LOAN AGREEMENT                    Exhibit 10.40
                                     BETWEEN                   
                         CATHERINES STORES CORPORATION,
                                CATHERINES, INC.
                                       AND
                            NATIONAL BANK OF COMMERCE

         This is an Agreement between CATHERINES STORES CORPORATION, a Tennessee
corporation  ("Stores"),  and CATHERINES,  INC., a Delaware  corporation  ("CI")
(hereinafter  collectively  referred  to as  "Company"),  and  NATIONAL  BANK OF
COMMERCE,  One Commerce Square,  Memphis,  Tennessee 38150  (hereinafter  called
"Bank"), entered into as of the _____ day of ____________, 1998.

                                    RECITALS:

                                    ARTICLE I
                                   DEFINITIONS

         Section 1.1. The terms defined in this Section 1.1 (except as otherwise
expressly  provided  for  in  this  Agreement)  shall  apply  to all  terms  and
provisions of this Agreement:

(a)      Business  Day - shall mean the  business  day of Bank and, in the event
         any  provision of this  Agreement or any other  instrument or agreement
         evidencing  or securing  the Loan  requires  that action be taken on or
         before a particular date that falls on a day that is not a business day
         of Bank, the time for the taking of such action shall  automatically be
         postponed until the next following business day of Bank.

(b)      Current  Portion of  Long-Term  Debt - shall  mean that  portion of the
         Company's  total  long-term  debt that  matures or is payable  within a
         twelve-month period, or within the operating cycle if longer, including
         all amounts payable within such period on capital leases.

(c)       Debt Coverage  Ratio - shall mean the quotient  determined by dividing
          (i) the sum of Net Income (before the payment of income taxes) for the
          previous   twelve-month   period,  plus  depreciation,   amortization,
          interest  expense,  operating lease expenses,  the non-cash portion of
          Store Closing Expenses, which shall not exceed $1,925,000 for purposes
          of the  calculation,  and the non-cash  portion of  write-offs  by the
          Company   pursuant  to  FASB  121,   all  computed  for  the  previous
          twelve-month  period;  by (ii) the sum of Current Portion of Long-Term
          Debt, plus interest expense and operating lease expenses, all computed
          for the previous twelve-month period.

(d)      Inter-Company  Indebtedness - shall mean  Indebtedness of Stores or one
         or more of its  subsidiaries  that is owed  solely  to Stores or one or
         more other subsidiaries.

(e)      Loan - shall mean the term loan advanced to Company by Bank pursuant to
         Article II and the Note (defined below) executed by the Company.

(f)      Loan Documents - shall mean,  collectively,  this  Agreement,  together
         with the following documents:

                  (i) Promissory  Note of even date executed by Company and made
         payable  to  Bank  in  the  original  principal  amount  of  $6,919,000
         ("Note");

                  (ii)  Leasehold Deed of Trust of even date executed by Company
         for the benefit of Bank (the "Leasehold Deed of Trust");

                  (iii) Deed of Trust of even date  executed  by the  Industrial
         Development  Board  of the  City  of  Memphis  and  County  of  Shelby,
         Tennessee,  for the benefit of Bank  (collectively with the Leaseholder
         Deed of Trust, the "Deeds of Trust"); and

                  (iv) UCC-1 financing statements executed by Company and Bank.

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(g)      Net Income - shall mean for any  period,  the net income of Company for
         such  period  as  determined  in  accordance  with  generally  accepted
         accounting procedures.

     (h)  Obligation  or  Obligations - shall  include (1) all  indebtedness  of
          Company to Bank under this Agreement or any other Loan Document or any
          other  instrument or agreement  between  Company and Bank,  including,
          without  limitation,  the  indebtedness of Company under the Loan, (2)
          any  advance  under the Loan that may be in excess of the  limits  set
          forth in  Section  2.1  below  and the  interest  accrued  and  unpaid
          thereon,  (3) all liabilities of Company acquired by purchase by Bank,
          by  assignment  or  participation,  (4) all other  indebtedness  of or
          damages  against  Company,  however  arising,  whenever  arising,  and
          whether absolute or contingent,  due or to become due to Bank, and (5)
          all costs and  expenses  incurred by Bank or its agents in  connection
          with  this  Agreement  or any  other  Loan  Document  and all  related
          agreements  and documents  including  reasonable  attorneys'  fees and
          court costs incurred by Bank in obtaining legal advice  regarding this
          Agreement or any other Loan Document or in enforcing  payment  thereof
          or of any  indebtedness  of  Company  or to extend  Bank's  lien or to
          defend  any action or  proceeding  related  to this  Agreement  or any
          collateral,  including  any costs and  expenses of any  proceeding  in
          which Bank is involved with Company.

(i)      Store  Closing  Expenses - shall mean such expenses as set forth in the
         Company's  consolidated  financial  statements  delivered in accordance
         with Article V below.

(j)      Tangible Net Worth - shall mean total assets of Company as set forth on
         the balance  sheet of Company  prepared in  accordance  with  generally
         accepted accounting principles less (i) the Company's Total Liabilities
         and (ii) the net book  value of all  items of the  following  character
         which  are  included  in the  assets  of  Company:  (1)  goodwill,  (2)
         organizational  expense,  (3) research and  development  expenses,  (4)
         patents, trademarks, trade names, and copyrights, (5) deferred charges,
         (6) treasury stock, and (7) any other assets of an intangible nature.

(k)      Total  Liabilities - shall mean the aggregate amount of all obligations
         of the Company as shown on the balance sheet of the Company prepared in
         accordance with generally accepted accounting principles.

