LA GEAR INC, 10-Q, 1997-07-15

LA GEAR INC
10-Q, 1997-07-15
RUBBER & PLASTICS FOOTWEAR

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MAY 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------------------- ----

Commission file number 1-10157

L.A. GEAR, INC.

(Exact name of registrant as specified in its charter)

CALIFORNIA 95-3375118
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

2850 OCEAN PARK BOULEVARD, SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices) (Zip code)

(310) 452-4327
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- --------

The number of shares outstanding of the registrant's Common Stock, no par value,
at July 11, 1997 was 22,959,070 shares.

THIS FORM 10-Q CONTAINS 110 PAGES.

THE EXHIBIT INDEX APPEARS ON PAGE 20.

<PAGE>

L.A. GEAR, INC.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 31, 1997

PART I. FINANCIAL INFORMATION Page

Item 1. Financial Statements

Consolidated Condensed Balance Sheets at 3
May 31, 1997 and November 30, 1996

Consolidated Condensed Statements of Operations and
Accumulated Deficit for the three months ended
May 31, 1997 and May 31, 1996 4

Consolidated Condensed Statements of Operations and
Accumulated Deficit for the six months ended
May 31, 1997 and May 31, 1996 5

Consolidated Condensed Statements of Cash Flows
for the six months ended May 31, 1997 and May 31, 1996 6

Notes to Consolidated Condensed Financial Statements 7

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 16

Item 2. Changes in Securities 16

Item 3. Defaults Upon Senior Securities 17

Item 4. Submission of Matters to a Vote of Security Holders 17

Item 5. Other Information 17

Item 6. Exhibits and Reports on Form 8-K 18

Signature 19

Exhibit Index 20

<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

May 31, November 30,
1997 1996
----------- ------------
(unaudited)
ASSETS

<S> <C> <C>
Current assets:
Cash and cash equivalents $9,331 $ 34,239
Accounts receivable, net 22,211 23,938
Inventories 26,591 32,809
Prepaid expenses and other current assets 1,846 1,933
-------- --------

Total current assets 59,979 92,919

Property and equipment, net 2,579 4,445
Goodwill, net 1,471 1,538
Other assets 1,832 2,054
-------- --------

$65,861 $100,956
-------- --------
-------- --------

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY

Current liabilities:
Accounts payable and accrued liabilities $ 26,290 $ 46,452
-------- --------
-------- --------

Total current liabilities 26,290 46,452

7 3/4% convertible subordinated debentures due 2002 50,000 50,000

Shareholders' (deficit) equity:
7 1/2% Series B Cumulative Convertible Preferred Stock,
$100 stated value; 1,161,822 shares authorized; 1,161,337
shares issued and outstanding at May 31, 1997 and
November 30, 1996 115,473 115,473
Preferred stock, no stated value; 8,838,178 shares authorized
and unissued at May 31, 1997 and November 30, 1996 -- --
Common stock, no par value; 80,000,000 shares authorized;
22,959,070 shares issued and outstanding at
May 31, 1997; 22,936,433 shares issued and
outstanding at November 30, 1996 128,132 128,093
Cumulative currency translation adjustment (575) 296
Accumulated deficit (253,459) (239,358)
-------- --------
Total shareholders' (deficit) equity (10,429) 4,504
-------- --------
Commitments and contingencies -- --
-------- --------

$65,861 $100,956
-------- --------
-------- --------

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

3
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L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Three months ended May 31,
--------------------------
1997 1996
--------- ----------

Net sales $ 28,772 $38,472
Cost of sales 23,771 28,774
--------- ----------

Gross profit 5,001 9,698

Selling, general and administrative expenses 11,488 20,517
Litigation settlement expense (income), net 527 (1,955)
Restructuring credits (1,899) --
Other income (1,617) --
Interest expense, net 913 521
--------- ----------

Loss before minority interest (4,411) (9,385)

Minority interest -- 1,905
--------- ----------

Net loss (4,411) (7,480)

Dividends on Series B Cumulative Convertible
Preferred Stock (2,239) (1,108)
Dividends on mandatorily redeemable
Series A Cumulative Convertible
Preferred Stock -- (1,002)
--------- ----------

Loss applicable to common stock (6,650) (9,590)

Accumulated deficit, beginning of period (246,809) (170,224)
--------- ----------

Accumulated deficit, end of period $(253,459) $ (179,814)
--------- ----------
--------- ----------

Loss per common share $(0.29) $ (0.42)
--------- ----------
--------- ----------

Weighted average common shares outstanding 22,959 22,937
--------- ----------
--------- ----------

SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

4
<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Six months ended May 31,
------------------------
1997 1996
--------- ----------

Net sales $63,803 117,138
Cost of sales 50,647 82,886
--------- ----------

Gross profit 13,156 34,252

Selling, general and administrative expenses 24,497 43,913
Litigation settlement expense (income), net 424 (1,955)
Restructuring credits (2,120) --
Other income (1,617) --
Interest expense, net 1,657 1,134
--------- ----------

Loss before minority interest (9,685) (8,840)

Minority interest -- 2,459
--------- ----------

Net loss (9,685) (6,381)

Dividends on Series B Cumulative Convertible
Preferred Stock (4,416) (1,108)
Dividends on mandatorily redeemable
Series A Cumulative Convertible
Preferred Stock -- (3,044)
--------- ----------

Loss applicable to common stock (14,101) (10,533)

Accumulated deficit, beginning of period (239,358) (169,281)
--------- ----------

Accumulated deficit, end of period $(253,459) $ (179,814)
--------- ----------
--------- ----------

Loss per common share $(0.61) $(0.46)
--------- ----------
--------- ----------

Weighted average common shares outstanding 22,955 22,937
--------- ----------
--------- ----------

SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

5
<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

Six months ended May 31,
------------------------

1997 1996
-------- -------

Net cash (used in) provided by operating activities $(25,648) $12,866
-------- -------

Investing activities:
Proceeds from assets held for sale 633 --
Capital expenditures (387) (694)
-------- -------

Net cash provided by (used in) investing
activities 246 (694)
-------- -------

Financing activities:
Proceeds from issuance of common stock 39 --
Net repayments under international credit facilities -- (1,218)
Other -- (622)
-------- -------

Net cash provided by (used in) financing
activities 39 (1,840)
-------- -------

Effect of exchange rate changes on cash and
cash equivalents 455 49
-------- -------

Net (decrease) increase in cash and cash
equivalents (24,908) 10,381

Cash and cash equivalents at beginning of period 34,239 35,956
-------- -------

Cash and cash equivalents at end of period $9,331 $46,337
-------- -------
-------- -------

SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.

6
<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION In the opinion of management, the accompanying
unaudited consolidated condensed financial statements contain all adjustments,
which consist only of normal recurring adjustments, necessary to present fairly
the consolidated financial position of L.A. Gear, Inc. and its subsidiaries
(collectively referred to as the "Company") at May 31, 1997, the results of
operations for the three months and six months ended May 31, 1997 and 1996 and
the cash flows for the six months ended May 31, 1997 and 1996. This interim
financial information and notes thereto should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended November 30,
1996. The Company's results of operations and cash flows for interim periods
are not necessarily indicative of the results to be expected for any other
interim period or the full year.

STOCK OPTIONS In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company will
adopt the disclosure only provisions of SFAS No. 123 in the fiscal year ending
November 30, 1997 and the adoption of SFAS No. 123 will not have a material
impact on the Company's financial position or results of operations.

LOSS PER COMMON SHARE Loss per common share has been computed on the loss
applicable to common stock (net loss plus dividends on Series A Cumulative
Convertible Preferred Stock and Series B Cumulative Convertible Preferred Stock)
divided by the weighted average number of common shares outstanding during each
period.

RECLASSIFICATIONS Certain reclassifications have been made to 1996 amounts
for conformity to the 1997 presentation.

NOTE 2. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

SIX MONTHS ENDED MAY 31,
------------------------
1997 1996
------ ---------
(IN THOUSANDS)
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
INTEREST PAID $1,908 $2,099
------ ---------
------ ---------
INTEREST RECEIVED $(291) $(950)
------ ---------
------ ---------

NONCASH FINANCING ACTIVITY:
DIVIDENDS ACCRUED AND UNPAID ON SERIES B
CUMULATIVE CONVERTIBLE PREFERRED STOCK $4,416 $--
------ ---------
------ ---------
EXCHANGE OF SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK PLUS ACCRUED AND UNPAID
DIVIDENDS FOR SERIES B CUMULATIVE CONVERTIBLE
PREFERRED STOCK $-- $110,790
------ ---------
------ ---------
SERIES B CUMULATIVE CONVERTIBLE PREFERRED
STOCK ISSUED IN PAYMENT OF DIVIDENDS DUE
ON SERIES B CUMULATIVE CONVERTIBLE
PREFERRED STOCK $-- $1,108
------ ---------
------ ---------

7
<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 3. OTHER INCOME

Other income consists of foreign exchange gains of $728,000 in
connection with the sale of stock and assets of certain foreign subsidiaries and
of $889,000 of gain from the dissolution of the Company's Far East joint venture
with Inchcape Pacific Limited.

NOTE 4. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net of allowance for doubtful accounts and merchandise
returns, consist of the following:

MAY 31, NOVEMBER 30,
1997 1996
------- -------
(IN THOUSANDS)

TRADE RECEIVABLES
DOMESTIC $10,208 $12,581
INTERNATIONAL 9,524 14,216
------- -------
TOTAL TRADE RECEIVABLES 19,732 26,797

OTHER RECEIVABLES 5,267 1,280
------- -------
24,999 28,077
LESS ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND MERCHANDISE RETURNS (2,788) (4,139)
------- -------

$22,211 $23,938
------- -------
------- -------

During the six months ended May 31, 1997 the Company sold substantially all
of the assets of its Italian and German subsidiaries and the capital stock of
its Dutch subsidiary. Included in other receivables is $4.2 million owed to the
Company from the purchasers of the assets of its Italian and German
subsidiaries.

NOTE 5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:

MAY 31, NOVEMBER 30,
1997 1996
------- -------
(IN THOUSANDS)

ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES $13,550 $17,869
ACCRUED INVENTORY PURCHASES 4,590 8,417
ACCRUED RESTRUCTURING CHARGES 3,734 20,166
ACCRUED DIVIDENDS ON SERIES B CUMULATIVE
CONVERTIBLE PREFERRED STOCK 4,416 --
------- -------
$26,290 $46,452
------- -------
------- -------

8
<PAGE>

L.A. GEAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

In the fourth quarter of fiscal 1996, management committed to a
restructuring plan aimed at bringing the Company's operating expenses in line
with its sales base and recorded a restructuring charge of $28.8 million. Of
the $20.2 million remaining reserve at November 30, 1996, $14.4 million was
utilized in the six months ended May 31, 1997 primarily for severance payments,
the transition to service certain of the Company's European customers through
independent distributors rather than through direct subsidiaries, and space
consolidation at the Company's Santa Monica, California headquarters and
Ontario, California distribution center. During the three months and six
months ended May 31, 1997, the Company recognized $1.9 million and $2.1 million,
respectively, of income representing adjustments to restructuring reserves
relating primarily to: (i) the sublease of premises at its Santa Monica and
Ontario locations at more favorable terms and shorter vacancy periods than
originally anticipated, and (ii) greater consideration than originally
anticipated from the sale of stock and assets of certain European subsidiaries.
The Company anticipates that substantially all of the contemplated restructuring
actions will be completed by November 30, 1997 and believes that the accrued
restructuring charges of $3.7 million at May 31, 1997 appropriately reflect the
remaining liabilities associated with these actions.

NOTE 6. BANK BORROWINGS

On May 21, 1997, the Company entered into a Loan and Security Agreement
(the "Agreement") with Congress Financial Corporation which provides the Company
with a new three-year revolving credit facility (the "Revolving Facility")
through May 2000, for loans and letters of credit. The Revolving Facility
replaces the Company's previous revolving credit facility with BankAmerica
Business Credit.

The Revolving Facility provides for maximum borrowings outstanding at any
time of the lesser of: (i) $40 million for aggregate loans and letters of
credit, or (ii) an amount equal to a borrowing base calculated on the Company's
eligible accounts receivable and inventory as defined under the Agreement.
There is a $25 million sublimit for outstanding aggregate loans at any time.
Loans bear interest at the publicly announced prime rate of CoreStates Bank,
N.A. plus 1/4% for up to $5 million of loans outstanding, and at such prime rate
plus 1/2% for loans outstanding in excess of $5 million. The Revolving Facility
is secured primarily by the Company's domestic assets .

As of May 31, 1997, there were no cash borrowings and approximately $15.7
million of letters of credit commitments outstanding under the Revolving
Facility, with $7.2 million available for borrowing. During the three months
ended May 31, 1997 the Company's maximum loans outstanding under the prior
revolving credit facility with BankAmerica Business Credit were $2.3 million.

NOTE 7. SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK

The Series B Cumulative Convertible Preferred Stock, stated value $100
per share, accrues dividends at a rate of 7 1/2% per annum, and is
convertible into shares of the Company's Common Stock at a conversion price
of $6.75 per share. The Company elected not to pay the cash dividends
aggregating $4.4 million required on the Series B Preferred Stock due
February 28, 1997 ($2.2 million) and May 31, 1997 ($2.2 million). The
aggregate unpaid dividends will bear additional dividends accruing at a rate
of 8 5/8% per annum, compounded quarterly, until all such arrearages are paid.

9
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ALL REFERENCES TO YEARS ARE TO FISCAL YEARS ENDING NOVEMBER 30, 1997 OR 1996, AS
APPLICABLE.

NET SALES
- --------------------------------------------------------------------------------

In the second quarter of 1997, the Company's net sales decreased by 25.2%
to $28.8 million, compared to $38.5 million in the second quarter of 1996. For
the six months ended May 31, 1997, the Company's net sales decreased by 45.5% to
$63.8 million, compared to $117.1 million in the year earlier period. Domestic
net sales in the second quarter and six months ended May 31, 1997 decreased by
36.6% and 52.7% from the comparable 1996 periods, respectively. Net
international sales, which accounted for approximately 43% and 37% of the
Company's total net sales for the quarter and six months ended May 31, 1997,
respectively, decreased by 1.5% and 26.4% from the comparable 1996 periods.

The following tables set forth certain information regarding the Company's
net sales:

THREE MONTHS ENDED MAY 31, NET SALES
- -------------------------- ----------------------------------------
1997 1996
---------------- ----------------
(DOLLARS IN THOUSANDS)

DOMESTIC FOOTWEAR
CHILDREN'S $8,013 28% $13,357 35%
WOMEN'S 4,221 15 8,785 23
MEN'S 4,165 14 3,109 8
OTHER 57 0 721 2
------- --- -------- ---
TOTAL DOMESTIC SALES 16,456 57 25,972 68
------- --- -------- ---

INTERNATIONAL FOOTWEAR
CHILDREN'S 5,416 19 5,775 15
WOMEN'S 4,025 14 2,869 7
MEN'S 2,556 9 1,621 4
OTHER 319 1 2,235 6
------- --- -------- ---
TOTAL INTERNATIONAL SALES 12,316 43 12,500 32
------- --- -------- ---
TOTAL NET SALES $28,772 100% $38,472 100%
------- --- -------- ---
------- --- -------- ---

SIX MONTHS ENDED MAY 31, NET SALES
- -------------------------- ----------------------------------------
1997 1996
---------------- ----------------
(DOLLARS IN THOUSANDS)

DOMESTIC FOOTWEAR
CHILDREN'S $22,313 35% $40,200 35%
WOMEN'S 9,371 15 28,487 24
MEN'S 8,444 13 15,437 13
OTHER 148 0 1,044 1
------- --- -------- ---
TOTAL DOMESTIC SALES 40,276 63 85,168 73
------- --- -------- ---

INTERNATIONAL FOOTWEAR
CHILDREN'S 11,060 17 16,478 14
WOMEN'S 7,401 12 7,280 6
MEN'S 4,295 7 4,908 4
OTHER 771 1 3,304 3
------- --- -------- ---
TOTAL INTERNATIONAL SALES 23,527 37 31,970 27
------- --- -------- ---
TOTAL NET SALES $63,803 100% $117,138 100%
------- --- -------- ---
------- --- -------- ---

10
<PAGE>

The following tables set forth the percentage changes, by Children's,
Women's and Men's categories, in the number of pairs sold during the 1997 period
as compared to the same period of 1996:

THREE MONTHS ENDED MAY 31, VOLUME OF FOOTWEAR SOLD
- -------------------------- -----------------------
INCREASE (DECREASE) BETWEEN 1997 AND 1996
-----------------------------------------
DOMESTIC INTERNATIONAL TOTAL
-------- ------------- -----

CHILDREN'S (32%) 18% (21%)
WOMEN'S (49%) 54% (30%)
MEN'S 58% 71% 62%

TOTAL VOLUME INCREASE (DECREASE) (30%) 37% (16%)

SIX MONTHS ENDED MAY 31, VOLUME OF FOOTWEAR SOLD
- ------------------------ -----------------------
INCREASE (DECREASE) BETWEEN 1997 AND 1996
-----------------------------------------
DOMESTIC INTERNATIONAL TOTAL
-------- ------------- -----

CHILDREN'S (40%) (17%) (35%)
WOMEN'S (67%) 20% (52%)
MEN'S (38%) (10%) (32%)

TOTAL VOLUME DECREASE (49%) (5%) (41%)

The decrease in domestic net sales in the second quarter of fiscal 1997
was due primarily to: (i) a reduction in the number of pairs sold and in the
average selling price per pair of children's shoes, and (ii) a decrease in
women's shoes sold to Wal-Mart. Domestic men's shoe sales increased during
the second quarter of 1997 compared to year-ago levels primarily from an
increase in men's shoes sold to Wal-Mart. The decrease in domestic net sales
for the first half of fiscal 1997 was primarily attributable to sales of
$33.1 million to Wal-Mart in the first half of 1996 in fulfillment of
Wal-Mart's 1995 minimum purchase commitment. This compares to sales to
Wal-Mart of $6.9 million in the first half of fiscal 1997. Additionally, the
Company experienced lower sales volume and lower average selling prices per
pair across its product lines in the first half of fiscal 1997 compared to
the prior year period. The lower average selling prices per pair for both
the second quarter and first half of fiscal 1997 were in part due to a
greater proportion of sales of discontinued product.

Total international net sales in the second quarter of fiscal 1997 remained
relatively flat with year-ago levels as increased footwear sales, particularly
in adult product of the Company's continuing subsidiary operations in the United
Kingdom and France, were offset by lower footwear and apparel sales in Germany,
Italy, and Holland where operations have been transitioned from direct
subsidiaries to independent distributors. For the first half of fiscal 1997,
international sales decreased from year-ago levels principally from: (i) the
aforementioned transition of operations in certain European countries, and (ii)
the closure of the Company's Far East joint venture with Inchcape Pacific
Limited in September 1996 and the lack of alternative distribution arrangements
in those markets since that time.

Total sales of the Company's children's lighted shoes decreased by $4.3
million to $8.1 million in the second quarter of fiscal 1997 from $12.4 million
in the comparable prior year period, primarily due to lower worldwide demand.
For the first half of fiscal 1997, total sales of the Company's children's
lighted shoes decreased by $12.9 million to $19.9 million from $32.8 million in
the comparable prior year period, primarily due to a decrease internationally in
both volume and average selling price per pair.

<PAGE>

GROSS MARGIN
- --------------------------------------------------------------------------------

The gross margin for the second quarter and first half of 1997 decreased to
17.4% and 20.6%, respectively, from 25.2% and 29.2% during the comparable
periods in 1996, respectively. The decrease principally resulted from
a decline in domestic gross margins to 13.4% and 17.8% in the second quarter and
first half of fiscal 1997, respectively, from 28.5% and 30.2% during the
comparable periods of fiscal 1996. The decline in domestic gross margins is
attributable to a combination of increases in reserves for slow moving and
discontinued inventory and a greater proportion of sales of discontinued
product. The aforementioned reduction of sales to Wal-Mart during fiscal 1997
also contributed to the Company's lower domestic margins in the first half of
fiscal 1997 over the comparable prior year period.

International gross margins increased from 18.4% in the second quarter of
fiscal 1996 to 22.7% in the comparable period of 1997. The international
gross margin in the second quarter of fiscal 1996 was adversely impacted by
margins recorded by the Company's Far East joint venture which was closed in
September 1996. For the first half of fiscal 1997, international margins
decreased to 25.5% from 26.6% in the comparable period in fiscal 1996.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------------------------------------------

Total selling, general and administrative expenses decreased by $9.0
million, or 44.0%, to $11.5 million in the second quarter of 1997 and decreased
by $19.4 million, or 44.2%, to $24.5 million in the first half of 1997 compared
to the respective prior year periods. Approximately $5.8 million and $14.4
million in restructuring costs incurred in the second quarter and first half of
fiscal 1997, respectively, were applied against the restructuring reserve
established in 1996. As a percentage of net sales, selling, general and
administrative expenses were 39.9% and 38.4% in the second quarter and first
half of fiscal 1997, respectively, compared to 53.3% and 37.5% in the comparable
prior year periods.

Domestic selling, general and administrative expenses decreased by $4.9
million, or 33.4%, to $9.8 million in the second quarter of 1997 and
decreased by $12.8 million, or 39.8%, to $19.4 million in the first half of
fiscal 1997 compared to the comparable prior year periods. These decreases
were largely due to expense reductions realized from the implementation of
the Company's 1996 corporate reorganization plan and includes reductions in
(i) compensation and benefit expenses, and (ii) advertising and promotional
expenses.

International selling, general and administrative expenses decreased by
$4.1 million, or 70.8%, to $1.7 million in the second quarter of fiscal 1997,
and decreased by $6.6 million, or 56.3%, to $5.1 million in the first half of
fiscal 1997 compared to the comparable prior year periods. These decreases
were primarily due to (i) the transition of operations in Germany, Italy, and
Holland from direct subsidiaries to independent distributors, and (ii) the
elimination of all operating expenses associated with the Company's Far East
joint venture.

OTHER INCOME
- --------------------------------------------------------------------------------

Other income consists of foreign exchange gains of $728,000 in connection
with the sale of stock and assets in certain foreign subsidiaries and of
$889,000 of gain from the dissolution of the Company's Far East joint venture
with Inchcape Pacific Limited.

RESTRUCTURING CREDITS
- --------------------------------------------------------------------------------

During the second quarter and first half of fiscal 1997, the Company
recognized $1.9 million and $2.1 million, respectively, of income representing
adjustments to restructuring reserves relating primarily to: (i) the sublease
of premises at its Santa Monica and Ontario locations at more favorable terms
and shorter vacancy periods than originally anticipated, and (ii) greater
consideration than orginally anticipated from the sale of stock and assets of
certain European subsidiaries.

<PAGE>

INTEREST EXPENSE, NET
- --------------------------------------------------------------------------------

Interest expense of $1.0 million and $1.9 million for the three and six
months ended May 31, 1997, respectively, and $1.0 million and $2.1 for the
three and six months ended May 31, 1996, respectively, was primarily related
to interest costs on the $50 million, 7 3/4% convertible subordinated
debentures due 2002 issued in December 1992. Interest income decreased to
$58,000 and $291,000 for the three and six months ended May 31, 1997,
respectively, compared to $516,000 and $950,000 in the comparable prior year
periods primarily as a result of decreased average cash balances.

LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------

The following table sets forth certain information regarding the Company's
liquidity and capital resources:

MAY 31, NOVEMBER 30,
1997 1996
---- ----
(DOLLARS IN THOUSANDS)

CASH AND CASH EQUIVALENTS $ 9,331 $ 34,239
WORKING CAPITAL 33,689 46,467

OUTSTANDING LETTERS OF CREDIT 15,697 26,467
CONVERTIBLE SUBORDINATED DEBENTURES 50,000 50,000

THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
--------------- --------------
1997 1996 1997 1996
---- ---- ---- ----

AVERAGE DAILY SHORT-TERM BORROWINGS $412 $-- $208 $4
WEIGHTED AVERAGE INTEREST RATES 9.91% --% 9.91% 8.25%

CASH AND CASH EQUIVALENTS Cash and cash equivalent balances decreased by
$24.9 million from November 30, 1996 to a balance of $9.3 million at May 31,
1997 primarily due to $25.6 million in net cash used for operating activities
including the payment of certain restructuring costs of $8.0 million in the
first half of fiscal 1997.

WORKING CAPITAL Working capital decreased by $12.8 million to $33.7
million during the six month period ended May 31, 1997. The decrease was
primarily due to the reduction in cash and cash equivalents that were used to
finance the Company's operating losses and due to a reduction in inventories.

BORROWING FACILITIES On May 21, 1997, the Company entered into a Loan and
Security Agreement (the "Agreement") with Congress Financial Corporation which
provides the Company with a new three-year revolving credit facility (the
"Revolving Facility") through May 2000, for loans and letters of credit. The
Revolving Facility replaces the Company's previous revolving credit facility
with BankAmerica Business Credit.

<PAGE>

The Company's liquidity is contingent primarily on attaining forecast
levels of sales, gross margins and operating expenses. The Company believes
that based on its current forecast, its present funding sources are sufficient
to meet its liquidity needs. However, the Company can make no assurances that
it will meet its current forecast. In the event that the Company's future
operating results fall below management's expectations, additional sources of
working capital funding may be necessary and difficult to obtain.

CONVERTIBLE SUBORDINATED DEBENTURES The $50 million Debentures are
convertible into shares of the Company's Common Stock at a conversion rate of
$12.30 per share, and are redeemable by the Company at any time, initially at
a specified premium to par, declining to par for redemptions on or after
November 30, 2000.

SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK The Series B
Cumulative Convertible Preferred Stock, stated value $100 per share, accrues
dividends at a rate of 71/2% per annum, and is convertible into shares of the
Company's Common Stock at a conversion price of $6.75 per share. The Company
elected not to pay cash dividends aggregating $4.4 million required on
the Series B Preferred Stock due February 28, 1997 ($2.2 million) and May 31,
1997 ($2.2 million). The aggregate unpaid dividends will bear additional
dividends accruing at a rate of 8 5/8% per annum, compounded quarterly, until
all such arrearages are paid.

FUTURE OUTLOOK
- --------------------------------------------------------------------------------

THIS DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF CERTAIN
EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH IN THIS
DISCUSSION. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 15.

Beginning with the Fall 1997 product line, the Company has adopted a new
strategy aimed at differentiating its products among its various tiers of
distribution channels. This strategy involves two major components:

(i) NEW COMPANY BRANDS These new brands are designed to appeal to
demographic groups with whom the Company is not currently achieving
significant market share penetration. Two new brands being introduced
for Fall 1997 are Mongo-TM-, a fashion-forward casual shoe designed to
appeal to trend-setting young adults; and Digit3-TM-, a performance
brand for the extreme sports enthusiast.

(ii) SUB-BRANDS AND CO-LABELING The Company is now introducing the sub-
brand L.A. Lights-Registered Trademark- by L.A. Gear as the umbrella
brand for all four of its children's lighted product lines. Within the
women's product line, the Company has added the co-label ABS+-TM- to
its women's athletic shoes containing new cushioning technology.

Successful product differentiation and distribution segmentation are vital
to the Company's attempts to realize revenue growth and margin improvement.
Accordingly, the Company will now offer its newest technologies, brands and
co-labels at higher tiered distribution channels while continuing to offer its
basic lines through all of its distribution channels.

Although the Company's strategy has been favorably received by many of the
Company's key retailers, it is too early to assess the impact of this strategy
on the Company's future operations as the initial shipments of the Fall 1997
products are currently taking place. Successful sell-through of these initial
shipments at the retail level and subsequent "at once" re-orders will be
critical to the Company's financial performance for the balance of the year.

The Company had a combined domestic and international order backlog of
$33.5 and $51.8 million at June 30, 1997 and 1996, respectively. The
domestic backlog declined by $14.0 million from $36.5 million at June 30,
1996 to $22.5 million at June 30, 1997 while the international backlog
declined by $4.3 million from $15.3 million at June 30, 1996 to $11.0 million
at June 30, 1997. Year-ago backlog data includes orders for the children's
Graf/x-TM- product line that was subsequently discontinued. In addition,
year-ago international backlog includes orders for direct subsidiary
operations in certain European countries which have since been converted to
independent distributorships as well as including orders for the Company's
Far East joint venture which was subsequently terminated. Orders for
children's lighted shoes as a percentage of the total backlog at June 30,
1997 and 1996 were 37.4% and 30.9%, respectively. The trends in backlog from
period to period may not be indicative of future actual shipment trends.

14
<PAGE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties,
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic
and business conditions; the size and growth of the overall athletic footwear
market; changes in consumer preferences and demographics; competition; success
of operating initiatives; development and operating costs; advertising and
promotional efforts; brand awareness; the existence or adherence to development
schedules; the existence of adverse publicity; new product development and
introduction; the loss of significant customers; availability, location and
terms of product distribution channels; changes in business strategy or
development plans; quality of management; availability, terms and deployment of
capital; business abilities and judgment of personnel; business disruptions; the
ability to reverse recent trends that have caused reductions in market share and
substantial losses; continued access to licensed intellectual property rights;
continued access to adequate sources of product supply; risks associated with
unaffiliated manufacturers and international operations; and other factors
referenced in this report. Given such uncertainties, shareholders are cautioned
not to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such forward-looking statements to
reflect future events or developments.

In addition, the Company has implemented several measures in fiscal 1996
and 1997 discussed elsewhere in this Form 10-Q in an effort to reorganize its
production and distribution structures and to reduce its overhead and other
costs. The Company's ability to capitalize on these measures will depend in
large part on its ability to predict and quickly exploit fashion trends in
the footwear market and thereby attain its revenue and margin goals. The
Company believes that its business strategy for fiscal 1997 will better
position it to address changes in the marketplace and to build on its past
successes in offering branded footwear in the market. However, if sales,
margins and operating expense savings in fiscal 1997 fall below management's
expectations, additional sources of working capital may be necessary and
difficult to obtain. There can be no assurance that the Company will be able
to successfully exploit this strategy or that the strategy will have the
desired effect.

15
<PAGE>

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

(a) The Company entered into agreements on May 24, 1997 with Aaron Design,
Inc. and Tseng-Lu Chein whereby: (i) the Company received an exclusive
license to use certain of Aaron Design's and Tseng-Lu Chein's patents
and patents pending in the Company's lighted footwear products; (ii)
the parties entered into a footwear electronic component supply
agreement to supply certain electronic components for the Company's
lighted footwear; and (iii) the parties agreed to settle and dismiss
that certain action entitled LA GEAR, INC. V. AARON DESIGN, INC.,
TSENG-LU CHEIN, A.K.A. IVAN CHEIN, CV 96-6351 LGB (Ex), which
dismissal with prejudice was entered in the U.S. District Court for
the Central District of California on June 3, 1997.

(b) L.A. GEAR, INC. V. NICHOLAS RODGERS, ET. AL. On November 6, 1996
L.A. Gear filed a complaint and motion in the United States District
Court for the Central District of California for an injunction
against Nicholas Rodgers and two companies owned and/or controlled
by him entitled L.A. GEAR, INC. V. ORLAFORD LIMITED, ET. AL., Civil
Case No. 96-7767 LGB (Cwx.). Rodgers is the holder of a patent that
relates to the lighted shoe technology previously employed in styles
marketed under the name "L.A. Lights" that Rodgers had licensed to
L.A. Gear's sourcing agent for its lighted shoes, BBC International,
Ltd. ("BBC"), in return for royalty payments. BBC had in turn
granted a sublicense to the Company to allow the Company to sell
such lighted shoes in return for a commission covering, among other
things, the royalty BBC was required to pay Rodgers. Early in 1996,
and unbeknown to L.A. Gear, Rodgers filed suit against BBC in
Wisconsin for patent infringement claiming that in addition to the
Company's shoes, BBC was sourcing the manufacture of shoes for Kmart
Corporation and others for which no royalty was being paid. Rodgers
sought to terminate BBC's license on the patent. Once L.A. Gear
learned of this suit, it began using a technology different from
the technology described in Rodgers' patent to manufacture lighted
shoes. In imposing sanctions against BBC, however, the Wisconsin
court specifically ruled that L.A. Gear was not a party to the
Wisconsin action and hence no sanctions could be imposed against L.A.
Gear. Meanwhile, BBC, after having contempt sanctions imposed on it in
Wisconsin, appealed the Wisconsin court's ruling. Subsequently, BBC
and Rodgers reached settlement.

L.A. Gear, in its suit, seeks a determination that the technologies
currently used in its lighted shoes are different than the technology
that was the subject of the action brought against BBC in Wisconsin,
and that such shoes do not infringe any patent held by Rodgers. L.A.
Gear's motion for an injunction, which seeks to prevent Rodgers from
enforcing his patent against L.A. Gear, currently is due to be heard
by the court in August 1997. Pending a hearing, L.A. Gear and Rodgers
have agreed upon a stipulated order which prevents Rodgers from
interfering with the sale of L.A. Gear shoes.

Rodgers filed an action in Wisconsin against L.A. Gear on January 17,
1997 for patent infringement. Rodgers has dismissed his Wisconsin
action and will refile it as a counterclaim to L.A. Gear's California
action. L.A. Gear believes any such claims against it are without
merit and intends to vigorously defend any such claims.

(c) FINEXPANCE S.P.A V. L.A. GEAR, INC., TRIBUNAL OF CHIAVARI, ITALY. On
February 9, 1993, Finexpance S.p.A ("Finexpance"), the exclusive
distributor of the Company's products in Italy from January 22, 1988
until February 1, 1993, filed a complaint against L.A. Gear alleging,
among other things, unfair competition and loss of customer base and
goodwill. Plaintiff is seeking damages in excess of $22 million.
L.A. Gear believes Finexpance's claims are without merit and intends
to vigorously defend the action. A further hearing was held on the
matter on April 23, 1997. No additional action is required in this
matter until late 1997 or early 1998.

ITEM 2 - CHANGES IN SECURITIES

Not applicable

16
<PAGE>

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

The Series B Preferred Stock, stated value $100 per share, accrues
dividends at a rate of 7 1/2% per annum, and is convertible into shares
of the Company's Common Stock at a conversion price of $6.75 per
share.

The Company elected not to pay cash dividends aggregating $4.4
million required on the Series B Preferred Stock due February 28,
1997 ($2.2 million) and May 31, 1997 ($2.2 million). The aggregate
unpaid dividends will bear additional dividends accruing at a rate
of 8 5/8% per annum, compounded quarterly, until all such arrearages
are paid.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The Annual Meeting of Shareholders of the Company was held on April
15, 1997.

(b) Not applicable.

