------UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 10-Q

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ___ SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JULY 29, 1995

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ___ SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 0-14818

TRANS WORLD ENTERTAINMENT CORPORATION (Exact name of registrant as specified in its charter)

New York 14-1541629 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)

38 Corporate Circle Albany, New York 12203 (Address of principal executive offices, including zip code)

(518) 452-1242 (Registrant's telephone number, including area code)

Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 ------

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value, 9,732,814 shares outstanding as of September 7, 1995 ------

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets -- July 29, 1995, January 28, 1995 and July 30, 1994 3

Condensed Consolidated Statements of Income -- Thirteen Weeks and Twenty-Six Weeks Ended July 29, 1995 and July 30, 1994 4

Condensed Consolidated Statements of Cash Flows -- Twenty-Six Weeks Ended July 29, 1995 and July 30, 1994 5

Notes to Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8

PART II OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders 12

Item 6. Exhibits and Reports on Form 8-K 12

SIGNATURES 13 -2- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) (unaudited)

July 29, January 28, July 30, 1995 1995 1994 ------ ASSETS ------CURRENT ASSETS: Cash and cash equivalents $ 8,248 $ 90,091 $ 8,011 Merchandise inventory 207,640 222,358 221,985 Other current assets 22,231 16,527 12,841 ------Total current assets 238,119 328,976 242,837 ------VIDEOCASSETTE RENTAL INVENTORY, NET 7,762 7,472 6,472 DEFERRED TAX ASSET 505 505 --- FIXED ASSETS: Property, plant and equipment 176,137 182,262 175,312 Less: Fixed asset write-off reserve 6,934 10,485 --- Accumulated depreciation and amortization 88,041 85,620 80,413 ------81,162 86,157 94,899 ------OTHER ASSETS 4,025 3,829 2,949 ------TOTAL ASSETS $331,573 $426,939 $347,157 ======

LIABILITIES AND SHAREHOLDERS' EQUITY ------

CURRENT LIABILITIES: Accounts payable $ 70,778 $135,493 $ 75,419 Notes payable 65,214 74,947 64,439 Income taxes payable --- 1,961 --- Store closing reserve 5,374 9,276 --- Current portion of long-term debt and capital leases 4,183 6,618 12,747 Other current liabilities 5,360 7,250 7,825 ------Total current liabilities 150,909 235,545 160,430 ------LONG-TERM DEBT, less current portion 59,716 59,770 54,101 CAPITAL LEASE OBLIGATIONS, less current portion 6,611 6,671 6,866 OTHER LIABILITIES 5,075 5,476 4,714 ------TOTAL LIABILITIES 222,311 307,462 226,111 ------SHAREHOLDERS' EQUITY Common stock ($.01 par value; 20,000,000 shares authorized; 9,781,208, 9,731,208 and 9,731,208 issued, respectively) 97 97 97 Additional paid-in capital 24,236 24,236 24,236 Treasury stock, at cost (48,394, 48,394 & 48,394 shares, respectively) (503) (503) (503) Retained earnings 85,432 95,647 97,216 ------Total shareholders' equity 109,262 119,477 121,046 ------TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $331,573 $426,939 $347,157 ======

See Notes to Condensed Consolidated Financial Statements.

-3- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited)

Thirteen Weeks Ended ------July 29, July 30, 1995 1994 ------ Sales $104,292 $106,978 Cost of sales 68,977 67,503 ------Gross profit 35,315 39,475 Selling, general and administrative expenses 37,558 37,329 Depreciation and amortization 4,110 4,146 ------Loss from operations (6,353) (2,000) Interest expense 3,845 2,667 ------Loss before income tax benefit (10,198) (4,667) Income tax benefit (4,069) (1,862) ------NET LOSS ($6,129) ($2,805) ======LOSS PER SHARE ($0.63) ($0.29) ======Weighted average number of common shares outstanding 9,733 9,708 ======

Twenty-Six Weeks Ended ------July 29, July 30, 1995 1994 ------ Sales $216,204 $216,178 Cost of sales 141,235 135,873 ------Gross profit 74,969 80,305 Selling, general and administrative expenses 76,291 74,891 Depreciation and amortization 8,355 8,314 ------Loss from operations (9,677) (2,900) Interest expense 7,319 4,899 ------Loss before income tax benefit (16,996) (7,799) Income tax benefit (6,781) (3,112) ------NET LOSS ($10,215) ($4,687) ======

LOSS PER SHARE ($1.05) ($0.48) ======

Weighted average number of common shares outstanding 9,726 9,713 ======

See Notes to Condensed Consolidated Financial Statements.