         Section 1.2 All accounting terms not specifically  defined herein shall
be  construed  in  accordance  with  generally  accepted  accounting  principles
consistently applied.

                                   ARTICLE II
                                   OBLIGATIONS

         Section  2.1  Subject to the terms and  provisions  of this  Agreement,
Company  desires to borrow  from Bank,  and Bank has agreed to extend  Company a
term loan in the  maximum  principal  amount not to exceed the lesser of (i) Six
Million Nine Hundred Nineteen  Thousand and No/100 Dollars  ($6,919,000.00),  or
(ii) an amount equal to eighty-five  percent (85%) of the appraised value of the
Premises, as defined in Article III.

         Section 2.2 All of Company's indebtedness to Bank under the Loan or any
other Loan Document related to the Loan or Note or otherwise under or related to
this Agreement and any and all expenses related thereto shall be due and payable
in full March 1, 2005 (the "Maturity Date").

         All unpaid principal,  accrued and unpaid interest and costs to be paid
by Company  under the Loan shall bear interest at the rate of seven and one-half
percent (7.5%) per annum. Payments of principal and interest based upon a twenty
(20) year  amortization  shall be due and payable  monthly  commencing  April 1,
1998, and on the first day of each calendar month  thereafter until the Maturity
Date, at which time all outstanding  principal and interest under the Loan shall
be due and payable in full, all as more particularly set forth in the Note. From
and after the  occurrence of any Event of Default,  all  Obligations  shall bear


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interest at the maximum rate permitted  under  applicable law. In no event shall
the rate of interest at any time exceed the maximum  effective  rate of interest
which Bank,  as a national  bank,  is permitted to contract for and charge under
applicable law in effect from time to time.

         Section 2.3 Company shall be permitted to prepay the Loan in whole upon
giving Bank not less than thirty (30) days' prior  written  irrevocable  notice,
together with payment of any applicable  prepayment  fee.  Company  acknowledges
that if the Note is prepaid  before the stated  Maturity Date and Bank is unable
to collect the  prepayment  fee, Bank may suffer damages from the loss of income
caused by its  inability  to obtain  the yield it would have  realized  from the
Note. If Company  elects to prepay it shall prepay the entire unpaid  balance of
the Loan with  accrued  interest  and all other sums due at such time,  together
with the following prepayment fee:

                  (i) If the Loan is prepaid at any time prior to March 1, 1999,
         the  prepayment  fee  shall be equal  to two  percent  (2%) of the then
         outstanding balance under the Loan; and

                  (ii) If the Loan is  prepaid  at any time  during  the  period
         commencing  March 1, 1999,  and prior to March 1, 2000,  the prepayment
         fee  shall be  equal to one and  one-half  percent  (1.5%)  of the then
         outstanding balance under the Loan.

                  (iii) If the Loan is  prepaid  at any time  during  the period
         commencing  March  1,  2000,  and  prior  to  the  Maturity  Date,  the
         prepayment  fee  shall  be  equal  to one  percent  (1%)  of  the  then
         outstanding balance under the Loan.

         The  prepayment fee shall be due and payable if the Loan is paid by any
means before the Maturity Date, or in the event of payment upon an  acceleration
hereunder.  If for any reason the  prepayment  fee is deemed  unenforceable,  in
whole or in part,  Bank may pursue any of the legal or equitable right or remedy
now or  hereafter  available  to Bank and shall be entitled to recover an amount
equal to the damages  incurred as a result of the  prepayment but in no event in
excess of the amount of the prepayment penalty.

         Section 2.4 Bank shall not be  obligated to advance the Loan unless all
of the following conditions are satisfied:

                  (i) All of the Loan Documents provided for herein or otherwise
         requested  by Bank to  evidence  and  secure  the Loan  must  have been
         executed and delivered to Bank.

                  (ii) If requested by Bank,  it shall have  received an opinion
         of Company's counsel in form and substance acceptable to Bank.

                  (iii)  All   representations   and  warranties  made  in  this
         Agreement,  in all  other  Loan  Documents,  and any  other  instrument
         executed in connection  herewith or therewith  shall have been true and
         correct as of the date made,  and as of the date of the  funding of the
         Loan.

                  (iv)  Company must not  otherwise  be in default  hereunder or
         under any  other  Loan  Document,  or under  any  other  instrument  or
         agreement now or hereafter existing between Company and Bank.

                  (v)  Unless  waived  in  writing  by  Bank,  Bank  shall  have
received:

                           (A) A paid  title  insurance  policy,  prepared  upon
         opinion of counsel  selected by Bank,  in form and content,  and with a
         company  acceptable to Bank,  insuring that the Loan Documents create a
         valid  first  lien in and upon  the  Premises,  free  and  clear of all
         defects and  encumbrances  except  such as Bank and its  counsel  shall
         approve,  and  containing  full  coverage  against  liens of mechanics,
         materialmen,  laborers and any other parties who might claim  statutory
         or common law liens, and no survey exceptions other than those approved
         by Bank  and  Bank's  counsel,  together  with any  other  endorsements
         required by Bank;

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<PAGE>



                           (B) Suitable policies or evidence of the insurance in
         accordance with applicable requirements of this Agreement and the Deeds
         of Trust;

                           (C)  Unless  waived  by  Bank,  a  boundary   survey,
         certified  by a surveyor  registered  as such in the state in which the
         Premises is located, to which is attached a certificate satisfactory to
         Bank dated within sixty (60) days of the date hereof and covering  such
         matters as Bank  shall  require,  including,  but not  limited  to, the
         location of all present and  proposed  improvements,  building  setback
         lines, right-of-ways,  easements and encroachments, and means of public
         ingress and egress;

                           (D)  Certification to the effect that a search of the
         public  records  disclosed  no  conditional  sales  contracts,  chattel
         mortgages, financing statements or title retention agreements filed and
         recorded in the real property records which affect the Premises;

                           (E)      An appraisal acceptable to Bank; and

                           (F) An environmental audit acceptable to Bank.

