), (ii) or (iii) hereof. The price at which Factory 2-U will be
entitled to exercise the Buy-back Option shall be determined by reference to the
following table:



<TABLE>
<CAPTION>


    Number of years elapsed from the              1              2              3              4              5
             Effective Date
------------------------------------------   -------------- ------------   ------------   -------------  ---------------
<S>                                          <C>            <C>            <C>            <C>            <C>


Percentage of Executive  Stock subject to    80%            60%            40%            20%            0%
the Buy-back Option



Exercise Price of the Buy-back Option        $5.808         $6.637         $7.467         $8.297         --


</TABLE>

The number of shares of Executive  Stock subject to the Buy-Back  Option and the
exercise price of the Buy-Back  Option shall be determined by  interpolation  in
the event of any  exercise  of the  Buy-Back  Option on any date  other  than an
anniversary of the Effective Date.

     (d) Factory 2-U granted to Executive,  effective as of the Effective  Date,
further options (the "Further Options")  entitling  Executive to acquire a total
of 271,197  shares of Factory 2-U's common stock at a price of $6.637 per share.
The Executive will be entitled to exercise the Further  Options (i) prior to the
sixth  anniversary of the Effective Date and (ii) during the period which begins
on the day which is 60 days before the ninth  anniversary  of the Effective Date
and ends on (and  includes) the ninth  anniversary  of the  Effective  Date (the
"Fully Vested  Period"),  and the Further  Options will expire at 5:00 p.m., San
Diego, California time, on the ninth anniversary of the Effective Date, provided
that:

     (i) except  during the Fully  Vested  Period,  the  Executive  shall not be
entitled to exercise any of the Further  Options until the closing  market price
of Factory  2-U's common stock equals or exceeds  $19.91 per share on sixty (60)
trading  days during any twelve (12) month period  commencing  at any time after
the Effective Date and terminating prior to the termination,  for any reason, of
Executive's employment by the Company;

     (ii) except during the Fully Vested Period, the Executive shall be entitled
to exercise not more than 135,599 of the Further  Options if the closing  market
price of Factory  2-U's  shares  shall equal or exceed  $19.91 per share on, but
shall fail to exceed  $24.89 per share,  on sixty (60)  trading  days during any
twelve (12) month period  commencing  at any time after the  Effective  Date and
terminating prior to the termination,  for any reason, of Executive's employment
by the Company; and

     (iii) the  Executive  shall be  entitled  to  exercise  all of the  Further
Options if the  closing  market  price of Factory  2-U's  shares  shall equal or
exceed $24.89 per share for sixty (60) trading days during any twelve (12) month
period commencing at any time after

                                       3
<PAGE>

the  Effective  Date and  terminating  prior to the termination, for any reason,
of Executive's employment by the Company.

     (e) If the  Executive  is still  employed by the  Company  during the Fully
Vested Period, during the Fully Vested Period, the Executive will be entitled to
exercise  all the Further  Options,  without  regard to what the closing  market
price of Factory 2-U's common stock is or has been.

     6.  Employment  Benefits  and  Vacation.  (a) During the  Employment  Term,
Executive shall be entitled to participate in all pension, retirement,  savings,
welfare and other pension and welfare  employee  benefit plans and  arrangements
and fringe  benefits and  perquisites  generally  maintained by the Company from
time to time for the benefit of senior executives of the Company,  in accordance
with  their  respective  terms as in effect  from time to time  (other  than any
special arrangement entered into by contract with an executive).

     (b) During the  Employment  Term,  Executive  shall be entitled to vacation
each year in accordance with the Company's policies in effect from time to time,
but in no event less than four (4) weeks paid  vacation per calendar  year.  The
Executive  shall also be entitled to such sick leave as is customarily  provided
by the Company for its senior executive employees.

     7. Moving  Expenses.  The  Executive has been  reimbursed,  on an after-tax
basis, for expenses incurred by the Executive in the relocation of his family to
San Diego for the purpose of commencing  Executive's employment pursuant to this
Agreement.

     8. Business  Expenses.  The Executive  shall be reimbursed  for the travel,
entertainment   and  other  business  expenses  incurred  by  Executive  in  the
performance  of his duties  hereunder,  in accordance  with  policies  generally
applicable to senior executives of the Company as in effect from time to time.

