Document:

AGREEMENT

     This  Agreement  (the  "Agreement")  is  entered  into on  March 31,  2000,
effective as of December 1,  1999 between AMCOL  International  Corporation (the
"Company") and Frank B. Wright, Jr. ("Employee").

     WHEREAS,  the Company  considers it essential and in the best  interests of
the Company and its  shareholders to foster the continued  employment of its key
management personnel;

     WHEREAS,  Employee  is  considered  a key  management  employee,  currently
serving  as  Vice  President  of  the  Company  and  President  of  its  Volclay
International Corporation subsidiary; and

     WHEREAS,  the Company desires to assure the future continuity of Employee's
services  in the event of any  actual or  threatened  "Change  in  Control"  (as
defined in Section 6 below) of the Company.

     IT IS THEREFORE AGREED AS FOLLOWS:

     1. Effect of Agreement. This Agreement shall be effective and binding as of
December 1,   1999.  However,  except  as  specifically  provided  herein,  this
Agreement shall not alter  materially  Employee's  duties and obligations to the
Company and the remuneration  and benefits which Employee may reasonably  expect
to receive from the Company in the absence of a Change in Control.

     2. Employment On and After Change in Control. Provided that the employee is
an employee of the Company immediately prior to a Change in Control, the Company
shall employ Employee, and Employee shall accept such employment, effective upon
such Change in Control for a period of twenty-four (24) months after said Change
in Control subject to the terms and conditions stated herein.

     3. Duties After Change In Control.  Employee agrees that during the term of
his employment with the Company after a Change in Control,  he shall perform the
duties  described  in Section 12 below and such other duties for the Company and
its  subsidiaries  consistent  with his  experience and training as the Board of
Directors  of the Company  (the  "Board") or the Board's  representatives  shall
determine from time to time, which duties shall be at least  substantially equal
in status, dignity and character to his duties at the date hereof. He shall also
have the title of Vice  President of the Company and such other titles as he may
have as of the Change in Control.  Employee  further agrees to devote his entire
working time and  attention to the business of the Company and its  subsidiaries
and use his best efforts to promote such business.

     4.  Compensation  Prior to Change in Control.  Prior to a Change in Control
the Company agrees to pay Employee  compensation  for his services in an amount,
and to provide him with life insurance,  disability,  health and other benefits,
as set by the  Company  from  time to time.  For the  purpose  of this  Section,
compensation does not include any bonus or other incentive  compensation plan or
stock purchase  plan,  which may vary from year to year at the discretion of the
Company.
<PAGE>
     5. Termination of Employment  Prior to a Change of Control.  Employee shall
be entitled to terminate his employment prior to a Change in Control at any time
upon  sixty (60) days'  prior  written  notice.  The  Company,  shall be able to
terminate Employee's employment at any time prior to a Change in Control with or
without  cause upon sixty (60) days'  prior  written  notice (or the  payment of
salary in lieu  thereof).  This  Section  shall not be  construed  to reduce any
accrued  benefits  payable in  connection  with any  termination  of  Employee's
employment prior to a Change in Control.

     Nothing  expressed or implied in this  Agreement  shall create any right or
duty on the part of the  Company  or  Employee  to have  Employee  remain in the
employment of the Company prior to a Change in Control.

     6. Termination of Employment On or After Change in Control.

     (a) For purposes of this  Agreement the term "Change in Control"  means the
change in the legal or  beneficial  ownership of fifty-one  percent (51%) of the
shares of the Company's common stock within a six (6) month period other than by
death or  operation of law, or the sale of ninety  percent  (90%) or more of the
Company's assets within a six (6) month period.

     (b)  Employee's  employment  on  and  after  a  Change  in  Control  may be
terminated  with just  cause by the  Company  at any time upon not less than ten
(10) days' prior  written  notice.  Prior to  termination  for just cause on and
after a Change in Control,  the Board of Directors  shall by majority  vote have
declared that Employee's  termination is for just cause specifically stating the
basis  for such  determination.  In the event  such a  termination  occurs,  the
provisions of Sections 9(a) and 12 below shall apply.

     Employee's  employment  may be  terminated  on or after a Change in Control
without just cause pursuant to the constructive termination procedures described
in the next  paragraph  or by the Company  giving  Employee not less than thirty
(30)  days'  prior  written  notice.  In  the  event  Employee's  employment  is
terminated pursuant to the preceding sentence:

     (i)  the provisions of Section 9(b) below shall apply; and

     (ii) although Employee's  employment term shall be deemed terminated at the
          end  of  such  notice  period  (or,  in  the  case  of a  constructive
          termination  described in the next paragraph,  as of the date Employee
          notifies the Company of such  termination),  such termination shall in
          no way  affect the term of this  Agreement  or  Employee's  duties and
          obligations under Section 12 below.

     For purposes of this Section 6(b),  Employee  shall be considered as having
been  terminated  by the  Company on or after a Change in Control for other than
just cause  provided  that he has notified  the Company of any of the  following
within ten (10) days of the occurrence thereof:

     (i)  the  assignment  to  Employee  of any duties of  substantially  lesser
          status,  dignity and character  than the duties as a Vice President of
          the Company  immediately  prior to the effective date of the Change in
          Control;
<PAGE>
     (ii) a post-Change in Control reduction by the Company in Employee's annual
          base salary or bonus or incentive plan (as in effect immediately prior
          to the effective date of the Change in Control);

     (iii)relocation  of Employee's  office to a location  which is more than 35
          miles from the location in which  Employee  principally  works for the
          Company  immediately  prior to the  effective  date of the  Change  in
          Control; the relocation of the appropriate  principal executive office
          of the Company or the Company's  operating  division or subsidiary for
          which Employee  performed the majority of his services for the Company
          during the year prior to the  effective  date of the Change in Control
          to a location  which is more than 35 miles from the  location  of such
          office  immediately  prior to such date; or his being  required by the
          Company  in order to perform  duties of  substantially  equal  status,
          dignity and character to those duties he performed  immediately  prior
          to the  effective  date of the  Change  in  Control  to  travel on the
          Company's   business  to  a  substantially   greater  extent  than  is
          consistent with his business travel obligations as of such date; or

     (iv) the  failure of the  Company to  continue  to  provide  Employee  with
          benefits substantially equivalent to those enjoyed by him under any of
          the  Company's  life  insurance,   medical,  health  and  accident  or
          disability plans in which he was  participating  immediately  prior to
          the effective date of the Change in Control,  the taking of any action
          by the Company which would  directly or indirectly  materially  reduce
          any of such  benefits or deprive him of any  material  fringe  benefit
          enjoyed by him  immediately  prior to effective  date of the Change in
          Control,  or the  failure of the  Company to provide him with at least
          the number of paid  vacation days to which he is entitled on the basis
          of years of service  under the  Company's  normal  vacation  policy in
          effect  immediately  prior  to the  effective  date of the  Change  in
          Control.

     (c) In the event  Employee's  employment is terminated on or after a Change
in Control in any manner not described in Section 6(b) above:

     (i)  the  provisions  of Section  9(b) shall not apply and  Employee  shall
          instead  receive the sums and benefits  described in Section 9(a); and
          (ii)  such  termination  shall  in no way  affect  the  term  of  this
          Agreement or Employee's duties or obligations under Section 12 below.

     (d) Any termination of employment of Employee following the commencement of
any  discussions  by a shareholder  or group of  shareholders  owning legally or
beneficially more than twenty percent (20%) of the common stock or an officially
designated  representative  of the Board of  Directors  with a third  party that
results  within one  hundred  eighty  (180)  days in a Change in  Control  shall
(unless such termination is for cause or wholly  unrelated to such  discussions)
be deemed to be a  termination  of Employee on and after a Change in Control for
purposes of this Agreement.
<PAGE>
     7. Notice of  Termination.  Any  termination by the Company or assertion of
termination by Employee shall be  communicated  by written notice of termination
to the other party at the following address:

                           AMCOL International Corporation
                           One North Arlington
                           1500 West Shure Drive
                           Arlington Heights, Illinois 60004
                           Attention:  Chief Executive Officer

                           Mr. Frank B. Wright, Jr.
                           AMCOL International Corporation
                           One North Arlington
                           1500 West Shure Drive
                           Arlington Heights, Illinois 60004

     8. Disability.  If as a result of Employee's  incapacity due to physical or
mental  illness,  he shall have been absent from his duties with the Company for
one hundred  eighty (180) days within any  twelve-(l2)-consecutive-month  period
and within thirty (30) days after written  notice of the Company's  intention to
terminate  his  employment  is given,  Employee  shall not have  returned to the
performance of his duties with the Company  substantially  on a full-time basis,
the  Company  may  terminate  his  employment  for  disability.  This  shall not
constitute a  termination  for the purposes of  obtaining  benefits  pursuant to
Section 9.

     9. Benefits Upon  Termination And Leave Of Employment On or After Change in
the Control.

     (a) If  Employee  is  terminated  for just  cause  on or after a Change  in
Control,  he shall only  receive the accrued  sums and  benefits  payable to him
through the date he is  terminated;  the  provisions of Section 9(b) below shall
not be  applicable  in such case and Employee  shall not receive (or shall cease
receiving) the payments and benefits described in Section 9(b).

     (b) Subject to Employee's  compliance  with the provisions of Section 12(a)
below,  if Employee  is  terminated  during the  twenty-four  (24) month  period
beginning on and continuing  after a Change in Control other than for just cause
(either at the discretion of the Company's  management or  constructively by the
operation of Section 6), he shall receive the following payments and benefits in
lieu of any other sums or benefits otherwise payable to him by the Company:

          (i)  all then accrued pay, benefits, executive compensation and fringe
               benefits,  including  (but not  limited  to) pro rata  bonus  and
               incentive plan earnings;

          (ii) medical,  health and disability  benefits which are substantially
               similar to the benefits  the Company is  providing  him as of the
               date of his  employment is terminated for a period of twenty-four
               (24) months thereafter; and
<PAGE>
          (iii) one dollar less than two times his base period compensation.

          The  foregoing  payments  and  benefits  shall be deemed  compensation
     payable for the duties to be performed  by Employee  pursuant to Section 12
     below.  For  purposes  of  this  Agreement,  (A)  Employee's  "base  period
     compensation" is the average annual "compensation" (as defined below) which
     was  includable  in his gross  income for his base period  (i.e.,  his most
     recent  five (5)  taxable  years  ending  before  the date of the Change in
     Control);  and (B) if Employee's  base period includes a short taxable year
     or less  than  all of a  taxable  year,  compensation  for  such  short  or
     incomplete  taxable year shall be annualized before determining his average
     annual compensation for the base period. (In annualizing compensation,  the
     frequency with which payments are expected to be made over an annual period
     shall be taken into account.  Thus, any amount of  compensation  for such a
     short or incomplete  taxable year that  represents a payment that would not
     be made more than once per year shall not be  annualized).  The sum payable
     to  Employee  pursuant to Section  9(b)(iii)  shall in any and all cases be
     reduced by any compensation which Employee receives, excluding stock option
     or other  stock  incentive  bonus  plan  compensation  from the date of the
     Change in Control  until the  termination  date.  For  purposes  of Section
     9(iii)  and  the  definitions   pertaining  to  said  Section,   Employee's
     "compensation" is the compensation  which was payable to him by the Company
     or a related entity determined  without regard to the following Sections of
     the Internal Revenue Code of 1986, as amended (the "Code"):  125 (cafeteria
     plans), 402(a)(8) (cash or deferred arrangements), 402(h)( 1 )(B) (elective
     contributions  to  simplified  employee  pensions),  and,  in the  case  of
     employer  contributions  made  pursuant  to a salary  reduction  agreement,
     403(b) (tax sheltered annuities).

          Except for the benefits  described in Section 9(b)(ii) above, the sums
     due  pursuant  to this  Section  9(b) shall be paid in up to two (2) annual
     installments  commencing  thirty (30) days after the sums  become due.  All
     sums  due  shall  be  subject  to  appropriate  withholding  and  statutory
     requirements.  Employee shall not be required to mitigate the amount of any
     payment  provided for in this Section 9(b) by seeking  other  employment or
     otherwise.  Notwithstanding  anything  stated in this  Section  9(b) to the
     contrary,  however,  the amount of any payment or benefit  provided  for in
     this Section 9(b) shall be reduced by no more than 50% by any  compensation
     earned by Employee as a result of  employment  by another  employer and the
     Company shall not be required to provide medical,  health and/or disability
     benefits to the extent such benefits would duplicate  benefits  received by
     Employee in connection with his employment with any new employer.

     Notwithstanding  anything stated in this Agreement to the contrary,  if the
amounts which are payable and the benefits  which are provided to Employee under
this Agreement,  either alone or together with other payments which Employee has
a right to receive from the Company or any of its affiliates, would constitute a
"parachute payment" (as defined in Code Section 280G), such amounts and benefits
shall be  reduced,  as  necessary,  to the  largest  amount as will result in no
portion of said amounts and benefits  being either not deductible as a result of
Code Section 280G or subject to the excise tax imposed by Code Section 4999. The
determination  of any  reduction in said  amounts and  benefits  pursuant to the
foregoing  proviso  shall  be  made  by the  Company  in good  faith,  and  such
determination shall be conclusive and binding on Employee.  The amounts provided
to Employee under this Agreement in connection with a Change in Control, if any,
shall be deemed  allocated  to such  amounts  and/or  benefits to be paid and/or
provided  as the  Company's  Board of  Directors  in its sole  discretion  shall
determine.
<PAGE>
     10.  Special   Situations.   The  parties   recognize  that  under  certain
circumstances  a Change in  Control  may occur  under  conditions  which make it
inappropriate for Employee to receive the termination benefits or protection set
forth in this Agreement. Therefore, in the event that a Change in Control occurs
for any one of the  following  reasons,  the  provisions  of Sections 2, 6 and 9
shall not apply:

     (a) the  purchase  of more  than  fifty  percent  (50%) of the stock of the
Company by an employee stock ownership plan or similar  employee benefit plan of
which Employee is a participant; or

     (b) the  purchase of more than fifty  percent  (50%) of the stock or ninety
percent (90%) of the assets of the Company by a group of individuals or entities
including  Employee  as a member or  participant,  including  but not limited to
those  transactions  commonly  known as a leveraged or other forms of management
buy-outs.

     11. Dispute.  Any dispute arising under this Agreement  (except Section 12)
shall be  promptly  submitted  to  arbitration  under the Rules of the  American
Arbitration  Association.  An  arbitrator  is to be mutually  agreed upon by the
parties or upon failure of  agreement,  designated  by the American  Arbitration
Association.

     12. Non-Competition, Non-Solicitation, and Confidentiality.

     (a) In  consideration  of  this  Agreement  and  other  good  and  valuable
consideration, Employee agrees that for so long as he is employed by the Company
and for twelve (12) months thereafter he shall not own manage, operate, control,
be employed  by or  otherwise  engage in any  competitive  business.  Employee's
agreement  pursuant to the preceding  sentence shall be in addition to any other
agreement or legal  obligation he may have with or to the Company.  For purposes
of the preceding sentence,  a "competitive  business" is any business engaged in
the production, refinement or sale of Bentonite and/or any business conducted by
the  Company,  its  affiliates  or  any  subsidiaries  thereof  as of  the  date
Employee's  employment  is  terminated.  A business  which is  conducted  by the
Company,  its affiliates or any subsidiaries  which is subsequently  sold by the
Company is not a  competitive  business as of the date such business is sold. An
"affiliate" of the Company' is any company which either controls,  is controlled
by or is under  common  control  with the  Company.  The  phrase  "any  business
conducted by the Company,  its  affiliates,  joint ventures or any  subsidiaries
thereof' includes not only current businesses but also any new products, product
lines or use of processes under  development,  consideration or investigation on
the date Employee's employment with the Company is terminated.

     Employee also agrees that during the twelve (12) month period  described in
the first sentence of this Section 12(a) he will not directly or indirectly,  on
behalf of himself or any other person or entity,  make a solicitation or conduct
business,  with any customer or potential  customer of the Company with which he
had  contact  while  employed  by  the  Company,   its  affiliates   and/or  any
subsidiaries  thereof,  with  respect  to any  products  or  services  which are
competitive  with any business  conducted by the Company,  its affiliates or any
subsidiaries  thereof.  For purposes of the preceding sentence,  a "customer" is
any person or entity that has purchased goods or services from the Company,  its
affiliates  or any  subsidiaries  thereof  within the twelve  (12) month  period
ending on the date Employee's  employment is terminated.  A "potential customer"
is any person or entity that the Company
<PAGE>
solicited for business  within  twelve (12) months prior to the date  Employee's
employment with the Company is terminated.

     The Company and Employee recognize that his responsibilities  have included
product  development,  sales and marketing of bentonite  clay,  fuller's  earth,
nanocomposites  and  related  products  to  various  markets  including  without
limitation the foundry,  agricultural,  plastic and well drilling industries and
establishing contacts and business relationships on behalf of the Company in the
domestic and international markets. Employee's contacts on behalf of the Company
represent substantial assets of the Company which are entitled to protection. In
recognition of this situation,  the covenants set forth in this Section 12 shall
apply  to  competitive   businesses  and  solicitation  in  the  United  States,
Australia,  Japan, China, India, Thailand, Egypt, Canada, Mexico and those other
countries of Europe, North America, South America and Asia in which the Company,
its affiliates,  joint ventures and  subsidiaries  are located or have conducted
$100,000 or more of business  during the twelve (12) month period  ending on the
date Employee's employment with the Company terminated.

     Before and forever after his  termination  or  resignation,  Employee shall
keep  confidential and refrain from utilizing or disseminating any confidential,
proprietary  or trade secret  information  of the Company for any purpose  other
than furthering the business interests of the Company.

     (b)  During  Employee's  employment  hereunder  and  during  one  (1)  year
following his resignation or the termination of his employment hereunder for any
reason,  Employee  will not induce or attempt to influence any present or future
employee of the Company, its affiliates or any subsidiaries thereof to leave its
employ.

     (c) In  consideration  of the  covenant not to compete the Company will pay
one/twelfth  (1/12) of  Employee's  annual base salary each month for a total of
twelve  (12)  months.  The  Company  may at its sole  discretion  for any reason
whatsoever  not make  these  payments  if it so elects and the  covenant  not to
compete  will end at the end of the month in which the  Company  elects to cease
payment.

     13. Other Agreements. Except to the extent expressly set forth herein, this
Agreement  shall not  modify or lessen  any  benefit  or  compensation  to which
Employee is entitled  under any  agreement  between  Employee and the Company or
under  any  plan   maintained  by  the  Company  in  which  he  participates  or
participated.  Benefits or compensation shall be payable thereunder,  if at all,
according to the terms of the applicable  plan(s) or agreement(s).  The terms of
this Agreement shall supersede any existing  agreement  between Employee and the
Company  executed  prior to the date hereof to the extent any such  Agreement is
inconsistent with the terms hereof.

     14. Successors:  Binding Agreement.  The Company will require any successor
(whether direct or indirect by purchase, merger,  consolidation or otherwise, to
all or  substantially  all of the  business  and/or  assets of the  Company') to
expressly  assume and agree to perform this  Agreement in the same manner and to
the same  extent  that the  Company  would be  required to perform it if no such
succession had taken place.

     This  Agreement  shall  inure  to the  benefit  of and  be  enforceable  by
Employee's  personal  or  legal  representatives,   executors,   administrators,
successors,  heirs,  distributees,  devisees and legatees.
<PAGE>
     15.  Injunction.  The  remedy at law for any  breach of  Section 12 will be
inadequate and the Company,  its affiliates and any  subsidiaries  thereof would
suffer continuing and irreparable injury to their business as a direct result of
any  such  breach.  Accordingly,  notwithstanding  anything  stated  herein,  if
Employee  shall breach or fail to perform any term,  condition or duty contained
in Section 12 hereof,  then,  in such event,  the  Company  shall be entitled to
institute  and  prosecute  proceedings  in any court of competent  jurisdiction,
either in law or in  equity,  to obtain  the  specific  performance  thereof  by
Employee or to seek a temporary restraining order or injunctive relief,  without
any' requirement to show actual damages or post bond, to restrict  Employee from
violating  the  provisions  of Section  12;  however,  nothing  herein  shall be
construed  to prevent the Company'  seeking such other remedy in the courts,  in
case of any breach of this  Agreement by  Employee,  as the Company may elect or
invoke. If court proceedings are instituted by the Company to enforce Section 12
hereof,  and the Company is the prevailing party, the Company shall receive,  in
addition to any damages  awarded,  reasonable  attorneys'  fees, court costs and
ancillary expenses.

     16. Miscellaneous.  This Agreement may not be modified or discharged unless
such  waiver,  modification  or  discharge is agreed to in writing and signed by
Employee and such officers of the Company as may be  specifically  designated by
its Board for that  purpose.  Except  for any  failure  to give the ten (10) day
notice  described  in Section  6(b) above,  the failure of either  party to this
Agreement  to object  to any  breach  by the  other  party or the  non-breaching
party's  conduct or conduct  forbearance  shall not  constitute a waiver of that
party's  rights to enforce this  Agreement.  No waiver by either party hereto at
any time of any breach by the other party  hereto of, or  compliance  with,  any
condition  or  provision  of this  Agreement to be performed by such other party
shall be deemed a waiver of any  subsequent  breach by such  other  party or any
similar  or  dissimilar  provisions  or  conditions  at the same or any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied,  with  respect to the  subject  matter  hereof have been made by either
party  which  are not  expressly  set  forth in this  Agreement.  The  validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Illinois.