                                   ARTICLE III
                                   COLLATERAL

         Section 3.1 As further assurance of payment of the Obligations, Company
has  executed  and  caused the  execution  and  delivery  of the Deeds of Trust,
whereby  first  mortgage  liens are  granted  to Bank on the  leasehold  and fee
interests in that real property and improvements known municipally as 3742 Lamar
Avenue, Memphis,  Tennessee (the "Premises"),  as more particularly described in
the Deeds of Trust.

         Section 3.2 In order to further secure the payment of the  Obligations,
Company  hereby grants to Bank a security  interest and right of set off against
all of Company's presently owned or hereafter acquired monies,  items,  credits,
deposits  and  instruments  (including  certificates  of deposit)  presently  or
hereafter  in the  possession  of Bank.  By  maintaining  any such  accounts  or
property  at  Bank,  Company  acknowledges  that it  voluntarily  subjects  such
accounts or property to Bank's rights hereunder,  and agrees that Bank shall not
be liable for the dishonor of any instrument  resulting from Bank's  exercise of
its rights hereunder, provided, that such rights shall be exercised by Bank only
after an Event of Default has occurred.

                                   ARTICLE IV
                         REPRESENTATIONS AND WARRANTIES

         Section  4.1 The  Company  represents  and  warrants to the Bank (which
representations and warranties will survive the making of the Loan) that:

(a)      The Company is duly  organized,  validly  existing and in good standing
         with the Secretary of State under the laws of the respective  states of
         incorporation  and  is  authorized  to do  business  in  the  state  of
         Tennessee and any other state where the Company is doing business.

(b)      The Company has the full power,  authority,  and legal right to execute
         and deliver and to perform and observe the provisions of this Agreement
         and to borrow  hereunder  and in doing so it will not  violate any law,
         its Charter or bylaws or any other agreement or instrument binding upon
         it.  Company  has taken or caused to be taken all  necessary  action to
         authorize the execution, delivery and performance of this Agreement and
         all other Loan  Documents,  as applicable.  The Deeds of Trust grant to
         Bank a direct, valid,  enforceable and perfected first lien mortgage on
         the Premises and Company's leasehold estate therein.

(c)       The   consolidated   financial   statement  of  the  Company  and  all
          subsidiaries  for the fiscal  year  ended  February  1,  1997,  fairly
          reflects the financial  condition of the Company and  subsidiaries and
          the  results  of its  operation  as of the dates  and for the  periods
          stated. No material adverse changes have since occurred.

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(d)      The Company has no  liabilities,  direct or  contingent,  except  those
         disclosed in the certified financial statement above. Company is not in
         default  under any  indenture,  mortgage,  deed of trust,  agreement or
         other  instrument  to which it is a party or by which it may be  bound,
         which  default  would have a material  adverse  effect on the financial
         condition or business operation of Company and the execution hereof, or
         any  other  instrument  executed  in  connection   herewith,   nor  the
         consummation of the transactions herein and therein contemplated,  will
         violate any of the foregoing instruments to which Company is a party.

(e)      Company  has filed or caused to be filed all  federal,  state and local
         tax returns,  which are required to be filed, and has paid or caused to
         be paid  all  taxes  as  shown  on said  returns  or on any  assessment
         received by it, to the extent  that such taxes have become due,  except
         as otherwise permitted by the provisions hereof.

(f)      There is no civil or administrative  action,  suit or proceeding at law
         or  in  equity  or  by  or  before  any  court,  arbitrator,  civil  or
         administrative   governmental   instrumentality  or  other  agency  now
         pending,  or, to the  knowledge of the Company,  threatened  against or
         affecting the Company, which, if adversely determined,  would result in
         any  material  adverse  change in the  business,  or in the  condition,
         financial or otherwise,  of the Company.  The Company is not in default
         with respect to any order, writ, injunction,  judgment or decree of any
         court or of any governmental agency or department.

(g)       Except as  disclosed  to Bank in  writing,  all  prior,  existing  and
          current conduct of business and activities,  including but not limited
          to all conduct and activities related to the Premises, comply and have
          at all times complied with all applicable present and will comply with
          all future statutes,  regulations, rules, ordinances, codes, licenses,
          permits,  orders,  approvals,  plans,   authorizations,   concessions,
          franchises,   and  similar  terms,  of  all   governmental   agencies,
          departments, commissions, boards, bureaus, or instrumentalities of the
          United States,  or any states  wherein the Company does business,  and
          political   subdivisions   thereof   and  all   applicable   judicial,
          administrative,  and regulatory decrees,  judgments, and orders of all
          types   (all  of  which  are   hereinafter   referred   to  as  "Legal
          Requirements"),  including  specifically but without  limitation those
          relating to the protection of human health or the environment.

(h)      Neither  Company nor any  predecessor of Company has received notice or
         other  communication  concerning  any  alleged  violation  of any Legal
         Requirement  relating to protection of human health or the environment,
         and neither  Company nor any predecessor of Company has received notice
         or other  communication  concerning any alleged  violation of any other
         Legal  Requirement  that has not been corrected to the  satisfaction of
         the appropriate authority.