-4- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

Twenty-Six Weeks Ended ------July 29, July 30, 1995 1994 ------ NET CASH USED BY OPERATING ACTIVITIES ($65,513) ($68,551) ------INVESTING ACTIVITIES: Acquisition of property and equipment (3,758) (10,197) Purchases of videocassette rental inventory, net of amortization (290) (306) ------Net cash used by investing activities (4,048) (10,503) ------FINANCING ACTIVITIES: Net increase (decrease) in revolving line of credit (9,733) 64,439 Payments of long-term debt and capital lease obligations (2,549) (3,079) Other --- (341) ------Net cash provided (used) by financing activities (12,282) 61,019 ------Net decrease in cash and cash equivalents (81,843) (18,035) Cash and cash equivalents, beginning of period 90,091 26,046 ------Cash and cash equivalents, end of period $ 8,248 $ 8,011 ======

See Notes to Condensed Consolidated Financial Statements.

-5- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements consist of Trans World Entertainment Corporation and its subsidiaries (the "Company"), all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. Joint venture investments, none of which were material, are accounted for using the equity method.

The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these consolidated financial statements reflects all normal, recurring adjustments which, in the opinion of management, are necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations applicable to interim financial statements.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.

Note 2. Restructuring Reserve

During the fourth quarter of 1994 the Company recorded a pre-tax restructuring charge of $21 million to reflect the anticipated costs associated with a program to close 143 stores through the first quarter of 1996. The restructuring charge included the write-down of fixed assets, estimated cash payments to landlords for early termination of operating leases and the cost of returning product to the Company's distribution center and vendors. The charge also included estimated legal and consulting fees, including those that the Company was obligated to pay on behalf of its lenders while working to renegotiate its credit agreements. Management believes that the reserve balance at the end of the second quarter is sufficient to cover the costs of closing the remaining stores included in the restructuring program.

-6-

Total costs charged to the restructuring reserves during the first half of 1995 are summarized as follows:

First First Second Second Quarter Quarter Quarter Quarter Beginning Charges Charges Ending Reserve Against Against Reserve Balance Reserve Reserve Balance ------(in thousands) Non-cash write-offs ------ Leasehold improvements $ 7,077 $ 393 $ 1,351 $ 5,333 Furniture and fixtures 3,408 917 890 1,601 Excess inventory shrinkage 944 0 240 704 ------Total non-cash 11,429 1,310 2,481 7,638 ------Cash outflows ------Lease obligations 4,250 568 457 3,225 Return penalties and related costs 2,725 325 625 1,775 Termination benefits 200 135 27 38 Consulting and legal fees 1,157 1,004 521 (368) ------Total cash outflows 8,332 2,032 1,630 4,670 ------Total $19,761 $3,342 $ 4,111 $12,308 ======

Note 3. Seasonality

The Company's business is seasonal in nature, with the highest sales and earnings occurring in the fourth fiscal quarter. In the past three fiscal years, the fourth quarter has represented substantially all of the Company's net income for the year.

Note 4. Earnings (Loss) Per Share

Earnings (Loss) per share is based on the weighted average number of common shares outstanding during each fiscal period. Common stock equivalents, which relate to employee stock options, are excluded from the calculations, as their inclusion would have an anti-dilutive impact on the loss per share.

-7- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Thirteen Weeks Ended July 29, 1995 Compared to Thirteen Weeks Ended July 30, 1994 ------

Sales. The Company's sales declined $2.7 million or 2.5% for the second quarter ended July 29, 1995 compared to the second quarter of 1994. This sales decrease is primarily due to the net store count decrease of 72 stores since the second quarter of 1994 and a 4.8% quarterly decline in comparable store sales.

