INCENTIVE STOCK OPTION AGREEMENT


     THIS  AGREEMENT is executed  this ________ day of July 1997, by and between
FAC REALTY, INC. (formerly known as Factory Stores of America, Inc.), a Delaware
corporation  (the  "Company"),   and  C.  CAMMACK  MORTON,  an  individual  (the
"Holder"),  pursuant to and under  authority  of the Factory  Stores of America,
Inc., 1993 Amended and Restated Employee Stock Incentive Plan (the "Plan").

                              W I T N E S S E T H:

     WHEREAS,  Factory Stores of America, Inc., and the Holder entered into that
certain  Incentive  Stock  Option  Agreement  dated as of February 14, 1996 (the
"Prior Agreement"); and

     WHEREAS,  pursuant  to the  Plan,  the  Administrator  may  grant new stock
options to an optionee, on terms and conditions determined by the Administrator,
upon  the  voluntary  surrender  of Stock  Options  previously  granted  to such
optionee; and

     WHEREAS,  as part of the Holder's  future  compensation  arrangements,  the
Administrator  has  determined  it is in the best  interests  of the  Company to
accept the voluntary  surrender of existing Stock Options  granted to the Holder
under the Prior  Agreement,  and to replace such options as provided  more fully
herein; and

     WHEREAS the Company and the Holder desire to terminate the Prior Agreement,
and the Holder  desires to  surrender,  and the  Company  desires to accept such
surrender,  all  shares  and  options  and all  rights  granted  under the Prior
Agreement; and

     WHEREAS,  the  Company  desires  to provide  the  Holder  with an option to
purchase  Eighty-Eight  Thousand Eight Hundred  Eighty-Five  (88,885)  shares of
Common Stock, $0.01 par value, of the Company ("Shares"); and

     WHEREAS, the Holder desires to accept such option;

     NOW, THEREFORE,  in consideration of the mutual covenants herein set forth,
the parties hereto hereby agree as follows:

     1. Grant of Option.  The Company does hereby  grant to the Holder,  and the
Holder does hereby accept,  the right and option (the "Option") to purchase,  at
the option of the Holder,  88,885 Shares at the option price of $5.625 per Share
and upon and subject to the other terms and conditions  hereof.  Notwithstanding
the  foregoing,  if at any time or from time to time the  number  of Shares  are
increased or decreased,  or changed into or exchanged for a different  number or
kind of  shares  of stock or  other  securities  of the  Company  or of  another
corporation  (whether as a result of a stock split, stock dividend,  combination
or  exchange  of  shares,  exchange  for  other  securities,   reclassification,
reorganization,   redesignation,  merger,  consolidation,   recapitalization  or
otherwise),  then (i) there shall  automatically be substituted,  for each Share
for which the  Option has not been  exercised,  the number and kind of shares of
stock or other securities into


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which each outstanding share shall be changed or for which each such share shall
be  exchanged,  and (ii) the  option  price  per  Share  shall be  increased  or
decreased  proportionately  so that the aggregate  exercise price for the Shares
subject to the Option shall remain the same as immediately  prior to such event.
In addition to the foregoing,  the Company shall be entitled in the event of any
such  increase,  decrease  or  exchange  of Shares to make  adjustments  to this
Agreement  (including  adjustments  which may  provide  for the  elimination  of
fractional  shares) which do not have a material adverse effect upon the Holder,
where necessary to preserve the terms and conditions hereof.

     2. Term of the Option.  Subject to the other terms and  conditions  hereof,
the  Option  shall  vest  with  respect  to  Seventeen  Thousand  Seven  Hundred
Seventy-Seven  (17,777) Shares on April 1, 1997 (the "Effective Date") and shall
vest with respect to Seventeen  Thousand  Seven Hundred  Seventy-Seven  (17,777)
Shares per year on the first through fourth anniversaries of the Effective Date,
and is  exercisable,  in whole or in part, only with respect to those Shares for
which the  Option  has  become  vested.  Shares  for which the Option has become
exercisable shall be referred to herein as "Vested Shares," and Shares for which
the Option has not become  exercisable  shall be referred to herein as "Unvested
Shares." The Option shall terminate on April 1, 2007, and must be exercised,  if
at  all,   before   such  date  and  shall  not   thereafter   be   exercisable,
notwithstanding  anything herein to the contrary.  The "Effective  Date" for the
purpose of this Paragraph 2 shall be the date first above written.