     17.  Severability.  The parties hereto intend this Agreement to be enforced
to the  maximum  extent  permitted  by law. In the event any  provision  of this
Agreement  is deemed to be invalid or  unenforceable  by any court of  competent
jurisdiction,  such  provisions  shall be  deemed to be  restricted  in scope or
otherwise  modified  to the  extent  necessary  to  render  the same  valid  and
enforceable.  In the event the  provisions  of Section 12 cannot be  modified or
restricted  so as to be  valid  and  enforceable,  then  the same as well as the
Company's  obligation to make any payment or transfer any benefit to Employee in
connection with any termination of Employee's employment shall be deemed excised
from this  Agreement,  and this Agreement  shall be construed and enforced as if
such  provisions had  originally  been  incorporated  herein as so restricted or
modified or as if such provisions had not originally been contained  herein,  as
the case may be. The  invalidity  or  unenforceability  of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement which shall remain in full force and effect.

     18.  Survival.  The  obligations of the parties under this Agreement  shall
survive the term of this Agreement.
<PAGE>
     19.  Term of  Agreement.  The  term of this  Agreement  shall  commence  on
December 1,  1999 and end on December 1,  2002; provided,  however,  that in the
event Employee's employment is terminated while this Agreement is in force, this
Agreement  shall  terminate  when the Company has made all  payments to Employee
required  by  Section 9 hereof and  Employee  has  complied  with the duties and
obligations  described in Section 12 hereof (all of which duties and obligations
shall specifically survive the termination of the Employee's employment). To the
extent  necessary for the Company's  enforcement of the provisions of Section 12
above (but only for such purpose), Employee's employment term shall be deemed to
continue through the end of the Agreement term.

EMPLOYEE                                  AMCOL INTERNATIONAL CORPORATION

/s/ Frank B. Wright                       By: /s/ Larry Washow
Frank B. Wright                           Its: PresidentEXHIBIT 10.2

                               FINANCING AGREEMENT

                       The CIT Group/Business Credit, Inc.

                             (as Agent and a Lender)

                                       and

                            Factory 2-U Stores, Inc.

                                  (as Borrower)

                              Dated: March 3, 2000

<PAGE>

                               TABLE OF CONTENTS

                                                                          Page

SECTION 1.     Definitions..................................................1
SECTION 2.     Conditions Precedent........................................13
SECTION 3.     Revolving Loans.............................................16
SECTION 4.     Intentionally Left Blank....................................20
SECTION 5.     Letters of Credit...........................................20
SECTION 6.     Collateral..................................................23
SECTION 7.     Representations, Warranties and Covenants...................25
SECTION 8.     Interest, Fees and Expenses.................................32
SECTION 9.     Powers......................................................36
SECTION 10.    Events of Default and Remedies..............................37
SECTION 11.    Term and Termination........................................40
SECTION 12.    Miscellaneous...............................................41
SECTION 13.    Agreement between the Lenders...............................43
SECTION 14.    Agency......................................................46

                                      -i-

<PAGE>

                  THE CIT GROUP/BUSINESS  CREDIT,  INC., a New York corporation,
(hereinafter  "CITBC"),  with offices  located at 300 South Grand Avenue,  Third
Floor,  Los  Angeles,  California  90071  (CITBC and any other  party  hereafter
becoming a Lender  hereunder  pursuant to Section 13.9 hereof each  individually
sometimes referred to as a "Lender" and collectively,  the "Lenders"), and CITBC
as Agent for the Lenders  (hereinafter  the  "Agent") are pleased to confirm the
terms and conditions under which the Lenders acting through the Agent shall make
revolving loans and other financial  accommodations to FACTORY 2-U STORES, INC.,
a Delaware  corporation  (hereinafter the "Company"),  with a principal place of
business at 4000 Ruffin Road, San Diego, California 92123.

SECTION 1      Definitions

     For purposes of this  Financing  Agreement,  the  following  terms shall be
defined in the following manner:

                  Accounts  shall mean all of the  Company's  now  existing  and
future: (a) accounts (as defined in the U.C.C.), including,  without limitation,
all accounts  created by or arising from all of the Company's  sales of goods or
rendition of services to its customers,  and all accounts  arising from sales or
rendition of services made under any of the Company's trade names or styles,  or
through any of the Company's divisions,  but the term Accounts shall not include
the Company's  landlord  receivables for tenant  improvements  and the Company's
employee stock subscription receivables; (b) Credit Card Receivables (whether or
not specifically  listed on schedules  furnished to the Agent);  (c) any and all
instruments,  documents,  General  Intangibles,  payment  intangibles,  contract
rights  and  chattel  paper  (all as  such  terms  are  defined  in the  U.C.C.)
representing   Accounts;  (d)  unpaid  seller's  rights  (including  rescission,
replevin,  reclamation  and  stoppage in transit)  relating to the  foregoing or
arising therefrom;  (e) rights to any goods represented by any of the foregoing,
including  rights to returned or  repossessed  goods;  (f)  reserves  and credit
balances  arising  hereunder;  (g)  guarantees  or  collateral  for  any  of the
foregoing;  (h) insurance  policies or rights  relating to any of the foregoing;
and (i) cash and non-cash proceeds of any and all the foregoing.

                  Agent Commitment Letter shall mean the commitment letter dated
February 10, 2000, issued by the Agent to, and accepted by, the Company.

                  Anniversary  Date shall have the  meaning set forth in Section
11.1 hereof.

                  Assignment  and Transfer  Agreement  shall mean the Assignment
and Transfer Agreement in the form of Exhibit B hereto.

                                      -1-

<PAGE>

                  Availability  shall  mean at any time the excess of the lesser
of (a)  the  Borrowing  Base  or  (b)  $50,000,000,  over  the  sum  of (x)  the
outstanding  aggregate amount of all Obligations,  including without limitation,
all  Obligations  with respect to Revolving  Loans and Letters of Credit and (y)
the Availability Reserve.

                  Availability  Reserve  shall  mean an amount  equal to any (a)
delinquent sales taxes, (b) delinquent  rental payments for the Company's leased
premises,  and (c) such  other  reserves  as the Agent  deems  necessary  in its
commercially  reasonable  judgment as a result of (i) negative  forecasts and/or
trends in the Company's  business,  profits,  operations or financial  condition
that could  reasonably  be  expected  to have a material  adverse  effect on the
Company  and  its   subsidiaries   taken  as  a  whole  or  (ii)  other  issues,
circumstances,   or  facts  that  could  otherwise  reasonably  be  expected  to
negatively impact the Company,  it's business,  profits,  operations,  financial
condition or assets.

                  Borrowing Base shall mean the sum of (a)  eighty-five  percent
(85%) of the outstanding  Eligible  Accounts  Receivable of the Company plus (b)
the  aggregate  value  of  Eligible  Inventory  (including  Eligible  In-Transit
Inventory)  determined  at the lower of cost or market on a first-in,  first-out
basis multiplied by the Inventory Advance Percentage;  provided that in no event
shall advances  against Eligible  In-Transit  Inventory exceed the lesser of (A)
$5,000,000,  or (B)  forty  percent  (40%) of the  aggregate  value of  Eligible
Inventory.

                  Business  Day shall  mean any day on which  both the Agent and
The Chase Manhattan Bank are open for business.

                  Capital Lease shall mean any lease of property  (whether real,
personal or mixed) which, in conformity with GAAP, is accounted for as a capital
lease on the balance sheet of the Company.

                  Chase Manhattan Rate shall mean the rate of interest per annum
announced  by The Chase  Manhattan  Bank from time to time as its prime  rate in
effect at its principal  office in the City of New York.  (The prime rate is not
intended to be the lowest rate of interest  charged by The Chase  Manhattan Bank
to its borrowers).

                  Closing Date shall mean March 3, 2000.

                  Collateral  shall mean all present and future  Accounts,
 Inventory,  and Other Collateral of the Company.

                  Collateral  Management Fee shall mean, for the initial term of
this Financing  Agreement,  the sum of $105,000 which shall be paid to the Agent
in  accordance  with  Section 8.8 hereof to offset the expenses and costs of the
Agent  in  connection  with  record   keeping,   analyzing  and  evaluating  the
Collateral.  Following

                                      -2-

<PAGE>

 the initial term of this Financing  Agreement,  an annual
Collateral  Management  Fee shall be  established in an amount as agreed between
the Agent and the Company.

                  Consolidated  Balance Sheet shall mean a consolidated  balance
sheet for the Company, prepared in accordance with GAAP and in a form acceptable
to the Agent.

                  Contract  Rate  shall  mean the  applicable  rate of  interest
computed as set forth in Section 8.1 of this Financing Agreement.

                  Credit  Card  Acknowledgments  shall  mean,  individually  and
collectively,  the  agreements by Credit Card Issuers or Credit Card  Processors
who are  parties  to  Credit  Card  Agreements  in favor of Agent  acknowledging
Agent's first priority  security interest in the monies due and to become due to
the Company  (including,  without  limitation,  credits and reserves)  under the
Credit Card Agreements,  and agreeing to transfer such amounts to the Depository
Account established for such purposes, as the same now exist or may hereafter by
amended, modified, supplemented, extended, renewed, restated or replaced.

                  Credit  Card  Agreements  shall  mean  all  agreements  now or
hereafter  entered into by the Company with any Credit Card Issuer or any Credit
Card  Processor,  as the same now exist or may  hereafter be amended,  modified,
supplemented, extended, renewed, restated or replaced.

                  Credit Card Issuer shall mean any person  (including,  without
limitation,  a bank) (other than the Company) who issues or whose  members issue
credit cards, including,  without limitation,  MasterCard or VISA bank credit or
debit  cards or other  bank  credit or debit  cards  issued  through  MasterCard
International,  Inc.,  Visa,  U.S.A.,  Inc. or Visa  International  and American
Express,  Discover, Diners Club, Carte Blanche and other bank or non-bank credit
or debit cards.

                  Credit Card  Processor  shall mean any servicing or processing
agent  or any  factor  or  financial  intermediary  who  facilitates,  services,
processes or manages the credit authorization,  billing, transfer and/or payment
procedures with respect to sales  transactions of the Company  involving  credit
cards or debit card  purchases  by  customers  using credit cards or debit cards
issued by any Credit Card Issuer.

                  Credit  Card  Receivables  shall  mean  collectively,  (a) all
present and future rights of the Company to payment from any Credit Card Issuer,
Credit  Card  Processor  or other  third  party  arising  from sales of goods or
rendition of services to  customers  who have  purchased  such goods or services
using a credit  or debit  card and (b) all  present  and  future  rights  of the
Company to payment from any Credit Card Issuer,  Credit Card  Processor or other
third party in connection with the sale or transfer of Accounts arising pursuant
to the sale of goods or rendition of services to

                                      -3-

<PAGE>

 customers  who have  purchased
such goods or services using a credit card or a debit card.

                  Customarily Permitted Liens shall mean:

                  (a) liens of local or state authorities for franchise or other
like taxes provided the aggregate amount of such liens shall not exceed $250,000
in the aggregate at any one time;

                  (b)  statutory  liens of  landlords  and  liens  of  carriers,
warehousemen,  mechanics,  materialmen  and other  like  liens  imposed  by law,
created in the ordinary course of business and for amounts not yet due (or which
are  being  contested  in  good  faith  by  appropriate   proceedings  or  other
appropriate actions which are sufficient to prevent imminent foreclosure of such
liens)  and  with  respect  to which  adequate  reserves  or  other  appropriate
provisions are being maintained in accordance with GAAP; and

                  (c)  deposits  made (and the liens  thereon)  in the  ordinary
course of business (including, without limitation, security deposits for leases,
surety  bonds  and  appeal  bonds) in  connection  with  workers'  compensation,
unemployment  insurance and other types of social security benefits or to secure
the  performance of tenders,  bids,  contracts  (other than for the repayment or
guarantee  of  borrowed   money  or  purchase  money   obligations),   statutory
obligations  and other  similar  obligations  arising  as a result  of  progress
payments under government contracts.

                  Default  shall mean any event  specified in Section 10 hereof,
whether or not any requirement  for the giving of notice,  the lapse of time, or
both, or any other condition, event or act, has been satisfied.

                  Default  Rate of Interest  shall mean a rate of  interest  per
annum  equal to the lesser of (a) the  Maximum  Legal Rate or (b) the sum of (i)
two percent (2%) and (ii) the applicable Contract Rate based upon the applicable
increment over the Chase Manhattan Rate as determined  under Section 8.1 hereof,
which the Agent on behalf of the Lenders shall be entitled to charge the Company
on all  Obligations due the Agent on behalf of the Lenders by the Company to the
extent provided in Section 10.2 of this Financing Agreement.  Agent on behalf of
Lenders  acknowledges  that no "breakage fee" will be charged to Borrower in the
event  that  Agent  converts  the  interest  rate on a  Libor  Loan to a rate of
interest based on the Chase Manhattan Rate as the result of an Event of Default.

                  Depository  Accounts  shall  have  the  meaning  specified  in
Section 3.4 hereof.

                                      -4-

<PAGE>

                  Documentation   Fee  shall  mean  the  Agent's  standard  fees
relating  to  any  and  all  modifications,  waivers,  releases,  amendments  or
additional  collateral with respect to this Financing Agreement,  the Collateral
and/or the Obligations.

                  Documents of Title shall mean all present and future documents
(as defined in the U.C.C.) including, without limitation all warehouse receipts,
bills of lading,  shipping  documents,  chattel paper,  instruments  and similar
documents,  all whether  negotiable or not and all goods and Inventory  relating
thereto and all cash and non-cash proceeds of the foregoing.

                  Early  Termination  Date  shall mean any date  (other  than an
Anniversary  Date) on  which  this  Financing  Agreement  or the Line of  Credit
(including the Letter of Credit Sub-Line) is terminated.

                  Early  Termination  Fee  shall:  (a) mean the fee the Agent is
entitled  to charge the Company in the event the Line of Credit  (including  the
Letter of Credit  Sub-Line) or this Financing  Agreement is terminated on a date
prior to an Anniversary  Date; and (b) be determined by multiplying  the Line of
Credit  (including  the Letter of Credit  Sub-Line) by (i) one percent (1.0%) if
the Early  Termination Date occurs on or prior to one (1) year after the Closing
Date,  and (ii) one-half  percent  (0.5%) if the Early  Termination  Date occurs
after one (1) year after the  Closing  Date but prior to two (2) years after the
Closing Date.

                  EBITDA shall mean,  for any period,  all  earnings  before all
interest,  tax  obligations,  depreciation  and  amortization  expense  for said
period,  all determined in accordance  with GAAP on a basis  consistent with the
latest audited  financial  statements of the Company but excluding noncash stock
option compensation charges and the effect of extraordinary and/or non-recurring
gains or losses for such period.

                  Eligible  Accounts  Receivable  shall mean the gross amount of
the  Company's  Credit  Card  Receivables  that are  subject  to a valid,  first
priority and fully perfected  security  interest in favor of the Agent on behalf
of  the  Lenders,  less,  without  duplication,  the  sum of  (a)  any  returns,
discounts,  claims, credits and allowances of any nature (whether issued, owing,
granted or outstanding),  (b) accounts that remain unpaid for more than ten (10)
days  from  the  date of the  transaction,  and  (c)  reserves  for (i)  amounts
representing historic returns,  discounts,  claims, credits and allowances,  and
(ii)  amounts as deemed  necessary  by the Agent in the  exercise of  reasonable
business judgment and which are customary in the commercial finance industry.

                  Eligible  In-Transit  Inventory shall mean the gross amount of
the  Company's  Eligible  Inventory  which is in  transit  to and/or  from third
parties  with  respect to which the  Company  has title and that is subject to a
valid,  first  priority and fully  perfected  security  interest in favor of the
Agent on behalf of the Lenders and which  conforms to the  warranties  contained
herein and which at all times  continues  to

                                      -5-

<PAGE>

 be  acceptable  to the Agent in the
exercise of its reasonable  business judgment,  less, without  duplication,  (a)
goods in transit to and from third parties  (other than the Company's  agents or
warehouses)  with  respect  to which  there  exists  no  proof of the  Company's
ownership  thereof  reasonably  acceptable  to  the  Agent  in  conformity  with
commercial  finance  industry  standards,  (b)  Inventory  in  possession  of  a
warehouseman,  bailee or other third party unless such  warehouseman,  bailee or
third party has executed a notice of security  interest  agreement  (in form and
substance  satisfactory  to the Agent) and the Agent has taken all other  action
required to perfect its security  interest in such  Inventory,  (c) Inventory in
transit in excess of thirty (30) days, and (d) Inventory at vendors.

                  Eligible   Inventory  shall  mean  the  gross  amount  of  the
Company's  Inventory  that is  subject  to a valid,  first  priority  and  fully
perfected  security  interest in favor of the Agent on behalf of the Lenders and
which  conforms  to the  warranties  contained  herein  and  which at all  times
continues  to be  acceptable  to the  Agent in the  exercise  of its  reasonable
business judgment,  including the Eligible In-Transit  Inventory,  less, without
duplication, any (a) work-in-process, (b) supplies, (c) goods not present in the
United  States of America,  (d) goods  returned  or  rejected  by the  Company's
customers  other than  goods that are  undamaged  and  resaleable  in the normal
course of business,  (e) goods to be returned to the  Company's  suppliers,  (f)
goods in transit to and from third parties  (other than the Company's  agents or
warehouses)  with  respect  to which  there  exists  no  proof of the  Company's
ownership  thereof  reasonably  acceptable  to  the  Agent  in  conformity  with
commercial  finance  industry  standards,  (g)  Inventory  in  possession  of  a
warehouseman,  bailee or other third party unless such  warehouseman,  bailee or
third party has executed a notice of security  interest  agreement  (in form and
substance  satisfactory  to the Agent) and the Agent has taken all other  action
required  to  perfect  its  security  interest  in such  Inventory,  and (h) any
reserves  required by the Agent in its  reasonable  discretion for special order
goods, market value declines, shrinkage, slow-moving, damaged or obsolete goods,
and bill and hold (deferred  shipment) or  consignment  sales to the extent that
Company has not already taken reserves for such in its reports to Agent.

                  Equipment  shall  mean  all  present  and  hereafter  acquired
equipment  (as  defined  in  the  U.C.C.)  including,  without  limitation,  all
machinery, equipment, furnishings and fixtures, and all additions, substitutions
and  replacements  thereof,  wherever  located,  together with all  attachments,
components,  parts,  equipment  and  accessories  installed  thereon  or affixed
thereto and all proceeds of whatever sort.

                  ERISA shall mean the Employee  Retirement  Income Security Act
of 1974, as amended from time to time and the rules and regulations  promulgated
thereunder from time to time.

                                      -6-

<PAGE>

                  Event(s)  of  Default  shall  have the  meaning  provided  for
in  Section 10  of this  Financing Agreement.

                  Executive Officers shall mean the Chairman,  President,  Chief
Executive Officer, Chief Operating Officer,  Chief Financial Officer,  Executive
Vice President(s), Senior Vice President(s), Treasurer, Controller and Secretary
of the Company.

                  Financing Agreement,  hereof,  hereto,  hereunder and words of
similar  meaning shall mean this Financing  Agreement  including any exhibits or
schedules,  as such  Financing  Agreement  may  from  time  to time be  amended,
modified or supplemented.

                  GAAP shall mean generally  accepted  accounting  principles in
the United  States of America as in effect  from time to time and for the period
as to which such accounting principles are to apply.

                  General  Intangibles  shall have the  meaning set forth in the
U.C.C.  and shall  include,  without  limitation,  all present and future right,
title and  interest in and to all trade  names,  Trademarks  (together  with the
goodwill associated therewith),  Patents, licenses, customer lists, distribution
agreements, supply agreements,  indemnification rights and tax refunds, together
with all  monies and claims  for  monies  now or  hereafter  due and  payable in
connection  with any of the  foregoing or  otherwise,  and all cash and non-cash
proceeds thereof.

                  Indebtedness shall mean, without duplication, all liabilities,
contingent or otherwise,  which are any of the  following:  (a)  obligations  in
respect of money  (borrowed or otherwise) or for the deferred  purchase price of
property,  services or assets,  other than Inventory,  or (b) lease  obligations
which, in accordance with GAAP, have been, or which should be capitalized.

                  Inventory  shall  mean  all  of  the  Company's   present  and
hereafter  acquired  inventory  (as defined in the U.C.C.),  and all  additions,
substitutions  and replacements  thereof,  wherever  located,  together with all
General  Intangibles  and materials used or usable in  processing,  packaging or
shipping same and all cash and noncash proceeds thereof.

                  Inventory  Advance  Percentage  shall  mean the  lesser of (a)
seventy percent (70%) of the aggregate value of Eligible Inventory or (b) ninety
percent  (90%)  of the Net  Orderly  Liquidation  Value  of the  Inventory  as a
percentage of the total  Inventory as  determined  by the most recent  Inventory
appraisal, as provided for in Section 7.13 hereof.

                                      -7-

<PAGE>

                  Investment  Property  shall mean all of the Company's  present
and hereafter acquired securities, securities entitlements,  securities accounts
and other investment property (as such terms are defined in the U.C.C.).

                  Issuing Bank shall mean the bank issuing Letters of Credit for
the account of the Company.

                  Letters  of Credit  shall mean all  letters  of credit  issued
hereunder  with the  assistance  of the Agent on behalf  of the  Lenders  by the
Issuing Bank for or on behalf of the Company.

