EXHIBIT 10.1

             AMENDMENT NO. 5 TO THE COMPANY'S FINANCING AGREEMENT,
       DATED MARCH 25, 1998, WITH THE CIT GROUP/COMMERICAL SERVICES, INC.
                 AS AGENT FOR ITSELF AND CERTAIN OTHER LENDERS,
                             AS PREVIOUSLY AMENDED















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                                 FIFTH AMENDMENT

                           TO THE FINANCING AGREEMENT



            FIFTH AMENDMENT,  dated as of March 25, 1998 (this "Amendment"),  to
the Financing Agreement,  dated as of February 13, 1996, as amended by the First
Amendment  dated as of February 13, 1997, the Second  Amendment dated as of June
1,  1997,  the  Third  Amendment  dated as of  October  1,  1997 and the  Fourth
Amendment  dated  as of  November  28,  1997  (as  so  amended,  the  "Financing
Agreement"),  by and among  Happy Kids,  Ltd.,  a New York  corporation  ("Happy
Kids"), O'Boy Inc., a New York corporation  ("O'Boy"),  Talk of the Town Apparel
Corp., a New York corporation ("TOT Apparel"),  O.P. Kids,  L.L.C., a New Jersey
limited  liability  company ("OP, LLC", and together with Happy Kids, O'Boy, and
TOT  Apparel,  each  a  "Borrower"  and  collectively,   the  "Borrowers"),  the
guarantors  listed on Schedule B to the Financing  Agreement (each a "Guarantor"
and  collectively,  the  "Guarantors"),  the lenders listed on Schedule A to the
Financing Agreement (each a "Lender" and collectively the "Lenders") and The CIT
Group/Commercial Services, Inc., as agent for the Lenders (in such capacity, the
"Agent").

            WHEREAS,  (i)  Happy  Kids  has  changed  its  name  to  Happy  Kids
Children's Apparel Ltd. ("HK Children's") and (ii) O'Boy has changed its name to
Happy  Kids Inc.  ("Happy  Kids  Inc." or the  "Parent")  and  converted  from a
Subchapter  S  corporation  to a  Subchapter  C  corporation  under the Internal
Revenue Code (collectively, the "Name Changes").

            WHEREAS,  pursuant to the terms of an  Agreement  and Plan of Merger
substantially  in  the  form  attached  hereto  as  Annex  VI  (the  "OP  Merger
Agreement"),  to be executed between OP, LLC and O.P. Kids Acquisition,  Inc., a
New Jersey  corporation ("OP Inc."),  (i) OP, LLC intends to merge with and into
OP Inc. with OP Inc., as the surviving corporation in such merger,  assuming all
of  the  obligations  of  OP,  LLC  including,   without  limitation,  all  such
obligations under the Financing  Agreement and the other Loan Documents (the "OP
Merger") and (ii) immediately following the OP Merger, the name of OP Inc. shall
be changed to O.P. Kids, Inc. (collectively, the "OP Merger Transactions").

            WHEREAS,  pursuant to the terms of an  Agreement  and Plan of Merger
substantially in the form attached hereto as Annex VII (the "H.O.T.  Kidz Merger
Agreement"),  to be executed  between H.O.T.  Kidz,  L.L.C.,  a New York limited
liability company and a Guarantor under the Financing Agreement ("H.O.T. Kidz ")
and H.O.T. Kidz, Inc., a New York corporation ("H.O.T. Kidz, Inc."), H.O.T. Kidz
intends to merge with and into H.O.T.  Kidz, Inc. with H.O.T. Kidz, Inc., as the
surviving corporation in such merger,  assuming all of the obligations of H.O.T.
Kidz including,  without  limitation,  all such obligations  under the Financing
Agreement and the other Loan Documents (the "H.O.T. Kidz Merger").

            WHEREAS,  pursuant to the terms of the Securities Purchase Agreement
dated as of January 1, 1998 (the "Reorganization  Agreement"),  among Happy Kids
Inc., Jack M. Benun


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and Mark J. Benun,  a copy of which is attached as Annex VIII hereto,  after the
date hereof (i) in exchange for an aggregate of 2,131,250 shares of common stock
of Parent,  Jack M. Benun shall  transfer to Parent all of the Capital  Stock of
the  Borrowers  (other  than the Happy Kids Inc.) and the  Corporate  Guarantors
currently owned by him, (ii) in exchange for an aggregate of 2,131,250 shares of
common  stock of  Parent,  Mark J.  Benun  shall  transfer  to Parent all of the
Capital  Stock of the  Borrowers  (other than Happy Kids Inc.) and the Corporate
Guarantors  currently  owned by him, and (iii) Happy Kids Inc.  shall own all of
the outstanding  Capital Stock of HK Children's,  TOT Apparel,  O.P. Kids, Inc.,
H.O.T. Kidz, Inc., Hawk and J&B (the "Corporate Reorganization").

            WHEREAS, in connection with the Corporate Reorganization, Happy Kids
Inc. intends to (i) declare a distribution of all the remaining  undistributed S
Corporation   earnings  of  the  Borrowers  and  the  Guarantors  (the  "S  Corp
Distribution")  and (ii) consolidate the indebtedness  evidenced by the existing
Subordinated Note in the principal amount of approximately $1,400,000 with the S
Corp  Distribution  and issue four year 5.7%  promissory  notes in the aggregate
principal amount of approximately  $7,000,000 in favor of Jack M. Benun, Mark J.
Benun and Isaac Levy, substantially in the form attached hereto as Annex IX (the
"S Corp Distribution Notes").

            WHEREAS, after name changes, the OP Merger Transactions,  the H.O.T.
Kids Merger, the Corporate  Reorganization,  and the S Corp Distribution,  Happy
Kids Inc.  intends to consummate an initial public  offering of its common stock
(the "IPO"), the proceeds of which (after,  deducting underwriting discounts and
commissions and reasonable and customary offering expenses) shall be used to (i)
prepay the Loans under the Financing  Agreement in the  principal  amount of not
less than  $15,800,000,  and (ii)  prepay  the S Corp  Distribution  Notes in an
aggregate principal amount of $2,000,000 (the "S Corp Notes Prepayment").

            WHEREAS,  in  connection  with  the  Name  Changes,  the  OP  Merger
Transactions,  the H.O.T. Kidz Merger, the Corporate Reorganization,  the S Corp
Distribution,  the S Corp  Distribution  Notes,  the IPO  and  the S Corp  Notes
Prepayment  (collectively,  the "Transactions"),  the Borrowers, the Guarantors,
the Lenders and the Agent wish to amend the  Financing  Agreement to among other
things (i) add O.P. Kids, Inc. as a Borrower to the Financing  Agreement and the
other Loan Documents and add H.O.T.  Kidz,  Inc. as a Guarantor to the Financing
Agreement and the other Loan Documents,  (ii) release the Individual  Guarantors
from their  obligations  as  Guarantors  under the  Financing  Agreement  and to
release certain  collateral pledged by the Individual  Guarantors,  and (iii) to
permit the Transactions.

            Accordingly,  the  Borrowers,  the  Guarantors,  the Lenders and the
Agent hereby agree as follows:

            1.  Definitions.  All  terms  which  are  defined  in the  Financing
Agreement and not otherwise defined herein are used herein as defined therein.

            2. The first paragraph of the Financing  Agreement is hereby amended
in its entirety to read as follows:


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                  "FINANCING  AGREEMENT,  dated as of  February  13, 1996 by and
      among Happy Kids Children's Apparel Ltd., a New York corporation  formerly
      known as Happy Kids,  Ltd.  ('Happy  Kids'),  Happy Kids Inc.,  a New York
      corporation formerly known as O'Boy Inc. (the 'Parent'),  Talk of the Town
      Apparel Corp., a New York corporation ('TOT Apparel') and O.P. Kids, Inc.,
      a New Jersey corporation and successor by merger to O.P. Kids, L.L.C. ('OP
      Inc.',  and together with Happy Kids,  the Parent and TOT Apparel,  each a
      'Borrower' and collectively  the  'Borrowers'),  the guarantors  listed on
      Schedule B hereto (each a 'Guarantor' and collectively, the 'Guarantors'),
      the lenders listed on Schedule A hereto (each a 'Lender' and collectively,
      the 'Lenders') and The CIT Group/Commercial  Services,  Inc., as agent for
      the Lenders (in such capacity, the 'Agent')."

            3.  Recitals.  The first two  sentences  in the  Recitals are hereby
amended in their entirety to read as follows:  "The Borrowers and the Guarantors
have asked the Lenders to extend credit to the  Borrowers,  from the date hereof
through  the  Final  Maturity  Date  (as  hereinafter  defined),  in the form of
discretionary  revolving credit loans to the Borrowers at any time and from time
to time prior to the Final Maturity Date in an aggregate principal amount not in
excess  of (i)  $49,000,000  on and prior to April 30,  1998,  (ii)  $42,000,000
during  the  period  from May 1,  1998  through  December  31,  1998,  and (iii)
$47,000,000  during the period from January 1, 1999  through the Final  Maturity
Date. This revolving credit facility may include a $35,000,000  letter of credit
subfacility."