     9. Termination.  (a) The employment of Executive under this Agreement shall
terminate upon the occurrence of any of the following events:

          (i)      the death of Executive;

          (ii)     the termination by Factory 2-U of Executive's employment due
 to Executive's Disability pursuant to Section 9(b) hereof;

          (iii)    the termination by Executive of Executive's employment for
Good Reason pursuant to Section 9(c) hereof;

          (iv)     the termination by Factory 2-U of Executive's employment
 without Cause;

          (v)      the termination by Executive of Executive's employment
without Good Reason upon sixty (60) days prior written notice; or

          (vi)     the termination by Factory 2-U of Executive's employment for
Cause pursuant to Section 9(e) hereof.

                                       4
<PAGE>

     (b)  Disability.  If, by reason of the same or related  physical  or mental
reasons,  Executive is unable to carry out his material  duties pursuant to this
Agreement  for more than six (6) months in any  twelve  (12)  consecutive  month
period,  Factory 2-U may terminate  Executive's  employment for Disability  upon
thirty (30) days prior written notice, by a Notice of Disability Termination.

     (c)  Termination  for Good Reason.  A  Termination  for Good Reason means a
termination  by Executive by written  notice given within ninety (90) days after
the occurrence of the Good Reason event.  For purposes of this Agreement,  "Good
Reason"  shall mean the  occurrence or failure to cause the  occurrence,  as the
case  may  be,  without  Executive's  express  written  consent,  of  any of the
following circumstances,  unless such circumstances are fully corrected prior to
the date of termination  specified in the Notice of Termination  for Good Reason
(as defined in Section 9(d) hereof):  (i) the material  branch by the Company of
any of its  obligations  to  Executive  under this  Agreement  or the failure of
Factory 2-U to make timely payments of compensation or reimbursement pursuant to
Section 3, 4, 7 or 8 hereof; (ii) any material  diminution,  after the Effective
Date, of Executive's positions,  duties or responsibilities hereunder, as of the
Effective  Date  (except  in each case in  connection  with the  termination  of
Executive's  employment  for Cause or Disability  or as a result of  Executive's
death,  or temporarily  as a result of Executive's  illness or other absence and
provided  that a  reduction  in the size or  number of the  units  reporting  to
Executive as a result of dispositions,  shall not be a material diminution),  or
the assignment to Executive of duties or responsibilities  that are inconsistent
with Executive's  position as the Chief Executive  Officer of Factory 2-U; (iii)
removal of, or the  nonreelection  of, the  Executive  from his  position as the
Chief  Executive  Officer of Factory 2-U; or (iv) a relocation  of the principal
executive  offices of Factory 2-U to a location more than twenty-five (25) miles
from San Diego, California or a relocation of Executive away from such principal
executive office.

     (d) Notice of Termination of Good Reason.  A Notice of Termination for Good
Reason  shall  mean a  notice  that  shall  indicate  the  specific  termination
provision in Section 9(c) relied upon and shall set forth in  reasonable  detail
the facts and circumstances  claimed to provide a basis for Termination for Good
Reason.  The failure by Executive to set forth in the Notice of Termination  for
Good Reason any fact or  circumstance  which  contributes  to the  showing  Good
Reason  shall not waive any right of Executive  hereunder or preclude  Executive
from asserting such fact or circumstance in enforcing his rights hereunder.  The
Notice of  Termination  for Good Reason shall provide for a date of  termination
not less than ten (10) nor more than sixty (60) days after the date such  Notice
of Termination for Good Reason is given, provided that in the case of the events
set forth in  Section  9(c)(ii)  or (iii) the date may be two (2) days after the
giving of such notice.

     (e) Cause.  Subject to the  notification  provisions of Section 9(f) below,
Executive's employment hereunder may be terminated by Factory 2-U for Cause. For
purposes of this  Agreement,  the term  "Cause"  shall be limited to (i) willful
misconduct  by  Executive  with  regard  to the  Company;  (ii) the  refusal  of
Executive  to follow  the  proper  written  direction  of the  Board;  provided,
however,  that the  foregoing  refusal shall not be "Cause" if Executive in good
faith believes that such direction is illegal, unethical or immoral and promptly
so notifies the entity or person giving the  direction;  (iii)  Executive  being
convicted of a felony;  (iv) the willful  breach by  Executive of any  fiduciary
duty owed by Executive to any Constituent Corporation

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<PAGE>

which has a material  adverse  effect on the  Company;  or (v)  Executive's
material fraud with regard to any Constituent Corporation.