                  Letter of Credit Guaranty shall mean the guaranty delivered by
the  Agent  on  behalf  of the  Lenders  to the  Issuing  Bank of the  Company's
reimbursement  obligation  under the  Issuing  Bank's  reimbursement  agreement,
application for letter of credit or other like document.

                  Letter of Credit  Guaranty Fee shall mean the fee the Agent on
behalf of the Lenders may charge the Company under Section 8.3 of this Financing
Agreement for: (a) issuing the Letter of Credit Guaranty or (b) otherwise aiding
the Company in obtaining Letters of Credit.

                  Letter  of  Credit  Sub-Line  shall  mean  $5,000,000  in  the
aggregate.

                  Libor shall mean at any time of determination,  and subject to
availability,  for each  Libor  Period,  the  highest of the  applicable  London
Interbank  Offered rate paid in London on dollar  deposits  from other banks for
such Libor Period as (a) quoted by The Chase Manhattan Bank, (b) published under
"Money  Rates" in the New York City  edition  of the Wall  Street  Journal or if
there is no such  publication  or  statement  therein  as to  Libor  then in any
publication  used in the New York City financial  community or (c) determined by
the Agent based upon  information  presented on Telerate Systems at Page 3750 as
of 11:00 a.m. (London Time).

                  Libor Loan shall mean that portion of the Revolving  Loans for
which the Company has elected to use Libor for interest rate computations.

                  Libor  Period  shall mean the Libor for one month,  two month,
three month or six month U.S. dollar deposits, as selected by the Company.

                  Line of Credit  shall mean the  commitment  of the  Lenders to
make Revolving  Loans  pursuant to Section 3 of this Financing  Agreement and to
assist the  Company in opening  Letters of Credit  pursuant to Section 5 of this
Financing Agreement, in the aggregate amount of up to $50,000,000.

                                      -8-

<PAGE>

                  Line of Credit  Fee  shall  mean the fee due the Agent for the
benefit  of the  Lenders  at the  end of each  month  for  the  Line of  Credit,
determined by multiplying the difference  between (a) the Line of Credit and (b)
the sum of (i) the average daily  balance of the  Revolving  Loans plus (ii) the
average daily balance of Letters of Credit for said month by one-eighth  percent
(0.125%) per annum for the number of days in said month.

                  Loan  Facility Fee shall mean the fee payable to the Agent for
the benefit of the Lenders in accordance  with,  and pursuant to, the provisions
of Section 8.7 of this Financing Agreement.

                  Maximum  Legal  Rate  shall mean the  highest  maximum  lawful
interest rate which may be contracted for, charged,  taken, received or reserved
under this  Financing  Agreement by the Agent  and/or the Lenders in  accordance
with applicable  state or federal law, taking into account all items  contracted
for,  charged or received in connection  with the Obligations  evidenced  hereby
which are treated as interest under the applicable state or federal law, as such
rate may change from time to time.

                  Net   Orderly   Liquidation   Value  shall  mean  the  orderly
liquidation  value,  as  determined  pursuant  to  Section  7.13  hereof,  after
deduction of associated costs, fees and liquidation expenses.

                  Obligations  shall mean all loans and  advances  made or to be
made by the Agent  and/or  the  Lenders  to the  Company  or to  others  for the
Company's  account  (including,  without  limitation,  all  Revolving  Loans and
Letters of Credit);  any and all indebtedness  and obligations  which may at any
time be owing by the  Company  to the Agent  and/or the  Lenders  and that arise
under this Financing Agreement, as it may be amended,  renewed,  supplemented or
otherwise  modified  from time to time,  whether now in existence or incurred by
the Company from time to time hereafter; whether secured by pledge, lien upon or
security  interest in any of the  Company's  assets or property or the assets or
property  of any  other  person,  firm,  entity  or  corporation;  whether  such
indebtedness is absolute or contingent,  joint or several, matured or unmatured,
direct or indirect  and  whether  the Company is liable to the Agent  and/or the
Lenders for such  indebtedness  as  principal,  surety,  endorser,  guarantor or
otherwise. Obligations shall also include indebtedness owing to the Agent and/or
the Lenders by the Company  under this  Financing  Agreement  or under any other
agreement or arrangement  now or hereafter  entered into between the Company and
the Agent and/or the Lenders relating to this Financing Agreement;  indebtedness
or  obligations  incurred  by, or imposed on, the Agent  and/or the Lenders as a
result of  environmental  claims (other than as a result of actions of the Agent
and/or the Lenders)  arising out of the Company's  operation,  premises or waste
disposal  practices or sites;  the  Company's  liability to the Agent and/or the
Lenders as maker or endorser on any promissory note or other  instrument for the
payment of money; the Company's

                                      -9-

<PAGE>

  liability to the Agent and/or the Lenders under
any  instrument  of  guaranty  or  indemnity,  or  arising  under any  guaranty,
endorsement or undertaking  which the Agent and/or the Lenders may make or issue
to others for the Company's account,  including any accommodation  extended with
respect to  applications  for  Letters of Credit,  the Agent's (on behalf of the
Lenders)  acceptance  of  drafts  or the  Agent's  (on  behalf  of the  Lenders)
endorsement of notes or other instruments for the Company's account and benefit.

                  Other  Collateral  shall mean (a) all now owned and  hereafter
acquired  deposit  accounts  maintained  by or on behalf of the Company with any
bank or financial institution in which any proceeds of the Accounts or Inventory
are  deposited;  (b) all of the Company's  cash and other monies and property in
the  possession  or control  of the Agent  and/or  the  Lenders;  (c) all of the
Company's  books,  records,  ledger  cards,  disks and related  data  processing
software at any time evidencing or containing information relating to any of the
Collateral  or  otherwise  necessary  or  helpful in the  collection  thereof or
realization thereon; and (d) all cash and non-cash proceeds of the foregoing.

                  Out-of-Pocket  Expenses shall mean all of the Agent's  present
and future  expenses  incurred  relative to this  Financing  Agreement,  whether
incurred  heretofore or hereafter,  which expenses shall include,  without being
limited to, the cost of record  searches,  all appraisal fees, third party field
examination  fees, all costs and expenses  incurred by the Agent in opening bank
accounts,  depositing checks,  receiving and transferring funds, and any charges
imposed on the Agent and/or the Lenders due to "insufficient funds" of deposited
checks and the Agent's and/or the Lenders'  standard fee relating  thereto,  any
amounts  paid by the Agent on behalf of the  Lenders,  incurred by or charged to
the Agent on behalf of the  Lenders  by the  Issuing  Bank  under the  Letter of
Credit Guaranty or the Company's reimbursement agreement, application for letter
of credit or other like document which pertain either  directly or indirectly to
such Letters of Credit, and the Agent's standard fees relating to the Letters of
Credit and any drafts  thereunder,  travel,  lodging and similar expenses of the
Agent's  personnel  inspecting and  monitoring the Collateral  from time to time
hereunder,  local  counsel  fees,  fees and  taxes  relative  to the  filing  of
financing  statements,  and all attorneys'  fees,  expenses,  costs and fees set
forth in Section 10.3 of this Financing Agreement.

                  Patents shall mean all present and hereafter  acquired patents
and/or patent rights of the Company and all cash and non-cash proceeds thereof.

                  Permitted  Encumbrances  shall mean: (a) liens existing on the
date hereof on specific  items of Equipment and listed on Schedule 1 hereto (but
only to the extent such liens do not  encumber the  Collateral)  and other liens
expressly permitted, or consented to, by the Agent; (b) Permitted Purchase Money
Liens;  (c) Customarily  Permitted  Liens;  (d) liens created in connection with
sale  leasebacks or loans secured

                                      -10-

<PAGE>

 by the Company's  equipment to the extent that
such transactions constitute Permitted Indebtedness hereunder; (e) liens granted
the Agent by the Company; (f) liens of judgment creditors provided such liens do
not exceed, in the aggregate,  at any time, $200,000 (other than liens bonded or
insured to the reasonable  satisfaction  of the Agent);  and (g) liens for taxes
not yet due and payable or which are being diligently contested in good faith by
the Company by appropriate  proceedings  for which the Company has posted a bond
in the  required  amount  or  otherwise  has  taken  action  necessary  to  stay
enforcement  of such  lien.  In no event  shall any  Collateral  be  subject  to
foreclosure  proceedings or, in the Agent's  discretion,  subject to any loss of
perfection or priority in favor of the Agent and/or the Lenders.

                  Permitted  Indebtedness  shall mean (a)  current  indebtedness
maturing in less than one year and incurred in the  ordinary  course of business
for raw  materials,  supplies,  equipment,  services,  taxes or  labor;  (b) the
indebtedness  secured by the Permitted  Purchase Money Liens;  (c)  indebtedness
arising under the Letters of Credit and this Financing  Agreement;  (d) deferred
taxes and other  expenses  incurred  in the  ordinary  course of  business;  (e)
Subordinated Debt, if unsecured and subject to a subordination agreement in form
and substance  satisfactory  to the Agent;  (f)  indebtedness  arising from sale
leaseback transactions or loans secured by the Company's equipment,  but only if
(i)  the  Company  gives  prior  written  notice  to  the  Agent  of  each  such
transaction,  (ii) an Event of Default has not occurred and is continuing at the
time any such  transaction  is entered into,  (iii) such  indebtedness  does not
exceed the cost of the Company's  equipment  being given as collateral  for such
indebtedness, and (iv) the transaction does not involve the Company's intangible
assets  (including,  but not  limited  to,  trademarks,  trade  names  and trade
styles);  and (g) other  indebtedness  existing on the date of execution of this
Financing  Agreement and listed in the most recent financial statement delivered
to the Agent and the Lenders or otherwise disclosed to the Agent in writing; and
(h) indebtedness secured by liens on real estate acquired after the date of this
Financing  Agreement,  provided that (i) each such lien shall attach only to the
real estate  acquired,  (ii) the aggregate amount of such real estate debt shall
not, at any time,  exceed  $10,000,000,  (iii) the Company  shall give the Agent
prior written  notice before  incurring any such real estate  indebtedness,  and
(iv) no Event of Default  shall have  occurred and be continuing at the time the
Company incurs any such indebtedness.

                  Permitted Purchase Money Liens shall mean liens on any item of
equipment acquired after the date of this Financing  Agreement provided that (a)
each such lien shall attach only to the item(s) of equipment to be acquired, (b)
the Company shall give the Agent prior written notice before  incurring any such
indebtedness,  and (c) no Event of Default shall have occurred and be continuing
at the time the Company incurs any such indebtedness.

                                      -11-

<PAGE>

                  Required  Lenders  shall mean Lenders  holding more than fifty
percent  (50%) of the  outstanding  loans,  advances,  extensions  of credit and
commitments to the Company hereunder.

                  Revolving  Loans shall mean the loans and advances made,  from
time to time, to or for the account of the Company by the Agent on behalf of the
Lenders pursuant to Section 3 of this Financing Agreement.

                  Revolving  Loan  Account  shall have the meaning  specified in
Section 3.6 hereof.

                  Revolving Loan  Promissory Note shall mean the promissory note
in the  form of  Exhibit  A hereto  executed  by the  Company  to  evidence  the
Revolving  Loans  made by the  Agent on  behalf of the  Lenders  to the  Company
pursuant to Section 3 hereof.

                  Settlement  Date  shall  mean  the  date,   weekly,  and  more
frequently,  at the discretion of the Agent,  upon the occurrence of an Event of
Default or a  continuing  decline or  increase of the  Revolving  Loans that the
Agent and the Lenders  shall  settle  amongst  themselves  so that (a) the Agent
shall not have, as Agent,  any money at risk and (b) on such Settlement Date the
Lenders  shall have a pro rata  amount of all  outstanding  Revolving  Loans and
Letters of Credit,  provided that each  Settlement  Date for a Lender shall be a
Business Day on which such Lender and its bank are open for business.

                  Subordinated Debt shall mean unsecured debt due (and the notes
evidencing such) which has been subordinated,  by a Subordination  Agreement (in
form and substance  reasonably  satisfactory to the Agent), to the prior payment
and  satisfaction  of the  Obligations  of the  Company to the Agent  and/or the
Lenders,  including  without  limitation  the debt of the  Company  to  American
Endeavour Fund Ltd. and Landmark Secondary Partners IX, L.P., or their permitted
assigns.

                  Subordination  Agreement  shall mean the  agreement  among the
Company,  the then holder of  Subordinated  Debt and the Agent pursuant to which
Subordinated  Debt of such  holder  is  subordinated  to the prior  payment  and
satisfaction of the Company's  Obligations to the Agent and the Lenders (in form
and substance reasonably satisfactory to the Agent).

                  Tangible Net Worth shall mean,  as  determined  in  accordance
with GAAP, the difference  between (i) the assets of the Company after deducting
adequate  reserves  in each  case  where,  a  reserve  is  proper  and  (ii) all
Indebtedness of the Company other than  Subordinated  Debt;  provided,  however,
that  notwithstanding  the foregoing in no event shall there be included as such
assets:  intangibles,  goodwill, patents,  trademarks,  trade names, copyrights,
licenses,  goodwill,   receivables  from

                                      -12-

<PAGE>

 affiliates,   directors,  officers  or
employees,  deferred charges or treasury stock or any securities or Indebtedness
of the Company or any other securities unless the same are readily marketable in
the United States of America or entitled to be used as a credit against  federal
income tax liabilities, and any other assets designated from time to time by the
Agent, in its reasonable credit judgment.

                  Trademarks  shall  mean all  present  and  hereafter  acquired
trademarks  and/or  trademark  rights  (together  with the  goodwill  associated
therewith) and all cash and non-cash proceeds thereof.

                  U.C.C.  shall mean the  Uniform  Commercial  Code as in effect
from time to time in the State of  California.  Terms  defined by reference to
the U.C.C.  in this  Financing  Agreement  shall be deemed  amended  without
any action of the parties hereto when the U.C.C.  is amended,  including
without  limitation when revised Division 9 of the U.C.C. becomes
effective on July 1, 2001.

SECTION 2      Conditions Precedent

2.1 The  obligation  of the Agent and the  Lenders  to make loans  hereunder  is
subject  to  the  satisfaction  of,  or  waiver  of,  immediately  prior  to  or
concurrently with the making of such loans, the following conditions precedent:

     (a) Lien Searches - The Agent shall have received tax, judgment and Uniform
Commercial Code searches  satisfactory to the Agent for all locations  presently
occupied or used by the Company.

     (b)  Casualty  Insurance - The Company  shall have  delivered  to the Agent
evidence  reasonably  satisfactory to the Agent that casualty insurance policies
listing the Agent,  for the benefit of the Lenders,  as loss payee or mortgagee,
as the case may be,  are in full force and  effect,  all as set forth in Section
7.5 of this Financing Agreement.

     (c) UCC Filings - Any documents  (including without  limitation,  financing
statements)  required to be filed in order to create,  in favor of the Agent for
the benefit of the Lenders a first and exclusive  perfected security interest in
the  Collateral  (subject to  Permitted  Encumbrances)  with  respect to which a
security interest may be perfected by a filing under the U.C.C.  shall have been
properly filed in each office in each  jurisdiction  required in order to create
in favor of the Agent for the  benefit of the  Lenders a  perfected  lien on the
Collateral.  The Agent  shall have  received  acknowledgment  copies of all such
filings  (or, in lieu  thereof,  the Agent shall have  received  other  evidence
satisfactory  to the Agent that all such filings have been made);  and the Agent
shall have received  evidence  that all  necessary  filing fees and all taxes or
other expenses related to such filings have been paid in full.

                                      -13-

<PAGE>

     (d) Opinion - Counsel for the Company shall have  delivered to the Agent an
opinion satisfactory to counsel for the Agent opining, inter alia, that, subject
to the (i) filing,  priority and remedies  provisions of the Uniform  Commercial
Code, (ii) the provisions of the Bankruptcy Code,  insolvency  statutes or other
like laws, (iii) the equity powers of a court of law and (iv) such other matters
as may be agreed upon with the Agent: (A) this Financing Agreement and all other
loan documents of the Company are (1) valid,  binding and enforceable  according
to their  terms,  (2) are duly  authorized  and (3) do not  violate  any  terms,
provisions,  representations  or  covenants  in the  charter  or  by-laws of the
Company  or,  to the best  knowledge  of such  counsel,  of any loan  agreement,
mortgage,  deed of trust,  note,  security or pledge  agreement  or indenture to
which the  Company  is a  signatory  or by which the  Company  or its assets are
bound;  and (B) the provisions of all federal and state  securities laws and the
Hart-Scott-Rodino  Anti-Trust  Improvements Act have been fully complied with or
that compliance is not legally required.

     (e) Additional Documents - The Company shall have executed and delivered to
the Agent all loan  documents  necessary to consummate  the lending  arrangement
contemplated hereunder.

     (f)  Subordination  Agreements  - American  Endeavour  Fund Ltd.,  Landmark
Secondary Partners IX, L.P. and any other holder of Subordinated Debt shall have
executed  and  delivered  to the Agent a  Subordination  Agreement,  in form and
substance satisfactory to the Agent,  subordinating the debt due to each of them
by the Company to the prior payment and  satisfaction  of the Obligations of the
Company to the Agent and/or the Lenders.

     (g) Landlord Waivers - The Agent shall have received  satisfactory landlord
waivers from Ruffin San Diego Corporation and Pacific Gulf Properties.

     (h) Bailee Agreements - The Agent shall have received  satisfactory  bailee
agreements from FMI International and Streamline Shippers Association.

     (i)  Board  Resolution  - The  Agent  shall  have  received  a copy  of the
resolutions of the Board of Directors of the Company  authorizing the execution,
delivery and performance of this Financing Agreement any related agreements,  in
each case  certified by the Secretary or Assistant  Secretary of the Company (as
the case may be) as of the  date  hereof,  together  with a  certificate  of the
Secretary  or  Assistant  Secretary  of the  Company  as to the  incumbency  and
signature  of the  officers of the Company  executing  such  agreements  and any
certificate or other documents to be delivered by them pursuant hereto, together
with evidence of the incumbency of such Secretary or Assistant Secretary.

                                      -14-

<PAGE>

     (j)  Corporate  Organization  - The Agent shall have received (i) a copy of
the Certificate of  Incorporation  of the Company  certified by the Secretary of
State of its  incorporation,  and (ii) a copy of the By-Laws (as amended through
the  date  hereof)  of the  Company  certified  by the  Secretary  or  Assistant
Secretary of the Company.

     (k)  Officer's  Certificate  - The Agent  shall have  received  an executed
Officer's Certificate of the Company,  satisfactory in form and substance to the
Agent,  certifying that (i) the representations and warranties  contained herein
are true and correct in all material respects on and as of the date hereof; (ii)
the  Company is in  compliance  with all of the terms and  provisions  set forth
herein; and (iii) no Default or Event of Default has occurred.

     (l) Absence of Default and Material  Adverse Change - No Default,  Event of
Default  or  material  adverse  change  in the  financial  condition,  business,
prospects, profits, operations or assets of the Company shall have occurred.

     (m)  Legal  Restraints/Litigation  - At  the  date  of  execution  of  this
Financing  Agreement,  there  shall  be  no  (i)  litigation,  investigation  or
proceeding  (judicial  or  administrative)  pending or  threatened  against  the
Company or its assets,  by any agency,  division  or  department  of any county,
city, state or federal government arising out of this Financing Agreement,  (ii)
injunction,   writ  or  restraining   order   restraining  or  prohibiting   the
consummation  of the financing  arrangements  contemplated  under this Financing
Agreement  or  (iii)  to the  best  knowledge  of  the  Company,  suit,  action,
investigation or proceeding  (judicial or administrative)  pending or threatened
against  the  Company  or its  assets,  which,  in the  opinion  of the Agent if
adversely  determined  could have a  material  adverse  effect on the  business,
operation, assets, financial condition or Collateral of the Company.

     (n)  Disbursement  Authorization  - The Company shall have delivered to the
Agent  all   information   necessary  for  the  Agent  to  issue  wire  transfer
instructions  on behalf of the  Company for the  initial  and  subsequent  loans
and/or  advances to be made under this Financing  Agreement  including,  but not
limited to, disbursement authorizations in form acceptable to the Agent.

     (o)  Examination  &  Verification  - The Agent shall have  completed to the
satisfaction  of the Agent an  examination  and  verification  of the  Accounts,
Inventory, and books and records of the Company which examination shall indicate
that, after giving effect to all loans,  advances and extensions of credit to be
made at closing,  the Company shall have an opening  additional  Availability of
not less than  $10,000,000  all as more fully  required by the Agent  Commitment
Letter.  It is understood  that such  requirement  contemplates  that all debts,
obligations and payables are current.

                                      -15-

<PAGE>

     (p) Cash Budget  Projections - The Agent shall have received,  reviewed and
be satisfied with a 12 month cash budget  projection  prepared by the Company in
the form provided by the Agent.

     (q)  Depository  Accounts - The Company shall have  established a system of
bank  accounts  with  respect to the  collection  of Accounts and the deposit of
proceeds of Inventory  and other  Collateral as shall be acceptable to the Agent
in all respects. In addition,  the Company, the applicable financial institution
holding  the  Depositary  Account,  and the  Agent  shall  (and any such  future
financial  institution shall in the future) enter into such blockage and control
agreements as may be acceptable to Agent.