            4. Existing Definitions.  (a) The definition of the term "Additional
Financing" in Section 1.01 of the Financing  Agreement is hereby  deleted in its
entirety.

                  (b) The definition of the term "Additional  Lender" in Section
1.01 of the Financing Agreement is hereby deleted in its entirety.

                  (c)  The  second  sentence  of  the  definition  of  the  term
"Affiliate" in Section 1.01 of the Financing  Agreement is hereby amended in its
entirety to read as follows:

                        "Notwithstanding  anything to the contrary, for purposes
            of this Agreement and the other Loan Documents, the term "Affiliate"
            shall also include any Family Member of Jack M. Benun, Mark J. Benun
            or Isaac Levy and any Person  controlled  by a Family Member of Jack
            M. Benun, Mark J. Benun or Isaac Levy."

                  (d) The definition of the term "Cash Collateral  Agreement" in
Section 1.01 of the Financing Agreement is hereby deleted in its entirety.

                  (e) The  definition of the term "Change of Control" in Section
1.01 of the  Financing  Agreement  is hereby  amended in its entirety to read as
follows:

                        "'Change of Control' means (i) Jack M. Benun shall cease
            to own and control, of record and beneficially,  at least 25% of the
            outstanding Capital Stock of the Parent free and clear of all Liens,
            provided  that the failure of Jack M. Benun to own and  control,  of
            record and  beneficially,  at least 25% of the  outstanding  Capital
            Stock of


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            the Parent free and clear of all Liens shall not constitute a Change
            of Control or a Material Adverse Effect if such failure results from
            the transfer of such  Capital  Stock upon his death to his spouse or
            the  beneficiaries  of his  estate,  any trust  established  for his
            spouse or the  beneficiaries of his estate or Mark J. Benun or Isaac
            Levy,  (ii) Jack M. Benun,  Mark J. Benun and Isaac Levy shall cease
            to own and control in the aggregate, of record and beneficially,  at
            least 51% of the  outstanding  Capital  Stock of the Parent free and
            clear of all Liens, (iii) the Parent shall cease to own and control,
            of record and beneficially,  all of the outstanding Capital Stock of
            Happy Kids, TOT Apparel, OP Inc., H.O.T. Kidz, Hawk and J&B, or (iv)
            Jack M. Benun shall cease to be the  President  and Chief  Executive
            Officer  of the  Parent or cease to be  involved  in the  day-to-day
            operations  and  management  of the  business of each  Borrower  and
            Corporate  Guarantor,  provided that the failure of Jack M. Benun to
            be the President and Chief Operating  Officer of the Parent or to be
            involved in the day-to-day operations and management of the business
            of each Borrower and  Corporate  Guarantor as a result of his death,
            disability or incapacity shall not constitute a Change of Control or
            a Material Adverse Effect if another Person reasonably acceptable to
            the  Lenders is hired by the Parent and  assumes  such  offices  and
            duties  within six (6) months of the date of such death,  disability
            or incapacity."

                  (f) The  definition of the term "Combined  Current  Assets" in
Section 1.01 of the Financing Agreement is hereby deleted in its entirety.

                  (g) The definition of the term "Combined Current  Liabilities"
in Section 1.01 of the Financing Agreement is hereby deleted in its entirety.

                  (h) The definition of the term  "Combined  Tangible Net Worth"
in Section 1.01 of the Financing Agreement is amended in its entirety to read as
follows:

                        "'Consolidated  Tangible Net Worth' means,  with respect
            to the Parent and its Subsidiaries,  the excess of (i) the aggregate
            net book value of the assets  (other than  patents,  patent  rights,
            trademarks, trade names, franchises,  copyrights, licenses, permits,
            goodwill  and  other  intangible   assets   classified  as  such  in
            accordance with GAAP) of the Parent and its  Subsidiaries  after all
            appropriate  adjustments  in  accordance  with  GAAP  applied  on  a
            consistent  basis  (including,  without  limitation,   reserves  for
            doubtful  receivables,  obsolescence,  depreciation and amortization
            and  excluding  the amount of any  write-up  or  revaluation  of any
            asset) over (ii) the Consolidated Total  Unsubordinated  Liabilities
            of the  Parent  and its  Subsidiaries,  in each  case  computed  and
            consolidated in accordance with GAAP applied on a consistent basis."

                  (i) The definition of the term "Combined Total  Unsubordinated
Liabilities" in Section 1.01 of the Financing Agreement is hereby amended in its
entirety to read as follows:

                        "'Consolidated Total Unsubordinated  Liabilities' means,
            with respect to the Parent and its Subsidiaries, all items which, in
            accordance with GAAP applied on a consistent  basis,  would properly
            be included on the liability side of the balance sheet of the Parent
            and its Subsidiaries (other than capital stock, capital surplus


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            and  retained  earnings),  as of the date on  which  the  amount  of
            Consolidated Total Unsubordinated  Liabilities is to be computed and
            consolidated in accordance with GAAP applied on a consistent basis."

                  (j) The  definition  of the term "Credit  Exposure" in Section
1.01 of the  Financing  Agreement  is hereby  amended in its entirety to read as
follows:

                        "'Credit  Exposure' means,  with respect to each Lender,
            the total  credit  exposure of such Lender (i) on and prior to April
            30, 1998,  as set forth in Part A of Schedule A hereto,  (ii) during
            the period from May 1, 1998 through  December 31, 1998, as set forth
            in Part B of  Schedule A hereto,  and (iii)  during the period  from
            January 1, 1999  through the Final  Maturity  Date,  as set forth in
            Part C of Schedule A hereto, in each case as the same may be further
            adjusted  from  time to time  pursuant  to  Sections  10.01 or 11.01
            hereof."

                  (k) The  definition  of the  term  "Cumulative  Net  Loss"  in
Section 1.01 of the  Financing  Agreement  is hereby  amended in its entirety to
read as follows:

                        "'Cumulative  Net Loss' means, at the end of each fiscal
            quarter of the Parent and its Subsidiaries,  the cumulative Net Loss
            for the four (4)  consecutive  fiscal  quarters ending at the end of
            such fiscal quarter."

                  (l) The definition of the term "Disney" in Section 1.01 of the
Financing Agreement is hereby deleted in its entirety.

                  (m) The definition of the term "Disney License  Agreements" in
Section 1.01 of the Financing Agreement is hereby deleted in its entirety.

                  (n) The definition of the term "Guarantors" in Section 1.01 of
the  Financing  Agreement  is  hereby  amended  by  deleting  the  words  ", the
Individual Guarantors."

                  (o) The  definition of the term  "Guaranty" in Section 1.01 of
the Financing Agreement is hereby amended by deleting clause (ii) thereof in its
entirety and substituting in lieu thereof "(ii) intentionally omitted, and."

                  (p) The definition of the term "Happy Kids License  Agreement"
in Section 1.01 of the Financing Agreement is hereby deleted in its entirety.

                  (q) The  definition of the term "H.O.T.  Kidz" in Section 1.01
of the Financing Agreement is hereby amended in its entirety to read as follows:

                        "'H.O.T.  Kidz'  means  H.O.T.  Kids,  Inc.,  a New York
            corporation and the successor by merger to H.O.T.  Kidz,  L.L.C.,  a
            New York limited liability company."

                  (r) The definition of the term "Increased Financing Condition"
in Section 1.01 of the Financing Agreement is hereby deleted in its entirety.


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                  (s) The definition of the term "Increased  Financing Effective
Date" in  Section  1.01 of the  Financing  Agreement  is hereby  deleted  in its
entirety.

                  (t) The definition of the term "Increased  Interest Amount" in
Section 1.01 of the Financing Agreement is hereby deleted in its entirety.

                  (u) The  definition  of the term  "Individual  Guarantors"  in
Section 1.01 of the Financing Agreement is hereby deleted in its entirety.

                  (v) The  definition of the term "L/C  Subfacility"  in Section
1.01 of the  Financing  Agreement  is hereby  amended in its entirety to read as
follows:

                        "'L/C  Subfacility' shall mean that portion of the Total
            Credit Exposure equal to $35,000,000,  or such other amount as shall
            be agreed to in writing by the Agent, the Lenders and the Parent."

                  (w) The definition of the term "License Agreements" in Section
1.01 of the Financing  Agreement is hereby  amended by deleting the words ", the
Disney License Agreements and the Happy Kids License Agreements".

                  (x) The  definition of the term  "Licensor" in Section 1.01 of
the  Financing  Agreement  is hereby  amended by deleting  the words ",  Disney,
Spencer's".

                  (y) The  definition  of the term "Loan  Documents"  in Section
1.01 of the  Financing  Agreement  is hereby  amended in its entirety to read as
follows:

                        "'Loan  Documents' means this Agreement,  the Notes, the
            Joinder Agreements,  the Security Agreements,  the Pledge Agreement,
            the CIT Assignment Agreement,  the Guaranties,  the Letter of Credit
            Applications,  the  Blockage  Agreement  and all other  instruments,
            documents and agreements executed and delivered pursuant hereto."

                  (z) The  definition of the term  "Mortgage" in Section 1.01 of
the Financing Agreement is hereby deleted in its entirety.

