SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q


[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities  Exchange
Act of 1934

For the quarterly period ended May 1, 1999 or

[  ]  Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from         to
                              --------    ----------

                         Commission File No. 000-19372


                         CATHERINES STORES CORPORATION
             (exact name of registrant as specified in its charter)

         Tennessee                                   62-1350411
(State or other jurisdiction of               (IRS Employer Identification No.)
incorporation or organization)

                  3742 Lamar Avenue, Memphis, Tennessee, 38118
                    (Address of principal executive offices)

       Registrant's telephone number, including area code (901) 363-3900


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required to file such reports).

                                    Yes X No

Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.

         As of June 2, 1999 there were  7,022,806  shares of  Catherines  Stores
Corporation common stock outstanding.





<PAGE>



                          CATHERINES STORES CORPORATION

                                    FORM 10-Q

                                   May 1, 1999

                                Table of Contents


         PART 1 -          FINANCIAL INFORMATION

                           Consolidated Statements of Income

                           Consolidated Balance Sheets


                           Consolidated Statements of Cash Flows

                           Notes to Consolidated Financial Statements

                           Management's Discussion and Analysis of
                           Financial Condition and Results
                           of Operations

         PART 2 -          OTHER INFORMATION








<PAGE>

PART 1 - FINANCIAL INFORMATION

CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME


                                                          Thirteen weeks ended
                                                      May 1, 1999    May 2, 1998
                                                      -----------    -----------

Net sales                                             $80,299,728    $76,452,394

Cost of sales, including buying
 and occupancy costs                                   53,279,423     51,109,138
                                                      -----------    -----------

Gross margin                                           27,020,305     25,343,256

Selling, general and administrative expenses           20,718,058     20,431,048

Amortization of intangible assets                         253,191        254,308
                                                      -----------    -----------

Operating income before store closing costs             6,049,056      4,657,900

Write-down of store assets and store
 closing costs                                            206,756        188,657
                                                      -----------    -----------

Operating income                                        5,842,300      4,469,243

Interest and other, net                                   103,371        279,648
                                                      -----------    -----------

Income before income taxes                              5,738,929      4,189,595

Provision for income taxes                              2,292,000      1,718,000
                                                      -----------    -----------

Net income                                            $ 3,446,929    $ 2,471,595
                                                      ===========    ===========


Net income per common share                           $      0.49    $      0.34
                                                      ===========    ===========

Net income per common share, assuming dilution        $      0.48    $      0.34
                                                      ===========    ===========



The  accompanying  notes are an integral  part of these  consolidated  financial
statements.




<PAGE>


CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                           May 1,        January 30,
                                                                                           1999             1999
                                                                                           ------        -----------


<S>                                                                                <C>                 <C>

A S S E T S
Current Assets:
Cash and cash equivalents                                                           $  11,239,091     $  11,561,223
Receivables                                                                             5,073,552         2,457,333
Merchandise inventory                                                                  54,341,816        50,355,267
Prepaid expenses and other                                                              4,696,153         3,398,562
Deferred income taxes                                                                   4,203,000         4,203,000
                                                                                      -------------     ------------
Total current assets                                                                   79,553,612        71,975,385
                                                                                      -------------     ------------

Property and Equipment, at cost:
 Land                                                                                     500,000           500,000
 Buildings and leasehold improvements                                                  25,952,174        25,751,524
 Fixtures and equipment                                                                32,899,561        31,910,633
 Equipment under capital leases                                                        14,304,145        13,588,016
 Improvements in process                                                                2,303,612         2,644,496
                                                                                      -------------     ------------
                                                                                        75,959,492       74,394,669
Less accumulated depreciation and amortization                                         (41,250,750)     (39,410,261)
                                                                                      -------------     -------------
                                                                                        34,708,742       34,984,408
                                                                                      -------------     -------------
Other Assets and Deferred Charges, less
 accumulated amortization of $2,078,944
 and $1,997,082                                                                         2,069,808         2,290,022
Goodwill, less accumulated amortization of
 $5,667,927 and $5,534,646                                                             21,566,592        21,871,164
                                                                                      -------------     ------------
                                                                                     $ 137,898,754    $ 131,120,979
                                                                                      =============     ============

L I  A  B  I  L  I  T I E S  A N D   S T O C K H O L D E R S '  E Q U I T Y
Current Liabilities:
Accounts payable                                                                    $  27,296,860     $  22,310,110
Accrued expenses                                                                       20,319,484        19,347,208
Current maturities of long-term bank
 and other debt                                                                         1,695,319         1,816,119
                                                                                       -----------       -----------
Total current liabilities                                                              49,311,663        43,473,437
                                                                                       -----------       -----------

Long-Term Bank and Other Debt, less
 current maturities                                                                     9,274,277         9,517,067
Deferred Income Taxes                                                                     378,000           378,000
Stockholders' Equity:
Preferred stock, $.01 par value, 1,000,000
 shares authorized, none issued and outstanding                                              --                --
Common stock, $.01 par value, 50,000,000
 shares authorized, 6,999,743 and 7,279,949
 shares issued and outstanding                                                             69,998            72,800
Additional paid-in capital                                                             44,263,399        46,525,187
Retained earnings                                                                      34,601,417        31,154,488
                                                                                      ------------      ------------
Total stockholders' equity                                                             78,934,814        77,752,475
                                                                                      ------------      ------------
                                                                                    $ 137,898,754     $ 131,120,979
                                                                                      ============      ============

</TABLE>


The  accompanying  notes  are an  integral  part of these  consolidated  balance
sheets.


<PAGE>


CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>


                                                                                                     Thirteen weeks ended

                                                                                            May 1, 1999                May 2, 1998
                                                                                            -----------                -----------

<S>                                                                                        <C>                         <C>
Cash Flows from Operating Activities:
Net income                                                                                 $  3,446,929                $  2,471,595
                                                                                           ------------                ------------
Adjustments to reconcile net income to
 net cash provided by operating activities--
  Depreciation and amortization                                                               2,318,901                   2,191,213
  Change in reserve for store closing costs                                                      (1,300)                    148,211
  Write-down of underperforming and
   closed store assets                                                                          206,756                        --
  Net change in current assets and liabilities                                               (2,821,416)                 (1,412,788)
  Change in other noncash reserves                                                              881,383                     962,785
  Change in other assets                                                                        138,354                    (108,156)
                                                                                           ------------                ------------
Total adjustments                                                                               722,678                   1,781,265
                                                                                           ------------                ------------

Net cash provided by operating activities                                                     4,169,607                   4,252,860
                                                                                           ------------                ------------

Cash Flows from Investing Activities:
Capital expenditures                                                                         (1,695,427)                 (1,299,029)
                                                                                           ------------                ------------

Net cash used in investing activities                                                        (1,695,427)                 (1,299,029)
                                                                                           ------------                ------------

Cash Flows from Financing Activities:
Sales of common stock                                                                            29,364                      35,514
Repurchases of common stock                                                                  (2,293,954)                       --
Proceeds from long-term bank and other debt                                                        --                     6,919,000
Principal payments of long-term bank and
 other debt                                                                                    (531,722)                 (8,532,489)
                                                                                           ------------                ------------

Net cash used in financing activities                                                        (2,796,312)                 (1,577,975)
                                                                                           ------------                ------------

Net (Decrease) Increase in Cash and
 Cash Equivalents                                                                              (322,132)                  1,375,856
Cash and Cash Equivalents,
 beginning of period                                                                         11,561,223                   3,089,290
                                                                                           ------------                ------------

Cash and Cash Equivalents,
 end of period                                                                             $ 11,239,091                $  4,465,146
                                                                                           ============                ============
</TABLE>


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



<PAGE>


CATHERINES STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) General

     In the  opinion of  management,  the  accompanying  unaudited  consolidated
financial  statements  contain all adjustments  (consisting of normal  recurring
adjustments)  which  management   considers  necessary  to  present  fairly  the
consolidated  financial position of Catherines Stores Corporation ("Stores") and
its  wholly  owned  subsidiaries  as of May 1,  1999  and  May 2,  1998  and the
consolidated  results of their  operations and their cash flows for the thirteen
weeks  ended  May 1,  1999 and May 2,  1998.  Stores  and its  subsidiaries  are
collectively  referred to as the  "Company".  The results of operations  for the
thirteen week periods may not be indicative of the results for the entire year.

     These statements  should be read in conjunction with the Company's  audited
financial statements and related notes which have been incorporated by reference
in the  Company's  Form 10-K for the year ended  January 30, 1999.  Accordingly,
significant  accounting  policies and other  disclosures  necessary for complete
financial statements in conformity with generally accepted accounting principles
have been  omitted  since  such items are  reflected  in the  Company's  audited
financial statements and related notes thereto.

     Certain  prior  year  balances  have been  reclassified  to  conform to the
current year presentation.

     The  preparation  of financial  statements  in  conformity  with  generally
accepted accounting principles requires management to make certain estimates and
assumptions  that affect the  reported  amounts of assets and  liabilities,  and
disclosure of contingent  assets and  liabilities,  at the date of the financial
statements,  and the  reported  amounts  of  revenues  and  expenses  during the
reporting period. Actual results could differ from those estimates.

(2)       Accounts Receivable

     The Company sells accounts receivable generated from its proprietary credit
card to a third-party  provider,  without  recourse.  Under the  agreement,  the
Company sells its  receivables  from in-house  credit sales on a daily basis. In
April 1999,  the agreement  was extended to January  2005. In addition,  certain
terms of the agreement were favorably  amended.  Also, as an incentive to extend
the agreement,  the  third-party  provider agreed to pay the Company an up-front
cash  payment.   This  amount  was  included  in  accounts   receivable  in  the
accompanying  balance sheet as of May 1, 1999 and will be amortized  into income
evenly over the life of the new agreement.


<PAGE>

(3) Statements of Cash Flows

     The changes in current assets and  liabilities  reflected in the statements
of cash flows were as follows:


                                                        Thirteen Weeks Ended
                                                     May 1,            May 2,
                                                     1999               1998
                                                     ------            ------
Increase (decrease) in cash and
 cash equivalents-
  Receivables                                    $(2,580,918)       $  (879,239)
  Merchandise inventory                           (4,750,233)        (4,687,575)
  Prepaid expenses and other                      (1,297,591)          (513,702)
  Accounts payable                                 4,986,750          2,640,335
  Accrued expenses                                   820,576          2,027,393
                                                 -----------        -----------
    Total                                        $(2,821,416)       $(1,412,788)
                                                 ===========        ===========

     Interest  paid during the thirteen  weeks ended May 1, 1999 and May 2, 1998
was approximately $213,000 and $295,000,  respectively.  Interest expense is net
of interest income of approximately  $123,000 and $15,000 for the first quarters
of fiscal 1999 and 1998,  respectively.  Income  taxes paid during the  thirteen
weeks  ended  May 1,  1999 and May 2, 1998  were  approximately  $1,488,000  and
$463,000, respectively.

 (4) Accrued Expenses

     Accrued expenses consisted of the following:

                                                       May 1,        January 30,
                                                       1999             1999
                                                      -------         ----------

Payroll and related benefits                       $ 3,346,776       $ 5,012,439
Taxes other than income taxes                        2,216,970         1,761,964
Rent and other related costs                         2,430,622         2,427,805
Deferred revenues                                    2,377,613         1,556,298
Reserve for customer awards                          1,521,417         1,513,900
Reserve for store closing costs                      1,109,045         1,110,345
Income taxes                                         1,774,877         1,000,333
Other                                                5,542,164         4,964,124
                                                   -----------       -----------
  Total                                            $20,319,484       $19,347,208
                                                   ===========       ===========

(5) Long-Term Bank and Other Debt

     Long-term bank and other debt consisted of the following:

                                                      May 1,         January 30,
                                                       1999            1999
                                                     -------         -----------
Due to banks:
 Mortgage note                                   $  6,745,361      $  6,784,599
 Working capital notes                                   --                --
Other:
 Capital lease and other obligations                4,224,235         4,548,587
                                                 ------------      ------------
                                                   10,969,596        11,333,186
Less current maturities                            (1,695,319)       (1,816,119)
                                                 ------------      ------------
  Total                                          $  9,274,277      $  9,517,067
                                                 ============      ============



<PAGE>



     The mortgage financing  agreement  provides a $6,919,000  mortgage facility
with a seven-year term and a 20-year  amortization  period. The interest rate on
the mortgage  note is fixed at 7.5%.  The working  capital  facility has a total
availability  of $28 million,  including the swing line of credit.  The interest
rate fluctuates  based on the Company's debt coverage  ratio.  The interest rate
can range from LIBOR plus 1 1/4 to LIBOR plus 2 1/4, or the agent  bank's  prime
rate,  at the  Company's  option.  Based on the  formula in the  agreement,  the
Company's current borrowing cost would be LIBOR plus 1 1/4%, or the agent bank's
prime rate, at the Company's  option.  Amounts available under this facility are
based on the Company's eligible receivables and inventories.

     At May 1, 1999, the Company had approximately  $22,500,000  available under
its combined  working  capital and swing line facility.  Outstanding  letters of
credit were  approximately  $5,500,000 at May 1, 1999. During the thirteen weeks
ended May 1, 1999,  the Company  entered into capital lease  agreements  for the
purpose of obtaining computer equipment, at a cost of approximately $168,000.

 (6) Leases

     During the thirteen weeks ended May 1, 1999,  the Company  entered into new
or relocation leases for 18 stores and amended or extended leases for 17 stores,
which  increased  future minimum rental  payments by  approximately  $10,700,000
since  January  30,  1999.  Total  future  minimum  rental  payments  under  all
noncancelable operating leases with initial or remaining lease terms of one year
or more are approximately $76,800,000.