(i)      Neither  Company  nor any  predecessor  of  Company  has  engaged in or
         permitted any operations or activities for the purpose of or in any way
         involving  the  handling,   manufacture,   treatment,   storage,   use,
         generation,  release,  discharge,  refining, dumping, disposal, sale or
         distribution  of  any  Pollutant,   Contaminant,   Hazardous  Material,
         Hazardous  Substance,  or  Hazardous  Waste,  as those terms are or may
         become defined under any federal,  state or local statute,  regulation,
         rule or  ordinance  or  amendments  thereto in  violation of any of the
         foregoing.

                                    ARTICLE V
                                    COVENANTS

         Section 5.1 Until this Agreement has been terminated in writing and the
Obligations,  including all principal, interest and service fees, have been paid
in full,  and this Loan Agreement is terminated in a writing signed on behalf of
Bank and Company, the Company (at its expense) shall:

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(a)       Furnish  to Bank (i) within one  hundred  twenty  (120) days after the
          close  of  each  fiscal  year,  a copy of the  consolidated  financial
          statement of the Company and all subsidiaries,  audited by independent
          certified  public  accountants  of recognized  standing  acceptable to
          Bank,  such reports  shall be prepared in  accordance  with  generally
          accepted accounting principles  consistently applied and shall include
          Company's   balance   sheet,   statement   of  income,   statement  of
          stockholder's  equity, and statement of cash flows; (ii) within forty-
          five (45) days of the close of the first  three (3)  fiscal  quarters,
          quarterly financial statements in the form of Company's Form 10Q filed
          with the  Securities  and Exchange  Commission  for that quarter;  and
          (iii) such  additional  information  as the Bank from time to time may
          request.

(b)      Furnish to Bank copies of management letters from Company's independent
         certified public accountants when available.

(c)      Keep  insured the  Premises and all  buildings,  machinery,  equipment,
         furnishings,  inventory  and supplies  insured by  insurance  companies
         acceptable  to the Bank and in such amounts as the Bank may,  from time
         to time reasonably  require,  all as more particularly set forth in the
         Deeds of Trust.

(d)      Comply with all applicable statutes and government  regulations and pay
         all  taxes,  assessments,   governmental  charges,  claims  for  labor,
         supplies,  rent and other obligations which, if unpaid,  might become a
         lien against the Premises  except  liabilities  being contested in good
         faith and against  which,  if requested by Bank,  the Company will post
         bond or establish and maintain reserves satisfactory to Bank.

(e)       Maintain  the Premises  and all other  assets and  properties  in good
          operating condition.

(f)      Permit an  authorized  representative  of Bank to visit and  inspect at
         reasonable  times during regular  business hours any of its properties,
         collateral, including its books, and to make extracts therefrom, and to
         discuss its affairs, finances and accounts with its officers.

(g)      When  requested  by Bank in the  exercise of its  reasonable  judgment,
         furnish to Bank at the expense of the Company, a written  environmental
         audit  report or survey of the  Premises,  which audit report or survey
         shall be prepared by an  independent  licensed  consultant  approved in
         writing in advance by Bank;  provided,  the cost of same shall be borne
         by Bank in the event that said report shows no material  adverse change
         in the condition thereof.

(h)      When  requested  by Bank in the  exercise of its  reasonable  judgment,
         furnish to Bank at the expense of Company,  a written inspection report
         and/or a written appraisal report with respect to the Premises,  or any
         item  thereof,  which  report  or  appraisal  shall  be  prepared  by a
         qualified  independent  appraiser or consultant  approved in writing in
         advance by the Bank; provided,  the cost of same shall be borne by Bank
         in the event that said report shows no material adverse change in value
         thereof.

(i)      Upon discovery  promptly  notify Bank of the occurrence of any Event of
         Default  hereunder,  or of the filing of any suit or proceeding  before
         any court or  government  agency  against  Company  in which an adverse
         decision  could  have a material  adverse  effect  upon  Company or its
         business.

(j) Maintain and preserve its corporate existence in full force and effect.

         Section  5.2 While any  Obligation  remains  unpaid and until this Loan
Agreement  is  terminated  in a writing  signed  on behalf of Bank and  Company,
except with the prior  written  consent of the Bank,  the Company shall not, nor
shall it permit any subsidiary to:

(a)      Except for mergers or the  consolidation  of any  subsidiary of Company
         with any other subsidiary of Company, make or acquiesce in any material
         change in management,  nor permit any  reorganization,  sale of assets,
         liquidation or dissolution, merger, or agree to

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         any sale of stock by  shareholders or any other transfer or transaction
         which would  result in the change of  ownership  or  beneficial  voting
         control  (whether  directly  or  indirectly)  of more  than  forty-nine
         percent  (49%)  of  the  equity   securities  of  the  Company  or  any
         subsidiary.

(b)      Engage in,  directly or through  other  corporations  or entities,  any
         material business other than the business presently conducted.

(c)      Assume,  guarantee,  endorse or otherwise  become  directly liable with
         respect to any  obligation of any person,  firm,  corporation  or other
         entity other than Inter-Company Indebtedness.

(d)      Permit  Tangible Net Worth,  on a consolidated  basis,  to be less than
         $43,000,000  at the close of any fiscal  quarter.  For each fiscal year
         after December 31, 1998, the foregoing  tangible net worth  requirement
         will  increase by an amount equal to fifty  percent  (50%) of Company's
         Net Income for the previous fiscal year.

(e)      Permit the Debt Coverage  Ratio,  on a consolidated  basis,  to be less
         than 1.2:1 at the end of each fiscal year.