                  (aa) The definition of the term "Net Income (Loss)" in Section
1.01 of the  Financing  Agreement  is hereby  amended in its entirety to read as
follows:

                        "'Net  Income  (Loss)'  means,  for any period,  the net
            income (or loss) of a Person and its Subsidiaries after income taxes
            for such period, but excluding any extraordinary gains, all computed
            and  consolidated  in  accordance  with  GAAP  applied  on  a  basis
            consistent with the corresponding prior period."

                  (bb) The definition of the term "O'Boy" in Section 1.01 of the
Financing Agreement is hereby deleted in its entirety.


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                  (cc) The  definition  of the term "OP, LLC" in Section 1.01 of
the Financing Agreement is hereby deleted in its entirety.

                  (dd) The  definition  of the term "Prime Rate" in Section 1.01
of the  Financing  Agreement is hereby  amended by deleting  the name  "Chemical
Bank" each time that it  appears in such  definition  and  substituting  in lieu
thereof "The Chase Manhattan Bank."

                  (ee) The  definition of the term  "Security  Agreement(s)"  in
Section 1.01 of the Financing  Agreement is hereby amended by deleting the words
", dated the date hereof," and the words "pursuant to Article V hereof."

                  (ff) The definition of the term "Spencer's" in Section 1.01 of
the Financing Agreement is hereby deleted in its entirety.

                  (gg) The definition of the term "Subordinated Note" in Section
1.01 of the Financing Agreement is hereby deleted in its entirety.

                  (hh) The definition of the term  "Subordination  Agreement" in
Section 1.01 of the Financing Agreement is hereby deleted in its entirety.

                  (ii) The definition of the term "Termination Anniversary Date"
in Section 1.01 of the Financing  Agreement is hereby amended in its entirety to
read as follows:

                        "'Termination Anniversary Date' means March 31, 1999 and
            thereafter March 31 of each succeeding calendar year."

                  (jj) The  definition  of the term "Total  Credit  Exposure" in
Section 1.01 of the  Financing  Agreement  is hereby  amended in its entirety to
read as follows:

                        "'Total Credit Exposure' means (i) on and prior to April
            30,  1998,  the sum of the  Lenders'  Credit  Exposures in Part A of
            Schedule A hereto,  (ii) during the period from May 1, 1998  through
            December 31, 1998, the sum of the Lenders' Credit  Exposures in Part
            B of Schedule A hereto,  and (iii) during the period from January 1,
            1999 through the Final Maturity Date, the sum of the Lenders' Credit
            Exposures in Part C of Schedule A hereto,  in each case, as the same
            may be further adjusted from time to time pursuant to Sections 10.01
            or 11.01 hereof."

                  (kk) The  definition of the term "Working  Capital" in Section
1.01 of the Financing Agreement is hereby deleted in its entirety.

                  5. New  Definitions.  The following  definitions  of the terms
"Blockage Agreement", "Fifth Amendment", "IPO", "Joinder Agreements", "OP Inc.",
"Parent", "Pledge Agreement" and "S Corp Distribution Notes" are hereby added to
Section 1.01 of the Financing Agreement:

                        "'Blockage  Agreement' means the Blockage Agreement made
            by the  Parent,  as obligor,  and Jack M.  Benun,  Mark J. Benun and
            Isaac Levy, as creditors, in


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            favor of the  Agent and the  Lenders,  in the form of Annex X to the
            Fifth  Amendment,  as the same may be amended or otherwise  modified
            from time to time."

                        "'Fifth  Amendment' means the Fifth Amendment,  dated as
            of March 25, 1998 to the Financing Agreement."

                        "'IPO' has the meaning  specified  therefor in the Fifth
            Amendment."

                        "'Joinder Agreements' has the meaning specified therefor
            in the Fifth Amendment."

                        "'OP Inc.' has the  meaning  specified  therefor  in the
            preamble hereto."

                        "'Parent'  has the  meaning  specified  therefor  in the
            preamble hereto."

                        "'Pledge  Agreement'  means the Pledge Agreement made by
            the Parent in favor of the Agent, substantially in the form of Annex
            XI to the Fifth Amendment, securing the Obligations, as the same may
            be amended or otherwise modified from time to time."

                        "'S Corp  Distribution  Notes' has the meaning specified
            therefor in the Fifth Amendment."

            6.  Credit  Exposure.  The second  sentence  of Section  2.01 of the
Financing Agreement is hereby amended in its entirety to read as follows:

                        "Notwithstanding the foregoing,  the aggregate principal
            amount of Loans  outstanding at any time to the Borrowers  shall not
            exceed the lower of (i) the difference  between (A) the Total Credit
            Exposure,  and (B) the aggregate Letter of Credit Obligations,  (ii)
            the difference  between (A) the then current  Borrowing Base and (B)
            the aggregate Letter of Credit  Obligations,  and (iii)  $35,000,000
            during the period from  January 1, 1998  through  April 30, 1998 and
            $30,000,000  during the period  from May 1, 1998  through  the Final
            Maturity Date."

            7.  Notes.  Section  2.04(a) of the  Financing  Agreement  is hereby
amended by deleting the words ", dated the Effective Date,".

            8. Interest. Paragraphs (a) and (b) of Section 2.06 of the Financing
Agreement are hereby amended in their entirety to read as follows:

                        "(a)  Loans.   Each  Loan  will  bear  interest  on  the
            principal amount thereof from time to time outstanding from the date
            of such Loan until such  principal  amount  becomes due at the Prime
            Rate.


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                        (b) Default  Interest.  Any amount of  principal  of any
            Loan and (to the extent permitted by law) interest and other amounts
            which are not paid when due, whether upon demand, by acceleration or
            otherwise,  shall  bear  interest  from the day when due until  such
            amount  is paid in full at a  fluctuating  interest  rate per  annum
            equal at all times to the Post Default Rate."

            9.  Prepayment of Loans.  Paragraphs  (e) and (f) of Section 2.07 of
the  Financing  Agreement are each hereby  amended in their  entirety to read as
follows:

                        "(e) INTENTIONALLY OMITTED.

                         (f)   INTENTIONALLY OMITTED."

            10.  Letter of Credit  Fees.  Section  3.03(b)(i)  of the  Financing
Agreement is hereby  amended by deleting each  reference to ".25%"  contained in
such Section and substituting in lieu thereof ".1875%".

            11. Fees. Section 4.01 of the Financing  Agreement is hereby amended
by deleting  paragraphs (a), (c), (d), (e) and (f) thereof in their entirety and
substituting in lieu thereof the following new paragraphs (a), (c), (d), (e) and
(f):

                        "(a) INTENTIONALLY OMITTED."

                        "(c) INTENTIONALLY OMITTED.

                         (d)   INTENTIONALLY OMITTED.

                         (e)   INTENTIONALLY OMITTED.

                         (f)   INTENTIONALLY OMITTED."

            12. Contribution.  The following new Section 4.06 is hereby added to
the Financing Agreement:

                        "SECTION 4.06.  Contribution.  (a) On any date a payment
            in respect of the Obligations is made, the right of contribution, if
            any, of each  Borrower and Corporate  Guarantor  (each an "Obligor")
            against  each  Contributor  shall be  determined  as provided in the
            immediately  succeeding sentence,  with the right of contribution of
            each Obligor to be revised and restated as of each such date. At any
            time that a payment (a "Relevant  Payment") is made by an Obligor in
            respect of the  Obligations  and results in the  aggregate  payments
            made by such Obligor in respect of the  Obligations to and including
            the  date  of  such  Relevant   Payment  to  exceed  such  Obligor's
            Contribution  Percentage  of  the  aggregate  payments  made  by all
            Obligors in respect of the  Obligations  to and including  such date
            (such excess,  the  "Aggregate  Excess  Amount"),  each such Obligor
            shall have a right of contribution  against each Contributor who has
            made payments in respect of the  Obligations  to and including  such
            date  in  an   aggregate   amount   less  than  such   Contributor's
            Contribution  Percentage  of  the  aggregate  payments  made  to


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<PAGE>


            and  including   such  date  by  all  Obligors  in  respect  of  the
            Obligations  (the aggregate  amount of such deficit,  the "Aggregate
            Deficit  Amount") in an amount equal to (x) a fraction the numerator
            of which is the  Aggregate  Excess  Amount of such  Obligor  and the
            denominator  of which is the sum of the Aggregate  Excess Amounts of
            all Obligors  multiplied by (y) the Aggregate Deficit Amount of such
            Contributor. An Obligor's right of contribution, if any, pursuant to
            this paragraph shall arise at the time of each computation,  subject
            to adjustment at the time of subsequent computations,  provided that
            such Obligor may not take any action to enforce such right until the
            Obligations  have been paid in full, it being  expressly  recognized
            and agreed by all Obligors that any Obligor's  right of contribution
            arising  pursuant hereto against any Contributor  shall be expressly
            junior  and  subordinate  to  such  Contributor's   obligations  and
            liabilities in respect of the  Obligations.  As used in this Section
            4.06 (i) "Contributor"  shall mean each Obligor required to make any
            payment to any other Obligor pursuant to this Section 4.06, (ii) the
            "Contribution  Percentage" of each Obligor shall mean the percentage
            obtained by dividing  (x) the Benefit  Amount of such Obligor by (y)
            the aggregate  Benefit Amount of all Obligors and (iii) the "Benefit
            Amount" of each Obligor  shall mean the net value of the benefits to
            such  Obligor  from  the  credit  extensions  made  under  the  Loan
            Documents.