     Total rent expense for all operating leases was as follows:

                                                      Thirteen Weeks Ended
                                                    May 1,              May 2,
                                                    1999                 1998
                                                    ------              -------

Minimum rentals                                  $5,264,617           $5,229,744
Contingent rentals                                  100,765               36,003
                                                 ----------           ----------
Total                                            $5,365,382           $5,265,747
                                                 ==========           ==========

(7) Net Income Per Common Share

     The  reconciliation  of net income per common  share and diluted net income
per common share is as follows:

<TABLE>
<CAPTION>
                                                                                                 Diluted
                                                     Net Income                                  Net Income
                                                     Per                        Stock            Per
                                                     Common Share               Options          Common Share
                                                     ------------               -------          ------------

<S>                                                  <C>                        <C>              <C>
Thirteen weeks ended May 1, 1999:
Net income                                           $3,446,929                 -                $3,446,929
Weighted average shares                               7,106,469                  134,466          7,240,935
                                                     ----------                                  ----------
Per share amount                                     $     0.49                                  $     0.48
                                                     ==========                                  ==========

Thirteen weeks ended May 2, 1998:
Net income                                           $2,471,595                 -                $2,471,595
Weighted average shares                               7,232,696                  125,250          7,357,946
                                                     ----------                                  ----------
Per share amount                                     $     0.34                                  $     0.34
                                                     ==========                                   =========
</TABLE>


<PAGE>


(8) Store Closing Costs

     In late fiscal 1997, the Company adopted a plan to close  approximately  30
underperforming  stores upon lease termination or settlement with the landlords.
During fiscal 1998, 14 unprofitable stores were closed, including two during the
first  quarter.  In  addition,   based  on  financial  performance  evaluations,
management  added 10 stores to the store closing plan and removed 11 stores from
the store closing plan,  bringing the number of stores in the store closing plan
to 15 at January 30, 1999. The Company closed one unprofitable  store during the
first quarter of 1999.

     The Company has scheduled  seven  additional  stores for closing during the
remainder of fiscal 1999. Terminations of the remaining stores' leases are still
being  negotiated  with the  landlords.  Write-down  of store  assets  and store
closing costs were approximately $207,000 and $189,000 during the first quarters
of 1999 and 1998, respectively.

(9)  Stockholders' Equity

     The change in stockholders' equity was as follows:

<TABLE>
<CAPTION>

                                              Additional
                                  Common       Paid-In         Retained
                                  Stock        Capital         Earnings         Total
                                -----------  ------------     -----------      --------

<S>                          <C>              <C>             <C>           <C>
Balance at
 January 30, 1999            $     72,800    $ 46,525,187    $ 31,154,488   $ 77,752,475
Net proceeds from the sale
 of 4,894 common shares                49          29,315            --           29,364
Repurchase of 285,100
 shares of common stock             (2,851)     (2,291,103)           --       (2,293,954)
Net income                           --              --         3,446,929      3,446,929
                             ------------    ------------    ------------   ------------
Balance May 1, 1999          $     69,998    $ 44,263,399    $ 34,601,417   $ 78,934,814
                             ============    ============    ============   ============
</TABLE>



<PAGE>

     Item 2.


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

     Forward-Looking Statements

     This outlook contains forward-looking  statements within the meaning of the
Private  Securities  Litigation  Reform  Act  of  1995.  Such  forward-  looking
statements  are based on  current  expectations  that are  subject  to known and
unknown risks,  uncertainties  and other factors that could cause actual results
to differ materially from those contemplated by the forward-looking  statements.
Such  factors  include,  but  are not  limited  to,  the  following:  Year  2000
information systems issues; general economic conditions; competitive factors and
pricing  pressures;  the Company's  ability to predict fashion trends;  consumer
apparel buying patterns;  adverse weather  conditions and inventory risks due to
shifts in market  demand.  The Company does not undertake to publicly  update or
revise the forward-looking  statements even if experience or future changes make
it clear  that  projected  results  expressed  or  implied  therein  will not be
realized.

     Overview

     The Company's net income for the thirteen week period ended May 1, 1999 was
$3,447,000 compared to $2,472,000 in the thirteen week period ended May 2, 1998.
Operating  income  margins were 7.3% for the first  quarter of 1999  compared to
5.8%  in  1998.  Write-down  of  store  assets  and  store  closing  costs  were
approximately  $207,000 and $189,000 during the first quarters of 1999 and 1998,
respectively.  Before these costs,  the operating income margins would have been
7.5% and 6.1% in 1999 and 1998, respectively.

     The  improvement  in  operating  income  margin  over  the  prior  year  is
attributable to improved sales and  merchandise  margins,  leveraged  buying and
occupancy  costs,  savings  generated  from the  amendment  and extension of the
contract  with the  Company's  third-party  credit  processor  and a decrease in
consulting  fees,  which were incurred in 1998 to  re-engineer  the  merchandise
planning and distribution functions.

     Liquidity and Capital Resources

     The  Company's  cash  provided  by  operations  was  $4,170,000  during the
thirteen  weeks ended May 1, 1999,  compared to cash  provided by  operations of
$4,253,000  during the  thirteen  weeks ended May 2, 1998.  The decrease in cash
flow  provided by  operations  is primarily  attributable  to an  investment  in
working capital, offset by increases in net income and depreciation expense. The
Company's working capital was $30,242,000 at May 1, 1999 compared to $28,502,000
at January 30, 1999. The Company's  internally  generated cash flow financed its
operating  requirements,  capital  expenditures  and  debt  service  during  the
thirteen week period ended May 1, 1999.

     The Company  maintains a merchant  services  agreement  with a  third-party
credit  processor.  This  agreement  provides  for the Company to sell,  without
recourse,  accounts  receivable from private label credit card sales. The third-
party  provides all  authorization,  billing and  collection  services for these
accounts.  The  agreement  was amended and extended  during the first quarter of
1999, allowing the Company to obtain more favorable terms. Also, as an incentive
to extend the agreement,  the third-party  provider agreed to pay the Company an
up-front cash payment. This amount will be amortized evenly into income over the
life of the new agreement. The agreement expires in January 2005.

     Capital Expenditures

     The Company has incurred approximately  $1,100,000 to relocate,  remodel or
expand  approximately  seven existing  stores during the first quarter of fiscal
1999.  An  additional  $400,000  has been  incurred  for the opening of five new
locations.  The Company  estimates  that total fiscal 1999 capital  expenditures
will be approximately  $8,000,000, of which an estimated $5,500,000 will be used
for the opening of 12 new locations and the remodeling, relocation and expansion
of approximately 42 other locations.  The remainder of the capital  expenditures
are to upgrade existing computer systems, add additional software technology and
to maintain existing facilities.

     Banking Arrangements

     The mortgage financing  agreement  provides a $6,919,000  mortgage facility
with a seven-year term and a 20-year  amortization  period. The interest rate on
the mortgage  note is fixed at 7.5%.  The existing  bank credit  facility has an
availability  of $28,000,000,  including the swing line of credit.  The interest
rate fluctuates  based on the Company's debt coverage  ratio.  The interest rate
can range from LIBOR plus 1 1/4 to LIBOR plus 2 1/4, or the agent  bank's  prime
rate,  at the  Company's  option.  Based on the  formula in the  agreement,  the
Company's current borrowing cost would be LIBOR plus 1 1/4%, or the agent bank's
prime rate, at the Company's option. The agreement expires June 30, 2001.

     At May 1, 1999, the Company had approximately  $22,500,000  available under
its  combined  working  capital  and  swing  line  facility  and   approximately
$5,500,000 in outstanding letters of credit.

     The Company believes that its internally generated cash flow, together with
borrowings  under the bank  credit  agreement,  will be  adequate to finance the
Company's operating  requirements,  debt repayments and capital needs during the
foreseeable future.

     Results of Operations

     Thirteen Weeks Ended May 1, 1999 Compared to Thirteen Weeks Ended May 2,
     1998

         Net sales in the first quarter of 1999  increased  5.0% to  $80,300,000
     from  $76,452,000  in the first quarter of 1998.  Comparable  stores' sales
     increased 6.0%, primarily due to an increase in the number of saleschecks


<PAGE>



generated  and an  increase in the number of units per  salescheck,  offset by a
decrease in average unit price.  During the first quarter,  one store was closed
and five stores were  opened,  increasing  the number of stores  operated by the
Company on May 1, 1999 to 436. At May 2, 1998, the Company operated 440 stores.

     Gross margin,  after buying and occupancy costs,  increased as a percentage
of sales to 33.6%  from  33.1% in the first  quarter of 1998.  The  increase  is
attributable  to  both  leveraged   buying  and  occupancy  costs  and  improved
merchandise  margins.  Buying and  occupancy  costs  deceased as a percentage of
sales  by 21 basis  points.  Additionally,  merchandise  margin  increased  as a
percentage of sales by 29 basis points.  The increase in merchandise  margin was
driven primarily by an increase in merchandise markup.

     Selling,  general and  administrative  expenses increased to $20,718,000 in
the first quarter of 1999 compared to  $20,431,000 in the first quarter of 1998.
As a percentage  of sales,  the  selling,  general and  administrative  expenses
decreased to 25.8% from 26.7% in the first quarter of 1998. Factors contributing
to this decrease were the savings  obtained  through the amendment and extension
of the Company's third-party credit agreement and a decrease in consulting fees,
which  were  incurred  in 1998  to  re-engineer  the  merchandise  planning  and
distribution functions.

     In late fiscal 1997, the Company adopted a plan to close  approximately  30
underperforming  stores upon lease termination or settlement with the landlords.
During fiscal 1998, 14 unprofitable stores were closed, including two during the
first  quarter.  In  addition,   based  on  financial  performance  evaluations,
management  added 10 stores to the store closing plan and removed 11 stores from
the store closing plan,  bringing the number of stores in the store closing plan
to 15 at January 30, 1999. The Company closed one unprofitable  store during the
first quarter of 1999.  The Company has scheduled  seven  additional  stores for
closing  during the  remainder of fiscal  1999.  Terminations  of the  remaining
stores'  leases are still being  negotiated  with the  landlords.  Write-down of
store assets and store  closing costs were  approximately  $207,000 and $189,000
during the first quarters of 1999 and 1998, respectively.

     Interest  expense was  approximately  $103,000 in the first quarter of 1999
compared to $280,000 in the first  quarter of 1998.  The  decrease is  primarily
attributable  to the decrease in working  capital  borrowings and an increase in
interest  income.  Interest  expense is net of interest income of  approximately
$123,000  and  $15,000  for  the  first   quarters  of  fiscal  1999  and  1998,
respectively.

     Income taxes were  provided at  effective  rates of 39.9% and 41.0% for the
thirteen  weeks ended May 1, 1999 and May 2, 1998,  respectively.  The statutory
rate is affected  primarily by  non-deductible  goodwill  amortization and state
income taxes.




<PAGE>


     Net  income  for the  first  quarter  of 1999 was  $3,447,000  compared  to
$2,472,000 for the first quarter of 1998. Net income per common share,  assuming
dilution,  was $0.48 per share in the first  quarter of 1999 and $0.34 per share
in the first  quarter of 1998.  Before the  write-down of store assets and store
closing  costs,  the Company's net income per common share would have been $0.49
and $0.35 for the first quarters of 1999 and 1998, respectively.

     During the first  quarter of 1999,  the  Company  repurchased  and  retired
285,100 shares of its outstanding common stock for approximately $2,294,000.

     Year 2000 Compliance

     The Company has developed a plan to ensure its systems are  compliant  with
the  requirements to process  transactions in the year 2000. The majority of the
Company's  information  systems are provided and serviced by outside vendors who
are in the  process of  completing  all  necessary  updates to ensure  they will
continue to be effective in the year 2000.  Management  currently  believes that
any other minor technological  equipment,  if not year 2000 compliant,  will not
have a material impact on the Company's business operations.

     The   Company  has   requested,   from  its  key   third-party   providers,
certifications of year 2000 compliance.  The Company is developing plans to test
the systems where the  third-party  responded as being compliant by December 31,
1999.  Contingency  plans to  address  unexpected  year 2000  scenarios  will be
developed  to  address  the   material   risks  and   uncertainties   for  those
third-parties  who either do not respond or who responded  that they will not be
compliant.  The Company  expects the majority of its  information  systems to be
year 2000  compliant  by 2000;  however,  no  assurances  can be given  that the
efforts by the Company and its  third-parties  will be  successful.  The Company
does not  currently  estimate  that the cost to remedy  year  2000  noncompliant
technologies will be significant.

<PAGE>


     PART 2 - OTHER INFORMATION

     Item 1.   Legal Proceedings
            None

     Item 2.   Changes in the Rights of the Company's Security Holders
            Not applicable

     Item 3.   Defaults by the Company on its Senior Securities
            Not applicable

     Item 4.   Submission of Matters to a vote of Security Holder

           The Annual  Meeting of the  Stockholders  of the  Company was held on
           June 2, 1999.  Matters voted upon at the meeting were the election of
           directors, the ratification of independent public accountants and the
           increase  of the number of shares  under the 1994  Omnibus  Incentive
           Plan,  to limit  discretion  thereunder  and to  ratify  the grant of
           options thereunder.

                                                                        Abstain/
                                                                         Broker
                                       For      Against     Withheld   Non-Votes
Election of directors:
   David C. Forell                  5,561,431      -       1,329,215       -
   Allen B. Morgan, Jr.             5,561,431      -       1,329,215       -
   Elliot J. Stone                  5,559,631      -       1,331,015

Increase   incentive  plan
 authorized   shares, limit
 discretion thereunder, and
 ratificationof all grants
 under the plan to date             3,511,698    1,356,116      -      2,022,832

Appointment of Arthur Andersen LLP  6,876,238        7,531      -          6,877

           Item 5.  Other Information
                    Not applicable

           Item 6.  Exhibits and Reports on Form 8-K

               (A)  Exhibits:

                   (1) Merchant  Services  Agreement  between  Hurley State Bank
                    and Catherines, Inc.

                   (2) 27.1 Financial Data Schedule (for EDGAR filing only)

               (B) Reports on Form 8-K:
                   None.



<PAGE>


     Pursuant to the  requirements  of the  Securities and Exchange Act of 1934,
the  Registrant  has duly  caused  this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                   SIGNATURES


                     June 2, 1999                 /s/ David C. Forell
                       (Date)                     --------------------------
                                                     David C. Forell,
                                                     Executive Vice President,
                                                     Chief Financial Officer
                                                     Secretary







<PAGE>


CONFIDENTIAL INFORMATION HAS BEEN OMITTED FROM THIS EXHIBIT AND FILED SEPARATELY
WITH THE SEC. EACH PLACE OF OMISSION IS INDICATED WITH **.