(f)      Incur, create,  assume become or be liable in any manner in respect of,
         or suffer to exist, any debt for borrowed money except:

                  (i)  indebtedness under this Agreement;

                  (ii)  indebtedness  presently  existing and listed on Schedule
5.2(1);

                  (iii)  indebtedness created by Bank;

                  (iv) indebtedness as incurred or assumed by the Company (A) in
         connection with any financing lease entered into after the closing date
         or (B) as to CI only,  to pay all or any part of the purchase  price of
         property  acquired  after the closing date,  not to exceed the purchase
         price of the property so acquired;  provided that except in the case of
         InterCompany  Indebtedness,  the outstanding  principal balances of the
         indebtedness  described in subsections  5.2(f)(iv) and (v) shall not at
         any time exceed the sum of $10,000,000;

                  (v)  indebtedness  incurred by Stores and CI after the closing
         date (A)  under  unsecured  lines of  credit  with  any  person,  firm,
         company,  or other  entity and (B) under  demand  and other  short-term
         promissory  notes  payable to or to the order of any  person;  provided
         that except in the case of Inter-Company Indebtedness,  the outstanding
         principal  balances  of  the  indebtedness   described  in  subsections
         5.2(f)(iv) and (v) shall not at any time exceed the sum of $10,000,000;

                  (vi) Inter-Company Indebtedness, including without limitation,
         (A) Inter-Company  Indebtedness incurred by Stores or any subsidiary of
         Company  under  an  unsecured  loan  or  advance  from  Stores  or  any
         subsidiary  of Company,  which loan or advance is used by the borrowing
         entity  to  purchase  inventory  from  Stores  or is used by  Stores to
         purchase  inventory  from any  person or entity  and (B)  Inter-Company
         Indebtedness created by the purchase,  sale, lease, license or exchange
         of property or the rendering of any service by Stores or any subsidiary
         of Company to Stores or any subsidiary of Company; and

                  (vii) any sale and leaseback transaction.

(g)      Create  or suffer  to be  created  or to exist  upon its  property  any
         mortgage,  lien,  charge,  security interest or encumbrance of any kind
         except:

                  (i)  liens permitted under this Agreement;


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                  (ii) liens presently existing and listed on Schedule 5.2(2);

                  (iii)  liens created by Bank;

                  (iv)   liens  for   taxes,   assessments,   charges  or  other
         governmental levies not yet due or as to which the period of grace (not
         to exceed 60 days),  if any,  related  thereto has not expired or which
         are being  contested in good faith and by appropriate  proceedings,  so
         long as adequate  reserves with respect  thereto are  maintained on the
         books of Stores or any subsidiary in accordance with generally accepted
         accounting principles;

                  (v)   carriers',   warehousemen's,   mechanics',   landlord's,
         materialmen's,  repairmen's or other like liens arising in the ordinary
         course of business  (A) which are not overdue for a period of more than
         60  days  or (B)  which  are  being  contested  in  good  faith  and by
         appropriate proceedings;

                  (vi)  pledges  or  deposits  in  connection   with   workmen's
         compensation,   unemployment   insurance  and  other  social   security
         legislation,  or to secure the  performance  of statutory  obligations,
         appeal or similar  bonds,  leases  and trade  contracts  (exclusive  of
         obligations for the payment of borrowed money);

                  (vii) liens  securing  indebtedness  permitted  by  subsection
         5.2(f)(iv), provided that any such lien shall be confined solely to the
         item  or  items  of  property   acquired  with  the  proceeds  of  such
         indebtedness  or  which  is or are the  subject  of a  financing  lease
         permitted by said section;

                  (viii) liens on property of the Company created solely for the
         purpose of securing  indebtedness  permitted by subsection  5.2(f)(iv),
         incurred  to finance  or  refinance  the  purchase  price of  property;
         provided that no such lien shall extend to or cover the property  other
         than the respective  property so acquired,  and the principal amount of
         indebtedness  secured  by any such  lien  shall at no time  exceed  the
         original purchase price of such property;

                  (ix)  rights  of  setoff  in  favor of  banks  arising  in the
         ordinary course of business;

                  (x) any lien  constituting  a renewal or  continuation  of any
         lien permitted by this subsection  5.2(g), but only in the case of each
         such renewal or  continuation,  to the extent that the principal amount
         of  indebtedness  secured by such lien does not  exceed  the  principal
         amount of such  indebtedness  so secured at the time of the  renewal or
         continuation,  and that  such lien is  limited  to all or a part of the
         property that secured the lien renewed or continued; and

                  (xi) other liens  incidental to the conduct of its business or
         the ownership of the property which are not incurred in connection with
         borrower  money and which do not in the  aggregate  materially  detract
         from the value of its property or materially  impair the use thereof in
         the  operation of its business and which,  in any event,  do not secure
         obligations in excess of $75,000.

(h)      As to  Stores,  disburse  or  distribute  as  dividends  nor  expend or
         exchange in  redemption  or  purchase of its capital  stock any cash or
         property (except its own capital stock) on an annual basis in excess of
         ten percent (10%) of Company's Net Profit.

(i)      Sell or  otherwise  dispose  of any  substantial  part  of its  assets,
         capital  stock or properties  or transfer  directly or  indirectly  any
         interest in the Premises.

(j)       Cause,  permit or suffer the  existence or the  commission by Company,
          its agents,  employees,  contractors,  tenants, or invitees, or by any
          other person of a violation of any Legal Requirement related to any of
          Company's  conduct or activities  which results in a material  adverse
          change in the business, or condition,  financial or otherwise,  of the
          Company.