     (r) Existing Revolving Credit Agreement - (i) The Company's existing credit
agreement with FINOVA Capital  Corporation  shall be terminated,  (ii) all loans
and  obligations  of the Company  thereunder  shall be paid or satisfied in full
utilizing  the  proceeds  of the initial  Revolving  Loans to be made under this
Financing  Agreement,  and (iii) all liens upon or security interest in favor of
FINOVA Capital  Corporation in connection  therewith shall be terminated  and/or
released upon such payment.

     (s) The Agent Commitment Letter - The Company shall have fully complied, to
the satisfaction of the Agent, with all of the terms and conditions of the Agent
Commitment Letter.

     (t) Credit  Card  Acknowledgments  and Credit Card  Agreements  - The Agent
shall have  received,  in form and  content  acceptable  to it, the Credit  Card
Acknowledgments and the Credit Card Agreements.

2.2 Upon the execution of this Financing Agreement and the initial  disbursement
of loans hereunder,  all of the above Conditions  Precedent set forth in Section
2.1 shall have been deemed  satisfied  except as the Company and the Agent shall
otherwise agree in a separate writing.

SECTION 3      Revolving Loans

3.1 The Lenders  agree,  subject to the terms and  conditions of this  Financing
Agreement  from time to time,  and within the  Availability,  but subject to the
Lenders' right to make "overadvances", to make loans and advances to the Company
on a revolving  basis (i.e.  subject to the  limitations  set forth herein,  the
Company may borrow,  repay and re-borrow  Revolving  Loans).  Each request shall
constitute, unless otherwise disclosed in writing to the Agent and the Lenders a
representation  and  warranty by the  Company  that after  giving  effect to the
requested  advance,  no  Default  or  Event of  Default  has  occurred  and such
requested Revolving Loan is within the Availability.  All requests for loans and
advances  must be  received  by an officer of the

                                      -16-

<PAGE>

 Agent no later than 1:00 p.m.,
New York  time,  of the  Business  Day on which  such  loans  and  advances  are
required.  Should the Agent for any reason honor requests for advances in excess
of  the  limitations  set  forth  herein,  such  advances  shall  be  considered
"overadvances" and shall be made in the Agent's sole discretion,  subject to any
additional terms the Agent deems necessary.

3.2 In  furtherance of the  continuing  assignment and security  interest in the
Company's Accounts, the Company will, upon the creation of Accounts, execute and
deliver  to the  Agent in such  form and  manner  as the  Agent  may  reasonably
require,   solely  for  the  Agent's   convenience  in  maintaining  records  of
Collateral,  such confirmatory schedules of Accounts as the Agent may reasonably
request,  and  such  other  appropriate  reports  designating,  identifying  and
describing the Accounts as the Agent may reasonably require.  In addition,  upon
the  Agent's  request  the  Company  shall  provide  the  Agent  with  copies of
agreements  (including Credit Card Agreements) and such other  documentation and
information  relating to said  Accounts  and other  Collateral  as the Agent may
reasonably require. Failure to provide the Agent with any of the foregoing shall
in no way affect,  diminish,  modify or otherwise  limit the security  interests
granted herein.  The Company hereby authorizes the Agent to regard the Company's
printed name or rubber stamp  signature on  assignment  schedules or invoices as
the equivalent of a manual signature by one of the Company's authorized officers
or agents.

3.3 The  Company  hereby  represents  and  warrants  that:  (a) each Credit Card
Receivable  is based on an actual  and bona fide sale and  delivery  of goods or
rendition of services to customers,  made by the Company in the ordinary  course
of its business;  (b) the Inventory  being sold and the Credit Card  Receivables
created are the  exclusive  property of the Company and are not and shall not be
subject to any lien, consignment arrangement,  encumbrance, security interest or
financing statement whatsoever,  other than the Permitted Encumbrances;  (c) the
invoices evidencing such Credit Card Receivables are in the name of the Company;
and (d) the  customers of the Company have  accepted the goods or services,  owe
and are  obligated to pay the full amounts  stated in the invoices  according to
their terms, without dispute,  offset,  defense,  counterclaim or contra, except
for disputes and other matters arising in the ordinary  course of business.  The
Company  confirms  to the Agent that any and all taxes or fees  relating  to its
business,  its sales,  the  Accounts  or goods  relating  thereto,  are its sole
responsibility  and that same will be paid by the Company when due and that none
of said taxes or fees  represent a lien on or claim  against the  Accounts.  The
Company also  warrants  and  represents  that it is a duly and validly  existing
corporation and is qualified in all states where the failure to so qualify would
have a adverse  effect on the  business  of the  Company  or the  ability of the
Company to enforce  collection of Accounts due from  customers  residing in that
state. The Company agrees to maintain such books and records regarding  Accounts
as the Agent may reasonably require and agrees that the books and records of the
Company will reflect the Agent's interest in

                                      -17-

<PAGE>

the Accounts.  All of the books and
records of the Company will be available  to the Agent upon  reasonable  advance
notice during normal business hours (except that no advance notice need be given
if an Event of Default or Default  has  occurred  and has not been waived by the
Agent  or  cured  as  allowed  hereunder),  including  any  records  handled  or
maintained for the Company by any other company or entity.

3.4 All checks,  cash,  notes or other  instruments or property  received by the
Companies from collections on Accounts or from the sale or other  disposition of
Inventory  and Other  Collateral  shall be held by the  Company in trust for the
benefit of the Agent and Lenders, separate from the Company's other property and
funds and shall  immediately  be  deposited  in the  Depository  Accounts.  Such
Depository  Accounts  shall  be  subject  to  blockage  and  control  agreements
satisfactory to Agent.

         The Company may and will enforce, collect and receive all amounts owing
on the Accounts and/or received from sales or other dispositions of Inventory at
the  Company's  expense,  and may manage and  direct  its  Depository  Accounts;
however, such privilege shall terminate automatically upon the institution by or
against the Company of any proceeding under any bankruptcy or insolvency law or,
at the  election of the Agent in its sole  discretion:  (x) if the  Availability
(computed without regard to the $50,000,000 Line of Credit maximum Availability)
is at any time less than $10,000,000 and at all times thereafter until such time
the Company  maintains  minimum  Availability  (computed  without  regard to the
$50,000,000 Line of Credit maximum  Availability) of $10,000,000 for a period of
ninety (90) days,  or (y) upon the  occurrence of any other Event of Default and
until  such  Event of  Default is waived in writing by the Agent or cured to the
Agent's satisfaction.

         Upon the  occurrence  of an event under (x) or (y)  immediately  above,
Agent shall have the right, at its option, to notify the financial  institutions
where such  Depository  Accounts  are located and  institute  its  blockage  and
control  rights  with  respect  to  such  Depository  Accounts.  If the  Company
thereafter  maintains an Availability  of more than  $10,000,000 for a period of
not less than  ninety (90)  consecutive  days or, if  applicable,  such Event of
default  has been  waived  in  writing  by the  Agent  or  cured to the  Agent's
satisfaction,  upon the Company's  request,  Agent will authorize the Company to
manage and direct such Depository Accounts.

         All   amounts   received   by  the  Agent  in   payment   of   Accounts
("Collections")  will be  credited  to the  Company's  account  upon the Agent's
receipt of "good funds" at the Agent's bank account in New York, New York on the
Business  Day of receipt  if  received  no later  than 1:00 p.m.  or on the next
succeeding  Business Day if received after 1:00 p.m. No checks,  drafts or other
instrument  received by the Agent shall  constitute  final  payment to the Agent
unless and until such instruments have actually been collected.

                                      -18-

<PAGE>

3.5 The Company  agrees to notify the Agent  promptly of any matters  materially
affecting the value,  enforceability or collectibility of any Account and of all
material  customer  disputes,   offsets,   defenses,   counterclaims,   returns,
rejections  and all reclaimed or repossessed  merchandise or goods.  The Company
agrees to issue credit  memoranda  promptly  (with  duplicates to the Agent upon
request after the occurrence of an Event of Default) upon  accepting  returns or
granting allowances,  and may continue to do so until the Agent has notified the
Company  that an Event of Default has  occurred  and that all future  credits or
allowances are to be made only after the Agent's prior written approval.

3.6 The Agent shall  maintain a separate  account on its books in the  Company's
name (the  "Revolving  Loan  Account") in which the Company will be charged with
loans  and  advances  made by the Agent to it or for its  account,  and with any
other  Obligations,  including  any  and  all  costs,  expenses  and  reasonable
attorney's  fees which the Agent may incur in connection with the exercise by or
for the Agent of any of the rights or powers herein conferred upon the Agent, or
in the  prosecution or defense of any action or proceeding to enforce or protect
any  rights of the Agent in  connection  with this  Financing  Agreement  or the
Collateral  assigned  hereunder,  or any Obligations  owing to the Agent and the
Lenders by the Company.  The Company will be credited with all amounts  received
by the  Agent  and/or  the  Lenders  from the  Company  or from  others  for the
Company's  account,  including,  as set forth above, all amounts received by the
Agent in  payment  of  assigned  Accounts  and such  amounts  will be applied to
payment of the Obligations.  In no event shall prior recourse to any Accounts or
other  security  granted to or by the Company be a  prerequisite  to the Agent's
right to demand payment of any  Obligation.  Further,  it is understood that the
Agent and/or the Lenders shall have no  obligation  whatsoever to perform in any
respect any of the Company's contracts or obligations relating to the Accounts.

3.7 After the end of each  month,  the Agent shall  promptly  send the Company a
statement  showing in reasonable  detail the accounting for the charges,  loans,
advances  and other  transactions  occurring  between  the Agent and the Company
during that month.  The monthly  statements  shall be deemed correct and binding
upon the Company and shall  constitute an account stated between the Company and
the Agent unless the Agent receives a written statement of the exceptions within
thirty (30) days of the date of the monthly statement.

3.8 In the event that the sum of (a) the outstanding  balance of Revolving Loans
and (b) the outstanding  balance of Letters of Credit exceeds the maximum amount
thereof  available  under Sections 3 and 5 hereof (herein the amount of any such
excess  shall be  referred  to as the  "Excess")  such  Excess  shall be due and
payable to the Agent for the benefit of the Lenders immediately upon the Agent's
demand therefor.

                                      -19-

<PAGE>

SECTION 4      Intentionally Left Blank

SECTION 5      Letters of Credit

                  In order to assist  the  Company  in  establishing  or opening
documentary  and/or standby  Letters of Credit with an Issuing Bank to cover the
purchase of Inventory and for other purposes  approved by the Agent, the Company
has requested the Agent on behalf of the Lenders to join in the applications for
such Letters of Credit,  and/or guarantee payment or performance of such Letters
of Credit and any drafts or  acceptances  thereunder  through the  issuance of a
Letter of Credit  Guaranty,  thereby lending the Agent's and the Lenders' credit
to the  Company  and the  Agent and the  Lenders  have  agreed  to do so.  These
arrangements  shall be handled by the Agent subject to the terms and  conditions
set forth below.

5.1 Within the Line of Credit and Availability,  the Agent and the Lenders shall
assist the  Company in  obtaining  Letter(s)  of Credit in an  aggregate  amount
outstanding at any one time equal to or less than the Letter of Credit Sub-Line.
The Agent's and the Lenders'  assistance for amounts in excess of the limitation
set forth  herein  shall at all times and in all respects be in the Agent's sole
discretion. It is understood that the form and purpose of each Letter of Credit,
and any modifications thereof, must be acceptable to the Agent in its reasonable
business judgment. Any and all outstanding Letters of Credit shall be treated as
a Revolving Loan for Availability purposes.  Notwithstanding  anything herein to
the  contrary,  upon the  occurrence of a Default  and/or Event of Default,  the
Agent's and Lenders' assistance in connection with any Letter of Credit Guaranty
shall be in the Agent's  sole  discretion  unless such  Default  and/or Event of
Default is cured to the Agent's satisfaction or waived by the Agent in writing.

5.2 The Agent shall have the right, without notice to the Company, to charge the
Company's Revolving Loan Account on the Agent's books with the amount of any and
all  indebtedness,  liability or  obligation  of any kind  incurred by the Agent
under any Letter of Credit  Guaranty  at the earlier of (a) payment by the Agent
under  such  Letter of Credit  Guaranty,  or (b) the  occurrence  of an Event of
Default that has not been waived in writing by the Agent or cured to the Agent's
satisfaction.  Any amount  charged to Company's  Revolving Loan Account shall be
deemed a Revolving  Loan hereunder and shall incur interest at the rate provided
in Section 8.1 of this Financing Agreement.

5.3 The Company unconditionally  indemnifies the Agent and the Lenders and holds
the Agent and the Lenders  harmless  from any and all loss,  claim or  liability
incurred  by the Agent  and/or the  Lenders  arising  from any  transactions  or
occurrences  relating  to  Letters  of  Credit  established  or  opened  for the
Company's

                                      -20-

<PAGE>

 account, the collateral relating thereto and any drafts or acceptances
thereunder, and all Obligations thereunder, including any such loss or claim due
to any action taken by any Issuing Bank,  other than for any such loss, claim or
liability arising out of the gross negligence or willful misconduct by the Agent
and/or the Lenders  under the Letters of Credit  Guaranty.  The Company  further
agrees to hold the Agent and the Lenders  harmless  from any errors or omission,
negligence  or  misconduct  by the Issuing  Bank.  The  Company's  unconditional
obligation  to the Agent and the  Lenders  hereunder  shall not be  modified  or
diminished for any reason or in any manner whatsoever, other than as a result of
the Agent's and/or the Lenders' gross negligence or willful misconduct.  Subject
to this Section 5.3, the Company  agrees that any charges  incurred by the Agent
and/or  the  Lenders  for the  Company's  account by the  Issuing  Bank shall be
conclusive  on the Company,  the Agent and the Lenders and may be charged to the
Company's Revolving Loan Account.

5.4 In connection  with the issuance of Letters of Credit,  the Agent and/or the
Lenders shall not be  responsible  for: (a) the existence,  character,  quality,
quantity,  condition,  packing,  value or delivery of the goods purporting to be
represented by any documents;  (b) any difference or variation in the character,
quality, quantity,  condition, packing, value or delivery of the goods from that
expressed in the Letter of Credit  documents;  (c) the validity,  sufficiency or
genuineness  of any  documents  or of any  endorsements  thereon,  even  if such
documents  should  in  fact  prove  to  be  in  any  or  all  respects  invalid,
insufficient,  fraudulent  or forged;  (d) the time,  place,  manner or order in
which  shipment  is made;  (e)  partial or  incomplete  shipment,  or failure or
omission to ship any or all of the goods referred to in the Letters of Credit or
documents; (f) any deviation from instructions;  (g) delay, default, or fraud by
the shipper and/or anyone else in connection with the Collateral or the shipping
thereof;  or (h) any breach of  contract  between the shipper or vendors and the
Company.  Furthermore,  without being limited by the foregoing, the Agent and/or
the Lenders shall not be responsible  for any act or omission in connection with
the issuance of any Letter of Credit with respect to or in  connection  with any
Collateral.

5.5 Except as  otherwise  provided  herein,  the Company  agrees that any action
taken by the Agent  and/or the  Lenders,  if taken in good faith,  or any action
taken by any Issuing Bank,  under or in  connection  with the Letters of Credit,
the guarantees, the drafts or acceptances,  or the Collateral,  shall be binding
on the Company and shall not put the Agent  and/or the Lenders in any  resulting
liability to the Company.  In furtherance  thereof,  but subject to Section 5.6,
the Agent  shall  have the full right and  authority  to clear and  resolve  any
questions  of  non-compliance  of  Letter  of  Credit  documents;  to  give  any
instructions as to acceptance or rejection of any Letter of Credit  documents or
goods; to execute any and all steamship or airways  guaranties (and applications
therefor),  indemnities  or  delivery  orders;  to grant any  extensions  of the
maturity  of,  time of payment  for,  or time of  presentation  of, any  drafts,
acceptances, or documents; and with the consent of the Company (such consent

                                      -21-

<PAGE>

 not
to be  unreasonably  withheld  and being  needed only if no Event of Default has
occurred and is continuing) to agree to any  amendments,  renewals,  extensions,
modifications, changes or cancellations of any of the terms or conditions of any
of the applications,  Letters of Credit, drafts or acceptances. Such actions may
be taken in the Agent's  sole name,  and the  Issuing  Bank shall be entitled to
comply with and honor any and all such documents or  instruments  executed by or
received solely from the Agent.

5.6 Without the Agent's express consent and endorsement in writing,  the Company
agrees:  (a) not to execute any applications for steamship or airway guaranties,
indemnities or delivery orders; to grant any extensions of the maturity of, time
of  payment  for,  or  time of  presentation  of,  any  drafts,  acceptances  or
documents; or to agree to any amendments,  renewals, extensions,  modifications,
changes  or  cancellations  of any  of the  terms  or  conditions  of any of the
applications,  Letters  of  Credit,  drafts  or  acceptances;  and (b) after the
occurrence of an Event of Default which is not cured within any applicable grace
period,  if any,  or waived by the  Agent,  not to (i)  clear  and  resolve  any
questions  of  non-compliance  of Letter of Credit  documents,  or (ii) give any
instructions as to acceptances or rejection of any Letter of Credit documents or
goods.

5.7 The Company  agrees that any necessary  import,  export or other licenses or
certificates  for the  import  or  handling  of the  Collateral  will  have been
promptly procured; all foreign and domestic governmental laws and regulations in
regard to the shipment  and  importation  of the  Collateral,  or the  financing
thereof will have been promptly and fully complied with; and any certificates in
that regard that the Agent may at any time request  will be promptly  furnished.
In this connection,  the Company warrants and represents that all shipments made
under any such Letters of Credit are in accordance with the laws and regulations
of the countries in which the shipments  originate  and  terminate,  and are not
prohibited  by any such laws and  regulations.  The  Company  assumes  all risk,
liability and responsibility  for, and agrees to pay and discharge,  all present
and future  local,  state,  federal or foreign  taxes,  duties,  or levies.  Any
embargo, restriction,  laws, customs or regulations of any country, state, city,
or other political  subdivision,  where the Collateral is or may be located,  or
wherein  payments are to be made,  or wherein  drafts may be drawn,  negotiated,
accepted,   or  paid,  shall  be  solely  the  Company's  risk,   liability  and
responsibility.

5.8 Upon any  payments  made to the  Issuing  Bank  under  the  Letter of Credit
Guaranty, the Agent for the benefit of the Lenders shall acquire by subrogation,
any rights, remedies, duties or obligations granted or undertaken by the Company
to the  Issuing  Bank in any  application  for Letters of Credit,  any  standing
agreement  relating  to Letters of Credit or  otherwise,  all of which  shall be
deemed to have been  granted  to the Agent for the  benefit of the  Lenders  and
apply in all  respects  to the

                                      -22-

<PAGE>

 Agent for the benefit of the Lenders and shall be
in addition to any rights, remedies, duties or obligations contained herein.

SECTION 6      Collateral

6.1 As security for the prompt  payment in full of all loans and  advances  made
and to be made to the Company  from time to time by the Agent and/or the Lenders
pursuant  hereto,  as well  as to  secure  the  payment  in  full  of any  other
Obligations,  the Company hereby pledges and grants to the Agent for the benefit
of the Lenders a continuing  general  lien upon and security  interest in all of
its:

     (a)      present and hereafter acquired Inventory;

     (b)      present and future Accounts; and

     (c)      present and future Other Collateral.

6.2      The security interests granted hereunder shall extend and attach to:

     (a) All  Collateral  which is presently in existence  and which is owned by
the  Company  or in which the  Company  has any  interest,  whether  held by the
Company or others for its account; and

     (b) All Inventory and any portion thereof which may be returned,  rejected,
reclaimed or  repossessed  by either the Agent or the Company from the Company's
customers, as well as to all supplies, incidentals, packaging materials, labels,
trademarks and any other items which contribute to the finished goods, including
the sale, promotion or shipment thereof.

6.3 The Company  agrees to  safeguard,  protect and hold all  Inventory  for the
Agent's account and make no disposition  thereof except in the regular course of
the  business of the Company as herein  provided.  Until the Agent has given the
Company notice to the contrary, as provided for below, any Inventory may be sold
and  shipped  by the  Company to its  customers  in the  ordinary  course of the
Company's business, on open account and on terms currently being extended by the
Company to its  customers,  provided  that,  if  required by Section 3.4 of this
Financing  Agreement,  all  proceeds  of all  sales  (including  cash,  accounts
receivable, checks, notes, Credit Card Receivables,  instruments for the payment
of money and similar  proceeds) shall be forthwith  transferred,  endorsed,  and
turned over and delivered to the Agent for the benefit of the Lenders. The Agent
shall have the right to withdraw this permission at any time upon the occurrence
of an Event of Default and until such time as such Event of Default is waived or
cured to the Agent's  satisfaction,  in which event no further disposition shall
be made of the  Inventory  by the  Company  without the  Agent's  prior

                                      -23-
<PAGE>

  written
approval.  Upon the sale, exchange, or other disposition of Inventory, as herein
provided,  the security interest in the Company's  Inventory provided for herein
shall,  without  break in  continuity  and  without  further  formality  or act,
continue in, and attach to, all  proceeds,  including  any  instruments  for the
payment of money,  accounts  receivable,  contract  rights,  documents of title,
shipping  documents,  chattel paper and all other cash and non-cash  proceeds of
such sale,  exchange  or  disposition.  As to any such sale,  exchange  or other
disposition,  the  Agent  shall  have all of the  rights  of an  unpaid  seller,
including stoppage in transit, replevin, rescission and reclamation.