                           MERCHANT SERVICES AGREEMENT


     This MERCHANT  SERVICES  AGREEMENT (the "Agreement") is made as of December
1, 1998,  by and  between  Hurley  State Bank  ("Bank"),  a Bank  organized  and
existing  under the laws of the State of South  Dakota  with its  offices at 811
East 10th  Street,  Sioux  Falls,  South  Dakota  57103,  and  Catherines,  Inc.
("Company"), a corporation organized and existing under the laws of the State of
Delaware, with its offices at 3742 Lamar Avenue, Memphis, Tennessee 38118.


                                   WITNESSETH:

     WHEREAS,  Bank intends to issue to consumers private label credit cards for
use at specific retail  establishments and desires to offer to certain consumers
the ability to use a Bank-issued  credit card (bearing certain Tradenames and/or
Trademarks which are either licensed to or owned by Company) for the purchase of
goods,  gift certificates for goods, and services normally offered by Company to
its Cardholders (either in its stores, by mail,  including statement inserts, by
electronic  means  or  as  otherwise  agreed  to  by  the  parties)(collectively
"Authorized Goods"); and

     WHEREAS,  Company is in the  business  of  providing  Authorized  Goods and
desires to offer  consumers the  convenience of using a Bank-issued  credit card
with its licensed or owned Tradenames and/or  Trademarks  appearing on such card
in payment therefor; and

     WHEREAS,  Bank directly or through its designee will operate and administer
a merchant  authorization  and settlement  program  whereby,  subject to certain
conditions, Bank will authorize certain Bank-issued credit card transactions for
Company and Company or its designated  agent will present Bank with  transaction
records for payment; and

     WHEREAS, Bank and Company intend that this Agreement supersede all previous
agreements  (and their  various  addendums)  between the  parties  for  merchant
services provided by Bank to Company,  and cover all outstanding  accounts under
such previous agreements.

     NOW,  THEREFORE,  in  consideration  of the  foregoing  premises and mutual
covenants  hereinafter set forth and for other good and valuable  consideration,
the receipt and sufficiency of which are hereby  acknowledged,  Bank and Company
agree as follows:

                                    ARTICLE I

                                   DEFINITIONS

     1.1 Definitions.  Except as otherwise specifically indicated, the following
terms shall have the meaning specified herein:

     "Account"  means a credit account on which a purchase  transaction has been
made or may be made by (or by a person authorized by) the Cardholder pursuant to
a Card.  An Account may have more than one Card issued for it. Any Account shall
be deemed to be the  property  of Bank and Bank  shall  establish  the terms and
conditions under which Accounts will be established.


<PAGE>

     "Account  Balances"  shall  have the same  meaning  as is set  forth in the
Additional Purchase Agreement.

     "Account  Issuance  Criteria"  means the credit  criteria  under which Bank
shall determine  whether to approve or decline  applications for Accounts.  Bank
may make changes to the Account  Issuance  Criteria based on the  performance of
the Card Plan and will advise  Company and discuss  such  changes  with  Company
prior to implementation  of such changes.  Bank and Company shall meet from time
to  time  to  discuss  the  Account  Issuance  Criteria  as it  relates  to  the
performance of the Card Plan.

     "Active  Account" means an Account which at any time during a billing cycle
has a debit or credit balance.

     "Additional  Purchase  Agreement"  means a Purchase and Sale Agreement,  in
substantially the form attached hereto as Schedule G.

     "Affiliates"   means   Catherines   of   California,   Inc.,  a  California
corporation,  Catherines of  Pennsylvania,  Inc., a Tennessee  corporation,  and
Catherines Partners, L.P., a Tennessee limited partnership.

     "Assets  to be Sold"  shall  have the same  meaning  as is set forth in the
Additional Purchase Agreement.

     "Authorization" means permission from Bank to make a Card Sale.

     "Authorization  Center"  means  the  facility  designated  by  Bank  as the
facility at which Card Sales are authorized.

     "Business  Day" means  Mondays  through  Fridays  except  days when Bank is
closed for business.

     "Card"  means (i) a credit  card  issued by Company  (or a  Predecessor  in
Interest of Company)  prior to the  Transfer  Date  bearing  Company's  (or such
Predecessor's)  name or one of its  Tradenames,  and which  evidences an Account
which was purchased from Company pursuant to the Original Purchase Agreement, or
(ii) a credit  card  issued  by Bank  with  certain  Tradenames  and  Trademarks
appearing on such card or with such other design as mutually  acceptable  to the
parties, which evidences an Account. During the term of this Agreement,  Company
shall not (and shall not cause or permit the  Affiliates  to) issue,  arrange to
issue,  or accept any other  private  label credit card, or private label credit
account,  including  any credit card or account  under any of the  Tradenames or
Trademarks,  except for Accounts which Bank purchased but returned to Company as
an  Ineligible  Account  under the Original  Purchase  Agreement.  The foregoing
limitation shall not apply to third party non-private label credit cards such as
Visa,  MasterCard or Discover Card (including  those which are co-branded  cards
bearing the  Trademarks  or  Tradenames).  "Card Plan" means the programs  under
which Accounts have been or will be established and Cards issued to Cardholders.
"Card  Sale"  means  any  sale of  Authorized  Goods  that  Company  makes  to a
Cardholder pursuant to this Agreement that is charged to an Account.


<PAGE>



     "Cardholder"  means (i) the person in whose  name an Account is  maintained
and (ii) an authorized user of that Account, as applicable.

     "Chargeback"  means the  refusal of Bank to pay  Company for a Card Sale or
the return to Company and reimbursement to Bank of a Card Sale for which Company
was previously paid.

     "Credit"  means a non-cash  refund  (for  returns or  otherwise)  issued by
Company to a Cardholder of all or a portion of the amount of a Card Sale.

     "Credit Slip" means evidence of a Credit in paper or electronic form.

     "Customer  Satisfaction Survey" shall have the meaning set forth in Section
3.1(d) below.

     "Daily  Remittances"  shall have the  meaning  set forth in Section  2.7(c)
below.

     "Effective Date" means December 1, 1998.

     "Electronic Commerce" means transactions generated from the Internet- based
catalog  developed by Company and  transmitted  by  Cardholder to Company or its
agent via the  Internet,  telephone,  facsimile or mail.  Company and Bank shall
mutually agree on the process by which a Cardholder may transmit transactions to
Company or Bank via the Internet (including without limitation  transmissions by
a third party intermediary designated by Company (such as AT&T Secure Buy).

     "Electronic  Location"  means a  Company  location  at  which  there  is an
Electronic Terminal.

     "Electronic  Terminal" means an electronic  terminal or computer capable of
communicating by means of an on-line or dial-up  electronic link (whether routed
through Bank's  facilities or otherwise) with an Authorization  Center to obtain
Authorization.  Company agrees that the  Electronic  Terminals it uses hereunder
shall be reasonably acceptable to Bank.

     "Eligible  Accounts"  shall have the  meaning  set forth in the  Additional
Purchase Agreement.

     "Floor Limit" means the United States dollar amount  designated by Bank, as
it may be changed  from time to time,  at or above which  Authorization  must be
obtained to make a Card Sale.

     "Ineligible  Accounts"  shall have the meaning set forth in the  Additional
Purchase Agreement.

     "Net Card Sales" means the actual amount of Card Sales less  Chargebacks or
Credits.  "Network  Services"  shall have the  meaning  set forth in the Network
Services Agreement attached hereto as Schedule B.

     "Operating Regulations" means the standard operating procedures of Bank, as
they may be changed  from time to time,  which shall be provided to Company upon
written  request  therefore.  For  purposes  of this  Agreement,  the  Operating
Regulations  shall be deemed an integral part of the Agreement and references to
the Agreement shall be deemed to include the Operating Regulations.

<PAGE>


     "Predecessor  in Interest" means a corporation or entity from whom or as to
which  Company  acquired or  otherwise  succeeded  to  ownership  of  Cardholder
Agreements (as defined in the Original Purchase Agreement) and Accounts relating
thereto.

     "Privilege Fee" shall have the meaning set forth in Section 3.1(e).

     "Original  Purchase  Agreement" means the agreement  Company and Bank dated
October 1, 1992,  for the initial  purchase of Company's  then existing  private
label credit card accounts and the balances thereunder.

     "Sales  Data"  means Card Sales and Credits  whether in paper form,  in the
form of magnetic  tape, or in a form in which the data  representing  Card Sales
and Credits are electronically transmitted.

     "Sales Slip" means evidence of a Card Sale in paper or electronic form.

     "Securitization  Agreement"  means an  agreement  between  Bank and a third
party which may include a  limitation  or delay in the timing of Bank's right to
cause the purchase,  or Company's  right to purchase the  receivables on certain
Accounts covered under such securitization agreement.

     "Settlement"  means the reimbursement to Company for the net amount of Card
Sales and  Credits  remitted  to Bank,  including  any  reduction  for  payments
accepted by Company in accordance with paragraph 2.7 herein.

     "Settlement   Account"  means  the  deposit  account(s)  at  the  financial
institution(s)  designated  by Company as the  account(s)  to be debited  and/or
credited, as applicable, for the Settlement of Card transactions and the payment
of any fees and charges due hereunder.

     "Standards" means all of the standards of performance set forth in Schedule
C attached hereto.

     "Tradename"  means  Catherines,  Plus Sizes (including "PS Plus Sizes . . .
Plus Savings"), Catherine's Stout Shoppe, Clothes for Eve, Added Dimensions, The
Answer, Other Dimensions, Virginia Specialty Stores, VSSI, the corporate name of
Company, and any combinations thereof.

     "Trademark"  means any logo or symbol utilized by Company as a trademark or
service mark in connection  with the sale of Authorized  Goods.  "Transfer Date"
shall have the meaning set forth in the Additional Purchase Agreement.

     Other  capitalized  terms used  herein  without  definition  shall have the
definitions ascribed to them in the Additional Purchase Agreement.

     1.2.  Construction.  Unless the context otherwise clearly indicates,  words
used in the singular include the plural and words used in the plural include the
singular.


<PAGE>

                                   ARTICLE II

                  ISSUANCE OF ACCOUNTS AND ACCEPTANCE OF CARDS

     2.1 Conditions of Opening Accounts.  Subject to the terms and conditions of
this  Agreement,  Bank shall  receive  Cardholder  applications  and  approve or
decline Accounts in accordance with Bank's Account Issuance Criteria.

     (a) Written  Applications.  Applications which are received by Bank through
the mail and are not made  contemporaneously  with a sale shall be  reviewed  in
accordance  with Account  Issuance  Criteria and Bank's  customary  practice for
written applications.

     (b) Applications with Accompanying Sale. Applications telephoned to Bank by
Company's  employees  in  conjunction  with a sale shall be  reviewed by Bank in
accordance with Bank's Account Issuance Criteria.  Subject to the obligations of
Bank under  Section  3.1(f)(iii),  Bank shall use its best efforts to approve or
decline such applications within five (5) minutes after receipt by Bank. Company
shall be responsible for the following:

     (i) Providing all  information  found on Customer's  Application  which has
been requested by Bank's representative.

     (ii) Obtaining positive  identification of the individual  applying for the
Account,  including  but not limited to  obtaining  driver's  license and social
security numbers.

     (iii)  Obtaining the signature on the application of all persons whose name
will appear on the Account or will be responsible for the Account.

     (iv) Upon either approval or decline,  the application must be sent to Bank
at the designated address.

     (v) The  sale  must be  entered  into  Company's  Electronic  Terminal.  If
requested to do so by Bank's representative, Company's employee shall also enter
into the Electronic Terminal the approval code provided by Bank.

     Failure  by  Company to adhere to the above  procedures  shall  result in a
chargeback in accordance with Paragraph 2.10 of this Agreement.

     (c)  Credit  Scoring  Models.  Any  changes by Bank to new  Account  Credit
Scoring  Models (as utilized in opening new Accounts)  will be submitted by Bank
to Company and will be discussed by Bank with Company  prior to  implementation,
with Bank to provide to Company in connection  with such  discussion the reasons
for  such  changes.  Bank  will  test  any new  credit  scoring  model  based on
historical data from previous applications for Accounts,  and will not implement
the new model if the prior  testing  of the new model  reflects a 20% or greater
reduction in the application approval rates;  provided,  however,  that Bank may
implement such new scoring model if such  implementation  is necessary to ensure
the safety and  soundness  of Bank.  Notwithstanding  the above,  Bank will not,
without Company's prior agreement,  replace the credit scoring models with a new
model  more  than one time  during  the  Initial  Term or one  time  during  any
Subsequent  Term unless Bank is required to do so to comply with  applicable law
or  regulation,  or to address  material  changes in economic  conditions or the
demographics of applicants.

<PAGE>

     (d) Toll Free Line. Bank shall at all times designated in the Standards, at
its expense,  provide a toll free telephone number to Company  accessible at all
Company  locations  in the United  States  for use by  Company  in  transmitting
telephone or other electronic applications for new Accounts;  provided, however,
Bank shall not be obligated  to furnish  more than four (4) toll free  telephone
numbers to Company.

     (e) POS Fee.  As an  inducement  for  Company  to  utilize  a Remote  Entry
Application  Processing ("REAP") function for transmitting  applications for the
Card to Bank  (including  applications  transmitted  from or  through  Company's
website   [except  for  those   applications   transmitted  by  the  prospective
Cardholder] or other Internet  connections mutually agreed upon by the parties),
Bank  will  pay to  Company  a POS  Fee,  as set  forth  below,  for  each  REAP
application  for the Card which has been  approved by Bank and  activated by the
Cardholder  in the same calendar  month.  The base POS Fee will be [**] per such
application.  For each month  during which the total of  applications  submitted
utilizing the REAP function is between 50% and 74.99%,  the POS Fee will be [**]
per  such  application.  For each  month  during  which  the  total  of  Company
applications  submitted  utilizing the REAP function is 75% or greater,  the POS
Fee will be [**]  such  application.  The POS Fee will be paid to  Company  once
monthly  under  the  mechanism  for  settlement  of Card  Sales as set  forth in
paragraph 2.7.

     (f) Monthly  Reports on New Accounts.  Bank shall furnish to Company,  on a
monthly  basis,  at  Bank's  expense,   a  report  setting  forth  all  material
information  regarding all new Accounts opened by Bank during the prior month in
substantially the form attached hereto as Schedule D.

