HAPPY KIDS INC.

                    CHANGE IN CONTROL SEVERANCE PAY AGREEMENT

      THIS CHANGE IN CONTROL  SEVERANCE PAY AGREEMENT (the  "Agreement") is made
as of the 12th day of January,  1999, by and between Happy Kids Inc., a New York
corporation (the "Company"),  and Stuart Bender, an employee of the Company (the
"Employee").

                                    Recitals:
                                    --------

1.    The Company is a designer  and marketer of  custom-designed,  licensed and
      branded children's apparel and produces high quality,  coordinated apparel
      programs.  The Employee is currently  employed by the Company as the Chief
      Financial Officer.

2.    The Company and the Employee desire to provide for the payment, in certain
      instances,  of  severance  pay  to  the  Employee  in  the  event  of  the
      termination of Employee's  employment following a change of control of the
      Company, on the terms and conditions set forth in this Agreement:


                                   Agreement:
                                   ---------

      In  consideration  of the premises and the mutual covenants and conditions
set forth herein, the Company and the Employee agree as follows:

      Section 1.  Operation of Agreement.   This  Agreement  shall be  effective
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immediately upon its execution, but the provisions hereof shall not be operative
unless  and until a "Change  in  Control"  (as such term is defined in Section 2
hereof) has occurred.  The provisions of this  Agreement  shall not be operative
and shall not apply to any  termination  of  employment,  for any reason,  which
          --- -----
occurs before the period beginning three months and one day prior to a Change in
Control or which occurs after the period  beginning one year and one day after a
Change in Control.

      Section 2. Change in Control. The term "Change in Control" as used in this
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Agreement shall mean the first to occur of any of the following:

      (a) The  effective  date or date of  consummation  of any  transaction  or
      series of transactions (other than a transaction to which only the Company
      and one or more of its  subsidiaries  are  parties)  pursuant to which the
      Company:

          (i) becomes a  subsidiary  of another  corporation;  (ii) is merged or
          consolidated  with or into another  corporation;  (iii)  engages in an
          exchange of shares with another corporation;  or (iv) transfers, sells
          or otherwise  disposes of all or substantially  all of its assets to a
          single  purchaser  (other than the  Employee) or a group of purchasers
          (none of whom is the Employee);


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      provided,  however,  that this Subsection (a) shall not be applicable to a
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      transaction or series of  transactions  in which a majority of the capital
      stock of the other  corporation,  following such  transaction or series of
      transactions,  is owned or  controlled by the holders of a majority of the
      Company's outstanding capital stock immediately before such sale, transfer
      or disposition; or

      (b) The date upon which any person  (other  than the  Employee),  group of
      associated  persons  acting in concert  (none of whom is the  Employee) or
      corporation  becomes a direct or  indirect  beneficial  owner of shares of
      stock of the Company  representing an aggregate of more than fifty percent
      (50%) of the votes then entitled to be cast at an election of directors of
      the Company;  and provided,  however,  that the acquisition of shares in a
                        --------   -------
      bona fide  public  offering  or  private  placement  of  securities  by an
      ---- ----
      investor who is acquiring such shares for passive investment purposes only
      shall not constitute a "Change in Control;" or

      (c) The date  upon  which the  persons  who were  members  of the Board of
      Directors of the Company as of the date hereof (the  "Current  Directors")
      cease to  constitute  a  majority  of the  Board of  Directors;  provided,
                                                                       --------
      however,  that any new director  whose  nomination  or selection  has been
      -------
      approved  by the  affirmative  vote of at least  three (3) of the  Current
      Directors then in office shall also be deemed a Current Director.