(c)(i) PROPOSAL ONE: Election of Directors
Total Vote
For Withheld
--- --------
William L. Benford 36,442,745 643,762
Walter C. Bladstrom 36,433,013 653,494
Allan E. Dalshaug 36,432,752 653,755
Willie D. Davis 36,432,752 653,755
Stanley P. Gold 36,444,830 641,677
Stephen A. Koffler 36,433,137 653,370
Ann E. Meyers 36,434,972 651,535
Clifford A. Miller 36,448,352 638,155
Robert G. Moskowitz 36,435,037 651,470
Vappalak A. Ravindran 36,435,037 651,470

(c)(ii) PROPOSAL TWO: Ratification of the appointment of Price Waterhouse
LLP as the Company's independent accountants for the fiscal year
ending November 30, 1997.

For: 36,642,433
Against: 266,866
Abstain: 177,208

(d) Not applicable.

ITEM 5 - OTHER INFORMATION

(a) As reported in the Company's Form 10-K, in November 1996, the Company
announced a plan for the consolidation and restructuring of its
European operations. As part of that plan, the Company in fiscal 1997
sold the stock of its subsidiary in The Netherlands, and placed its
Italian and German subsidiaries in liquidation and dormancy,
respectively. In addition, the Company entered into independent
distributorship agreements for the servicing of its customers in The
Netherlands, Italy, and Germany while continuing to service its
customers in Belgium, France and the United Kingdom through its direct
subsidiaries.

(b) On July 1, 1997, L.A. Gear announced certain changes in the senior
management of the Company.

David F. Gatto, has returned to the Company as Executive Vice
President and Chief Administrative Officer overseeing the Company's
legal, finance, human resources, distribution and information
technology functions.

D. Garn Anderson will be joining the Company as Vice President of
Finance.

William R. Sherman was promoted to Vice President, General Counsel and
Secretary.

Victor J. Trippetti, the Company's Senior Vice President and Chief
Financial Officer, has elected early retirement.

17
<PAGE>

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

10.1 Loan and Security Agreement, dated May 21, 1997, by and
between L.A. Gear California, Inc. and Congress Financial
Corporation (Western) ("Congress").

10.2 Continuing Guaranty and Waiver, dated as of May 21, 1997, by
L.A. Gear, Inc. in favor of Congress.

10.3 General Security Agreement, dated May 21, 1997, by L.A.
Gear, Inc. in favor of Congress.

10.4 Patent and Trademark Security Agreement, dated as of May 21,
1997, between L.A. Gear California, Inc. and Congress.

10.5 Patent and Trademark Security Agreement, dated as of May 21,
1997, between L.A. Gear, Inc. and Congress.

10.6 Assignment of Proceeds of Letter of Credit, dated May 21,
1997, between L.A. Gear California, Inc. and Congress.

27.1 Financial Data Schedule

(b) Reports on Form 8-K:

Not applicable.

18
<PAGE>

SIGNATURE

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

Dated: July 15, 1997 L.A. GEAR, INC.
--------------------------

By: /s/ Bruce W. MacGregor
-----------------------------

Bruce W. MacGregor
President and
Chief Operating Officer

By: /s/ Victor J. Trippetti
-----------------------------

Victor J. Trippetti
Senior Vice President and
Chief Financial Officer

19
<PAGE>

EXHIBIT INDEX

Exhibit No. Document Page No.
- ----------- -------- --------
<S> <C> <C>
10.1 Loan and Security Agreement, dated May 21, 1997, by and between
L.A. Gear California, Inc. and Congress Financial Corporation
(Western) ("Congress"). 21

10.2 Continuing Guaranty and Waiver, dated as of May 21, 1997, by
L.A. Gear, Inc. in favor of Congress. 70

10.3 General Security Agreement, dated May 21, 1997, by L.A. Gear,
Inc. in favor of Congress. 76

10.4 Patent and Trademark Security Agreement, dated as of May 21,
1997, between L.A. Gear California, Inc. and Congress. 91

10.5 Patent and Trademark Security Agreement, dated as of May 21,
1997, between L.A. Gear, Inc. and Congress. 99

10.6 Assignment of Proceeds of Letter of Credit, dated May 21,
1997, between L.A. Gear California, Inc. and Congress. 108

27.1 Financial Data Schedule 110
</TABLE>

<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

LOAN AND SECURITY AGREEMENT

between

CONGRESS FINANCIAL CORPORATION (WESTERN)

As Lender
And

L.A. GEAR CALIFORNIA, INC.

As Borrower

DATED: MAY 21, 1997

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<PAGE>

TABLE OF CONTENTS
-----------------
PAGE(S)
-------

SECTION 1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 1

SECTION 2. CREDIT FACILITIES. . . . . . . . . . . . . . . . . . . . . . .10
2.1 Revolving Loans. . . . . . . . . . . . . . . . . . . . . . . .10
2.2 Letter of Credit Accommodations. . . . . . . . . . . . . . . .11

SECTION 3. INTEREST AND FEES. . . . . . . . . . . . . . . . . . . . . . .14
3.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . .14
3.2 Closing Fee. . . . . . . . . . . . . . . . . . . . . . . . . .15
3.3 Servicing Fee. . . . . . . . . . . . . . . . . . . . . . . . .15
3.4 Letter of Credit Fees. . . . . . . . . . . . . . . . . . . . .15
3.5 [Intentionally omitted]. . . . . . . . . . . . . . . . . . . .15
3.6 Compensation Adjustment. . . . . . . . . . . . . . . . . . . .16
3.7 Eurodollar Rate Loans-Changes in Laws and Increased
Costs ofLoans. . . . . . . . . . . . . . . . . . . . . . . . .17

SECTION 4. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . .17
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations . . . . . . . . . . . . . . . . . . . . . . . .17
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations . . . . . . . . . . . . . . . . . . . . . . . .19

SECTION 5. GRANT OF SECURITY INTEREST . . . . . . . . . . . . . . . . . .20

SECTION 6. COLLECTION AND ADMINISTRATION. . . . . . . . . . . . . . . . .20
6.1 Borrower's Loan Account. . . . . . . . . . . . . . . . . . . .20
6.1 Borrower's Loan Account. . . . . . . . . . . . . . . . . . . .21
6.2 Statements . . . . . . . . . . . . . . . . . . . . . . . . . .21
6.3 Collection of Accounts . . . . . . . . . . . . . . . . . . . .21
6.4 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . .22
6.5 Authorization to Make Loans. . . . . . . . . . . . . . . . . .22
6.6 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . .23

SECTION 7. COLLATERAL REPORTING AND COVENANTS . . . . . . . . . . . . . .23
7.1 Collateral Reporting . . . . . . . . . . . . . . . . . . . . .23
7.2 Accounts Covenants . . . . . . . . . . . . . . . . . . . . . .23
7.3 Inventory Covenants. . . . . . . . . . . . . . . . . . . . . .25
7.4 Equipment Covenants. . . . . . . . . . . . . . . . . . . . . .25
7.5 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . .26
7.6 Right to Cure. . . . . . . . . . . . . . . . . . . . . . . . .26
7.7 Access to Premises . . . . . . . . . . . . . . . . . . . . . .26

SECTION 8. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . .27
8.1 Corporate Existence, Power and Authority; Subsidiaries . . . .27
8.2 Financial Statements; No Material Adverse Change . . . . . . .27
8.3 Chief Executive Office; Collateral Locations . . . . . . . . .27
8.4 Priority of Liens; Title to Properties . . . . . . . . . . . .28
8.5 Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . .28
8.6 Litigation.. . . . . . . . . . . . . . . . . . . . . . . . . .28
8.7 Compliance with Other Agreements and Applicable Laws . . . . .28
8.8 Environmental Compliance . . . . . . . . . . . . . . . . . . .29
8.9 Employee Benefits. . . . . . . . . . . . . . . . . . . . . . .29
8.10 Accuracy and Completeness of Information . . . . . . . . . . .30

<PAGE>

TABLE OF CONTENTS
-----------------
(continued)

PAGE(S)
-------

8.11 Survival of Warranties; Cumulative . . . . . . . . . . . . . .30

SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS . . . . . . . . . . . . . .30
9.1 Maintenance of Existence . . . . . . . . . . . . . . . . . . .30
9.2 New Collateral Locations . . . . . . . . . . . . . . . . . . .31
9.3 Compliance with Laws, Regulations. . . . . . . . . . . . . . .31
9.4 Payment of Taxes and Claims. . . . . . . . . . . . . . . . . .32
9.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . .32
9.6 Financial Statements and Other Information . . . . . . . . . .33
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. . . .34
9.8 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . .34
9.9 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . .35
9.10 Loans, Investments, Guarantees, Etc. . . . . . . . . . . . . .36
9.11 Dividends and Redemptions. . . . . . . . . . . . . . . . . . .36
9.12 Transactions with Affiliates . . . . . . . . . . . . . . . . .36
9.13 Import Documentation.. . . . . . . . . . . . . . . . . . . . .37
9.14 [Intentionally Omitted]. . . . . . . . . . . . . . . . . . . .37
9.15 Compliance with ERISA. . . . . . . . . . . . . . . . . . . . .37
9.16 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . .37
9.17 Further Assurances . . . . . . . . . . . . . . . . . . . . . .38

SECTION 10. EVENTS OF DEFAULT AND REMEDIES . . . . . . . . . . . . . . . .38
10.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . .38
10.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . .40

SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS, AND CONSENTS;
GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . .41
11.1 Governing Law; Choice of Forum; Service of Process;
Jury Trial Waiver. . . . . . . . . . . . . . . . . . . . . . .41
11.2 Waiver of Notices. . . . . . . . . . . . . . . . . . . . . . .42
11.3 Amendments and Waivers . . . . . . . . . . . . . . . . . . . .42
11.4 Waiver of Counterclaims. . . . . . . . . . . . . . . . . . . .43
11.5 Indemnification. . . . . . . . . . . . . . . . . . . . . . . .43

SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS . . . . . . . . . . . . . . .43
12.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
12.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . .44
12.3 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . .44
12.4 Successors . . . . . . . . . . . . . . . . . . . . . . . . . .45
12.5 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . .45

<PAGE>

INDEX TO
--------
EXHIBITS AND SCHEDULES
----------------------

Exhibit A Information Certificate
Exhibit B Projections
Exhibit C Borrower Investment Policy
Schedule 8.4 Existing Liens

iii

<PAGE>

LOAN AND SECURITY AGREEMENT
---------------------------

This Loan and Security Agreement dated May 21, 1997 (this "Agreement) is
entered into by and between Congress Financial Corporation (Western), a
California corporation ("Lender") and L.A. Gear California, Inc., a California
corporation ("Borrower").

W I T N E S S E T H:
--------------------

WHEREAS, Borrower has requested that Lender enter into certain financing
arrangements with Borrower pursuant to which Lender may make loans and provide
other financial accommodations to Borrower; and

WHEREAS, Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:

SECTION 1. DEFINITIONS

All terms used herein which are defined in Article 1 or Article 9 of the
California Uniform Commercial Code shall have the respective meanings given
therein unless otherwise defined in this Agreement. All references to the
plural herein shall also mean the singular and to the singular shall also mean
the plural. All references to Borrower and Lender pursuant to the definitions
set forth in the recitals hereto, or to any other person herein, shall include
their respective successors and assigns. The words "hereof", "herein",
"hereunder", "this Agreement" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not any particular
provision of this Agreement and as this Agreement now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced. An
Event of Default shall exist or continue or be continuing until such Event of
Default is cured or waived in accordance with Section 11.3. Any accounting term
used herein unless otherwise defined in this Agreement shall have the meaning
customarily given to such term in accordance with GAAP. For purposes of this
Agreement, the following terms shall have the respective meanings given to them
below:

1.1 "ACCOUNTS" shall mean all present and future rights of Borrower
to payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.

1.2 "ADJUSTED EURODOLLAR RATE" shall mean, with respect to each
Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded
upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent)
determined by dividing the Eurodollar Rate for such Interest Period by a
percentage equal to: (i) one (1) minus (ii) the Reserve Percentage. For
purposes hereof, "Reserve Percentage" shall mean the reserve percentage,
expressed as a decimal, prescribed by any United States or foreign banking
authority for determining the reserve requirement which is or would be
applicable to deposits of United States dollars in a non-United States or an
international banking office of Reference Bank used to fund a Eurodollar Rate
Loan

-1-

<PAGE>

or any Eurodollar Rate Loan made with the proceeds of such deposit, whether or
not the Reference Bank actually holds or has made any such deposits or loans.
The Adjusted Eurodollar Rate shall be adjusted on and as of the effective day of
any change in the Reserve Percentage.

1.3 [Intentionally Omitted]

1.4 "AVAILABILITY RESERVES" shall mean, as of any date of
determination, such amounts as Lender may from time to time establish and revise
in its good faith business judgment reducing the amount of Revolving Loans and
Letter of Credit Accommodations which would otherwise be available to Borrower
under the lending formula(s) provided for herein: (a) to reflect events,
conditions, contingencies or risks which, as determined by Lender in its good
faith business judgment, do or may affect either (i) the Collateral or any other
property which is security for the Obligations or its value, (ii) the assets,
business or prospects of Borrower or any Obligor or (iii) the security interests
and other rights of Lender in the Collateral (including the enforceability,
perfection and priority thereof) or (b) to reflect Lender's good faith belief
that any collateral report or financial information furnished by or on behalf of
Borrower or any Obligor to Lender is or may have been incomplete, inaccurate or
misleading in any material respect or (c) to reflect any state of facts which
Lender determines in good faith constitutes an Event of Default or may, with
notice or passage of time or both, constitute an Event of Default. Without
limiting the generality of the foregoing, Lender (i) shall establish on the date
hereof and maintain throughout the term of this Agreement and throughout any
renewal term an Availability Reserve for an amount equal to three (3) months of
Borrower's gross rent and other obligations as lessee for each leased premises
of Borrower which is located in a state where a landlord may be entitled to a
priority lien on Collateral to secure unpaid rent and with respect to each such
property the landlord has not executed a form of waiver and consent acceptable
to Lender, (ii) may establish an additional Availability Reserve on the date
hereof, and from time to time hereafter, and maintain such reserve throughout
the term of this Agreement and throughout any renewal term in an amount
determined by Lender in its good faith business judgment to be sufficient to
cover the anticipated moving expenses and other costs associated with the
transfer of Inventory from each of Borrower's locations to another location
acceptable to Lender, (iii) may establish and maintain an additional
Availability Reserve from time to time in its good faith business judgment to
compensate for any increase in the percentage of Inventory represented by slow
moving Inventory (which shall include, but not be limited to, Inventory held for
longer than six (6) months), and (iv) may establish an additional Availability
Reserve on the date hereof, and from time to time hereafter, in its good faith
business judgment, to compensate for dilution in the Eligible Accounts
(including without limitation dilution and potential dilution as a result of
returns, discounts, allowances, co-op advertising and other items determined by
Lender in its good faith business judgment).

1.5 "BLOCKED ACCOUNT" shall have the meaning set forth in Section 6.3
hereof.

1.6 "BUSINESS DAY" shall mean any day other than a Saturday, Sunday,
or other day on which commercial banks are authorized or required to close under
the laws of the State of New York or the Commonwealth of Pennsylvania, and a day
on which CoreStates Bank, N.A., or such other bank as Lender may from time to
time designate, and Lender are open for the transaction of business; provided
that, for all Eurodollar Rate Loans, any such day as described above in this
definition of Business Day shall exclude any day on which banks are closed for
dealings in dollar deposits in the London interbank market or other applicable
Eurodollar Rate market.

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1.7 "CODE" shall mean the Internal Revenue Code of 1986, as the same
now exists or may from time to time hereafter be amended, modified, recodified
or supplemented, together with all rules, regulations and interpretations
thereunder or related thereto.

1.8 "COLLATERAL" shall have the meaning set forth in Section 5
hereof.

1.8A "DEBENTURE" shall mean the Parent's outstanding 7 3/4%
Convertible Subordinated Debentures.

1.9 "ELIGIBLE ACCOUNTS" shall mean Accounts created by Borrower which
are and continue to be acceptable to Lender based on the criteria set forth
below. In general, Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and BONA FIDE sale and
delivery of goods by Borrower or rendition of services by Borrower in the
ordinary course of its business which transactions are completed in accordance
with the terms and provisions contained in any documents related thereto;

(b) such Accounts are not unpaid more than 120 days after the
date of the original invoice for them and are not unpaid more than 60 days after
their due date;

(d) such Accounts do not arise from sales on consignment,
guaranteed sale, sale and return, sale on approval, or other terms under which
payment by the account debtor may be conditional or contingent;

(e) the chief executive office of the account debtor with
respect to such Accounts is located in the United States of America or Canada,
or, at Lender's option, if either: (i) the account debtor has delivered to
Borrower an irrevocable letter of credit issued or confirmed by a bank in the
United States satisfactory to Lender, sufficient to cover such Account, payable
in the United States of America and in U.S. Dollars, in form and substance
satisfactory to Lender and, if required by Lender, the original of such letter
of credit has been delivered to Lender or Lender's agent and the issuer thereof
notified of the assignment of the proceeds of such letter of credit to Lender,
or (ii) such Account is subject to credit insurance payable to Lender issued by
an insurer and on terms and in an amount acceptable to Lender, or (iii) such
Account is otherwise acceptable in all respects to Lender including, but not
limited to, the creditworthiness of the account debtor and the political risk
associated therewith, and the ability of the Lender to collect the foreign
Account, subject to such lending formulas with respect to each foreign Account
as Lender may determine, and each such foreign Account is payable to Borrower at
a location in the United States of America and in U.S. Dollars;

(f) such Accounts do not consist of progress billings, bill and
hold invoices or retainage invoices, except as to bill and hold invoices, if
Lender shall have received an agreement in writing from the account debtor, in
form and substance satisfactory to Lender, confirming the unconditional
obligation of the account debtor to take the goods related thereto and pay such
invoice;

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(g) the account debtor with respect to such Accounts has not
asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such
Accounts;

(h) there are no facts, events or occurrences which would impair
the validity, enforceability or collectability of such Accounts or reduce the
amount payable or delay payment thereunder;

(i) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;

(j) neither the account debtor nor any officer or employee of
the account debtor with respect to such Accounts is an officer, employee or
agent of or affiliated with Borrower directly or indirectly by virtue of family
membership, ownership, control, management or otherwise;

(k) the account debtors with respect to such Accounts are not
any foreign government, the United States of America, any State, political
subdivision, department, agency or instrumentality thereof (other than the
United States Armed Forces Exchange Services), unless, if the account debtor is
the United States of America, any State, political subdivision, department,
agency or instrumentality thereof, upon Lender's request, the Federal Assignment
of Claims Act of 1940, as amended or any similar State or local law, if
applicable, has been complied with in a manner satisfactory to Lender;

(l) there are no proceedings or actions which are threatened or
pending against the account debtors with respect to such Accounts which might
result in any material adverse change in any such account debtor's financial
condition;

(m) such Accounts of a single account debtor or its affiliates
do not constitute more than twenty percent (20%) (or, in the case of Wal-mart,
30%) of all otherwise Eligible Accounts (but the portion of the Accounts not in
excess of such percentage may be deemed Eligible Accounts);

(n) such Accounts are not owed by an account debtor who has
Accounts unpaid more than 120 days after the date of the original invoice or
more than 60 days after their due date, which constitute more than fifty percent
(50%) of the total Accounts of such account debtor;

(o) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit with respect to such
account debtors as determined by Lender from time to time (but the portion of
the Accounts not in excess of such credit limit may still be deemed Eligible
Accounts); and

(p) such Accounts are owed by account debtors deemed
creditworthy at all times by Lender, as determined by Lender.

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General criteria for Eligible Accounts may be established and revised from time
to time by Lender in its good faith business judgment. Any Accounts which are
not Eligible Accounts shall nevertheless be part of the Collateral.

1.10 "ELIGIBLE INVENTORY" shall mean Inventory consisting of finished
goods held for resale in the ordinary course of the business of Borrower which
are acceptable to Lender based on the criteria set forth below. In general,
Eligible Inventory shall not include (a) work-in-process; (b) raw materials or
components which are not part of finished goods; (c) spare parts for equipment;
(d) packaging and shipping materials; (e) supplies used or consumed in
Borrower's business; (f) Inventory at premises other than those owned and
controlled by Borrower, except if Lender shall have received an agreement in
writing from the person in possession of such Inventory and/or the owner or
operator of such premises in form and substance satisfactory to Lender
acknowledging Lender's first priority security interest in the Inventory,
waiving security interests and claims by such person against the Inventory and
permitting Lender access to, and the right to remain on, the premises so as to
exercise Lender's rights and remedies and otherwise deal with the Collateral;
(g) Inventory in-transit; (h) Inventory subject to a security interest or lien
in favor of any person other than Lender except those permitted in this
Agreement; (i) bill and hold goods; (j) obsolete or slow moving Inventory; (k)
Inventory which is not subject to the first priority, valid and perfected
security interest of Lender; (l) returned, damaged and/or defective Inventory;
(m) Inventory purchased or sold on consignment; (n) Inventory held for longer
than six (6) months; or (o) Inventory not located at Borrower's Ontario,
California Distribution Center. General criteria for Eligible Inventory may be
established and revised from time to time by Lender in its good faith business
judgment. Any Inventory which is not Eligible Inventory shall nevertheless be
part of the Collateral.

1.11 "ENVIRONMENTAL LAWS" shall mean all federal, state, district,
local and foreign laws, rules, regulations, ordinances, and consent decrees
relating to health, safety, hazardous substances, pollution and environmental
matters, as now or at any time hereafter in effect, applicable to Borrower's
business and facilities (whether or not owned by it), including laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contamination, chemicals, or hazardous, toxic or dangerous substances, materials
or wastes into the environment (including, without limitation, ambient air,
surface water, ground water, land surface or subsurface strata) or otherwise
relating to the generation, manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants,
chemicals, or hazardous, toxic or dangerous substances, materials or wastes.

1.12 "EQUIPMENT" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.

1.13 "ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, as the same now exists or may hereafter from time to time
be amended, modified, recodified or supplemented, together with all rules,
regulations and interpretations thereunder or related thereto.

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1.14 "ERISA AFFILIATE" shall mean any person required to be aggregated
with Borrower or any of its affiliates under Sections 414(b), 414(c), 414(m) or
414(o) of the Code.

1.15 "EURODOLLAR RATE LOANS" shall mean any Loans or portion thereof
on which interest is payable based on the Adjusted Eurodollar Rate in accordance
with the terms hereof.

1.16 "EURODOLLAR RATE" shall mean with respect to the Interest Period
for a Eurodollar Rate Loan, the interest rate per annum equal to the arithmetic
average of the rates of interest per annum (rounded upwards, if necessary, to
the next one-sixteenth (1/16) of one (1%) percent) at which Reference Bank is
offered deposits of United States dollars in the London interbank market (or
other Eurodollar Rate market selected by Borrower and approved by Lender) on or
about 9:00 a.m. (New York time) two (2) Business Days prior to the commencement
of such Interest Period in amounts substantially equal to the principal amount
of the Eurodollar Rate Loans requested by and available to Borrower in
accordance with this Agreement, with a maturity of comparable duration to the
Interest Period selected by Borrower.

1.17 "EVENT OF DEFAULT" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.

1.18 "EXCESS AVAILABILITY" shall mean the amount, as determined by
Lender, calculated at any time, equal to: (a) Borrower's unrestricted cash and
LC Cash Collateral (as defined in Section 2.2(c)(3) below), PLUS (b) the lesser
of: (i) the amount of the Revolving Loans available to Borrower as of such time
based on the applicable lender advance rates multiplied by the Net Amount of
Eligible Accounts and the Value of Eligible Inventory, as determined by Lender,
and subject to the sublimits and Availability Reserves from time to time
established by Lender hereunder, and (ii) the Maximum Credit, MINUS (c) the sum
of: (i) the amount of all then outstanding and unpaid Obligations, (ii) the
aggregate amount of all then outstanding and unpaid trade payables of Borrower
which are more than thirty (30) days past due as of such time (other than
outstanding trade payables as to which Borrower contests liability in good faith
or which Borrower is reviewing to confirm the amounts payable thereunder in the
ordinary course of its business), (iii) the aggregate amount of Borrower's book
overdrafts, and (iv) the aggregate amount of Borrower's lease and note payments
which are due and payable.

1.19 "FINANCING AGREEMENTS" shall mean, collectively, this Agreement
and all notes, guarantees, security agreements and other agreements, documents
and instruments now or at any time hereafter executed and/or delivered by
Borrower or any Obligor in connection with this Agreement, as the same now exist
or may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced.

1.20 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Boards which are applicable to the
circumstances as of the date of determination consistently applied.

1.21 "HAZARDOUS MATERIALS" shall mean any hazardous, toxic or
dangerous substances, materials and wastes, including, without limitation,
hydrocarbons (including naturally occurring or man-made petroleum and
hydrocarbons), flammable explosives, asbestos, urea formaldehyde

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insulation, radioactive materials, biological substances, polychlorinated
biphenyls, pesticides, herbicides and any other kind and/or type of pollutants
or contaminants (including, without limitation, materials which include
hazardous constituents), sewage, sludge, industrial slag, solvents and/or any
other similar substances, materials, or wastes and including any other
substances, materials or wastes that are or become regulated under any
Environmental Law (including, without limitation any that are or become
classified as hazardous or toxic under any Environmental Law).

1.22 "INFORMATION CERTIFICATE" shall mean the Information Certificate
of Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.

1.23 "INTEREST PERIOD" shall mean for any Eurodollar Rate Loan, a
period of approximately one (1), two (2), or three (3) months duration as
Borrower may elect, the exact duration to be determined in accordance with the
customary practice in the applicable Eurodollar Rate market; PROVIDED, THAT,
Borrower may not elect an Interest Period which will end after the last day of
the then-current term of this Agreement.

1.24 "INTEREST RATE" shall mean, as to Prime Rate Loans:

(a) One-quarter of one percent (0.25%) per annum in excess
of the Prime Rate (the "Reduced Prime Rate"), on the first $5,000,000 principal
amount of outstanding Prime Rate Loans; and

(b) One-half of one percent (0.50%) per annum in excess of
the Prime Rate (the "Regular Prime Rate"), on all outstanding Prime Rate Loans
in excess of $5,000,000.

"INTEREST RATE" shall mean, as to Eurodollar Rate Loans:

(a) on the first $5,000,000 principal amount of outstanding
Eurodollar Rate Loans, two and three-quarters percent (2.75%) per annum in
excess of the Adjusted Eurodollar Rate (based on the Eurodollar Rate applicable
for the Interest Period selected by Borrower as in effect three (3) Business
Days after the date of receipt by Lender of the request of Borrower for such
Eurodollar Rate Loans in accordance with the terms hereof, whether such rate is
higher or lower than any rate previously quoted to Borrower) (the "Reduced
Eurodollar Rate"); and

(b) On all outstanding Eurodollar Rate Loans in excess of
$5,000,000, three percent (3.0%) per annum in excess of the Adjusted Eurodollar
Rate (based on the Eurodollar Rate applicable for the Interest Period selected
by Borrower as in effect three (3) Business Days after the date of receipt by
Lender of the request of Borrower for such Eurodollar Rate Loans in accordance
with the terms hereof, whether such rate is higher or lower than any rate
previously quoted to Borrower) (the "Regular Eurodollar Rate").

PROVIDED, THAT, the Interest Rate shall mean the rate of two and one-half
percent (2.50%) per annum in excess of the Prime Rate as to Prime Rate Loans and
the rate of five percent (5%) per annum in excess of the Adjusted Eurodollar
Rate as to Eurodollar Rate Loans, at Lender's option,

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without notice, (a) for the period on and after the date of termination or
non-renewal hereof, or the date of the occurrence of any Event of Default or
event which with notice or passage of time or both would constitute an Event of
Default, and for so long as such Event of Default or other event is continuing
as determined by Lender and until such time as all Obligations are indefeasibly
paid in full (notwithstanding entry of any judgment against Borrower) and (b) on
the Revolving Loans at any time outstanding in excess of the amounts available
to Borrower under Section 2 (whether or not such excess(es), arise or are made
with or without Lender's knowledge or consent and whether made before or after
an Event of Default).

AND PROVIDED FURTHER THAT, only the first $5,000,000 of total combined
Obligations shall be entitled to a Reduced Rate, so that, if, for example,
$5,000,000 of outstanding Obligations was bearing interest at the Eurodollar
Reduced Rate, then all other outstanding Obligations bearing interest at a rate
based on the Prime Rate would bear interest at the Regular Prime Rate, and vice
versa.

1.25 "INVENTORY" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.

1.26 "LETTER OF CREDIT ACCOMMODATIONS" shall mean the letters of
credit, merchandise purchase or other guaranties, and indemnity agreements which
are from time to time either (a) issued, opened or provided by Lender for the
account of Borrower or any Obligor or (b) with respect to which Lender has
agreed to indemnify the issuer or guaranteed to the issuer the performance by
Borrower of its obligations to such issuer.

1.27 "LOANS" shall mean the Revolving Loans.

1.28 "MAXIMUM CREDIT" shall mean the amount of $40,000,000, except
that, at any time after six months after the date hereof, Borrower may, at its
option, increase the Maximum Credit in increments of $5,000,000 each, up to a
total Maximum Credit of $50,000,000, by giving Lender written notice thereof at
least 60 days prior to the effective date of the increase; provided that any
such increase in the Maximum Credit shall be subject to the following additional
conditions, all of which shall be satisfied 60 days prior to the date the
increase in the Maximum Credit is to go into effect and at the date the increase
in the Maximum Credit is to go into effect: (a) Borrower shall have paid all
Closing Fees when due, (b) no Event of Default and no event which, with notice
or passage of time or both, would constitute an Event of Default shall have
occurred, (c) Borrower's net income, for the Calculation Periods (as defined
below) shall not have been less than that set forth in the Projections for such
period by more than 20%, and (d) there has not, in Lender's good faith business
judgment, been a deterioration or decline in the value of the Collateral. For
purposes hereof, the "Calculation Periods" shall mean both of the following
periods: (i) the period from June 1, 1997 to the end of the month which, at
the date the notice to increase the Maximum Credit was received, is the most
recent month for which financial statements of the Borrower are available, and
(ii) the period from June 1, 1997 to the end of the month which, at the date the
increase in the Maximum Credit is to go into effect, is the most recent month
for which financial statements of the Borrower are available. For purposes of
the foregoing, Borrower's net income shall include extraordinary gains and
extraordinary losses.

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1.29 "NET AMOUNT OF ELIGIBLE ACCOUNTS" shall mean the gross amount of
Eligible Accounts less (a) sales, excise or similar taxes included in the amount
thereof and (b) returns, discounts, claims, credits and allowances of any nature
at any time issued, owing, granted, outstanding, available or claimed with
respect thereto.

1.30 "OBLIGATIONS" shall mean any and all Revolving Loans, Letter of
Credit Accommodations and all other obligations, liabilities and indebtedness of
every kind, nature and description owing by Borrower to Lender and/or its
affiliates, including principal, interest, charges, fees, costs and expenses,
however evidenced, whether as principal, surety, endorser, guarantor or
otherwise, whether arising under this Agreement or otherwise, whether now
existing or hereafter arising, whether arising before, during or after the
initial or any renewal term of this Agreement or after the commencement of any
case with respect to Borrower under the United States Bankruptcy Code or any
similar statute (including, without limitation, the payment of interest and
other amounts which would accrue and become due but for the commencement of such
case), whether direct or indirect, absolute or contingent, joint or several, due
or not due, primary or secondary, liquidated or unliquidated, secured or
unsecured, and however acquired by Lender.

1.31 "OBLIGOR" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than Borrower.

1.32 "PARENT" shall mean L.A. Gear, Inc.

1.33 "PARTICIPANT" shall mean any person which at any time
participates with Lender in respect of the Loans, the Letter of Credit
Accommodations or other Obligations or any portion thereof.

1.34 "PAYMENT ACCOUNT" shall have the meaning set forth in Section 6.3
hereof.

1.35 "PERSON" or "PERSON" shall mean any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code of
1986, as amended), business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.

1.36 "PRIME RATE" shall mean the rate from time to time publicly
announced by CoreStates Bank, N.A., or its successors, at its office in
Philadelphia, Pennsylvania, as its prime rate, whether or not such announced
rate is the best rate available at such bank.

1.37 "PRIME RATE LOANS" shall mean any Loans or portion thereof on
which interest is payable based on the Prime Rate in accordance with the terms
thereof.

1.38 "PROJECTIONS" shall mean the Projections dated February 20, 1997
provided by Borrower to Lender (a copy of which is attached hereto as Exhibit B)
and Projections subsequently provided by the Borrower to the Lender pursuant to
Section 9.6(d) below, which are acceptable to Lender.

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1.39 "RECORDS" shall mean all of Borrower's present and future books
of account of every kind or nature, purchase and sale agreements, invoices,
ledger cards, bills of lading and other shipping evidence, statements,
correspondence, memoranda, credit files and other data relating to the
Collateral or any account debtor, together with the tapes, disks, diskettes and
other data and software storage media and devices, file cabinets or containers
in or on which the foregoing are stored (including any rights of Borrower with
respect to the foregoing maintained with or by any other person).

1.40 "REFERENCE BANK" shall mean CoreStates Bank, N.A., or such other
bank as Lender may from time to time designate.

1.41 "REVOLVING LOANS" shall mean the loans now or hereafter made by
Lender to or for the benefit of Borrower on a revolving basis (involving
advances, repayments and readvances) as set forth in Section 2.1 hereof.

1.42 "VALUE" shall mean, with respect to Inventory, the lower of (a)
cost computed on a first-in-first-out basis in accordance with GAAP (as
determined by Borrower in good faith and approved by Lender in good faith) or
(b) market value (as determined by Lender in good faith).

SECTION 2. CREDIT FACILITIES

2.1 REVOLVING LOANS

(a) Subject to, and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans to Borrower from time to time in
amounts requested by Borrower up to an amount equal to the lesser of $25,000,000
(the "Maximum Revolving Loan Amount"), or the following:

(i) Eighty-five percent (85%) of the Net Amount of Eligible
Accounts,

PLUS

(ii) the lesser of sixty-five percent (65%) (the "Inventory
Advance Rate") of the Value, or eighty-five percent (85%) of the appraised
orderly liquidation value, of Eligible Inventory consisting of finished goods,

MINUS

(iii) any Availability Reserves.

For purposes of the foregoing, appraised orderly liquidation value shall be
determined by the appraisals referred to in Section 7.3 below and shall be net
of expenses which Lender determines in its good faith business judgment would be
incurred in a liquidation.

Without limiting any of the Lender's other rights to adjust advance rates or
Availability Reserves, as set forth in this Agreement, the Inventory Advance
Rate may be reduced by Lender to 60%, in the event Borrower's quarterly net
income in any fiscal quarter is less than that set forth in the Projections by
20% or more. (For purposes of the foregoing, Borrower's net income shall
include extraordinary gains and extraordinary losses.)