     (g) Viewing  Access as to Certain  Matters.  At all times  during the hours
Bank is to furnish customer  service  pursuant to the Standards,  Bank shall, at
its expense,  provide to the credit department of Company,  on-line viewing only
access to the Account inquiry  screens for each Account,  which will include the
"PLCI"  screen  (containing  the  customer's  name,  address,  limit and balance
information)  and the "ARIH"  screen,  and Company will implement a procedure to
obtain a Cardholder's consent to access Cardholder's credit information.


     2.2 Honoring of Cards.

     (a) Conditions for Honoring  Cards.  Subject to the terms and conditions of
this  Agreement,  Company  agrees to accept the Card for  payment of  Authorized
Goods in those instances when a Cardholder wishes to charge the purchase of such
Authorized  Goods to  his/her  Account  and shall not  attempt  to  suppress  or
discriminate  against use of a Card by a Cardholder  (except in accordance  with
this  Agreement).  Company  shall  accept  the Card at all of its  participating
locations for the purchase of Authorized  Goods,  provided the Card transactions
resulting  from  such  acceptance  of the Card are  submitted  to Bank in United
States  dollars.  Bank will advise  Company if it  develops  the  capability  of
accepting Card  transactions in currencies other than United States dollars.  In
such event,  Card  transactions  may be made in such other currencies upon terms
and  conditions  to be  mutually  determined  at that time.  If any  facility or
service is operated on Company premises under a franchise, lease or license from


<PAGE>

Company  and  such  franchisee,  lessee  or  licensee  (who is not a party  to a
merchant services agreement with Bank) agrees with Company to accept Cards, Card
Sales  incurred at such  facility  or service  shall be subject to the terms and
conditions of this  Agreement and must be handled  through  Company as if it had
transacted  such Card Sales.  Company shall be obligated to pay its  franchisee,
lessee or  licensee  with  respect  to such Card  Sales in  accordance  with the
provisions of Company's agreement with such franchisee,  lessee or licensee,  to
the extent such agreement does not conflict with the terms of this Agreement.

     (b) Card  Acceptance.  Acceptance of Cards by Company shall  continue until
the termination of this Agreement.

     2.3  Acceptance  of Cards.  Company  shall accept each Card  presented by a
Cardholder as conditional  payment for Authorized Goods provided that all of the
following  conditions  are met with  respect to each Card Sale and that  Company
further  complies  with  all of the  procedures  set  forth  elsewhere  in  this
Agreement and in the Operating  Regulations  relating to the acceptance of Cards
each time it makes a Card Sale:

     (a) The Card is used as conditional  payment for Authorized Goods purchased
by a Cardholder;

     (b) Company will not accept a Card for the purpose of advancing  money to a
Cardholder or paying money to a Cardholder  for any amount that is included in a
Card Sale;

     (c) Company has followed the  procedures  for the completion of Sales Slips
as set forth in Section 2.5 below; and

     (d)  Company  has  obtained  Authorization  for the Card  Sale if  required
pursuant to paragraph 2.6 below.

     2.4 Operating Regulations. The Operating Regulations may be changed by Bank
from time to time  upon  sixty  (60)  days  prior  written  notice  to  Company,
provided,   however,  that  changes  which  do  not  require  major  systems  or
operational  modifications  and changes required for security  measures shall be
made effective as soon as possible following Company's receipt of notice thereof
but in all events  shall  become  effective  within  ten (10) days of  Company's
receipt  of  notice  thereof.   Notwithstanding   the  above,   other  than  for
modifications  required by applicable law or regulation (which will be effective
immediately) the parties shall mutually agree on such  modification in the event
such  modification  involves a significant cost to Company.  In the event of any
conflict or  inconsistency  between the terms of this Agreement and those of the
Operating Regulations, the former shall govern.

     2.5 Completion of Sales Slips.


     (a) General Requirements. For each Card Sale, Company shall prepare a Sales
Slip using a form that is  mutually  acceptable  to Bank and  Company,  e.g.,  a
universal  sales slip.  Each Sales Slip must be legible and fully completed with
the following information:

     (i) The date and,  unless  otherwise  provided to Bank, e.g. batch reports,
etc., location (city/state or Internet) of the Card Sale;

<PAGE>

     (ii) A brief description of the Authorized Goods;

     (iii) The total amount of the Card Sale, including tax;

     (iv) The Account number;

     (v) The Authorization number or code (where applicable); and

     (vi) Company's  merchant number,  unless  otherwise  provided to Bank, e.g.
batch reports; and

     (vii)  A  unique  number  must be  assigned  to  each  transaction  that is
transmitted via the Internet.

     Each Sales Slip shall be imprinted  to obtain a clear  imprint of the Card;
provided  that in the case of Sales Data which are  electronically  produced  by
Company,  Company  shall  not be  required  to obtain  an  imprint  of the Card.
However,  Company shall be required to enter the Account  number,  as applicable
into the electronic terminal.

     (b) Cardholder's  Signature.  With the exception of transactions  generated
through Electronic  Commerce,  a Sales Slip must be signed by the Cardholder for
each  Card  Sale at the  time the Card  Sale is made and in the  presence  of an
authorized  representative  or employee of Company.  The  signature on the Sales
Slip must be  reasonably  similar to the  signature  appearing on the  signature
panel of the Card.  Transactions  generated  through  Electronic  Commerce  must
include a Sales Slip with a notation  as to the method of  presentation  for the
transaction.  After completion of the Card Sale, Company shall provide a legible
and  completed  copy of the Sales Slip to the  Cardholder.  If Company  fails to
obtain the signature of the Cardholder or the required  notation on a Sales Slip
and the  Cardholder  has not  authorized the Card Sale or denies the validity of
the Card  Sale,  the Card  Sale  shall be  subject  to  Chargeback  pursuant  to
paragraph 2.10 below.

     2.6 Authorization.


     (a) General  Requirements.  In accordance  with the terms of this paragraph
2.6, Company shall obtain  Authorization for each proposed Card Sale at or above
the Floor Limit and, as required  below.  For  purposes of this  Agreement,  the
purchase of one or more items or other  Authorized Goods made by a Cardholder at
one Company location and at one time shall be deemed to constitute a single Card
Sale.

     (b) Floor  Limit.  The Floor  Limit  shall be $0. Bank may change the Floor
Limit upon thirty (30) days prior notice to Company.  Notwithstanding the above,
the Floor  Limit  shall  automatically  become  $200 only during such times that
Company is unable to obtain an electronic or telephone  authorization  from Bank
due solely to Bank's authorization system not being operational.

     (c) Obtaining Authorization.



<PAGE>


     (i) Electronic  Locations.  To obtain  Authorization for Card Sales made at
Electronic  Locations,   including  transactions   transmitted  to  Company  via
Electronic Commerce,  Company shall utilize an Electronic Terminal in accordance
with  procedures  applicable  for  the use of that  terminal.  At an  Electronic
Location,  if a referral  code is displayed on an Electronic  Terminal,  Company
shall telephone Bank to obtain further instructions, using a toll-free telephone
number provided by Bank for such purpose.

     (ii)  Non-Electronic  Authorization.  To obtain  Authorization  when Bank's
electronic   capability  to  provide   Authorization  or  Company's   electronic
capability to obtain  Authorization  is not  operational,  Company shall contact
Bank using a toll-free  telephone  number provided by Bank for such purpose.  If
the  Authorization  Center  approves  the Card  Sale,  Company  will be given an
Authorization code or number which must be written on the Sales Slip.

     (d) Right of Chargeback. If Authorization for any Card Sale is required but
not obtained by Company,  or requested by Company but declined by Bank, Bank may
process a Chargeback for such Card Sale pursuant to paragraph 2.10 below.

     (e)  Cancellation  of  Authorization.  At  its  expense,  Bank  shall  make
available  during Bank's normal  authorization  hours, a toll-free  number which
Company may call in the event a previously  authorized  Card Sale is canceled by
the Cardholder.

     (f) Account Number  Look-Up.  In the event Company calls Bank to look-up an
Account number for a purchasing  Cardholder due to the fact that such Cardholder
does not have his Card with him at the time of purchase,  Bank shall provide the
number to Company and proceed with the  authorization  process without requiring
the Cardholder to produce any forms of identification provided that the identity
of the  Cardholder is known to Company and Company  orally vouches to Bank as to
the identity of such  Cardholder  at the time such  authorization  is requested.
Notwithstanding the foregoing, Bank is specifically authorized to Chargeback any
such sale to  Company if the  person in whose  name the  Account  is  maintained
refuses to pay for such the Card Sale on the basis that the person who  utilized
the Card to make such sale was not the Cardholder which such person  represented
himself/herself  to be. (g) Authorization of Card Usage by Cardholder's  Spouse,
Subject to Chargeback  Rights.  For purposes of this Agreement,  the spouse of a
person in whose name an Account is maintained  shall  automatically be deemed to
be an  authorized  user of the  Account  (even  if  such  spouse  has  not  been
specifically  authorized by such person to be a user of the Account)  unless and
until a charge made by such spouse on such Account is rejected by such person on
the basis that such spouse is not an authorized  user.  Accordingly,  unless and
until such a rejection  of a charge has been made by such a person with  respect
to his (her) spouse, in the event that Company requests authorization for a sale
to such spouse, Bank shall not deny the authorization by reason of the fact that
such   spouse  is  not  a   specifically   authorized   user  of  the   Account.
Notwithstanding  any  of the  foregoing,  Bank  is  specifically  authorized  to
Chargeback  any sale to  Company  if the  person in whose  name the  Account  is
maintained  refuses  to pay for such a Card  Sale on the  basis  that his  (her)
spouse was not specifically designated by such person as an authorized user.



<PAGE>

     (h) Payment Made in Store.  For purposes of determining  whether aCard Sale
will be  authorized  or denied for a Cardholder on the basis of the credit limit
for the  Account,  Bank shall  accept the oral  statement  of Company  that such
Cardholder  has  made  an  in-store  payment  to  Company.  Notwithstanding  the
foregoing,  Bank is  specifically  authorized  to  Chargeback  any such  sale to
Company if the  Account  was in fact over its  credit  limit at the time of such
sale and the  charge  arising  from such sale is not paid by or on behalf of the
person in whose name the Account is maintained.

     (i) Over Limit  Sales.  Bank will  continue  to  authorize  Card Sales to a
Cardholder when the Cardholder's Account would be in excess of Bank's prescribed
credit limit,  up to a maximum of 30% over such limit,  when warranted by and in
accordance with the "Triad" behavioral scoring criteria or other similar scoring
criteria as utilized by Bank from time to time.

     2.7 Settlement of Card Transactions.

     (a)  Remittance of Sales Data by Company.  At least  weekly,  Company shall
remit  Sales  Data to Bank.  All such  remittances  shall be in Bank's  form and
format. Remittances of Sales Data shall contain all of the information specified
in this Agreement and the Operating Regulations. Upon receipt thereof, Bank will
balance and edit the data submitted and make appropriate  adjustments for errors
or  invalid  or  incomplete  transactions.  In the event all or a portion of the
required data is not received by Bank or such data is unreadable, Bank shall not
be required to process the Sales Data containing the missing or unreadable data,
but shall  promptly  inform  Company or its  designated  agent of the missing or
unreadable  data.  Company shall be responsible for retrieving and  resubmitting
the Sales Data in completed  form.  Company shall be  responsible  for the loss,
damage or destruction of Sales Data until such Sales Data is received by Bank.

     (b) Obligation to Reimburse Company for Sales Data. Subject to Bank's right
of Chargeback,  Bank shall pay Company for all Card Sales properly  submitted by
Company and received by Bank. Bank will pay Company an amount equal to the total
amount of Card  Sales  submitted  to and  received  by Bank,  less the amount of
Credits and in-store payments under Section 2.8, if any, submitted that Business
Day by  Company,  plus  or  minus  the  applicable  amount,  if any,  for  other
adjustments to the amounts so submitted as expressly  provided for herein.  Bank
shall not be required to pay Company for any Card Sale not  submitted  within 60
days of the date of the Card Sale.

     (c) Method and Timing of Settlement. For each electronic or tape remittance
of Sales Data  received  in Bank's  form and format by the  following  specified
local time on a particular  Business Day at the location specified by Bank, Bank
will initiate the  appropriate  credit or debit to the  Settlement  Account,  as
applicable,  by federal wire transfer of funds, on the U.S. Federal Reserve wire
system,  by the  following  specified  Business  Day ("Daily  Remittances"),  as
follows:  (x) receipt by 10:00 AM, Eastern Time,  transfer initiated by the next
Business Day; (y) receipt after 10:00 AM,  Eastern Time,  transfer  initiated by
the second  Business Day.  Company  hereby  authorizes  Bank and its  designated
agents  and  representatives  to  credit  or debit the  Settlement  Account,  as
applicable,  in accordance  with this  Agreement and the rules and procedures of
the settlement institution. This authority shall remain in effect until five (5)
Business  Days  after  Bank  receives   written   notice  from  Company  of  its
cancellation of such authorization, provided that in the event of termination of
this Agreement, Company agrees to maintain the Settlement Account with


<PAGE>



sufficient  funds until such time as Company and Bank agree that all Chargebacks
and other  adjustments are processed and to permit Bank to credit and debit such
Settlement  Account until all charges,  Chargebacks  and other  adjustments  are
settled as provided in this  Agreement.  Bank shall not be liable to Company for
any  delays in  receipt  of funds or errors  in credit  entries  caused by third
parties  including,  but not limited to, a  clearinghouse,  Company's  financial
institution, or any agent of Company.

     2.8 Cardholder Credits and Payments.  Unless specifically  required by law,
Company will not give cash refunds to any  Cardholder in connection  with a Card
Sale. For each Credit issued by Company, Company will prepare and deliver to the
Cardholder a Credit Slip which  Company  will  complete in  accordance  with the
Operating Regulations. Company shall submit Sales Data evidencing each Credit to
Bank  within  one (1)  Business  Day  after  it is  issued  in  order  that  the
appropriate  Credit may be  entered on the  Cardholder's  Account.  Company  may
accept payment for a Card Sale from a Cardholder  (other than through the use of
the  Card) if  Authorization  for such  Card Sale is denied by Bank or such Card
Sale is charged  back to Company by Bank.  In  addition,  Company  may accept in
store payments on an Account from  Cardholders  provided that the payment amount
and Cardholder  information is submitted with the settlement  data and in a form
that is mutually agreeable to Bank and Company.