                                        8

<PAGE>



       

(k)       Cause,  permit,  or  suffer  any  Pollutant,  Contaminant,   Hazardous
          Material,  Hazardous Substance, or Hazardous Waste, as those terms are
          or may  become  defined  under any  federal,  state or local  statute,
          regulation,  rule or ordinance or  amendments  thereto,  to be brought
          upon,  treated,  kept,  stored  disposed  of,  discharged,   released,
          produced,  manufactured,  generated,  refined,  used upon,  or sold or
          distributed  on or from any of its  premises or through the conduct or
          activities of Company, its agents,  employees,  contractors,  tenants,
          invitees,  or  any  other  person  related  to  Company's  conduct  or
          activities  without (i) notice to Bank,  and (ii)  complying  with all
          such  federal,  state or local  statutes,  regulations,  rules  and/or
          ordinances.

                                   ARTICLE VI
                           EVENTS OF DEFAULT; REMEDIES

         Section 6.1 If any one or more of the following  events  (herein called
Events of Default) shall occur and be continuing:

(a)       Default  in  payment  of any of the  Obligations  when the same  shall
          become due and payable; or

(b)      Default in due observance or performance of any covenant, agreement, or
         provision of this Agreement or any material  agreement(s)  by which the
         Company is or shall be bound, including, without limitation,  either of
         the Deeds of Trust and each and every  other  Loan  Document,  and such
         default  continues for ten (10) days, or any Loan Document shall at any
         time cease to be in full force and effect or  declared  void or Company
         shall deny any further liability hereunder or thereunder; or

(c)      Any representation or warranty  heretofore or hereafter made in writing
         by or on behalf of Company herein or in either of the Deeds of Trust or
         any other Loan Document or otherwise in connection  with this Agreement
         or any Loan Document shall prove to have been false or incorrect in any
         material respect on the date on or as of when made; or

(d)      Failure to pay when due and before the  expiration  of any grace period
         any other indebtedness of $50,000 or more which Company is obligated to
         pay in any capacity to any person or entity,  whether such indebtedness
         shall have become due because of acceleration of maturity or otherwise,
         including  but not  limited  to  failure to pay when due and before the
         expiration  of  any  grace  period  the  Obligations  created  by  this
         Agreement; or

(e)      Company shall:

                  (i)  admit in writing its inability to pay its debts as they
         become due; or

                  (ii) file a petition in bankruptcy or for reorganization under
         the Bankruptcy Act, or file a pleading asking such relief under similar
         state laws,  or have or suffer to be filed an  involuntary  petition in
         bankruptcy against Company which is not contested and discharged within
         sixty (60) days; or

                  (iii)  make an  assignment  for the  benefit of  creditors  or
         become voluntarily or involuntarily dissolved or become insolvent; or

                  (iv) consent to the  appointment  of a trustee or receiver for
         all or a major portion of its property; or

                  (v) be finally  adjudicated  a debtor or  insolvent  under any
federal or state law; or


                                        9

<PAGE>



                  (vi)  become  subject to a court  order  under any  federal or
         state law  appointing  a receiver or trustee for all or a major part of
         its property or ordering the winding up or  liquidation of its affairs,
         or  approving a petition  filed  against it under the  Bankruptcy  Act,
         which order, shall not be vacated,  denied, set aside, or stayed within
         sixty (60) days from the date of entry; or

                  (vii)  become  subject to a final  judgment for the payment of
         money and the same shall not be  discharged  or provision  made for its
         discharge within forty-five (45) days from the date of entry thereof or
         an appeal or other appropriate  proceeding for review thereof shall not
         be taken within said period and a stay of execution pending such appeal
         shall not be obtained; or

                  (viii)  become  subject to a writ or warrant of  attachment or
         any similar  process issued by any court against all or any substantial
         portion of its property and such writ or warrant of  attachment  or any
         similar process in not stayed or is not released within forty-five (45)
         days after its entry or levy or after any stay is vacated or set aside;

                  (ix)  become  subject  to a tax lien or  judgment  lien on the
         Premises,  or in the  event  of a levy  against  Premises,  or any part
         thereof of any execution, attachment, sequestration or other writ; or

(g)      The sale or other  voluntary  or  involuntary  transfer  of any  equity
         interest in Company  that  results in the change of ownership or direct
         or indirect voting control of more than forty-nine percent (49%) of the
         equity interest of CI;

then and in such event (unless all defaults shall theretofore have been remedied
or waived in writing), without demand, presentment, or other notice of any kind,
all of which are hereby expressly waived,  Bank may, in its discretion,  declare
the unpaid  principal under the Loan, or, with respect to any event specified in
(i)-(vi) of subparagraph (f) above, the unpaid principal  balance under the Loan
shall be,  together  with all  unpaid  interest,  penalties  and  service  fees,
immediately  due and  payable  in  full.  An Event of  Default  hereunder  shall
constitute a default under each and every other Loan Document.

         Section  6.2 If one or more  Events of Default  shall  occur,  Bank may
proceed  to  protect  and  enforce  all  rights  hereunder  by  any  appropriate
proceeding,  whether for  specific  performance  of any  covenant  or  agreement
contained in this  Agreement,  or in aid of the exercise of any power granted in
this  Agreement,  or may  proceed to enforce  the  payment of  Obligation  or to
enforce any other  legal or  equitable  right  under any other Loan  Document or
otherwise available to Bank.

         Section 6.3 All rights,  remedies, or powers hereby conferred upon Bank
shall be deemed cumulative and not exclusive of any other rights,  remedies,  or
powers  available  at law or in  equity.  No delay in  exercising  or failure or
omission to exercise  any right,  remedy,  or power shall impair any such right,
remedy, or power or shall be construed to be a waiver of any Event of Default or
any acquiescence therein. Any such right, remedy, or power may be exercised from
time to time,  independently  or  concurrently,  and as often as shall be deemed
expedient.  No waiver of any Event of  Default  shall  extend to any  subsequent
Event of Default.  No single or partial exercise of any right,  remedy, or power
shall preclude other or further exercise thereof.

