Exhibit - 10.78

                    SEPARATION AGREEMENT AND GENERAL RELEASE


     THIS  SEPARATION  AGREEMENT AND GENERAL RELEASE is made and entered into by
and between THOMAS R. KELLY,  JR.  (hereinafter  referred to as "Employee")  and
GOODY'S FAMILY CLOTHING, INC. (hereinafter referred to as "the Company").

                               STATEMENT OF FACTS

         Employee   desires  to  resign  from  the   Company  to  pursue   other
opportunities. Employee desires to accept the following agreements, and Employee
and the Company desire to settle fully and finally any  differences and disputes
between them, including,  but in no way limited to, any differences and disputes
that might arise, or have arisen, out of Employee's employment with the Company,
and the termination thereof.

                               STATEMENT OF TERMS

         In consideration of the premises and mutual promises herein  contained,
it is agreed as follows:

         Section 1.        Non-Admission of Liability.
                           --------------------------

         This Separation  Agreement and General Release (the "Agreement")  shall
not in any way be  construed  as an  admission  by the Company that it has acted
wrongfully  with respect to Employee or any other  person,  or that Employee has
any  rights  whatsoever  against  the  Company,  and  the  Company  specifically
disclaims  any  liability  to or  wrongful  acts  against  Employee or any other
person, on the part of itself, its employees or its agents.

         Section 2.        Termination of Employment.
                           -------------------------

         Employee  represents,  understands  and agrees that his employment with
the Company terminated on May 5, 2000 (the "Date of Termination").

         Section 3.        Return of Consideration.
                           -----------------------

         Employee  understands  that this  Agreement  is final and  binding.  If
Employee attempts to challenge the  enforceability  of this Agreement,  he shall
initially  tender to the Company,  by certified  funds delivered to the Company,
all monies and other value he receives  pursuant  to this  Agreement,  and shall
invite the  Company  to retain  such  monies  and agree with him to cancel  this
Agreement. In the event the Company accepts this offer, the Company shall retain
such monies and this Agreement shall be cancelled. In the event the Company does
not accept such offer,  the Company  shall so notify  Employee,  and shall place
such monies in an  interest-bearing  escrow  account  pending  resolution of the
dispute  as to  whether  this  Agreement  shall be set  aside  and/or  otherwise
rendered unenforceable.

         Section 4.        Consideration.
                           -------------

     a.  Severance  Payment.  The  Company  agrees to pay  Employee a  severance
payment in the  ------------------  total gross amount of Four Hundred  Thousand
Dollars  ($400,000.00),  less  applicable  tax  withholding  and other  standard
deductions.

     b.  Vacation  Pay.  The  Employee  waives any right he may have to assert a
claim to be paid ------------- for accrued vacation days.

         Section 5.        Cessation of Authority.
                           ----------------------

         Employee   understands  and  agrees  that  effective  on  the  Date  of
Termination,  he is  not  authorized  to  incur  any  expenses,  obligations  or
liabilities,  or to make any  commitments  on  behalf of the  Company.  Employee
agrees  to  submit  to the  Company  within  twenty  (20)  days from the Date of
Termination  any and all  expenses  incurred  by him  through  that  date.  Such
expenses shall be paid by the Company in accordance  with its existing  policies
and procedures.

         Section 6.        Return of Company Materials and Property.
                           ----------------------------------------

         Employee  understands  and agrees that he will turn over to the Company
on or before  the -  execution  date of this  Agreement  all  files,  memoranda,
records,  credit cards and other documents,  physical or personal property which
he  received  from  the  Company  and/or  which  he  used in the  course  of his
employment with the Company and which are the property of the Company.  Employee
agrees,  represents and acknowledges that as a result of his employment with the
Company,  he  has  had  in  his  custody,  possession  and  control  proprietary
documents, data, materials, files and other similar items concerning proprietary
information  of the Company as described in the Employment  Agreement  dated May
20,  1998  and  attached  as  Exhibit  "A" to this  Agreement  (the  "Employment
Agreement"), and Employee acknowledges, warrants and agrees that he has returned
all such items and any copies or extras thereof and any other property, files or
documents  obtained  as a result of his  employment  with the Company and he has
held such information in trust and in strict  confidence and will continue to do
so, and that he has complied  and will comply with Section 12 of the  Employment
Agreement regarding proprietary information.

         Section 7.        Employment Agreement; No Solicitation.
                           -------------------------------------

         Employee  understands  and  agrees  that the terms of Section 12 of the
Employment Agreement are fully enforceable and remain in full force and effect.