     2.9 Billing Inquiries and Cardholder Disputes.

     (a) Bank will notify  Company as soon as practical  when a  Cardholder  has
made a billing  inquiry or filed a billing error notice  relating to a Card Sale
made by Company.  Company agrees to investigate  and make a good faith effort to
resolve  each  billing  inquiry or dispute  referred  to it by Bank or  received
directly from a Cardholder. Within fifteen (15) Business Days from the date Bank
provides a billing  inquiry or dispute to Company,  Company shall notify Bank in
writing of the resolution thereof or the action Company will take to resolve the
billing inquiry or dispute. Company shall provide Bank with all such information
as Bank may reasonably request in connection therewith.

     (b) Bank shall continue to adjust disputed late fees and finance charges in
accordance with the same policy as in effect at Bank on the Effective Date.

     (c) In connection  with the  collection  of Accounts and the  resolution of
Cardholder  inquiries  and  disputes,  Bank shall  utilize a designated  unit of
trained  collection  and  customer  service  personnel  who will  interact  with
Cardholders in a professional and helpful manner.  Further, all collection calls
will be conducted in conformance with the debt collection  practices  provisions
of the Federal Fair Debt Collection  Practices Act and similar  applicable state
acts. In the event Company advises Bank of its receipt of a significant increase
in the  number of  complaints  from  Cardholders  relating  to Banks  collection
practices,  Bank will review with Company the nature of such complaints and Bank
will remedy any non-compliance with the aforementioned criteria.

     (d) Bank will notify Company of each lawsuit in which Bank is sued by or on
behalf of a Cardholder and Bank is found by a court of competent jurisdiction to
have  violated  the  Federal  Fair  Debt  Collection  Practices  Act or  similar
applicable state acts.



<PAGE>



     2.10 Chargeback Rights and Procedures.

     (a) Chargeback  Rights.  If Company has not complied with the terms of this
Agreement or with the Operating  Regulations  with respect to either the Opening
of  Accounts  or a Card Sale made by  Company,  or if, at the end of the fifteen
(15)  Business  Day  billing  inquiry/dispute  resolution  period  specified  in
paragraph 2.9 above, the billing inquiry or dispute is not resolved (or Bank has
not been informed of the  resolution or the action  Company will take to resolve
the billing  inquiry or dispute),  Bank may process a Chargeback  to Company for
the amount of the disputed portion of the Account balance,  the Card Sale or the
disputed  portion  thereof,  as  applicable.   Bank  will  supply  Company  with
reasonable  documentation  to  support  such  Chargeback.  If Bank  processes  a
Chargeback and the disputed amount is subsequently paid by the Cardholder,  Bank
will  promptly  reimburse  Company for the amount of the  disputed  Card Sale or
disputed portion thereof.

     (b) Method of Recourse. Bank is not required to pay Company for a Card Sale
which is being  charged  back.  If Bank has already  paid  Company for such Card
Sale,  Bank,  at its sole  discretion,  may deduct the amount to be charged back
from the  Settlement  Account or offset  such  amount  from a future  payment to
Company.  Any Chargebacks which are not paid by the aforesaid means shall be due
and  payable  by Company  promptly  on demand.  In the event  Bank  processes  a
Chargeback,  Bank will  supply  support  detail to Company to enable  Company to
attempt to collect such amount from its customer.

     (c) Company's Right to Collect from its Customer.  If Bank fails to pay for
the Card Sale for any reason (or exercises its right of Chargeback  with respect
thereto) then Company may pursue any rights or remedies  available to Company at
law or in equity  against its customer  (the  Cardholder or other person to whom
Company sold the Authorized  Goods) to recover payment for the Authorized  Goods
sold  by  Company,  and  the  initial  acceptance  by  Company  of the  Card  as
conditional  payment  therefor  is  not  intended  by  either  party  hereto  to
constitute  a waiver by  Company  of any such  rights or  remedies  against  its
customer.

     (d)  Compliance  with  Laws.   Notwithstanding  anything  to  the  contrary
contained herein,  in the event a Cardholder,  in accordance with the provisions
of applicable state law or the federal Truth in Lending Act and Regulation Z, as
they may be amended from time to time,  files with Bank a billing  error inquiry
or alleges a quality  dispute with respect to goods or services  purchased  from
Company,  Bank has the right of Chargeback  against  Company with respect to the
Card Sale which is the subject of such inquiry or dispute.

     2.11  Representations  and Warranties.  Company  represents and warrants to
Bank that each Card Sale will arise out of a bona fide sale of Authorized  Goods
by Company and will not involve the use of a Card for any other purpose.

     2.12  Reports.  Within 30 days  after the close of each  month,  Bank shall
supply Company with a monthly statement containing the following information for
said month:  Card Sales,  Credits,  in-store  payments,  Chargebacks,  and Daily
Remittances. Company may elect to receive additional reports available from Bank
containing additional information at Bank's then current price for such reports.




<PAGE>

     2.13 Standards.  The Standards are hereby  incorporated herein by reference
and constitute terms and provisions of this Agreement. The term "Agreement", and
all   references   thereto,   shall  be  deemed  to   include   the   Standards.
Notwithstanding  anything  to the  contrary  contained  in any  other  agreement
between Bank and Company,  or between Bank's  designated  processor and Company,
Bank agrees as follows:

     (a) Except as provided in paragraph 4.6 of this Agreement  (Force Majeure),
Bank  shall at all time  perform  (and/or  cause  its  designated  processor  to
perform) all of the Standards; and

     (b) in the event of any conflict or inconsistency  between the terms of the
Standards and any present or future Operating Regulations, the Standards, to the
extent that they do not conflict with applicable law, shall govern; and

     (c) Bank shall,  on a monthly basis,  at its expense,  furnish to Company a
written report as to the performance by it (and/or its designated  processor) of
the Standards  during the previous  month,  in  substantially  the form attached
hereto as Schedule C, reporting each incident of performance and non-performance
thereof with respect to the matters covered by the Standards.

     2.14 Observation and Review of Processing Facilities. At Company's request,
Bank shall,  at Bank's  expense,  provide to Company (x) a letter from Bank's or
its designated processor's  independent accounting firm reporting the results of
the accounting firm's review (as such may exist) of Bank's and/or its designated
processor's records and internal control procedures relating to the Accounts and
conformance with this Agreement,  or (y) (if no such review exists) will prepare
and provide to Company such review  following the accounting  period  succeeding
Company's request therefor.  At Company's request and expense,  Bank will permit
Company's auditors to make reasonable inquiries to Bank's independent accounting
firm to respond to any  questions  relating to such letter  provided to Company.
Upon reasonable notice and subject to reasonable scope and frequency, Bank shall
permit  Company's  employees to visit any of its processing  locations to review
and observe the records,  programs,  credit processing procedures and procedures
relating  to the  Accounts  or Bank's  obligations  under this  Agreement.  Upon
reasonable notice and subject to reasonable scope and frequency, Bank shall also
review with Company's employees Bank's scoring models in reasonable detail.

     2.15  Conflicts  and  Inconsistencies.  In the  event  of any  conflict  or
inconsistency  between the terms of this Agreement  (inclusive of the Standards)
and  any  present  or  future  Operating  Regulation  or  the  Network  Services
Agreement,  the terms of this  Agreement  shall  govern  unless  such  terms are
prohibited by law or regulation.



                                   ARTICLE III

                            RESPONSIBILITIES/PAYMENTS

     3.1 Bank's Responsibilities.

     (a)  Promptly  following  the  date  upon  which  this  Agreement  is fully
executed,  Bank will pay to  Company a one-time  payment  of [**] (the  "Initial
Payment"). If this Agreement is terminated prior


<PAGE>



to the end of the Initial  Term for any reason  pursuant to the sections of this
Agreement  referred to on Schedule F as to which "Yes" appears in the Fee Refund
column of  Schedule  F, Bank  shall be  entitled  to a  pro-rated  return of the
Initial Payment  described in this Section 3.1(a) based on the unexpired portion
of the intended  Initial Term of this  Agreement (74 months).  (For example,  if
this Agreement is terminated after 36 months, Bank would be entitled to a return
of 38/74ths of the Initial Payment [74-36=38].)

     (b) During the term of this  Agreement,  Bank will  compensate  SPS Payment
Systems,  Inc. ("SPS") for transaction  processing  services related to the Card
provided by SPS to Company pursuant to the Network Services  Agreement  attached
hereto as Schedule B.

     (c) During the term of this Agreement,  Bank will provide  servicing of the
Accounts from its center in Gray,  Tennessee;  provided,  however, that Bank may
move such  servicing to a different  location upon one hundred eighty (180) days
prior  notification to Company,  at which time,  Company will have the option to
terminate this Agreement upon written  notice,  given within thirty (30) days of
Company's  receipt of Bank's notice of relocation,  and elect a Purchase  Option
according to Section 4.4(d) of this Agreement.  Notwithstanding  the immediately
preceding  sentence,  Company cannot terminate the Agreement as provided in this
Section 3.1(c) if such  relocation is (x) required by a federal or state statute
or regulation or any court of competent jurisdiction, (y) a temporary (i.e., not
more than ninety (90) days) relocation, or (z) a natural disaster.

     (d) Bank agrees to conduct a Customer  Satisfaction Survey according to the
following guidelines and with the following consequences:

     (i) Customer  Satisfaction Survey. (i) Promptly after the execution of this
Agreement,  Bank shall retain (at Bank's expense) the services of an independent
firm to conduct  promptly a survey  (the  "Customer  Satisfaction  Survey")  the
purpose  of which  is to  measure  overall  customer  satisfaction  based on the
aggregate  percentage of Customers that respond "satisfied" and "very satisfied"
to the survey  questions  that are  determined  by the parties to be relevant to
identifying levels of customer satisfaction.  The aggregate level of "satisfied"
and "very  satisfied"  customers  identified by such initial survey shall become
the  baseline   satisfaction   percentage  for  purposes  of  measuring   Bank's
performance  under this Section.  Bank and Company shall mutually  establish the
target satisfaction percentage for each calendar year. Beginning on May 1, 1999,
during  the  term of this  Agreement,  Bank  shall  retain  the  services  of an
independent firm to conduct a Customer  Satisfaction Survey during each calendar
quarter,  on regularly  scheduled dates,  and to prepare a report  describing in
appropriate detail the results of such survey, comparing Bank's current level of
customer service for that quarter against target satisfaction  percentage.  Bank
shall discuss with  Company,  prior to Bank  committing to any change  mentioned
below, any proposed change in the method,  form or questions of the survey to be
used. Bank shall cause the firm which conducts each Customer Satisfaction Survey
to send the complete report thereon to Company at the same time as it is sent to
Bank.

     (ii) Meeting Customer Satisfaction  Standards. In the event that Bank fails
to meet the target satisfaction  percentage for any calendar quarter, Bank shall
report  to  Company  the  reasons  for  the  failure  to  achieve   such  target
satisfaction percentage and propose a plan for taking such action as Bank


<PAGE>



deems  appropriate  to meet such  target  satisfaction  percentage.  The parties
acknowledge that Company will be damaged by Bank's failure to meet such customer
satisfaction  standards  and that such  damages  would be difficult to quantify.
Therefore, if Bank fails to meet the customer satisfaction standards as measured
by the survey conducted closest to the third anniversary of this Agreement, then
Company may elect, by providing Bank with 180 days advance  written  notice,  to
terminate  this  Agreement  and  Company  shall have the right to  purchase  the
Accounts   pursuant  to  the  Purchase  Option  as  stated  in  Section  4.4(d).
Notwithstanding the foregoing, if any significant upgrade to the systems related
to the operation of the Accounts  (i.e.,  which might  reasonably be expected to
have a  favorable  impact  on Bank's  ability  to meet the  target  satisfaction
percentage) has been approved in advance by Company,  then Company's termination
rights under this  Section  shall be waived  during a  reasonable  period if and
while such upgrade is being actively implemented.

     (e) During  the term of this  Agreement,  Bank will pay to  Company  within
seven (7) days after the last  Saturday  after each  month end,  an amount  (the
"Privilege  Fee")  equal to [**] of Net Card  Sales by  Company  to  Cardholders
during the subject month.

     (f) Bank agrees to implement the following processes:

     (i) Bank will  implement  by  August 1,  1999,  an  "enhanced  statementing
process",  which will include the ability to place on monthly billing statements
messages,  coupons and/or advertisements which target the statements of specific
Cardholders or groups of Cardholders based on selected Account data,  geographic
location,  or Bank's Cardholder  Account number provided by Company.  (Bank will
not be required to add such  information on statements of Cardholders who do not
currently  meet Bank's  criteria  for  purchases,  and Bank will advise  Company
monthly of the number of Cardholders  who did not receive such  information  for
such  reason.) If Bank fails to  implement  the  enhanced  statementing  process
described in this  subsection  (i) by said date,  Company shall be entitled to a
payment of [**] per month for each  calendar  month in which the  process is not
available  for use by Company.  From and after such  implementation,  Bank shall
place on statements  such  messages,  coupons  and/or  advertisements  as may be
requested  from  time to  time  by  Company.  Bank  shall  not  place  any  such
information  on statements  for the purpose of  soliciting  sales of products or
services,  without  Company's  prior  written  consent.  However,  Bank shall be
entitled to place  information on statements that relates to the  administration
or collection of Accounts,  without the prior written  consent of Company.  Bank
shall not be entitled  to share in any fees or  commissions  by Company  paid by
vendors whose  products or services are sold to  Cardholders as a result of such
messages, coupons and/or advertisements.