     (f) Notice of  Termination  for Cause.  A Notice of  Termination  for Cause
shall mean a notice that shall  indicate the specific  termination  provision in
Section 9(e) relied upon and shall set forth in reasonable  detail the facts and
circumstances  which  provide a basis for  Termination  for  Cause.  Further,  a
Notification  for Cause shall include a copy of a resolution  duty adopted by at
least a majority of the entire membership of the Board at a meeting of the Board
which was  called for the  purpose of  considering  such  termination  and which
Executive and his  representative had the right to attend and address the Board,
finding  that,  in the good faith  opinion of the  Board,  Executive  engaged in
conduct  set  forth  in the  definition  of  Cause  herein  and  specifying  the
particulars  thereof  in  reasonable  detail.  The  date  of  termination  for a
Termination  for Cause shall be the date indicated in the Notice of Termination.
Any  purported  Termination  for Cause which is held by a court not to have been
based on the grounds set forth in this  Agreement  or not to have  followed  the
procedures  set forth in this  Agreement  shall be deemed a Termination  without
Cause.

     10.  Consequences  of Termination of Employment.  (a) Death. If Executive's
employment is terminated  during the  Employment  Term by reason of  Executive's
death,  the  employment  period under this  Agreement  shall  terminate  without
further  obligations  to  the  Executive's  legal   representatives  under  this
Agreement except for (i) any compensation earned but not yet paid, including and
without limitation,  any declared but unpaid bonus, any amount of Base Salary or
deferred  compensation  accrued or earned but unpaid,  any accrued  vacation pay
payable pursuant to the Company's policies and any reimbursed  business expenses
payable  pursuant to Section 8, which  amounts  shall be promptly paid in a lump
sum to Executive's  estate;  (ii) the product of (x) the target annual bonus for
the  fiscal  year  of  Executive's  death,  multiplied  by (y) a  fraction,  the
numerator of which is the number of days of the current fiscal year during which
Executive  was  employed by Factory 2-U,  and the  denominator  of which is 365,
which  bonus  shall be paid when  bonuses  for such period are paid to the other
executives;  (iii) full  accelerated  vesting,  with a waiver of all performance
based targets, under all outstanding  equity-based and long-term incentive plans
(with options  remaining  outstanding  as provided  under the  applicable  stock
option plan and a pro rata payment under any long term incentive  plans based on
actual  coverage  under such plans at the time payments  normally  would be made
under such  plans);  (iv)  subject to  Section 11 hereof,  any other  amounts or
benefits owing to Executive under the then applicable  employee benefit plans or
policies of the Company,  which shall be paid in  accordance  with such plans or
policies;  (v) payment on a monthly  basis of twelve (12) months of Base Salary,
which shall be paid to Executive's  spouse, or if she shall predecease him, then
to Executive's children (or their guardian if one is appointed) in equal shares;
and (vi) payment of the spouse's and dependent's  COBRA coverage premiums to the
extent, and as long as, they remain eligible for COBRA coverage, but in no event
more than three (3) years.

     (b)  Disability.  If  Executive's  employment  is  terminated  by reason of
Executive's Disability,  Executive shall be entitled to receive the payments and
benefits  to which  his  representatives  would be  entitled  in the  event of a
termination  of employment by reason of his death;  provided that the payment of
Base Salary shall be reduced by the projected  amount he would receive under any
long-term  disability  policy or program  maintained  by the Company  during the
twelve (12) month period during which Base Salary is being paid.

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<PAGE>

     (c)  Termination by Executive for Good Reason or for Change in Control.  If
(i) Executive  terminates  his  employment  hereunder for Good Reason during the
Employment  Term,  or  (ii) a  Change  in  Control  occurs  and  within  90 days
thereafter Executive  terminates his employment for any reason,  Executive shall
be entitled to receive the payments  and  benefits to which his  representatives
would be entitled in the event of a  termination  of employment by reason of his
death.

     (d) Termination with Cause or Voluntary Resignation without Good Reason. If
Executive's  employment  hereunder is terminated (i) by Factory 2-U for Cause or
(ii) by Executive  without Good Reason except within 90 days  following a Change
in Control,  the  Executive  shall be  entitled to receive  only his Base Salary
through  the  date  of  termination,  any  earned  but  unpaid  bonus,  and  any
unreimbursed business expenses payable pursuant to Section 8. All other benefits
(including  without  limitation  rights to retain restricted stock and rights to
exercise  options)  due  Executive  shall  terminate  upon such  termination  of
employment.