6.4 The Company  agrees at its own cost and expense to keep its  Equipment in as
good and  substantial  repair and condition,  reasonable wear and tear excepted,
making any and all  repairs and  replacements  when and where  necessary.  If an
Event of Default has occurred and is continuing, the Company also agrees to make
no disposition  of Equipment  unless the Company first obtains the prior written
approval of the Agent.

6.5 The rights and  security  interests  granted to the Agent for the benefit of
the Lenders hereunder are to continue in full force and effect,  notwithstanding
the  termination  of this  Financing  Agreement  or the fact  that  the  account
maintained in the Company's name on the books of the Agent may from time to time
be  temporarily  in a credit  position,  until the final  payment in full to the
Agent and the Lenders of all  Obligations  and the termination of this Financing
Agreement.  Any delay,  or omission by the Agent  and/or the Lenders to exercise
any right hereunder, shall not be deemed a waiver thereof, or be deemed a waiver
of any other right,  unless such waiver be in writing and signed by the Agent. A
waiver on any one  occasion  shall not be construed as a bar to or waiver of any
right or remedy on any future occasion.

6.6 To the extent that the  Obligations  are hereafter  secured by any assets or
property other than the Collateral or by the guarantee,  endorsement,  assets or
property  of any other  person,  then the Agent shall have the right in its sole
discretion to determine which rights,  security,  liens,  security  interests or
remedies  the  Agent  shall  at any time  pursue,  foreclose  upon,  relinquish,
subordinate, modify or take any other action with respect to, without in any way
modifying or affecting any of them, or any of the Agent's or the Lenders' rights
hereunder.

6.7 Any reserves or balances to the credit of the Company and any other property
or assets of the Company in the  possession  of the Agent and/or the Lenders may
be held by the Agent as  security  for any  Obligations  and applied in whole or
partial  satisfaction  of such  Obligations  when due.  The  liens and  security
interests  granted herein and any other lien or security  interest the Agent may
have in any other assets of the Company shall secure payment and  performance of
all now

                                      -24-

<PAGE>

 existing and future Obligations.  The Agent may in its discretion charge
any or all of the Obligations to the Revolving Loan Account when due.

SECTION 7      Representations, Warranties and Covenants

7.1 The Company hereby  warrants and represents  and/or  covenants that: (a) the
fair value of the  Company's  assets  exceeds  the book  value of the  Company's
liabilities;  (b) the Company is generally  able to pay its debts as they become
due and payable;  (c) the Company does not have  unreasonably  small  capital to
carry on its  business as it is currently  conducted  absent  extraordinary  and
unforeseen  circumstances;  (d) Schedule 2 hereto  correctly and completely sets
forth the Company's  chief  executive  office,  all of the Company's  Collateral
locations  and all trade  names of the  Company;  (e) except  for the  Permitted
Encumbrances,  the security interests granted herein constitute and shall at all
times  constitute  the first and only  liens on the assets of the  Company;  (f)
except for the  Permitted  Encumbrances,  the  Company is or will be at the time
additional  Collateral is acquired by it, the absolute  owner of the  Collateral
with full  right to  pledge,  sell,  consign,  transfer  and  create a  security
interest  therein,  free and  clear of any and all  claims  or liens in favor of
others;  (g) the Company will at its expense forever warrant and, at the Agent's
request, defend the same from any and all claims and demands of any other person
other  than the  Permitted  Encumbrances;  and (h) the  Company  will not grant,
create or permit to exist, any lien upon or security interest in the Collateral,
or any  proceeds  thereof,  or in any  other  assets of the  Company,  including
without limitation the Equipment,  General  Intangibles,  Investment Property or
real estate,  or any proceeds  thereof,  in favor of any other person other than
the holders of the Permitted Encumbrances.

7.2  The  Company  agrees  to  maintain  books  and  records  pertaining  to the
Collateral in such detail, form and scope as the Agent shall reasonably require.
The  Company  agrees  that the Agent or its agents may enter upon the  Company's
premises with  reasonable  notice (such notice not being required if an Event of
Default has  occurred  and is  continuing)  at any time during  normal  business
hours, and from time to time, for the purpose of inspecting the Collateral,  and
any and all records pertaining  thereto.  The Company agrees to afford the Agent
prior written notice of any change in the location of any Collateral, other than
to  locations,  that as of the date hereof,  are known to the Agent and at which
the Agent has filed financing statements and otherwise fully perfected its liens
thereon. The Company is also to advise the Agent promptly, in sufficient detail,
of any material adverse change relating to the type,  quantity or quality of the
Collateral or the security interests granted to the Agent therein.

7.3 The Company agrees to: execute and deliver to the Agent,  from time to time,
solely for the Agent's  convenience in  maintaining a record of the  Collateral,
the loans, the Borrowing Base, Accounts and Inventory,  such written

                                      -25-

<PAGE>

 statements,
accounting  reports,  schedules and other  information and  documentation in the
form  and  with  such   frequency   as  the  Agent   may   reasonably   require.
Notwithstanding  the foregoing,  the Company shall deliver to Agent, on a weekly
basis (by  Wednesday  of the  following  week)  during the  months of  November,
December and January, and on a monthly basis during the other months of the year
(by the fifteenth  (15th) day of the  following  month),  the reports  described
below for the preceding week or month, as the case may be:

     (a)      a borrowing base report;

     (b)      a retail stock ledger report; and

     (c)      a report of Credit Card Receivables and Accounts.

Upon demand by the Agent,  the Company  shall provide the report listed above as
(c) on a weekly basis.  At any time the Company's  Availability is less than ten
million dollars  ($10,000,000)  (computed without regard to the $50,000,000 Line
of  Credit  maximum   Availability)  or  upon  the  occurrence  and  during  the
continuance of any Event of Default,  the Company  shall,  upon demand by Agent,
provide the reports listed above as (a) and (b) on a weekly basis.

7.4 The Company agrees to comply with the  requirements of all state and federal
laws in order to grant to the Agent valid and perfected  first and only security
interests in the Collateral  except as expressly  provided herein.  The Agent is
hereby authorized by the Company,  to the extent permitted by applicable law, to
file  any  financing  statements  covering  the  Collateral  whether  or not the
Company's signature appears thereon. The Company agrees to do whatever the Agent
may  reasonably  request,  from time to time,  by way of: (a) filing  notices of
liens, financing statements, amendments, renewals and continuations thereof; (b)
cooperating with the Agent's  custodians;  (c) keeping Collateral  records;  (d)
transferring  proceeds  of  Collateral  to  the  Agent's  possession;   and  (e)
performing  such  further acts as the Agent may  reasonably  require in order to
effect the purposes of this Financing Agreement.

7.5  (a)  The  Company  agrees to  maintain  insurance  on the assets of the
Company,  including the Inventory,  under such policies of insurance,  with such
insurance  companies,  in such  reasonable  amounts and covering such  insurable
risks as are at all times  reasonably  satisfactory  to the Agent.  All policies
covering the  Inventory  are,  subject to the rights of any holders of Permitted
Encumbrances holding claims senior to the Agent, to be made payable to the Agent
for  the  benefit  of  the   Lenders,   in  case  of  loss,   under  a  standard
non-contributory  "mortgagee",  "lender"  or "secured  party"  clause and are to
contain  such other  provisions  as the Agent may  require to fully  protect the
Agent's interest in the Inventory and to any payments to be

                                      -26-

<PAGE>

made under such policies. All original policies or true copies thereof are to be
delivered  to the  Agent,  with the loss  payable  endorsement  with  respect to
Inventory in the Agent's favor for the benefit of the Lenders, and shall provide
for not less than  thirty  (30) days  prior  written  notice to the Agent of the
exercise  of any right of  cancellation.  At the  Company's  request,  or if the
Company  fails to  maintain  such  insurance,  the  Agent may  arrange  for such
insurance,  but at the Company's  expense and without any  responsibility on the
Agent's  part for:  obtaining  the  insurance,  the  solvency  of the  insurance
companies,  the adequacy of the coverage,  or the collection of claims. Upon the
occurrence  of an Event of Default  which is not waived or cured to the  Agent's
satisfaction, the Agent shall, subject to the rights of any holders of Permitted
Encumbrances  holding  claims senior to the Agent,  have the sole right,  in the
name of the Agent or the Company,  to file claims under any insurance  policies,
to receive,  receipt and give  acquittance  for any payments that may be payable
thereunder,  and to  execute  any  and  all  endorsements,  receipts,  releases,
assignments,  reassignments  or other  documents that may be necessary to effect
the collection,  compromise or settlement of any claims under any such insurance
policies.

     (b)      (i)     In the  event  of any  loss  or  damage  by  fire  or
 other  casualty, insurance proceeds relating to Inventory shall reduce
the Revolving Loans.

              (ii)    The  Company  agrees  to pay any  reasonable  costs,
fees or  expenses which the Agent may reasonably incur in connection with this
Section 7.5.

7.6 The Company  agrees to pay,  when due,  all taxes,  assessments,  claims and
other charges (herein  "taxes")  lawfully levied or assessed upon the Company or
the Company's assets, including the Collateral,  and if such taxes remain unpaid
after  the date  fixed  for the  payment  thereof  unless  such  taxes are being
diligently contested in good faith by the Company by appropriate  proceedings or
if any lien shall be claimed  thereunder  (a) for taxes due the United States of
America or (b) which in the  Agent's  opinion  might  create a valid  obligation
having priority over the rights granted to the Agent herein, then the Agent may,
on the  Company's  behalf,  pay such taxes,  and the amount  thereof shall be an
Obligation secured hereby and due to the Agent on demand.

7.7 The  Company:  (a) agrees to comply with all acts,  rules,  regulations  and
orders of any legislative,  administrative  or judicial body or official,  which
the  failure to comply  with would have a  material  and  adverse  impact on the
Collateral,  or any material part thereof,  or on the operation of the Company's
business;  provided that the Company may contest any acts,  rules,  regulations,
orders and directions of such bodies or officials in any reasonable manner which
will not, in the Agent's reasonable opinion, materially and adversely effect the
Agent's rights or priority in the Collateral;  and (b) agrees to comply with all
environmental statutes,

                                      -27-

<PAGE>

 acts, rules, regulations or orders as presently existing
or as adopted or amended in the future,  applicable to the ownership  and/or use
of its real property and operation of its business,  which the failure to comply
with would have a material and adverse impact on the Collateral, or any material
part thereof,  or on the  operation of the business of the Company.  The Company
hereby  indemnifies  the Agent and the Lenders and agrees to defend and hold the
Agent and the Lenders harmless from and against any and all loss, damage, claim,
liability,  injury or expense  which the Agent and/or the Lenders may sustain or
incur  (other  than as a result of actions of the Agent  and/or the  Lenders) in
connection  with:  any claim or expense  asserted  against the Agent  and/or the
Lenders  as a result  of any  environmental  pollution,  hazardous  material  or
environmental  clean-up of the Company's real property;  or any claim or expense
which results from the Company's operations (including,  but not limited to, the
Company's off-site disposal  practices) and the Company further agrees that this
indemnification shall survive termination of this Financing Agreement as well as
the payment of all Obligations or amounts payable  hereunder.  The Company shall
not be deemed to have  breached  any  provision  of this  Section 7.7 if (x) the
failure to comply with the  requirements  of this Section 7.7 resulted from good
faith  error or  innocent  omission,  (y) the  Company  promptly  commences  and
diligently  pursues a cure of such breach and (z) such  failure is cured  within
thirty (30) days following the Company's receipt of notice of such failure.

7.8 Until termination of the Financing Agreement and payment and satisfaction of
all Obligations due hereunder,  the Company agrees that,  unless the Agent shall
have otherwise  consented in writing,  the Company will furnish to the Agent and
each  Lender,  within  ninety (90) days after the end of each fiscal year of the
Company,  an audited  Consolidated  Balance Sheet as at the close of such fiscal
year, and statements of profit and loss, cash flow and reconciliation of surplus
the Company for such fiscal  year,  audited by  independent  public  accountants
selected by the  Company and  satisfactory  to the Agent (the  current  auditor,
Arthur Andersen, is deemed  satisfactory);  within sixty (60) days after the end
of each fiscal quarter of the Company a Consolidated Balance Sheet as at the end
of such period and  statements of profit and loss,  cash flow and surplus of the
Company,  certified  by an  authorized  financial or  accounting  officer of the
Company;  and within thirty (30) days after the end of each month a Consolidated
Balance  Sheet as at the end of such period and  statements  of profit and loss,
cash flow and  surplus of the  Company  and all  subsidiaries  for such  period,
certified by an authorized  financial or accounting officer of the Company;  and
from time to time, such further  information  regarding the business affairs and
financial  condition  of  the  Company  as the  Agent  may  reasonably  request,
including without limitation (a) the accountant's management practice letter and
(b)  annual  cash flow  projections  in form  satisfactory  to the  Agent.  Each
financial  statement  which the Company is required to submit  hereunder must be
accompanied  by  an  officer's  certificate,   signed  by  the  President,  Vice
President,  Controller,  or Treasurer of the Company,  pursuant to which any one
such  officer must  certify  that:

                                      -28-

<PAGE>

 (x) the  financial  statement(s)  fairly and
accurately  represent(s)  the  Company's  financial  condition at the end of the
particular  accounting period, as well as the Company's operating results during
such accounting period,  subject to year-end audit  adjustments;  (y) during the
particular  accounting period: (i) there has been no Default or Event of Default
under this Financing Agreement,  provided, however, that if any such officer has
knowledge  that any such  Default or Event of Default has  occurred  during such
period,  the existence of and a detailed  description of same shall be set forth
in such officer's certificate;  and (ii) the Company has not received any notice
of cancellation  with respect to its property  insurance  policies;  and (z) the
exhibits   attached  to  such   financial   statement(s)   constitute   detailed
calculations  showing compliance with all financial  covenants contained in this
Financing Agreement.

7.9 Until termination of the Financing Agreement and payment and satisfaction of
all Obligations due hereunder, the Company agrees that unless the Agent provides
its prior written consent, (which shall not be unreasonably withheld), or except
as otherwise herein provided, the Company will not:

     (a)  Mortgage,  assign,  pledge,  transfer  or  otherwise  permit any lien,
charge,  security interest,  encumbrance or judgment,  (whether as a result of a
purchase money or title retention  transaction,  or other security interest,  or
otherwise)  to exist on any of its assets or goods,  whether  real,  personal or
mixed, whether now owned or hereafter acquired, including without limitation the
Equipment,  General  Intangibles,  the  Documents  of  Title  and/or  Investment
Property, except for the Permitted Encumbrances;

     (b) Incur or create any Indebtedness other than the Permitted  Indebtedness
or Indebtedness incurred hereunder;

     (c) Borrow  any money on the  security  of the  Company's  Collateral  from
sources other than the Agent and the Lenders;

     (d) Sell, lease,  assign,  transfer or otherwise dispose of (i) Collateral,
except  in  the  ordinary  course  of  business,   pursuant  to  sale  leaseback
transactions meeting the requirements of Permitted  Indebtedness or as otherwise
specifically  permitted  by this  Financing  Agreement,  or (ii)  either  all or
substantially all of the Company's assets, which do not constitute Collateral;

     (e) Merge or consolidate or otherwise  alter or modify its corporate  name,
principal place of business,  structure,  status or existence,  or enter into or
engage in any operation or activity  materially  different  from that  presently
being conducted by the Company, except that the Company may change its corporate
name or address;  provided that (i) the Company shall give the Agent thirty (30)
days prior written notice thereof and (ii) the Company shall execute and deliver
prior to or  simultaneously  with  any such  action  any and all  documents  and
agreements  requested

                                      -29-

<PAGE>

 by the Agent (including,  without limitation,  any and all
U.C.C. financing statements) to confirm the continuation and preservation of all
security interests and liens granted to the Agent for the benefit of the Lenders
hereunder;

     (f)  Assume,  guarantee,  endorse,  or  otherwise  become  liable  upon the
obligations  of  any  person,  firm,  entity  or  corporation,   except  by  the
endorsement  of  negotiable  instruments  for deposit or  collection  or similar
transactions in the ordinary course of business;

     (g)  Declare  or pay any  dividend  of any kind on, or  purchase,  acquire,
redeem or retire,  any of the  capital  stock or equity  interest,  of any class
whatsoever,  whether now or hereafter outstanding,  other than dividends paid in
capital stock of the Company;

     (h) Make any advance or loan to, or any  investment  in, any firm,  entity,
person or  corporation,  provided,  however,  that the Company may make  noncash
Company  stock  loans to  employees  secured by such stock or other  advances to
employees for expenses, travel and the like in the ordinary course of business;

     (i)  Prepay  any  Subordinated  Debt,  except to the  following  extent and
provided no Event of Default has occurred and is continuing:  (1) if the Company
issues additional equity, the Company may prepay Subordinated Debt to the extent
of the net cash  proceeds the Company  receives from such  issuance;  (2) if the
Company issues  additional  Subordinated  Debt, the Company may prepay  existing
Subordinated  Debt to the extent of the net cash  proceeds the Company  receives
from such  issuance,  provided such new  Subordinated  Debt is on more favorable
terms to the Company (in the opinion of Agent) than such  existing  Subordinated
Debt; and (3) notwithstanding  clauses (1) and (2) above, the Company may prepay
Subordinated  Debt to the extent  Availability  (computed  without regard to the
$50,000,000  Line of Credit  maximum  Availability)  after giving effect to such
prepayment exceeds  $15,000,000,  provided that (a) the Company has maintained a
trailing  twelve  (12)  month  EBITDA of not less than  thirty  million  dollars
($30,000,000)  and (b) the Company is in compliance  with the Tangible Net Worth
requirements set forth in Section 7.10 below; or

     (j) Amend,  modify or otherwise  alter the terms of any  Subordinated  Debt
without the prior written approval of the Agent.

7.10 Until  termination of the Financing  Agreement and payment and satisfaction
in  full  of all  Obligations  hereunder,  at any  time  that  the  Availability
(computed without regard to the $50,000,000 Line of Credit maximum Availability)
is less than  $7,500,000,  the  Company  shall  maintain at such time during the
periods below a Tangible Net Worth greater than:

                                      -30-
<PAGE>

Period                                      Tangible Net Worth
--------------------------------        ----------------------------------------

March 3, 2000 (Closing Date) until      $22,000,000 (at January 29, 2000)
April 3, 2000

April 4, 2000 until February 3, 2001    $22,000,000000 plus 80% of the Company's
                                         cumulative income after January 29,
                                         2000 computed on a monthly basis based
                                         upon the most recent monthly financial
                                         statements delivered pursuant
                                         to Section 7.8 (in the event of a loss,
                                         this amount shall not be decreased
                                         below $22,000,000)

                                        (such amount at February 3, 2001, the
                                         "February 3, 2001 Amount")

February 4, 2001 until May 5, 2001      February 3, 2001 Amount plus $400,000

May 6, 2001 until August 4, 2001        February 3, 2001 Amount plus $1,400,000

August 5, 2001 until November 3, 2001   February 3, 2001 Amount plus $3,500,000

November 4, 2001 until                  February 3, 2001 Amount plus $10,000,000
 February 2, 2002

February 3, 2002 until May 4, 2002      February 3, 2001 Amount plus $10,400,000

May 5, 2002 until August 3, 2002        February 3, 2001 Amount plus $11,400,000

August 4, 2002 until November 2, 2002   February 3, 2001 Amount plus $13,500,000

November 3, 2002 and thereafter         February 3, 2001 Amount plus $20,000,000

7.11 The Company agrees to advise the Agent in writing of: (a) any  expenditures
(actual  or  anticipated),  or  series  of  related  expenditures,  in excess of
$150,000 for (i) environmental  clean-up,  (ii)  environmental  compliance,  and
(iii) environmental  testing;  and (b) any notices the Company receives from any
local,  state or federal  authority  advising  the Company of any  environmental
liability  (real or  potential)  stemming  from the  Company's  operations,  its
premises,  its waste  disposal  practices,  or waste  disposal sites used by the
Company and to provide the Agent with copies of all such notices if so required,
to the extent permitted by applicable law.

7.12 Without the prior written consent of the Agent,  the Company agrees that it
will  not  enter  into  any  transaction,  including,  without  limitation,  any
purchase,  sale,  lease,  loan or exchange of property  with any  subsidiary  or
affiliate of the Company;  provided that the Company may pay an aggregate amount
of not more

                                      -31-
<PAGE>

 than $250,000 in any fiscal year to Three Cities Research,  Inc. and
its  affiliates  for payment or  reimbursement  of management  fees and expenses
incurred in the Company's ordinary course of business.

7.13 The Company has  provided to the Agent,  and agrees to provide to the Agent
on an annual basis commencing with the first anniversary of the Closing Date, an
appraisal  indicating  the  Net  Orderly  Liquidation  Value  of the  Inventory,
provided,  however,  that  if  Availability  (computed  without  regard  to  the
$50,000,000 Line of Credit maximum  Availability) is less than $20,000,000 for a
period of sixty (60) days,  such  appraisals  will be conducted on a semi-annual
basis. Such appraisals shall be performed by an appraiser reasonably  acceptable
to and engaged by the Agent, but shall be paid for by the Company.