         Section 6.4 Company covenants that if default is made in any payment of
principal  or interest on any  Obligation,  it will pay such  further  amount as
shall be  sufficient  to cover the costs and  expense of  collection,  including
reasonable  attorneys' fees and costs of court. This Agreement and the books and
records of Bank shall  constitute  prima  facie  evidence  of all  matters  with
respect to the Loan and amounts due hereunder.


                                       10

<PAGE>



                                   ARTICLE VII
                        FURTHER AGREEMENTS AND COVENANTS

         Section 7.1 Notices  shall be deemed to have been  properly  given when
hand delivered or deposited in the United States mail,  registered or certified,
first class postage  prepaid  whether or not the same is actually  received,  if
addressed to:

         The Company:               Catherines Stores Corporation
                                    Catherines, Inc.
                                    3742 Lamar Avenue
                                    Memphis, TN  38118
                                    Attention: David C. Forell

         With a copy to:            Waring Cox, PLC
                                    50 North Front Street, 13th Floor
                                    Memphis, TN 38103
                                    Attention: Samuel D. Chafetz, Esq.

         The Bank:                  National Bank of Commerce
                                    Metropolitan Banking
                                    One Commerce Square, Second Floor
                                    Memphis, TN 38150
                                    Attention: Lynn Carson

         With a copy to:            Burch, Porter & Johnson, PLLC
                                    50 North Front Street, Suite 800
                                    Memphis, TN 38103
                                    Attention: LeeAnne M. Cox, Esq.

or directed to such address as either party may direct by a written  notice sent
in accordance with this Section.

         Section 7.2 All covenants and  agreements  contained in this  Agreement
and in any  agreement  or  instrument  evidencing  or securing the Loan shall be
binding  upon and inure to the benefit of the parties and their  successors  and
assigns,  provided,  Company  may not assign  this  Agreement  without the prior
written consent of Bank.

         Section 7.3 This  Agreement  shall be deemed a contract  made under the
laws of  Tennessee,  except with  regard to interest  which shall be governed by
Federal law in effect from time to time. Anything in this Agreement or any other
instrument  or  agreement  evidencing  or  securing  the  Loan  to the  contrary
notwithstanding,  it is  understood  and agreed by the parties  that, if for any
reason  interest  paid or  contracted  to be paid by  Company  on the Loan shall
exceed the maximum amount  permitted by applicable law, all amounts which exceed
the maximum amount permitted by such law shall be credited on interest  accrued,
or principal,  or both,  at the time of payment so that such interest  shall not
exceed the maximum amount permitted from time to time by applicable law.

         Section  7.4  Both  Company  and  Bank  each  knowingly,   voluntarily,
irrevocably  and  without  coercion,  waive  all  rights to trial by jury of all
disputes  between  them.  Neither  Bank  nor  Company  shall be  deemed  to have
relinquished  this  waiver of jury  trial  unless the party  claiming  that this
waiver has been relinquished  produces a written  instrument signed by the other
party stating that this waiver has in fact been relinquished.

         Section  7.5 The  parties  agree  that the sole  proper  venue  for the
determination of any litigation commenced by the Company against the Bank on any
basis shall be in a court of competent  jurisdiction  which is located in Shelby
County,  Tennessee and the parties hereby expressly declare that any other venue
shall be improper and the Company  expressly waives any right to a determination
of any such  litigation  by  Company  against  the Bank by a court in any  other
venue. Company further agrees that service of process by any judicial officer or


                                       11

<PAGE>


by  registered or certified  U.S.  Mail, as specified in Section 7.1 on Notices,
shall establish  personal  jurisdiction  over the Company and Company waives any
rights under the laws of any state to object to jurisdiction within the State of
Tennessee. Company acknowledges that this Agreement was negotiated, executed and
delivered  in the State of  Tennessee  and shall be governed  and  construed  in
accordance with the laws thereof.  Provided,  however, nothing contained in this
Section 7.5 shall prevent Bank from bringing any action or exercising any rights
against any security or against  Company or any  guarantor  personally,  and any
property of either,  within any other  state.  Initiating  such  proceedings  or
taking such action in any other state shall in no event  constitute  a waiver of
the  agreement  contained  herein that the laws of the State of Tennessee  shall
govern the rights  and  obligations  of  Company  and Bank  hereunder  or of the
submission herein made by Company to personal  jurisdiction  within the State of
Tennessee. The aforesaid means of obtaining personal jurisdiction and perfecting
service of process are not intended to be exclusive,  but are  cumulative and in
addition to all other means of obtaining  personal  jurisdiction  and perfecting
service  of  process  now or  hereafter  provided  by the  laws of the  State of
Tennessee.

         Section  7.6 The  provisions  of this  Agreement  shall  be  considered
severable, and should any one or more provisions hereof be stricken or otherwise
determined to be  unenforceable  for any reason,  then the remaining  provisions
shall continue in full force and effect and shall be enforced in accordance with
their terms.

         Section 7.7 This  Agreement  may be executed in multiple  counterparts,
all of which together shall constitute one and the same instrument.