     3. 1993 Amended and Restated  Employee Stock Incentive Plan. This Option is
in all  respects  subject  to the terms  and  conditions  of the Plan,  which is
incorporated by reference herein.

     4.  Exercise.  (i) Subject to the other terms and  conditions  hereof,  and
provided payment is made as provided below, the Option shall be exercisable from
time to time by  written  notice to the  Company  (in the form  required  by the
Company) which shall:

          (a) state that the Option is thereby  being  exercised,  the number of
     Shares with respect to which the Option is being exercised,  each person in
     whose name any  certificates  for the Shares should be registered  and such
     person's address and social security number;

          (b) be signed by the person or persons entitled to exercise the Option
     and, if the Option is being  exercised by anyone other than the Holder,  be
     accompanied by proof  satisfactory  to counsel for the Company of the right
     of such person or persons to exercise the Option under all applicable  laws
     and regulations; and

          (c) be accompanied by such  representations,  warranties or agreements
     with respect to the investment intent of such person or persons  exercising
     the Option and the  compliance  with any applicable law or regulation or to
     confirm  any factual  matters as the Company or its counsel may  reasonably
     request, in form and substance satisfactory to counsel for the Company.

               (ii) Payment of the Option price may be made,  in the  discretion
          of the


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          person exercising the Option, in one of the following  manners,  or in
          any other manner approved by the Administrator (as  "Administrator" is
          defined in the Plan), in its sole discretion:

          (a)  the  written  notice  to  the  Company  described  above  may  be
     accompanied  by full payment of the option  price in cash or by check,  or,
     with the consent of the  Company,  in whole or in part with a surrender  of
     previously  acquired  Shares of the Company  having a Fair Market Value (as
     defined  below)  on the  date of  exercise  equal  to that  portion  of the
     purchase price for which payment in cash or check is not made. The later of
     the dates on which such  notice and  payment  are  received  by the Company
     shall be the date of exercise of the Option; and

          (b)  within  five  days of the  giving  of the  written  notice to the
     Company described above, the funds to pay for exercise of the Option may be
     delivered to the Company a broker acting on behalf of the person exercising
     the Option either in connection with the sale of the Shares  underlying the
     Option or in connection  with the making of a margin loan to such person to
     enable payment of the exercise price of the Option.  The later of the dates
     on which such notice and payment are  received by the Company  shall be the
     date of exercise of the Option.  In connection with any such exercise,  the
     Company  will provide a copy of the notice of exercise of the Option to the
     aforesaid  broker  upon  receipt  by the  Company  of such  notice and will
     deliver to such broker,  within five  business days of the delivery of such
     notice to the Company,  a certificate or certificates  (as requested by the
     broker)  representing the number of Shares  underlying the Option that have
     been sold by such broker for the person exercising the Option.

               (iii) For purposes hereof,  the "Fair Market Value" of a Share as
          of a given date shall be (in order of applicability):  (a) the closing
          price of a Share on the  principal  exchange  on which the  Shares are
          then trading, if any, on the day immediately prior to such date, or if
          Shares were not traded on the day  previous to such date,  then on the
          next  preceding  trading day during which a sale  occurred;  or (b) if
          Shares  are not  traded on an  exchange  but are quoted on NASDAQ or a
          successor  quotation  system,  (1) the last sale  price (if Shares are
          then listed as a National  Market Issue under the NASD national Market
          System), or (2) if Shares are not then so listed, the mean between the
          closing  representative  bid and asked  prices  for  Shares on the day
          previous  to such  date  as  reported  by  NASDAQ  or  such  successor
          quotation  system;  or (c) if  Shares  are not  publicly  traded on an
          exchange and not quoted on NASDAQ or a successor quotation system, the
          mean between the closing bid and asked  prices for Shares,  on the day
          previous  to  such  date,   as   determined   in  good  faith  by  the
          Administrator;  and (d) if Shares are not  publicly  traded,  the fair
          market value established by the Administrator acting in good faith.

               (iv) Upon  exercise  of the  Option and the  satisfaction  of all
          conditions  thereto,  the  Company  shall  deliver  a  certificate  or
          certificates  for  Shares to the  specified  person or  persons at the
          specified  time upon  receipt of payment  for such Shares as set forth
          above.