     (ii) Bank will  implement by February 1, 2000,  an  "enhanced  statementing
process",  which  will  include  the  ability  to insert  with  monthly  billing
statements  up  to  nine  (9)  different  inserted   messages,   coupons  and/or
advertisements  per  statement  per  monthly  billing  cycle  which  target  the
statements of specific  Cardholders or groups of  Cardholders  based on selected
account data,  geographic location, or Bank's Cardholder Account number provided
by  Company.  If Bank  fails to  implement  the  enhanced  statementing  process
described in this subsection  (ii) by said date,  Company shall be entitled to a
payment of [**] per month for each  calendar  month in which the  process is not
available for use by Company. From and after such implementation, Bank shall


<PAGE>



insert such materials as may be requested from time to time by Company; provided
however,  that  Bank is  entitled,  at its  option,  to  utilize  up to five (5)
different  inserted messages or advertisements  each month,  including,  but not
limited to notices required by applicable law or regulation and envelopes.  Bank
shall not insert any such materials without the prior written consent of Company
(except notices required by applicable law or regulation).  If such vendors were
procured  by Bank and  approved by  Company,  then Bank and  Company  will split
evenly any fees or  commissions  paid by vendors whose  products or services are
sold to  Cardholders  using such  inserts,  with the  exception  of  products or
services related to credit insurance. Bank shall not be entitled to share in any
fees or  commissions  paid by vendors  procured  by Company,  whose  products or
services are sold to Cardholders  using such inserts.  Company agrees to pay any
additional postage expenses incurred by Bank for any monthly statements weighing
in excess of one (1) ounce, due solely to Company's  inserts.  Cardholders shall
not be  permitted  to purchase  goods  offered by such  inserts by use of credit
cards other than Cards issued by Bank.

     (iii) Bank  agrees to be prepared by October 1, 1999,  to  accommodate  the
receipt from  Company,  by electronic  transmission  to Bank's  electronic  data
interface  system,  of application  information for the opening of new Accounts,
and the  approval  by Bank of the opening of such new  Accounts,  which meet the
following standards:

     A. The receipt of application  information  requires  Company to conform to
data  transmission  requirements  specified  by  Bank.  Such  data  transmission
requirements,  as may be amended from time to time, shall be provided to Company
by Bank;

     B. Such accommodation to receive  applications must enable Bank to make the
credit  response to the application and return such response into the electronic
data interface system within an average time of sixty (60) seconds from the time
that the required application  information is received by Bank's electronic data
interface system.

     C. Bank shall  provide  Company with  application  processing  software and
reference materials to transmit the application information to Bank's electronic
interface system if Company  utilizes a compatible  Windows-based PC or Hypercom
T77GQ in all Company store locations at no cost to Company.  At Company's option
Bank will provide to Company  (using  either Bank  personnel or personnel of the
information input device vendor)  implementation  services, and Company will pay
Bank for such services the actual cost to Bank therefor.

     D. If Bank is not  prepared to  accommodate  the receipt from  Company,  by
electronic   transmission  to  Bank's   electronic  data  interface   system  of
application information for the opening of new Accounts and the approval by Bank
of the opening of such new Accounts by said date,  Company  shall be entitled to
an additional payment of [**] per month for each calendar month.

     (iv)  The  parties  specifically  acknowledge  that,   notwithstanding  the
payments  required to be made by Bank for the failure by Bank to  implement  the
processes  or  procedures  required  by this  section  3.1(f),  Company  is also
entitled to  terminate  this  Agreement  pursuant to the  provisions  of Section
4.4(b)(vii) for such failure.


<PAGE>

     (v) All amounts  payable by Bank to Company  under this Section  3.1(f) for
any calendar  month shall be paid within thirty (30) days of the last day of the
calendar month. All amounts payable by Bank to Company under this Section 3.1(f)
shall be deemed liquidated  damages, as to which the parties hereby stipulate as
follows:  (a)damages,  in the event of failure by Bank to  discharge  timely its
obligations  under this  Section  3.1(f),  are  incapable  or very  difficult of
accurate  estimation at the time this  Agreement was made;  (b) the parties have
discussed,  negotiated  and made a  reasonable  attempt  to fix the  appropriate
amount of  compensation  in the event of such  failure by Bank;  (c) the amounts
stipulated bear a reasonable  relationship to the probable  damages in the event
of such failure by Bank and are not  disproportionate  to any damages reasonably
to be anticipated, in a context where proof of loss would be very difficult; (d)
it would be  difficult,  if not  impossible,  for  Company to obtain an adequate
remedy in the event of a failure by Bank;  (e) Company and Bank have  relatively
equal bargaining  power; and (f) Company and Bank have relied upon advice of its
own counsel in entering into this Agreement,  including these liquidated damages
provisions.

     (g) Bank will pay to Company [**] one time for each new Account  opened and
activated in the same calendar  month during this  Agreement  (the  aggregate of
such amounts  payable to be paid within  seven (7) days after the last  Saturday
after each month end).

     (h) Bank will provide  thirty (30) days prior written  notice to Company of
the intended sale of any Ineligible  Accounts to any person or entity other than
Company.  Company will have the option, upon receipt of such notice, to purchase
such  Ineligible  Accounts  at a price  equal to  market  value  of the  Account
Balances  (determined  by bona fide written  offer to purchase  obtained by Bank
from an independent  third party).  Company must notify Bank of its intention to
purchase such  Ineligible  Accounts not later than ten (10) days after Company's
receipt of Bank's  notification.  If Company does not purchase  such  Ineligible
Accounts, then Bank can sell such Ineligible Accounts at a price and on terms no
more  favorable  than those set forth in the above  notice to Company,  provided
Bank shall sell only with a right of recall from the purchaser. The purchase and
sale  of  such  Ineligible  Accounts  shall  be  pursuant  to the  terms  of the
Additional  Purchase  Agreement (except for the price, which shall be determined
as set forth in this Subsection (h)).

     (i) Upon  request  by  Company  from time to time,  Bank  shall  provide to
Company a written copy of the application  information  required by Bank for the
opening of new Accounts.  The application  information  required by Bank for the
opening of new Accounts shall not, at any time, be substantially more burdensome
than the  information  then  required  by at least  two  other  banks or  credit
institutions that are major competitors of Bank in the business of private label
credit cards (including,  without  limitation,  GE Capital,  Bank One, Citibank,
Alliance Data Systems, and Household Retail).

     3.2 Payments by Company

     (a) Company will pay Bank such fees for services, forms or materials as set
forth in Schedule A which is attached hereto and incorporated herein.  Except as
otherwise set forth herein,  unless custom  development is requested by Company,
there shall be no further charges to Company for set up or conversion hereunder.

<PAGE>


                                   ARTICLE IV

                                  MISCELLANEOUS

     4.1 Indemnification.

     (a)  Indemnification  by  Company.  Company  shall be  liable  to and shall
defend,  indemnify  and hold  harmless  Bank  and its  officers,  employees  and
directors  for,  from and  against  any losses,  damages,  claims or  complaints
(including  reasonable outside  attorney's fees and  disbursements)  incurred by
Bank or its respective officers, employees and directors arising out of:

     Any claim,  complaint or setoff made by a  Cardholder  with respect to Card
Sales or Credits submitted by Company pursuant to this Agreement;

     (ii) Anything wrongfully done or not done by Company in connection with the
furnishing of any Authorized  Goods  purchased by  Cardholders  pursuant to this
Agreement; and

     (iii) The death or injury to any person or the loss,  destruction or damage
to any property arising out of the furnishing by Company of any Authorized Goods
purchased with the Card.

     (iv) Any claim or complaint of a third party in connection  with the use of
any  Tradename  or  Trademark on the Card or in  advertisements  and  promotions
relating to the Card Plan.

     (b)  Indemnification  by Bank.  Bank  shall be liable to and shall  defend,
indemnify  and hold harmless  Company and its officers,  employees and directors
for,  from and against  any losses,  damages,  claims or  complaints  (including
reasonable outside attorney's fees and disbursements) incurred by Company or its
officers,  employees  and  directors  arising out of any claim or complaint by a
Cardholder  with  respect  to  anything  wrongfully  done or not done by Bank in
connection with such Cardholder's  Account.  Notwithstanding the foregoing,  the
indemnification  by Bank shall not apply to any claim or  complaint  relating to
Company's failure to resolve a billing inquiry or dispute with a Cardholder.

     Bank further  agrees to defend,  indemnify and hold Company,  its officers,
employees and directors harmless from and against any claims,  demands,  damages
or assertions of liability of any kind or nature whatsoever, resulting from:

     (i) a breach of any of the terms, covenants, conditions or other provisions
hereof or any action taken by Bank  hereunder,  and from and against any and all
actions, suits,  proceedings,  assessments,  settlements,  judgments,  costs and
expenses, including legal fees, arising therefrom;

     (ii) the failure of any actions taken by Bank or any form, letter,  notice,
statement,  or other material used by it in connection  with the  performance of
its duties and obligations under this Agreement, to comply with


<PAGE>



the Federal  Consumer  Credit  Protections  Act and  Regulation  Z under Title I
thereof,   all   applicable   installment   sales,   billing  error  and  credit
discrimination  statutes or laws (including any regulations,  judicial decisions
and/or official  opinions  relating  thereto),  any applicable  statutes or laws
regarding the issuance of credit cards and/or liability thereon for unauthorized
use,  applicable  statutes or laws regarding the obtaining  and/or use of credit
reports and other information concerning individuals, any applicable statutes or
laws  regarding  the  collection  of debts,  or interest  charged  thereon,  any
applicable  requirements  relating to credits or credit balances,  and all other
applicable  Federal,  state and local statutes,  laws, rules or regulations with
respect to the  administration of the Card Plan under this Agreement,  including
but not limited to, those relating to unfair,  deceptive or unconscionable  acts
and practices,  except to the extent that such noncompliance results from an act
or acts of Company or Company's  failure to act, as required by this  Agreement;
and

     (iii) the  misfeasance,  malfeasance or fraudulent acts of any employees or
agents of Bank.

     The indemnity  provisions  under Section  4.1(b) hereof shall not apply and
the provision of Section 4.1(a)  hereunder  shall control to the extent that any
claims, demands, damages or assertions of liability are caused by the actions or
inactions of Company,  unless such action or inaction  occurred by reason of the
instructions of Bank or materials provided or specified by Bank.

     (c) Notice of Claim.  In the event that Bank or Company  shall  receive any
claim or demand or be subject to any suit or  proceeding of which a claim may be
made against the other under this Section 4.1, the indemnified  party shall give
prompt  written notice thereof to the  indemnifying  party and the  indemnifying
party will be entitled to participate in the settlement or defense  thereof and,
if the  indemnifying  party elects,  to take over and control the  settlement or
defense thereof with counsel satisfactory to the indemnified party. In any case,
the indemnifying  party and the indemnified party shall cooperate (at no cost to
the indemnified  party) in the settlement or defense of any such claim,  demand,
suit or proceeding.

     (d) Survival.  The terms of this Section 4.1 shall survive the  termination
of the Agreement.

     4.2 Card Plan Promotion; Advertising and Service Marks.

     (a) Limited  License.  Company hereby  authorizes Bank for purposes of this
Agreement to use the Tradenames and Trademarks,  whether or not registered,  and
any other proprietary designations, on the Card and in advertising and promoting
the Card Plan, subject to Company's prior periodic reasonable review of the form
of such use and to such reasonable  specifications of Company to the extent such
specifications  are directly related to the legal  maintenance of the Tradenames
and Trademarks,  if any. In addition,  Company authorizes Bank and Bank's credit
card processor to identify  Company as a client in trade  advertising  and trade
promotional  material,  including  the  use  of  Company's  corporate  name  and
representations  of the  credit  card  issued by Bank,  provided  however,  that
Company's  name  shall  be  used  only  in  the  context  of a list  of  current
representative clients of Bank and Bank's processor.



<PAGE>



     (b) Promotion of the Card Plan.  Company shall prominently  display at each
of its locations  advertising  and  promotional  materials  relating to the Card
Plan,  including  without  limitation  "take-one"  applications  for  the  Card.
Further,  to the extent Company displays other third party credit or charge card
materials,  it shall display the advertising and promotional  materials relating
to the Card Plan in a manner and with a frequency  equal to or greater than that
accorded any other third party credit or charge card.  Company shall only use or
display such  materials  in  accordance  with the  Operating  Regulations  or in
accordance  with any  specifications  provided by Bank.  Bank and Company  shall
cooperate in the development of advertising and display materials and such other
operating forms and materials necessary to promote the Card and make Card Sales.
All advertising  copy relating to the Card Plan produced or used by Company must
be  presented  to Bank in writing for its approval in advance of any use thereof
and may not be used without having been so approved. Bank may charge Company and
Company agrees to pay for credit  applications  and for any other  materials and
forms requested by Company.  Any materials which refer to Bank shall not be used
by Company following termination of this Agreement.

     (c) Cardholder  Solicitation.  Any solicitations of Company's  customers or
any other  consumers  by Bank  during the term of this  Agreement  must be first
mutually agreed to by Bank and Company but subject to Bank's credit analysis and
determination.  During  the  term  of this  Agreement,  Cardholders'  names  and
addresses  shall be deemed the property of Bank.  Company's  customer  names and
addresses  shall be deemed the property of Company.  The names and  addresses of
Company's  customer  base may be used by Company for any purpose not  prohibited
under  this  Agreement.  Cardholder  information  may be used  by  Bank  for the
maintenance  of Accounts and operation of the Card Plan so long as Bank does not
use such  information  in a manner that is  anti-competitive  and  injurious  to
Company's retail  business.  After  termination of this Agreement,  in the event
Company does not purchase all of Bank's outstanding Card receivables, Bank shall
not be  restricted  in its use of  Cardholder  information,  including,  without
limitation, conversion of the Accounts to another Bank program, except that Bank
shall not sell Company's  customer list to a direct competitor of Company unless
such list is sold in conjunction with a sale of the outstanding Card receivables
to that  competitor.  During the term of this Agreement,  Bank cannot use, sell,
transfer,  or  otherwise  dispose of or permit  third party  access to or use of
(with or without  compensation  to  Bank)Cardholder  information for any purpose
(including  Cardholder  solicitations  of any nature)  without the prior written
consent of Company.

     (d)  Periodic  Meetings.  Company and Bank shall meet  periodically  and as
necessary  by  mutual  agreement  to  discuss  the  performance,  operation  and
promotion of the Card Plan. At these  meetings,  Bank will discuss with Company,
prior  to  implementation,  any  changes  which  Bank  intends  to  make  to the
Cardholder  Agreements  that  might  affect  the  cost of the  Card  Plan to the
Cardholder.   After  such  discussions,  any  such  changes  to  the  Cardholder
agreements  which would increase the cost of the Card Plan to the Cardholder may
only be made by Bank (i) if required by applicable  law or  regulation,  or (ii)
with Company's prior consent,  such consent not to be unreasonably  withheld, or
(iii) if a majority of Company's  competitors  which are major national  women's
apparel  retailers and which issue private  label cards (either  proprietary  or
third party), are or have been offering similar terms to their cardholders.  For
purposes of this paragraph, the such competitors of Company means United Retail,
Charming Shoppes,  May Department Stores,  Dillard Department Stores,  Federated
Department Stores, The Limited Inc., and Dayton-Hudson Department Stores.