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(b) Lender may, in its discretion, from time to time, upon not
less than five (5) days prior notice to Borrower, (i) reduce the lending formula
with respect to Eligible Accounts to the extent that Lender determines in good
faith that: (A) the dilution with respect to the Accounts for any period (based
on the ratio of (1) the aggregate amount of reductions in Accounts other than as
a result of payments in cash to (2) the aggregate amount of total sales) has
increased in any material respect or may be reasonably anticipated to increase
in any material respect above historical levels, or (B) the general
creditworthiness of account debtors has declined or (ii) reduce the lending
formula(s) with respect to Eligible Inventory to the extent that Lender
determines that: (A) the number of days of the turnover, or the mix, of the
Inventory for any period has changed in any material respect or (B) the
liquidation value of the Eligible Inventory, or any category thereof, has
decreased, or (C) the nature and quality of the Inventory has deteriorated in
any material respect. In determining whether to reduce the lending formula(s),
Lender may consider events, conditions, contingencies or risks which are also
considered in determining Eligible Accounts, Eligible Inventory or in
establishing Availability Reserves.

(c) Except in Lender's discretion, the aggregate amount of the
Loans, the Letter of Credit Accommodations and other Obligations outstanding at
any time shall not exceed the Maximum Credit. In the event that the outstanding
amount of any component of the Loans, or the aggregate amount of the outstanding
Loans, Letter of Credit Accommodations and other Obligations exceed the amounts
available under the lending formulas set forth in Section 2.1(a) hereof, the
sublimits for Letter of Credit Accommodations set forth in Section 2.2(c) or the
Maximum Credit, as applicable, such event shall not limit, waive or otherwise
affect any rights of Lender in that circumstance or on any future occasions and
Borrower shall, upon demand by Lender, which may be made at any time or from
time to time, immediately repay to Lender the entire amount of any such
excess(es) for which payment is demanded.

2.2 LETTER OF CREDIT ACCOMMODATIONS.

(a) Subject to, and upon the terms and conditions contained
herein, at the request of Borrower, Lender agrees to provide or arrange for
Letter of Credit Accommodations for the account of Borrower containing terms and
conditions acceptable to Lender and the issuer thereof. Any payments made by
Lender to any issuer thereof and/or related parties in connection with the
Letter of Credit Accommodations shall constitute additional Revolving Loans to
Borrower pursuant to this Section 2.

(b) In addition to any charges, fees or expenses charged by any
bank or issuer in connection with the Letter of Credit Accommodations, Borrower
shall pay to Lender a letter of credit fee at a rate equal to one percent (1%)
per annum (in the case of Letter of Credit Accommodations which are not "Loan
Reserved LC Accommodations" as defined in Section 2.2(c)(2) below) and one and
one half percent (1.50%) per annum (in the case of Letter of Credit
Accommodations which are "Loan Reserved LC Accommodations" ), computed on the
daily outstanding balance of the Letter of Credit Accommodations for the
immediately preceding month (or part thereof), payable in arrears as of the
first day of each succeeding month; PROVIDED, HOWEVER, that such letter of
credit fee shall be increased, at Lender's option, without notice, to three and
one-half percent (3.50%) per annum for the period on or after (i) the date of
termination or non-renewal of this Agreement (unless Borrower either provides
cash collateral or standby letters of credit with respect thereto as provided in
Section 12.1(a)), or (ii) the date of the occurrence of an Event of Default.
Such letter of credit fee shall be calculated on the basis of

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a three hundred sixty (360) day year and actual days elapsed and the obligation
of Borrower to pay such fee shall survive the termination or non-renewal of this
Agreement.

(1) No Letter of Credit Accommodations shall be available
unless on the date of the proposed issuance of any Letter of Credit
Accommodations, the Revolving Loans available to Borrower under Section 2.1
(subject to the Maximum Credit and any Availability Reserves, but without regard
to the Maximum Revolving Loan Amount) are equal to or greater than the following
(unless the Borrower has provided cash collateral as provided below):

(i) if the proposed Letter of Credit Accommodation is
for the purpose of purchasing Inventory which is to be delivered to the United
States and which would be Eligible Inventory (except for the fact that it has
not yet been delivered to Borrower's place of business), the sum of (A)

35% of the amount of such Letter of Credit
Accommodation (to be increased by 1% for each 1% reduction in the Inventory
Advance Rate below 65%), plus (B) freight, taxes, duty and other amounts which
Lender estimates (based on reasonable estimates provided by Borrower to Lender)
must be paid in connection with such Inventory upon arrival and for delivery to
Borrower (or its customer), and

(ii) if the proposed Letter of Credit Accommodation is
for standby letters of credit guaranteeing the purchase of Eligible Inventory or
the proposed Letter of Credit Accommodation is for any other purpose, an amount
equal to one hundred (100%) percent of the face amount thereof and all other
commitments and obligations made or incurred by Lender with respect thereto.

(2) Effective on the issuance of each Letter of Credit
Accommodation and while the same is outstanding, the amount of Revolving Loans
which would otherwise be available to Borrower (subject to the Maximum Credit
and any Availability Reserves, but without regard to the Maximum Revolving Loan
Amount) shall be reduced by the applicable amount set forth in Section
2.2(c)(1)(i) or Section 2.2(c)(1)(ii). Letter of Credit Accommodations as to
which there is, in whole or in part, a reduction in the amount of Revolving
Loans which would otherwise be available to Borrower are referred to herein as
"Loan Reserved LC Accommodations".

(3) In lieu of reductions in available Revolving Loans, as
set forth above in Section 2.2(c)(2), Borrower may provide Lender with cash
collateral (the "LC Cash Collateral") in an amount equal to the amount of said
required reductions in available Revolving Loans. Lender shall pay Borrower
interest on all LC Cash Collateral, from the date received by the Lender in
immediately available funds, at an interest rate equal to the Prime Rate minus
3.25% per annum. The LC Cash Collateral shall constitute Collateral for all
purposes of this Loan Agreement and shall secure all of the Obligations.

(d) At any time an Event of Default exists or has occurred and
is continuing, upon Lender's request, Borrower will either furnish cash
collateral to secure the reimbursement obligations to the issuer in connection
with any Letter of Credit Accommodations or furnish cash collateral to Lender
for the Letter of Credit Accommodations, and in either case, the Revolving

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Loans otherwise available to Borrower shall not be reduced as provided in
Section 2.2(c) to the extent of such cash collateral.

(e) Borrower shall indemnify and hold Lender harmless from and
against any and all losses, claims, damages, liabilities, costs and expenses
which Lender may suffer or incur in connection with any Letter of Credit
Accommodations and any documents, drafts or acceptances relating thereto,
including, but not limited to, any losses, claims, damages, liabilities, costs
and expenses due to any action taken by any issuer or correspondent with respect
to any Letter of Credit Accommodation. Borrower assumes all risks with respect
to the acts or omissions of the drawer under or beneficiary of any Letter of
Credit Accommodation and for such purposes the drawer or beneficiary shall be
deemed Borrower's agent. Borrower assumes all risks for, and agrees to pay, all
foreign, Federal, State and local taxes, duties and levies relating to any goods
subject to any Letter of Credit Accommodations or any documents, drafts or
acceptances thereunder. Borrower hereby releases and holds Lender harmless from
and against any acts, waivers, errors, delays or omissions, whether caused by
Borrower, by any issuer or correspondent or otherwise, unless caused by the
gross negligence or willful misconduct of Lender, with respect to or relating to
any Letter of Credit Accommodation. The provisions of this Section 2.2(e) shall
survive the payment of Obligations and the termination or non-renewal of this
Agreement.

(f) Nothing contained herein shall be deemed or construed to
grant Borrower any right or authority to pledge the credit of Lender in any
manner. Lender shall have no liability of any kind with respect to any Letter
of Credit Accommodation provided by an issuer other than Lender unless Lender
has duly executed and delivered to such issuer the application or a guarantee or
indemnification in writing with respect to such Letter of Credit Accommodation.
Borrower shall be bound by any interpretation made in good faith by Lender, or
any other issuer or correspondent under or in connection with any Letter of
Credit Accommodation or any documents, drafts or acceptances thereunder,
notwithstanding that such interpretation may be inconsistent with any
instructions of Borrower. Lender shall have the sole and exclusive right and
authority to, and Borrower shall not: (i) at any time an Event of Default exists
or has occurred and is continuing, (A) approve or resolve any questions of
non-compliance of documents, (B) give any instructions as to acceptance or
rejection of any documents or goods or (C) execute any and all applications for
steamship or airway guaranties, indemnities or delivery orders, and (ii) at all
times, (A) grant any extensions of the maturity of, time of payment for, or time
of presentation of, any drafts, acceptances, or documents, and (B) agree to any
amendments, renewals, extensions, modifications, changes or cancellations of any
of the terms or conditions of any of the applications, Letter of Credit
Accommodations, or documents, drafts or acceptances thereunder or any letters of
credit included in the Collateral. Lender may take such actions either in its
own name or in Borrower's name.

(g) Any rights, remedies, duties or obligations granted or
undertaken by Borrower to any issuer or correspondent in any application for any
Letter of Credit Accommodation, or any other agreement in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation, shall be deemed to
have been granted or undertaken by Borrower to Lender. Any duties or
obligations undertaken by Lender to any issuer or correspondent in any
application for any Letter of Credit Accommodation, or any other agreement by
Lender in favor of any issuer or correspondent relating to any Letter of Credit
Accommodation, shall be deemed to have been undertaken by Borrower to Lender and
to apply in all respects to Borrower.

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SECTION 3. INTEREST AND FEES.

3.1 INTEREST.

(a) Borrower shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at the Interest Rate. All
interest accruing hereunder on and after the date of any Event of Default or
termination or non-renewal hereof shall be payable on demand.

(b) Borrower may from time to time request that Prime Rate Loans
be converted to Eurodollar Rate Loans or that any existing Eurodollar Rate Loans
continue for an additional Interest Period. Such request from Borrower shall
specify the amount of the Prime Rate Loans which will constitute Eurodollar Rate
Loans (subject to the limits set forth below) and the Interest Period to be
applicable to such Eurodollar Rate Loans. Subject to the terms and conditions
contained herein, three (3) Business Days after receipt by Lender of such a
request from Borrower, such Prime Rate Loans shall be converted to Eurodollar
Rate Loans or such Eurodollar Rate Loans shall continue, as the case may be,
PROVIDED, THAT, (i) no Event of Default, or event which with notice or passage
of time or both would constitute an Event of Default exists or has occurred and
is continuing, (ii) no party hereto shall have sent any notice of termination or
non-renewal of this Agreement, (iii) Borrower shall have complied with such
customary procedures as are established by Lender and specified by Lender to
Borrower from time to time for requests by Borrower for Eurodollar Rate Loans,
(iv) no more than four (4) Interest Periods may be in effect at any one time,
(v) the aggregate amount of the Eurodollar Rate Loans must be in an amount not
less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof,
(vi) the maximum amount of the Eurodollar Rate Loans at any time requested by
Borrower shall not exceed the amount equal to eighty percent (80%) of the daily
average of the principal amount of the Revolving Loans which it is anticipated
will be outstanding during the applicable Interest Period, in each case as
determined by Lender (but with no obligation of Lender to make such Revolving
Loans) and (vii) Lender shall have determined that the Interest Period or
Adjusted Eurodollar Rate is available to Lender through the Reference Bank and
can be readily determined as of the date of the request for such Eurodollar Rate
Loan by Borrower. Any request by Borrower to convert Prime Rate Loans to
Eurodollar Rate Loans or to continue any existing Eurodollar Rate Loans shall be
irrevocable. Notwithstanding anything to the contrary contained herein, Lender
and Reference Bank shall not be required to purchase United States Dollar
deposits in the London interbank market or other applicable Eurodollar Rate
market to fund any Eurodollar Rate Loans, but the provisions hereof shall be
deemed to apply as if Lender and Reference Bank had purchased such deposits to
fund the Eurodollar Rate Loans.

(c) Any Eurodollar Rate Loans shall automatically convert to
Prime Rate Loans upon the last day of the applicable Interest Period, unless
Lender has received and approved a request to continue such Eurodollar Rate Loan
at least three (3) Business Days prior to such last day in accordance with the
terms hereof. Any Eurodollar Rate Loans shall, at Lender's option, upon notice
by Lender to Borrower, convert to Prime Rate Loans in the event that (i) an
Event of Default or event which with the notice or passage of time or both would
constitute an Event of Default, shall exist, (ii) this Agreement shall terminate
or not be renewed, or (iii) the aggregate principal amount of the Prime Rate
Loans which have previously been converted to Eurodollar Rate Loans or existing
Eurodollar Rate Loans continued, as the case may be, at the beginning of an
Interest Period shall at any time during such Interest Period exceed

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either (A) the aggregate principal amount of the Loans then outstanding, or (B)
the Revolving Loans then available to Borrower under Section 2 hereof. Borrower
shall pay to Lender, upon demand by Lender (or Lender may, at its option, charge
any loan account of Borrower) any amounts required to compensate Lender, the
Reference Bank or any participant with Lender for any loss (including loss of
anticipated profits), cost or expense incurred by such person, as a result of
the conversion of Eurodollar Rate Loans to Prime Rate Loans pursuant to any of
the foregoing.

(d) Interest shall be payable by Borrower to Lender monthly in
arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. The interest rate on non-contingent Obligations (other than Eurodollar
Rate Loans) shall increase or decrease by an amount equal to each increase or
decrease in the Prime Rate effective on the first day of the month after any
change in such Prime Rate is announced based on the Prime Rate in effect on the
last day of the month in which any such change occurs. In no event shall
charges constituting interest payable by Borrower to Lender exceed the maximum
amount or the rate permitted under any applicable law or regulation, and if any
such part or provision of this Agreement is in contravention of any such law or
regulation, such part or provision shall be deemed amended to conform thereto.

3.2 CLOSING FEE Borrower shall pay to Lender closing fees (the
"Closing Fees") as follows:

(a) A Closing Fee the amount of $400,000, which shall be fully
earned as of the date hereof, payable $133,333 on the date hereof, $133,333 on
February 15, 1998, and $133,334 on November 15, 1998; and

(b) If Borrower exercises its right, under Section 1.28 above, to
increase the Maximum Credit, an additional Closing Fee in the amount of 1% of
the increase shall be due and payable on the date each increase is to go into
effect.

Borrower shall be entitled to a credit against the Closing Fee in the amount of
any deposits previously paid to Lender which have not been utilized by Lender;
provided that nothing herein limits Borrower's responsibility for payment of
costs and expenses under Section 9.16 or any other provisions of this Agreement.
Lender agrees to waive the Closing Fees payable on November __, 1998, if
Borrower's net income for the fiscal year ending November 30, 1997 is at least
equal to the amount set forth in the Projections.

3.3 SERVICING FEE. Borrower shall pay to Lender an annual servicing
fee in the amount of $20,000, which shall be fully earned on the date hereof and
on each subsequent anniversary of the date hereof. Said servicing fee shall be
payable in quarterly installments of $5,000 each, commencing on the date hereof
and continuing quarterly hereafter.

3.4 LETTER OF CREDIT FEES. [See Section 2.2(b)]

3.5 [Intentionally omitted]

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3.6 COMPENSATION ADJUSTMENT

(a) If after the date of this Agreement the introduction of, or
any change in, any law or any governmental rule, regulation, policy, guideline
or directive (whether or not having the force of law), or any interpretation
thereof, or compliance by Lender or any Participant therewith:

(i) subjects Lender to any tax, duty, charge or
withholding on or from payments due from Borrower (excluding franchise taxes
imposed upon, and taxation of the overall net income of, Lender or any
Participant), or changes the basis of taxation of payments, in either case in
respect of amounts due it hereunder, or

(ii) imposes or increases or deems applicable any
reserve requirement or other reserve, assessment, insurance charge, special
deposit or similar requirement against assets of, deposits with or for the
account of, or credit extended by Lender or any Participant, or

(iii) imposes any other condition the result of which is
to increase the cost to Lender or any Participant of making, funding or
maintaining the Revolving Loans or Letter of Credit Accommodations or reduces
any amount receivable by Lender or any Participant in connection with the Loans
or Letter of Credit Accommodations, or requires Lender or any Participant to
make payment calculated by references to the amount of loans held or interest
received by it, by an amount deemed material by Lender or any Participant, or

(iv) imposes or increases any capital requirement or
affects the amount of capital required or expected to be maintained by Lender or
any Participant or any corporation controlling Lender or any Participant, and
Lender or any Participant determines that such imposition or increase in capital
requirements or increase in the amount of capital expected to be maintained is
based upon the existence of this Agreement or the Loans or Letter of Credit
Accommodations hereunder, all of which may be determined by Lender's reasonable
allocation of the aggregate of its impositions or increases in capital required
or expected to be maintained, and the result of any of the foregoing is to
increase the cost to Lender or any Participant of making, renewing or
maintaining the Loans or Letter of Credit Accommodations, or to reduce the rate
of return to Lender or any Participant on the Loans or Letter of Credit
Accommodations, then upon demand by Lender, Borrower shall pay to Lender, and
continue to make periodic payments to Lender or any Participant, such additional
amounts as may be necessary to compensate Lender or any Participant for any such
additional cost incurred or reduced rate of return realized.

(b) A certificate of Lender claiming entitlement to compensation
as set forth above will be conclusive in the absence of manifest error. Such
certificate will set forth the nature of the occurrence giving rise to such
compensation, the additional amount or amounts to be paid and the compensation
and the method by which such amounts were determined. In determining any
additional amounts due from Borrower under this Section 3.6, Lender shall act
reasonably and in good faith and will, to the extent that the increased costs,
reductions, or amounts received or receivable relate to the Lender's or a
Participant's loans or commitments generally and are not specifically
attributable to the Loans and commitments hereunder, use averaging and
attribution methods which are reasonable and equitable and which cover all loans
and commitments under this Agreement by the Lender or such Participant, as the
case may be, whether or not the loan

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documentation for such other loans and commitments permits the Lender or such
Participant to receive compensation costs of the type described in this Section
3.6.

3.7 EURODOLLAR RATE LOANS-CHANGES IN LAWS AND INCREASED COSTS OF
LOANS.

(a) Notwithstanding anything to the contrary contained herein,
all Eurodollar Rate Loans shall, upon notice by Lender to Borrower, convert to
Prime Rate Loans in the event that (i) any change in applicable law or
regulation (or the interpretation or administration thereof) shall either (A)
make it unlawful for Lender, Reference Bank or any participant to make or
maintain Eurodollar Rate Loans or to comply with the terms hereof in connection
with the Eurodollar Rate Loans, by an amount deemed by Lender to be material, or
(B) shall result in the increase in the costs to Lender, Reference Bank or any
participant of making or maintaining any Eurodollar Rate Loans or (C) reduce the
amounts received or receivable by Lender in respect thereof, by an amount deemed
by Lender to be material or (ii) the cost to Lender, Reference Bank or any
participant of making or maintaining any Eurodollar Rate Loans shall otherwise
increase by an amount deemed by Lender to be material. Borrower shall pay to
Lender, upon demand by Lender (or Lender may, at its option, charge any loan
account of Borrower) any amounts required to compensate Lender, the Reference
Bank or any participant with Lender for any loss (including loss of anticipated
profits), cost or expense incurred by such person as a result of the foregoing,
including, without limitation, any such loss, cost or expense incurred by reason
of the liquidation or reemployment of deposits or other funds acquired by such
person to make or maintain the Eurodollar Rate Loans or any portion thereof. A
certificate of Lender setting forth the basis for the determination of such
amount necessary to compensate Lender as aforesaid shall be delivered to
Borrower and shall be conclusive, absent manifest error.

(b) If any payments or prepayments in respect of the Eurodollar
Rate Loans are received by Lender other than on the last day of the applicable
Interest Period (whether pursuant to acceleration, upon maturity or otherwise),
including any payments pursuant to the application of collections under Section
6.3 or any other payments made with the proceeds of Collateral, Borrower shall
pay to Lender upon demand by Lender (or Lender may, at its option, charge any
loan account of Borrower) any amounts required to compensate Lender, the
Reference Bank or any participant with Lender for any additional loss (including
loss of anticipated profits), cost or expense incurred by such person as a
result of such prepayment or payment, including, without limitation, any loss,
cost or expense incurred by reason of the liquidation or reemployment of
deposits or other funds acquired by such person to make or maintain such
Eurodollar Rate Loans or any portion thereof.

SECTION 4. CONDITIONS PRECEDENT

4.1 CONDITIONS PRECEDENT TO INITIAL LOANS AND LETTER OF CREDIT
ACCOMMODATIONS. Each of the following is a condition precedent to Lender making
the initial Loans and providing the initial Letter of Credit Accommodations
hereunder:

(a) Lender shall have received, in form and substance
satisfactory to Lender, all releases, terminations and such other documents as
Lender may request to evidence and effectuate the termination of any interest in
and to any assets and properties of Borrower, duly authorized, executed and
delivered by it or each of them, including, but not limited to, UCC termination
statements for all UCC financing statements and Lender shall have satisfied
itself

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that it has valid, perfected and first priority security interests in and liens
upon the Collateral and any other property which is intended as security for the
Obligations, or the liability of any Obligor in respect thereto, subject only to
the security interests and liens permitted herein or in the other Financing
Agreements;

(b) all requisite corporate action and proceedings in connection
with this Agreement and the other Financing Agreements shall be satisfactory in
form and substance to Lender, and Lender shall have received all information and
copies of all documents, including, without limitation, records of requisite
corporate action and proceedings which Lender may have requested in connection
therewith, such documents where requested by Lender or its counsel to be
certified by appropriate corporate officers or governmental authorities;

(c) no material adverse change shall have occurred in the
assets, business or prospects of Borrower since the date of Lender's latest
field examination and no change or event shall have occurred which would impair
the ability of Borrower or any Obligor to perform its obligations hereunder or
under any of the other Financing Agreements to which it is a party or of Lender
to enforce the Obligations or realize upon the Collateral;

(d) Lender shall have completed a field review of the Records
and of such other financial information, projections, budgets, business plans
and cash flows as Lender shall reasonably request from time to time, including,
but not limited to, current agings of receivables, current perpetual inventory
records and/or rollforwards of Accounts and Inventory through the date of
closing, together with supporting documentation, including documentation with
respect to Inventory in-transit, goods in bonded warehouses or at other
third-party locations, that will enable Lender to accurately identify and verify
the eligible Collateral at or before closing in a manner satisfactory to Lender,
the results of which shall be satisfactory to Lender;

(e) Lender shall have received, in form and substance
satisfactory to Lender, all consents, waivers, acknowledgments and other
agreements from third persons which Lender may deem necessary or desirable in
order to permit, protect and perfect its security interests in and liens upon
the Collateral or to effectuate the provisions or purposes of this Agreement and
the other Financing Agreements, including, without limitation, acknowledgments
by lessors, mortgagees and warehousemen of Lender's security interests in the
Collateral, waivers by such persons of any security interests, liens or other
claims by such persons to the Collateral and agreements permitting Lender access
to, and the right to remain on, the premises to exercise its rights and remedies
and otherwise deal with the Collateral;

(f) Lender shall have received evidence of insurance and loss
payee endorsements required hereunder and under the other Financing Agreements,
in form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;

(g) Lender shall have received, in form and substance
satisfactory to Lender, such opinion letters of counsel to Borrower with respect
to the Financing Agreements and such other matters as Lender may request;

(h) the Excess Availability as determined by Lender as of the
date hereof, shall be not less than Eight Million Dollars ($8,000,000) after
giving effect to the initial Loans made or

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to be made hereunder and the payment of all fees and expenses payable upon the
consummation of the initial transactions contemplated by this Agreement;

(i) Lender shall have received, in form and substance
satisfactory to Lender and its counsel, the assignment of all of Borrower's
rights in registered patents, trademarks, service marks and copyrights, as
Collateral hereunder, on Lender's standard forms of Collateral Assignments;

(j) Lender shall have received, in form and substance
satisfactory to Lender, an executed copy of a Blocked Account Agreement,
pursuant to Section 6.3(ii) hereof, among Lender, Borrower and Bank of America;
and

(k) the other Financing Agreements and all instruments and
documents hereunder and thereunder shall have been duly executed and delivered
to Lender, in form and substance satisfactory to Lender; and

(l) Any holders of a security interest in Borrower's assets
including, without limitation, vendors of Inventory to Borrower, shall have
executed such intercreditor and subordination agreements in form and substance
satisfactory to Lender; and

(m) Lender shall have received the unconditional continuing
guaranty of Borrower's Parent and a Security Agreement executed by the Parent,
both on Lender's standard form, together with documents relating thereto; and

(n) Lender shall have received executed Bailee Agreements, in
such form as Lender shall specify, executed by all of Borrower's freight
forwarders and freight expeditors. In the event, in the future, Borrower shall
desire to use the services of a different freight forwarder or freight
expeditor, Borrower shall first cause such freight forwarder or freight
expeditor to execute and deliver to Lender a Bailee Agreement in such form as
Lender shall specify.

4.2 CONDITIONS PRECEDENT TO ALL LOANS AND LETTER OF CREDIT
ACCOMMODATIONS. Each of the following is an additional condition precedent to
Lender making Loans and/or providing Letter of Credit Accommodations to
Borrower, including the initial Loans and Letter of Credit Accommodations and
any future Loans and Letter of Credit Accommodations:

(a) all representations and warranties contained herein and in
the other Financing Agreements shall be true and correct in all material
respects with the same effect as though such representations and warranties had
been made on and as of the date of the making of each such Loan or providing
each such Letter of Credit Accommodation and after giving effect thereto; and

(b) no Event of Default and no event or condition which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of the date of the making of
such Loan or providing each such Letter of Credit Accommodation and after giving
effect thereto.

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SECTION 5. GRANT OF SECURITY INTEREST

To secure payment and performance of all Obligations, Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and hereby assigns to Lender as security, the following
property and interests in property, whether now owned or hereafter acquired or
existing, and wherever located (collectively, the "Collateral"):

5.1 Accounts

5.2 All present and future contract rights, general intangibles
(including, but not limited to, tax and duty refunds, registered and
unregistered patents, trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, choses in
action and other claims and existing and future leasehold interests in
equipment, real estate and fixtures), chattel paper, documents, instruments,
securities, financial assets, securities accounts, security entitlements,
investment property, letters of credit, bankers' acceptances and guaranties;

5.3 All present and future monies, securities, credit balances,
deposits, deposit accounts and other property of Borrower now or hereafter held
or received by or in transit to Lender or its affiliates or at any other
depository or other institution from or for the account of Borrower, whether for
safekeeping, pledge, custody, transmission, collection or otherwise, and all
present and future liens, security interests, rights, remedies, title and
interest in, to and in respect of Accounts and other Collateral, including,
without limitation, (a) rights and remedies under or relating to guaranties,
contracts of suretyship, letters of credit and credit and other insurance
related to the Collateral, (b) rights of stoppage in transit, replevin,
repossession, reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, (c) goods described in invoices, documents, contracts
or instruments with respect to, or otherwise representing or evidencing,
Accounts or other Collateral, including, without limitation, returned,
repossessed and reclaimed goods, and (d) deposits by and property of account
debtors or other persons securing the obligations of account debtors;

5.4 Inventory;

5.5 Equipment;

5.6 Records; and

5.7 All products and proceeds of the foregoing, in any form,
including, without limitation, insurance proceeds and all claims against third
parties for loss or damage to or destruction of any or all of the foregoing.

SECTION 6. COLLECTION AND ADMINISTRATION

6.1 BORROWER'S LOAN ACCOUNT. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans, all Letter of
Credit Accommodations and other Obligations and the Collateral, (b) all payments
made by or on behalf of Borrower and (c) all other appropriate debits and
credits as provided in this Agreement, including, without limitation, fees,
charges, costs, expenses and interest. All entries in the loan account(s) shall
be made in accordance with Lender's customary practices as in effect from time
to time.

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6.2 STATEMENTS. Lender shall render to Borrower each month a
statement setting forth the balance in the Borrower's loan account(s) maintained
by Lender for Borrower pursuant to the provisions of this Agreement, including
principal, interest, fees, costs and expenses. Each such statement shall be
subject to subsequent adjustment by Lender but shall, absent manifest errors or
omissions, be considered correct and deemed accepted by Borrower and
conclusively binding upon Borrower as an account stated except to the extent
that Lender receives a written notice from Borrower of any specific exceptions
of Borrower thereto within thirty (30) days after the date such statement has
been mailed by Lender. Until such time as Lender shall have rendered to
Borrower a written statement as provided above, the balance in Borrower's loan
account(s) shall be presumptive evidence of the amounts due and owing to Lender
by Borrower.

6.3 COLLECTION OF ACCOUNTS

(a) Borrower shall establish and maintain, at its expense,
blocked accounts or lockboxes and related blocked accounts (in either case,
"Blocked Accounts"), as Lender may specify, with such banks as are acceptable to
Lender into which Borrower shall promptly deposit and direct its account debtors
to directly remit all payments on Accounts and all payments constituting
proceeds of Inventory or other Collateral in the identical form in which such
payments are made, whether by cash, check or other manner. The banks at which
the Blocked Accounts are established shall enter into an agreement, in form and
substance satisfactory to Lender, providing that all items received or deposited
in the Blocked Accounts are the property of Lender, that the depository bank has
no lien upon, or right to setoff against, the Blocked Accounts, the items
received for deposit therein, or the funds from time to time on deposit therein
and that the depository bank will wire, or otherwise transfer, in immediately
available funds, on a daily basis, all funds received or deposited into the
Blocked Accounts to such bank account of Lender as Lender may from time to time
designate for such purpose ("Payment Account"). Borrower agrees that all
payments made to such Blocked Accounts or other funds received and collected by
Lender, whether on the Accounts or as proceeds of Inventory or other Collateral
or otherwise shall be the property of Lender.

(b) For purposes of calculating interest on the Obligations,
such payments or other funds received will be applied (conditional upon final
collection) to the Obligations one (1) Business Day following the date of
receipt of immediately available funds by Lender in the Payment Account, or two
(2) Business Days following the date of receipt of funds that are not
immediately available to Lender in the Payment Account, as applicable. For
purposes of calculating the amount of the Revolving Loans available to Borrower
such payments will be applied (conditional upon final collection) to the
Obligations on the Business Day of receipt by Lender in the Payment Account, if
such payments are received within sufficient time (in accordance with Lender's
usual and customary practices as in effect from time to time) to credit
Borrower's loan account on such day, and if not, then on the next Business Day.
In the event that there are no outstanding monetary Obligations at the time such
payments or other funds are received, Borrower shall pay Lender a charge in an
amount equal to interest at the Reduced Prime Rate on the amount of such payment
or other funds, for one (1) Business Day following the date of receipt of
immediately available funds by Lender in the Payment Account, or two (2)
Business Days following the date of receipt of funds that are not immediately
available to Lender in the Payment Account, as applicable.

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(c) Borrower and all of its affiliates, subsidiaries,
shareholders, directors, employees or agents shall, acting as trustee for
Lender, receive, as the property of Lender, any monies, checks, notes, drafts or
any other payment relating to and/or proceeds of Accounts or other Collateral
which come into their possession or under their control and immediately upon
receipt thereof, shall deposit or cause the same to be deposited in the Blocked
Accounts, or remit the same or cause the same to be remitted, in kind, to
Lender. In no event shall the same be commingled with Borrower's own funds.
Borrower agrees to reimburse Lender on demand for any amounts owed or paid to
any bank at which a Blocked Account is established or any other bank or person
involved in the transfer of funds to or from the Blocked Accounts arising out of
Lender's payments to or indemnification of such bank or person, unless such
payment or indemnification obligation of Lender was a result of Lender's gross
negligence or willful misconduct. The obligation of Borrower to reimburse
Lender for such amounts pursuant to this Section 6.3 shall survive the
termination or non-renewal of this Agreement.

6.4 PAYMENTS All Obligations shall be payable to the Payment Account
as provided in Section 6.3 or such other place as Lender may designate from time
to time. Lender may apply payments received or collected from Borrower or for
the account of Borrower (including, without limitation, the monetary proceeds of
collections or of realization upon any Collateral) to such of the Obligations,
whether or not then due, in such order and manner as Lender determines. At
Lender's option, all principal, interest, fees, costs, expenses and other
charges provided for in this Agreement or the other Financing Agreements may be
charged directly to the loan account(s) of Borrower. Borrower shall make all
payments to Lender on the Obligations free and clear of, and without deduction
or withholding for or on account of, any setoff, counterclaim, defense, duties,
taxes, levies, imposts, fees, deductions, withholding, restrictions or
conditions of any kind. If after receipt of any payment of, or proceeds of
Collateral applied to the payment of, any of the Obligations, Lender is required
to surrender or return such payment or proceeds to any Person for any reason,
then the Obligations intended to be satisfied by such payment or proceeds shall
be reinstated and continue and this Agreement shall continue in full force and
effect as if such payment or proceeds had not been received by Lender. Borrower
shall be liable to pay to Lender, and does hereby indemnify and hold Lender
harmless for the amount of any payments or proceeds surrendered or returned.
This Section 6.4 shall remain effective notwithstanding any contrary action
which may be taken by Lender in reliance upon such payment or proceeds. This
Section 6.4 shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.

6.5 AUTHORIZATION TO MAKE LOANS. Lender is authorized to make the
Loans and provide the Letter of Credit Accommodations based upon telephonic or
other instructions received from anyone purporting to be an officer of Borrower
or other authorized person or, at the discretion of Lender, if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of
Credit Accommodations hereunder shall specify the date on which the requested
advance is to be made or Letter of Credit Accommodations established (which day
shall be a Business Day) and the amount of the requested Loan. Requests
received after 10:30 a.m. (Los Angeles time) on any day shall be deemed to have
been made as of the opening of business on the immediately following Business
Day. All Loans and Letter of Credit Accommodations under this Agreement shall
be conclusively presumed to have been made to, and at the request of and for the
benefit of, Borrower when deposited to the credit of Borrower or otherwise
disbursed or established in accordance with the instructions of Borrower or in
accordance with the terms and conditions of this Agreement.

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6.6 USE OF PROCEEDS. All Loans made or Letter of Credit
Accommodations provided by Lender to Borrower pursuant to the provisions hereof
shall be used by Borrower only for general operating, working capital and other
proper corporate purposes of Borrower not otherwise prohibited by the terms
hereof. None of the proceeds will be used, directly or indirectly, for the
purpose of purchasing or carrying any margin security or for the purposes of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of Regulation G
of the Board of Governors of the Federal Reserve System, as amended.