     (e) Termination by the Company Without Cause. If Executive's  employment is
terminated  by the  Factory 2-U without  cause,  Executive  shall be entitled to
receive the payment and benefits to which his representatives  would be entitled
in the event of a termination  of  employment by reason of his death;  provided,
however,  that Executive  shall not be entitled to receive the benefit set forth
in clause (iii) of Paragraph 10(a) hereof.

     11.  No  Mitigation;  No  Set-Off.  In  the  event  of any  termination  of
employment under Section 9, Executive shall be under no obligation to seek other
employment and there shall be no offset against any amounts due Executive  under
this  Agreement on account of any  remuneration  attributable  to any subsequent
employment  that  Executive may obtain.  Any amounts due under Section 10 are in
the nature of severance payments, or liquidated damages, or both, and are not in
the nature of a penalty.  Such amounts are  inclusive and in lieu of any amounts
payable under any other salary  continuation  or cash  severance  arrangement of
Factory 2-U or any  affiliate  thereof and to the extent paid or provided  under
any other such arrangement shall be offset from the amount due hereunder.

     12.  Change in Control.  (a)  Subject to the  provisions  of Section  12(b)
hereof, for purposes of this Agreement,  the term "Change in Control" shall mean
(a) the sale of all or  substantially  all of the  assets of the  Company in the
aggregate,  whether pursuant to a single  transaction or pursuant to a series of
transactions  and whether through an asset sale or stock sale,  other than to an
affiliate;  (b) any "person" (as defined in the Act) not an affiliate of Factory
2-U on the  Effective  Date becomes the  "beneficial  owner" (as defined in Rule
13d-3  under the Act),  directly or  indirectly,  of  securities  of Factory 2-U
representing  fifty (50%) or more of the combined  voting power of Factory 2-U's
then  outstanding  securities;  (c) during any period of two consecutive  years,
individuals  who at the  beginning  of  such  period  constitute  the  Board  of
Directors,  and any new director  (other than a director  designated by a person
who has entered  into an  agreement  with  Factory  2-U to effect a  transaction
described in this paragraph) whose election by the Board of Directors of Factory
2-U or nomination for election by Factory 2-U's  stockholders  was approved by a
vote of at least  two-thirds  of the  directors  then still in office who either
were  directors at the  beginning of the  two-year  period or whose  election or
nomination  for election  was  previously  so approved,  cease for any reason to
constitute at least a majority of the Board of Directors;  (d) the  stockholders
of Factory 2-U approve a merger or consolidation of

                                       7
<PAGE>

Factory   2-U  with  any  other   corporation,   other  than  a  merger  or
consolidation  which  would  result in the  voting  securities  of  Factory  2-U
outstanding  immediately  prior  thereto  continuing  to  represent  (either  by
remaining  outstanding  or by being  converted  into  voting  securities  of the
surviving  entity) more than fifty percent (50%) of the combined voting power of
the  voting  securities  of Factory  2-U or such  surviving  entity  outstanding
immediately  after such  merger or  consolidation;  or (e) the  stockholders  of
Factory  2-U  approve  a plan  of  complete  liquidation  of  Factory  2-U or an
agreement for the sale or disposition by Factory 2-U of all or substantially all
of Factory 2-U's assets other than the sale of all or  substantially  all of the
assets of Factory 2-U to a person or persons who beneficially  own,  directly or
indirectly, at least fifty percent (50%) or more of the combined voting power of
the outstanding voting securities of Factory 2-U at the time of the sale.

     (b)  Factory  2-U and  Searles  acknowledge  that  Factory  2-U and General
Textiles effected a restructuring of such corporations. Notwithstanding anything
to  the  contrary  set  forth  herein,  it  is  agreed  that  no  restructuring,
recapitalization,  reorganization,  merger, consolidation or similar transaction
involving  General  Textiles,  Factory  2-U or any  affiliate  thereof  (but not
involving any  unaffiliated  third party) shall be deemed to have constituted or
to constitute a Change of Control hereunder.