<PAGE>


     (e) Marketing  Fund.  Beginning on January 1, 1999, and on each January 1st
thereafter during the Initial Term of this Agreement,  Bank shall make available
to  Company  an  amount  equal  to at  least  [**] to be used  during  the  next
succeeding twelve-month period by Company and Bank for mutually agreed upon Card
promotions.  Amounts  not spent or  committed  prior to  December 31 of any such
twelve-month  period during the Term will not carry over to the next such period
and will be retained by Bank.  Amounts up to the  aforesaid  limit shall be paid
directly by Bank or if,  handled by Company,  shall be promptly  paid by Bank to
Company,  upon presentation by Company to Bank of invoices (no later than ninety
(90) days from the date of the invoice)  for  expenses  (paid or to be paid) for
such  mutually  agreed  promotions,  as if such amount were a Card Sale  amounts
under paragraph 2.7. Notwithstanding the foregoing,  such annual promotional sum
shall only be made available by Bank on each such January 1st if the outstanding
balance  of all  Accounts  on such date is greater  than 90% of the  outstanding
balance of all Accounts measured as of February 1, 1999.

     4.3 Books and Records.  Company shall retain an original copy of each Sales
Slip and Credit  Slip for one hundred  180 days  following  the date of the Card
Sale and a  microfilm  or other  copy  thereof  for a total of seven (7)  years.
Company  will send to Bank the  original  or a legible  copy of any Sales  Slip,
Credit Slip or any other record  relating to this Agreement  retained by Company
within fifteen (15) Business Days of a request from Bank.

     4.4 Term and Termination.

     (a) Term.  This Agreement  shall become  effective as of the Effective Date
when executed by authorized  officers of each of the parties and shall remain in
effect (unless otherwise terminated as provided herein) through January 31, 2005
(the "Initial  Term") and shall continue  thereafter for additional two (2) year
periods  ("Subsequent  Term(s)")  unless either party provides written notice of
termination  at least  one (1)  year  prior  to the end of the  Initial  Term or
Subsequent  Term(s).  The  termination  of this  Agreement  shall not affect the
rights  and  obligations  of  the  parties  with  respect  to  transactions  and
occurrences which take place prior to the effective date of termination,  except
as otherwise provided herein.

     (b) Termination. This Agreement may otherwise be terminated, in addition to
the termination  provisions  contained in Sections 3.1(c),  (d)(ii) and (f), and
Section 4.10, as follows:

     (i) by Bank or Company  immediately  upon  notice to the other party in the
event the other party shall for  reasons of  insolvency  (a) elect to wind up or
dissolve its operation or is wound up and dissolved,  (b) make an assignment for
the benefit of  creditors,  (c) file a voluntary  petition in  bankruptcy or for
reorganization  or is  adjudicated  as  bankrupt  or  insolvent,  or (d)  have a
liquidator or trustee  appointed over its affairs and such appointment shall not
have  been  terminated  and  discharged  within 30 days  thereof;  or by Bank or
Company upon 60 days prior  written  notice to the other party in the event that
other  party  becomes  insolvent  or  repeatedly  fails to pay its debts as they
become due or  otherwise  suffers a  material  adverse  change in its  financial
condition  (for purposes of this  Agreement,  a material  adverse  change in the
party's  financial  condition  shall  mean but not be  limited  to a default  in



<PAGE>



payment or some other failure to meet a debt  obligation,  either of which is of
such a  material  nature  that a  lender  could  declare  a  default),  and such
condition shall not have been cured prior to the expiration of the 60 day notice
period; or

     (ii) by Bank or Company upon 30 days prior  written  notice to the other in
the event the other materially breaches its obligations  hereunder provided that
such  termination  shall be deemed  ineffective if the breaching party cures its
breach within the 30 day period; or

     (iii) by Bank upon 30 days  prior  written  notice to  Company in the event
that Company  closes or otherwise  ceases  operation in twenty  percent (20%) or
more of its retail locations (as such exist on the Effective Date) such that the
aggregate of such closures or cessations materially impacts the Cardholder's use
or the utility of their Accounts (provided, however, that if Company disposes of
a division to a third party, Bank will not unreasonably  object to entering into
a Merchant Services Agreement with such third party and, if no such agreement is
entered into, Bank may cause Company (or a third party designated by Company) to
purchase that portion of the Accounts and  outstanding  receivables  relating to
that division under the purchase requirements in Section 4.4(c) herein); or

     (iv) by  Company,  upon six (6) months  prior  written  notice to Bank,  if
during any three (3) consecutive  month period Bank fails to comply (or fails to
cause its designated processor to comply) with any two or more of the Standards;
or

     (v) by Company, upon six (6) months prior written notice to Bank, if during
any 12  consecutive  month  period  Bank  fails to comply (or fails to cause its
designated  processor to comply) with any two or more of the Standards (computed
by measuring  the average  performance  of each  Standard over the entire twelve
month period); or

     (vi) by Company,  upon six (6) months prior written  notice,  if during the
Initial  Term of this  Agreement,  Bank is sued by or on  behalf  of one or more
Cardholders and found by one or more courts of competent jurisdiction in a total
of three  separate  lawsuits to have violated the provisions of the Federal Fair
Debt Collection Practices Act (or a similar applicable state act).

     (vii) by Company, upon six (6) months prior written notice to Bank, if Bank
fails to implement by the third  anniversary  date of the Effective Date, any of
the processes or procedures required by Section 3.1(f).

     (viii) by Company,  upon not less than six (6) months prior written  notice
to Bank, if Bank implements a new scoring model pursuant to Section 2.1(c),  the
prior  testing  or actual  implementation  of which  reflects  a 20% or  greater
reduction in application approval rates.


     (c) Purchase Requirement.

     (i) If any  event  arises  that  would be a basis for  termination  of this
Agreement  by Bank under  Section  4.4(b)(ii)  or (iii),  Bank may,  at its sole
option,  require Company,  its successors and assigns, to purchase,  or to cause
its parent corporation, if any, to purchase from Bank or Bank's designee


<PAGE>



(subject to the terms of any then current securitization agreements of Bank) all
of the Assets to be Sold at a price  equal to 102% of the Account  Balances.  In
the event of any such  required  purchase,  Bank's  refund  rights under Section
3.1(a) shall be as set forth on Schedule F.

     (ii) If any event  arises  that  would be a basis for  termination  of this
Agreement by Bank under Section 4.4(b)(i) or 4.10, Bank may, at its sole option,
require Company, its successors and assigns to purchase,  or to cause its parent
corporation,  if any, to purchase from Bank or Bank's  designee  (subject to the
terms of any then current  securitization  agreements of Bank) all of the Assets
to be Sold at a price equal to 100% of the Account Balances. In the event of any
such required  purchase,  Bank's refund rights under Section  3.1(a) shall be as
set forth on Schedule F.

     (iii)  Notwithstanding  any  other  provisions  herein,  if  Bank  (or  its
designee)  is a  party  to any  securitization  agreement  with  respect  to any
receivables  of the Accounts  (comprising  Assets to be Sold) at the time of any
purchase thereof by Company (its successors,  assigns, or parent company),  then
Bank (or its designee)  shall be entitled to cause the sale and delivery of such
particular  receivables to be delayed to the extent reasonably  necessary for it
to remove the encumbrance of such securitization agreement, and Company (or such
purchasing  entity)  shall not be  required to pay the  purchase  price for such
receivables until such time as such receivables are so delivered, all as further
described in the Additional Purchase Agreement.

     (iv)  Notwithstanding any other provision herein, if Company is required or
permitted to purchase the Assets to be Sold under the terms hereof, then Company
(or its designated purchaser of the Assets to be Sold) shall also have the right
to purchase  the  Ineligible  Accounts.  The purchase  price for the  Ineligible
Accounts  shall be (at Bank's  option)  the greater of zero or the amount of any
bona fide bid Bank receives therefor from an unaffiliated third party; provided,
however,  that if Bank elects to sell the Ineligible Accounts hereunder for more
than zero,  then Company (or its designated  purchaser of the Assets to be Sold)
may refuse to purchase the Ineligible Accounts.

     (d) Company's  Purchase  Option.  If any event arises that would be a basis
for termination of this Agreement by Company under Sections 3.1(c),  3.1(d)(ii),
3.1(f),  4.4(b)(i),  (ii),  (iv),  (v), (vi) or (vii), or 4.10 (see Schedule F),
Company may, at its sole option,  require Bank,  its  successors  and assigns to
sell or to cause its parent corporation, if any, to sell to Company or Company's
designee (subject to the terms of any then current securitization  agreements of
Bank)  all of the  Assets  to be Sold at a price  equal  to 100% of the  Account
Balances,  pursuant  to the  terms of the  Additional  Purchase  Agreement.  The
provisions  of  Section  4.4(c)(iii)  and (iv)  above  shall  also  apply in the
circumstances  described  in this  Section  4.4(d).  In the  event  of any  such
optional  purchase,  Bank's refund  rights under Section  3.1(a) shall be as set
forth on Schedule F.

     (e) Termination of Card Acceptance.  Bank upon 30 days prior written notice
to Company may elect to  terminate  the  acceptance  of the Card at a particular
Company  location if  acceptance of the Card at such location is subject to high
fraudulent activity,  excessive  Chargebacks or other course of business conduct
that is  materially  injurious  to the  business  relationship  between Bank and
Company, where Bank has provided 60 days prior written notice to Company of such
activity  or conduct and Company has not either (i) cured such within the 60 day
period,  or (ii) has not put in place within such period  reasonable  procedures
where  such  will be cured  within  an  additional  30 days.  Termination  of an
individual Company location shall not affect this Agreement.
<PAGE>


     (f) Duties Upon  Termination.  Upon termination of this Agreement,  Company
will  promptly  submit  to  Bank  all  Sales  Data  made  through  the  date  of
termination.  In  the  event  Company  purchases  all of  the  outstanding  Card
receivables from Bank or Bank's  designee,  Company shall be entitled to receive
from Bank the books and  records  relating  to the Card  Plan.  In the event any
notice of  termination is given by Company or Bank pursuant to the terms of this
Agreement,  Bank agrees to maintain,  until the effectiveness of the termination
so noticed, a level of services which satisfies the Standards.

     (g)  Reasonable   Adjustments  to  Additional   Purchase  Agreement  as  to
Designees,  Etc. Bank and Company acknowledge that pursuant to the provisions of
paragraph 4.4(c) of this Agreement, Bank may appoint a designee to be the seller
of the Assets to be Sold under the Additional Purchase Agreement, and/or require
the  successors,  assigns,  or parent  corporation (if any) of Company to be the
purchaser thereunder.  Bank and Company further acknowledge that pursuant to the
provisions of paragraph 4.4(d) of this Agreement, Bank may appoint a designee to
be the seller of the Assets to be Sold under the Additional  Purchase Agreement,
and/or  Company  may  appoint  a  designee  to  be  the  purchaser   thereunder.
Notwithstanding  anything to the  contrary  contained  herein,  Bank and Company
agree that if any such entity is  appointed as seller or purchaser of the Assets
to be Sold in accordance  with  paragraphs  4.4(c) or (d) hereof,  then Bank and
Company  shall  make such  changes  and  revisions  to the  current  form of the
Additional  Purchase  Agreement  attached  as  Schedule  G  hereto,  as  may  be
reasonably  necessary  (prior to the  execution  thereof) to insert and describe
such other entity therein in such capacity,  and to properly define and describe
the Assets to be Sold, the Credit Card Business, and the other matters disclosed
or covered by the provisions thereof.

     (h) Other  Reasonable  Adjustments  to Additional  Purchase  Agreement.  In
addition to the foregoing  paragraph  4.4 (g),  regardless of whether or not any
such appointment is made by Bank or Company, Bank and Company each agree that in
the event a sale of the Assets to be Sold is to occur pursuant to the provisions
of paragraphs 4.4(c) or (d) of this Agreement, then they shall each perform such
other acts and deeds,  and make such other revisions to the Additional  Purchase
Agreement,  as may be  reasonably  necessary to  effectuate  an orderly sale and
transfer  of the  Assets  to be Sold in  accordance  with the  overall  intents,
purposes,  and economic  terms of this  Agreement  and the  Additional  Purchase
Agreement without materially or substantially changing the economic terms of the
Additional Purchase Agreement.

     4.5 Status of the Parties. In performing their responsibilities pursuant to
this Agreement, Bank and Company are in the position of independent contractors.
This  Agreement is not  intended to create,  nor does it create and shall not be
construed  to  create,  a  relationship  of  partner  or  joint  venturer  or an
association  for  profit  between  Bank and  Company.  Further,  notwithstanding
anything contained in this Agreement to the contrary, any third party designated
by Company  to obtain  Authorization  or perform  data  capture,  remittance  or
Settlement  functions  hereunder  shall be subject to the  approval  of Bank and
shall be deemed to be the agent of  Company  for all such  purposes  and not the



<PAGE>

agent of Bank and Company  shall be fully liable for the fees and actions of any
such third party with respect to obtaining such Authorization or the performance
of such functions.

     4.6 Force Majeure.  Neither party to this Agreement  shall be liable to the
other (and this Agreement  shall not be subject to termination) by reason of any
failure in performance  of this  Agreement in accordance  with its terms if such
failure  arises  out of causes  beyond  the  control  and  without  the fault or
negligence of such party. Such causes may include but are not limited to acts of
God or of the public enemy, acts of civil or military authority, fires, strikes,
unavailability of energy resources,  delay in  transportation,  riots or war. In
the event of any force majeure occurrence, the disabled party shall use its best
efforts to meet its  obligations  as set forth in this  Agreement.  The disabled
party shall  promptly  and in writing  advise the other party if it is unable to
perform due to a force majeure event, the expected duration of such inability to
perform,  and of any  developments  (or changes  therein)  that appear likely to
affect the ability of that party to perform any of its obligations  hereunder in
whole or in part.