                        (b) Each of the  Obligors  recognizes  and agrees  that,
            except for any right of  contribution  arising  pursuant  to Section
            4.06(a),  each  Obligor  which  makes any  payment in respect of the
            Obligations  shall have no right of  contribution,  reimbursement or
            subrogation  against any other  Obligor in respect of such  payment,
            any such right of contribution, reimbursement or subrogation arising
            under law or otherwise being expressly waived by all Obligors.

                        (c) Each of the  Obligors  recognizes  and  acknowledges
            that the rights to contribution  arising  hereunder shall constitute
            an asset in favor of the party  entitled  to such  contribution.  In
            this connection each Obligor has the right to waive its contribution
            right against any Contributor to the extent that after giving effect
            to  such  waiver  such   Obligor   would   remain   solvent  in  the
            determination of the Agent."

            13.  Individual  Guarantors.  The introductory  paragraph to Section
7.01 of the  Financing  Agreement is hereby  amended by deleting the words "each
Borrower,  each  Corporate  Guarantor and, where  appropriate,  each  Individual
Guarantor"  and  substituting  in lieu thereof "each Borrower and each Corporate
Guarantor."

            14.  Reporting  Requirements.   Section  7.01(a)  of  the  Financing
Agreement is hereby amended in its entirety to read as follows:

                        "(a) Reporting Requirements. Furnish to the Lenders:

                                    (i) as soon as  available,  and in any event
                        within  45 days  after  the end of each of the first and
                        third fiscal quarters in each fiscal year of the Parent,
                        consolidated   and    consolidating    balance   sheets,
                        consolidated and consolidating  statements of income and
                        retained  earnings and  consolidated  and  consolidating
                        statements   of  cash  flow  of  the   Parent   and  its
                        Subsidiaries as at the end of such quarter;  and for the
                        period   commencing  at  the


                                       10
<PAGE>


                        end of the immediately  preceding fiscal year and ending
                        with  the  end  of  such   quarter,   setting  forth  in
                        comparative  form  the  corresponding  figures  for  the
                        corresponding   date  or  period   of  the   immediately
                        preceding  fiscal year and setting forth in  comparative
                        form the  corresponding  figures  set  forth in the most
                        recent financial  projections delivered by the Borrowers
                        to the Lenders  pursuant  to clause (x) of this  Section
                        7.01(a),  all  in  reasonable  detail  and  prepared  in
                        accordance  with  GAAP,  duly  certified  by  the  chief
                        executive officer of the Parent as (A) fairly presenting
                        the   financial   condition   of  the   Parent  and  its
                        Subsidiaries  at the end of such quarter and the results
                        of  operations  of the Parent and its  Subsidiaries  for
                        such   periods   (subject  to  normal   year-end   audit
                        adjustments), and (B) having been prepared in accordance
                        with GAAP;

                                    (ii) as soon as  available  and in any event
                        within  60  days  after  the  end of the  second  fiscal
                        quarter of the Parent,  consolidated  and  consolidating
                        balance   sheets,    consolidated   and    consolidating
                        statements   of  income  and   retained   earnings   and
                        consolidated and  consolidating  statements of cash flow
                        of the  Parent  and its  Subsidiaries  for  such  fiscal
                        quarter and for the six-month period ended at the end of
                        such quarter,  setting forth in each case in comparative
                        form the figures for the  corresponding  quarter and the
                        corresponding  six-month  period of the previous  fiscal
                        year  and  setting   forth  in   comparative   form  the
                        corresponding  figures  set  forth  in the  most  recent
                        financial  projections delivered by the Borrowers to the
                        Lenders  pursuant to clause (x) of this Section 7.01(a),
                        all in reasonable detail and prepared in accordance with
                        GAAP  and,  in the  case of the  consolidated  financial
                        statements,  accompanied  by a review report  thereon of
                        Grant  Thornton,  LLP  or  other  independent  certified
                        public  accountants of recognized  standing  selected by
                        the Parent and  acceptable to the Agent and the Required
                        Lenders,  which report shall state that such accountants
                        reviewed such semi-annual  financial statements and that
                        based on such review,  such accountants are not aware of
                        any material  modifications  that should be made in such
                        financial   statements  in  order  for  them  to  be  in
                        conformity with GAAP;

                                    (iii) as soon as available, and in any event
                        within 90 days after the end of each  fiscal year of the
                        Parent,  consolidated and consolidating  balance sheets,
                        consolidated and consolidating  statements of income and
                        retained  earnings and  consolidated  and  consolidating
                        statements   of  cash  flow  of  the   Parent   and  its
                        Subsidiaries as at the end of such fiscal year,  setting
                        forth in comparative form the corresponding  figures for
                        the immediately  preceding fiscal year and setting forth
                        in comparative form the corresponding  figures set forth
                        in the most recent  financial  projections  delivered by
                        the  Borrowers to the Lenders  pursuant to clause (x) of
                        this  Section  7.01(a),  all in  reasonable  detail  and
                        prepared in  accordance  with GAAP,  and, in the case of
                        the consolidated  financial statements accompanied by an
                        audit  report and with an  unqualified  opinion of Grant
                        Thornton,  LLP or  other  independent  certified  public
                        accountants  of  recognized  standing  selected  by  the
                        Parent and  satisfactory  to the Agent and the  Required
                        Lenders,  together  with a


                                       11
<PAGE>


                        written  statement of such accountants (A) to the effect
                        that,  in making  the  examination  necessary  for their
                        unqualified opinion of such financial  statements,  they
                        have not obtained any  knowledge of the  existence of an
                        Event of Default as it  relates to  Sections  7.01(l)(i)
                        and (ii) and insofar as it relates to accounting matters
                        and (B) if such  accountants  shall  have  obtained  any
                        knowledge  of the  existence  of such  Event of  Default
                        described  in clause  (A) above,  describing  the nature
                        thereof;

                                    (iv) INTENTIONALLY OMITTED;

                                    (v) INTENTIONALLY OMITTED;

                                    (vi) as soon as  available  and in any event
                        within 30 days of the end of each month,  an  internally
                        prepared   consolidated   balance  sheet,   consolidated
                        statements   of  income  and   retained   earnings   and
                        consolidated  statements  of cash flow for such month of
                        the  Parent  and its  Subsidiaries  and  for the  period
                        commencing  at  the  end of  the  immediately  preceding
                        fiscal year and ending at the end of such month, setting
                        forth in comparative form the corresponding  figures for
                        the  corresponding  period of the immediately  preceding
                        fiscal year,  all in  reasonable  detail and prepared in
                        accordance with GAAP;

                                    (vii)  simultaneously  with the  delivery of
                        the financial  statements  required by clauses (i), (ii)
                        and (iii) of this Section 7.01(a),  a certificate of the
                        chief executive officer of the Parent,  (A) stating that
                        such  officer  has  reviewed  the   provisions  of  this
                        Agreement  and the  other  Loan  Documents  to which the
                        Parent and its  Subsidiaries are a party and has made or
                        caused to be made under his  supervision a review of the
                        condition   and   operations   of  the  Parent  and  its
                        Subsidiaries during the period covered by such financial
                        statements with a view to determining whether the Parent
                        and its Subsidiaries  were in compliance with all of the
                        provisions  of such Loan  Documents  at the  times  such
                        compliance is required by the Loan  Documents,  and that
                        such review has not  disclosed,  and such officer has no
                        knowledge  of, the  existence  during  such period of an
                        Event of Default or Potential Default or, if an Event of
                        Default or Potential  Default  existed,  describing  the
                        nature and period of  existence  thereof  and the action
                        which the Parent and its Subsidiaries propose to take or
                        took with respect thereto, (B) containing a breakdown of
                        the  expenses  set  forth on such  financial  statements
                        together  with any back-up  requested by the Agent,  and
                        (C)  containing  a  schedule  showing  the  calculations
                        specified in Section 7.01(l) of this Agreement;

                                    (viii)  within 15 days after the end of each
                        month,  a  schedule,  in form and  substance  reasonably
                        satisfactory  to the  Agent,  current as of the close of
                        business on the last day of such month, certified by the
                        chief  executive  officer  of  the  Parent  (A)  of  all
                        Accounts  Receivable  of the  Borrowers  existing on the
                        last day of such month  showing  separately  those which
                        are  more  than  30,  60,  90 and  120  days  old  and a
                        description  of  all  Liens,   set-offs,   defenses  and
                        counterclaims


                                       12
<PAGE>


                        with  respect  thereto  reasonably  satisfactory  to the
                        Agent and  current  as of the close of  business  on the
                        last day of such month together with a reconciliation of
                        such schedule with the schedule delivered to the Lenders
                        pursuant  to this clause (A) for the prior month and (B)
                        containing a breakdown of the Borrowers'  Inventory on a
                        consolidated   basis  for  all   Borrowers   and  on  an
                        individual  basis by  Borrower,  by amount and valued at
                        the lower of cost or market value  (which shall  include
                        dollar valuation by location and dollar valuation by the
                        season for which the  Inventory was  manufactured  to be
                        sold) and warehouse and  production  facility  location,
                        appropriately completed with information satisfactory to
                        the  Agent,   incorporating  all  appropriate  month-end
                        adjustments  and  current as of the close of business on
                        the last  day of such  month  immediately  prior to such
                        date;