     13. Confidential  Information,  Non-Competition and Non-Solicitation of the
Company.  (a) (i) Executive  acknowledges  that,  as a result of his  employment
hereunder,  Executive  will obtain secret and  confidential  information  of the
Company and the Company will suffer substantial damage, which would be difficult
to ascertain and in an amount which would be difficult to compute,  if Executive
should use any of such  confidential  information and that because of the nature
of the  information  that will be known to  Executive  it is  necessary  for the
Company to be  protected by the  prohibition  against  Competition  as set forth
herein, as well as the Confidentiality restrictions set forth herein.

     (ii) Executive  acknowledges that the retention of nonclerical employees of
the Company, in which the Company has invested training and on which the Company
depends for the operation of its business, is important to the businesses of the
Company;  Executive  will obtain unique  information  as to such employees as an
executive  of the  Company  and will  develop  a unique  relationship  with such
persons as a result of being an executive of the Company; and, therefore,  it is
necessary for the Company to be protected from Executive's  Solicitation of such
employees as set forth below.

     (iii)  Executive  acknowledges  that the  provisions of this  Agreement are
reasonable  and necessary for the  protection of the business of the Company and
that part of the compensation paid under this Agreement and the agreement to pay
severance in certain  instances is in  consideration  for the agreements in this
Section 13.

     (b) As used herein,  "Competition" shall mean:  participating,  directly or
indirectly,  as  an  individual  proprietor,   partner,  stockholder,   officer,
employee,  director,  joint  venturer,  investor,  lender,  consultant or in any
capacity  whatsoever  (within  the  United  States of  America,  or in any other
country  where any  Constituent  Corporation  does  business)  in a business  in
competition  with  any  business  conducted  by  any  Constituent   Corporation;
provided,  however,  that such participation shall not include (i) the ownership
of not more than one percent (1%) of

                                       8
<PAGE>

the  total  outstanding  stock  of a publicly-held  company;  or any  activity
engaged  in with  the  prior  written approval of the Board.

     (c) As used herein,  "Solicitation"  shall mean  recruiting,  soliciting or
inducing any nonclerical  employee of any  Constituent  Corporation to terminate
his or her employment  with, or otherwise  cease his or her  relationship  with,
such Constituent Corporation or hiring, or assisting another person or entity to
hire, any nonclerical employee of any Constituent Corporation or any person who,
within  six  (6)  months  before,  had  been  a  nonclerical  employees  of  any
Constituent  Corporation,  unless the employment of such person by a Constituent
Corporation was terminated involuntarily and without cause.

     (d) If any restriction set forth with regard to Competition or Solicitation
is found  by any  court  of  competent  jurisdiction,  or an  arbitrator,  to be
unenforceable because it extends for too long a period of time or over too great
a range  of  activities  or in too  broad  a  geographical  area,  it  shall  be
interpreted  to extend over the maximum  period of time,  range of activities or
geographic  area as to which it may be  enforceable.  If any  provision  of this
Section 13 shall be declared to be invalid or enforceable,  in whole or in part,
as a result of the  foregoing,  as a result  of  public  policy or for any other
reason,  such  invalidity  shall not affect  the  remaining  provisions  of this
Section, which shall remain in full force and effect.

     (e)  During  and after  the  Employment  Term,  Executive  shall  hold in a
fiduciary  capacity  for the benefit of the  Company all secret or  confidential
information,  knowledge  or data  relating  to the  Company  and  its  business,
including any confidential information as to suppliers (i) obtained by Executive
during  his  employment  by the  Company  and (ii) not  otherwise  in the public
domain.  Executive  shall not,  without  prior  written  consent of the Company,
unless  compelled  pursuant to the order of a court or other government or legal
body  having  jurisdiction  over such  matter,  communicate  or divulge any such
information,  knowledge  or data to anyone  other  than the  Company,  and those
designated  by it. In the event  Executive  is  compelled by order of a court or
other governmental or legal body to communicate or divulge any such information,
knowledge or data to anyone other than the foregoing,  he shall promptly  notify
the Company of any such order and he shall  cooperate  fully with the Company in
protecting such information to the full extent possible under applicable law.

     (f) Upon  termination  of his employment  with the Company,  or at any time
Factory 2-U may  request,  Executive  will  promptly  deliver to Factory 2-U, as
requested, all documents (whether prepared by the Company,  Executive or a third
party)  relating to the company or any of its business or property  which he may
possess  or have  under  his  direction  or  control,  other  than his  personal
employment and personnel records.