         Section  7.8  All  conditions  of  the   obligations  of  either  party
hereunder,  including  the  obligation  of Bank to advance  the Loan are imposed
solely and exclusively for the benefit of the other party and Bank's  successors
and assigns and any  permitted  assigns of  Company.  No other  person or entity
shall have  standing to require  satisfaction  of such  conditions in accordance
with their  terms or, with  respect to Company,  be entitled to assume that Bank
will refuse to advance the Loan in the absence of strict  compliance with any or
all thereof,  and no other person or entity shall, under any  circumstances,  be
deemed  to be a  beneficiary  of such  conditions,  any and all of which  may be
freely  waived  in  whole  or in  part  by the  respective  party  to  whom  the
performance  of  any  such  condition  shall  run  at any  time  if in the  sole
discretion of such party it deems it desirable to do so.

         Section 7.9 Bank is not the agent or  representative  of  Company,  and
Company  is not the  agent  or  representative  of  Bank,  and  nothing  in this
Agreement  shall be construed to make Bank liable to anyone for goods  delivered
to or services  performed  with  respect to the  Premises or for debts or claims
accruing  against  Company.  Nothing  herein nor the acts of the parties  hereto
shall be construed to create a  partnership  or joint  venture  between Bank and
Company, or any other relationship except as debtor and creditor.

         Section 7.10 Neither this  Agreement  nor any  provision  hereof may be
changed,  waived,  discharged or terminated orally, but only by an instrument in
writing  signed by the party  against whom  enforcement  of the change,  waiver,
discharge or termination is sought.

         Section 7.11 Whenever the singular or plural number,  or the masculine,
feminine or neuter gender is used herein,  it shall  equally  include the other.
All references to "Company"  shall be deemed to refer to  Catherines,  Inc., and
Catherines  Stores  Corporation  both in the  conjunctive and in the disjunctive
whenever the context permits. All obligations under this agreement and all other
Loan Documents shall be the joint and several obligations of said entities.

         IN WITNESS WHEREOF,  the parties have executed this agreement as of the
day and year first above written.

                                    CATHERINE STORES CORPORATION

                                    By:
                                    Title:

                                       12

<PAGE>




                                    CATHERINES, INC.

                                    By:
                                    Title:


                                    NATIONAL BANK OF COMMERCE

                                    By:                                       
                                    Title:











































                                                        13

<PAGE>



                                 Schedule 5.2(1)

                              EXISTING INDEBTEDNESS

1.       Master  Equipment Lease  Agreement dated March 15, 1991,  between Sanwa
         Business  Credit  Corporation  and  Catherines,   Inc.,  together  with
         Amendments 1 through 5 thereto.

2.       Master Lease  Agreement  No. 092893 dated  September 28, 1993,  between
         Econocom- USA, Inc., and Catherines, Inc.

3.       Equipment Lease Agreement dated December 31, 1993, by and between First
         American National Bank and Catherines, Inc.

4.       Promissory Notes with an outstanding  principal balance of $7,500.65 as
         of February _____, 1998, relating to Virginia Speciality Stores, Inc.'s
         Chapter 11 Reorganization.

5.       Fixed Rate Term Loan with the  National  Bank of Commerce  with a fixed
         7.5% interest rate to Catherines  Stores  Corporation  and  Catherines,
         Inc., in the principal  amount equal to the lesser of  $6,919,000.00 or
         85% of the  appraised  value of the real  estate  located at 3742 Lamar
         Avenue,  Memphis,  Tennessee,  titled  in the  name  of the  Industrial
         Development Board and leased to Catherines.

6.       Indebtedness  under the Loans as defined in that  certain  Amended  and
         Restated  Credit  Agreement  dated  February 27,  1998,  by and between
         Catherines,   Inc.,   Catherines  Stores  Corporation,   Catherines  of
         Pennsylvania,   Inc.,   Catherines  of  California,   Inc.,  Catherines
         Partners,  L.P., and First American  National Bank, as Agent,  Hibernia
         National Bank and Bank One, N.A.

7.       Security  interest in various  credit card  accounts  with Hurley State
         Bank and Catherines,  Inc.,  pursuant to a (i) Purchase Agreement dated
         October 1, 1992,  between  Catherines,  Inc., and Hurley State Bank and
         (ii) Purchase  Agreement dated December 15, 1990,  between  Catherines,
         Inc. (as successor to Virginia  Specialty Stores,  Inc., by merger) and
         Hurley State Bank.


<PAGE>


                                 Schedule 5.2(2)

                                 Permitted Liens

1.       National Bank of Commerce
         One Commerce Square
         Memphis, TN  38103

         Deed of Trust, Security Agreement and Fixture Filing dated February 27,
         1998,  and  Leasehold  Deed of Trust,  Security  Agreement  and Fixture
         Filing dated February 27, 1998,  securing a Term Loan with the National
         Bank of Commerce with a fixed 7.5%  interest rate to Catherines  Stores
         Corporation and Catherines,  Inc., in the principal amount equal to the
         lesser of $6,919,000  or 85% of the appraised  value of the real estate
         located at 3742 Lamar Avenue, Memphis, Tennessee, titled in the name of
         the Industrial Development Board and leased to Catherines, Inc.

2.       Liens related to indebtedness described in Schedule 5.2(1).

3.       Security Interest in all surveillance and related equipment provided by
         Sensormatic Electronics Corp. to Catherines, Inc., and Catherine Stores
         Corporation  whether  now  owned  or  leased  by and  from  Sensormatic
         Electronics Corp.

4.       Security interest in the favor of Koury Corporation by Catherine Stores
         Corporation  on  all  furnishings,   equipment,   fixtures,  inventory,
         accounts  receivable and other personal  property of any kind belonging
         to Catherine  Stores  Corporation at a certain  premises in Greensboro,
         North Carolina.


<PAGE>