      Section 3. Severance Pay Upon  Termination by Company  Without Cause or By
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Employee for Cause. If, during the three-month  period  immediately  preceding a
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Change in Control or during the one-year period  immediately  following a Change
in Control, the Employee's employment with the Company is terminated:

      (a) By the Company for no reason or for any reason other than:

          (i) death;  (ii)  disability  (in the event that the Employee shall be
          unable to  perform  Employee's  duties  for a period  of  ninety  (90)
          consecutive  calendar  days by  reason  of  disability  as a result of
          illness,   accident  or  other   physical  or  mental   incapacity  or
          disability);  or (iii) the  dishonest  or  willful  misconduct  of the
          Employee,  including but not limited to: misappropriating any funds or
          property of the Company;  attempting to willfully  obtain any personal
          profit  from any  transaction  in which the  Employee  has an interest
          which is adverse to the interests of the Company;  any act or omission
          which  substantially  impairs  the  Company's  ability to conduct  its
          ordinary business in its usual manner; unreasonable neglect or refusal
          to perform  the  duties  assigned  to the  Employee;  conviction  of a
          felony; or any other act or omission which subjects the Company or any
          of its  subsidiaries  to  substantial  public  disrespect,  scandal or
          ridicule; or


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<PAGE>
      (b) By the  Employee  as a result  of, or within  thirty  (30) days of the
      following:

          (i) a reduction in Employee's  rate of regular  compensation  from the
          Company to an amount below the rate of Employee's regular compensation
          as  in  effect   immediately   prior  to  Employee's   termination  or
          immediately  prior to the Change in  Control,  as  applicable;  (ii) a
          requirement  that  the  Employee  relocate  to a  location  more  than
          thirty-five  (35) miles from the Employee's  office  location with the
          Company  immediately  prior to Employee's  termination  or immediately
          prior to the Change in Control,  as  applicable;  or (iii) a change in
          duties or job responsibilities  from those in effect immediately prior
          to  Employee's  termination  or  immediately  prior to the  Change  in
          Control, as applicable,  which change results in the diminution of the
          Employee's status, authority and duties, except for such subordination
          in duties or job  responsibilities  as may normally be required due to
          the Company's  change from an independent  business  entity to being a
          subsidiary or division of another corporate entity;

then,  in the event such  termination  occurred  during the  three-month  period
immediately  preceding  such  Change  in  Control,  the  Company  shall  pay the
Severance Amount (hereinafter defined) within thirty (30) days of the occurrence
of the Change in Control,  or, in the event such termination occurred during the
one-year period  following the occurrence of the Change in Control,  the Company
shall pay the  Employee,  within  thirty (30) days after the  effective  date of
Employee's  termination,  the Severance Amount.  For purposes of this Agreement,
Severance  Amount  shall mean an amount  equal to three (3) times the sum of the
rate of Employee's annual regular compensation as in effect immediately prior to
Employee's  termination  or  immediately  prior to the  Change  in  Control,  as
applicable,  plus an amount equal to the bonus,  if any, paid to the Employee in
the year  prior to such  termination  or  Change in  Control.  The  Company  may
withhold from any such severance  compensation any federal,  state, city, county
or other taxes. If the Severance Amount is due to the Employee hereunder and the
termination  occurred during the three-month  period  immediately  preceding the
Change in Control,  then the Company  shall also be obligated  to reimburse  the
Employee,  upon receipt of appropriate  receipts for such  payments,  for actual
amounts which are otherwise unreimbursable or unfunded by any other employer and
which were or are  expended  by the  Employee  to  obtain,  for a maximum of six
months  from the  date of  termination,  comparable  insurance  benefits  as are
customarily provided to employees of the Company. If the Severance Amount is due
to the  Employee  hereunder  and the  termination  occurred  during the one-year
period immediately  following the Change in Control, then the Company shall also
be  obligated  to provide the Employee  with  insurance  benefits for six months
following termination of Employee's employment;  provided,  however, that if the
                                                 --------   -------
Employer  begins  employment with an employer other than the Company during such
six months,  then such benefits  shall cease to be owed or owing on the date the
Employee begins such employment with such other employer;  and provided further,
                                                               -------- -------
that in the event that the Employee's continued  participation in any such plans
for such period is not possible under the general terms and provisions  thereof,
the Company shall pay to the Employee benefits which are  substantially  similar
in content and value to those which the 


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<PAGE>
Employee was entitled under such plans or programs for such period.

      Except as set forth in Section 5 hereto,  with  respect to options held by
the Employee,  if any, if the Severance  Amount is paid pursuant to this Section
3, such payment  shall  constitute  the entire  obligation of the Company to the
Employee and full  settlement of any claim under law or equity that the Employee
might otherwise assert against the Company, or any of its employees, officers or
directors on account of the Employee's termination.