7.14 The  Company  has taken and shall  continue  to take all action  reasonably
necessary  to assure that its  computer-based  systems  are able to  effectively
process date-sensitive data functions.  The Company represents and warrants that
the "Year 2000" problem (that is, the inability of certain computer applications
to recognize and properly perform  date-sensitive  functions  involving  certain
dates on or about or  subsequent  to December  31,  1999) has not  resulted in a
material  adverse effect on the Company's  business,  assets or operations.  The
Company  represents  and  warrants  that all  computer  applications  which  are
material to its business were and shall be, on a timely basis,  able to properly
perform  date-sensitive  functions  for all dates on and after  January 1, 2000.
Upon the Agent's  request from time to time,  the Company  shall  provide to the
Agent assurances that the Company's computer systems and software are or will be
Year 2000  compliant on a timely  basis,  all in form and  substance  reasonably
satisfactory to the Agent.

SECTION 8      Interest, Fees and Expenses

8.1  Interest on the  outstanding  balance of  Revolving  Loans shall be payable
monthly  as of the end of each  month and  shall  accrue at a rate per annum set
forth below,  based on the  Company's  EBITDA,  as  determined on a rolling four
fiscal  quarter  basis  for the  most  recent  fiscal  quarter  of the  Company;
provided,  however,  that Level III shall apply throughout the first ninety (90)
days following the Closing Date.  Except for the change on the ninetieth  (90th)
day after the Closing Date, which shall become effective on such day, any change
in the interest  rate will be effective on the first day of the month  following
the Agent's receipt of the quarterly financial  statements delivered pursuant to
Section  7.8,  on the  average of the net  balances  owing by the Company to the
Agent and/or the Lenders in the Company's Revolving Loan Account at the close of
each day during  such month.  Failure of the  Company to deliver  the  financial
statements  pursuant to Section  7.8,  shall  result in the  highest  applicable
interest rate being charged on all Revolving  Loans,  provided,  as of the first

                                      -32-
<PAGE>

day of the month after which such failure is cured or waived,  the interest rate
set forth below will be charged:

<TABLE>

<CAPTION>

Level          EBITDA                                  Libor Rate plus          Or        Chase Manhattan Rate plus
------         -----------------------------------     -----------------        -----     --------------------------
<S>            <C>                                     <C>                      <C>       <C>

I              Greater than $28,000,000                1.50%                    or        0.00%

II             Greater than $20,000,000 but less
               than or equal to $28,000,000            1.75%                    or        0.00%

III            Greater than $15,000,000, but less
               than or equal to $20,000,000            2.00%                    or        0.00%

IV             Greater than $10,000,000, but less
               than or equal to $15,000,000            2.25%                    or        0.25%

V              Less than $10,000,000                   2.50%                    or        0.50%

</TABLE>

                  In the event of any change in said Chase  Manhattan  Rate, the
rate provided for in the first sentence  above shall change,  as of the first of
the month following any change.  The rate hereunder shall be calculated based on
a 360-day  year.  The Agent and the  Lenders  shall be  entitled  to charge  the
Company's  Revolving Loan Account for all interest  provided for herein when due
until all Obligations  have been paid in full.  Notwithstanding  anything to the
contrary  contained  herein,  in no event  shall the  interest  rate  applicable
hereunder decrease by more than one-quarter percent (0.25%) within any six-month
period, except for the six-month period following the Closing Date, during which
the interest rate applicable  hereunder shall not decrease in excess of one-half
percent (0.50%).

8.2 The Company  may elect to use Libor as to any  outstanding  Revolving  Loans
provided  that there then  exists no Default or Event of Default and the Company
has so  advised  the Agent of its  election  to use  Libor and the Libor  Period
selected  no later than three (3)  Business  Days  preceding  the first day of a
Libor  Period.  The  election of Libor shall be  effective  provided  there then
exists no Default or Event of Default, on the fourth Business Day following said
notice.  The Libor elections must be for $1,000,000 or whole  multiples  thereof
and there shall be no more than three (3) Libor Loans  outstanding  at one time.
If no such  election is timely made or can be made, or if the Libor rate can not
be  determined,  then the Agent  shall use the Chase  Manhattan  Rate,  plus the
applicable  margin as  determined  pursuant to Section  8.1  hereof,  to compute
interest. In the event the Company requests any Libor election the Company shall
pay to the  Agent a $500  processing  fee upon the  effective  date of each such
Libor election  hereunder.  In addition,  the Company shall pay to the Agent for
the benefit of the Lenders, upon the request of the Agent such amount or amounts
as shall compensate the Agent and/or the Lenders for any loss, costs or expenses
incurred by the Agent and/or the Lenders (as reasonably  determined by the Agent
and the Lenders) as a result of: (a) any payment or  prepayment  on a date other
than the last day of a Libor  Period for such Libor Loan,  or (b) any failure of

                                      -33-

<PAGE>

the Company to borrow a Libor Loan on the date for such  borrowing  specified in
the relevant notice; such compensation to include, without limitation, an amount
equal to any loss or expense suffered by the Agent and/or the Lenders during the
period  from the date of receipt of such  payment or  prepayment  or the date of
such  failure  to  borrow  to the last day of such  Libor  Period if the rate of
interest  obtained by the Agent and/or the Lenders upon the  reemployment  of an
amount of funds equal to the amount of such  payment,  prepayment  or failure to
borrow is less than the rate of interest  applicable to such Libor Loan for such
Libor Period. The determination by the Agent and/or the Lenders of the amount of
any such loss or  expense,  when set forth in a written  notice to the  Company,
containing  the Agent's and/or the Lenders'  calculations  thereof in reasonable
detail,  shall be conclusive on the Company,  in the absence of manifest  error.
Calculation  of all amounts  payable to the Agent and/or the Lenders  under this
Section 8.2 with regard to Libor Loans shall be made as though the Agent and the
Lenders had actually  funded the Libor Loans through the purchase of deposits in
the relevant  market and currency,  as the case may be, bearing  interest at the
rate  applicable  to such  Libor  Loans in an amount  equal to the amount of the
Libor Loans and having a maturity  comparable to the relevant  interest  period;
provided,  however,  that the Agent and the  Lenders  may fund each of the Libor
Loans  in any  manner  the  Agent  and the  Lenders  see  fit and the  foregoing
assumption  shall be used only for  calculation  of amounts  payable  under this
Section 8.2. In  addition,  notwithstanding  anything to the contrary  contained
herein,  the Agent and the  Lenders  shall  apply all  proceeds  of  Collateral,
including the Accounts,  and all other amounts  received by it from or on behalf
of the Company,  initially to the loans accruing interest at the Chase Manhattan
Rate  and  subsequently  to  Libor  Loans;  provided,  however,  that  upon  the
occurrence  of an Event of  Default  or in the  event  the  aggregate  amount of
outstanding  Libor Loans exceeds  Availability or the applicable  maximum levels
set  forth  therefor,  the  Agent and the  Lenders  may  apply all such  amounts
received by them to the payment of  Obligations in such manner and in such order
as the Agent may elect in its reasonable business judgment.

8.3 In  consideration of the Letter of Credit Guaranty of the Agent, the Company
shall pay the Agent for the benefit of the Lenders the Letter of Credit Guaranty
Fee which  shall be an amount  equal to one and  one-half  percent  (1.50%)  per
annum,  payable monthly in arrears,  on the face amount of each Letter of Credit
less the  amount of any and all  amounts  previously  drawn  under the Letter of
Credit.

8.4 Any charges,  fees,  commissions,  costs and  expenses  charged to the Agent
and/or the Lenders for the  Company's  account by any Issuing Bank in connection
with or arising  out of  Letters of Credit  issued  pursuant  to this  Financing
Agreement  or out of  transactions  relating  thereto  will  be  charged  to the
Company's  account in full when charged to or paid by the Agent and when made by
any such Issuing Bank shall be conclusive on the Agent.

                                      -34-

<PAGE>

8.5 The Company  shall  reimburse or pay the Agent,  as the case may be, for all
Out-of-Pocket  Expenses,  which shall be invoiced in reasonable  detail, and any
applicable Documentation Fee.

8.6 Upon the last  Business Day of each month,  commencing  with the last day of
the month in which this Financing  Agreement is executed,  the Company shall pay
the Agent for the benefit of the Lenders the Line of Credit Fee.

8.7 To induce the Agent and the Lenders to enter into this  Financing  Agreement
and to extend to the  Company  the  Revolving  Loan and  Letters of Credit,  the
Company  shall pay to the Agent for the benefit of the  Lenders a Loan  Facility
Fee in the amount $125,000, fully earned and payable upon the Closing Date.

8.8 On the dates and in the amounts set forth  below,  the Company  shall pay to
the Agent the  Collateral  Management Fee for the initial term of this Financing
Agreement, which shall be fully earned on the Closing Date and not refundable or
rebateable:

          Date of Payment                         Amount of Payment
          -------------------                     -----------------------------

          On the Closing Date                     $25,000

          On the first and second
           anniversaries of the Closing Date      $40,000

Any unpaid balance of the Collateral Management Fee shall be immediately due and
payable upon a termination hereof or a Default hereunder and acceleration of the
balance owing hereunder. Following the initial term of this Financing Agreement,
an annual Collateral  Management Fee shall be established in an amount as agreed
between the Agent and the Company.

8.9 In no event shall the rates of interest  hereunder  exceed the Maximum Legal
Rate. In the event that the Contract  Rate  computed  under this Section 8 would
exceed the  Maximum  Legal  Rate,  the rates of  interest  under this  Financing
Agreement  for any such period shall be limited to the Maximum  Legal Rate,  but
any  subsequent  reductions  in the Contract  Rate shall not reduce the rates of
interest  under the Financing  Agreement  below the Maximum Legal Rate until the
total amount of interest  charged  hereunder  equals the amount of interest that
would have been charged had the Contract Rate been charged at all times.

8.10 After the  occurrence and during the  continuation  of an Event of Default,
the  Company  shall  pay the  Agent's  standard  charges  for,  and the fees and
expenses of, the Agent's personnel used by the Agent for reviewing the books and

                                      -35-

<PAGE>

records of the Company and for  verifying,  testing,  protecting,  safeguarding,
preserving or disposing of all or any part of the Collateral,  which shall be in
addition to the Collateral Management Fee.

8.11 The Company hereby  authorizes the Agent to charge the Company's  Revolving
Loan Account  with the Agent with the amount of all  payments  due  hereunder as
such payments become due. The Company  confirms that any charges which the Agent
may so make to the Company's  Revolving Loan Account as herein  provided will be
made as an accommodation to the Company and solely at the Agent's discretion.

SECTION 9      Powers

9.1 The  Company  hereby  constitutes  the Agent on behalf of the Lenders or any
person  or  agent  the  Agent  may  designate  as its  attorney-in-fact,  at the
Company's cost and expense, to exercise all of the following powers, which being
coupled  with an  interest,  shall be  irrevocable  until  all of the  Company's
Obligations to the Agent and the Lenders have been paid in full:

     (a) To receive, take, endorse, sign, assign and deliver, all in the name of
the Agent or the Company, any and all checks, notes, drafts, and other documents
or instruments relating to the Collateral;

     (b) To receive, open and dispose of all mail addressed to the Company which
Agent reasonably believes may represent payment of Accounts and to notify postal
authorities  to change the address for  delivery  thereof to such address as the
Agent may designate;

     (c) To request from customers indebted on Accounts at any time, in the name
of the  Agent  or the  Company  or that  of the  Agent's  designee,  information
concerning the amounts owing on the Accounts;

     (d) To transmit  to  customers  indebted on Accounts  notice of the Agent's
interest  therein and to notify  customers  indebted on Accounts to make payment
directly to the Agent for the Company's account;

     (e) To take or bring,  in the name of the Agent or the Company,  all steps,
actions,  suits or  proceedings  deemed by the Agent  necessary  or desirable to
enforce or effect collection of the Accounts; and

     (f)  To  execute  financing  statements  in the  name  of  the  Company  as
attorney-in-fact  at any time as the Agent may deem  necessary  to  establish or
maintain perfection of the security interest in the Collateral.

                                      -36-

<PAGE>

9.2 Notwithstanding  anything hereinabove contained to the contrary,  the powers
set  forth in  Section  9.1(b),  (d) and (e) may  only be  exercised  after  the
occurrence  of an Event of Default  and until such time as such Event of Default
is  waived in  writing  by the Agent or cured to the  Agent's  satisfaction.  In
addition, the powers set forth in Section 9.1(c) above will only be exercised in
the name of the Company or a certified public accountant designated by the Agent
prior to the occurrence of such Event of Default.

SECTION 10     Events of Default and Remedies

10.1 Notwithstanding  anything  hereinabove to the contrary,  the Lenders acting
through the Agent may terminate this Financing  Agreement  immediately  upon the
occurrence of any of the following (herein "Events of Default"):

     (a)  failure of the Company to pay any of the  Obligations  within five (5)
Business Days of the due date thereof,  provided that nothing  contained  herein
shall  prohibit the Agent from charging such amounts to the Company's  Revolving
Loan Account on the due date thereof;

     (b) cessation of the business of the Company or the calling of a meeting of
the  creditors  of the  Company  for  purposes  of  compromising  the  debts and
obligations of the Company;

     (c) the failure of the Company to generally meet debts as they mature;

     (d)  the  commencement  by  or  against  the  Company  of  any  bankruptcy,
insolvency,  arrangement,  reorganization,  receivership or similar  proceedings
under any federal or state law,  provided  that in the event of any  involuntary
proceeding  commenced  against the Company such  proceeding  is not dismissed or
discharged within thirty (30) days after commencement thereof;

     (e)  breach by the  Company of any  warranty,  representation  or  covenant
contained herein (other than those referred to in sub-paragraph (f) below) or in
any other written agreement  between the Company and the Lenders,  provided that
such  breach  by  the  Company  of any of  the  warranties,  representations  or
covenants  referred  in this  sub-paragraph  (e)  shall  not,  unless  otherwise
provided  herein,  be deemed to be an Event of  Default  unless  and until  such
breach  shall  remain  unremedied  to the Agent's  satisfaction  for a period of
twenty (20) days from the date of such breach;

     (f) breach by the Company of any  warranty,  representation  or covenant of
Section 3.3 (other than the third sentence of Section 3.3), Section 3.4,

                                      -37-
<PAGE>

Section6.3, Section 7.1, Section 7.5, Section 7.6, and Section 7.9 through
Section 7.10 inclusive;

     (g) the Company shall (i) engage in any "prohibited transaction" as defined
in ERISA,  (ii) have any "accumulated  funding  deficiency" as defined in ERISA,
(iii) have any Reportable Event as defined in ERISA, (iv) terminate any Plan, as
defined in ERISA or (v) engage in any  proceeding  in which the Pension  Benefit
Guaranty  Corporation  shall seek  appointment,  or is appointed,  as trustee or
administrator  of any Plan,  as  defined  in  ERISA,  and with  respect  to this
sub-paragraph  (h), such event or condition (x) remains  uncured for a period of
thirty  (30) days from  date of  occurrence  and (y)  could,  in the  reasonable
opinion of the Agent, subject the Company to any tax, penalty or other liability
material to the business, operations or financial condition of the Company;

     (h) without the prior written  consent of the Agent,  the Company shall (i)
amend or modify the  Subordinated  Debt  existing on the date of this  Financing
Agreement,  or (ii) make any payment on account of the Subordinated  Debt except
as  permitted  herein  or in  the  Subordination  Agreements  relating  to  such
Subordinated Debt; or

     (i) any default or event of default  (after giving effect to any applicable
grace  or cure  periods)  under  any  instrument  or  agreement  evidencing  any
Indebtedness of the Company having a principal amount in excess of $750,000.

10.2 Upon the occurrence of a Default and/or an Event of Default,  the Agent may
(at its option) and shall at the direction of the Required  Lenders declare that
all loans, advances and extensions of credit provided for in Sections 3 and 5 of
this Financing  Agreement shall be thereafter in the Agent's sole discretion and
the  obligation of the Agent and/or the Lenders to make  Revolving  Loans and/or
arrange for the issuance of Letters of Credit shall cease unless such Default or
Event of Default  is waived in writing by the Agent on behalf of the  Lenders or
cured  to the  Agent's  satisfaction,  and upon  the  occurrence  of an Event of
Default the Agent may (at its option) and shall at the direction of the Required
Lenders  declare that:  (a) all  Obligations  shall become  immediately  due and
payable;  (b)  the  Default  Rate of  Interest  shall  be  charged  on all  then
outstanding or thereafter incurred  Obligations in lieu of the interest provided
for in Section 8 of this Financing  Agreement provided that with respect to this
clause (b): (i) the Agent has given the Company  written  notice of the Event of
Default,  provided,  however, that no notice is required if the Event of Default
is the Event listed in Section 10.1(d);  (ii) the Company has failed to cure the
Event of Default within ten (10) days after (A) the Agent  deposited such notice
in the United States mail or (B) the  occurrence of the Event of Default  listed
in  Section  10.1(d);  and (iii)  this  Financing  Agreement  shall  immediately
terminate  upon  notice to the  Company,  provided,  however,  that no notice of
termination  is required if

                                      -38-

<PAGE>

 the Event of Default is the Event  listed in Section
10.1(d).  The exercise of any option is not  exclusive of any other option which
may be exercised at any time by the Agent and/or the Lenders.

10.3 Immediately upon the occurrence of any Event of Default,  the Agent may and
at the direction of the Required  Lenders shall to the extent  permitted by law:
(a) remove from any  premises  where same may be located any and all  documents,
instruments, files and records, and any receptacles or cabinets containing same,
relating to the Accounts,  or the Agent may use, at the Company's expense,  such
of the  Company's  personnel,  supplies  or space  at the  Company's  places  of
business or otherwise,  as may be necessary to properly  administer  and control
the Accounts or the handling of collections and realizations  thereon; (b) bring
suit,  in the name of the  Company  or the Agent on behalf of the  Lenders,  and
generally  shall  have all other  rights  respecting  said  Accounts,  including
without  limitation  the right to:  accelerate  or extend  the time of  payment,
settle,  compromise,  release  in  whole  or in part  any  amounts  owing on any
Accounts  and issue  credits in the name of the Company or the Agent;  (c) sell,
assign and deliver the  Collateral  and any returned,  reclaimed or  repossessed
merchandise, with or without advertisement, at public or private sale, for cash,
on credit or otherwise, at the Agent's sole option and discretion, and the Agent
may bid or  become  a  purchaser  at any  such  sale,  free  from  any  right of
redemption, which right is hereby expressly waived by the Company; (d) foreclose
the  security  interests  in the  Collateral  created  herein  by any  available
judicial procedure,  or to take possession of any or all of the Inventory and/or
Other Collateral  without judicial process,  and to enter any premises where any
Inventory  and/or  Other  Collateral  may be located  for the  purpose of taking
possession  of or  removing  the same and (e)  exercise  any  other  rights  and
remedies provided in law, in equity,  by contract or otherwise.  The Agent shall
have the right,  without notice or  advertisement,  to sell, lease, or otherwise
dispose of all or any part of the  Collateral,  whether in its then condition or
after  further  preparation  or  processing,  in the name of the  Company or the
Agent, or in the name of such other party as the Agent may designate,  either at
public or private sale or at any broker's board, in lots or in bulk, for cash or
for credit, with or without warranties or  representations,  and upon such other
terms and conditions as the Agent in its sole discretion may deem advisable, and
the Agent shall have the right to purchase  at any such sale.  If any  Inventory
shall require rebuilding, repairing, maintenance or preparation, the Agent shall
have the right, at its option, to do such of the aforesaid as is necessary,  for
the purpose of putting the  Inventory in such  saleable  form as the Agent shall
deem  appropriate.  The Company agrees, at the request of the Agent, to assemble
the  Inventory  and to make it available to the Agent at premises of the Company
or elsewhere and to make  available to the Agent the premises and  facilities of
the Company for the purpose of the Agent's  taking  possession  of,  removing or
putting  the  Inventory  in  saleable  form.  However,  if  notice  of  intended
disposition  of any  Collateral  is  required by law, it is agreed that ten (10)
days notice shall  constitute  reasonable  notification and full compliance with
the law. The net cash

                                      -39-

<PAGE>

 proceeds resulting from the Agent's exercise of any of the
foregoing  rights (after  deducting all charges,  costs and expenses,  including
reasonable  attorneys' fees) shall be applied by the Agent to the payment of the
Company's Obligations,  whether due or to become due, in such order as the Agent
may elect,  and the Company shall remain liable to the Agent and the Lenders for
any  deficiencies,  and the Agent in turn  agrees to remit to the Company or its
successors or assigns, any surplus resulting  therefrom.  The enumeration of the
foregoing  rights is not intended to be exhaustive and the exercise of any right
shall not  preclude  the  exercise  of any other  rights,  all of which shall be
cumulative.

SECTION 11     Term and Termination

11.1 This Financing Agreement shall become effective as of the date set forth on
the first  page  hereof  and shall  continue  in full  force and  effect for the
initial  term  ending  three (3) years from the Closing  Date (the  "Anniversary
Date"), and from year to year thereafter (each, an "Anniversary  Date"),  unless
sooner terminated pursuant to the terms hereof.