SECTION 7. COLLATERAL REPORTING AND COVENANTS

7.1 COLLATERAL REPORTING. Borrower shall provide Lender with the
following documents in a form satisfactory to Lender: (a) on a regular basis as
required by Lender, a schedule of Accounts; (b) on a monthly basis or more
frequently as Lender may request, (i) perpetual inventory reports, (ii)
inventory reports by category (comparable to those presently prepared by
Borrower), (iii) agings of accounts payable, (iv) letter of credit reports
setting forth the status of outstanding letters of credit, and (iv) bell curve
Inventory reports (by size and style); (c) upon Lender's request, (i) copies of
customer statements and credit memos, remittance advices and reports, and copies
of deposit slips and bank statements, (ii) copies of shipping and delivery
documents, and (iii) copies of purchase orders, invoices and delivery documents
for Inventory and Equipment acquired by Borrower; (d) agings of accounts
receivable on a monthly basis or more frequently as Lender may request; and (e)
such other reports as to the Collateral as Lender shall request from time to
time; (f) a report as to any planned introduction by Borrower of any new "high
fashion" or other category of product, prior to making any material purchase
commitments with respect thereto. If any of Borrower's records or reports of
the Collateral are prepared or maintained by an accounting service, contractor,
shipper or other agent, Borrower hereby irrevocably authorizes such service,
contractor, shipper or agent to deliver such records, reports, and related
documents to Lender and to follow Lender's instructions with respect to further
services at any time that an Event of Default exists or has occurred and is
continuing.

7.2 ACCOUNTS COVENANTS.

(a) Borrower shall notify Lender promptly (which notification
may be in the regular reports provided to Lender) of: (i) any material delay in
Borrower's performance of any of its obligations to any account debtor or the
assertion of any claims, offsets, defenses or counterclaims by any account
debtor, or any disputes with account debtors, or any settlement, adjustment or
compromise thereof, (ii) all material adverse information relating to the
financial condition of any account debtor and (iii) any event or circumstance
which, to Borrower's knowledge would cause Lender to consider any then existing
Accounts as no longer constituting Eligible Accounts. No credit, discount,
allowance or extension or agreement for any of the foregoing shall be granted to
any account debtor without Lender's consent, except in the ordinary course of
Borrower's business in accordance with practices and policies previously
disclosed in writing to Lender. So long as no Event of Default exists or has
occurred and is continuing, Borrower may settle, adjust or compromise any claim,
offset, counterclaim or dispute with any account debtor. At any time that an
Event of Default exists or has occurred and is continuing, Lender shall, at its
option, have the exclusive right to settle, adjust or compromise any claim,

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offset, counterclaim or dispute with account debtors or grant any credits,
discounts or allowances.

(b) Borrower shall promptly report to Lender any return of
Inventory by an account debtor having a sales price in excess of $100,000. At
any time that Inventory is returned, reclaimed or repossessed, the Account for
the returned, reclaimed or repossessed Inventory shall not be deemed an Eligible
Account. In the event any account debtor returns Inventory when an Event of
Default exists or has occurred and is continuing, Borrower shall, upon Lender's
request, (i) hold the returned Inventory in trust for Lender, (ii) segregate all
returned Inventory from all of its other property, (iii) dispose of the returned
Inventory solely according to Lender's instructions, and (iv) not issue any
credits, discounts or allowances with respect thereto without Lender's prior
written consent.

(c) With respect to each Account: (i) the amounts shown on any
invoice delivered to Lender or schedule thereof delivered to Lender shall be
true and complete, (ii) no payments shall be made thereon except payments
immediately delivered to Lender pursuant to the terms of this Agreement, (iii)
no credit, discount, allowance or extension or agreement for any of the
foregoing shall be granted to any account debtor except as reported to Lender in
accordance with this Agreement and except for credits, discounts, allowances or
extensions made or given in the ordinary course of Borrower's business in
accordance with practices and policies previously disclosed to Lender, (iv)
there shall be no setoffs, deductions, contras, defenses, counterclaims or
disputes existing or asserted with respect thereto except as reported to Lender
in accordance with the terms of this Agreement, (v) none of the transactions
giving rise thereto will violate any applicable State or Federal laws or
regulations, all documentation relating thereto will be legally sufficient under
such laws and regulations and all such documentation will be legally enforceable
in accordance with its terms.

(d) Lender shall have the right at any time or times, in
Lender's name or in the name of a nominee of Lender, to verify the validity,
amount or any other matter relating to any Account or other Collateral, by mail,
telephone, facsimile transmission or otherwise.

(e) Borrower shall deliver or cause to be delivered to Lender,
with appropriate endorsement and assignment, with full recourse to Borrower, all
chattel paper and instruments which Borrower now owns or may at any time acquire
immediately upon Borrower's receipt thereof, except as Lender may otherwise
agree.

(f) Lender may, at any time or times that an Event of Default
exists or has occurred and is continuing, (i) notify any or all account debtors
that the Accounts have been assigned to Lender and that Lender has a security
interest therein and Lender may direct any or all accounts debtors to make
payment of Accounts directly to Lender, (ii) extend the time of payment of,
compromise, settle or adjust for cash, credit, return of merchandise or
otherwise, and upon any terms or conditions, any and all Accounts or other
obligations included in the Collateral and thereby discharge or release the
account debtor or any other party or parties in any way liable for payment
thereof without affecting any of the Obligations, (iii) demand, collect or
enforce payment of any Accounts or such other obligations, but without any duty
to do so, and Lender shall not be liable for its failure to collect or enforce
the payment thereof nor for the negligence of its agents or attorneys with
respect thereto and (iv) take whatever other action Lender may deem necessary or
desirable for the protection of its interests. At any time that an

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Event of Default exists or has occurred and is continuing, at Lender's request,
all invoices and statements sent to any account debtor shall state that the
Accounts and such other obligations have been assigned to Lender and are payable
directly and only to Lender and Borrower shall deliver to Lender such originals
of documents evidencing the sale and delivery of goods or the performance of
services giving rise to any Accounts as Lender may require.

7.3 INVENTORY COVENANTS. With respect to the Inventory: (a) Borrower
shall at all times maintain inventory records reasonably satisfactory to Lender,
keeping correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, Borrower's cost therefor and daily
withdrawals therefrom and additions thereto; (b) Borrower shall conduct a
physical count of the Inventory at least once each year, but at any time or
times as Lender may request during the continuance of an Event of Default, and
promptly following such physical inventory shall supply Lender with a report in
the form and with such specificity as may be reasonably satisfactory to Lender
concerning such physical count; (c) Borrower shall not remove any Inventory from
the locations set forth or permitted herein, without the prior written consent
of Lender, except for sales of Inventory in the ordinary course of Borrower's
business and except to move Inventory directly from one location set forth or
permitted herein to another such location; (d) upon Lender's request, Borrower
shall, at its expense, no more than twice in any twelve (12) month period, but
at any time or times as Lender may request during the continuance of an Event of
Default, deliver or cause to be delivered to Lender written reports or
appraisals as to the Inventory in form, scope and methodology acceptable to
Lender and by an appraiser acceptable to Lender, addressed to Lender or upon
which Lender is expressly permitted to rely, and if Lender wishes appraisals of
the Inventory other than those referred to above, Lender may cause the same to
be done at its expense, and Borrower shall cooperate in connection therewith;
(e) Borrower shall produce, use, store and maintain the Inventory, with all
reasonable care and caution and in accordance with applicable standards of any
insurance and in conformity with applicable laws (including, but not limited to,
the requirements of the Federal Fair Labor Standards Act of 1938, as amended and
all rules, regulations and orders related thereto); (f) Borrower assumes all
responsibility and liability arising from or relating to the production, use,
sale or other disposition of the Inventory; (g) Borrower shall not sell
Inventory to any customer on approval, or any other basis which entitles the
customer to return or may obligate Borrower to repurchase such Inventory; (h)
Borrower shall keep the Inventory in good and marketable condition; and (i)
Borrower shall not, without prior written notice to Lender, acquire or accept
any Inventory on consignment or approval.

7.4 EQUIPMENT COVENANTS. With respect to the Equipment: (a) upon
Lender's request, Borrower shall, at its expense, at any time or times as Lender
may request during the continuance of an Event of Default, deliver or cause to
be delivered to Lender written reports or appraisals as to the Equipment in
form, scope and methodology acceptable to Lender and by an appraiser acceptable
to Lender; (b) Borrower shall keep the Equipment in good order, repair, running
and marketable condition (ordinary wear and tear excepted); (c) Borrower shall
use the Equipment with all reasonable care and caution and in accordance with
applicable standards of any insurance and in conformity with all applicable
laws; (d) the Equipment is and shall be used in Borrower's business and not for
personal, family, household or farming use; (e) Borrower shall not remove any
Equipment from the locations set forth or permitted herein, except to the extent
necessary to have any Equipment repaired or maintained in the ordinary course of
the business of Borrower or to move Equipment directly from one location set
forth or permitted herein to another such location and except for the movement
of motor vehicles used by or for the benefit of Borrower in

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the ordinary course of business; (f) the Equipment is now and shall remain
personal property and Borrower shall not permit any of the Equipment to be or
become a part of or affixed to real property; and (g) Borrower assumes all
responsibility and liability arising from the use of the Equipment.

7.5 POWER OF ATTORNEY. Borrower hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as Borrower's true and
lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name,
to: (a) at any time an Event of Default exists or has occurred and is continuing
(i) demand payment on Accounts or other proceeds of Inventory or other
Collateral, (ii) enforce payment of Accounts by legal proceedings or otherwise,
(iii) exercise all of Borrower's rights and remedies to collect any Account or
other Collateral, (iv) sell or assign any Account upon such terms, for such
amount and at such time or times as the Lender deems advisable, (v) settle,
adjust, compromise, extend or renew an Account, (vi) discharge and release any
Account, (vii) prepare, file and sign Borrower's name on any proof of claim in
bankruptcy or other similar document against an account debtor, (viii) notify
the post office authorities to change the address for delivery of Borrower's
mail to an address designated by Lender, and open and dispose of all mail
addressed to Borrower, and (ix) do all acts and things which are necessary, in
Lender's determination, to fulfill Borrower's obligations under this Agreement
and the other Financing Agreements and (b) at any time to (i) take control in
any manner of any item of payment or proceeds thereof, (ii) have access to any
lockbox or postal box into which Borrower's mail is deposited, (iii) endorse
Borrower's name upon any items of payment or proceeds thereof and deposit the
same in the Lender's account for application to the Obligations, (iv) endorse
Borrower's name upon any chattel paper, document, instrument, invoice, or
similar document or agreement relating to any Account or any goods pertaining
thereto or any other Collateral, (v) sign Borrower's name on any verification of
Accounts and notices thereof to account debtors and (vi) execute in Borrower's
name and file any UCC financing statements or amendments thereto. Borrower
hereby releases Lender and its officers, employees and designees from any
liabilities arising from any act or acts under this power of attorney and in
furtherance thereof, whether of omission or commission, except as a result of
Lender's own gross negligence or willful misconduct as determined pursuant to a
final non-appealable order of a court of competent jurisdiction.

7.6 RIGHT TO CURE. Lender may, at its option, (a) cure any default
by Borrower under any agreement with a third party or pay or bond on appeal any
judgment entered against Borrower, (b) discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with respect
to the Collateral and (c) pay any amount, incur any expense or perform any act
which, in Lender's judgment, is necessary or appropriate to preserve, protect,
insure or maintain the Collateral and the rights of Lender with respect thereto.
Lender may add any amounts so expended to the Obligations and charge Borrower's
account therefor, such amounts to be repayable by Borrower on demand. Lender
shall be under no obligation to effect such cure, payment or bonding and shall
not, by doing so, be deemed to have assumed any obligation or liability of
Borrower. Any payment made or other action taken by Lender under this Section
shall be without prejudice to any right to assert an Event of Default hereunder
and to proceed accordingly.

7.7 ACCESS TO PREMISES. From time to time as requested by Lender, at
the cost and expense of Borrower, (a) Lender or its designee shall have complete
access to all of Borrower's premises during normal business hours and after
notice to Borrower, or at any time and without

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notice to Borrower if an Event of Default exists or has occurred and is
continuing, for the purposes of inspecting, verifying and auditing the
Collateral and all of Borrower's books and records, including, without
limitation, the Records, and (b) Borrower shall promptly furnish to Lender such
copies of such books and records or extracts therefrom as Lender may request,
and (c) use during normal business hours such of Borrower's personnel,
equipment, supplies and premises as may be reasonably necessary for the
foregoing and if an Event of Default exists or has occurred and is continuing
for the collection of Accounts and realization of other Collateral.

SECTION 8. REPRESENTATIONS AND WARRANTIES

Borrower hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which are a continuing condition of the making of Loans and the
providing of Letter of Credit Accommodations by Lender to Borrower:

8.1 CORPORATE EXISTENCE, POWER AND AUTHORITY; SUBSIDIARIES. Borrower
is a corporation duly organized and in good standing under the laws of its state
of incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on Borrower's financial condition,
results of operation or business or the rights of Lender in or to any of the
Collateral. The execution, delivery and performance of this Agreement, the
other Financing Agreements and the transactions contemplated hereunder and
thereunder are all within Borrower's corporate powers, have been duly authorized
and are not in contravention of law or the terms of Borrower's certificate of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which Borrower is a party or by which Borrower or
its property are bound. This Agreement and the other Financing Agreements
constitute legal, valid and binding obligations of Borrower enforceable in
accordance with their respective terms. Borrower does not have any subsidiaries
except as set forth on the Information Certificate, and Borrower represents and
warrants that such subsidiaries are and shall at all times continue to be
inactive corporations without any assets (other than interests in foreign
subsidiaries).

8.2 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. All financial
statements relating to Borrower which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance with GAAP and fairly present
the financial condition and the results of operations of Borrower as at the
dates and for the periods set forth therein. Except as disclosed in any interim
financial statements furnished by Borrower to Lender prior to the date of this
Agreement, there has been no material adverse change in the assets, liabilities,
properties and condition, financial or otherwise, of Borrower, since the date of
the most recent audited financial statements furnished by Borrower to Lender
prior to the date of this Agreement.

8.3 CHIEF EXECUTIVE OFFICE; COLLATERAL LOCATIONS. The chief
executive office of Borrower and Borrower's Records concerning Accounts are
located only at the address set forth below and its only other places of
business and the only other locations of Collateral, if any, are the addresses
set forth in the Information Certificate, subject to the right of Borrower to
establish new locations in accordance with Section 9.2 below. The Information
Certificate correctly identifies any of such locations which are not owned by
Borrower and sets forth the owners

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and/or operators thereof and to the best of Borrower's knowledge, the holders of
any mortgages on such locations.

8.4 PRIORITY OF LIENS; TITLE TO PROPERTIES. The security interests
and liens granted to Lender under this Agreement and the other Financing
Agreements constitute valid and perfected first priority liens and security
interests in and upon the Collateral subject only to the liens indicated on
Schedule 8.4 hereto and the other liens permitted under Section 9.8 hereof.
Borrower has good and marketable title to all of its properties and assets
subject to no liens, mortgages, pledges, security interests, encumbrances or
charges of any kind, except those granted to Lender and such others as are
specifically listed on Schedule 8.4 hereto or permitted under Section 9.8
hereof.

8.5 TAX RETURNS. Borrower has filed, or caused to be filed, in a
timely manner all tax returns, reports and declarations which are required to be
filed by it (without requests for extension except as previously disclosed in
writing to Lender). All information in such tax returns, reports and
declarations is complete and accurate in all material respects. Borrower has
paid or caused to be paid all taxes due and payable or claimed due and payable
in any assessment received by it, except taxes the validity of which are being
contested in good faith by appropriate proceedings diligently pursued and
available to Borrower and with respect to which adequate reserves have been set
aside on its books. Adequate provision has been made for the payment of all
accrued and unpaid Federal, State, county, local, foreign and other taxes
whether or not yet due and payable and whether or not disputed.

8.6 LITIGATION. Except as set forth on the Information Certificate,
there is no present investigation by any governmental agency pending, or to the
best of Borrower's knowledge threatened, against or affecting Borrower, its
assets or business and there is no action, suit, proceeding or claim by any
Person pending, or to the best of Borrower's knowledge threatened, against
Borrower or its assets or goodwill, or against or affecting any transactions
contemplated by this Agreement, which if adversely determined against Borrower
would result in any material adverse change in the assets, business or prospects
of Borrower or would impair the ability of Borrower to perform its obligations
hereunder or under any of the other Financing Agreements to which it is a party
or of Lender to enforce any Obligations or realize upon any Collateral.

8.7 COMPLIANCE WITH OTHER AGREEMENTS AND APPLICABLE LAWS. Borrower is
not in default in any material respect under, or in violation in any material
respect of any of the terms of, any agreement, contract, instrument, lease or
other commitment to which it is a party or by which it or any of its assets are
bound and Borrower is in compliance in all material respects with all applicable
provisions of laws, rules, regulations, licenses, permits, approvals and orders
of any foreign, Federal, State or local governmental authority, except as
follows: Borrower is in default under agreements relating to its outstanding
Series B Preferred Stock in that Borrower has failed to make certain quarterly
dividend payments thereon, but Borrower represents and warrants to Lender that
the only effect of such default is to increase the rate at which dividends
accrue thereon, and neither the holders of the Series B Preferred Stock nor any
other person has any other right or remedy as a result of such default.

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8.8 ENVIRONMENTAL COMPLIANCE

(a) Borrower has not generated, used, stored, treated,
transported, manufactured, handled, produced or disposed of any Hazardous
Materials, on or off its premises (whether or not owned by it) in any manner
which at any time violates any applicable Environmental Law or any license,
permit, certificate, approval or similar authorization thereunder and the
operations of Borrower complies in all material respects with all Environmental
Laws and all licenses, permits, certificates, approvals and similar
authorizations thereunder.

(b) There has been no investigation, proceeding, complaint,
order, directive, claim, citation or notice by any governmental authority or any
other person nor is any pending or to the best of Borrower's knowledge
threatened, with respect to any non-compliance with or violation of the
requirements of any Environmental Law by Borrower or the release, spill or
discharge, threatened or actual, of any Hazardous Material or the generation,
use, storage, treatment, transportation, manufacture, handling, production or
disposal of any Hazardous Materials or any other environmental, health or safety
matter, which affects Borrower or its business, operations or assets or any
properties at which Borrower has transported, stored or disposed of any
Hazardous Materials.

(c) Borrower has no material liability (contingent or otherwise)
in connection with a release, spill or discharge, threatened or actual, of any
Hazardous Materials or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials.

(d) Borrower has all licenses, permits, certificates, approvals
or similar authorizations required to be obtained or filed in connection with
the operations of Borrower under any Environmental Law and all of such licenses,
permits, certificates, approvals or similar authorizations are valid and in full
force and effect.

8.9 EMPLOYEE BENEFITS

(a) Borrower has not engaged in any transaction in connection
with which Borrower or any of its ERISA Affiliates could be subject to either a
civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by
Section 4975 of the Code, including any accumulated funding deficiency described
in Section 8.9(c) hereof and any deficiency with respect to vested accrued
benefits described in Section 8.9(d) hereof.

(b) No liability to the Pension Benefit Guaranty Corporation has
been or is expected by Borrower to be incurred with respect to any employee
pension benefit plan of Borrower or any of its ERISA Affiliates. There has been
no reportable event (within the meaning of Section 4043(b) of ERISA) or any
other event or condition with respect to any employee pension benefit plan of
Borrower or any of its ERISA Affiliates which presents a risk of termination of
any such plan by the Pension Benefit Guaranty Corporation.

(c) Full payment has been made of all amounts which Borrower or
any of its ERISA Affiliates is required under Section 302 of ERISA and Section
412 of the Code to have paid under the terms of each employee pension benefit
plan as contributions to such plan as of the last day of the most recent fiscal
year of such plan ended prior to the date hereof, and no

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accumulated funding deficiency (as defined in Section 302 of ERISA and Section
412 of the Code), whether or not waived, exists with respect to any employee
pension benefit plan, including any penalty or tax described in Section 8.9(a)
hereof and any deficiency with respect to vested accrued benefits described in
Section 8.9(d) hereof.

(d) The current value of all vested accrued benefits under all
employee pension benefit plans maintained by Borrower that are subject to Title
IV of ERISA does not exceed the current value of the assets of such plans
allocable to such vested accrued benefits, including any penalty or tax
described in Section 8.9(a) hereof and any accumulated funding deficiency
described in Section 8.9(c) hereof. The terms "current value" and "accrued
benefit" have the meanings specified in ERISA.

(e) Neither Borrower nor any of its ERISA Affiliates is or has
ever been obligated to contribute to any "multiemployer plan" (as such term is
defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA.

8.10 ACCURACY AND COMPLETENESS OF INFORMATION. All information
furnished by or on behalf of Borrower in writing to Lender in connection with
this Agreement or any of the other Financing Agreements or any transaction
contemplated hereby or thereby, including, without limitation, all information
on the Information Certificate is true and correct in all material respects on
the date as of which such information is dated or certified and does not omit
any material fact necessary in order to make such information not misleading.
No event or circumstance has occurred which has had or could reasonably be
expected to have a material adverse affect on the business, assets or prospects
of Borrower, which has not been fully and accurately disclosed to Lender in
writing.

8.11 SURVIVAL OF WARRANTIES; CUMULATIVE. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.

SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS

9.1 MAINTENANCE OF EXISTENCE. Borrower shall at all times preserve,
renew and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, trade names, approvals, authorizations, leases
and contracts necessary to carry on the business as presently or proposed to be
conducted. Borrower shall give Lender thirty (30) days prior written notice of
any proposed change in its corporate name, which notice shall set forth the new
name and Borrower shall deliver to Lender a copy of the amendment to the
Certificate of Incorporation of Borrower providing for the name change certified
by the Secretary of State of the jurisdiction of incorporation of Borrower as
soon as it is available.

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9.2 NEW COLLATERAL LOCATIONS. Borrower may open any new location
within the continental United States provided Borrower (a) gives Lender thirty
(30) days prior written notice of the intended opening of any such new location
and (b) executes and delivers, or causes to be executed and delivered, to Lender
such agreements, documents, and instruments as Lender may deem reasonably
necessary or desirable to protect its interests in the Collateral at such
location, including, without limitation, UCC financing statements and, if
Borrower leases such new location, provides a favorable landlord waiver or
subordination, or, in the alternative, Lender may apply an Availability Reserve
in an amount equal to three (3) months gross rent in a manner consistent with
the Availability Reserve established to cover rent as defined in Section 1.4
hereof.

9.3 COMPLIANCE WITH LAWS, REGULATIONS.

(a) Borrower shall, at all times, comply in all material
respects with all laws, rules, regulations, licenses, permits, approvals and
orders applicable to it and duly observe all requirements of any Federal, State
or local governmental authority, including, without limitation, the Employee
Retirement Security Act of 1974, as amended, the Occupational Safety and Hazard
Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, and
all statutes, rules, regulations, orders, permits and stipulations relating to
environmental pollution and employee health and safety, including, without
limitation, all of the Environmental Laws.

(b) Copies of all environmental surveys, audits, assessments,
feasibility studies and results of remedial investigations shall be promptly
furnished, or caused to be furnished, by Borrower to Lender. Borrower shall
take prompt and appropriate action to respond to any non-compliance with any of
the Environmental Laws and shall regularly report to Lender on such response.

(c) Borrower shall give both oral and written notice to Lender
immediately upon Borrower's receipt of any notice of, or Borrower's otherwise
obtaining knowledge of, (i) the occurrence of any event involving the release,
spill or discharge, threatened or actual, of any Hazardous Material or (ii) any
investigation, proceeding, complaint, order, directive, claims, citation or
notice with respect to: (A) any non-compliance with or violation of any
Environmental Law by Borrower or (B) the release, spill or discharge, threatened
or actual, of any Hazardous Material or (C) the generation, use, storage,
treatment, transportation, manufacture, handling, production or disposal of any
Hazardous Materials or (D) any other environmental, health or safety matter,
which affects Borrower or its business, operations or assets or any properties
at which Borrower transported, stored or disposed of any Hazardous Materials.

(d) Without limiting the generality of the foregoing, whenever
Lender reasonably determines that there is non-compliance, or any condition
which requires any action by or on behalf of Borrower in order to avoid any
material non-compliance, with any Environmental Law, Borrower shall, at Lender's
request and Borrower's expense: (i) cause an independent environmental engineer
acceptable to Lender to conduct such tests of the site where Borrower's
non-compliance or alleged non-compliance with such Environmental Laws has
occurred as to such non-compliance and prepare and deliver to Lender a report as
to such non-compliance setting forth the results of such tests, a proposed plan
for responding to any environmental problems described therein, and an estimate
of the costs thereof and (ii) provide to Lender a supplemental report of such
engineer whenever the scope of such non-compliance, or Borrower's response
thereto or the estimated costs thereof, shall change in any material respect.

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(e) Borrower shall indemnify and hold harmless Lender, its
directors, officers, employees, agents, invitees, representatives, successors
and assigns, from and against any and all losses, claims, damages, liabilities,
costs, and expenses (including attorneys' fees and legal expenses) directly or
indirectly arising out of or attributable to the use, generation, manufacture,
reproduction, storage, release, threatened release, spill, discharge, disposal
or presence of a Hazardous Material, including, without limitation, the costs of
any required or necessary repair, cleanup or other remedial work with respect to
any property of Borrower and the preparation and implementation of any closure,
remedial or other required plans. All representations, warranties, covenants
and indemnifications in this Section 9.3 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.

9.4 PAYMENT OF TAXES AND CLAIMS. Borrower shall duly pay and
discharge all taxes, assessments, contributions and governmental charges upon or
against it or its properties or assets, except for taxes the validity of which
are being contested in good faith by appropriate proceedings diligently pursued
and available to Borrower and with respect to which adequate reserves have been
set aside on its books. Borrower shall be liable for any tax or penalties
imposed on Lender as a result of the financing arrangements provided for herein
and Borrower agrees to indemnify and hold Lender harmless with respect to the
foregoing, and to repay to Lender on demand the amount thereof, and until paid
by Borrower such amount shall be added and deemed part of the Loans, PROVIDED,
THAT, nothing contained herein shall be construed to require Borrower to pay any
income or franchise taxes attributable to the income of Lender from any amounts
charged or paid hereunder to Lender. The foregoing indemnity shall survive the
payment of the Obligations and the termination or non-renewal of this Agreement.

9.5 INSURANCE. Borrower shall, at all times, maintain with
financially sound and reputable insurers insurance with respect to the
Collateral against loss or damage and all other insurance of the kinds and in
the amounts customarily insured against or carried by corporations of
established reputation engaged in the same or similar businesses and similarly
situated. Said policies of insurance shall be satisfactory to Lender as to
form, amount and insurer. Borrower shall furnish certificates, policies or
endorsements to Lender as Lender shall require as proof of such insurance, and,
if Borrower fails to do so, Lender is authorized, but not required, to obtain
such insurance at the expense of Borrower. All policies shall provide for at
least thirty (30) days prior written notice to Lender of any cancellation or
reduction of coverage and that Lender may act as attorney for Borrower in
obtaining, and at any time an Event of Default exists or has occurred and is
continuing, adjusting, settling, amending and canceling such insurance.
Borrower shall cause Lender to be named as a loss payee and an additional
insured (but without any liability for any premiums) under such insurance
policies and Borrower shall obtain non-contributory lender's loss payable
endorsements to all insurance policies in form and substance satisfactory to
Lender. Such lender's loss payable endorsements shall specify that the proceeds
of such insurance shall be payable to Lender as its interests may appear and
further specify that Lender shall be paid regardless of any act or omission by
Borrower or any of its affiliates. At its option, Lender may apply any
insurance proceeds received by Lender at any time to the cost of repairs or
replacement of Collateral and/or to payment of the Obligations, whether or not
then due, in any order and in such manner as Lender may determine or hold such
proceeds as cash collateral for the Obligations.

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9.6 FINANCIAL STATEMENTS AND OTHER INFORMATION.

(a) Borrower shall keep proper books and records in which true
and complete entries shall be made of all dealings or transactions of or in
relation to the Collateral and the business of Borrower and its subsidiaries (if
any) in accordance with GAAP and Borrower shall furnish or cause to be furnished
to Lender:

(i) By March 31 of each year, monthly unaudited consolidated
and consolidating financial statements of Borrower and its Parent for the
preceding months of December and January (including in each case balance sheets,
statements of income and loss), all in reasonable detail, fairly presenting the
financial position and the results of the operations of Borrower and its Parent
and their subsidiaries as of the end of and through such fiscal months;

(ii) Within 45 days after the end of the months of February,
May and August in each year, monthly and quarterly unaudited consolidated and
consolidating financial statements of Borrower and its Parent for such months
and for the fiscal quarters ending in such months (including in each case
balance sheets, statements of income and loss and, for the Parent, a quarterly
consolidated statement of shareholders' equity), all in reasonable detail,
fairly presenting the financial position and the results of the operations of
Borrower and its Parent and their subsidiaries as of the end of and through such
fiscal months

(iii) Within 30 days after the end of the months of March,
April, June, July, September and October, monthly unaudited consolidated and
consolidating financial statements of Borrower and its Parent (including in each
case balance sheets and statements of income and loss), all in reasonable
detail, fairly presenting the financial position and the results of the
operations of Borrower and its Parent and their subsidiaries as of the end of
and through such fiscal months; and

(iv) within ninety (90) days after the end of each fiscal
year, audited consolidated and consolidating financial statements of Borrower
and its Parent (including in each case balance sheets, statements of income and
loss, and, for the Parent only, statements of cash flow and statements of
shareholders' equity), and the accompanying notes thereto, all in reasonable
detail, fairly presenting the financial position and the results of the
operations of Borrower and its Parent and their subsidiaries as of the end of
and for such fiscal year, together with the opinion of independent certified
public accountants, which accountants shall be an independent accounting firm
selected by Borrower and reasonably acceptable to Lender, that such financial
statements have been prepared in accordance with GAAP, and present fairly the
results of operations and financial condition of Borrower and its subsidiaries
as of the end of and for the fiscal year then ended.

(b) Borrower shall promptly notify Lender in writing of the
details of (i) any loss, damage, investigation, action, suit, proceeding or
claim relating to the Collateral or any other property which is security for the
Obligations or which would result in any material adverse change in Borrower's
business, properties, assets, goodwill or condition, financial or otherwise and
(ii) the occurrence of any Event of Default or event which, with the passage of
time or giving of notice or both, would constitute an Event of Default.

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(c) Borrower shall promptly after the sending or filing thereof
furnish or cause to be furnished to Lender copies of all financial reports which
Borrower sends to its stockholders generally and copies of all reports and
registration statements which Borrower files with the Securities and Exchange
Commission, any national securities exchange or the National Association of
Securities Dealers, Inc.

(d) Borrower shall furnish or cause to be furnished to Lender
such budgets, forecasts, projections and other information in respect of the
Collateral and the business of Borrower, as Lender may, from time to time,
reasonably request. Without limiting the generality of the foregoing, Borrower
shall deliver to Lender projections prepared in a comparable manner and with
detail comparable to the Projections dated February 20, 1997 and attached as
Exhibit B hereto, for each fiscal year of Borrower commencing during the term
hereof, within 60 days after the beginning of each such fiscal year, all of
which Projections shall be acceptable to the Lender in its discretion. Lender is
hereby authorized to deliver a copy of any financial statement or any other
information relating to the business of Borrower to any court or other
government agency (if so required) or to any participant or assignee or
prospective participant or assignee. Borrower hereby irrevocably authorizes and
directs all accountants or auditors to deliver to Lender, at Borrower's expense,
copies of the financial statements of Borrower and any reports or management
letters prepared by such accountants or auditors on behalf of Borrower and to
disclose to Lender such information as they may have regarding the business of
Borrower. Any documents, schedules, invoices or other papers delivered to
Lender may be destroyed or otherwise disposed of by Lender one (1) year after
the same are delivered to Lender, except as otherwise designated by Borrower to
Lender in writing.

9.7 SALE OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ETC.
Borrower shall not, directly or indirectly, (a) merge into or with or
consolidate with any other Person or permit any other Person to merge into or
with or consolidate with it, or (b) sell, assign, lease, transfer, abandon or
otherwise dispose of any stock or indebtedness to any other Person or any of its
assets to any other Person (except for (i) sales of Inventory in the ordinary
course of business and (ii) the disposition of worn-out or obsolete Equipment or
Equipment no longer used in the business of Borrower so long as (A) if an Event
of Default exists or has occurred and is continuing, any proceeds are paid to
Lender and (B) such sales do not involve Equipment having a net book value in
excess of $250,000 for all such Equipment disposed of in any fiscal year of
Borrower), or (c) form or acquire any subsidiaries, or (d) wind up, liquidate or
dissolve or (e) agree to do any of the foregoing.

9.8 ENCUMBRANCES. Borrower shall not create, incur, assume or suffer
to exist any security interest, mortgage, pledge, lien, charge or other
encumbrance of any nature whatsoever on any of its assets or properties,
including, without limitation, the Collateral, EXCEPT: (a) liens and security
interests of Lender; (b) liens securing the payment of taxes, either not yet
overdue or the validity of which are being contested in good faith by
appropriate proceedings diligently pursued and available to Borrower and with
respect to which adequate reserves have been set aside on its books; (c)
non-consentual statutory liens (other than liens securing the payment of taxes)
arising in the ordinary course of Borrower's business to the extent: (i) such
liens secure indebtedness which is not overdue or (ii) such liens secure
indebtedness relating to claims or liabilities which are fully insured and being
defended at the sole cost and expense and at the sole risk of the insurer or
being contested in good faith by appropriate proceedings diligently pursued and
available to Borrower, in each case prior to the commencement of foreclosure or
other similar

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proceedings and with respect to which adequate reserves have been set aside on
its books; (d) zoning restrictions, easements, licenses, covenants and other
restrictions affecting the use of real property which do not interfere in any
material respect with the use of such real property or ordinary conduct of the
business of Borrower as presently conducted thereon or materially impair the
value of the real property which may be subject thereto; (e) purchase money
security interests in Equipment (including capital leases) and purchase money
mortgages on real estate not to exceed $1,000,000 in the aggregate at any time
outstanding so long as such security interests and mortgages do not apply to any
property of Borrower other than the Equipment or real estate so acquired, and
the indebtedness secured thereby does not exceed the cost of the Equipment or
real estate so acquired, as the case may be; (f) the security interests and
liens set forth on Schedule 8.4 hereto; (g) pledges or deposits under workers'
compensation, unemployment insurance, social security and other similar laws by
Borrower; and (h) deposits, bids or performance bonds made or issued in the
ordinary course of business, in connection with acquisitions or sales of goods
or services in the ordinary course of business.