     4.7  Confidentiality.  In  performing  its  obligations  pursuant  to  this
Agreement,  each party may have access to and receive  certain  confidential  or
proprietary  information about the other party,  including,  but not limited to:
such party's  marketing  philosophy and objectives,  competitive  advantages and
disadvantages,  Cardholder and customer names and addresses,  financial results,
technological development, store locations, sales volume(s),  merchandise mix or
other  information of the business or affairs of each party, its parent company,
or  its  affiliated  and  subsidiary  companies,  which  that  party  reasonably
considers confidential and/or proprietary (hereinafter  collectively referred to
as  "Confidential  Information").  Both parties agree that they will reveal such
Confidential  Information  only  to  those  of  their  directors,  officers,  or
employees (or, with regard to Company,  directors,  officers or employees of any
of its operating  divisions/subsidiaries  which accept or may consider accepting
the Card, and, with regard to Bank,  directors,  officers, or employees of Bank,
or its affiliates which are involved in the development of the Card program) who
are engaged in the  implementation  of  policies,  programs or  procedures  with
regard to the  acceptance  of the Card by Company.  Each party agrees not to use
such Confidential  Information nor to disclose  Confidential  Information to any
third  party,  except  as may  be  necessary  for  that  party  to  perform  its
obligations  pursuant to this  Agreement and except as may be agreed upon by the
parties.  If either should disclose  Confidential  Information to a third party,
such  party  shall  cause  said  third  party to  agree  to the  confidentiality
provisions set forth in this paragraph 4.7.

     Confidential  Information  shall  not  include  information  in the  public
domain,  information  already known by the party receiving the information prior
to  commencing  the  discussions  that led to this  Agreement,  and  information
lawfully obtained from a third party. The provisions of this Paragraph 4.7 shall
survive the termination of this Agreement.

     4.8 Access to Cardholder List. Company may request from Bank the Cardholder
names and addresses of  Cardholders  who use their Cards to purchase  Authorized
Goods.  With  respect  to each  such  request,  except  when  Company  uses  the
Cardholder  information  only to sell or advertise any  Authorized  Goods,  Bank
shall charge and Company agrees to pay a fee in the amount set forth in Schedule


<PAGE>



A. Except as  specifically  provided in the  definition  of  Cardholder  herein,
during the term of this Agreement,  any other use of such Cardholder information
including,  without  limitation,  the disclosure or sale of such  information to
third parties, is prohibited and is subject to the confidentiality provisions of
Paragraph 4.7.

     4.9 Financial Information. At least annually, Company shall provide to Bank
financial  statements  prepared by Company and audited by an independent  public
accounting firm in the form required to be presented in an Annual Report on Form
10-K (or its successor form) to the Securities and Exchange Commission.  Company
shall provide to Bank quarterly unaudited  financial  information for Catherines
Stores  Corporation  for  the  previous  quarter,  in the  form  required  to be
presented  in a  Quarterly  Report on Form 10-Q (or its  successor  form) to the
Securities and Exchange Commission

     4.10 Assignability;  Successors and Assigns.  This Agreement and any of the
rights,  interests  and  obligations  of either of the parties  hereunder may be
assigned  to a parent,  subsidiary,  or  affiliate  of either  party  (including
without  limitation the  Affiliates).  Bank may assign this Agreement to a third
party upon the sale of all or  substantially  all of its assets or stock to such
third party, provided however that in the event Bank assigns this agreement to a
party other than an affiliate or subsidiary of Bank,  Company may terminate this
Agreement  upon at least 60 days prior written  notice and shall have the option
to purchase all of the outstanding Card receivables from Bank or Bank's designee
in accordance  with the terms Section 4.4(d) of this  Agreement.  This Agreement
may  not  otherwise  be  assigned  without  the  prior  written  consent  of the
non-assigning  party,  which  consent  shall  not be  unreasonably  withheld  or
delayed.  The rights and  obligations  of the parties  hereto shall inure to the
benefit of and shall be binding upon the  successors  and  permitted  assigns of
each of them.  Company  shall  notify Bank within 20 days after it or its parent
corporation,  if any, agrees to merge or be consolidated into or transfer all or
substantially  all of either of their  respective  assets to another entity.  In
such event if the new entity does not meet Bank's financial  requirements  (that
the net worth of assignee be equal to or greater than  Company's net worth as of
the Effective Date) Bank may, within 30 days of its receipt of Company's notice,
terminate this Agreement upon 60 days written notice to Company. Notwithstanding
anything to the contrary herein,  Company is entitled, at any time and from time
to time,  without  the  consent of or notice to Bank,  to grant to any person or
entity, as collateral  security for the payment or performance of any present or
future indebtedness,  obligation,  or liabilities of Company or any other person
or entity, a security interest, collateral assignment, pledge, or other lien in,
on, or with respect to any or all of Company's present or future rights (whether
now existing or hereafter  acquired) to receive payments of monies or funds from
Bank (or its designee) under the terms of any prior Merchant Services  Agreement
or this Agreement (as modified or amended from time to time).

     4.11 Amendment. Except as otherwise provided herein, neither this Agreement
nor any of its  provisions  shall be  amended  or  modified  except  in  writing
executed by a duly authorized officer of each party.

     4.12 Severability.  If any provision, or portion thereof, of this Agreement
is held invalid,  illegal,  void or  unenforceable by reason of any rule or law,
administrative  order,  judicial decision or public policy, all other provisions
of this Agreement shall nevertheless remain in full force and in effect.


<PAGE>


     4.13 Entire Agreement. This Agreement,  including the Operating Regulations
and any exhibits and documents incorporated by reference, constitutes the entire
Agreement  between the parties in connection  with the acceptance of the Card by
Company and supersedes all prior agreements,  negotiations and communications on
such subject matter.

     4.14  Governing  Law. This  Agreement  will be governed by and construed in
accordance with the laws of the State of South Dakota.

     4.15 Applicable Law or Regulation.  It is expressly understood that changes
in  the  performance  of  either  party's   obligations   under  this  Agreement
necessitated  by a change in  interpretation  by any  federal or state  court or
regulatory agency of competent  jurisdiction of any applicable  federal or state
statute or regulation will not constitute a breach of this Agreement.

     4.16  Waivers.  Neither  party  shall be deemed to have  waived  any of its
rights,  powers or remedies under this Agreement  unless such waiver is approved
in writing by the waiving party.

     4.17 Notices. Whenever notice or demand under this Agreement is given to or
made upon either party by the other party,  such notice or demand shall be given
in writing,  either (i) by depositing it in the United States mail  addressed to
such party at its address as set forth below, with postage thereon prepaid,  and
any  notice or demand so mailed  shall be deemed to have been  given at the time
when it was mailed, or (ii) by courier,  telecopier, or similar method, and such
notice or demand  shall be deemed to have been given when the telex,  cablegram,
writing, or other form of notice or demand is either personally delivered to the
party  or  delivered  to  the  address  set  forth  below.  Notwithstanding  the
foregoing,  notice of intent to terminate  this  Agreement and notice of default
shall be sent by certified or registered mail, return receipt requested.

If to Bank:                         Hurley State Bank
                                    811 East 10th Street
                                    Sioux Falls, South Dakota  57103
                                    Attn:   President

With a copy to:                     SPS Payment Systems, Inc.
                                    2500 Lake Cook Road
                                    Riverwoods, Illinois  60015
                                    Attn: General Counsel

If to Company:                      Catherines, Inc.
                                    3742 Lamar Avenue
                                    Memphis, Tennessee  38118
                                    Attn: Chief Financial Officer
With a copy to:                     Waring Cox PLC
                                    50 North Front Street
                                    Memphis, Tennessee  38103
                                    Attn: Sam D. Chafetz, Esq.

     EITHER PARTY MAY CHANGE THE ADDRESS TO WHICH NOTICE SHALL BE SENT BY GIVING
WRITTEN NOTICE OF SUCH CHANGE TO THE OTHER PARTY IN THE MANNER PROVIDED HEREIN.


<PAGE>



     4.18  Captions.  The captions used in this Agreement have been inserted for
convenience  and for  reference  only and shall not be deemed to limit or define
the text of this Agreement.

     4.19  Counterparts.  This  Agreement  may be  executed  by the  parties  in
separate  counterparts,  each of which shall  constitute  an original but all of
which shall constitute one and the same Agreement.

     4.20 No Third Party Rights.  Nothing in this  Agreement  shall create or be
deemed to create any third party  beneficiary  rights in any Person not party to
this Agreement.


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


CATHERINES, INC.                                 HURLEY STATE BANK


By:________________________                      By:  _______________________

Title: _____________________                     Title: _____________________


<PAGE>



                                   SCHEDULE A

                                      FEES


                                   ITEM AMOUNT

1.   Credit  cards  and  card  carriers,   in-store  forms,   including   credit
     applications  and sales and credit slips  (Company  shall have the right to
     supply the above in a form approved by Bank Cost Company's  expense):  plus
     15% handling

2.   Each tape file or exception report of Cardholder names and addresses

                  12 per year free upon request.
                  Each request thereafter:                               $150

3.   System changes requested by Company: Cost


<PAGE>



                                   SCHEDULE B
                                NETWORK SERVICES

                                   (ATTACHED)


<PAGE>



                                   SCHEDULE C
                                    STANDARDS

     The following rules constitute the Standards. As of the date hereof, Bank's
designated  processor for fulfilling the Standards is SPS Payment Systems,  Inc.
("SPS"):


OPERATING HOURS:

     SPS shall  operate  the  following  departments  during  the days and hours
(E.S.T.) listed below. SPS shall extend these hours to accommodate  Company when
normal store hours are extended due to special  sales events and seasonal  sales
events. A minimum of a 14 day advance written notice is required from Company to
enable SPS to accommodate the change in normal  operating hours. SPS will notify
Company 30 days in advance if the operating hours or days are changed.

NEW ACCOUNTS:
         8 a.m. to Midnight, Monday through Saturday.  Sundays, 10 a.m. to
         Midnight
AUTHORIZATIONS:
         9 a.m. to Midnight, Monday through Saturday. Sundays, 11 a.m. to 9 p.m.
CUSTOMER SERVICE:
         9 a.m. to 7 p.m., Monday through Friday
COLLECTIONS:
         8 a.m. to 9 p.m., Monday through Saturday

     The above  departments  hours and days of operation  will be altered on the
following holidays: New Years Eve and New Years Day, Christmas Eve and Christmas
Day, and Thanksgiving Eve and Thanksgiving Day.

PERFORMANCE

Monthly average answering time for:

     New  Accounts,  except 11 A.M.- 2 P.M.,  shall not  exceed:  30 Seconds New
     Accounts 11 A.M.-2.P.M. shall not exceed: 20 Seconds

     Authorizations,  except 11 A.M.  - 2 P.M.,  shall not  exceed:  30  Seconds
     Authorizations,  11 A.M. - 2 P.M.,  shall not exceed : 30 Seconds  Customer
     Service shall not exceed: 45 Seconds

     The monthly Abandon Call Rate shall not exceed: 4.5%

     The monthly average  processing  time* for new Accounts shall not exceed: 5
     Minutes

     Network Availability shall equal or exceed: 98%

*  New Application processing time will be 5 minutes for current processing.
This will be 60 seconds for new processing

SPS shall use its existing  systems to track and report the monthly  performance
of the above performance standards.


<PAGE>

SYSTEMS

     The Voice Response Unit shall be available from 7 A.M. to Midnight (EST), 7
days a week.  The  Telephone  System shall be available  from 9 A.M. to Midnight
(EST),  7 days a week.  A manual  log of the "down  time" of the above  shall be
maintained  for Catherines  review.  This manual log will be kept to the best of
SPS' knowledge.

     The Network shall be available 7 days a week during  operating hours listed
above in Operating Hours and Systems. The availability shall be 98% of the time.
Reporting  of Network  Series 1  availability  shall be  provided  to SPS by the
network supplier.

PHONE AND WRITTEN INQUIRIES

     Phone and written  inquiries  to Customer  Service  shall be resolved in an
average of 4  business  days or less,  from the day  received.  Inquiries  which
require  Company  to assist in  resolving  (such as  ticket  retrieval)  are not
included in this measurement. During periodic visits to the Operations Center an
authorized  representative of Company may survey Cardholder  Accounts to measure
the resolution rate of phone inquiries.

COLLECTIONS

     SPS will operate its collection  activity in accordance  with the Fair Debt
Collection Act, or other legal requirements in effect.

     1. Full payment of Account Balance will not be demanded from the Cardholder
as a routine collection procedure.

     2.  Customers  may be  allowed  to make  arrangements  as low as one months
payment.

     3. With two  consecutive  minimum  payments,  a customer's  Account will be
brought current at least once in a 15 month period.

     4. Triad  collection  strategies  will be  reviewed  in general  terms with
Company.

5. Customers will be given 5 days from promised  payment date before a follow-up
call is made, as a routine collection procedure.

     6. SPS will notify Company if collection calls are made on Sunday.



<PAGE>


                                   SCHEDULE D
                                     REPORTS




<PAGE>



                                   SCHEDULE E
                                 INQUIRY SCREEN







<PAGE>



                                   SCHEDULE F
                               TERMINATION MATRIX

<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>


     Section                  Event General Summary               Purchase Price           Prorated Fee Refund
<C>                <C>                                                 <C>                  <C>
3.1(c)             Bank servicing moves from Gray                      100%                         No
3.1(d)( ii)        Bank customer satisfaction failure                  100                        Yes
3.1(f)             Bank failure to produce technology            See 4.4(b)(vii)            See 4.4(b)(vii)
4.4(b)(i)          Company insolvency, etc.                            102                         No
                   Bank insolvency, etc.                               100                         No
4.4(b)(ii)         Company breaches                                    102                        Yes
                   Bank breaches                                       100                         No
4.4(b)(iii)        Company closes 20% of stores                        102                        Yes
4.4(b)(iv)         Bank fails standards                                100                         No
4.4(b)(v)          Bank fails standards                                100                         No
4.4(b)(vi)         Bank loses lawsuits                                 100                         No
4.4(b)(vii)        Bank fails to implement                             100                       Yes
                   processes/procedures
4.4(b)(viii)       Scoring model change                                100                         No
4.10               Bank merges, etc.                                   100                         No
                   Company merges, etc.                                100                        Yes
------------------ -------------------------------------------- ----------------------------- ----------------
</TABLE>








<PAGE>



                                   SCHEDULE G
                          ADDITIONAL PURCHASE AGREEMENT