     (g) During the Employment Term and for one (1) year  thereafter,  Executive
will not enter into Competition with the Company.  Furthermore,  in the event of
any termination of Executive's employment for any reason whatsoever,  whether by
the Company or by the  Executive  and  whether or not for Cause,  Good Reason or
expiration of the Employment Term, the Executive will not engage in Solicitation
for three (3) years thereafter.

(h) Executive acknowledges that in the event of a breach of this Section 13, the
Company  will be  cause  irreparable  injury  and  money  damages  may not be an
adequate

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<PAGE>

remedy.  Consequently,  Executive  agrees  that the  Company  shall be
entitled to injunctive relief (in addition to its other remedies at law) to have
the provisions of this Section 13 enforced.

     14.  Indemnification.  (a) The Company  agrees that if  Executive is made a
party to or  threatened  to be made a party to any action,  suit or  proceeding,
whether civil,  criminal,  administrative or investigative (a "Proceeding"),  by
reason of the fact that he is or was a director  or  officer of any  Constituent
Corporation or is or was serving at the request of any  Constituent  Corporation
as a  director,  officer,  member,  employee,  fiduciary  or  agent  of  another
corporation  or of a  partnership,  joint  venture,  trust or other  enterprise,
including,  without limitation,  service with respect to employee benefit plans,
whether or not the basis of such  Proceeding  is alleged  action in an  official
capacity as a director,  officer,  member,  employee,  fiduciary  or agent while
serving as a  director,  officer,  member,  employee,  fiduciary  or agent while
serving as a director,  officer, member, employee,  fiduciary or agent, he shall
be indemnified and held harmless by the applicable company to the fullest extent
authorized  by  applicable  law  against  all  Expenses  incurred or suffered by
Executive in connection therewith, and such indemnification shall continue as to
Executive  even if  Executive  has ceased to be an  officer,  director,  member,
fiduciary or agent, or is no longer employed by such company, and shall inure to
the benefit of his heirs, executors and administrators.

     (b) As used in this Agreement,  the term "Expenses" shall include,  without
limitation,  damages, losses, judgments,  liabilities,  fines, penalties, excise
taxes,   settlements  and  costs,   attorneys'  fees,   accountants'  fees,  and
disbursements and costs of attachment or similar bonds, investigations,  and any
expenses of establishing a right to indemnification under this Agreement.

     (c) Expenses  incurred by Executive in connection with any Proceeding shall
be paid in advance upon request of Executive  and the giving by the Executive of
any undertakings required by applicable law.

     (d) Executive  shall give the Company  notice of any claim made against him
for which indemnity will or could be sought under this  Agreement.  In addition,
Executive  shall give the Company such  information  and  cooperation  as it may
reasonably  require and as shall be within  Executive's  power and at such times
and places as are reasonably convenient for Executive.

     (e) With  respect to any  Proceeding  as to which  Executive  notifies  the
Company of the commencement thereof:

          (i)      The Company will be entitled to participate therein at its
 own expense; and

          (ii) Except as otherwise  provided  below,  to the extent that it may
 wish,  the Company will be entitled to assume the defense thereof,  with
counsel reasonably satisfactory to Executive,  in which case Executive also
shall have the right to employ his own counsel in such action,  suit or
proceeding,  but only at his own cost and expense,  provided  that the Company
shall only be permitted to assume defense of a Proceeding if (1) the Proceeding
could not result in imposition of criminal penalties against Executive and
(2) the Company acknowledges that it

                                       10
<PAGE>

is liable to indemnify  Executive  with respect to al Expenses with respect to
such Proceedings,  except  as  provided  earlier  in this  sentence  with
regard to Executive's own counsel.

     (f) The  Company  shall not be liable to  indemnify  Executive  under  this
Agreement  for any amounts paid in  settlement  of any action or claim  effected
without its written consent. The Company shall not settle any action or claim in
any manner  which  would  impose any penalty on  Executive  (except a penalty in
respect of which Executive is fully indemnified  hereunder) without  Executive's
written consent. Neither the Company nor Executive will unreasonably withhold or
delay consent to any proposed settlement.

     (g) The right to  indemnification  and the payment of expenses  incurred in
defending a  Proceeding  in advance of its final  disposition  conferred in this
Section 14 shall not be exclusive of any other right which Executive may have or
hereafter  may  acquire  under any  statute,  provision  of the  certificate  of
incorporation or by-laws of the any company, agreements, vote of stockholders or
disinterested directors or otherwise.