9.9 INDEBTEDNESS. Borrower shall not incur, create, assume, become
or be liable in any manner with respect to, or permit to exist, any obligations
or indebtedness, EXCEPT (a) the Obligations; (b) trade obligations and normal
accruals in the ordinary course of business not yet due and payable, or with
respect to which the Borrower is contesting in good faith the amount or validity
thereof by appropriate proceedings diligently pursued and available to Borrower,
and with respect to which adequate reserves have been set aside on its books;
(c) purchase money indebtedness (including capital leases) to the extent not
incurred or secured by liens (including capital leases) in violation of any
other provision of this Agreement; and (d) obligations or indebtedness set forth
on the Information Certificate; PROVIDED, THAT, (i) with respect to such
indebtedness other than the Debentures, Borrower may only make regularly
scheduled payments of principal and interest in respect of such indebtedness in
accordance with the terms of the agreement or instrument evidencing or giving
rise to such indebtedness as in effect on the date hereof, (ii) as to the
Debentures, Borrower may only make regularly scheduled payments of interest (not
principal) in respect of the Debentures in accordance with the terms of the
agreement or instrument evidencing or giving rise to the Debentures, and
Borrower may only make such interest payments if no Event of Default and no
event which, with notice or passage of time or both, would constitute an Event
of Default hereunder, has occurred and is continuing, (iii) Borrower shall not,
and shall not permit Parent to, directly or indirectly, (A) amend, modify, alter
or change the terms of any of the foregoing indebtedness or any agreement,
document or instrument related thereto as in effect on the date hereof, or (B)
except as otherwise permitted under this Agreement, directly or indirectly,
redeem, retire, defease, purchase or otherwise acquire the Debentures or other
indebtedness, or set aside or otherwise deposit or invest any sums for such
purpose, and (iv) Borrower shall furnish to Lender all notices or demands in
connection with the Debentures or other indebtedness either received by Borrower
or Parent or on behalf of either of them, promptly after the receipt thereof, or
sent by Borrower or Parent or behalf of either of them, concurrently with the
sending thereof, as the case may be. Notwithstanding the foregoing, Borrower
may, itself or through the Parent, redeem or purchase Debentures if, at the date
the redemption or purchase is to be consummated, and after giving effect
thereto, no Event of Default and no event which, with notice or passage of time
or both, would constitute an Event of Default hereunder, has occurred and is
continuing, and Borrower has Excess Availability of $8,000,000 or more.

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9.10 LOANS, INVESTMENTS, GUARANTEES, ETC. Except as permitted under
Section 9.12 below, Borrower shall not, directly or indirectly, make any loans
or advance money or property to any person, or invest in (by capital
contribution, dividend or otherwise) or purchase or repurchase the stock or
indebtedness or all or a substantial part of the assets or property of any
person, or guarantee, assume, endorse, or otherwise become responsible for
(directly or indirectly) the indebtedness, performance, obligations or dividends
of any Person or agree to do any of the foregoing, EXCEPT: (a) the endorsement
of instruments for collection or deposit in the ordinary course of business; (b)
investments in: (i) short-term direct obligations of the United States
Government, (ii) negotiable certificates of deposit issued by any bank
satisfactory to Lender, payable to the order of the Borrower or to bearer and
delivered to Lender, (iii) commercial paper rated A1 or P1 and (iv) investments
permitted by Borrower's Investment Policy attached hereto as Exhibit C;
PROVIDED, THAT, as to any of the foregoing, unless waived in writing by Lender,
Borrower shall take such actions as are deemed necessary by Lender to perfect
the security interest of Lender in such investments and (c) the guarantees set
forth in the Information Certificate.

9.11 DIVIDENDS AND REDEMPTIONS. Borrower shall not, and Borrower shall
not permit Parent to, directly or indirectly, declare or pay any dividends on
account of any shares of any class of capital stock of Borrower or Parent now or
hereafter outstanding, or set aside or otherwise deposit or invest any sums for
such purpose, or redeem, retire, defease, purchase or otherwise acquire any
shares of any class of capital stock (or set aside or otherwise deposit or
invest any sums for such purpose) for any consideration other than common stock
or apply or set apart any sum, or make any other distribution (by reduction of
capital or otherwise) in respect of any such shares or agree to do any of the
foregoing, except that Borrower may distribute adequate funds to Parent, so that
it is able to pay, and Parent may pay the following, provided, in each case, no
Event of Default and no event which, with notice or passage of time or both,
would constitute an Event of Default has occurred and is continuing: (a)
dividends on its Series B Preferred Stock, provided that, at the date each such
payment is to be made, and after giving effect to each such payment, Borrower
has Excess Availability of not less than $8,000,000, and (b) regularly scheduled
payments of interest on the Debentures, and payment of interest and principal on
other Indebtedness permitted under Section 9.9 hererof, and (c) fees to SCA
under the Management Agreement dated as of June 1, 1996 (the "Management
Agreement") between Parent and Shamrock Capital Advisors, Inc. ("SCA").

9.12 TRANSACTIONS WITH AFFILIATES; UPSTREAMING. Borrower shall not
enter into any transaction for the purchase, sale or exchange of property or the
rendering of any service to or by any affiliate. Without limiting any of the
other terms and provisions of this Agreement, Borrower shall not make any
transfers of money or property of any kind to the Parent, regardless of the form
of transaction in which such transfer is to occur, except for transfers of money
to Parent to redeem or purchase Debentures in compliance with Section 9.9 above
or to pay dividends on Parent's Series B Preferred Stock in compliance with
Section 9.11 above. The provisions of this Section 9.12 shall not, however,
prohibit sales of Inventory (which is not Eligible Inventory) to foreign
subsidiaries in the ordinary course of business or advances by Borrower to its
foreign subsidiaries in the ordinary course of business, provided that the
aggregate amount at any time owing to the Borrower from all foreign subsidiaries
for all such sales and advances (not including non-cash intercompany profit)
does not exceed $25,000,000 in the aggregate at any time outstanding.

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9.13 IMPORT DOCUMENTATION. Borrower shall cause CoreStates Bank, N.A.
to be named as the consignee on all documentation relating to the import of
Inventory and other goods by or for the Borrower, including without limitation
all Forwarder Cargo Receipts and Bills of Lading.

9.14 [INTENTIONALLY OMITTED]

9.15 COMPLIANCE WITH ERISA. Borrower shall not with respect to any
"employee pension benefit plan" maintained by Borrower or any of its ERISA
Affiliates:

(a) (i) terminate any of such employee pension benefit plans so
as to incur any liability to the Pension Benefit Guaranty Corporation
established pursuant to ERISA, (ii) allow or suffer to exist any prohibited
transaction involving any of such employee pension benefit plans or any trust
created thereunder which would subject Borrower or such ERISA Affiliate to a tax
or penalty or other liability on prohibited transactions imposed under Section
4975 of the Code or ERISA, (iii) fail to pay to any such employee pension
benefit plan any contribution which it is obligated to pay under Section 302 of
ERISA, Section 412 of the Code or the terms of such plan, (iv) allow or suffer
to exist any accumulated funding deficiency, whether or not waived, with respect
to any such employee pension benefit plan, (v) allow or suffer to exist any
occurrence of a reportable event or any other event or condition which presents
a material risk of termination by the Pension Benefit Guaranty Corporation of
any such employee pension benefit plan that is a single employer plan, which
termination could result in any liability to the Pension Benefit Guaranty
Corporation or (vi) incur any withdrawal liability with respect to any
multiemployer pension plan.

(b) As used in this Section 9.15, the term "employee pension
benefit plans," "employee benefit plans", "accumulated funding deficiency" and
"reportable event" shall have the respective meanings assigned to them in ERISA,
and the term "prohibited transaction" shall have the meaning assigned to it in
Section 4975 of the Code and ERISA.

9.16 COSTS AND EXPENSES. Borrower shall pay to Lender on demand all
costs, expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents which may hereafter be contemplated (whether or not executed) or
entered into in respect hereof and thereof, including, but not limited to: (a)
all costs and expenses of filing or recording (including Uniform Commercial Code
financing statement filing taxes and fees, documentary taxes, intangibles taxes
and mortgage recording taxes and fees, if applicable); (b) costs and expenses
and fees for title insurance and other insurance premiums, environmental audits,
surveys, assessments, engineering reports and inspections, appraisal fees and
search fees; (c) costs and expenses of remitting loan proceeds, collecting
checks and other items of payment, and establishing and maintaining the Blocked
Accounts, together with Lender's customary charges and fees with respect
thereto; (d) charges, fees or expenses charged by any bank or issuer in
connection with the Letter of Credit Accommodations; (e) costs and expenses of
preserving and protecting the Collateral; (f) costs and expenses paid or
incurred in connection with obtaining payment of the Obligations, enforcing the
security interests and liens of Lender, selling or otherwise realizing upon the
Collateral, and otherwise enforcing the provisions of this Agreement and the
other Financing Agreements or defending any claims made or threatened against
Lender

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arising out of the transactions contemplated hereby and thereby (including,
without limitation, preparations for and consultations concerning any such
matters); (g) all out-of-pocket expenses and costs heretofore and from time to
time hereafter incurred by Lender during the course of periodic field
examinations of the Collateral and Borrower's operations, plus a per diem charge
at the rate of $650 per person per day for Lender's examiners in the field and
office; and (h) the fees and disbursements of counsel (including legal
assistants) to Lender in connection with any of the foregoing.

9.17 FURTHER ASSURANCES. At the request of Lender at any time and
from time to time, Borrower shall, at its expense, duly execute and deliver, or
cause to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Lender may
at any time and from time to time request a certificate from an officer of
Borrower representing that all conditions precedent to the making of Loans and
providing Letter of Credit Accommodations contained herein are satisfied. In
the event of such request by Lender, Lender may, at its option, cease to make
any further Loans or provide any further Letter of Credit Accommodations until
Lender has received such certificate and, in addition, Lender has determined
that such conditions are satisfied. Where permitted by law, Borrower hereby
authorizes Lender to execute and file one or more UCC financing statements
signed only by Lender.

SECTION 10. EVENTS OF DEFAULT AND REMEDIES

10.1 EVENTS OF DEFAULT. The occurrence or existence of any one or
more of the following events are referred to herein individually as an "EVENT OF
DEFAULT", and collectively as "EVENTS OF DEFAULT":

(a) Borrower fails to pay any of the Obligations within three
days after the date due, or fails to perform any of the terms, covenants,
conditions or provisions contained in this Agreement or any of the other
Financing Agreements, provided that, with respect to a breach of the following
provisions only, Borrower shall have ten (10) days to cure any such breach,
provided the breach was not intentional, provided the same or a similar breach
has not occurred in the prior six months, and provided the breach is capable of
being cured in such ten-day period: Sections 9.3, 9.4, 9.5, and 9.6;

(b) any representation, warranty or statement of fact made by
Borrower to Lender in this Agreement, the other Financing Agreements or any
other agreement, schedule, confirmatory assignment or otherwise shall when made
or deemed made be false or misleading in any material respect;

(c) any Obligor revokes, terminates or fails to perform any of
the terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Lender;

(d) any judgment for the payment of money is rendered against
Borrower or any Obligor in excess of $250,000 in any one case or in excess of
$500,000 in the aggregate and shall remain undischarged or unvacated for a
period in excess of thirty (30) days or execution

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<PAGE>

shall at any time not be effectively stayed, or any judgment other than for the
payment of money, or injunction, attachment, garnishment or execution is
rendered against Borrower or any Obligor or any of their assets;

(e) any Obligor (being a natural person or a general partner of
an Obligor which is a partnership) dies or Borrower or any Obligor, which is a
partnership, limited liability company or corporation, dissolves or suspends or
discontinues doing business;

(f) Borrower or any Obligor becomes insolvent (however defined
or evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its creditors or principal
creditors;

(g) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against Borrower or any Obligor or all or any part of its
properties and such petition or application is not dismissed within forty-five
(45) days after the date of its filing or Borrower or any Obligor shall file any
answer admitting or not contesting such petition or application or indicates its
consent to, acquiescence in or approval of, any such action or proceeding or the
relief requested is granted sooner;

(h) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by Borrower or any Obligor or for all or any part of its
property; or

(i) any default by Borrower or any Obligor under any agreement,
document or instrument relating to any indebtedness for borrowed money owing to
any person other than Lender (except for the Debentures, which are covered by
Section 10.1(n) below), or any capitalized lease obligations, contingent
indebtedness in connection with any guarantee, letter of credit, indemnity or
similar type of instrument in favor of any person other than Lender, in any case
in an amount in excess of $500,000, which default continues for more than the
applicable cure period, if any, with respect thereto, or any default by Borrower
or any Obligor under any material contract, lease, license or other obligation
to any person other than Lender, which default continues for more than the
applicable cure period, if any, with respect thereto;

(j) Sale by Trefoil Capital Investors, L.P. ("Trefoil") of its
beneficial ownership of the common stock of the Parent to a third-party
resulting in said third-party holding more than 44% of the beneficial ownership
of the common stock of the Parent, provided however that distributions to the
partners of Trefoil of common stock of the Parent shall not constitute an Event
of Default nor shall resales by such partners, except if such resales in a
single transaction or series of related transactions result in a third-party
acquiring beneficial ownership in excess of 44% of the common stock of the
Parent.

(k) the indictment or threatened indictment of Borrower or any
Obligor under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings against Borrower or any Obligor, pursuant to
which statute or proceedings the

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<PAGE>

penalties or remedies sought or available include forfeiture of any of the
property of Borrower or such Obligor;

(l) there shall be a material adverse change in the business or
assets of Borrower or any Obligor after the date hereof; or

(m) there shall be an event of default under any of the other
Financing Agreements; or

(n) any Event of Default occurs under the Indenture dated as of
December 24, 1992 with respect to the Debentures, or any amendment, extension,
renewal or replacement thereof or therefor.

10.2 REMEDIES.

(a) at any time an Event of Default exists or has occurred and
is continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by Borrower or any Obligor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or other applicable law, are
cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
an injunction to restrain a breach or threatened breach by Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against Borrower or any Obligor to collect the
Obligations without prior recourse to the Collateral.

(b) without limiting the foregoing, at any time an Event of
Default exists or has occurred and is continuing, Lender may, in its discretion
and without limitation, (i) accelerate the payment of all Obligations (including
without limitation any unpaid Closing Fees or other fees) and demand immediate
payment thereof to Lender (PROVIDED, THAT, upon the occurrence of any Event of
Default described in Sections 10.1(g) and 10.1(h), all Obligations shall
automatically become immediately due and payable), (ii) with or without judicial
process or the aid or assistance of others, enter upon any premises on or in
which any of the Collateral may be located and take possession of the Collateral
or complete processing, manufacturing and repair of all or any portion of the
Collateral, (iii) require Borrower, at Borrower's expense, to assemble and make
available to Lender any part or all of the Collateral at any place and time
designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and
realize upon any and all Collateral, (v) remove any or all of the Collateral
from any premises on or in which the same may be located for the purpose of
effecting the sale, foreclosure or other disposition thereof or for any other
purpose, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any
and all Collateral (including, without limitation, entering into contracts with
respect thereto, public or private sales at any exchange, broker's board, at any
office of Lender or elsewhere) at such prices or terms as Lender may deem
reasonable, for cash, upon credit or for future delivery, with the Lender having
the right to purchase the whole or any part of the Collateral at any such public
sale, all of the foregoing being free from any right or equity of redemption of
Borrower, which right or equity of redemption is hereby expressly waived and
released by Borrower and/or (vii) terminate this

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<PAGE>

Agreement. If any of the Collateral is sold or leased by Lender upon credit
terms or for future delivery, the Obligations shall not be reduced as a result
thereof until payment therefor is finally collected by Lender. If notice of
disposition of Collateral is required by law, five (5) days prior notice by
Lender to Borrower designating the time and place of any public sale or the time
after which any private sale or other intended disposition of Collateral is to
be made, shall be deemed to be reasonable notice thereof and Borrower waives any
other notice. In the event Lender institutes an action to recover any
Collateral or seeks recovery of any Collateral by way of prejudgment remedy,
Borrower waives the posting of any bond which might otherwise be required.

(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or in part and in such order
as Lender may elect, whether or not then due. Borrower shall remain liable to
Lender for the payment of any deficiency with interest at the highest rate
provided for herein and all costs and expenses of collection or enforcement,
including attorneys' fees and legal expenses.

(d) without limiting the foregoing, upon the occurrence of an
Event of Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice, (i)
cease making Loans or arranging for Letter of Credit Accommodations or reduce
the lending formulas or amounts of Revolving Loans and Letter of Credit
Accommodations available to Borrower and/or (ii) terminate any provision of this
Agreement providing for any future Loans or Letter of Credit Accommodations to
be made by Lender to Borrower.

SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS, AND CONSENTS; GOVERNING LAW

11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial
Waiver.

(a) The validity, interpretation and enforcement of this
Agreement and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of California
(without giving effect to principles of conflicts of law).

(b) Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the state courts of the County of Los Angeles,
State of California and of the United States District Court for the Central
District of California and waive any objection based on venue or FORUM NON
CONVENIENS with respect to any action instituted therein arising under this
Agreement or any of the other Financing Agreements or in any way connected with
or related or incidental to the dealings of the parties hereto in respect of
this Agreement or any of the other Financing Agreements or the transactions
related hereto or thereto, in each case whether now existing or hereafter
arising, and whether in contract, tort, equity or otherwise, and agree that any
dispute with respect to any such matters shall be heard only in the courts
described above (except that Lender shall have the right to bring any action or
proceeding against Borrower or its property in the courts of any other
jurisdiction which Lender deems necessary or appropriate in order to realize on
the Collateral or to otherwise enforce its rights against Borrower or its
property).

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<PAGE>

(c) Borrower hereby waives personal service of any and all
process upon it and consents that all such service of process may be made by
certified mail (return receipt requested) directed to its address set forth on
the signature pages hereof and service so made shall be deemed to be completed
five (5) days after the same shall have been so deposited in the U.S. mails, or,
at Lender's option, by service upon Borrower in any other manner provided under
the rules of any such courts. Within thirty (30) days after such service,
Borrower shall appear in answer to such process, failing which Borrower shall be
deemed in default and judgment may be entered by Lender against Borrower for the
amount of the claim and other relief requested.

(D) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (I) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (II) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND
LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER
OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.

(e) Lender shall not have any liability to Borrower (whether in
tort, contract, equity or otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Lender, that the losses were
the result of acts or omissions constituting gross negligence or willful
misconduct. In any such litigation, Lender shall be entitled to the benefit of
the rebuttable presumption that it acted in good faith and with the exercise of
ordinary care in the performance by it of the terms of this Agreement.

11.2 WAIVER OF NOTICES. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on Borrower which Lender may elect to give shall entitle Borrower
to any other or further notice or demand in the same, similar or other
circumstances.

11.3 AMENDMENTS AND WAIVERS. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender. Lender shall not, by any act, delay, omission or otherwise be deemed to
have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically
set forth therein. A waiver by Lender of any right, power and/or remedy on any
one occasion shall not be construed

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<PAGE>

as a bar to or waiver of any such right, power and/or remedy which Lender would
otherwise have on any future occasion, whether similar in kind or otherwise.

11.4 WAIVER OF COUNTERCLAIMS. Borrower waives all rights to interpose
any claims, deductions, setoffs or counterclaims of any nature (other than
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.

11.5 INDEMNIFICATION. Borrower shall indemnify and hold Lender, and
its directors, agents, employees and counsel, harmless from and against any and
all losses, claims, damages, liabilities, costs or expenses imposed on, incurred
by or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including, without limitation, amounts paid in settlement, court costs, and the
fees and expenses of counsel. To the extent that the undertaking to indemnify,
pay and hold harmless set forth in this Section may be unenforceable because it
violates any law or public policy, Borrower shall pay the maximum portion which
it is permitted to pay under applicable law to Lender in satisfaction of
indemnified matters under this Section. The foregoing indemnity shall survive
the payment of the Obligations and the termination or non-renewal of this
Agreement.

SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS

12.1 TERM.

(a) This Agreement and the other Financing Agreements shall
become effective as of the date set forth on the first page hereof and shall
continue in full force and effect for a term ending on May 31, 2000 (the
"Renewal Date"), and from year to year thereafter, unless sooner terminated
pursuant to the terms hereof. Lender or Borrower (subject to Lender's right to
extend the Renewal Date as provided above) may terminate this Agreement and the
other Financing Agreements effective on the Renewal Date or on the anniversary
of the Renewal Date in any year by giving to the other party at least sixty (60)
days prior written notice. Borrower may terminate this Agreement prior to the
end of the then current term, including any renewal term, for any reason upon
sixty (60) days prior written notice to Lender, and in such case Borrower agrees
to pay to Lender the applicable early termination fee provided for in Section
12.1(c) hereof. Regardless of the timing of termination, this Agreement and all
other Financing Agreements must be terminated simultaneously. Upon the
effective date of termination or non-renewal of the Financing Agreements,
Borrower shall pay to Lender, in full, all outstanding and unpaid Obligations
and shall furnish either cash collateral to Lender or standby letters of credit
in favor of Lender (in form and issued by Banks acceptable to Lender in its
good-faith discretion), in each case in such amounts as Lender determines are
reasonably necessary to secure Lender from loss, cost, damage or expense,
including attorneys' fees and legal expenses, in connection with any contingent
Obligations, including issued and outstanding Letter of Credit Accommodations
and checks or other payments provisionally credited to the Obligations and/or as
to which Lender has not yet received final and indefeasible payment. Such cash
collateral shall be remitted by wire transfer in Federal funds to such bank
account of Lender, as Lender may, in its discretion,

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designate in writing to Borrower for such purpose. Interest shall be due until
and including the next Business Day, if the amounts so paid by Borrower to the
bank account designated by Lender are received in such bank account later than
10:30 a.m., Los Angeles time.

(b) no termination of this Agreement or the other Financing
Agreements shall relieve or discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all Obligations have been fully and finally discharged and paid, and
Lender's continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Financing Agreements and
applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid.

(c) if for any reason this Agreement is terminated prior to the
end of the then current term or renewal term of this Agreement, Borrower agrees
to pay to Lender, upon the effective date of such termination, an early
termination fee in the amount set forth below if such termination is effective
in the period indicated:

AMOUNT PERIOD
------ ------
(i) 3% of the then applicable Maximum from the date of this
Credit Agreement to and including
the day preceding the first
anniversary of this Agreement

(ii) 2% of the then applicable Maximum from the first anniversary of
Credit this Agreement to and
including the day preceding
the second anniversary of this
Agreement

(iii) 1% of the then applicable Maximum from the second anniversary of
this Agreement to and
including the Renewal Date,
and if the Renewal Date is
extended as provided in
Section 12.1(a), at any time
during a renewal term, if any.

The early termination fee provided for in this Section 12.1 shall be deemed
included in the Obligations.

12.2 NOTICES. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at its address set forth below and to Borrower at
its chief executive office set forth below, or to such other address as either
party may designate by written notice to the other in accordance with this
provision, and (b) deemed to have been given or made: if delivered in person,
immediately upon delivery; if by telex, telegram or facsimile transmission,
immediately upon sending and upon confirmation of receipt; if by nationally
recognized overnight courier service with instructions to deliver the next
Business Day, one (1) Business Day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.

12.3 PARTIAL INVALIDITY. If any provision of this Agreement is held
to be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to

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<PAGE>

be invalid or unenforceable and the rights and obligations of the parties shall
be construed and enforced only to such extent as shall be permitted by
applicable law.

12.4 SUCCESSORS. This Agreement, the other Financing Agreements and
any other document referred to herein or therein shall be binding upon and inure
to the benefit of and be enforceable by Lender, Borrower and their respective
successors and assigns, except that Borrower may not assign its rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written consent of Lender. Lender may,
after notice to Borrower, assign its rights and delegate its obligations under
this Agreement and the other Financing Agreements and further may assign, or
sell participations in, all or any part of the Loans, the Letter of Credit
Accommodations or any other interest herein to another financial institution or
other person, in which event, the assignee or participant shall have, to the
extent of such assignment or participation, the same rights and benefits as it
would have if it were the Lender hereunder, except as otherwise provided by the
terms of such assignment or participation.

12.5 ENTIRE AGREEMENT This Agreement, the other Financing Agreements,
any supplements hereto or thereto, and any instruments or documents delivered or
to be delivered in connection herewith or therewith represents the entire
agreement and understanding concerning the subject matter hereof and thereof
between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written.

IN WITNESS WHEREOF, Lender and Borrower have caused these presents to be
duly executed as of the day and year first above written.

Lender: Borrower:

CONGRESS FINANCIAL CORPORATION L.A. GEAR CALIFORNIA, INC.
(WESTERN)

By: /s/Donald A. McLeod By: /s/Victor J. Trippetti
--------------------------- ----------------------------------
Title: Senior Vice President Title: Senior Vice President and CEO
------------------------ ------------------------------

Address: Chief Executive Office and
Location for Borrower's Records:

225 South Lake Avenue
Suite 1000 2850 Ocean Park Blvd.
Pasadena, California 91101 Santa Monica, California 90405

46,333-8

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<PAGE>

EXHIBIT 10.2

[LOGO] CONGRESS

CONTINUING GUARANTY AND WAIVER

BORROWER: L.A. GEAR CALIFORNIA, INC.

GUARANTOR(S): L.A. GEAR, INC.

DATE: MAY 21, 1997

THIS CONTINUING GUARANTY AND WAIVER (hereinafter called "Guaranty") is executed
by the above-named guarantor(s) (jointly and severally, the "Guarantor"), as of
the above date, in favor of CONGRESS FINANCIAL CORPORATION (WESTERN)
(hereinafter called "Congress"), whose address is 225 South Lake Avenue, Suite
1000, Pasadena, California 91101 with respect to the Indebtedness of the above-
named borrower (hereinafter called "Borrower").

1. CONTINUING GUARANTY. Guarantor hereby unconditionally guarantees and
promises to pay on demand to Congress, at the address indicated above, or at
such other address as Congress may direct, in lawful money of the United
States, and to perform for the benefit of Congress, all Indebtedness of
Borrower now or hereafter owing to or held by Congress. As used herein, the
term "Indebtedness" is used in its most comprehensive sense and shall mean
and include without limitation: (a) any and all debts, duties, obligations,
liabilities, representations, warranties and guaranties of Borrower or any
one or more of them, heretofore, now, or hereafter made, incurred, or
created, whether directly to Congress or acquired by Congress by assignment
or otherwise, or held by Congress on behalf of others, however arising,
whether voluntary or involuntary, due or not due, absolute or contingent,
liquidated or unliquidated, certain or uncertain, determined or undetermined,
monetary or nonmonetary, written or oral, and whether Borrower may be liable
individually or jointly with others, and regardless of whether recovery
thereon may be or hereafter become barred by any statute of limitations,
discharged or uncollectible in any bankruptcy, insolvency or other
proceeding, or otherwise unenforceable; and (b) any and all amendments,
modifications, renewals and extensions of any or all of the foregoing,
including without limitation amendments, modifications, renewals and
extensions which are evidenced by any new or additional instrument, document
or agreement; and (c) any and all attorneys' fees, court costs, and
collection charges incurred in endeavoring to collect or enforce any of the
foregoing against Borrower, Guarantor, or any other person liable thereon
(whether or not suit be brought) and any other expenses of, for or incidental
to collection thereof. As used herein, the term "Borrower" shall include any
successor to the business and assets of Borrower and shall also include
Borrower in its capacity as a debtor or debtor in possession under the
federal Bankruptcy Code, and any trustee, custodian or receiver for Borrower
or any of its assets, should Borrower hereafter become the subject of any
bankruptcy or insolvency proceeding, voluntary or involuntary; and all
indebtedness, liabilities and obligations incurred by any such person shall
be included in the Indebtedness guaranteed hereby. This Guaranty is given in
consideration for credit and other financial accommodations to be provided by
Congress to Borrower pursuant to that certain Loan and Security Agreement of
even date herewith (as amended from time to time, the "Loan Agreement") and
related documents (as amended from time to time, collectively, with the Loan
Agreement, the "Loan Documents"). All sums due under this Guaranty shall bear
interest from the date due until the date paid at the highest rate charged
with respect to any of the Indebtedness.

2. WAIVERS. Guarantor hereby waives: (a) presentment for payment, notice of
dishonor, demand, protest, and notice thereof as to any instrument, and all
other notices and demands to which Guarantor might be entitled, including
without limitation notice of all of the following: the acceptance hereof; the
creation, existence, or acquisition of any Indebtedness; the amount of the
Indebtedness from time to time outstanding; any foreclosure sale or other
disposition of any property which secures any or all of the Indebtedness or
which secures the obligations of any other guarantor of any or all of the
Indebtedness; any adverse change in Borrower's financial position; any other
fact which might increase Guarantor's risk; any default, partial payment or
non-payment of all or any part of the Indebtedness; the occurrence of any
other Event of Default (as hereinafter defined); any and all agreements and
arrangements between Congress and Borrower and any changes, modifications, or
extensions thereof, and any revocation, modification or release of any
guaranty of any or all of the Indebtedness by any person (including without
limitation any other person signing this Guaranty): (b) any right to require
Congress to institute suit against, or to exhaust its rights and remedies
against) Borrower or any other person, or to proceed against any property of
any kind which secures all or any part of the Indebtedness, or to exercise
any right of offset or other right

<PAGE>

with respect to any reserves, credits or deposit accounts held by or
maintained with Congress or any indebtedness of Congress to Borrower, or to
exercise any other right or power, or pursue any other remedy Congress may
have; (c) any defense arising by reason of any disability or other defense of
Borrower or any other guarantor or any endorser, co-maker or other person, or
by reason of the cessation from any cause whatsoever of any liability of
Borrower or any other guarantor or any endorser, co-maker or other person,
with respect to all or any part of the Indebtedness, or by reason of any act
or omission of Congress or others which directly or indirectly results in the
discharge or release of Borrower or any other guarantor or any other person
or any Indebtedness or any security therefor, whether by operation of law or
otherwise; (d) any defense arising by reason of any failure of Congress to
obtain, perfect, maintain or keep in force any security interest in, or lien
or encumbrance upon, any property of Borrower or any other person; (e) any
defense based upon any failure of Congress to give Guarantor notice of any
sale or other disposition of any property securing any or all of the
Indebtedness, or any defects in any such notice that may be given, or any
failure of Congress to comply with any provision of applicable law in
enforcing any security interest in or lien upon any property securing any or
all of the Indebtedness including, but not limited to, any failure by Congress
to dispose of any property securing any or all of the Indebtedness in a
commercially reasonable manner; (f) any defense based upon or arising out of
any bankruptcy, insolvency, reorganization, arrangement, readjustment of
debt, liquidation or dissolution proceeding commenced by or against Borrower
or any other guarantor or any endorser, co-maker or other person, including
without limitation any discharge of, or bar against collecting, any of the
Indebtedness (including without limitation any interest thereon), in or as a
result of any proceeding; and (g) the benefit of any and all statutes of
limitation with respect to any action based upon, arising out of or related
to this Guaranty. Until all of the Indebtedness has been paid, performed, and
discharged in full, nothing shall discharge or satisfy the liability of
Guarantor hereunder except the full performance and payment of all of the
Indebtedness. If any claim is ever made upon Congress for repayment or
recovery of any amount or amounts received by Congress in payment of or on
account of any of the Indebtedness, because of any claim that any such
payment constituted a preferential transfer or fraudulent conveyance, or for
any other reason whatsoever, and Congress repays all or part of said amount
by reasons of any judgment, decree or order of any court or administrative
body having jurisdiction over Congress or any of its property, or by reason
of any settlement or compromise of any such claim effected by Congress with
any such claimant (including without limitation the Borrower), then and in
any such event, Guarantor agrees that any such judgment, decree, order,
settlement and compromise shall be binding upon Guarantor, notwithstanding any
revocation or release of this Guaranty or the cancellation of any note or
other instrument evidencing any of the Indebtedness, or any release of any of
the Indebtedness, and the Guarantor shall be and remain liable to Congress
under this Guaranty for the amount so repaid or recovered, to the same extent
as if such amount had never originally been received by Congress, and the
provisions of this sentence shall survive, and continue in effect,
notwithstanding any revocation or release of this Guaranty. Until all of the
Indebtedness has been irrevocably paid and performed in full, Guarantor
hereby expressly and unconditionally waives all rights of subrogation,
reimbursement and indemnity of every kind against Borrower, and all rights of
recourse to any assets or property of Borrower, and all rights to any
collateral or security held for the payment and performance of any
Indebtedness, including (but not limited to) any of the forgoing rights which
Guarantor may have under any present or future document or agreement with any
Borrower or other person, and including (but not limited to) any of the
foregoing rights which Guarantor may have under any equitable doctrine of
subrogation, implied contract, or unjust enrichment, or any other equitable
or legal doctrine. Neither Congress, nor any of its directors, officers,
employees, agents, attorneys or any other person affiliated with or
representing Congress shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by
Guarantor or any other party through the ordinary negligence of Congress, or
any of its directors, officers, employees, agents, attorneys or any other
person affiliated with or representing Congress.

3. CONSENTS. Guarantor hereby consents and agrees that, without notice to or
by Guarantor and without affecting or impairing in any way the obligations or
liability of Guarantor hereunder, Congress may, from time to time before or
after revocation of this Guaranty, do any one or more of the following in
Congress' sole and absolute discretion: (a) accelerate (in accordance with
the Loan Documents), accept partial payments of, compromise or settle, renew,
extend the time for the payment, discharge, or performance of, refuse to
enforce, and release all or any parties to, any or all of the Indebtedness;
(b) grant any other indulgence to Borrower or any other person in respect of
any or all of the Indebtedness or any other matter; (c) accept, release,
waive, surrender, enforce, exchange, modify, impair, or extend the time for
the performance, discharge, or payment or, any and all property of any kind
securing any or all of the Indebtedness or any guaranty of any or all of the
Indebtedness, or on which Congress at any time may have a lien, or refuse to
enforce its rights or make any compromise or settlement or agreement therefor
in respect of any or all of such property; (d) substitute or add, or take any
action or omit to take any action which results in the release of, any one or
more endorsers or guarantors of all or any part of the Indebtedness,
including, without limitation one or more parties to this Guaranty,
regardless of any destruction or impairment of any right of contribution or
other right of Guarantor; (e) amend, alter or change in any respect
whatsoever any term or provision relating to an or all of the Indebtedness,
including the rate of interest thereon; (f) apply any sums received from
Borrower, any other guarantor, endorser, or co-signer, or from the
disposition of any collateral or security, to any indebtedness whatsoever
owing from such person or secured by such collateral or security, in such
manner and order as Congress determines

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<PAGE>

in its sole discretion, and regardless of whether such indebtedness is part
of the Indebtedness, is secured, or is due and payable; (g) apply any sums
received from Guarantor or from the disposition of any collateral or security
securing the obligations of Guarantor, to any of the Indebtedness in such
manner and order as Congress determines in its sole discretion, regardless of
whether or not such Indebtedness is secured or is due and payable. Guarantor
consents and agrees that Congress shall be under no obligation to marshal any
assets in favor of Guarantor, or against or in payment of any or all of the
Indebtedness. Guarantor further consents and agrees that Congress shall have
no duties or responsibilities whatsoever with respect to any property
securing any or all of the Indebtedness. Without limiting the generality of
the foregoing, Congress shall have no obligation to monitor, verify, audit,
examine, or obtain or maintain any insurance with respect to, any property
securing any or all of the Indebtedness.