                                    (ix)  within  15 days  after the end of each
                        month, a schedule, in form and substance satisfactory to
                        the Agent,  current as of the close of  business  on the
                        last day of such month, certified by the chief executive
                        officer of the Parent,  containing  all Inventory of the
                        Borrowers by style and season,  all open orders by style
                        and season and all  Inventory of the  Borrowers by style
                        and season available to be shipped against such orders;

                                    (x)  financial  projections,  prepared  on a
                        monthly  basis on or before  November 1 of each calendar
                        year for the succeeding calendar year for the Parent and
                        its  Subsidiaries  and on or  before  August  15 of each
                        calendar year for the following  "spring  season" of the
                        Parent and its Subsidiaries,  such financial projections
                        to be reasonable,  to be prepared on a reasonable  basis
                        and in  good  faith,  and  to be  based  on  assumptions
                        believed  by  the  Parent  and  its  Subsidiaries  to be
                        reasonable   at  the   time   made  and  from  the  best
                        information   then  available  to  the  Parent  and  its
                        Subsidiaries,  provided  that,  in order to satisfy  the
                        requirements   of  this  clause  (x),   such   financial
                        projections  must (A) be  reasonably  acceptable  to the
                        Agent  and the  Lenders  and (B) be  reviewed  by and be
                        acceptable to a financial consultant,  acceptable to the
                        Agent and the Lenders, retained by the Borrowers;

                                    (xi)  promptly   after   submission  to  any
                        Government   Authority  all  documents  and  information
                        furnished to such  Government  Authority  in  connection
                        with any  investigation  of any  Borrower  or  Corporate
                        Guarantor  other  than  inquiries  by such  Governmental
                        Authority that will not adversely effect in any material
                        respect  any  Borrower,  any  Corporate  Guarantor,  the
                        Collateral or the rights of the Lenders,  CIT, the Agent
                        or the L/C Issuer under this Agreement or the other Loan
                        Documents;

                                    (xii) as soon as possible,  and in any event
                        within  five days  after the  occurrence  of an Event of
                        Default or  Potential  Default,  or a  material  adverse
                        change in the  condition  or  operations,  financial  or
                        otherwise, of the Borrowers, the Corporate Guarantors or
                        any  of  their  respective  Subsidiaries,   the  written
                        statement  of the chief  executive  officer or the chief
                        financial  officer  of the  Parent,  setting  forth  the
                        details of such Event of Default,  Potential  Default or
                        material


                                       13
<PAGE>


                        adverse  change and the action which the  Borrowers  and
                        the  Corporate  Guarantors  propose to take with respect
                        thereto;

                                    (xiii)  (A) as soon as  possible  and in any
                        event  (1)  within  30 days  after  the  Borrowers,  the
                        Corporate  Guarantors or any of their  respective  ERISA
                        Affiliates   knows  or  has  reason  to  know  that  any
                        Termination   Event  described  in  clause  (i)  of  the
                        definition  of  Termination  Event  with  respect to any
                        Employee Plan has occurred, (2) within 10 days after the
                        Borrowers,  the  Corporate  Guarantors  or any of  their
                        respective  ERISA Affiliates knows or has reason to know
                        that any other  Termination  Event  with  respect to any
                        Employee Plan has occurred, and (3) within 10 days after
                        any of the Borrowers, any of the Corporate Guarantors or
                        any of their  respective  ERISA  Affiliates knows or has
                        reason to know that an  accumulated  funding  deficiency
                        has been incurred or an application has been made to the
                        Secretary of the  Treasury for a waiver or  modification
                        of the minimum funding standard  (including  installment
                        payments)  or an extension  of any  amortization  period
                        under Section 412 of the IRC with respect to an Employee
                        Plan, a statement of the chief financial  officer of the
                        Parent setting forth the details of such  occurrence and
                        the action,  if any, which the Borrowers,  the Corporate
                        Guarantors or any of their  respective  ERISA Affiliates
                        proposes to take with respect thereto,  (B) promptly and
                        in any event  within two  Business  Days  after  receipt
                        thereof by the  Borrowers,  the Corporate  Guarantors or
                        any of their  respective ERISA Affiliates from the PBGC,
                        copies of each  notice  received by the  Borrowers,  the
                        Corporate  Guarantors or any of their  respective  ERISA
                        Affiliates of the PBGC's intention to terminate any Plan
                        or to have a trustee  appointed to administer  any Plan,
                        (C)  promptly  and in any event within 30 days after the
                        filing thereof with the Internal Revenue Service, copies
                        of each Schedule B (Actuarial Information) to the annual
                        report (Form 5500 Series) with respect to each  Employee
                        Plan and  Multiemployer  Plan,  (D)  promptly and in any
                        event within five Business Days after receipt thereof by
                        the Borrowers,  the Corporate Guarantors or any of their
                        respective   ERISA   Affiliates  from  a  sponsor  of  a
                        Multiemployer  Plan or  from  the  PBGC,  a copy of each
                        notice   received  by  the   Borrowers,   the  Corporate
                        Guarantors or any of their  respective  ERISA Affiliates
                        concerning   the  imposition  or  amount  of  withdrawal
                        liability under Section 4202 of ERISA or indicating that
                        such Multiemployer Plan may enter reorganization  status
                        under  Section 4241 of ERISA and (E) promptly and in any
                        event within 10 days after any of the Borrowers,  any of
                        the  Corporate  Guarantors  or any of  their  respective
                        ERISA Affiliates sends notice of a plant closing or mass
                        layoff (as defined in WARN) to employees, copies of each
                        such  notice  sent  by  the  Borrowers,   the  Corporate
                        Guarantors or any of their respective ERISA Affiliates;

                                    (xiv)   promptly   after  the   commencement
                        thereof  but in any event not later than five days after
                        service  of  process  with  respect  thereto  on, or the
                        obtaining of knowledge  thereof by, the Borrowers or the
                        Corporate  Guarantors,  notice of each  action,  suit or
                        proceeding  before  any  court  or  other   Governmental
                        Authority  or other  regulatory  body or any  arbitrator
                        which may materially


                                       14
<PAGE>


                        adversely affect the operations or condition,  financial
                        or   otherwise,   of  the  Borrowers  or  the  Corporate
                        Guarantors;

                                    (xv) INTENTIONALLY OMITTED;

                                    (xvi) as soon as available  and in any event
                        (A) within 5 days after  receipt  or  delivery  thereof,
                        copies of any notices that the Borrowers receive from or
                        send to any  Licensor,  other than  notices that (1) are
                        made in the  ordinary  course  of  business,  (2) do not
                        involve matters that will result in a material  increase
                        in the obligations or liabilities of the Borrowers under
                        any License  Agreement and (3) will not adversely effect
                        in any material respect the Borrowers, the Collateral or
                        the  rights of the  Lenders,  CIT,  the Agent or the L/C
                        Issuer   under   this   Agreement   or  the  other  Loan
                        Agreements,  (B) within 5 Business  Days after  entering
                        into  any  License   Agreement  not  in  effect  on  the
                        Effective Date, a copy of the License Agreement, and (C)
                        within  5  Business  Days  prior to the  effective  date
                        thereof,   copies  of  any  amendments,   modifications,
                        waivers or other changes to the License Agreements; and

                                    (xvii)  promptly  upon  request,  such other
                        information  concerning  the  condition  or  operations,
                        financial  or   otherwise,   of  the  Borrowers  or  the
                        Corporate  Guarantors as the Agent from time to time may
                        reasonably request."

            15. Security Interest. Section 6.01(x) of the Financing Agreement is
hereby amended by deleting the words "and the Cash Collateral Agreement."

            16. Financial Covenants.  Section 7.01(l) of the Financing Agreement
is hereby amended in its entirety to read as follows:

                        "(l) Financial Covenants.

                                    (i)   Tangible    Net   Worth.    Maintained
                        Consolidated   Tangible  Net  Worth   (before  any  LIFO
                        adjustments made for the prior fiscal year in accordance
                        with GAAP) on each date set forth below of at least:


                                                    Minimum Consolidated
                                   Date              Tangible Net Worth
                             ------------------     --------------------

                             March 31, 1998             $20,000,000
                             June 30, 1998              $20,000,000
                             September 30, 1998         $24,000,000
                             December 31, 1998          $25,000,000
                             March 31, 1999             $25,000,000


                                       15
<PAGE>


                                    (ii) Net Loss.  Not incur a  Cumulative  Net
                        Loss  (before  any LIFO  adjustments  made for the prior
                        fiscal year in accordance  with GAAP) for the Parent and
                        its Subsidiaries at the end of any fiscal quarter of the
                        Parent.

                                    (iii)   Upon   receipt   of  the   financial
                        projections  required  to be  delivered  to the  Lenders
                        pursuant to Section  7.01(a)(x) for a calendar year, the
                        Parent and the Lenders shall  negotiate in good faith to
                        determine  minimum  Consolidated  Tangible Net Worth and
                        Cumulative Net Loss for the Parent and its  Subsidiaries
                        for the calendar year covered by such projections."