     (h) The Company  shall  obtain  officer and  director  liability  insurance
policies  covering  Executive  in the same  aggregate  amount and under the same
terms as are maintained by the Company for senior officers and directors.

     15. Miscellaneous.


     (a)  Entire  Arrangement/Amendments.  This  Agreement  and the  instruments
contemplated  herein,  contain  the entire  understanding  of the  parties  with
respect  to  the   employment  of  Executive  by  the  Company.   There  are  no
restrictions,   agreements,  promises,  warranties,  covenants  or  undertakings
between the parties with respect to the subject  matter  hereof other than those
expressly  set forth  herein and  therein.  This  Agreement  may not be altered,
modified, or amended except by written instrument signed by the parties hereto.

     (b) No Waiver.  The failure of a party to insist upon strict  adherence  to
any term of this  Agreement on any occasion  shall not be considered a waiver of
such party's rights or deprive such party of the right thereafter to insist upon
strict  adherence  to that term or any other  term of this  Agreement.  Any such
waiver must be in writing and signed by  Executive or an  authorized  officer of
Factory 2-U, as the case may be.

     (c) Assignment.  This Agreement shall not be assignable by Executive.  This
Agreement  shall be assignable  by Factory 2-U, but only to another  Constituent
Corporation and only if such Constituent Corporation promptly assumes all of the
obligations hereunder of Factory 2-U in a writing delivered to the Executive and
otherwise  complies with the provisions  hereof with regard to such  assumption.
Upon such assignment and assumption, all obligations of Factory 2-U herein shall
be the obligations of the assignee  entity or acquiror,  as the case may be, but
Factory 2-U shall remain secondarily liable for the obligations hereunder.

     (d)  Successors;  Binding  Agreement.  This  Agreement  shall  inure to the
benefit or and be binding upon the personal or legal representatives, executors,
administrators,  successor, heirs, distributees, devisees legatees and permitted
assignees of the parties hereto.

                                       11

<PAGE>

     (e)  Communications.  For the  purpose of this  Agreement,  notices and all
other  communications  provided  for in this  Agreement  shall be in writing and
shall be deemed to have been duly given (i) when faxed or delivered, or (ii) two
business days after mailed by United States registered or certified mail, return
receipt requested,  postage prepaid,  addressed to the respective  addresses set
forth on the  initial  page of this  Agreement,  provided  that all  notices  to
Factory  2-U shall be  directed to the  Chairman  of the Board of  Directors  of
Factory  2-U or to such  other  address as any party may have  furnished  to the
other in writing in  accordance  herewith.  Notice of change of address shall be
effective only upon receipt.

     (f)  Withholding  Taxes.  The Company may withhold from any and all amounts
payable under this Agreement to Executive such Federal, state and local taxes as
may be required to be withheld pursuant to any applicable law or regulation.

     (g)  Survival.  The  respective  rights  and  obligations  of  the  parties
hereunder shall survive any termination of Executive's  employment to the extent
necessary to the agreed preservation of such rights and obligations.

     (h)  Counterparts.  This Agreement may be signed in  counterparts,  each of
which shall be an original,  with the same effect as if the  signatures  thereto
and hereto were upon the same instrument.

     (i) Headings.  The headings of the sections contained in this Agreement are
for convenience only and shall not be deemed to control or affect the meaning or
construction of any provisions of this Agreement.

              IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written,



                                    FACTORY 2-U STORES, INC.



                                    By:  /S/ H. Whitney Wagner
                                          H. Whitney Wagner
                                          Compensation Committee, Chairman





                                     /s/ Michael M. Searles
                                     Michael M. Searles



                                       12
<PAGE>


                                                  EXHIBIT A

                                  Terms of Loan


Principal Amount:                  $1,400,000

Interest Rate:                     8%, to accrue and be paid at maturity.

Principal Amortization:            Annual  repayments of principal in an amount
                                   equal to 16.25%  of the  annual  bonus  paid
                                   to the  borrower by Factory 2-U.

Maturity:                          Five years from the date of the loan.

Security and Recourse:             The loan will be secured by a pledge of the
                                   shares purchased  with  the proceeds of the
                                   loan.  Personal recourse against the borrower
                                   will be limited to the amount of $600,000.




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