4. ACCOUNT STATED. Congress' books and records showing the account between
it and the Borrower shall be admissible in evidence in any action or
proceeding as presumptive proof of the items therein set forth. Congress'
monthly statements rendered to the Borrower shall be binding upon the
Guarantor (whether or not the Guarantor receives copies thereof), and shall
constitute an account stated between Congress and the Borrower, unless
Congress receives a written statement of the Borrower's exceptions within 30
days after the statement was mailed to the Borrower. The Guarantor assumes
full responsibility for obtaining copies of such monthly statements from the
Borrower, if the Guarantor desires such copies.

5. EXERCISE OF RIGHTS AND REMEDIES; FORECLOSURE OF TRUST DEEDS. Guarantor
hereby waives all rights of subrogation, reimbursement, indemnification, and
contribution and any other rights and defenses that are or may become
available to the Guarantor or other surety by reason of California Civil Code
Sections 2787 to 2855, inclusive. The Guarantor waives all rights and
defenses that the Guarantor may have because the Borrower's Indebtedness is
secured by real property. This means, among other things: (1) Congress may
collect from the Guarantor without first foreclosing on any real or personal
property collateral pledged by the Borrower. (2) If Congress forecloses on
any real property collateral pledged by the Borrower: (A) The amount of the
Indebtedness may be reduced only by the price for which that collateral is
sold at the foreclosure sale, even if the collateral is worth more than the
sale price. (B) Congress may collect from the Guarantor even if Congress, by
foreclosing on the real property collateral, has destroyed any right the
Guarantor may have to collect from the Borrower. This is an unconditional and
irrevocable waiver of any rights and defenses the Guarantor may have because
the Borrower's Indebtedness is secured by real property. These rights and
defenses include, but are not limited to, any right or defenses based upon
Section 580a, 580b, 580d, or 726 of the Code of Civil Procedure. The
Guarantor waives all rights and defenses arising out of an election of
remedies by Congress, even though that election of remedies, such as a
nonjudicial foreclosure with respect to security for a guaranteed obligation,
has destroyed the Guarantor's rights of subrogation and reimbursement against
the principal by the operation of Section 580d of the Code of Civil Procedure
or otherwise.

6. EVENTS OF DEFAULT. Notwithstanding the terms of all or any part of the
Indebtedness, the obligations of the Guarantor hereunder to pay and perform
all of the Indebtedness shall, at the option of Congress, immediately become
due and payable, without notice, and without regard to the expressed maturity
of any of the Indebtedness, in the event: (a) any warranty, representation,
statement, report, or certificate made or delivered to Congress by Borrower
or Guarantor, or any of their respective officers, partners, employees, or
agents, is incorrect, false, untrue, or misleading when given in any material
respect; or (b) there shall occur and be continuing, any Event of Default (as
defined in any of the Loan Documents, or in the Security Agreement between
Guarantor and Congress of even date, as amended (the "Security Agreement"))
or any other present or future document or agreement between Borrower and
Congress or between Guarantor and Congress; or (c) Guarantor shall revoke
this Guaranty or contest or deny liability under this Guaranty. All of the
foregoing are hereinafter referred to as "Events of Default".

7. INDEMNITY. Guarantor hereby agrees to indemnify Congress and hold
Congress harmless from and against any and all claims, debts, liabilities,
demands, obligations, actions, causes of action, penalties, costs and
expenses (including without limitation attorney's fees), of every nature,
character and description, which Congress may sustain or incur based upon or
arising out of any of the Indebtedness, any actual or alleged failure to
collect and pay over any withholding or other tax relating to Borrower or its
employees, any relationship or agreement between Congress and Borrower, any
actual or alleged failure of Congress to comply with any writ of attachment
or other legal process relating to Borrower or any of its property, or any
other matter, cause or thing whatsoever occurred, done, omitted or suffered
to be done by Congress relating in any way to Borrower or the Indebtedness
(except any such amounts sustained or incurred as the result of the gross
negligence or willful misconduct of Congress or any of its directors,
officers, employees, agents, attorneys, or any other person affiliated with
or representing Congress). Notwithstanding any provision in this Guaranty to
the contrary, the indemnity agreement set forth in this Section shall survive
any termination or revocation of this Guaranty and shall for all purposes
continue in full force and effect.

8. SUBORDINATION. Any and all rights of Guarantor under any and all debts,
liabilities and obligations owing from Borrower to Guarantor, including any
security for and guaranties of any such obligations, whether now existing or
hereinafter arising, are hereby subordinated in right of payment to the prior
payment in full of all of the Indebtedness. No payment in respect of any such
subordinated obligations shall at any time be made to or accepted by
Guarantor if at the time of such payment any Indebtedness is outstanding,
provided that Borrower may pay to Guarantor, and Guarantor may accept,
dividends and

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<PAGE>

distributions permitted by the Loan Agreement. If any Event of default has
occurred, Borrower and any assignee, trustee in bankruptcy, receiver, or any
other person having custody or control over any or all of Borrower's property
are hereby authorized and directed to pay to Congress the entire unpaid
balance of the indebtedness before making any payments whatsoever to
Guarantor, whether as a creditor, shareholder, or otherwise; and insofar as
may be necessary for that purpose, Guarantor hereby assigns and transfers to
Congress all rights to any and all debts, liabilities and obligations owing
from Borrower to Guarantor, including any security for and guaranties of any
such obligations, whether now existing or hereafter arising, including
without limitation any payments, dividends or distributions out of the
business or assets of Borrower. Any amounts received by Guarantor in
violation of the foregoing provisions shall be received and held as trustee
for the benefit of Congress and shall forthwith be paid over to Congress to
be applied to the Indebtedness in such order and sequence as Congress shall
in its sole discretion determine, without limiting or affecting any other
right or remedy which Congress any have hereunder or otherwise and without
otherwise affecting the liability of Guarantor hereunder. Guarantor hereby
expressly waives any right to set-off or assert any counterclaim against
borrower.

9. REVOCATION. This is a Continuing Guaranty relating to all of the
Indebtedness, including Indebtedness arising under successive transactions
which from time to time continue the Indebtedness or renew it after it has
been satisfied. Guarantor waives all benefits of California Civil Code
Section 2815, and agrees that the obligations of Guarantor hereunder may not
be terminated or revoked in any manner except by giving 90 days' advance
written notice of revocation to Congress at its address above by registered
first-class U.S. mail, postage prepaid, return receipt requested, and only as
to new loans made by Congress to Borrower more than 90 days after actual
receipt of such written notice by Congress. No termination or revocation of
this Guaranty shall be effective until 90 days following the date of actual
receipt of said written notice of revocation by Congress. Notwithstanding
such written notice of revocation or any other act of Guarantor or any other
event or circumstance, Guarantor agrees that this Guaranty and all consents,
waivers and other provisions hereof shall continue in full force and effect
as to any and all Indebtedness which is outstanding on or before the 90th day
following actual receipt of said written notice of revocation by Congress,
and all extensions, renewals and modifications of said Indebtedness
(including without limitation amendments, extensions, renewals and
modifications which are evidenced by new or additional instruments,
documents or agreements executed before or after expiration of said 90-day
period), and all interest thereon, accruing before or after expiration of
said 90-day period, and all attorney's fees, court costs and collection
charges, incurred before or after expiration of said 90-day period, in
endeavoring to collect or enforce any of the foregoing against Borrower,
Guarantor or any other person liable thereon (whether or not suit be brought)
and any other expenses of, for or incidental to collection thereof.

10. INDEPENDENT LIABILITY. Guarantor hereby agrees that one or more
successive or concurrent actions may be brought hereon against Guarantor, in
the same action in which Borrower may be sued or in separate actions, as often
as deemed advisable by Congress. The liability of Guarantor hereunder is
exclusive and independent of any other guaranty of any or all of the
indebtedness whether executed by Guarantor or by any other guarantor
(including without limitation any other persons signing this Guaranty). The
liability of Guarantor hereunder shall not be affected, revoked, impaired, or
reduced by any one or more of the following: (a) the fact that the
Indebtedness exceeds the maximum amount of Guarantor's liability, if any,
specified herein or elsewhere (and no agreement specifying a maximum amount
of Guarantor's liability shall be enforceable unless set forth in a writing
signed by Congress or set forth in this Guaranty); or (b) any direction as to
the application of payment by Borrower or by any other party; or (c) any
other continuing or restrictive guaranty or undertaking or any limitation on
the liability of any other guarantor (whether under this Guaranty or under any
other agreement); or (d) any payment on or reduction of any such other
guaranty or undertaking; or (e) any revocation, amendment, modification or
release of any such other guaranty or undertaking; or (f) any dissolution or
termination of or increase, decrease, or change in membership of any
Guarantor which is a partnership. Guarantor hereby expressly represents that
he was not induced to give this Guaranty by the fact that there are or may be
other guarantors either under this Guaranty or otherwise, and Guarantor
agrees that any release of any one or more of such other guarantors shall not
release Guarantor from his obligations hereunder either in full or to any
lesser extent. If Guarantor is a married person, Guarantor hereby expressly
agrees that recourse may be had against his or her separate property for all
of his or her obligations hereunder.

11. FINANCIAL CONDITION OF BORROWER. Guarantor is fully aware of the
financial condition of Borrower and is executing and delivering this Guaranty
at Borrower's request and based solely upon his own independent investigation
of all matters pertinent hereto, and Guarantor is not relying in any manner
upon any representation or statement of Congress with respect thereto.
Guarantor represents and warrants that he is in a position to obtain, and
Guarantor hereby assumes full responsibility for obtaining, any additional
information concerning Borrower's financial condition and any other matter
pertinent hereto as Guarantor may desire, and Guarantor is not relying upon
or expecting Congress to furnish to him any information now or hereafter in
Congress' possession concerning the same or any other matter. By executing
this Guaranty, Guarantor knowingly accepts the full range of risks
encompassed within a contract of continuing guaranty, which risks Guarantor
acknowledges include without limitation the possibility that Borrower will
incur additional Indebtedness for which Guarantor will be liable hereunder
after Borrower's financial condition or ability to pay such Indebtedness has
deteriorated and/or after bankruptcy or insolvency proceedings have been
commenced by o against Borrower Guarantor shall have no right to require
Congress to obtain

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<PAGE>

or disclose any information with respect to the Indebtedness, the financial
condition or character of Borrower, the existence of any collateral or
security for any or all of the Indebtedness, the filing by or against
Borrower of any bankruptcy or insolvency proceeding, the existence of any
other guaranties of all or any part of the Indebtedness, any action or
non-action on the part of Congress, Borrower, or any other person, or any
other matter, fact, or occurrence.

12. REPORTS AND FINANCIAL STATEMENTS OF GUARANTOR. Guarantor shall, at its
sole cost and expense, at any time and from time to time, prepare or cause to
be prepared, and provide to Congress upon Congress' request (i) such
financial statements and reports concerning Guarantor as are provided for in
the Loan Documents, (ii) any other information concerning Guarantor's
business, financial condition or affairs as Congress may request in its good
faith business judgment, and (iii) copies of any and all foreign, federal,
state and local tax returns and reports of or relating to Guarantor as
Congress may from time to time request in its good faith business judgment.
Guarantor hereby intentionally and knowingly waives any and all rights and
privileges it may have not to divulge or deliver said tax returns, reports
and other information which are requested by Congress hereunder or in any
litigation in which Congress may be involved relating directly or indirectly
to Borrower or to Guarantor. Guarantor further agrees promptly to give
written notice to Congress of any material adverse change in Guarantor's
financial condition and of any condition or event which constitutes an Event
of Default under this Guaranty. All reports and information furnished to
Congress hereunder shall be complete, accurate and correct in all respects.
Whenever requested, Guarantor shall further deliver to Congress a certificate
signed by Guarantor (and, if Guarantor is a partnership, by all general
partners of Guarantor, in their individual capacities, and, if Guarantor is a
corporation, by the president or secretary of Guarantor, in their individual
capacities) warranting and representing that all reports, financial
statements and other documents and information delivered or caused to be
delivered to Congress under this Guaranty, are complete, correct and
accurately present the financial condition of Guarantor in all material
respects, and that there exists on the date of delivery of said certificate
to Congress no condition or event which constitutes an Event of Default under
this Guaranty.

13. REPRESENTATIONS AND WARRANTIES. Guarantor hereby represents and warrants
that (i) it is in Guarantor's direct interest to assist Borrower in procuring
credit, because Borrower is an affiliate of Guarantor, furnishes goods or
services to Guarantor, purchases or acquires goods or services from
Guarantor, and/or otherwise has a direct or indirect corporate or business
relationship with Guarantor, (ii) this Guaranty has been duly and validly
authorized, executed and delivered and constitutes the valid and binding
obligation of Guarantor, enforceable in accordance with its terms, and (iii)
to the best of Guarantor's knowledge, the execution and delivery of this
Guaranty does not violate or constitute a default under (with or without the
giving of notice, the passage of time, or both) any order, judgement, decree,
instrument or agreement to which Guarantor is a party or by which it or its
assets are affected or bound in any material respect.

14. COSTS. Whether or not suit be instituted, Guarantor agrees to reimburse
Congress on demand for all reasonable attorneys' fees and all other
reasonable costs and expenses incurred by Congress in enforcing this
Guaranty, or arising out of or relating in any way to this Guaranty, or in
enforcing any of the Indebtedness against Borrower. Guarantor, or any other
person, or in connection with any property of any kind securing all or any
part of the Indebtedness. Without limiting the generality of the foregoing,
and in addition thereto, Guarantor shall reimburse Congress on demand for all
reasonable attorneys' fees and costs Congress incurs in any way relating to
Guarantor, Borrower or the Indebtedness, in order to: obtain legal advice;
enforce or seek to enforce any of its rights; commence, intervene in, respond
to, or defend any action or proceeding; file, prosecute or defend any claim
or cause of action in any action or proceeding (including without limitation
any probate claim, bankruptcy claim, third-party claim, creditor claim,
reclamation complaints and complaint for relief from any stay under the
Bankruptcy Code or otherwise): protect, obtain possession of, sell, lease,
dispose of or otherwise enforce any security interest in or lien on any
property of any kind securing any or all of the Indebtedness; or represent
Congress in any litigation with respect to Borrower's or Guarantor's affairs.
In the event either Congress or Guarantor files any lawsuit against the other
predicated on a breach of this Guaranty, the prevailing party in such action
shall be entitled to recover its attorneys' fees and costs of suit from the
non-prevailing party.

15. NOTICES. Any notice which a party shall be required or shall desire to
give to the other hereunder (except for notice of revocation, which shall be
governed by Section 10 of this Guaranty) shall be given by personal delivery
or by telecopier or by depositing the same in the United States mail, first
class postage pre-paid, addressed to Congress at its address set forth in the
heading of this Guaranty and to Guarantor at his address set forth under his
signature hereon, and such notices shall be deemed duly given one day after
the date of personal delivery or one day after the date telecopied or 3
business days after the date of mailing as aforesaid. Congress and Guarantor
may change their address for purposes of receiving notices hereunder by
giving written notice thereof to the other party in accordance herewith.
Guarantor shall give Congress immediate written notice of any change in his
address.

16. CONSTRUCTION; SEVERABILITY. If more than one party has executed this
Guaranty, the term "Guarantor" as used herein shall be deemed to refer to all
and any one or more such persons and their obligations hereunder shall be
joint and several. Without limiting the generality of the foregoing, if more
than one person has executed this Guaranty, this Guaranty shall in all
respects be interpreted as though each person signing this Guaranty had
signed a separate Guaranty, and references herein to "other guarantors" or
words of similar effects shall include without limitation other persons
signing this Guaranty. As used in this Guaranty, the term "property" is used
in its most comprehensive sense and shall mean all property of every kind and
nature whatsoever,

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<PAGE>

including without limitation real property, personal property, mixed
property, tangible property and intangible property. Words used herein in the
masculine gender shall include the neuter and feminine gender, words used
herein in the neuter gender shall include the masculine and feminine, words
used herein in the singular shall include the plural and words used in the
plural shall include the singular, wherever the context so reasonably
requires. If any provision of this Guaranty or the application thereof to any
party or circumstance is held invalid, void, inoperative or unenforceable,
the remainder of this Guaranty and the application of such provision to other
parties or circumstances shall not be affected thereby, the provisions of
this Guaranty being severable in any such instance.

17. GENERAL PROVISIONS. Congress shall have the right to seek recourse
against Guarantor to the full extent provided for herein and in any other
instrument or agreement evidencing obligations of Guarantor to Congress, and
against Borrower to the full extent of the Indebtedness. No election in one
form of action or proceeding, or against any party, or on any obligation,
shall constitute a waiver of Congress' right to proceed in any other form of
action or proceeding or against any other party. The failure of Congress to
enforce any of the provisions of this Guaranty at any time or for any period
of time shall not be construed to be a waiver of any such provision or the
right thereafter to enforce the same. All remedies hereunder shall be
cumulative and shall be in addition to all rights, powers and remedies give
to Congress by law or under any other instrument or agreement. Time is of the
essence in the performance by Guarantor of each and every obligation under
this Guaranty. If Borrower is a corporation, partnership or other entity,
Guarantor hereby agrees that Congress shall have no obligation to inquire
into the power or authority of Borrower or any of its officers, directors,
partners, or agents acting or purporting to act on its behalf, and any
Indebtedness made or created in reliance upon the professed exercise of any
such power or authority shall be included in the Indebtedness guaranteed
hereby. This Guaranty is the entire and only agreement between Guarantor and
Congress with respect to the guaranty of the Indebtedness of Borrower by
Guarantor, and all representations, warranties, agreements or undertakings
heretofore or contemporaneously made, which are not set forth herein, are
superseded hereby. No course of dealings between the parties, no usage of the
trade, and no parol or extrinsic evidence of any nature shall be used or be
relevant to supplement or explain or modify any term or provision of this
Guaranty. There are no conditions to the full effectiveness of this Guaranty.
The terms and provisions hereof may not be waived, altered, modified, or
amended except in a writing executed by Guarantor and a duly authorized
officer of Congress. All rights, benefits and privileges hereunder shall
inure to the benefit of and be enforceable by Congress and its successors and
assigns and shall be binding upon Guarantor and its successors and assigns.
Section headings are used herein for convenience only. Guarantor acknowledges
that the same may not describe completely the subject matter of the
applicable Section, and the same shall not be used in any manner to construe,
limit, define or interpret any term or provision hereof.

18. GOVERNING LAW; VENUE AND JURISDICTION. This instrument and all acts and
transactions pursuant or relating hereto and all rights and obligations of
the parties hereto shall be governed, construed, and interpreted in
accordance with the internal laws of the State of California. In order to
induce Congress to accept this Guaranty, and as a material part of the
consideration therefor, Guarantor (i) agrees that all actions or proceedings
relating directly or indirectly hereto shall, at the option of Congress, be
litigated in courts located within Los Angeles County, California, (ii)
consents to the jurisdiction of any such court and consents to the service of
process in any such action or proceeding by personal delivery or any other
method permitted by law; and (iii) waives any and all rights Guarantor may
have to transfer or change the venue of any such action or proceeding.

19. MUTUAL WAIVER OF RIGHT TO JURY TRIAL. CONGRESS AND GUARANTOR HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION, CLAIM, LAWSUIT OR PROCEEDING BASED
UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS GUARANTEE OR ANY
SUPPLEMENT OR AMENDMENT THERETO; OR (ii) ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN CONGRESS AND GUARANTOR; OR (iii) ANY BREACH,
CONDUCT, ACTS OR OMISSIONS OF CONGRESS OR GUARANTOR OR ANY OF THEIR
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER
PERSON AFFILIATED WITH OR REPRESENTING CONGRESS OR GUARANTOR; IN EACH OF THE
FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.

20. RECEIPT OF COPY. Guarantor acknowledges receipt of a copy of this
Guaranty.

GUARANTOR SIGNATURE: L.A. GEAR, INC.

By: /s/ Victor J. Trippetti
------------------------------
Title: /s/ Senior Vp and CFo
---------------------------

Address: 2850 Ocean Park Blvd.
Santa Monica, California 90405

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<PAGE>
EXHIBIT 10.3

GENERAL SECURITY AGREEMENT

This General Security Agreement ("Agreement") dated May 21, 1997 is by
L.A. Gear, Inc., a Delaware corporation ("Guarantor") in favor of Congress
Financial Corporation (Western) ("Lender").

W I T N E S S E T H

WHEREAS, Lender has entered or is about to enter into certain financing
arrangements with L.A. Gear California, Inc., a California corporation
("Borrower") pursuant to which Lender may make loans and provide other
financial accommodations to Borrower; and

WHEREAS, Guarantor has executed and delivered or is about to execute and
deliver to Lender a guarantee in favor of Lender pursuant to which Guarantor
absolutely and unconditionally guarantees to Lender the payment and
performance of all now existing and hereafter arising obligations,
liabilities and indebtedness of Borrower to Lender; and

NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:

SECTION 1. DEFINITIONS

All terms used herein which are defined in Article 1 or Article 9 of the
Uniform Commercial Code shall have the meanings given therein unless otherwise
defined in this Agreement. All references to the plural herein shall also mean
the singular and to the singular shall also mean the plural. All references to
Guarantor, Borrower and Lender pursuant to the definitions set forth in the
recitals hereto, or to any other person herein, shall include their respective
successors and assigns. The words "hereof", "herein", "hereunder", "this
Agreement" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not any particular provision of this Agreement
and as this Agreement now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced. An Event of Default
shall exist or continue or be continuing until such Event of Default is cured
or waived in accordance with Section 7.3. Any accounting term used herein
unless otherwise defined in this Agreement shall have the meanings customarily
given to such term in accordance with GAAP. For purposes of this Agreement,
the following terms shall have the respective meanings given to them below:

1.1 "Accounts" shall mean all present and future rights of Guarantor to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.

1.2 "Equipment" shall mean all of Guarantor's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used
in connection therewith, and substitutions and replacements thereof, wherever
located.

1.3 "Event of Default" shall have the meaning set forth in Section 6.1
hereof.

1.4 "Financing Agreements" shall mean, collectively, the Loan Agreement,
this Agreement and all notes, guarantees, security agreements and other
agreements, documents and

<PAGE>

instruments now or at any time hereafter executed and/or delivered by
Borrower, Guarantor or any Obligor in connection with the Loan Agreement, as
the same now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.

1.5 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the
American Institute of Certified Public Accountants and the statements and
pronouncements of the Financial Accounting Standards Boards which are
applicable to the circumstances as of the date of determination consistently
applied, except that, for purposes of Sections 5.13 and 5.14 hereof, GAAP
shall be determined on the basis of such principles in effect on the date
hereof and consistent with those used in the preparation of the audited
financial statements delivered to Lender prior to the date hereof.

1.6 "Information Certificate" shall mean the Information Certificate of
Guarantor constituting Exhibit A hereto containing material information with
respect to Guarantor, its business and assets provided by or on behalf of
Guarantor to Lender in connection with the preparation of this Agreement and
the other Financing Agreements and the financing arrangements provided for
herein.

1.7 "Inventory" shall mean all of Guarantor's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.

1.8 "Loan Agreement" shall mean the Loan and Security Agreement, dated
May 16, 1997, by and between Borrower and Lender, as the same now exists and
may hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced.

1.9 "Obligations" shall mean any and all obligations, liabilities and
indebtedness of every kind, nature and description owing by Guarantor to
Lender and/or its affiliates, including principal, interest, charges, fees,
costs and expenses, however evidenced, whether as principal, surety,
endorser, guarantor or otherwise, whether arising under this Agreement or
otherwise, whether now existing or hereafter arising, whether arising before,
during or after the initial or any renewal term of this Agreement or after
the commencement of any case with respect to Guarantor under the United
States Bankruptcy Code or any similar statute (including, without limitation,
the payment of interest and other amounts which would accrue and become due
but for the commencement of such case), whether direct or indirect, absolute
or contingent, joint or several, due or not due, primary or secondary,
liquidated or unliquidated, secured or unsecured, and however acquired by
Lender.

1.10 "Obligor" shall mean any other guarantor, endorser, acceptor,
surety or other person liable on or with respect to the Obligations or who is
the owner of any property which is security for the Obligations, other than
Borrower.

1.11 "Person" or "person" shall mean any individual, sole
proprietorship, partnership, corporation (including, without limitation, any
corporation which elects subchapter S status under the Internal Revenue Code
of 1986, as amended), business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.

1.12 "Records" shall mean all of Guarantor's present and future books
of account of every kind or nature, purchase and sale agreements, invoices,
ledger cards, bills of lading and other shipping evidence, statements,
correspondence, memoranda, credit files and other data relating to the
Collateral or any account debtor, together with the tapes, disks, diskettes
and other data and software storage media and devices, file cabinets or
containers in or on which the

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foregoing are stored (including any rights of Guarantor with respect to the
foregoing maintained with or by any other person).

SECTION 2. GRANT OF SECURITY INTEREST

To secure payment and performance of all Obligations, Guarantor hereby
grants to Lender a continuing security interest in, a lien upon, and a right
of set off against, and hereby assigns to Lender as security, the following
property and interests in property, whether now owned or hereafter acquired
or existing, and wherever located (collectively, the "Collateral"):

2.1 Accounts;

2.2 All present and future contract rights, general intangibles
(including, but not limited to, tax and duty refunds, registered and
unregistered patents, trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, choses
in action and other claims and existing and future leasehold interests in
equipment, real estate and fixtures), chattel paper, documents, instruments,
letters of credit, bankers' acceptances and guaranties;

2.3 All present and future monies, securities, credit balances,
deposits, deposit accounts and other property of Guarantor now or hereafter
held or received by or in transit to Lender or its affiliates or at any other
depository or other institution from or for the account of Guarantor whether
for safekeeping, pledge, custody, transmission, collection or otherwise, and
all present and future liens, security interests, rights, remedies, title and
interest in, to and in respect of Accounts and other Collateral, including,
without limitation, rights and remedies under or relating to guaranties,
contracts of suretyship, letters of credit and credit and other insurance
related to the Collateral, rights of stoppage in transit, replevin,
repossession, reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, goods described in invoices, documents, contracts
or instruments with respect to, or otherwise representing or evidencing,
Accounts or other Collateral, including, without limitation, returned,
repossessed and reclaimed goods, and deposits by and property of account
debtors or other persons securing the obligations of account debtors;

2.4 Inventory;

2.5 Equipment;

2.6 Records; and

2.7 all products and proceeds of the foregoing, in any form, including,
without limitation, insurance proceeds and any claims against third parties
for loss or damage to or destruction of any or all of the foregoing.

SECTION 3. COLLATERAL COVENANTS

3.1 ACCOUNTS COVENANTS.

(a) Lender shall have the right at any time or times, in Lender's
name or in the name of a nominee of Lender, to verify the validity, amount or
any other matter relating to any Account or other Collateral, by mail,
telephone, facsimile transmission or otherwise.

(b) Guarantor shall deliver or cause to be delivered to Lender,
with appropriate endorsement and assignment, with full recourse to Guarantor,
all chattel paper and instruments

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which Guarantor now owns or may at any time acquire immediately upon
Guarantor's receipt thereof, except as Lender may otherwise agree.

(c) Lender may, at any time or times that an Event of Default exists
or has occurred and is continuing, notify any or all account debtors that the
Accounts have been assigned to Lender and that Lender has a security interest
therein and Lender may direct any or all accounts debtors to make payment of
Accounts directly to Lender, extend the time of payment of, compromise, settle
or adjust for cash, credit, return of merchandise or otherwise, and upon any
terms or conditions, any and all Accounts or other obligations included in the
Collateral and thereby discharge or release the account debtor or any other
party or parties in any way liable for payment thereof without affecting any of
the Obligations, demand, collect or enforce payment of any Accounts or such
other obligations, but without any duty to do so, and Lender shall not be
liable for its failure to collect or enforce the payment thereof nor for the
negligence of its agents or attorneys with respect thereto and take whatever
other action Lender may deem necessary or desirable for the protection of its
interests. At any time that an Event of Default exists or has occurred and is
continuing, at Lender's request, all invoices and statements sent to any
account debtor shall state that the Accounts and such other obligations have
been assigned to Lender and are payable directly and only to Lender and
Guarantor shall deliver to Lender such originals of documents evidencing the
sale and delivery of goods or the performance of services giving rise to any
Accounts as Lender may require.

3.2 INVENTORY COVENANTS. With respect to the Inventory: Guarantor shall
at all times maintain inventory records reasonably satisfactory to Lender,
keeping correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, Guarantor's cost therefor and daily
withdrawals therefrom and additions thereto; Guarantor shall conduct a
physical count of the Inventory at least once each year, but at any time or
times as Lender may request during the continuance of an Event of Default, and
promptly following such physical inventory shall supply Lender with a report in
the form and with such specificity as may be reasonably satisfactory to Lender
concerning such physical count; Guarantor shall not remove any Inventory from
the locations set forth or permitted herein, without the prior written consent
of Lender, except for sales of Inventory in the ordinary course of Guarantor's
business and except to move Inventory directly from one location set forth or
permitted herein to another such location; upon Lender's request, Guarantor
shall, at its expense, no more than twice in any twelve (12) month period, but
at any time or times as Lender may request during the continuance of an Event
of Default, deliver or cause to be delivered to Lender written reports or
appraisals as to the Inventory in form, scope and methodology acceptable to
Lender and by an appraiser acceptable to Lender, addressed to Lender or upon
which Lender is expressly permitted to rely; Guarantor shall produce, use,
store and maintain the Inventory, with all reasonable care and caution and in
accordance with applicable standards of any insurance and in conformity with
applicable laws (including, but not limited to, the requirements of the Federal
Fair Labor Standards Act of 1938, as amended and all rules, regulations and
orders related thereto); Guarantor assumes all responsibility and liability
arising from or relating to the production, use, sale or other disposition of
the Inventory; Guarantor shall not sell Inventory to any customer on approval,
or any other basis which entitles the customer to return or may obligate
Guarantor to repurchase such Inventory; Guarantor shall keep the Inventory in
good and marketable condition; and Guarantor shall not, without prior written
notice to Lender, acquire or accept any Inventory on consignment or approval.

3.3 EQUIPMENT COVENANTS. With respect to the Equipment: upon Lender's
request, Guarantor shall, at its expense, at any time or times as Lender may
request during the continuance of Event of Default, deliver or cause to be
delivered to Lender written reports or appraisals as to the Equipment in
form, scope and methodology acceptable to Lender and by appraiser acceptable
to Lender; Guarantor shall keep the Equipment in good order, repair, running
and marketable condition (ordinary wear and tear excepted); Guarantor shall
use the Equipment with all reasonable care and caution and in accordance with
applicable standards of

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any insurance and in conformity with all applicable laws; the Equipment is
and shall be used in Guarantor's business and not for personal, family,
household or farming use; Guarantor shall not remove any Equipment from the
locations set forth or permitted herein, except to the extent necessary to
have any Equipment repaired or maintained in the ordinary course of the
business of Guarantor or to move Equipment directly from one location set
forth or permitted herein to another such location and except for the
movement of motor vehicles used by or for the benefit of Borrower in the
ordinary course of business; the Equipment is now and shall remain personal
property and Guarantor shall not permit any of the Equipment to be or become
a part of or affixed to real property; and Guarantor assumes all
responsibility and liability arising from the use of the Equipment.

3.4 POWER OF ATTORNEY. Guarantor hereby irrevocably designates and
appoints Lender (and all persons designated by Lender) as Guarantor's true
and lawful attorney-in-fact, and authorizes Lender, in Guarantor's or
Lender's name, to: at any time an Event of Default exists or has occurred
and is continuing demand payment on Accounts or other proceeds of Inventory
or other Collateral, enforce payment of Accounts by legal proceedings or
otherwise, exercise all of Guarantor's rights and remedies to collect any
Account or other Collateral, sell or assign any Account upon such terms, for
such amount and at such time or times as the Lender deems advisable, settle,
adjust, compromise, extend or renew an Account, discharge and release any
Account, prepare, file and sign Guarantor's name on any proof of claim in
bankruptcy or other similar document against an account debtor, notify the
post office authorities to change the address for delivery of Guarantor's
mail to an address designated by Lender, and open and dispose of all mail
addressed to Guarantor, and do all acts and things which are necessary, in
Lender's determination, to fulfill Guarantor's obligations under this
Agreement and the other Financing Agreements and at any time to take
control in any manner of any item of payment or proceeds thereof, have
access to any lockbox or postal box into which Guarantor's mail is deposited,
endorse Guarantor's name upon any items of payment or proceeds thereof and
deposit the same in the Lender's account for application to the Obligations,
endorse Guarantor's name upon any chattel paper, document, instrument,
invoice, or similar document or agreement relating to any Account or any
goods pertaining thereto or any other Collateral, and sign Guarantor's name
on any verification of Accounts and notices thereof to account debtors and
execute in Guarantor's name and file any UCC financing statements or
amendments thereto. Guarantor hereby releases Lender and its officers,
employees and designees from any liabilities arising from any act or acts
under this power of attorney and in furtherance thereof, whether of omission
or commission, except as a result of Lender's own gross negligence or willful
misconduct as determined pursuant to a final non-appealable order of a court
of competent jurisdiction.

3.5 RIGHT TO CURE. Lender may, at its option, cure any default by
Guarantor under any agreement with a third party or pay or bond on appeal any
judgment entered against Guarantor, discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with
respect to the Collateral and pay any amount, incur any expense or perform
any act which, in Lender's judgment, is necessary or appropriate to preserve,
protect, insure or maintain the Collateral and the rights of Lender with
respect thereto. Lender may add any amounts so expended to the Obligations
and charge Guarantor's account therefor, such amounts to be repayable by
Guarantor on demand. Lender shall be under no obligation to effect such
cure, payment or bonding and shall not, by doing so, be deemed to have
assumed any obligation or liability of Guarantor. Any payment made or other
action taken by Lender under this Section shall be without prejudice to any
right to assert an Event of Default hereunder and to proceed accordingly.