            17. Miscellaneous  Affirmative  Covenants.  Paragraphs (p), (q), (r)
and (s) of Section 7.01 of the Financing  Agreement  are each hereby  amended in
their entirety to read as follows:

                        "(p) INTENTIONALLY OMITTED.

                         (q) INTENTIONALLY OMITTED.

                         (r) INTENTIONALLY OMITTED.

                         (s) INTENTIONALLY OMITTED."

            18.  Indebtedness.  Section  7.02(b) of the  Financing  Agreement is
hereby  amended  by (i)  deleting  the word  "and" at the end of  clause  (viii)
thereof,  (ii) redesignating clause (ix) thereof as clause (x), and (iii) adding
the following new clause (ix):

                        "(ix) Indebtedness  evidenced by the S Corp Distribution
            Notes,  provided that such  Indebtedness is unsecured and subject to
            the terms of the Blockage Agreement, and"

            18. Guaranties. Section 7.02(c) of the Financing Agreement is hereby
amended by (i) deleting the word "and" at the end of clause (ii)  thereof,  (ii)
redesignating  clause  (iii)  thereof  as  clause  (iv),  and (iii)  adding  the
following new clause (iii):

                        "(iii)   guaranties   made  in  favor  of  the   Lenders
            guaranteeing the Obligations, and"

            20. Investment. Section 7.02(f) of the Financing Agreement is hereby
amended by (i) deleting  the words "and" at the end of clause (i) thereof,  (ii)
redesignating  clause  (ii)  thereof  as  clause  (iii),  and (iii)  adding  the
following new clause (ii):

                        "(ii)  investments by the Parent in the other  Borrowers
            and Corporate Guarantors; and"


                                       16
<PAGE>


            21.  Dividends.  Section  7.02(i)(1) of the  Financing  Agreement is
hereby amended in its entirety to read as follows:

                        "(1)  Declare  or pay any  dividends  or  distributions,
            purchase or otherwise acquire for value any of its Capital Stock now
            or hereafter outstanding,  return any capital to its stockholders as
            such,  or make any other  payment or  distribution  of assets to its
            stockholders as such, or permit any of its Subsidiaries to do any of
            the  foregoing,  provided  that any  Subsidiaries  of the Parent may
            declare or pay dividends or distributions to the Parent."

            22. Subordinated Debt. Section 7.02(o) of the Financing Agreement is
hereby amended in its entirety to read as follows:

                        "(o) Amendment or Waiver of S Corp  Distribution  Notes;
            Prepayment  of S Corp  Distribution  Notes.  (i) In the  case of the
            Parent,  agree  to any  amendment  or other  change  to (or make any
            payment  consistent with any amendment or other change to), or waive
            any of its rights under, the S Corp Distribution  Notes or refinance
            any of the Indebtedness  evidenced by the S Corp Distribution  Notes
            without  obtaining the prior written consent of the Required Lenders
            to  such  amendment,   modification,   payment,  waiver,  change  or
            refinancing.

                        (ii)  Directly  or  indirectly,  by deposit of monies or
            otherwise,  prepay,  purchase,  redeem, retire, defease or otherwise
            acquire, or make any payment on account of any principal of, premium
            or interest  payable in  connection  with the  payment,  prepayment,
            redemption,  defeasance or retirement of any Indebtedness  evidenced
            by the S Corp Distribution  Notes,  provided that (A) the Parent may
            make  payments to the extent  permitted by the terms of the Blockage
            Agreement and (B) Parent may prepay the S Corp Distribution Notes in
            an  aggregate  principal  amount not to exceed  $2,000,000  from the
            proceeds of the IPO."

            23. Events of Default.  Section 10.01(i) of the Financing  Agreement
is hereby  amended by deleting the words ", the  Mortgage,  the Cash  Collateral
Agreement,".

            24.  Notices.  Section  11.02 of the  Financing  Agreement is hereby
amended by (i) deleting the reference to "Happy Kids,  Ltd." and substituting in
lieu thereof  "Happy Kids Inc." and,  (ii)  deleting the reference to "Fishbach,
Hertan & Ives,  919 Third Avenue,  New York,  New York 10022,  Attention:  Myron
Fishbach,  Esq.,  Telephone:  (212)  752-4433,  Telecopier:  (212) 593-2441" and
substituting  in lieu  thereof  "Buchanan  Ingersoll,  500  College  Road  East,
Princeton Forrestal Center,  Princeton,  New Jersey 08540,  Attention:  David J.
Sorin, Telephone: (609) 987-6800, Telecopier: (609) 520-0360".

            25.  Administrative   Borrower.   Section  11.06  of  the  Financing
Agreement  is hereby  amended by deleting  the  reference to "Happy Kids" in the
heading  and the text of such  Section and  substituting  in lieu  thereof  "the
Parent."  Each  Borrower  hereby  irrevocably  appoints  the  Parent  as the new
Administrative Borrower replacing Happy Kids.


                                       17
<PAGE>


            26. Guaranty. (a) Section 12.01 of the Financing Agreement is hereby
amended by deleting the proviso at the end thereof.

            (b) Article  XII is hereby  amended by deleting  each  reference  to
"subject to the Limitation" contained in such Article.

            27. Delivery of Notes.  Each Lender shall deliver to the Agent,  for
delivery to and cancellation by the Borrowers, all Notes issued by the Borrowers
and held by the Lenders under the Financing  Agreement  (collectively,  the "Old
Notes"). The Borrowers shall execute and deliver to the Agent for the account of
each  Lender the Notes  which such  Lender is  entitled  to receive  pursuant to
Section  2.04  of the  Financing  Agreement,  in the  form of  Exhibit  A to the
Financing Agreement and in the principal amount for each Lender equal to its Pro
Rata  Share  of the  Total  Credit  Exposure,  as set  forth  in Annex I to this
Amendment  (the "New Notes").  The Agent shall release and deliver the Old Notes
to the Borrowers for cancellation and deliver the New Notes to the Lenders.

            28. Schedules.  Schedule A, Schedule B, Schedule  6.01(e),  Schedule
6.01(f) and Schedule 6.01(y) to the Financing  Agreement are each hereby amended
by deleting such  Schedules in their entirety and  substituting  in lieu thereof
new Schedules,  which are attached hereto as Annex I, Annex II, Annex III, Annex
IV and Annex V, respectively.

            29. Waiver and Consent. (a) Pursuant to the request of the Borrowers
and the  Guarantors  and in  accordance  with  Section  11.03  of the  Financing
Agreement,  the Lenders and the Agent hereby  consent to, and waive any Event of
Default  that  would  otherwise  arise  under  Section  10.01  of the  Financing
Agreement from, any  non-compliance by the Borrowers and the Guarantors with the
provisions of (i) Section 7.01(d) of the Financing Agreement by reason of the OP
Merger  Transactions and the H.O.T. Kidz Merger,  (ii) Section 7.02(d)(A) of the
Financing  Agreement by reason of the OP Merger Transactions and the H.O.T. Kidz
Merger,  (iii)  Section  7.02(f)  of the  Financing  Agreement  by reason of the
Corporate  Reorganization,  (iv) Section  7.02(i) of the Financing  Agreement by
reason  of the S Corp  Distribution  and the S Corp  Notes  Prepayment,  and (v)
Section  7.02(m)  of  the  Financing   Agreement  by  reason  of  the  Corporate
Reorganization.

            (b) The waivers and  consents in this  Section 29 shall be effective
only in this  specific  instance and for the specific  purposes set forth herein
and do not  allow  for any  other  or  further  departure  from  the  terms  and
conditions of the Financing  Agreement or any other Loan  Document,  which terms
and conditions shall remain in full force and effect.

            30.  Conditions.  This  Amendment  shall become  effective only upon
satisfaction in full of the following  conditions precedent (the first date upon
which all such conditions have been satisfied being herein called the "Amendment
Effective Date"):

            (a)  Representations  and  Warranties;  No  Event  of  Default.  The
representations  and  warranties  contained  herein,  in  Section  6.01  of  the
Financing  Agreement  and in each other Loan Document and  certificate  or other
writing  delivered to the Agent and the Lenders  pursuant  hereto on or prior to
the Amendment Effective Date shall be correct on and as of the


                                       18
<PAGE>


Amendment  Effective  Date as though made on and as of such date  (except to the
extent that such  representations  and warranties  expressly relate solely to an
earlier date in which case such representations and warranties shall be true and
correct on and as of such date);  and no  Potential  Default or Event of Default
shall have occurred and be continuing on the Amendment  Effective  Date or would
result from this Amendment becoming effective in accordance with its terms.