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         Section 8.        No Obligation.
                           -------------

         Employee agrees and understands that the consideration  described above
in Section 4. is not required by the Company's policies and procedures. Employee
further agrees and understands that his entitlement to receive the consideration
set forth above is  conditioned  upon his  execution of this  Agreement  and his
compliance with the terms of Section 12 of the Employment Agreement.

         Section 9.        Severability.
                           ------------

         The provisions of this  Agreement are severable,  and if any part of it
is found to be unenforceable,  the other paragraphs shall remain fully valid and
enforceable.  This Agreement shall survive the  termination of any  arrangements
contained herein.

         Section 10.       Consultation with an Attorney.

         The  Company  advises  Employee to consult  with an  attorney  prior to
executing this  Agreement.  Employee  agrees that he has had the  opportunity to
consult counsel if he chose to do so. Employee further  acknowledges that he has
had  ample  time  in  which  to  execute  this  Agreement,  and  that he has had
sufficient  time to read  and  consider  this  Agreement  before  executing  it.
Employee  acknowledges  that he is responsible  for any costs and fees resulting
from  his  attorney  reviewing  this  Agreement.  Employee  agrees  that  he has
carefully read this Agreement and understands  its contents,  that he signs this
Agreement  voluntarily,  with a full  understanding  of  its  significance,  and
intending to be bound by its terms.

         Section 11.       Right to Revoke.
                           ---------------

         Employee may take up to twenty one (21) days to decide whether he wants
to accept and sign this Agreement.  If Employee signs this  Agreement,  Employee
may revoke and cancel this  Agreement  at any time  within  seven (7) days after
each party's  execution of this  Agreement by: (i) providing  written  notice of
revocation  to the Company  and (ii)  returning  to the  Company  the  severance
payment paid by Company to Employee as specified in Section 4. herein above.  If
Employee does so revoke,  this Agreement  will be null and void.  This Agreement
shall not become  effective and  enforceable  until after the expiration of this
seven  (7) day  revocation  period;  after  such  time,  if  there  has  been no
revocation, the Agreement shall be fully effective and enforceable.


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         Section 12.       Complete Release.
                           ----------------

         As a material  inducement to the Company to enter into this  Agreement,
Employee hereby irrevocably and  unconditionally  releases,  acquits and forever
discharges  the  Company  and  each  of  the  Company's  owners,   stockholders,
predecessors,  successors,  assigns,  agents,  directors,  officers,  employees,
representatives,   attorneys,   parent   companies,   divisions,   subsidiaries,
affiliates (and agents,  directors,  officers,  employees,  representatives  and
attorneys of such parent companies, divisions, subsidiaries and affiliates), and
all  persons  acting  by,  through,  under  or  in  concert  with  any  of  them
(collectively  "Releasees"),  or any of them,  from any and all, but not limited
to,  rights  arising out of alleged  violations  or  breaches of any  contracts,
express or implied,  or any tort,  or any legal  restrictions  on the  Company's
right to  terminate  employees,  or any  federal,  state  or other  governmental
statute, regulation, or ordinance,  including, without limitation: (1) Title VII
of the Civil  Rights Act of 1964,  as  amended by the Civil  Rights Act of 1991,
(race, color, religion, sex, and national origin discrimination);  (2) 42 U.S.C.
ss. 1981  (discrimination);  (3) the Americans with Disabilities Act (disability
discrimination);  (4) 29  U.S.C.  ss.ss.  621-624  (the  Age  Discrimination  in
Employment  Act); (5) 29 U.S.C.  ss.  206(d)(1) (equal pay); (6) Executive Order
11246 (race,  color,  religion,  sex and national  origin  discrimination);  (7)
Executive   Order   11141  (age   discrimination);   (8)   Section  503  of  the
Rehabilitation  Act  of  1973  (handicap  discrimination);  (9)  intentional  or
negligent infliction of emotional distress or "outrage";  (10) defamation;  (11)
interference  with  employment;  (12) wrongful  discharge;  and (13) invasion of
privacy,  which Employee now has, owns or holds, or claims to have, own or hold,
or which Employee at any time heretofore had, owned or held, or claimed to have,
owned  or  held,  against  each or any of the  Releasees  at any  time up to and
including the date of this Agreement;  provided, however, that the Employee does
not release the  Company  from any claims  related to a breach by the Company of
its obligations hereunder.

         As a material  inducement to the Employee to enter into this Agreement,
the Company hereby irrevocably and unconditionally  releases acquits and forever
discharges  the  Employee  from  any  and  all  charges,   complaints,   claims,
liabilities, obligations, promises, agreements, controversies, damages, actions,
causes of action, suits, rights,  demands, costs, losses, debts, and expenses of
any nature whatsoever,  known or unknown,  suspected or unsuspected,  related to
Employee's  employment relation with the Company;  provided,  however,  that the
Company does not release the Employee from any claims related to a breach by the
Employee of his obligations hereunder.