3.6 ACCESS TO PREMISES. From time to time as requested by Lender, at
the cost and expense of Guarantor, Lender or its designee shall have
complete access to all of Guarantor's premises during normal business hours
and after notice to Guarantor, or at any time and without notice to Guarantor
if an Event of Default exists or has occurred and is continuing, for the

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purposes of inspecting, verifying and auditing the Collateral and all of
Guarantor's books and records, including, without limitation, the Records,
and Guarantor shall promptly furnish to Lender such copies of such books and
records or extracts therefrom as Lender may request, and use during normal
business hours such of Guarantor's personnel, equipment, supplies and
premises as may be reasonably necessary for the foregoing and if an Event of
Default exists or has occurred and is continuing for the collection of
Accounts and realization of other Collateral.

SECTION 4. REPRESENTATIONS AND WARRANTIES

Guarantor hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement):

4.1 CORPORATE EXISTENCE, POWER AND AUTHORITY; SUBSIDIARIES. Guarantor is
a corporation duly organized and in good standing under the laws of its state
of incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of
the business transacted by it or the ownership of assets makes such
qualification necessary, except for those jurisdictions in which the failure to
so qualify would not have a material adverse effect on Guarantor's financial
condition, results of operation or business or the rights of Lender in or to
any of the Collateral. The execution, delivery and performance of this
Agreement, the other Financing Agreements and the transactions contemplated
hereunder and thereunder are all within Guarantor's corporate powers, have been
duly authorized and are not in contravention of law or the terms of Guarantor's
certificate of incorporation, by-laws, or other organizational documentation,
or any indenture, agreement or undertaking to which Guarantor is a party or by
which Guarantor or its property are bound. This Agreement and the other
Financing Agreements constitute legal, valid and binding obligations of
Guarantor enforceable in accordance with their respective terms. Guarantor
does not have any subsidiaries except as set forth on the Information
Certificate.

4.2 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. All financial
statements relating to Guarantor which have been or may hereafter be delivered
by Guarantor to Lender have been prepared in accordance with GAAP and fairly
present the financial condition and the results of operation of Guarantor as at
the dates and for the periods set forth therein. Except as disclosed in any
interim financial statements furnished by Guarantor to Lender prior to the date
hereof, there has been no material adverse change in the assets, liabilities,
properties and condition, financial or otherwise, of Guarantor, since the date
of the most recent audited financial statements furnished by Guarantor to
Lender prior to the date hereof.

4.3 CHIEF EXECUTIVE OFFICE; COLLATERAL LOCATIONS. The chief executive
office of Guarantor and Guarantor's Records concerning Accounts are located
only at the address set forth below and its only other places of business and
the only other locations of Collateral, if any, are the addresses set forth in
the Information Certificate, subject to the right of Guarantor to establish new
locations in accordance with Section 5.2 below. The Information Certificate
correctly identifies any of such locations which are not owned by Guarantor and
sets forth the owners and/or operators thereof, and to the best of Guarantor's
knowledge, the holders of any mortgages on such locations.

4.4 PRIORITY OF LIENS; TITLE TO PROPERTIES. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 4.4
hereto and the other liens permitted under Section 5.8 hereof. Guarantor has
good and marketable title to all of its properties and assets subject to no
liens, mortgages, pledges, security interests, encumbrances or charges of any
kind, except those granted to Lender and such others as are specifically listed
on Schedule 4.4 hereto or permitted under Section 5.8 hereof.

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4.5 TAX RETURNS. Guarantor has filed, or caused to be filed, in a
timely manner all tax returns, reports and declarations which are required to
be filed by it (without requests for extension except as previously disclosed
in writing to Lender). All information in such tax returns, reports and
declarations is complete and accurate in all material respects. Guarantor
has paid or caused to be paid all taxes due and payable or claimed due and
payable in any assessment received by it, except taxes the validity of which
are being contested in good faith by appropriate proceedings diligently
pursued and available to Guarantor and with respect to which adequate
reserves have been set aside on its books. Adequate provision has been made
for the payment of all accrued and unpaid Federal, State, county, local,
foreign and other taxes whether or not yet due and payable and whether or not
disputed.

4.6 LITIGATION. Except as set forth on the Information Certificate,
there is no present investigation by any governmental agency pending, or to
the best of Guarantor's knowledge threatened, against or affecting Guarantor,
its assets or business and there is no action, suit, proceeding or claim by
any Person pending, or to the best of Guarantor's knowledge threatened,
against Guarantor or its assets or goodwill, or against or affecting any
transactions contemplated by this Agreement, which if adversely determined
against Guarantor would result in any material adverse change in the assets,
business or prospects of Guarantor or which would impair the ability of
Guarantor to perform its obligations hereunder or under any of the other
Financing Agreements to which it is a party or of Lender to enforce the
Obligations or realize upon any Collateral.

4.7 COMPLIANCE WITH OTHER AGREEMENTS AND APPLICABLE LAWS. Guarantor is
not in default in any material respect under, or in violation in any material
respect of any of the terms of, any agreement, contract, instrument, lease or
other commitment to which it is a party or by which it or any of its assets
are bound and Guarantor is in compliance in all material respects with all
applicable provisions of laws, rules, regulations, licenses, permits,
approvals and orders of any foreign, Federal, State or local governmental
authority, except as follows: Guarantor is in default under agreements
relating to its outstanding Series B Preferred Stock in that Guarantor has
failed to make certain quarterly dividend payments thereon, but Guarantor
represents and warrants to Lender that the only effect of such default is to
increase the rate at which dividends accrue thereon, and neither the holders
of the Series B Preferred Stock nor any other person has any other right or
remedy as a result of such default.

4.8 ACCURACY AND COMPLETENESS OF INFORMATION. All information
furnished by or on behalf of Guarantor in writing to Lender in connection
with this Agreement or any of the other Financing Agreements or any
transaction contemplated hereby or thereby, including, without limitation,
all information on the Information Certificate is true and correct in all
material respects on the date as of which such information is dated or
certified and does not omit any material fact necessary in order to make such
information not misleading. No event or circumstance has occurred which has
had or could reasonably be expected to have a material adverse affect on the
business, assets or prospects of Guarantor, which has not been fully and
accurately disclosed to Lender in writing.

4.9 SURVIVAL OF WARRANTIES; CUMULATIVE. All representations and
warranties contained in this Agreement or any of the other Financing
Agreements shall survive the execution and delivery of this Agreement and
shall be deemed to have been made again to Lender on the date of each
additional borrowing or other credit accommodation under the Loan Agreement
and shall be conclusively presumed to have been relied on by Lender
regardless of any investigation made or information possessed by Lender. The
representations and warranties set forth herein shall be cumulative and in
addition to any other representations or warranties which Guarantor shall now
or hereafter give, or cause to be given, to Lender.

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SECTION 5. AFFIRMATIVE AND NEGATIVE COVENANTS

5.1 MAINTENANCE OF EXISTENCE. Guarantor shall at all times preserve,
renew and keep in full, force and effect its corporate existence and rights
and franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, tradenames, approvals, authorizations, leases
and contracts necessary to carry on the business as presently or proposed to
be conducted. Guarantor shall give Lender thirty (30) days prior written
notice of any proposed change in its corporate name, which notice shall set
forth the new name and Guarantor shall deliver to Lender a copy of the
amendment to the Certificate of Incorporation of Guarantor providing for the
name change certified by the Secretary of State of the jurisdiction of
incorporation of Guarantor as soon as it is available.

5.2 NEW COLLATERAL LOCATIONS. Guarantor may open any new location
within the continental United States provided Guarantor gives Lender thirty
(30) days prior written notice of the intended opening of any such new
location and executes and delivers, or causes to be executed and delivered,
to Lender such agreements, documents, and instruments as Lender may deem
reasonably necessary or desirable to protect its interests in the Collateral
at such location, including, without limitation, UCC financing statements.

5.3 COMPLIANCE WITH LAWS, REGULATIONS, ETC. Guarantor shall, at all
times, comply in all material respects with all laws, rules, regulations,
licenses, permits, approvals and orders of any Federal, State or local
governmental authority applicable to it.

5.4 PAYMENT OF TAXES AND CLAIMS. Guarantor shall duly pay and
discharge all taxes, assessments, contributions and governmental charges upon
or against it or its properties or assets, except for taxes the validity of
which are being contested in good faith by appropriate proceedings diligently
pursued and available to Guarantor and with respect to which adequate
reserves have been set aside on its books. Guarantor shall be liable for any
tax or penalties imposed on Lender as a result of the financing arrangements
provided for herein and Guarantor agrees to indemnify and hold Lender
harmless with respect to the foregoing, and to repay to Lender on demand the
amount thereof, and until paid by Guarantor such amount shall be added and
deemed part of the Loans, provided, that, nothing contained herein shall be
construed to require Guarantor to pay any income or franchise taxes
attributable to the income of Lender from any amounts charged or paid
hereunder to Lender. The foregoing indemnity shall survive the payment of
the Obligations, the termination of this Agreement and the termination or
non-renewal of the Loan Agreement.

5.5 INSURANCE. Guarantor shall, at all times, maintain with
financially sound and reputable insurers insurance with respect to the
Collateral against loss or damage and all other insurance of the kinds and in
the amounts customarily insured against or carried by corporations of
established reputation engaged in the same or similar businesses and
similarly situated. Said policies of insurance shall be satisfactory to
Lender as to form, amount and insurer. Guarantor shall furnish certificates,
policies or endorsements to Lender as Lender shall require as proof of such
insurance, and, if Guarantor fails to do so, Lender is authorized, but not
required, to obtain such insurance at the expense of Guarantor. All policies
shall provide for at least thirty (30) days prior written notice to Lender of
any cancellation or reduction of coverage and that Lender may act as attorney
for Guarantor in obtaining, and at any time an Event of Default exists or has
occurred and is continuing, adjusting, settling, amending and canceling such
insurance. Guarantor shall cause Lender to be named as a loss payee and an
additional insured (but without any liability for any premiums) under such
insurance policies and Guarantor shall obtain non-contributory lender's loss
payable endorsements to all insurance policies in form and substance
satisfactory to Lender. Such lender's loss payable endorsements shall
specify that the proceeds of such insurance shall be payable to Lender as its
interests may appear and further specify that Lender shall be paid regardless
of any act or omission by Guarantor or any of its affiliates. At its option,
Lender may apply any insurance proceeds received by Lender at any time to the
cost of

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repairs or replacement of Collateral and/or to payment of the Obligations,
whether or not then due, in any order and in such manner as Lender may
determine or hold such proceeds as cash collateral for the Obligations.

5.6 FINANCIAL STATEMENTS AND OTHER INFORMATION.

(a) Guarantor shall keep proper books and records in which true
and complete entries shall be made of all dealings or transactions of or in
relation to the Collateral and the business of Guarantor and its subsidiaries
(if any) in accordance with GAAP and Guarantor shall furnish or cause to be
furnished to Lender the financial statements with respect to Guarantor set
forth in the Loan Agreement.

(b) Guarantor shall promptly notify Lender in writing of the
details of any loss, damage, investigation, action, suit, proceeding or
claim relating to the Collateral or any other property which is security for
the Obligations or which would result in any material adverse change in
Guarantor's business, properties, assets, goodwill or condition, financial or
otherwise and the occurrence of any Event of Default or event which, with
the passage of time or giving of notice or both, would constitute an Event of
Default.

(c) Guarantor shall promptly after the sending or filing thereof
furnish or cause to be furnished to Lender copies of all reports which
Guarantor sends to its stockholders generally and copies of all reports and
registration statements which Guarantor files with the Securities and
Exchange Commission, any national securities exchange or the National
Association of Securities Dealers, Inc.

(d) Guarantor shall furnish or cause to be furnished to Lender
such budgets, forecasts, projections and other information respecting the
Collateral and the business of Guarantor, as Lender may, from time to time,
reasonably request. Lender is hereby authorized to deliver a copy of any
financial statement or any other information relating to the business of
Guarantor to any court or other government agency or to any participant or
assignee or prospective participant or assignee. Guarantor hereby
irrevocably authorizes and directs all accountants or auditors to deliver to
Lender, at Guarantor's expense, copies of the financial statements of
Guarantor and any reports or management letters prepared by such accountants
or auditors on behalf of Guarantor and to disclose to Lender such information
as they may have regarding the business of Guarantor. Any documents,
schedules, invoices or other papers delivered to Lender may be destroyed or
otherwise disposed of by Lender one (1) year after the same are delivered to
Lender, except as otherwise designated by Guarantor to Lender in writing.

5.7 SALE OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ETC. Guarantor
shall not, directly or indirectly, merge into or with or consolidate with
any other Person or permit any other Person to merge into or with or
consolidate with it, or sell, assign, lease, transfer, abandon or otherwise
dispose of any stock or indebtedness to any other Person or any of its assets
to any other Person (except for sales of Inventory in the ordinary course of
business and the disposition of worn-out or obsolete Equipment or Equipment
no longer used in the business of Guarantor so long as if an Event of Default
exists or has occurred and is continuing, any proceeds are paid to Lender and
such sales do not involve Equipment having an aggregate net book value
(together with any such Equipment so sold by the Borrower) in excess of
$250,000 for all such Equipment disposed of in any fiscal year of Guarantor
and Borrower), or form or acquire any subsidiaries, or wind up, liquidate or
dissolve or agree to do any of the foregoing.

5.8 ENCUMBRANCES. Guarantor shall not create, incur, assume or suffer
to exist any security interest, mortgage, pledge, lien, charge or other
encumbrance of any nature whatsoever on any of its assets or properties,
including, without limitation, the Collateral, except: liens and security
interests of Lender; liens securing the payment of taxes, either not yet
overdue or the validity of which are being contested in good faith by
appropriate proceedings diligently pursued and available to Guarantor and
with respect to which adequate reserves have been set aside on its books;
non-consensual statutory liens (other than liens securing the payment of
taxes) arising in the ordinary course of Guarantor's business to the extent:
such liens secure indebtedness which is not overdue or such liens secure
indebtedness relating to claims or liabilities which are fully insured and
being defended at the sole cost and expense and at the sole risk of the
insurer or being contested in good faith by appropriate proceedings
diligently pursued

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and available to Guarantor, in each case prior to the commencement of
foreclosure or other similar proceedings and with respect to which adequate
reserves have been set aside on its books; zoning restrictions, easements,
licenses, covenants and other restrictions affecting the use of real property
which do not interfere in any material respect with the use of such real
property or ordinary conduct of the business of Guarantor as presently
conducted thereon or materially impair the value of the real property which
may be subject thereto; purchase money security interests in Equipment
(including capital leases) and purchase money mortgages on real estate not to
exceed $1,000,000 in the aggregate (combined with Borrower) at any time
outstanding, so long as such security interests and mortgages do not apply to
any property of Guarantor other than the Equipment or real estate so
acquired, and the indebtedness secured thereby does not exceed the cost of
the Equipment or real estate so acquired, as the case may be; and the
security interests and liens set forth on Schedule 4.4 hereto; pledges or
deposits under workers' compensation, unemployment insurance, social security
and other similar laws by Borrower; and deposits, bids or performance bonds
made or issued in the ordinary course of business, in connection with
acquisitions or sales of goods or services in the ordinary course of business.

5.9 INDEBTEDNESS. Guarantor shall not incur, create, assume, become or
be liable in any manner with respect to, or permit to exist, any obligations
or indebtedness, except the Obligations; trade obligations and normal
accruals in the ordinary course of business not yet due and payable, or with
respect to which the Guarantor is contesting in good faith the amount or
validity thereof by appropriate proceedings diligently pursued and available
to Guarantor, and with respect to which adequate reserves have been set aside
on its books; purchase money indebtedness (including capital leases) to the
extent not incurred or secured by liens (including capital leases) in
violation of any other provision of this Agreement; and obligations or
indebtedness set forth on the Information Certificate; provided, that (i)
with respect to such indebtedness other than the Debentures, Guarantor may
only make regularly scheduled payments of principal and interest in respect
of such indebtedness in accordance with the terms of the agreement or
instrument evidencing or giving rise to such indebtedness as in effect on the
date hereof, and (ii) as to the Debentures, Guarantor may only make regularly
scheduled payments of interest (not principal) in respect of the Debentures
in accordance with the terms of the agreement or instrument evidencing or
giving rise to the Debentures, and Guarantor may only make such interest
payments if no Event of Default and no event which, with notice or passage of
time or both, would constitute an Event of Default hereunder, has occurred
and is continuing. Guarantor shall not, directly or indirectly, amend,
modify, alter or change the terms of such indebtedness or any agreement,
document or instrument related thereto, or (except as permitted under the
Loan Agreement), directly or indirectly, redeem, retire, defease, purchase or
otherwise acquire the Debentures or other indebtedness, or set aside or
otherwise deposit or invest any sums for such purpose, and Guarantor shall
furnish to Lender all notices or demands in connection with the Debentures or
other indebtedness either received by Guarantor or on its behalf, promptly
after the receipt thereof, or sent by Guarantor or on its behalf,
concurrently with the sending thereof, as the case may be.

5.10 LOANS, INVESTMENTS, GUARANTEES, ETC. Guarantor shall not,
directly or indirectly, make any loans or advance money or property to any
person, or invest in (by capital contribution, dividend or otherwise) or
purchase or repurchase the stock or indebtedness or all or a substantial part
of the assets or property of any person, or guarantee, assume, endorse, or
otherwise become responsible for (directly or indirectly) the indebtedness,
performance, obligations or dividends of any Person or agree to do any of the
foregoing, except: the endorsement of instruments for collection or deposit
in the ordinary course of business;

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investments in: short-term direct obligations of the United States
Government, negotiable certificates of deposit issued by any bank
satisfactory to Lender, payable to the order of the Guarantor or to bearer
and delivered to Lender, commercial paper rated A1 or P1, and investments
permitted by Borrower's Investment Policy attached as Exhibit C to the Loan
Agreement; provided, that, as to any of the foregoing, unless waived in
writing by Lender, Guarantor shall take such actions as are deemed necessary
by Lender to perfect the security interest of Lender in such investments and
the guarantees set forth in the Information Certificate.

5.11 DIVIDENDS AND REDEMPTIONS. Guarantor shall not, directly or
indirectly, declare or pay any dividends on account of any shares of class of
capital stock of Guarantor now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of capital
stock (or set aside or otherwise deposit or invest any sums for such purpose)
for any consideration other than common stock or apply or set apart any sum,
or make any other distribution (by reduction of capital or otherwise) in
respect of any such shares or agree to do any of the foregoing, except that
Guarantor may pay dividends on its Series B Preferred Stock to the extent
permitted under Section 9.11 of the Loan Agreement.

5.12 TRANSACTIONS WITH AFFILIATES. Guarantor shall not enter into any
transaction for the purchase, sale or exchange of property or the rendering
of any service to or by any affiliate. Without limiting any of the other
terms and provisions of this Agreement, Parent shall not make any transfers
of money or property of any kind to any affiliate, regardless of the form of
transaction in which such transfer is to occur, except as permitted under
Section 9.12 of the Loan Agreement.

5.13 COSTS AND EXPENSES. Guarantor shall pay to Lender on demand all
costs, expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and
all other documents related hereto or thereto, including any amendments,
supplements or consents which may hereafter be contemplated (whether or not
executed) or entered into in respect hereof and thereof, including, but not
limited to: all costs and expenses of filing or recording (including Uniform
Commercial Code financing statement filing taxes and fees, documentary taxes,
intangibles taxes and mortgage recording taxes and fees, if applicable); all
title insurance and other insurance premiums, appraisal fees and search fees;
costs and expenses of preserving and protecting the Collateral; costs and
expenses paid or incurred in connection with obtaining payment of the
Obligations, enforcing the security interests and liens of Lender, selling or
otherwise realizing upon the Collateral, and otherwise enforcing the
provisions of this Agreement and the other Financing Agreements or defending
any claims made or threatened against Lender arising out of the transactions
contemplated hereby and thereby (including, without limitation, preparations
for and consultations concerning any such matters); and the fees and
disbursements of counsel (including legal assistants) to Lender in connection
with any of the foregoing.

5.14 FURTHER ASSURANCES. At the request of Lender at any time and from
time to time, Guarantor shall, at its expense, at any time or times duly
execute and deliver, or cause to be duly executed and delivered, such further
agreements, documents and instruments, and do or cause to be done such
further acts as may be necessary or proper to evidence, perfect, maintain and
enforce the security interests and the priority thereof in the Collateral and
to otherwise effectuate the provisions or purposes of this Agreement or any
of the other Financing Agreements. Where permitted by law, Guarantor hereby
authorizes Lender to execute and file one or more UCC financing statements
signed only by Lender.

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SECTION 6. EVENTS OF DEFAULT AND REMEDIES

6.1 EVENTS OF DEFAULT. The occurrence or existence of any Event of
Default under the Loan Agreement is referred to herein individually as an
"Event of Default", and collectively as "Events of Default".

6.2 REMEDIES.

(a) At any time an Event of Default exists or has occurred and is
continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and
other applicable law, all of which rights and remedies may be exercised
without notice to or consent by Guarantor or any Obligor, except as such
notice or consent is expressly provided for hereunder or required by
applicable law. All rights, remedies and powers granted to Lender hereunder,
under any of the other Financing Agreements, the Uniform Commercial Code or
other applicable law, are cumulative, not exclusive and enforceable, in
Lender's discretion, alternatively, successively, or concurrently on any one
or more occasions, and shall include, without limitation, the right to apply
to a court of equity for an injunction to restrain a breach or threatened
breach by Guarantor of this Agreement or any of the other Financing
Agreements. Lender may, at any time or times, proceed directly against
Guarantor or any Obligor to collect the Obligations without prior recourse to
the Collateral.

(b) Without limiting the foregoing, at any time an Event of
Default exists or has occurred and is continuing, Lender may, in its
discretion and without limitation, accelerate the payment of all Obligations
and demand immediate payment thereof to Lender (provided, that, upon the
occurrence of any Event of Default described in Sections 10.1(g) and 10.1(h)
of the Loan Agreement, all Obligations shall automatically become immediately
due and payable), with or without judicial process or the aid or assistance
of others, enter upon any premises on or in which any of the Collateral may
be located and take possession of the Collateral or complete processing,
manufacturing and repair of all or any portion of the Collateral, require
Guarantor, at Guarantor's expense, to assemble and make available to Lender
any part or all of the Collateral at any place and time designated by Lender,
collect, foreclose, receive, appropriate, setoff and realize upon any and
all Collateral, remove any or all of the Collateral from any premises on or
in which the same may be located for the purpose of effecting the sale,
foreclosure or other disposition thereof or for any other purpose, sell,
lease, transfer, assign, deliver or otherwise dispose of any and all
Collateral (including, without limitation, entering into contracts with
respect thereto, public or private sales at any exchange, broker's board, at
any office of Lender or elsewhere) at such prices or terms as Lender may deem
reasonable, for cash, upon credit or for future delivery, with the Lender
having the right to purchase the whole or any part of the Collateral at any
such public sale, all of the foregoing being free from any right or equity of
redemption of Guarantor, which right or equity of redemption is hereby
expressly waived and released by Guarantor. If any of the Collateral is sold
or leased by Lender upon credit terms or for future delivery, the Obligations
shall not be reduced as a result thereof until payment therefor is finally
collected by Lender. If notice of disposition of Collateral is required by
law, five (5) days prior notice by Lender to Guarantor designating the time
and place of any public sale or the time after which any private sale or
other intended disposition of Collateral is to be made, shall be deemed to be
reasonable notice thereof and Guarantor waives any other notice. In the
event Lender institutes an action to recover any Collateral or seeks recovery
of any Collateral by way of prejudgment remedy, Guarantor waives the posting
of any bond which might otherwise be required.

(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of
the Collateral to payment of the Obligations, in whole or in part and in such
order as Lender may elect, whether or not then due. Guarantor shall remain
liable to Lender for the payment of any deficiency with interest at the

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highest rate provided for in the Loan Agreement and all costs and expenses of
collection or enforcement, including attorneys' fees and legal expenses.

SECTION 7. JURY TRIAL WAIVER; OTHER WAIVERS
AND CONSENTS; GOVERNING LAW

7.1 GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS; JURY TRIAL
WAIVER.

(a) The validity, interpretation and enforcement of this Agreement
and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of California
(without giving effect to principles of conflicts of law).

(b) Guarantor irrevocably consents and submits to the
non-exclusive jurisdiction of the state courts of the County of Los Angeles,
State of California and the United States District Court for the Central
District of California and waives any objection based on venue or forum non
conveniens with respect to any action instituted therein arising under this
Agreement or any of the other Financing Agreements or in any way connected or
related or incidental to the dealings of Guarantor and Lender in respect of
this Agreement or the other Financing Agreements or the transactions related
hereto or thereto, in each case whether now existing or hereafter arising,
and whether in contract, tort, equity or otherwise, and agrees that any
dispute with respect to any such matters shall be heard only in the courts
described above (except that Lender shall have the right to bring any action
or proceeding against Guarantor or its property in the courts of any other
jurisdiction which Lender deems necessary or appropriate in order to realize
on the Collateral or to otherwise enforce its rights against Guarantor or its
property).

(c) Guarantor hereby waives personal service of any and all
process upon it and consents that all such service of process may be made by
certified mail (return receipt requested) directed to its address set forth
on the signature pages hereof and service so made shall be deemed to be
completed five (5) days after the same shall have been so deposited in the
U.S. mails, or, at Lender's option, by service upon Guarantor in any other
manner provided under the rules of any such courts. Within thirty (30) days
after such service, Guarantor shall appear in answer to such process, failing
which Guarantor shall be deemed in default and judgment may be entered by
Lender against Guarantor for the amount of the claim and other relief
requested.

(d) GUARANTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER THIS AGREEMENT OR ANY
OF THE OTHER FINANCING AGREEMENTS OR IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF GUARANTOR AND LENDER IN RESPECT OF THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. GUARANTOR
HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT GUARANTOR OR
LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF GUARANTOR AND LENDER TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

(e) Lender shall not have any liability to Guarantor (whether in
tort, contract, equity or otherwise) for losses suffered by Guarantor in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Lender that the losses were
the result of acts or

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omissions constituting gross negligence or willful misconduct. In any such
litigation, Lender shall be entitled to the benefit of the rebuttable
presumption that it acted in good faith and with the exercise of ordinary
care in the performance by it of the terms of this Agreement and the other
Financing Agreements.

7.2 WAIVER OF NOTICES. Guarantor hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with
respect to any and all instruments and commercial paper, included in or
evidencing any of the Obligations or the Collateral, and any and all other
demands and notices of any kind or nature whatsoever with respect to the
Obligations, the Collateral and this Agreement, except such as are expressly
provided for herein. No notice to or demand on Guarantor which Lender may
elect to give shall entitle Guarantor to any other or further notice or
demand in the same, similar or other circumstances.

7.3 AMENDMENTS AND WAIVERS. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course
of conduct, but only by a written agreement signed by an authorized officer
of Lender. Lender shall not, by any act, delay, omission or otherwise be
deemed to have expressly or impliedly waived any of its rights, powers and/or
remedies unless such waiver shall be in writing and signed by an authorized
officer of Lender. Any such waiver shall be enforceable only to the extent
specifically set forth therein. A waiver by Lender of any right, power
and/or remedy on any one occasion shall not be construed as a bar to or
waiver of any such right, power and/or remedy which Lender would otherwise
have on any future occasion, whether similar in kind or otherwise.

7.4 WAIVER OF COUNTERCLAIMS. Guarantor waives all rights to interpose
any claims, deductions, setoffs or counterclaims of any nature (other then
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.

7.5 INDEMNIFICATION. Guarantor shall indemnify and hold Lender, and
its directors, agents, employees and counsel, harmless from and against any
and all losses, claims, damages, liabilities, costs or expenses imposed on,
incurred by or asserted against any of them in connection with any
litigation, investigation, claim or proceeding commenced or threatened
related to the negotiation, preparation, execution, delivery, enforcement,
performance or administration of this Agreement, any other Financing
Agreements, or any undertaking or proceeding related to any of the
transactions contemplated hereby or any act, omission, event or transaction
related or attendant thereto, including, without limitation, amounts paid in
settlement, court costs, and the fees and expenses of counsel. To the extent
that the undertaking to indemnify, pay and hold harmless set forth in this
Section may be unenforceable because it violates any law or public policy,
Guarantor shall pay the maximum portion which it is permitted to pay under
applicable law to Lender in satisfaction of indemnified matters under this
Section. The foregoing indemnity shall survive the payment of the
Obligations, the termination of this Agreement and the termination or
non-renewal of the Loan Agreement. All of the foregoing costs and expenses
shall be part of the Obligations and secured by the Collateral.

SECTION 8. MISCELLANEOUS

8.1 NOTICES. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at 225 South Lake Avenue, Suite 1000,
Pasadena, California 91101 and to Guarantor at its chief executive office
set forth below, or to such other address as either party may designate by
written notice to the other in accordance with this provision, and (b) deemed
to have been given or made: if delivered in person, immediately upon
delivery; if by telex, telegram or facsimile transmission, immediately upon
sending and upon confirmation of receipt; if by nationally recognized
overnight courier service with instructions to deliver the next business day,
one (1) business day after sending; and if by certified mail, return receipt
requested, five (5) days after mailing.

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8.2 PARTIAL INVALIDITY. If any provision of this Agreement is held to
be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed
as though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be
construed and enforced only to such extent as shall be permitted by
applicable law.

8.3 SUCCESSORS. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon Guarantor
and its successors and assigns and inure to the benefit of and be enforceable
by Lender and its successors and assigns, except that Guarantor may not
assign its rights under this Agreement, the other Financing Agreements and
any other document referred to herein or therein without the prior written
consent of Lender.

8.4 ENTIRE AGREEMENT. This Agreement, the other Financing Agreements,
any supplements hereto or thereto, and any instruments or documents delivered
or to be delivered in connection herewith or therewith represents the entire
agreement and understanding concerning the subject matter hereof and thereof
between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written.

IN WITNESS WHEREOF, Guarantor has caused these presents to be duly
executed as of the day and year first above written.

Guarantor:

L.A. GEAR, INC.

Attest:
By: /s/ [ILLEGIBLE]
/s/ [ILLEGIBLE] --------------------------------
- --------------------------------------- Title: [ILLEGIBLE]
Secretary -----------------------------

CHIEF EXECUTIVE OFFICE:

2850 Ocean Park Blvd.
Santa Monica, California 90405

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EXHIBIT 10.4

PATENT AND TRADEMARK SECURITY AGREEMENT

This PATENT AND TRADEMARK SECURITY AGREEMENT ("Agreement"), dated as of May 21,
1997, is entered into between L.A. GEAR CALIFORNIA, INC., a California
corporation ("Grantor"), which has a mailing address at 2850 Ocean Park Blvd.,
Santa Monica, California 90405, and CONGRESS FINANCIAL CORPORATION (WESTERN)
("Congress"), which has a mailing address at 225 S. Lake Avenue, Suite 1000,
Pasadena, California 91101.
RECITALS

A. Grantor and Congress are, contemporaneously herewith, entering into
that certain Loan and Security Agreement ("Loan Agreement") and other
instruments, documents and agreements contemplated thereby or related thereto
(collectively, together with the Loan Agreement, the "Loan Documents"); and

B. Grantor is the owner of certain intellectual property, identified
below, in which Grantor is granting a security interest to Congress.

NOW THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth and for other
good and valuable consideration, the parties hereto mutually agree as follows:

1. DEFINITIONS AND CONSTRUCTION.

1.1 DEFINITIONS. The following terms, as used in this Agreement, have
the following meanings:

"CODE" means the California Uniform Commercial Code, as amended and
supplemented from time to time, and any successor statute.

"COLLATERAL" means all of the following, whether now owned or
hereafter acquired:

(i) Each of the trademarks and rights and interest which are
capable of being protected as trademarks (including trademarks, service
marks, designs, logos, indicia, tradenames, corporate names, company names,
business names, fictitious business names, trade styles, and other source or
business identifiers, and applications pertaining thereto), which are
presently, or in the future may be, owned, created, acquired, or used
(whether pursuant to a license or otherwise) by Grantor, in whole or in part,
and all trademark rights with respect thereto throughout the world, including
all proceeds thereof (including license royalties and proceeds of
infringement suits), and rights to renew and extend such trademarks and
trademark rights;

(ii) Each of the patents and patent applications which are
presently, or in the future may be, owned, issued, acquired, or used (whether
pursuant to a license or otherwise) by Grantor, in whole or in part, and all
patent rights with respect thereto throughout the world, including all
proceeds thereof (including license royalties and proceeds of infringement
suits), foreign filing rights, and rights to extend such patents and patent
rights;

(iii) All of Grantor's right to the trademarks and trademark
registrations listed on EXHIBIT A attached hereto, as the same may be updated
hereafter from time to time;

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<PAGE>

(iv) All of Grantor's right, title, and interest, in and to the
patents and patent applications listed on EXHIBIT B attached hereto, as the
same may be updated hereafter from time to time;

(v) All of Grantor's right, title and interest to register
trademark claims under any state or federal trademark law or regulation of
any foreign country and to apply for, renew, and extend the trademark
registrations and trademark rights, the right (without obligation) to sue or
bring opposition or cancellation proceedings in the name of Grantor or in the
name of Congress for past, present, and future infringements of the
trademarks, registrations, or trademark rights and all rights (but not
obligations) corresponding thereto in the United States and any foreign
country;

(vi) All of Grantor's right, title, and interest in all
patentable inventions, and to file applications for patent under federal
patent law or regulation of any foreign country, and to request reexamination
and/or reissue of the patents, the right (without obligation) to sue or bring
interference proceedings in the name of Grantor or in the name of Congress
for past, present, and future infringements of the patents, and all rights
(but not obligations) corresponding thereto in the United States and any
foreign country;

(vii) the entire goodwill of or associated with the businesses now
or hereafter conducted by Grantor connected with and symbolized by any of the
aforementioned properties and assets;

(viii) All general intangibles relating to the foregoing and all
other intangible intellectual or other similar property of the Grantor of any
kind or nature, associated with or arising out of any of the aforementioned
properties and assets and not otherwise described above; and

(ix) All products and proceeds of any and all of the foregoing
(including, without limitation, license royalties and proceeds of
infringement suits) and, to the extent not otherwise included, all payments
under insurance, or any indemnity, warranty, or guaranty payable by reason of
loss or damage to or otherwise with respect to the Collateral.

"OBLIGATIONS" means all obligations, liabilities, and indebtedness
of Grantor to Congress, whether direct, indirect, liquidated, or contingent,
and whether arising under this Agreement, the Loan Agreement, any other of
the Loan Documents, or otherwise, including all costs and expenses described
in Section 9.8 hereof.