11.2 Except as  otherwise  permitted  herein,  the Company or any Lender  acting
through the Agent may terminate this Financing  Agreement and the Line of Credit
only as of the  initial  or any  subsequent  Anniversary  Date and then  only by
giving the other at least sixty (60) days prior written  notice of  termination.
Notwithstanding the foregoing the Lenders acting through the Agent may terminate
the Financing Agreement  immediately upon the occurrence of an Event of Default,
provided,  however,  that if the Event of Default is an event  listed in Section
10.1(d) of this  Financing  Agreement,  the Agent and the Lenders may regard the
Financing  Agreement as  terminated  and notice to that effect is not  required.
This  Financing   Agreement,   unless  terminated  as  herein  provided,   shall
automatically    continue   from   Anniversary   Date   to   Anniversary   Date.
Notwithstanding  the  foregoing,   the  Company  may  terminate  this  Financing
Agreement and the Line of Credit prior to any applicable  Anniversary  Date upon
sixty (60) days' prior  written  notice to the Agent and the  Lenders,  provided
that the Company pays to the Agent for the benefit of the Lenders immediately on
demand,  the Early Termination Fee, if applicable.  Notwithstanding  anything to
the contrary  contained  herein:  (x) there shall be no Early Termination Fee if
the Early Termination Date occurs two (2) years after the Closing Date or at any
time  thereafter,  and (y)  there  shall  be no  Early  Termination  Fee if this
Financing Agreement  terminates because a controlling interest in the Company is
acquired by some entity (the  "purchaser") and CITBC  participates in the credit
facility  such  purchaser  enters  into  with  another  lender.  This  Financing
Agreement,  unless terminated as herein provided,  shall automatically  continue
from Anniversary Date to Anniversary  Date. All Obligations shall become due and
payable as of any termination  hereunder or under Section 10 hereof and, pending
a final  accounting,  the Agent and the Lenders may withhold any balances in the
Company's loan account

                                      -40-

<PAGE>

 (unless  supplied with an indemnity  satisfactory to the
Agent)  to  cover  all  of  the  Company's  Obligations,   whether  absolute  or
contingent. All of the Agent's and Lenders' rights, liens and security interests
shall continue after any termination  until all  Obligations  have been paid and
satisfied in full.

SECTION 12     Miscellaneous

12.1 The Company hereby waives  diligence,  demand,  presentment and protest and
any notices thereof as well as notice of nonpayment,  notice of dishonor, notice
of intent to accelerate and notice of acceleration.  No delay or omission of the
Agent or the Lenders or the Company to exercise  any right or remedy  hereunder,
whether before or after the happening of any Event of Default,  shall impair any
such right or shall operate as a waiver thereof or as a waiver of any such Event
of  Default.  No single or partial  exercise  by the Agent or the Lenders of any
right or remedy  precludes any other or further exercise  thereof,  or precludes
any other right or remedy.

12.2  THIS  WRITTEN  AGREEMENT  AND THE  OTHER  DOCUMENTS  REFERENCED  HEREIN OR
CONTEMPLATED  HEREBY REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT
BE  CONTRADICTED  BY  EVIDENCE  OF PRIOR,  CONTEMPORANEOUS  OR  SUBSEQUENT  ORAL
AGREEMENTS OF THE PARTIES HERETO.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS  AMONG
THE PARTIES.

12.3 It is the intent of the Company, the Agent and the Lenders to
conform  strictly to all applicable state and federal usury laws. All agreements
between the Company, the Agent and the Lenders whether now existing or hereafter
arising and whether written or oral, are hereby expressly  limited so that in no
contingency  or event  whatsoever,  whether  by  reason of  acceleration  of the
maturity  hereof or  otherwise,  shall the  amount  contracted  for,  charged or
received by the Agent and/or the Lenders for the use, forbearance,  or detention
of the money loaned hereunder or otherwise, or for the payment or performance of
any covenant or obligation contained herein or in any other document evidencing,
securing or pertaining to the Obligations  evidenced hereby which may be legally
deemed to be for the use,  forbearance or detention of money, exceed the maximum
amount which the Company is legally  entitled to contract for, charge or collect
under  applicable  state or federal  law. If from any  circumstances  whatsoever
fulfillment  of any  provision  hereof or of such other  documents,  at the time
performance of such provision shall be due, shall involve transcending the limit
of validity  prescribed  by law, then the  obligation  to be fulfilled  shall be
automatically  reduced  to the  limit  of such  validity,  and if from  any such
circumstance  the Agent  and/or the  Lenders  shall ever  receive as interest or
otherwise an amount in excess of the maximum that can be legally collected, then
such amount which would be excessive  interest shall be applied to the reduction
of the principal

                                      -41-

<PAGE>

indebtedness  hereof and any other amounts due with respect to
the Obligations evidenced hereby, but not to the payment of interest and if such
amount which would be excess interest  exceeds the Obligations and all other non
interest  indebtedness  described  above,  then such additional  amount shall be
refunded to the Company.  In determining  whether or not all sums paid or agreed
to be  paid  by the  Company  for  the  use,  forbearance  or  detention  of the
Obligations  of the Company to the Agent and/or the Lenders,  under any specific
contingency,  exceeds  the maximum  amount  permitted  by  applicable  law,  the
Company,  the Agent and the Lenders shall to the maximum extent  permitted under
applicable law, (a) treat all  Obligations as but a single  extension of credit,
(b) characterize any nonprincipal  payment as an expense,  fee or premium rather
than as sums paid or agreed to be paid by the Company  for the use,  forbearance
or detention of the  Obligations of the Company to the Agent and/or the Lenders,
(c) exclude  voluntary  prepayments  and the effect  thereof,  and (d) amortize,
prorate,  allocate and spread in equal parts, the total amount of such sums paid
or agreed to be paid by the Company for the use, forbearance or detention of the
Obligations  of the Company to the Agent and the Lenders  throughout  the entire
contemplated  term of the  Obligations  so that  the  interest  rate is  uniform
through the entire term of the  Obligations.  The terms and  provisions  of this
Section 12.3 shall control and supersede  every other  provision  hereof and all
other agreements between the Company, the Agent and the Lenders.

12.4 If any  provision  hereof  or of any  other  agreement  made in  connection
herewith is held to be illegal or  unenforceable,  such provision shall be fully
severable, and the remaining provisions of the applicable agreement shall remain
in full  force  and  effect  and  shall  not be  affected  by  such  provision's
severance.  Furthermore,  in lieu of any such  provision,  there  shall be added
automatically  as a part of the  applicable  agreement  a legal and  enforceable
provision as similar in terms to the severed provision as may be possible.

12.5 TO THE EXTENT  PERMITTED BY APPLICABLE LAW, THE COMPANY,  THE AGENT AND THE
LENDERS  EACH  HEREBY  WAIVE  ANY  RIGHT  TO A TRIAL  BY JURY IN ANY  ACTION  OR
PROCEEDING  ARISING  OUT  OF  THIS  FINANCING  AGREEMENT.   THE  COMPANY  HEREBY
IRREVOCABLY  WAIVES  PERSONAL  SERVICE OF  PROCESS  AND  CONSENTS  TO SERVICE OF
PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED.

12.6 Except as  otherwise  herein  provided,  any notice or other  communication
required hereunder shall be in writing, and shall be deemed to have been validly
served,  given or delivered when hand  delivered or sent by facsimile,  or three
Business  Days after  deposit in the United State mail,  with proper first class
postage prepaid and addressed to the party to be notified as follows:

                                      -42-

<PAGE>

          (a)      if to the Agent, at:

                                    The CIT Group/Business Credit, Inc.
                                    300 South Grand Avenue, Third Floor
                                    Los Angeles, California 90071
                                    Attn:  Regional Credit Manager
                                    Fax No.:  (213) 613-2566

          (b)      if to any other  party  becoming a Lender  hereunder,
at the  address  specified  in the  Assignment  and Transfer Agreement

          (c)      if to the Company, at:

                                    FACTORY 2-U STORES, INC.
                                    4000 Ruffin Road
                                    San Diego, California 92123
                                    Attn:  Chief Financial Officer
                                    Fax No.:  (858) 637-4180

                                    copies of any notices of an Event of Default
                                    shall also be provided to:

                                    HUGHES HUBBARD & REED LLP
                                    350 South Grand Avenue
                                    Los Angeles, California  90071-3442
                                    Attention:  Theodore Latty, Esquire
                                    Fax No.:  (213) 613-2950;
                                    provided that Agent's failure to send a
                                    notice of an Event of Default shall not
                                    result in any such notice to the Company not
                                    being fully effective

or to such other address as any party may designate for itself by like notice.

12.7     THE VALIDITY,  INTERPRETATION  AND  ENFORCEMENT OF THIS FINANCING
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.

12.8 This  Financing  Agreement  can be amended,  modified or changed  only by a
writing signed by the Company,  the Agent and the Required  Lenders  (unless the
consent of all Lenders is required pursuant to Section 14.10 hereof).

SECTION 13     Agreement between the Lenders

13.1  (a) The  Agent,  for the account of the Lenders,  shall  disburse all
loans and advances to the Company and shall handle all collections of Collateral
and repayment of Obligations.  It is understood that for purposes of advances to

                                      -43-
<PAGE>

the Company and for  purposes of this Section 13 the Agent is using the funds of
the Agent.  The Company agrees that the Agent may allow up to two (2) Lenders to
participate as Lenders under this Financing  Agreement without the prior consent
of the Company and that one (1) additional Lender may participate with the prior
consent  of the  Company  which  consent  shall  not be  unreasonably  withheld;
provided,  however, that Agent shall, at all times, hold a greater percentage of
outstanding loans than any other Lender.

     (b) Unless  the Agent  shall  have been  notified  in writing by any Lender
prior to any  advance to the  Company  that such Lender will not make the amount
which would  constitute its share of the borrowing on such date available to the
Agent, the Agent may assume that such Lender shall make such amount available to
the  Agent on a  Settlement  Date,  and the Agent  may,  in  reliance  upon such
assumption,  make available to the Company a corresponding amount. A certificate
of the Agent submitted to any Lender with respect to any amount owing under this
subsection shall be conclusive, absent manifest error. If such Lender's share of
such  borrowing is not in fact made available to the Agent by such Lender on the
Settlement  Date,  the Agent  shall be  entitled  to recover  such  amount  with
interest  thereon at the rate per annum applicable to Revolving Loans hereunder,
on demand,  from the Company without prejudice to any rights which the Agent may
have against such Lender  hereunder.  Nothing contained in this subsection shall
relieve any Lender which has failed to make available its ratable portion of any
borrowing  hereunder from its  obligation to do so in accordance  with the terms
hereof.  Nothing  contained herein shall be deemed to obligate the Agent to make
available  to the Company the full amount of a requested  advance when the Agent
has any notice  (written or otherwise)  that any of the Lenders will not advance
its ratable portion thereof.

13.2 On the  Settlement  Date, the Agent and the Lenders shall each remit to the
other, in immediately  available  funds,  all amounts  necessary so as to ensure
that, as of the  Settlement  Date,  the Lenders  shall have their  proportionate
share of all outstanding Obligations.

13.3 The Agent shall forward to each Lender, at the end of each month, a copy of
the account statement rendered by the Agent to the Company.

13.4 The Agent shall,  after  receipt of any interest and fees earned under this
Financing  Agreement,  promptly remit to the Lenders: (a) their pro rata portion
of all fees, provided,  however,  that the Lenders (other than CITBC in its role
as  the  Agent)  shall  (i)  not  share  in  the  Collateral  Management  Fee or
Documentation  Fees or the fees provided for in Section  8.10;  and (ii) receive
their  share  of the Loan  Facility  Fee in  accordance  with  their  respective
agreements with the Agent; and (b) interest computed at the rate and as provided
for in Section 8 of this Financing Agreement on all outstanding amounts advanced
by the Lenders on each Settlement

                                      -44-

<PAGE>

 Date, prior to adjustment, that are subsequent
to the last remittance by the Agent to the Lenders of the Company's interest.

13.5 The  Company  acknowledges  that each of the  Lenders  may sell one or more
participations  in the loans and extensions of credit made and to be made to the
Company hereunder to participants  without the Company's prior consent,  so long
as such participants are not granted rights that would require the participant's
consent to waivers,  amendments and other actions with respect to the provisions
of this Financing  Agreement.  The Company authorizes each Lender to disclose to
any participant or purchasing  lender (each, a "Transferee") and any prospective
Transferee  any and  all  financial  information  in  such  Lender's  possession
concerning  the Company and their  affiliates  which has been  delivered to such
Lender by or on behalf of the Company  pursuant to this  Financing  Agreement or
which has been  delivered  to such  Lender by or on  behalf  of the  Company  in
connection  with  such  Lender's  credit  evaluation  of  the  Company  and  its
affiliates prior to entering into this Financing Agreement.

13.6 The Company  hereby agrees that each Lender is solely  responsible  for its
portion of the Line of Credit and that neither the Agent nor any Lender shall be
responsible  for,  nor assume any  obligations  for the failure of any Lender to
make  available  its portion of the Line of Credit.  Further,  should any Lender
refuse to make  available  its  portion  of the Line of  Credit,  then the other
Lender may, but without obligation to do so, increase, unilaterally, its portion
of the Line of Credit in which event the Company is so  obligated  to that other
Lender.

13.7 In the event  that the  Agent,  the  Lenders  or any one of them is sued or
threatened with suit by the Company,  or by any receiver,  trustee,  creditor or
any committee of creditors on account of any  preference,  voidable  transfer or
lender  liability  issue,  alleged to have occurred or been received as a result
of, or during the transactions contemplated under this Financing Agreement, then
in such event any money paid in satisfaction or compromise of such suit, action,
claim or demand and any expenses,  costs and attorneys' fees paid or incurred in
connection  therewith,  whether  by the Agent,  the  Lenders or any one of them,
shall  be  shared  proportionately  by the  Lenders.  In  addition,  any  costs,
expenses,  fees or  disbursements  incurred  by outside  agencies  or  attorneys
retained by the Agent to effect  collection or  enforcement of any rights in the
Collateral,  including  enforcing,  preserving or maintaining  rights under this
Financing  Agreement  shall be  shared  proportionately  between  and  among the
Lenders to the extent not  reimbursed  by the  Company or from the  proceeds  of
Collateral.  The  provisions  of this  paragraph  shall not apply to any  suits,
actions,  proceedings  or claims  that (a)  predate  the date of this  Financing
Agreement or (b) are based on  transactions,  actions or omissions  that predate
the date of this Financing Agreement.

                                      -45-

<PAGE>

13.8 Each of the Lenders  agrees with each other Lender that any money or assets
of the Company held or received by such Lender,  no matter how or when received,
shall be applied to the reduction of the  Obligations  (to the extent  permitted
hereunder)  after (a) the occurrence of an Event of Default and (b) the election
by the Required Lenders to accelerate the Obligations.  In addition, the Company
authorizes,  and the  Lenders  shall have the right,  without  notice,  upon any
amount becoming due and payable hereunder,  to set-off and apply against any and
all property held by, or in the  possession of such Lender the  Obligations  due
such Lenders.

13.9 CITBC shall have the right at any time to assign to one or more  commercial
banks,  commercial  finance  lenders or other  financial  institutions  all or a
portion of its rights and obligations under this Financing Agreement (including,
without  limitation,  its  obligations  under the Line of Credit,  the Revolving
Loans and its rights and  obligations  with respect to Letters of Credit).  Upon
execution of an Assignment and Transfer  Agreement,  (a) the assignee thereunder
shall be a party hereto and, to the extent that rights and obligations hereunder
have been  assigned  to it  pursuant  to such  assignment,  have the  rights and
obligations  of CITBC as the case may be hereunder  and (b) CITBC shall,  to the
extent that rights and  obligations  hereunder have been assigned by it pursuant
to such  assignment,  relinquish its rights and be released from its obligations
under this Financing  Agreement.  The Company shall,  if necessary,  execute any
documents reasonably required to effectuate the assignments. No other Lender may
assign its interest in the loans and advances and extensions of credit hereunder
without the prior written consent of the Agent. In the event of an assignment in
violation of this Section 13.9,  the Company may, upon notice given to the Agent
within ten (10) days after the Company  receives  notice of such  assignment and
within sixty (60) days of such notice,  terminate this  Financing  Agreement and
the Line of  Credit by  payment  in full of all  Obligations,  but  without  any
obligation to pay an Early Termination Fee.

SECTION 14     Agency

14.1 Each Lender hereby  irrevocably  designates and appoints CITBC as the Agent
for the Lenders under this Financing  Agreement and any ancillary loan documents
and irrevocably  authorizes CITBC as Agent for such Lender,  to take such action
on its behalf under the provisions of the Financing  Agreement and all ancillary
documents  and to exercise  such powers and perform such duties as are expressly
delegated  to the  Agent  by the  terms  of  this  Financing  Agreement  and all
ancillary documents together with such other powers as are reasonably incidental
thereto.  Notwithstanding  any  provision  to the  contrary  elsewhere  in  this
Financing  Agreement,  the Agent shall not have any duties or  responsibilities,
except those expressly set forth herein, or any fiduciary  relationship with any
Lender  and  no  implied   covenants,   functions,   responsibilities,   duties,
obligations or liabilities  shall be read into this

                                      -46-

<PAGE>

 Financing  Agreement and the
ancillary documents or otherwise exist against the Agent.

14.2 The Agent may execute any of its duties under this Financing  Agreement and
all ancillary documents by or through agents or  attorneys-in-fact  and shall be
entitled  to the advice of counsel  concerning  all matters  pertaining  to such
duties.

14.3 Neither the Agent nor any of its officers, directors, employees, agents, or
attorneys-in-fact  shall be (a) liable to any  Lender  for any  action  lawfully
taken or omitted to be taken by it or such person  under or in  connection  with
the  Financing  Agreement and all  ancillary  documents  (except for its or such
person's own gross negligence or willful misconduct),  or (b) responsible in any
manner to any of the Lenders for any recitals,  statements,  representations  or
warranties  made  by the  Company  or any  officer  thereof  contained  in  this
Financing Agreement and all ancillary  documents or in any certificate,  report,
statement or other  document  referred to or provided for in, or received by the
Agent under or in connection  with,  this Financing  Agreement and all ancillary
documents or for the value, validity, effectiveness, genuineness, enforceability
or sufficiency of this  Financing  Agreement and all ancillary  documents or for
any  failure of the  Company to perform its  obligations  thereunder.  The Agent
shall not be under any obligation to any Lender to ascertain or to inquire as to
the  observance  or  performance  of any  of the  agreements  contained  in,  or
conditions  of, this  Financing  Agreement  and all  ancillary  documents  or to
inspect the properties, books or records of the Company.

14.4 The  Agent  shall be  entitled  to rely,  and shall be fully  protected  in
relying,  upon any note,  writing,  resolution,  notice,  consent,  certificate,
affidavit,  letter,  cablegram,  telegram,  telecopy, telex or teletype message,
statement,  order or other document or conversation believed by it to be genuine
and  correct  and to have  been  signed,  sent or made by the  proper  person or
persons and upon advice and  statements  of legal  counsel  (including,  without
limitation,  counsel to the Company),  independent accountants and other experts
selected by the Agent. The Agent shall be fully justified in failing or refusing
to take any action under this  Financing  Agreement and all ancillary  documents
unless it shall first receive such advice or concurrence of the Lenders,  or the
Required Lenders,  as the case may be, as it deems appropriate or it shall first
be indemnified to its  satisfaction by the Lenders against any and all liability
and expense  which may be incurred  by it by reason of taking or  continuing  to
take any such action. The Agent shall in all cases be fully protected in acting,
or in refraining from acting,  under this Financing  Agreement and all ancillary
documents in accordance with a request of the Lenders,  or the Required Lenders,
as the case may be,  and such  request  and any  action  taken or failure to act
pursuant thereto shall be binding upon all the Lenders.

                                      -47-

<PAGE>

14.5 The Agent shall not be deemed to have knowledge or notice of the occurrence
of any  Default or Event of  Default  hereunder  unless  the Agent has  received
notice from a Lender or the Company describing such Default or Event of Default.
In the event that the Agent  receives  such a notice,  the Agent shall  promptly
give  notice  thereof to the  Lenders.  The Agent  shall take such  action  with
respect to such Default or Event of Default as shall be  reasonably  directed by
the Lenders,  or Required Lenders,  as the case may be; provided that unless and
until the Agent shall have received such direction, the Agent may in the interim
(but shall not be obligated  to) take such  action,  or refrain from taking such
action,  with  respect  to such  Default  or Event of  Default  as it shall deem
advisable and in the best interests of the Lenders.

14.6 Each Lender  expressly  acknowledges  that neither the Agent nor any of its
officers,  directors,  employees,  agents  or  attorneys-in-fact  has  made  any
representations  or  warranties  to it and that no act by the Agent  hereinafter
taken,  including  any review of the affairs of the  Company  shall be deemed to
constitute  any  representation  or warranty  by the Agent to any  Lender.  Each
Lender  represents to the Agent that it has,  independently and without reliance
upon the Agent or any other Lender and based on such  documents and  information
as it has deemed  appropriate,  made its own appraisal of and investigation into
the  business,   operations,   property,   financial  and  other  condition  and
creditworthiness  of the  Company  and made its own  decision to enter into this
Financing Agreement. Each Lender also represents that it will, independently and
without  reliance upon the Agent or any other Lender and based on such documents
and information as it shall deem  appropriate at the time,  continue to make its
own credit  analysis,  appraisals  and  decisions in taking or not taking action
under  the  Financing  Agreement  and to make  such  investigation  as it  deems
necessary to inform itself as to the business,  operations,  property, financial
and other  condition or  creditworthiness  of the Company.  The Agent,  however,
shall provide the Lenders with copies of all financial  statements,  projections
and  business  plans which come into the  possession  of the Agent or any of its
officers, employees, agents or attorneys-in-fact.