     5. Termination of Employment.  If the Holder's  employment with the Company
ends on account of his death or permanent and total disability, the Option shall
automatically  become vested with respect to all Shares,  and the Option must be
exercised,  if at all,  within the one-year  period ending on the anniversary of
such death or permanent and total disability. In the


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case of death,  the Option  shall be  exercised  by the  Holder's  estate or the
person designated by the Holder by will, or as otherwise  designated by the laws
of descent and  distribution.  If the Holder's  employment with the Company ends
due to termination of his employment by the Company  "without cause" (as defined
in Section 8 of the Plan), the Option may and must be exercised, if at all, with
respect to any or all of the Vested Shares,  within one year of the date of such
termination.  In all other instances that the Holder ceases to be an employee of
the  Company,  the  Holder  shall  have no right  after his  employment  ends to
exercise  all or any part of this  Option  with  respect  to  either  Vested  or
Unvested  Shares.  For purposes  hereof,  "permanent  and total  disability"  is
defined in Section 8 of the Plan.

     6.  Transferability.  The Option and the  Holder's  rights  therein are not
transferable  by the Holder,  except upon the death of the Holder as provided in
Paragraph  5.  The  Option  is  exercisable  (subject  to any  other  applicable
restrictions  on exercise)  only by the Holder,  except when a guardian or other
legal  representative  has been duly  appointed for the Holder and except in the
event of the Holder's death as provided in Paragraph 5.

     7. Taxes. The Holder hereby agrees to pay to the Company any federal, state
or local  taxes  of any kind  that may be  required  by law to be  withheld  and
remitted by the Company with respect to the Option and the exercise thereof.  If
the Holder does not make such payment to the company, the Company, to the extent
required or permitted by law,  shall have the right to withhold from any payment
of any kind otherwise due to the Holder from the Company, any federal,  state or
local  taxes of any kind  required  by law to be  withheld  with  respect to the
Option or the Shares which are the subject of the Option. The Administrator,  in
its sole  discretion,  may  permit  the  Holder to pay such  taxes  through  the
withholding of Shares  otherwise  deliverable to the Holder upon exercise of the
Option or the delivery to the Company of Common Shares otherwise acquired by the
Holder.  The fair  market  value of Common  Shares  withheld  by the  Company or
tendered to the Company for the satisfaction of any tax withholding  obligations
determined to exist under this  Paragraph 8 shall be determined on the date such
Common Shares are withheld or tendered.

     8. Intent.  This Option is an incentive  stock option as defined in Section
422 of the Code.

     9.  Securities  Law  Compliance.  Notwithstanding  any  provision  of  this
Agreement to the contrary,  the Option shall not be exercisable  unless,  at the
time the Holder  attempts to exercise the Option,  in the opinion of counsel for
the Company,  all applicable  securities  laws,  rules and regulations have been
complied  with.  The  Holder  agrees  that the  Administrator  may  impose  such
restrictions  on  the  Shares  as are  deemed  advisable  by the  Administrator,
including,  without  limitation,  restrictions  relating  to  listing or trading
requirements.  The Holder  further  agrees that  certificates  representing  the
Shares may bear such  legends and  statements  as the  Administrator  shall deem
appropriate  or  advisable  to  assure,  among  other  things,  compliance  with
applicable securities laws, rules and regulations.

     10.  Rights of the Holder.  The Holder  shall have no  dividend,  voting or
other  rights of a  stockholder  with respect to the Shares which are subject to
the Option prior to the purchase of such Shares upon  exercise of the Option and
the execution and delivery of all other documents


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and instruments deemed necessary or desirable by the Company.

     11. Surrender of Outstanding Stock Options; Termination of Prior Agreement.
The Holder hereby voluntarily surrenders all outstanding stock options,  whether
vested or unvested,  granted under the Prior Agreement,  and the Company accepts
such surrender. The Prior Agreement is hereby terminated and of no further force
and  effect.  All shares and  options  and all  rights  granted  under the Prior
Agreement are hereby terminated and canceled.

     12.  Miscellaneous.  This  Agreement  shall be governed by and construed in
accordance  with  the  laws of the  State  of  Delaware,  except  to the  extent
otherwise  governed by Federal law.  All  capitalized  terms not defined  herein
shall have the meaning ascribed to them in the Plan.

     IN WITNESS  WHEREOF,  the parties have subscribed  their names hereto as of
the date first above written.

                                       FAC REALTY, INC., a Delaware corporation



                                       By: ___________________________________
                                                C. Cammack Morton


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