      Section  4.  No  Severance  Pay  Upon  Any  Other  Termination.  Upon  any
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termination  of the  Employee's  employment  with the Company  other than as set
forth in Section 3 hereto,  and  except as set forth in  Section 5 hereto,  with
respect to options held by the Employee,  if any, the sole obligation  hereunder
of  the  Company  shall  be to pay  Employee's  regular  compensation  up to the
effective  date of  termination.  In such  event,  however,  the  severance  pay
provisions  hereunder  will not impact in any way the rights of the  Employee or
the  obligations  of the Company  under any  employment  agreement  or any other
agreement  for the payment of employment  compensation  between the Employee and
the  Company,  whether  such  agreement(s)  are in  existence  now or come  into
existence hereafter.

      Section 5. Entire  Obligation.  Payment to the Employee pursuant to either
      -----------------------------
of Section 3 or 4 of this  Agreement  (provided that if payment is made pursuant
to Section 4 hereof,  the Company has met its  obligations  under any employment
agreement  or any other  agreement  for the payment of  employment  compensation
between the Employee and the Company) shall  constitute  the entire  obligation,
pursuant to each such  respective  Section,  of the Company to the  Employee and
full  settlement  of any  claim  under  law or equity  that the  Employee  might
otherwise  assert  against the  Company,  or any of its  employees,  officers or
directors on account of the Employee's termination;  provided,  however, that in
the  event  the  Employee  shall  have  options  outstanding  as of the  date of
Employee's termination,  such options shall continue to be governed by the terms
thereof,  regardless of whether the Employee receives  compensation  pursuant to
Section 3 or 4 hereof.

      Section 6. No Obligation To Continue  Employment.  This Agreement does not
      ------------------------------------------------
create  any  obligation  on the part of the  Company to  continue  to employ the
Employee following a Change in Control or in the absence of a Change in Control.

      Section 7. Term of Agreement. This Agreement shall terminate and no longer
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be in effect on the earlier of: (i) December 31, 2008;  (ii) the date upon which
the Employee ceases to be an employee of the Company, unless a Change in Control
occurs within three months after such termination  date; or (iii) if a Change in
Control occurs while the Employee is employed by the Company, until the date one
year following the Change in Control.

      Section 8.  Severability.  Should any  clause,  portion or section of this
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Agreement be unenforceable or invalid for any reason,  such  unenforceability or
invalidity shall not affect the  enforceability  or validity of the remainder of
the Agreement.

      Section 9.  Assignment:  Successors  in Interest.  This  Agreement,  being
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personal to the  Employee,  may not be assigned by the  Employee.  The terms and
conditions of this Agreement


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<PAGE>
shall inure to the benefit of and be binding upon the  successors and assigns of
the  Company,  and the heirs,  executors  and  personal  representatives  of the
Employee.

      Section 10. Waiver.  Failure to insist upon strict  compliance with any of
      ------------------
the terms,  covenants  or  conditions  of this  Agreement  shall not be deemed a
waiver  of  such  term,   covenant  or  condition,   nor  shall  any  waiver  or
relinquishment  of any  right or  power  hereunder  at any one or more  times be
deemed a waiver or  relinquishment  of such  right or power at any other time or
times.

      Section  11.  Governing  Law.  This  Agreement  shall be  governed  by and
      ----------------------------
construed in accordance with the laws of the State of New York applicable in the
case of agreements made and to be performed entirely within such State.

      Section 12.  Arbitration.  Any  controversy  or claim arising out of or in
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connection  with this  Agreement  shall be settled by  arbitration in accordance
with the rules of the  American  Arbitration  Association  then in effect in the
State of New York and judgment upon such award rendered by the arbitrator may be
entered in any court having jurisdiction  thereof. The arbitration shall be held
in the State of New York. The  arbitration  award shall include  attorneys' fees
and costs to the prevailing party.


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      IN WITNESS WHEREOF, this Agreement has been executed by the undersigned as
of the date first above written.



                                  HAPPY KIDS INC.



                                  By: /s/ Jack Benun
                                       -----------------------------------------
                                      Jack Benun,
                                      President and Chief Executive Officer



                                  THE EMPLOYEE



                                  /s/ Stuart Bender
                                  ----------------------------------------------
                                      Stuart Bender