            (b)  Delivery  of  Documents.  The Agent  shall have  received on or
before the Amendment  Effective Date the  following,  each in form and substance
satisfactory to the Agent and, unless indicated  otherwise,  dated the Amendment
Effective Date:

                        (i) counterparts of this Amendment, duly executed by the
            Borrowers, the Guarantors and the Lenders;

                        (ii)  the  New  Notes,  duly  executed  by  each  of  HK
            Children's, Happy Kids Inc., TOT Apparel and OP Inc.;

                        (iii) a Security Agreement,  in the form of Exhibit C to
            the Financing Agreement, duly executed by each of OP Inc. and H.O.T.
            Kidz, Inc.;

                        (iv) a  Joinder  Agreement,  in the form of Annex XII to
            this Amendment (the "Joinder Agreements"),  duly executed by each of
            OP Inc. and H.O.T. Kidz, Inc.;

                        (v) the Pledge  Agreement,  duly executed by the Parent,
            together with the original stock  certificates  representing  all of
            the shares of issued and  outstanding  Capital  Stock of the Parent,
            together with an undated stock power for each such certificate, duly
            executed in blank by an authorized officer of the Parent;

                        (vi)  the  Blockage  Agreement,  duly  executed  by  the
            Parent,  Jack M. Benun,  Mark J. Benun and Isaac Levy (together with
            the documents  delivered  pursuant to clauses (i), (ii), (iii), (iv)
            and (v) above collectively, the "Amendment Documents");

                        (vii)  appropriate  financing  statements on Form UCC-1,
            duly executed by the Parent, HK Children's, OP Inc. and H.O.T. Kidz,
            Inc.  and duly filed in such  office or offices as may be  necessary
            or, in the opinion of the Agent,  desirable  to perfect the security
            interests purported to be created by the Security Agreement to which
            such Persons are a party;

                        (viii)  certified  copies  of  requests  for  copies  of
            information  on  Form  UCC-11,   listing  all  effective   financing
            statements which name as debtor HK Children's, the Parent, O.P. Kids
            Acquisition,  Inc.,  OP Inc. and H.O.T.  Kidz,  Inc.,  together with
            copies  of such  financing  statements,  none of  which,  except  as
            otherwise  agreed in writing by the  Agent,  shall  cover any of the
            Collateral,  and results of searches for any tax and judgment  Liens
            filed against HK  Children's,  the Parent,  O.P.  Kids  Acquisition,
            Inc.,  OP Inc.  and  H.O.T.  Kidz,  Inc.  or their  property,


                                       19
<PAGE>


            which  results,  except as  otherwise  agreed to in  writing  by the
            Agent, shall not show any such Liens;

                        (ix) evidence of the insurance  coverage required by the
            terms of Section  7.01(h) of the  Financing  Agreement and the other
            Loan Documents naming the Agent an additional  insured or loss payee
            thereunder as specified by the Agent;

                        (x) a certificate of the chief executive  officer or the
            chief  financial  officer of the Parent,  certifying  that  attached
            thereto are complete and correct copies of the OP Merger  Agreement,
            the H.O.T. Kidz Merger Agreement, the Reorganization  Agreement, the
            S Corp Distribution Notes, the registration  statement of the Parent
            filed with the  Securities  Exchange  Commission,  the  underwriting
            agreement and the other material  agreements  executed by the Parent
            in  connection  with the IPO, all  employment  agreements of Jack M.
            Benun,  Mark T.  Benun and Isaac  Levy with the Parent and all other
            agreements,  instruments and other documents  executed and delivered
            in connection therewith as requested by the Agent;

                        (xi) a letter agreement  executed by HK Children's,  the
            Parent,  TOT Apparel and OP Inc. and the Factor in  connection  with
            the Factoring Agreements;

                        (xii) a copy of the  resolutions of each Borrower,  each
            Corporate Guarantor,  OP Inc. and H.O.T. Kidz, Inc., certified as of
            the  Amendment  Effective  Date by an  authorized  officer  thereof,
            authorizing  (A) the execution of each  Amendment  Document to which
            such Person is a party and the  transactions  contemplated  thereby,
            and (B) the execution,  delivery and performance by each such Person
            of each Amendment Documents to which such Person is a party, and the
            performance of the Financing Agreement, as amended;

                        (xiii) a certificate  of an  authorized  officer of each
            Borrower,  each Corporate Guarantor,  OP Inc. and H.O.T. Kidz, Inc.,
            certifying the names and true signatures of the  representatives  of
            such Person authorized to sign each Amendment Document to which such
            Person  is a party  and  the  other  documents  to be  executed  and
            delivered  by such  Person in  connection  herewith,  together  with
            evidence of the incumbency of such authorized officers;

                        (xiv) a certificate  of the  appropriate  official(s) of
            the state of organization and each state of foreign qualification of
            each Borrower,  each Corporate  Guarantor,  OP Inc. and H.O.T. Kidz,
            Inc.,  dated  within  15  days  of  the  Amendment  Effective  Date,
            certifying  as to the  subsistence  and good  standing  of,  and the
            payment of taxes by, such Person in such states;

                        (xv) a true and  complete  copy of the  charter  of each
            Borrower,  each Corporate Guarantor,  OP Inc. and H.O.T. Kidz, Inc.,
            certified as of a date not more than 30 days prior to the  Amendment
            Effective  Date  by  an   appropriate   official


                                       20
<PAGE>


            of the state of  organization of each such Person (or in the case of
            a Borrower or Corporate Guarantor that existed on the effective date
            of the  Financing  Agreement,  a  certificate  confirming  that such
            charter  has not been  amended or  otherwise  modified  since it was
            delivered to the Agent and the Lenders on the effective  date of the
            Financing  Agreement and that the copy thereof previously  delivered
            to the  Agent is true,  correct  and  complete  as of the  Amendment
            Effective Date);

                        (xvi)  a copy of the  by-laws  of  each  Borrower,  each
            Corporate  Guarantor,  OP Inc. and H.O.T. Kidz, Inc.,  together with
            all amendments thereto, certified as of the Amendment Effective Date
            by an  authorized  officer of each such  Person (or in the case of a
            Borrower or Corporate  Guarantor  that existed on the effective date
            of the  Financing  Agreement,  a  certificate  confirming  that such
            by-laws  have not been amended or  otherwise  modified  since it was
            delivered to the Agent and the Lenders on the effective  date of the
            Financing  Agreement and that the copy thereof previously  delivered
            to the  Agent is true,  correct  and  complete  as of the  Amendment
            Effective Date);

                        (xvii) an opinion of Buchanan Ingersoll,  counsel to the
            Borrowers, the Corporate Guarantors,  Op Inc. and H.O.T. Kidz, Inc.,
            as to such matters as the Agent may reasonably request;

                        (xviii) a certificate of the chief executive  officer or
            the chief  financial  officer of the  Parent,  certifying  as to the
            matters set forth in subsection (a) of this Section 30;

                        (xix) a copy of each  of the  License  Agreements  as in
            effect on the  Amendment  Effective  Date,  certified  as a true and
            correct  copy  thereof by the chief  executive  officer or the chief
            financial  officer of the Parent,  together with a copy of each such
            License Agreement; and

                        (xx)  such  other  agreements,  instruments,  approvals,
            opinions and other documents as the Agent may reasonably request.

            (c) Proceedings. All proceedings in connection with the transactions
contemplated by each Amendment Document,  and all documents  incidental thereto,
shall be  satisfactory to the Agent and its special  counsel,  and the Agent and
such  special  counsel  shall  have  received  all  such  information  and  such
counterpart  originals  or  certified  copies  of  documents,   and  such  other
agreements,  instruments,  approvals, opinions and other documents, as the Agent
or such special counsel may reasonably request.

            (d) Consummation of the Transactions.  (i) The Name Changes,  the OP
Merger  Transactions,  the H.O.T. Kidz Merger, the Corporate  Reorganization and
the S Corp Distribution shall have occurred on terms and conditions satisfactory
to the  Lenders,  (ii) the Parent  shall have  consummated  the IPO on terms and
conditions satisfactory to the Lenders,  provided that, the terms and conditions
of the IPO shall be satisfactory to the Lenders if such terms and conditions are
substantially  as set forth in Amendment  No. 2 to the Happy Kids Inc. Form S-1,
Registration


                                       21
<PAGE>


Statement (Registration No. 333-44267) as filed with the Securities and Exchange
Commission  on March 6,  1998 and if the price  per  share of the  common  stock
offered in the IPO  results in  proceeds  to the Parent  sufficient  to make the
payment  required by clause (iii) below,  (iii) the Borrowers  shall have repaid
the Loans with the  proceeds of the IPO in a  principal  amount of not less than
fifteen million eight hundred thousand dollars ($15,800,000) and (iv) the Parent
shall have  prepaid  the S Corp  Distribution  Notes in an  aggregate  principal
amount of $2,000,000.

            (e)  Restructuring  Fee. The Borrowers shall have paid the Agent for
the account of the Lenders in accordance  with the Lenders'  respective Pro Rata
Shares (or the Agent may charge the Loan  Account  pursuant  to Section  4.02) a
restructuring fee of $300,000,  which fee shall be earned in full on the date of
such payment.

            31.  Representations  and Warranties.  Each of the Borrowers and the
Corporate Guarantors represents and warrants as follows:

            (a) Each Borrower and Guarantor (i) is a corporation duly organized,
validly  existing  and in good  standing  under  the  laws of the  state  of its
organization  and (ii) has all  requisite  power,  authority  and legal right to
execute, deliver and perform the Amendment Documents to which it is a party, and
to perform the Financing Agreement, as amended hereby.