         Nothing  herein is  intended to be or is to be  construed  to affect or
release  Employee's  401(k) benefits,  vested stock options,  and related vested
benefits (except vacation benefits),  if any, as a result of his employment with
the Company.

         Section 13.        Confidentiality.
                           ----------------


         Employee  agrees  to  hold  this  Agreement  and  the  terms  of  it in
confidence  and not to disclose  the  existence,  content or details  thereof to
anyone,  other  than  to his  spouse,  his  attorneys,  accountants  and/or  tax
advisers,  who must be advised of and agreed to be bound by the  confidentiality
provision,  except as required by law,  rule or  regulation.  The  Company,  its
officers,  directors and employees likewise agree to keep this Agreement and its
contents  confidential,  except as required by law, rule or regulation.  Company
may  disclose  the  existence  of this  Agreement  and/or  its  details to those
individuals (including the Company's lenders,  external accounting firms and law
firms)  or  other  management  officials  who  have  a  "need  to  know"  in the
furtherance  of  their  official  duties,  or in  furtherance  of the  Company's
business interest.

         Section 14.  Non-Disparagement.

         Employee  agrees not to  indulge in any  conduct  that is  intended  to
reflect  adversely  upon the Company,  its  employees,  officers,  directors and
shareholders.  Employee  further agrees not to make any  statements  that may be
reasonably  construed to disparage the reputation or character of the Company or
its employees,  officers, directors or shareholders.  The Company's officers and
directors  agree  that  they  will  not:  (i)  make any  statements  that may be
reasonably  construed to disparage  the  reputation or character of the Employee
or, (ii)  indulge in any conduct  that is  intended  to reflect  adversely  upon
Employee.  Upon request from future potential  employers,  the Company agrees to
provide a reference  (consistent with the Company's  current policy)  reflecting
Employee's  date of hire,  his date of  resignation,  and his position  with the
Company.

         Section 15.       No Other Representations.
                           ------------------------

         Employee  represents and acknowledges that in executing this Separation
Agreement  and General  Release he does not rely,  and has not relied,  upon any
representation or statement not set forth herein made by any of the Releasees or
by any of the Releasees'  agents,  representatives,  or attorneys with regard to
the subject  matter,  basis or effect of this  Separation  Agreement and General
Release or otherwise.

         Section 16.  Previling Party.

         In the event of any  lawsuit or  proceeding  is brought to enforce  the
terms of this  Agreement,  the prevailing  party shall recover against the other
party,  reasonable attorneys' fees and expenses incurred in connection with such
action, including any appeals.

         Section 17.  Choice of Law.

         This agreement shall be construed and interpreted according to the laws
of the State of Tennessee.

         Section 18.       Sole and Entire Agreement.
                           -------------------------

         This  Agreement  sets forth the entire  agreement  between  the parties
hereto,  and supersedes any and all prior agreements or  understandings  between
the parties  pertaining  to the subject  matter  hereof  with the  exception  of
Section 12 of the Employment Agreement, which remains in effect to the extent it
is not inconsistent with this Separation Agreement and General Release.

         Employee  warrants  that  he  has  had  ample  time  to  consider  this
Agreement,  that he  understands  its  provisions,  and that he enters into this
Agreement voluntarily and after having the opportunity to receive the advice and
counsel of his attorney.


     PLEASE READ CAREFULLY.  THIS AGREEMENT  INCLUDES A RELEASE OF ALL KNOWN AND
UNKNOWN CLAIMS.

         Executed at Knoxville, Tennessee this _11th____ day of May, 2000.



Sworn to and subscribed                 ___/s/ Thomas R. Kelly Jr._____________
                                        ---------------------------------------
before me this _11th___ day                   Thomas R. Kelly, Jr.
                ----
of May 2000.


___/s/__Jean Thomas___________
   ---  ----------------------
         NOTARY PUBLIC


My Commission Expires:

         [NOTARY SEAL]




         Executed at Knoxville, Tennessee this __11th____ day of May 2000.

                                                 GOODY'S FAMILY CLOTHING, INC.



                                               By:      /s/ Regis J. Hebbeler
Sworn to and subscribed before me
this _11th_ day of May, 2000.


         /s/ Jean Thomas___________
                                                       NOTARY PUBLIC

My Commission Expires:

         [NOTARY SEAL]

H:\HR\Separation Agreement\Tom Kelly.doc


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