14.7 The Lenders  agree to  indemnify  the Agent in its capacity as such (to the
extent not reimbursed by the Company and without  limiting the obligation of the
Company  to do so),  from  and  against  any and all  liabilities,  obligations,
losses,  damages,  penalties,  actions,  judgments,  suits,  costs,  expenses or
disbursements  of any kind whatsoever  (including  negligence on the part of the
agent) which may at any time be imposed on, incurred by or asserted  against the
Agent in anyway  relating to or arising out of this  Financing  Agreement or any
ancillary  documents or any documents  contemplated  by or referred to herein or
the transactions contemplated hereby or any action taken or omitted by the Agent
under or in connection with any of the foregoing;  provided that no Lender shall
be liable for the  payment  of any  portion  of such  liabilities,  obligations,
losses,  damages,  penalties,  actions,  judgments,  suits,  costs,  expenses or
disbursements  resulting  solely from the Agent's  gross  negligence  or

                                      -48-
<PAGE>

 willful misconduct.  The agreements in this  paragraph  shall survive the
payment of the obligations.

14.8 The Agent may make loans to, and  generally  engage in any kind of business
with the Company as though the Agent were not the Agent hereunder.  With respect
to its loans made or renewed by it or loan obligations  hereunder as Lender, the
Agent shall have the same rights and powers,  duties and liabilities  under this
Financing Agreement as any Lender and may exercise the same as though it was not
the Agent and the terms  "Lender" and  "Lenders"  shall include the Agent in its
individual capacities.

14.9 The Agent may resign as the Agent upon 30 days'  notice to the  Lenders and
such  resignation  shall be effective upon the appointment of a successor Agent.
If the Agent shall resign as Agent,  then the Lenders  shall appoint a successor
Agent for the  Lenders  whereupon  such  successor  Agent  shall  succeed to the
rights,  powers  and  duties of the Agent and the term  "Agent"  shall mean such
successor Agent effective upon its  appointment,  and the former Agent's rights,
powers and duties as Agent shall be terminated, without any other or further act
or deed on the part of such former Agent or any of the parties to this Financing
Agreement.  After any retiring  Agent's  resignation  hereunder as the Agent the
provisions of this Section 14 shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was the Agent.  If CITBC resigns as Agent,
the Company  may,  upon notice given to the Agent within ten (10) days after the
Company receives notice of such appointment,  terminate this Financing Agreement
and the Line of Credit by payment in full of all  Obligations  but  without  any
obligation to pay an Early  Termination  Fee, unless the Company consents to the
successor Agent, such consent not to be unreasonably withheld.

14.10  Notwithstanding  anything  contained in this  Financing  Agreement to the
contrary,  the Agent will not, without the prior written consent of all Lenders:
(a) amend the  Financing  Agreement  to (i)  increase  the Line of Credit;  (ii)
reduce  the  interest  rates;  (iii)  reduce  or waive (A) any fees in which the
Lenders  share  hereunder;  or (B)  the  repayment  of any  Obligations  due the
Lenders; (b) extend the maturity of the Obligations; (c) alter or amend (i) this
Section  14.10 or (ii) the  definitions  of Borrowing  Base,  Eligible  Accounts
Receivable,  Eligible Inventory,  Eligible In-Transit  Inventory,  Collateral or
Required Lenders,  or the Agent's criteria for determining  compliance with such
definitions  of   eligibility;   (d)  release   Collateral  in  bulk  without  a
corresponding  reduction in the Obligations to the Lenders, or (e) intentionally
make any Revolving  Loan or assist in opening any Letter of Credit  hereunder if
after giving effect  thereto the total of Revolving  Loans and Letters of Credit
hereunder for the Company would exceed one hundred and ten percent (110%) of the
maximum amount available under Section 3 hereof. In all other respects the Agent
is authorized to take such actions or fail to take such actions if the Agent, in
its reasonable  discretion,  deems such to be advisable and in the best interest
of the Lenders,  including,  but not

                                      -49-
<PAGE>

 limited to, the making of an overadvance or
the  termination  of the Financing  Agreement upon the occurrence of an Event of
Default  unless it is  specifically  instructed  to the contrary by the Required
Lenders.

14.11 In the event any Lender's  consent is required  pursuant to the provisions
of this  Financing  Agreement and such Lender does not respond to any request by
the Agent for such  consent  within 10 days after  such  request is made to such
Lender, such failure to respond shall be deemed a consent.  In addition,  in the
event that any Lender  declines to give its consent to any such  request,  it is
hereby  mutually  agreed that the Agent  and/or any other  Lender shall have the
right (but not the  obligation) to purchase such Lender's share of the Loans for
the full amount thereof  together with accrued  interest  thereon to the date of
such purchase.

14.12 Each Lender agrees that  notwithstanding  the  provisions of Section 11 of
this Financing  Agreement any Lender may terminate this Financing  Agreement and
the Line of Credit only as of the initial or any subsequent Anniversary Date and
then only by giving the Agent 90 days prior written  notice  thereof.  Within 30
days after  receipt of any such  termination  notice,  the Agent  shall,  at its
option,  either (a) give notice of termination  to the Company  hereunder or (b)
purchase the Lender's  share of the  Obligations  hereunder  for the full amount
thereof plus accrued  interest  thereon.  Unless so  terminated  this  Financing
Agreement  and  the  Line  of  Credit  shall  be  automatically   extended  from
Anniversary Date to Anniversary Date.

                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Financing  Agreement to be executed,  agreed to, accepted and delivered by their
proper and duly authorized officers as of the date set forth above.

                              FACTORY 2-U STORES, INC.,
                              a Delaware corporation

                              By:  /s/ Douglas C. Felderman
                              Name:Douglas C. Felderman
                              Title:     EVP - CFO

                                      -50-
<PAGE>

Executed and Accepted at
Los Angeles, California,
March 3, 2000

THE CIT GROUP/BUSINESS CREDIT, INC., as Agent
and Lender

By:   /s/ Frank Brown
Name: Frank Brown
Title: Vice President

                                      -51-

<PAGE>

                                    EXHIBIT A

                         REVOLVING LOAN PROMISSORY NOTE

$50,000,000.00                                                     March 3, 2000

                  FOR VALUE RECEIVED, the undersigned, FACTORY 2-U STORES, INC.,
a Delaware corporation (the "Company"),  promises to pay to the order of THE CIT
GROUP/BUSINESS  CREDIT, INC. (herein "CITBC"),  as Agent for the Lenders under a
certain  Financing  Agreement of even date  herewith  between CITBC as Agent and
Lender,  other Lenders  parties  thereto and the Company  (herein the "Financing
Agreement")  at its office located at 300 South Grand Avenue,  Third Floor,  Los
Angeles,  California  90071, in lawful money of the United States of America and
in immediately  available  funds,  the principal amount of Fifty Million Dollars
($50,000,000.00),  or such other principal  amount advanced  pursuant to Section
3.1 of the  Financing  Agreement.  The  balance  of  such  Revolving  Loan  will
fluctuate as a result of the daily application of the proceeds of collections of
the  Accounts  and the making of  additional  Revolving  Loans as  described  in
Section 3. The  Revolving  Loans may be borrowed,  repaid and  reborrowed by the
Company. A final payment in an amount equal to the outstanding aggregate balance
of principal and interest  remaining  unpaid,  if any, under this Revolving Loan
Promissory  Note as shown on the books and records of the Agent shall be due and
payable upon any termination of the Financing Agreement.

                  All  capitalized  terms used  herein  shall  have the  meaning
provided therefor in the Financing Agreement, unless otherwise defined herein.

                  The Company  further  promises to pay interest at such office,
in like money, on the unpaid  principal amount owing hereunder from time to time
from the date hereof on the dates and at the rates  specified  in Section 8.1 of
the Financing Agreement.

                  If any payment on this Revolving Loan  Promissory Note becomes
due and payable on a day other than a Business  Day, the maturity  thereof shall
be extended to the next succeeding Business Day, and with respect to payments of
principal,  interest thereon shall be payable at the then applicable rate during
such extension.

                  This  Revolving  Loan  Promissory  Note is the Revolving  Loan
Promissory Note referred to in the Financing  Agreement,  and is subject to, and
entitled to, all provisions and benefits  thereof and is subject to optional and
mandatory prepayment, in whole or in part, as provided therein.

                                      -52-
<PAGE>

                  The date and amount of the  advance(s)  made  hereunder may be
recorded on the schedule  which is attached  hereto and hereby made part of this
Revolving Loan Promissory Note or the separate ledgers  maintained by the Agent,
provided that any failure to record any such  information on such schedule shall
not in any manner  affect the  obligation  of the  Company to make  payments  of
principal  and  interest in  accordance  with the terms of this  Revolving  Loan
Promissory  Note.  The aggregate  unpaid  principal  amount of all advances made
pursuant  hereto may be set forth in the balance column on said schedule or such
ledgers maintained by the Agent. All such advances,  whether or not so recorded,
shall be due as part of this Revolving Loan Promissory Note.

                  The Company  confirms  that any amount  received by or paid to
the  Agent in  connection  with the  Financing  Agreement  and/or  any  balances
standing to its credit on any of its  accounts  on the  Agent's  books under the
Financing  Agreement may in accordance with the terms of the Financing Agreement
be applied in reduction of this Revolving Loan  Promissory  Note, but no balance
or  amounts  shall  be  deemed  to  effect  payment  in whole or in part of this
Revolving Loan Promissory Note unless the Agent shall have actually charged such
account  or  accounts  for the  purposes  of such  reduction  or payment of this
Revolving Loan Promissory Note.

                  Upon  the  occurrence  of any  one or more  of the  Events  of
Default  specified  in  the  Financing  Agreement  or  upon  termination  of the
Financing  Agreement,  all amounts then remaining  unpaid on this Revolving Loan
Promissory Note may become, or be declared to be, immediately due and payable as
provided in the Financing Agreement.

                  The Company and any and all guarantors,  sureties and endorses
jointly and severally waive grace,  demand,  presentment for payment,  notice of
dishonor or default,  notice of intent to  accelerate,  notice of  acceleration,
protest and diligence in collecting.

                  This Revolving Loan  Promissory Note shall be governed by, and
construed  in  accordance  with,  the laws of the  state of  California  and the
applicable federal laws of the United States.

                              FACTORY 2-U STORES, INC.,
                              a Delaware corporation

                              By:
                              Name:
                              Title:

                                      -53-

<PAGE>

Attest:

Secretary

                                      -54-

<PAGE>

                                SCHEDULE TO GRID

Date           Loan                          Payment                     Balance

                                      -55-

<PAGE>

                                   EXHIBIT B

                        ASSIGNMENT AND TRANSFER AGREEMENT

                           Dated: _____________, 20__

                  Reference is made to the Financing Agreement dated as of March
3, 2000 (as amended, modified, supplemented and in effect from time to time, the
"Financing  Agreement"),  among Factory 2-U Stores, Inc., a Delaware corporation
(the "Company"),  the Lenders named therein, and The CIT Group/Business  Credit,
Inc., as Agent (the  "Agent").  Capitalized  terms used herein and not otherwise
defined  shall  have  the  meanings  assigned  to such  terms  in the  Financing
Agreement.  This  Assignment  and Transfer  Agreement,  between the Assignor (as
defined  and set forth on  Schedule  1 hereto  and made a part  hereof)  and the
Assignee  (as defined and set forth on Schedule 1 hereto and made a part hereof)
is dated as of the Effective  Date (as set forth on Schedule 1 hereto and made a
part hereof).

1. The Assignor  hereby  irrevocably  sells and assigns to the Assignee  without
recourse to the  Assignor,  and the Assignee  hereby  irrevocably  purchases and
assumes from the Assignor without recourse to the Assignor,  as of the Effective
Date,  an  undivided  interest  (the  "Assigned  Interest")  in and  to all  the
Assignor's  rights and  obligations  under the  Financing  Agreement  respecting
those, and only those, financing facilities contained in the Financing Agreement
as are set forth on Schedule 1  (collectively,  the  "Assigned  Facilities"  and
individually,  an "Assigned Facility"),  in a principal amount for each Assigned
Facility as set forth on Schedule 1.

2.  The  Assignor  (a)  makes no  representation  or  warranty  and  assumes  no
responsibility  with respect to any  statements,  warranties or  representations
made in or in connection with the Financing  Agreement or any other  instrument,
document  or  agreement  executed in  conjunction  therewith  (collectively  the
"Ancillary  Documents") or the execution,  legality,  validity,  enforceability,
genuiness,  sufficiency  or value of the  Financing  Agreement,  any  Collateral
thereunder or any of the Ancillary Documents  furnished pursuant thereto,  other
than that it is the legal and beneficial owner of the interest being assigned by
it hereunder  and that such  interest is free and clear of any adverse claim and
(b) makes no  representation  or  warranty  and assumes no  responsibility  with
respect  to the  financial  condition  of the  Company or any  guarantor  or the
performance  or  observance  by  the  Company  or  any  guarantor  of any of its
respective  obligations  under the  Financing  Agreement or any of the Ancillary
Documents furnished pursuant thereto.

3. The Assignee (a)  represents  and warrants  that it is legally  authorized to
enter into this  Assignment  and Transfer  Agreement;  (b) confirms  that it has
received a copy of the Financing Agreement, together with the copies of the most

                                      -56-

<PAGE>

recent  financial  statements  of the  Company,  and such  other  documents  and
information as it has deemed  appropriate to make its own credit  analysis;  (c)
agrees that it will,  independently  and without  reliance  upon the Agent,  the
Assignor or any other Lender and based on such  documents and  information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking  action  under the  Financing  Agreement;  (d) appoints and
authorizes  the Agent to take such action as agent on its behalf and to exercise
such powers under the  Financing  Agreement as are delegated to the Agent by the
terms thereof,  together with such powers as are reasonably  incidental thereto;
(e) agrees that it will be bound by the  provisions of the  Financing  Agreement
and will perform in accordance with its terms all the  obligations  which by the
terms of the  Financing  Agreement are required to be performed by it as Lender;
and (f) if the Assignee is organized  under the laws of a  jurisdiction  outside
the United States, attaches the forms prescribed by the Internal Revenue Service
of the United  States  certifying  as to the  Assignee's  exemption  from United
States withholding taxes with respect to all payments to be made to the Assignee
under the  Financing  Agreement  or such other  documents  as are  necessary  to
indicate  that all such payments are subject to such tax at a rate reduced by an
applicable tax treaty.

4.  Following  the execution of this  Assignment  and Transfer  Agreement,  such
agreement  will be delivered to the Agent for  acceptance by it and the Company,
effective as of the Effective Date.

5. Upon such acceptance, from and after the Effective Date, the Agent shall make
all  payments  in  respect  of the  assigned  interest  (including  payments  of
principal,  interest,  fees and other  amounts) to the  Assignee,  whether  such
amounts have accrued  prior to the  Effective  Date or accrue  subsequent to the
Effective Date. The Assignor and Assignee shall make all appropriate adjustments
in payments for periods  prior to the  Effective  Date made by the Agent or with
respect to the making of this assignment directly between themselves.

6. From and after the Effective  Date,  (a) the Assignee shall be a party to the
Financing  Agreement and, to the extent provided in this Assignment and Transfer
Agreement,  have the rights and obligations of a Lender thereunder,  and (b) the
Assignor  shall,  to  the  extent  provided  in  this  Assignment  and  Transfer
Agreement,  relinquish its rights and be released from its obligations under the
Financing Agreement.

7. THIS ASSIGNMENT AND TRANSFER  AGREEMENT  SHALL BE GOVERNED BY, AND CONSTRUED
 IN ACCORDANCE  WITH, THE LAWS OF THE STATE OF CALIFORNIA.

                                      -57-
<PAGE>

                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Assignment and  Acceptance to be executed by their  respective  duly  authorized
officers on Schedule 1 hereto.

                                      -58-

<PAGE>

                 Schedule 1 to Assignment and Transfer Agreement

Name of Assignor:

Name of Assignee:

Effective Date of Assignment:   ____________________, 20__

<TABLE>
<CAPTION>

                                                                Percentage Assigned of each facility (Shown as
                                Principal Amount (or, with       a percentage of aggregate principal amount or,
                                respect to Letters of Credit     with respect to Letters of Credit, fact amount
Assigned Facilities             face amount Assigned             of all Lenders)
<S>                             <C>                              <C>

Revolving Loans                 $______________                  ______________%

Letter of Credit
participation interest          $______________                  ______________%

                      Total:    $______________                  ______________%

</TABLE>

THE CIT GROUP/BUSINESS CREDIT, INC., As Agent
                                                    As Assignee

By:
Name:                                               By:
      -----------------------------
Title:                                              Name:
      -----------------------------
                                                    Title:
Factory 2-U Stores, Inc.
(the "Company")

By:
Name:
Title:

                                      -59-
<PAGE>

                                  Schedule 1

                                 Existing Liens

<TABLE>
<CAPTION>

ARIZONA

------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR                                FILING NUMBER            FILING DATE        SECURED PARTY
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
<S>                                   <C>                      <C>                <C>

Factory 2-U Stores, Inc.              995040                   11/28/97           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Factory 2-U, Inc.                     718725                   09/21/92           Metlife Capital Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Factory 2-U, Inc.                     769305                   12/21/93           Metlife Capital Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Factory 2-U, Inc.                     946305                   12/04/96           EUA Cogenex Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Factory 2-U, Inc.                     980552                   08/12/97           GTE Leasing Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Center                 504538                   10/16/87           Easton Sports, Inc.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Center                 790999                   06/20/94           Southern Pacific Thrift & Loan Assn.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Center                 790000                   06/20/94           Southern Pacific Thrift & Loan Assn.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      930441                   08/12/96           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      930442                   08/12/96           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      941038                   10/25/96           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      995041                   11/28/97           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      1011591                  04/08/98           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------

</TABLE>

<TABLE>
<CAPTION>

CALIFORNIA

------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR                                FILING NUMBER            FILING DATE        SECURED PARTY
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
<S>                                   <C>                      <C>                <C>

Factory 2-U Stores, Inc.              0004060398               02/03/00           Crown Credit Company
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Factory 2-U, Inc.                     9610660915               04/16/96           Metlife Capital Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Corp.                  9521661048               08/03/95           Megabank of Arapahoe
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Corp.                  9803660143               01/30/98           IBM Credit Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Corp.                  9805860694               02/24/98           IBM Credit Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Corp.                  9809060907               03/30/98           IBM Credit Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Center                 9533560109               11/28/95           Minnesota Mining and Manufacturing Co.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
Family Bargain Center                 9612360424               05/01/96           EUA Cogenex Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles, Inc.                9516060024               06/07/95           IBM Credit Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles, Inc.                9621860629               08/02/96           EUA Cogenex Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles, Inc.                9702860482               01/27/97           EUA Cogenex Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles, Inc.                9706961264               03/10/97           EUA Cogenex Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles, Inc.                9724860177               09/04/97           EUA Cogenex Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      9515260139               05/31/95           Graybar Financial Services
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      9524060630               08/25/95           Leasetec Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      9622260426               08/08/96           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      9630360291               10/28/96           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      9723061059               08/15/97           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      9725160339               09/04/97           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      9733560592               11/26/97           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      9810060294               04/09/98           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      9925060787               09/01/99           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      9928860025               10/12/99           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
</TABLE>

<TABLE>
<CAPTION>

NEVADA

------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR                                FILING NUMBER            FILING DATE        SECURED PARTY
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
<S>                                   <C>                      <C>                <C>

General Textiles                      96-12999                 08/15/96           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      97-19857                 12/01/97           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------

</TABLE>

<TABLE>
<CAPTION>

NEW MEXICO

------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR                                FILING NUMBER            FILING DATE        SECURED PARTY
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
<S>                                   <C>                      <C>                <C>

Factory 2-U Stores, Inc.              971201074                12/01/97           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      960812011                08/12/96           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      960812012                08/12/96           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      971201073                12/01/97           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
</TABLE>

                                      -61-

<PAGE>

<TABLE>
<CAPTION>

OREGON

------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR                                FILING NUMBER            FILING DATE        SECURED PARTY
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
<S>                                   <C>                      <C>                <C>

General Textiles                      418473                   04/16/98           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      419356                   04/22/98           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------

</TABLE>

<TABLE>
<CAPTION>

SAN DIEGO COUNTY, CA

------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR                                FILING NUMBER            FILING DATE        SECURED PARTY
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
<S>                                   <C>                      <C>                <C>

Family Bargain Corp.                  1995-0409158             09/14/95           Megabank of Arapahoe
------------------------------------- ------------------------ ------------------ ----------------------------------------

</TABLE>

<TABLE>
<CAPTION>

TEXAS

------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR                                FILING NUMBER            FILING DATE        SECURED PARTY
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
<S>                                   <C>                      <C>                <C>

Factory 2-U Stores, Inc.              242622                   11/26/97           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      242623                   11/26/97           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------

</TABLE>

<TABLE>
<CAPTION>

WASHINGTON

------------------------------------- ------------------------ ------------------ ----------------------------------------
DEBTOR                                FILING NUMBER            FILING DATE        SECURED PARTY
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
<S>                                   <C>                      <C>                <C>

General Textiles                      96-222-0093              08/09/96           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      96-317-0185              11/12/96           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
------------------------------------- ------------------------ ------------------ ----------------------------------------
General Textiles                      97-335-0893              12/01/97           Sensormatic Electronics Corp.
------------------------------------- ------------------------ ------------------ ----------------------------------------
</TABLE>

                                      -62-

<PAGE>

                                   Schedule 2

                 Collateral Locations, Chief Executive Office and Trade Names

                             Chief Executive Office

                                4000 Ruffin Road

                        San Diego, California 92123-1866

                              Collateral Locations

                                  See Attached

                                   Trade Names

                                   Factory 2-U
                             Family Bargain Centers

                                      -63-

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