            (b) The execution,  delivery and performance by it of each Amendment
Document  to  which it is a party  and the  performance  by it of the  Financing
Agreement,  as amended  hereby (i) have been duly  authorized  by all  necessary
action,  (ii) do not and will not violate or create a default under its articles
of  organization,  by-laws or any applicable law or any contractual  restriction
binding or otherwise affecting it or any of its properties,  and (iii) except as
provided  in the Loan  Documents,  do not and will not result in or require  the
creation of any Lien upon or with respect to its property.

            (c) No  authorization  or approval or other action by, and no notice
to or filing  with,  any  Governmental  Authority  or other  regulatory  body is
required in connection  with (i) the due execution,  delivery and performance by
it of each Amendment Document to which it is a party and (ii) the performance by
it of  each  Amendment  Document  to  which  it is a  party  and  the  Financing
Agreement, as amended hereby.

            (d) Each Amendment Document and the Financing Agreement,  as amended
hereby, is a legal,  valid and binding obligation of each Borrower and Corporate
Guarantor  that is a party  thereto  enforceable  against  each  such  Person in
accordance with the terms thereof.

            (e) The  representations  and warranties  contained in Article VI of
the Financing Agreement are correct on and as of the Amendment Effective Date as
though made on and as of the Amendment Effective Date (except to the extent such
representations and warranties expressly relate to an earlier date in which case
such representations and warranties shall be true and correct as of such earlier
date),  and no Event  of  Default  or  Potential  Default  has  occurred  and is
continuing  on and as of the Amendment  Effective  Date or will result from this
Amendment becoming effective in accordance with its terms.


                                       22
<PAGE>


            32.  Release.  Effective on the Amendment  Effective Date, the Agent
and the Lenders agree to (i) release Jack M. Benun, Mark J. Benun and Isaac Levy
from all of their  obligations  as  Individual  Guarantors  under the  Financing
Agreement,  (ii) release and return to Jack M. Benun all cash collateral pledged
to the Agent and the  Lenders  pursuant  to the Cash  Collateral  Agreement  and
release  Jack M. Benun  from all of his  obligations  under the Cash  Collateral
Agreement,  (iii) release Jack M. Benun, Mark J. Benun,  Isaac Levy and Francine
Benun from all of their  obligations under the Assignment of Tax Refunds made by
each such Person in favor of the Agent and the  Lenders,  (iv)  release  Jack M.
Benun and Francine Benun from all of their obligations  under the Mortgage,  (v)
release Jack M. Benun and Francine Benun from all of their obligations under the
Guaranty of Payment related to the Mortgage and (vi) execute and deliver to each
of the  foregoing  Persons all  documents  necessary  to effect  such  releases,
including,  without limitation,  UCC-3 termination statements and a satisfaction
of mortgage.

            33. Continued Effectiveness of the Financing Agreement.  Each of the
Borrowers and the Corporate  Guarantors  hereby confirms and agrees that, except
as  otherwise  provided  in Section 32 (i) each Loan  Document  to which it is a
party is,  and shall  continue  to be, in full  force and  effect  and is hereby
ratified and  confirmed in all respects  except that on and after the  Amendment
Effective  Date all  references  in any such  Loan  Document  to "the  Financing
Agreement", "thereto", "thereof", "thereunder" or words of like import referring
to the Financing Agreement shall mean the Financing Agreement as amended by this
Amendment,  and (ii) to the extent any such Loan Document  purports to assign or
pledge  to the  Agent,  or to grant  to the  Agent a Lien on any  collateral  as
security for the  Obligations  of the Borrowers or the  Guarantors  from time to
time existing in respect of the Financing Agreement and the Loan Documents, such
pledge,  assignment and/or grant of the Lien is hereby ratified and confirmed in
all respects.

            34. Miscellaneous.  (a) This Amendment may be executed in any number
of counterparts and by different parties hereto in separate  counterparts,  each
of which  shall be deemed to be an  original,  but all of which  taken  together
shall constitute one and the same agreement.

            (b)  Section  and  paragraph   headings   herein  are  included  for
convenience  of reference only and shall not constitute a part of this Amendment
for any other purpose.

            (c) This Amendment shall be governed by, and construed in accordance
with, the laws of the State of New York.

            (d) The Borrowers will pay on demand all reasonable  fees, costs and
expenses of the Agent in connection with the preparation, execution and delivery
of  this  Amendment  and  the  other  Amendment  Documents,  including,  without
limitation, the reasonable fees, disbursements and other charges of Schulte Roth
& Zabel LLP, counsel to the Agent.


                                       23
<PAGE>


            IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective  officers  thereunto duly authorized,  as of the
date first above written.

                                    BORROWERS
                                    ---------

                                    HAPPY KIDS CHILDREN'S APPAREL LTD.,
                                    formerly known as Happy Kids, Ltd.


                                    By:/s/ Jack M. Benun
                                       ---------------------------------
                                         Title: President
                                         Name:  Jack M. Benun


                                    HAPPY  KIDS  INC.,
                                    formerly  known as O'Boy Inc.


                                    By:/s/ Jack M. Benun
                                       ---------------------------------
                                         Title: President
                                         Name:  Jack M. Benun


                                    TALK OF THE TOWN APPAREL CORP.


                                    By:/s/ Jack M. Benun
                                       ---------------------------------
                                         Title: President
                                         Name:  Jack M. Benun


                                    O.P. KIDS, L.L.C.


                                    By:/s/ Jack M. Benun
                                       ---------------------------------
                                         Title: President
                                         Name:  Jack M. Benun


                                    GUARANTORS

                                    H.O.T. KIDZ, L.L.C.

                                    By:/s/ Jack M. Benun
                                       ---------------------------------
                                         Title: President
                                         Name:  Jack M. Benun


                                       24
<PAGE>


                                    HAWK INDUSTRIES, INC.


                                    By:/s/ Jack M. Benun
                                       ---------------------------------
                                         Title: President
                                         Name:  Jack M. Benun


                                    J&B 18 CORP.


                                    By:/s/ Jack M. Benun
                                       ---------------------------------
                                         Title: President
                                         Name:  Jack M. Benun


                                    /s/ Jack M. Benun
                                    ------------------------------------
                                    JACK M. BENUN


                                    /s/ Mark J. Benun
                                    ------------------------------------
                                    MARK J. BENUN


                                    /s/ Isaac Levy
                                    ------------------------------------
                                    ISAAC LEVY


                                    AGENT AND LENDER
                                    ----------------

                                    THE CIT GROUP/COMMERCIAL SERVICES, INC.


                                    By:/s/ Deborah Rogut
                                       ---------------------------------
                                         Title: Vice President
                                         Name:  Deborah Rogut


                                    LENDERS
                                    -------

                                    THE CHASE MANHATTAN BANK


                                    By:/s/ Randolph Cates
                                       ---------------------------------
                                         Title: Vice President
                                         Name:  Randolph Cates


                                       25
<PAGE>


                                    ISRAEL DISCOUNT BANK OF NEW YORK

                                    By:/s/ Gary Harkins
                                       ---------------------------------
                                         Title: Vice President
                                         Name:  Gary Harkins


                                    By:/s/ Ronald Bongiovanni
                                       ---------------------------------
                                         Title: Vice President
                                         Name:  Ronald Bongiovanni


                                    REPUBLIC NATIONAL BANK OF NEW YORK


                                    By:/s/ David Mehani
                                       ---------------------------------
                                         Title: First Vice President
                                         Name:  David Mehani


                                       26
<PAGE>


                                     ANNEX I

                                   SCHEDULE A
                                   ----------


PART A: From January 1, 1998 through April 30, 1998.
------- 


Lender                                           Exposure            Percentage
------                                           --------            ----------

The CIT Group/Commercial Services, Inc.        $ 14,518,700            29.63%

The Chase Manhattan Bank                       $ 20,153,700            41.13%

Israel Discount Bank of New York               $  6,507,200            13.28%

Republic National Bank of New York             $  7,820,400            15.96%
                                               ------------           -------
                                               $ 49,000,000           100.00%


PART B: From May 1, 1998 through December 31, 1998.
-------


Lender                                           Exposure            Percentage
------                                           --------            ----------

The CIT Group/Commercial Services, Inc.        $ 12,444,600            29.63%

The Chase Manhattan Bank                       $ 17,274,600            41.13%

Israel Discount Bank of New York               $  5,577,600            13.28%

Republic National Bank of New York             $  6,703,200            15.96%
                                               ------------           -------
                                               $ 42,000,00            100.00%


PART C: From January 1, 1999 through the Final Maturity Date.
-------


Lender                                           Exposure            Percentage
------                                           --------            ----------

The CIT Group/Commercial Services, Inc.        $ 13,927,700            29.63%

The Chase Manhattan Bank                       $ 19,331,300            41.13%

Israel Discount Bank of New York               $  6,241,000            13.28%

Republic National Bank of New York             $  7,500,000            15.96%
                                               ------------           -------
                                               $ 47,000,000           100.00%


<PAGE>


                                     ANNEX V

                                   SCHEDULE B
                                   ----------

                                   Guarantors
                                   ----------


H.O.T.  Kidz,  Inc., a New York  corporation and successor in interest to H.O.T.
Kidz, L.L.C.


Hawk Industries, Inc., a New Jersey corporation


J & B 18 Corp., a New York corporation