1.2 CONSTRUCTION. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, references to the
singular include the plural, and the term "including" is not limiting. The
words "hereof," "herein," "hereby," "hereunder," and other similar terms
refer to this Agreement as a whole and not to any particular provision of
this Agreement. Any initially capitalized terms used but not defined herein
shall have the meaning set forth in the Loan Agreement. Any reference herein
to any of the Loan Documents includes any and all alterations, amendments,
extensions, modifications, renewals, or supplements thereto or thereof, as
applicable. Neither this Agreement nor any uncertainty or ambiguity herein
shall be construed or resolved against Congress or Grantor, whether under any
rule of construction or otherwise. On the contrary, this Agreement has been
reviewed by Grantor, Congress, and their respective counsel, and shall be
construed and interpreted according to the ordinary meaning of the words used
so as to fairly accomplish the purposes and intentions of Congress and
Grantor. Headings have been set forth herein for convenience only, and shall
not be used in the construction of this Agreement.

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2. GRANT OF SECURITY INTEREST.

To secure the complete and timely payment and performance of all
Obligations, and without limiting any other security interest Grantor has
granted to Congress, Grantor hereby grants, assigns, and conveys to Congress a
security interest in Grantor's entire right, title, and interest in and to the
Collateral.

3. REPRESENTATIONS, WARRANTIES AND COVENANTS.

Grantor hereby represents, warrants, and covenants that:

3.1 TRADEMARKS; PATENTS. A true and complete schedule setting forth all
federal and state trademark registrations owned or controlled by Grantor or
licensed to Grantor, together with a summary description and full information in
respect of the filing or issuance thereof and expiration dates is set forth on
EXHIBIT A; and a true and complete schedule setting forth all patent and patent
applications owned or controlled by Grantor or licensed to Grantor, together
with a summary description and full information in respect of the filing or
issuance thereof and expiration dates is set forth on EXHIBIT B.

3.2 VALIDITY; ENFORCEABILITY. Each of the patents and trademarks is valid
and enforceable, and Grantor is not presently aware of any past, present, or
prospective claim by any third party that any of the patents or trademarks are
invalid or unenforceable, or that the use of any patents or trademarks violates
the rights of any third person, or of any basis for any such claims.

3.3 TITLE. Grantor is the sole and exclusive owner of the entire and
unencumbered right, title, and interest in and to each of the patents, patent
applications, trademarks, and trademark registrations, free and clear of any
liens, charges, and encumbrances, including pledges, assignments, licenses, shop
rights, and covenants by Grantor not to sue third persons.

3.4 NOTICE. Grantor has used and will continue to use proper statutory
notice in connection with its use of each of the patents and trademarks.

3.5 QUALITY. Grantor has used and will continue to use consistent
standards of high quality (which may be consistent with Grantor's past
practices) in the manufacture, sale, and delivery of products and services sold
or delivered under or in connection with the trademarks, including, to the
extent applicable, in the operation and maintenance of its merchandising
operations, and will continue to maintain the validity of the trademarks.

3.6 PERFECTION OF SECURITY INTEREST. Except for the filing of a financing
statement with the Secretary of State of California and filings with the United
States Patent and Trademark Office necessary to perfect the security interests
created hereunder, no authorization, approval, or other action by, and no notice
to or filing with, any governmental authority or regulatory body is required
either for the grant by Grantor of the security interest hereunder or for the
execution, delivery, or performance of this Agreement by Grantor or for the
perfection of or the exercise by Congress of its rights hereunder to the
Collateral in the United States.

4. AFTER-ACQUIRED PATENT OR TRADEMARK RIGHTS.

If Grantor shall obtain rights to any new trademarks, any new patentable
inventions or become entitled to the benefit of any patent application or patent
for any reissue, division, or continuation, of any patent, the provisions of
this Agreement shall automatically apply thereto. Grantor shall give prompt
notice in writing to Congress with respect to any such new trademarks or
patents, or renewal or extension of any trademark registration. Grantor shall
bear any expenses incurred in connection with future patent applications or
trademark registrations. Without limiting

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Grantor's obligation under this Section 4, Grantor authorizes Congress to modify
this Agreement by amending EXHIBITS A or B to include any such new patent or
trademark rights. Notwithstanding the foregoing, no failure to so modify this
Agreement or amend EXHIBITS A or B shall in any way affect, invalidate or
detract from Congress's continuing security interest in all Collateral, whether
or not listed on EXHIBIT A or B.

5. LITIGATION AND PROCEEDINGS.

Grantor shall commence and diligently prosecute in its own name, as the
real party in interest, for its own benefit, and its own expense, such suits,
administrative proceedings, or other action for infringement or other damages as
are in its reasonable business judgment necessary to protect the Collateral.
Grantor shall provide to Congress any information with respect thereto requested
by Congress. Congress shall provide at Grantor's expense all necessary
cooperation in connection with any such suits, proceedings, or action,
including, without limitation, joining as a necessary party. Following Grantor's
becoming aware thereof, Grantor shall notify Congress of the institution of, or
any adverse determination in, any proceeding in the United States Patent and
Trademark Office, or any United States, state, or foreign court regarding
Grantor's claim of ownership in any of the patents or trademarks, its right to
apply for the same, or its right to keep and maintain such patent or trademark
rights.

6. POWER OF ATTORNEY.

Grantor hereby appoints Congress as Grantor's true and lawful attorney,
with full power of substitution, to do any or all of the following, in the name,
place and stead of Grantor: (a) file this Agreement (or an abstract hereof) or
any other document describing Congress's interest in the Collateral with the
United States Patent and Trademark Office; (b) execute any modification of this
Agreement pursuant to Section 4 of this Agreement; (c) take any action and
execute any instrument which Congress may deem necessary or advisable to
accomplish the purposes of this Agreement; and (d) following an Event of Default
(as defined in the Loan Agreement), (i) endorse Grantor's name on all
applications, documents, papers and instruments necessary for Congress to use or
maintain the Collateral; (ii) ask, demand, collect, sue for, recover, impound,
receive, and give acquittance and receipts for money due or to become due under
or in respect of any of the Collateral; (iii) file any claims or take any action
or institute any proceedings that Congress may deem necessary or desirable for
the collection of any of the Collateral or otherwise enforce Congress's rights
with respect to any of the Collateral, and (iv) assign, pledge, convey, or
otherwise transfer title in or dispose of the Collateral to any person.

7. RIGHT TO INSPECT.

Grantor grants to Congress and its employees and agents the right to visit
Grantor's plants and facilities which manufacture, inspect, or store products
sold under any of the patents or trademarks, and to inspect the products and
quality control records relating thereto at reasonable times during regular
business hours.

8. SPECIFIC REMEDIES.

Upon the occurrence of any Event of Default (as defined in the Loan
Agreement), Congress shall have, in addition to, other rights given by law or in
this Agreement, the Loan Agreement, or in any other Loan Document, all of the
rights and remedies with respect to the Collateral of a secured party under the
Code, including the following:

8.1 NOTIFICATION. Congress may notify licensees to make royalty payments
on license agreements directly to Congress;

-4-

<PAGE>

8.2 SALE. Congress may sell or assign the Collateral and associated
goodwill at public or private sale for such amounts, and at such time or
times as Congress deems advisable. Any requirement of reasonable notice of
any disposition of the Collateral shall be satisfied if such notice is sent
to Grantor five (5) days prior to such disposition. Grantor shall be credited
with the net proceeds of such sale only when they are actually received by
Congress, and Grantor shall continue to be liable for any deficiency
remaining after the Collateral is sold or collected. If the sale is to be a
public sale, Congress shall also give notice of the time and place by
publishing a notice one time at least five (5) days before the date of the
sale in a newspaper of general circulation in the county in which the sale is
to be held. To the maximum extent permitted by applicable law, Congress may
be the purchaser of any or all of the Collateral and associated goodwill at
any public sale and shall be entitled, for the purpose of bidding and making
settlement or payment of the purchase price for all or any portion of the
Collateral sold at any public sale, to use and apply all or any part of the
Obligations as a credit on account of the purchase price of any collateral
payable by Congress at such sale.

9. GENERAL PROVISIONS.

9.1 EFFECTIVENESS. This Agreement shall be binding and deemed effective
when executed by Grantor and Congress.

9.2 NOTICES. Except to the extent otherwise provided herein, all
notices, demands, and requests that either party is required or elects to
give to the other shall be in writing and shall be governed by the notice
provisions of the Loan Agreement.

9.3 NO WAIVER. No course of dealing between Grantor and Congress, nor
any failure to exercise nor any delay in exercising, on the part of Congress,
any right, power, or privilege under this Agreement or under the Loan
Agreement or any other agreement, shall operate as a waiver. No single or
partial exercise of any right, power, or privilege under this Agreement or
under the Loan Agreement or any other agreement by Congress shall preclude
any other or further exercise of such right, power, or privilege or the
exercise of any other right, power, or privilege by Congress.

9.4 RIGHTS ARE CUMULATIVE. All of Congress's rights and remedies with
respect to the Collateral whether established by this Agreement, the Loan
Agreement, or any other documents or agreements, or by law shall be
cumulative and may be exercised concurrently or in any order.

9.5 SUCCESSORS. The benefits and burdens of this Agreement shall inure
to the benefit of and be binding upon the respective successors and permitted
assigns of the parties; provided that Grantor may not transfer any of the
Collateral or any rights hereunder, without the prior written consent of
Congress, except as specifically permitted hereby.

9.6 SEVERABILITY. The provisions of this Agreement are severable. If
any provision of this Agreement is held invalid or unenforceable in whole or
in part in any jurisdiction, then such invalidity or unenforceability shall
affect only such provision, or part thereof, in such jurisdiction, and shall
not in any manner affect such provision or part thereof in any other
jurisdiction, or any other provision of this Agreement in any jurisdiction.

9.7 ENTIRE AGREEMENT. This Agreement is subject to modification only by
a writing signed by the parties, except as provided in Section 4 of this
Agreement. To the extent that any provision of this Agreement conflicts with
any provision of the Loan Agreement, the provision giving Congress greater
rights or remedies shall govern, it being understood that the purpose of this
Agreement is to add to, and not detract from, the rights granted to Congress
under the Loan Agreement. This Agreement, the Loan Agreement, and the
documents relating thereto comprise the entire agreement of the parties with
respect to the matters addressed in this Agreement.

-5-

<PAGE>

9.8 FEES AND EXPENSES. Grantor shall pay to Congress on demand all
costs and expenses that Congress pays or incurs in connection with the
negotiation, preparation, consummation, administration, enforcement, and
termination of this Agreement, including: (a) reasonable attorneys' and
paralegals' fees and disbursements of counsel to Congress; (b) costs and
expenses (including reasonable attorneys' and paralegals' fees and
disbursements) for any amendment, supplement, waiver, consent, or subsequent
closing in connection with this Agreement and the transactions contemplated
hereby; (c) costs and expenses of lien and title searches; (d) taxes, fees,
and other charges for filing this Agreement at the United States Patent and
Trademark Office, or for filing financing statements, and continuations, and
other actions to perfect, protect, and continue the security interest created
hereunder; (e) sums paid or incurred to pay any amount or take any action
required of Grantor under this Agreement that Grantor fails to pay or take;
(f) costs and expenses of preserving and protecting the Collateral; and (g)
costs and expenses (including reasonable attorneys' and paralegals' fees and
disbursements) paid or incurred to enforce the security interest created
hereunder, sell or otherwise realize upon the Collateral, and otherwise
enforce the provisions of this Agreement, or to defend any claims made or
threatened against the Congress arising out of the transactions contemplated
hereby (including preparations for the consultations concerning any such
matters). The foregoing shall not be construed to limit any other provisions
of this Agreement or the Loan Documents regarding costs and expenses to be
paid by Grantor. The parties agree that reasonable attorneys' and paralegals'
fees and costs incurred in enforcing any judgment are recoverable as a
separate item in addition to fees and costs incurred in obtaining the
judgment and that the recovery of such attorneys' and paralegals' fees and
costs is intended to survive any judgment, and is not to be deemed merged
into any judgment.

9.9 INDEMNITY. Grantor shall protect, defend, indemnify, and hold
harmless Congress and Congress's assigns from all liabilities, losses, and
costs (including without limitation reasonable attorneys' fees) incurred or
imposed on Congress relating to the matters in this Agreement.

9.10 FURTHER ASSURANCES. At Congress's request, Grantor shall execute
and deliver to Congress any further instruments or documentation, and perform
any acts, that may be reasonably necessary or appropriate to implement this
Agreement, the Loan Agreement or any other agreement, and the documents
relating thereto, including without limitation any instrument or
documentation reasonably necessary or appropriate to create, maintain,
perfect, or effectuate Congress's security interests in the Collateral.

9.11 RELEASE. At such time as Grantor shall completely satisfy all of
the Obligations and the Loan Agreement shall be terminated, Congress shall
execute and deliver to Grantor all assignments and other instruments as may
be reasonably necessary or proper to terminate Congress's security interest
in the Collateral, subject to any disposition of the Collateral which may
have been made by Congress pursuant to this Agreement. For the purpose of
this Agreement, the Obligations shall be deemed to continue if Grantor enters
into any bankruptcy or similar proceeding at a time when any amount paid to
Congress could be ordered to be repaid as a preference or pursuant to a
similar theory, and shall continue until it is finally determined that no
such repayment can be ordered.

9.12 GOVERNING LAW. The validity and interpretation of this Agreement
and the rights and obligations of the parties shall be governed by the laws
of the State of California, excluding its conflict of law rules to the extent
such rules would apply the law of another jurisdiction, and the United
States. The parties agree that all actions or proceedings arising in
connection with this Agreement shall be tried and litigated only in the state
and federal courts located in the County of Los Angeles, State of California
or, at the sole option of CONGRESS, in any other court in which CONGRESS
shall initiate legal or equitable proceedings and which has subject matter
jurisdiction over the matter in controversy. each of Grantor and CONGRESS
waives, to the extent permitted

-6-

<PAGE>

under applicable law, any right they may have to assert the doctrine of forum
non conveniens or to object to venue to the extent any proceeding is brought
in accordance with this Section.

9.13 WAIVER OF RIGHT TO JURY TRIAL. CONGRESS AND GRANTOR EACH HEREBY
WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY
OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN CONGRESS AND GRANTOR;
OR (III) ANY CONDUCT, ACTS OR OMISSIONS OF CONGRESS OR GRANTOR OR ANY OF
THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS
AFFILIATED WITH CONGRESS OR GRANTOR; IN EACH OF THE FOREGOING CASES, WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE.

IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first written above.

CONGRESS FINANCIAL CORPORATION L.A. GEAR CALIFORNIA, INC.
(WESTERN)

By /s/ Donald A. McLeod By /s/ Victor J. Trippetti
------------------------------------ --------------------------------
Title Senior Vice President Title Senior Vice President and CEO
--------------------------------- -----------------------------

-7-

<PAGE>

STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )

On May 21, 1997, before me, Kathryn Gambino, Notary Public, personally
appeared DONALD A. MCLEOD, personally known to me (or proved to me on the basis
of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to
the within instrument and acknowledged to me that he/she/they executed the same
in his/her/their authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s), or the entity upon behalf of which
the person(s) acted, executed the instrument.

Witness my hand and official seal.

/s/ Kathyrn Gambino
---------------------
[SEAL]
(Seal)

STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )

On May 21, 1997, before me, Kathryn Gambino, Notary Public, personally
appeared VICTOR J. TRIPPETTI, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.

Witness my hand and official seal.

/s/ Kathyrn Gambino
---------------------
[SEAL]
(Seal)

-8-

<PAGE>

EXHIBIT 10.5

PATENT AND TRADEMARK SECURITY AGREEMENT

This PATENT AND TRADEMARK SECURITY AGREEMENT ("Agreement"), dated as of May 21,
1997, is entered into between L.A. GEAR, INC., a Delaware corporation
("Grantor"), which has a mailing address at 2850 Ocean Park Blvd., Santa Monica,
California 90405, and CONGRESS FINANCIAL CORPORATION (WESTERN) ("Congress"),
which has a mailing address at 225 S. Lake Avenue, Suite 1000, Pasadena,
California 91101.
RECITALS
A. Grantor and Congress are, contemporaneously herewith, entering into
that certain Loan and Security Agreement ("Loan Agreement") and other
instruments, documents and agreements contemplated thereby or related thereto
(collectively, together with the Loan Agreement, the "Loan Documents"); and

B. Grantor is the owner of certain intellectual property, identified
below, in which Grantor is granting a security interest to Congress.

1. DEFINITIONS AND CONSTRUCTION.

1.1 DEFINITIONS. The following terms, as used in this Agreement, have the
following meanings:

"CODE" means the California Uniform Commercial Code, as amended and
supplemented from time to time, and any successor statute.

"COLLATERAL" means all of the following, whether now owned or
hereafter acquired:

(i) Each of the trademarks and rights and interest which
are capable of being protected as trademarks (including trademarks, service
marks, designs, logos, indicia, tradenames, corporate names, company names,
business names, fictitious business names, trade styles, and other source
or business identifiers, and applications pertaining thereto), which are
presently, or in the future may be, owned, created, acquired, or used
(whether pursuant to a license or otherwise) by Grantor, in whole or in
part, and all trademark rights with respect thereto throughout the world,
including all proceeds thereof (including license royalties and proceeds of
infringement suits), and rights to renew and extend such trademarks and
trademark rights;

(ii) Each of the patents and patent applications which are
presently, or in the future may be, owned, issued, acquired, or used
(whether pursuant to a license or otherwise) by Grantor, in whole or in
part, and all patent rights with respect thereto throughout the world,
including all proceeds thereof (including license royalties and proceeds of
infringement suits), foreign filing rights, and rights to extend such
patents and patent rights;

(iii) All of Grantor's right to the trademarks and trademark
registrations listed on EXHIBIT A attached hereto, as the same may be
updated hereafter from time to time;

<PAGE>

(iv) All of Grantor's right, title, and interest, in and to
the patents and patent applications listed on EXHIBIT B attached hereto, as
the same may be updated hereafter from time to time;

(v) All of Grantor's right, title and interest to register
trademark claims under any state or federal trademark law or regulation of
any foreign country and to apply for, renew, and extend the trademark
registrations and trademark rights, the right (without obligation) to sue
or bring opposition or cancellation proceedings in the name of Grantor or
in the name of Congress for past, present, and future infringements of the
trademarks, registrations, or trademark rights and all rights (but not
obligations) corresponding thereto in the United States and any foreign
country;

(vi) All of Grantor's right, title, and interest in all
patentable inventions, and to file applications for patent under federal
patent law or regulation of any foreign country, and to request
reexamination and/or reissue of the patents, the right (without obligation)
to sue or bring interference proceedings in the name of Grantor or in the
name of Congress for past, present, and future infringements of the
patents, and all rights (but not obligations) corresponding thereto in the
United States and any foreign country;

(vii) the entire goodwill of or associated with the
businesses now or hereafter conducted by Grantor connected with and
symbolized by any of the aforementioned properties and assets;

(viii) All general intangibles relating to the foregoing and
all other intangible intellectual or other similar property of the Grantor
of any kind or nature, associated with or arising out of any of the
aforementioned properties and assets and not otherwise described above; and

(ix) All products and proceeds of any and all of the
foregoing (including, without limitation, license royalties and proceeds of
infringement suits) and, to the extent not otherwise included, all payments
under insurance, or any indemnity, warranty, or guaranty payable by reason
of loss or damage to or otherwise with respect to the Collateral.

"OBLIGATIONS" means all obligations, liabilities, and indebtedness of
Grantor to Congress, whether direct, indirect, liquidated, or contingent, and
whether arising under this Agreement, the Loan Agreement, any other of the Loan
Documents, or otherwise, including all costs and expenses described in Section
9.8 hereof.

1.2 CONSTRUCTION. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, references to the
singular include the plural, and the term "including" is not limiting. The words
"hereof," "herein," "hereby," "hereunder," and other similar terms refer to this
Agreement as a whole and not to any particular provision of this Agreement. Any
initially capitalized terms used but not defined herein shall have the meaning
set forth in the Loan Agreement. Any reference herein to any of the Loan
Documents includes any and all alterations, amendments, extensions,
modifications, renewals, or supplements thereto or thereof, as applicable.
Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against Congress or Grantor, whether under any rule of
construction or otherwise. On the contrary, this Agreement has been reviewed by
Grantor, Congress, and their respective counsel, and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of Congress and Grantor. Headings have
been set forth herein for convenience only, and shall not be used in the
construction of this Agreement.

-2-
<PAGE>

2. GRANT OF SECURITY INTEREST.

3. REPRESENTATIONS, WARRANTIES AND COVENANTS.

Grantor hereby represents, warrants, and covenants that:

3.4 NOTICE. Grantor has used and will continue to use proper statutory
notice in connection with its use of each of the patents and trademarks.

4. AFTER-ACQUIRED PATENT OR TRADEMARK RIGHTS.

-3-
<PAGE>

incurred in connection with future patent applications or trademark
registrations. Without limiting Grantor's obligation under this Section 4,
Grantor authorizes Congress to modify this Agreement by amending EXHIBITS A OR B
to include any such new patent or trademark rights. Notwithstanding the
foregoing, no failure to so modify this Agreement or amend EXHIBITS A OR B shall
in any way affect, invalidate or detract from Congress's continuing security
interest in all Collateral, whether or not listed on EXHIBIT A OR B.

5. LITIGATION AND PROCEEDINGS.

6. POWER OF ATTORNEY.

7. RIGHT TO INSPECT.

8. SPECIFIC REMEDIES.

8.1 NOTIFICATION. Congress may notify licensees to make royalty payments
on license agreements directly to Congress;

-4-
<PAGE>

8.2 SALE. Congress may sell or assign the Collateral and associated
goodwill at public or private sale for such amounts, and at such time or times
as Congress deems advisable. Any requirement of reasonable notice of any
disposition of the Collateral shall be satisfied if such notice is sent to
Grantor five (5) days prior to such disposition. Grantor shall be credited with
the net proceeds of such sale only when they are actually received by Congress,
and Grantor shall continue to be liable for any deficiency remaining after the
Collateral is sold or collected. If the sale is to be a public sale, Congress
shall also give notice of the time and place by publishing a notice one time at
least five (5) days before the date of the sale in a newspaper of general
circulation in the county in which the sale is to be held. To the maximum extent
permitted by applicable law, Congress may be the purchaser of any or all of the
Collateral and associated goodwill at any public sale and shall be entitled, for
the purpose of bidding and making settlement or payment of the purchase price
for all or any portion of the Collateral sold at any public sale, to use and
apply all or any part of the Obligations as a credit on account of the purchase
price of any collateral payable by Congress at such sale.

9. GENERAL PROVISIONS.

9.1 EFFECTIVENESS. This Agreement shall be binding and deemed effective
when executed by Grantor and Congress.

9.2 NOTICES. Except to the extent otherwise provided herein, all notices,
demands, and requests that either party is required or elects to give to the
other shall be in writing and shall be governed by the notice provisions of the
Loan Agreement.

9.3 NO WAIVER. No course of dealing between Grantor and Congress, nor any
failure to exercise nor any delay in exercising, on the part of Congress, any
right, power, or privilege under this Agreement or under the Loan Agreement or
any other agreement, shall operate as a waiver. No single or partial exercise
of any right, power, or privilege under this Agreement or under the Loan
Agreement or any other agreement by Congress shall preclude any other or further
exercise of such right, power, or privilege or the exercise of any other right,
power, or privilege by Congress.

9.4 RIGHTS ARE CUMULATIVE. All of Congress's rights and remedies with
respect to the Collateral whether established by this Agreement, the Loan
Agreement, or any other documents or agreements, or by law shall be cumulative
and may be exercised concurrently or in any order.

9.5 SUCCESSORS. The benefits and burdens of this Agreement shall inure to
the benefit of and be binding upon the respective successors and permitted
assigns of the parties; provided that Grantor may not transfer any of the
Collateral or any rights hereunder, without the prior written consent of
Congress, except as specifically permitted hereby.

9.6 SEVERABILITY. The provisions of this Agreement are severable. If any
provision of this Agreement is held invalid or unenforceable in whole or in part
in any jurisdiction, then such invalidity or unenforceability shall affect only
such provision, or part thereof, in such jurisdiction, and shall not in any
manner affect such provision or part thereof in any other jurisdiction, or any
other provision of this Agreement in any jurisdiction.

9.7 ENTIRE AGREEMENT. This Agreement is subject to modification only by a
writing signed by the parties, except as provided in Section 4 of this
Agreement. To the extent that any provision of this Agreement conflicts with
any provision of the Loan Agreement, the provision giving Congress greater
rights or remedies shall govern, it being understood that the purpose of this
Agreement is to add to, and not detract from, the rights granted to Congress
under the Loan

-5-
<PAGE>

Agreement. This Agreement, the Loan Agreement, and the documents relating
thereto comprise the entire agreement of the parties with respect to the matters
addressed in this Agreement.

9.8 FEES AND EXPENSES. Grantor shall pay to Congress on demand all costs
and expenses that Congress pays or incurs in connection with the negotiation,
preparation, consummation, administration, enforcement, and termination of this
Agreement, including: (a) reasonable attorneys' and paralegals' fees and
disbursements of counsel to Congress; (b) costs and expenses (including
reasonable attorneys' and paralegals' fees and disbursements) for any amendment,
supplement, waiver, consent, or subsequent closing in connection with this
Agreement and the transactions contemplated hereby; (c) costs and expenses of
lien and title searches; (d) taxes, fees, and other charges for filing this
Agreement at the United States Patent and Trademark Office, or for filing
financing statements, and continuations, and other actions to perfect, protect,
and continue the security interest created hereunder; (e) sums paid or incurred
to pay any amount or take any action required of Grantor under this Agreement
that Grantor fails to pay or take; (f) costs and expenses of preserving and
protecting the Collateral; and (g) costs and expenses (including reasonable
attorneys' and paralegals' fees and disbursements) paid or incurred to enforce
the security interest created hereunder, sell or otherwise realize upon the
Collateral, and otherwise enforce the provisions of this Agreement, or to defend
any claims made or threatened against the Congress arising out of the
transactions contemplated hereby (including preparations for the consultations
concerning any such matters). The foregoing shall not be construed to limit any
other provisions of this Agreement or the Loan Documents regarding costs and
expenses to be paid by Grantor. The parties agree that reasonable attorneys' and
paralegals' fees and costs incurred in enforcing any judgment are recoverable as
a separate item in addition to fees and costs incurred in obtaining the judgment
and that the recovery of such attorneys' and paralegals' fees and costs is
intended to survive any judgment, and is not to be deemed merged into any
judgment.

9.9 INDEMNITY. Grantor shall protect, defend, indemnify, and hold
harmless Congress and Congress's assigns from all liabilities, losses, and costs
(including without limitation reasonable attorneys' fees) incurred or imposed on
Congress relating to the matters in this Agreement.

9.10 FURTHER ASSURANCES. At Congress's request, Grantor shall execute and
deliver to Congress any further instruments or documentation, and perform any
acts, that may be reasonably necessary or appropriate to implement this
Agreement, the Loan Agreement or any other agreement, and the documents relating
thereto, including without limitation any instrument or documentation reasonably
necessary or appropriate to create, maintain, perfect, or effectuate Congress's
security interests in the Collateral.

9.11 RELEASE. At such time as Grantor shall completely satisfy all of the
Obligations and the Loan Agreement shall be terminated, Congress shall execute
and deliver to Grantor all assignments and other instruments as may be
reasonably necessary or proper to terminate Congress's security interest in the
Collateral, subject to any disposition of the Collateral which may have been
made by Congress pursuant to this Agreement. For the purpose of this Agreement,
the Obligations shall be deemed to continue if Grantor enters into any
bankruptcy or similar proceeding at a time when any amount paid to Congress
could be ordered to be repaid as a preference or pursuant to a similar theory,
and shall continue until it is finally determined that no such repayment can be
ordered.

-6-
<PAGE>

County of Los Angeles, State of California or, at the sole option of CONGRESS,
in any other court in which CONGRESS shall initiate legal or equitable
proceedings and which has subject matter jurisdiction over the matter in
controversy. each of Grantor and CONGRESS waives, to the extent permitted under
applicable law, any right they may have to assert the doctrine of forum non
conveniens or to object to venue to the extent any proceeding is brought in
accordance with this Section.

9.13 WAIVER OF RIGHT TO JURY TRIAL. CONGRESS AND GRANTOR EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY OTHER PRESENT OR
FUTURE INSTRUMENT OR AGREEMENT BETWEEN CONGRESS AND GRANTOR; OR (III) ANY
CONDUCT, ACTS OR OMISSIONS OF CONGRESS OR GRANTOR OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
CONGRESS OR GRANTOR; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE.

IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first written above.

CONGRESS FINANCIAL L.A. GEAR, INC.
CORPORATION (WESTERN)

By /s/ Donald A. McLeod
------------------------
Title SENIOR VICE PRESIDENT By /s/ Victor J. Trippetti
--------------------- ------------------------------
Title Senior VP + CFO
---------------------------

-7-
<PAGE>

STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )

Witness my hand and official seal.

/s/ Kathryn Gambino
------------------------------
[SEAL]

(Seal)

STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )

Witness my hand and official seal.

/s/ Kathryn Gambino
------------------------------

(Seal)

[SEAL]

-8-
<PAGE>

EXHIBIT "A"

REGISTERED TRADEMARKS

See EXHIBIT "A" attached hereto and made a part hereof by this reference.

PENDING TRADEMARKS

See EXHIBIT "A" attached hereto and made a part hereof by this reference.

-9-

<PAGE>
EXHIBIT 10.6

ASSIGNMENT OF
PROCEEDS OF LETTER OF CREDIT

THIS ASSIGNMENT OF PROCEEDS OF LETTER OF CREDIT dated May 21, 1997 is entered
into between L.A. Gear California, Inc. ("Borrower") and Congress Financial
Corporation (Western) ("Congress"), in connection with the Loan and Security
Agreement between Borrower and Congress of even date (the "Loan Agreement").
(Capitalized terms used in this Assignment, which are not defined, shall have
the meanings set forth in the Loan Agreement. The Loan Agreement and all
present and future documents and agreements executed in connection therewith or
relating thereto are referred to herein collectively as the "Loan Documents".)

1 ASSIGNMENT OF LETTER OF CREDIT. To further secure payment and
performance of all Obligations, Borrower hereby grants to Congress a
continuing security interest in, a lien upon, and hereby assigns to Congress,
all proceeds of all letters of credit in favor of Borrower, now existing or
hereafter arising, and all drafts drawn thereunder (the "Letters of Credit").
Without limiting any of the provisions of the Loan Agreement, the
"Collateral" (as defined in the Loan Agreement) includes without limitation
all Letters of Credit and all proceeds thereof and all documents relating
thereto.

2 PERFORMANCE OF CONDITIONS. Borrower agrees to perform all of the
obligations, and present all drafts and all other documents, necessary to
draw on the Letters of Credit in strict compliance with all of the terms and
conditions of the Letters of Credit and prior to their expiration, and
Borrower agrees to take all such other actions as are necessary to cause the
drafts drawn on the Letters of Credit to be paid in full directly to Congress
by the issuers of the Letters of Credit or the banks confirming the Letters
of Credit.

3 APPLICATION OF PROCEEDS. Whether or not any Event of Default has
occurred, Congress is authorized (but not obligated) to collect all of the
proceeds of the Letters of Credit. All such proceeds shall be credited to
the Payment Account (as set forth in, and subject to the charges set forth
in, Section 6.1 and 6.2 of the Loan Agreement), and all such proceeds shall
be applied to the Obligations in such order and manner as Congress shall
determine. Any excess of such proceeds over the Obligations shall be
remitted to the Borrower.

4 REPRESENTATIONS, WARRANTIES AND COVENANTS. Borrower represents and
warrants to Congress that it has not, and shall not, by negotiation of drafts
or otherwise, assign or grant any security interest in the whole or any part
of the proceeds of the Letters of Credit or give any other authorization or
direction to make any payment thereof to any other party other than Congress.
Borrower shall pay all costs and expenses in connection with this Agreement.
Borrower shall not agree to any amendments or modifications to the Letters of
Credit without the prior written consent of Congress, which shall not be
unreasonably withheld. Borrower shall not cancel or substitute for the
Letters of Credit. Borrower shall provide Congress with copies of all
correspondence relating to the Letters of Credit within one business day
after the same is sent or received by Borrower, and Borrower shall keep
Congress advised as to the status of all matters relating to the Letters of
Credit. No receipt of such correspondence or information by Congress shall
be deemed to be an acquiescence therein or consent thereto or to waive or
vary any of the provisions of this Agreement.

5 GENERAL. This Assignment is a supplement to the Loan Agreement,
and all rights and remedies hereunder and thereunder are cumulative. This
Assignment, the Loan Agreement and the other Loan Documents set forth in full
all of the representations and agreements of the parties with respect to the
subject matter hereof and supersede all prior oral discussions,
representations, agreements and understandings between the parties. This
Assignment may not

<PAGE>
Assignment of Proceeds of Letters of Credit
- ------------------------------------------------------------------------------

be modified or amended, nor may any rights hereunder be waived, except in a
writing signed by the parties hereto. Borrower agrees to take all further
actions and execute all further documents from time to time as may be
reasonably necessary to carry out the purposes of this Assignment. This
Assignment is being entered into, and shall be governed by the laws of the
State of California.

6 JURY WAIVER. BORROWER AND CONGRESS EACH HEREBY WAIVES ANY RIGHT TO
TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING
UNDER THIS ASSIGNMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR (ii) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO
IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE
TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE.
BORROWER AND CONGRESS EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A
JURY AND THAT BORROWER OR CONGRESS MAY FILE AN ORIGINAL COUNTERPART OF A COPY
OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE
PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

Borrower:

L.A. Gear California, Inc.

By /s/ [Illegible]
-----------------------------
Vice President & CFO

By /s/ [Illegible]
-----------------------------
Secretary

Congress:

Congress Financial Corporation (Western)

By /s/ DONALD A. MCLEOD
-----------------------------
Title SENIOR VICE PRESIDENT
--------------------------

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS, CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 9,331
<SECURITIES> 0
<RECEIVABLES> 24,999
<ALLOWANCES> 2,788
<INVENTORY> 26,591
<CURRENT-ASSETS> 1,846
<PP&E> 9,073
<DEPRECIATION> 6,492
<TOTAL-ASSETS> 65,861
<CURRENT-LIABILITIES> 26,290
<BONDS> 50,000
0
115,473
<COMMON> 128,132
<OTHER-SE> (254,034)
<TOTAL-LIABILITY-AND-EQUITY> 65,861
<SALES> 63,803
<TOTAL-REVENUES> 63,803
<CGS> 50,647
<TOTAL-COSTS> 73,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,948
<INCOME-PRETAX> (9,685)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,685)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,685)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)

</TABLE>