In the Company's music division, the second quarter comparable store sales declined 4.7% from the second quarter of 1994 while the video division declined 1.6% from the second quarter of 1994. The video rental division had a second quarter comparable sales decline of 10.8% compared to the second quarter of 1994. The comparable store sales decline is primarily attributed to a weaker new music release schedule in the second quarter of 1995 and lower traffic in the shopping malls. The Company currently expects this trend will continue into the third quarter based on the upcoming new music release schedule. Based on available industry sales information this trend is consistent throughout the industry. The increasing competition from electronics retailers and books superstores that are expanding in the music business has also contributed to the current sales trend.

Gross Profit. Gross profit as a percentage of sales decreased from 36.9% to 33.9% in the second quarter ended July 29, 1995, compared to the second quarter in 1994. The decrease was due to continued price competition, increased promotional activity, and costs associated with returning product to vendors as the Company reduces inventory levels.

Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") as a percentage of sales increased from 34.9% to 36.0% in the second quarter of 1995 compared to the second quarter of 1994. The increase in SG&A as a percent of sales was primarily due to the reduced leverage of overhead expenses because of the decrease in comparable store sales.

Interest Expense. Interest expense increased $1.2 million in the second quarter of 1995 compared to the second quarter of 1994. This increase was due to an increase in the interest rate the Company is paying on its long-term debt and borrowings under its revolving credit facilities.

Net Loss. The $6.1 million net loss for the second quarter ended July 29, 1995 compares to a $2.8 million net loss in the second quarter of 1994. The increased loss is due to the decline in comparable store sales combined with reduced gross margin rate, the expense growth in the stores, and the increase in interest expense. To achieve a profitable fiscal quarter comparable store sales growth would have had to increase substantially over the sales in the second quarter of 1994.

-8- Twenty-Six Weeks Ended July 29, 1995 Compared to Twenty-Six Weeks Ended July 30, 1994 ------Sales. The Company's sales remained flat for the first half of 1995 compared to the first half of 1994. During the first half of the year, comparable store sales declined approximately 3.4%.

Gross Profit. Gross profit as a percentage of sales declined to 34.7% for the first half of 1995 from 37.1% from the first half of 1994. This decline was due to continued price competition, increased promotional activity, and costs associated with returning product to vendors as the Company reduces inventory levels.

Selling, General and Administrative Expenses. SG&A as a percentage of sales increased from 34.6% to 35.3% in the first half of 1995 compared to the first half of 1994. The increase was primarily due to the decline in comparable store sales.

Interest Expense. Interest expense increased $2.4 million in the first half of 1995 compared to the first half of 1994. The increase is primarily attributed to the increase in the Company's weighted average borrowing rate.

Net Loss. The $10.2 million net loss for the first half of 1995 compares to a $4.7 million net loss in the first half of 1994. The increased loss is due to the decline in comparable store sales, the reduced gross margin rate, the expense growth in the stores, and the increase in interest expense.

-9- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Sources of Capital. Cash used by operating and investing activities in the first half of the fiscal year are financed through borrowings under the Company's revolving credit facilities, which permit aggregate borrowings of up to $72.3 million.

The Company's cash flow from operating activities typically decreases significantly during the second quarter and year-to-date periods due to repayments of accounts payable and lower sales at this time of year. During the first half of 1995 the Company's cash flow used by operations was $65.5 million, which is comparable to the $68.6 million in the first half of 1994. The most significant uses of cash in the period were the $64.7 million in normal reductions of accounts payable and $3.9 million of expenditures relating to the Company's underperforming store closing program. Cash flow from the reduction of merchandise inventory was $14.7 million in the first half of 1995 compared to $17.0 million in the first half of 1994.

The Company currently expects that inventory leverage will improve as it continues to return slow moving inventory to vendors in the third fiscal quarter. The level of the revolving credit facilities is considered adequate to finance the seasonally higher inventory requirements in the second half of the year. At fiscal year end and through the first half of fiscal 1996, inventory reduction will continue due to the additional store closings. The corresponding improvement to inventory leverage will be important to maintain or reduce the absolute level of borrowings on the Company's revolving credit facilities.

The Company is currently in compliance with all covenants under its credit and long-term note agreements as of and for the periods ended July 29, 1995. The Company will be in compliance with the covenants if the Company is profitable for the 1995 fiscal year.

CAPITAL EXPENDITURES

The Company opened five new stores and closed fifty-two stores in the second quarter of 1995, ending the period with 616 stores in operation and total retail square footage of 2.4 million. In addition, the Company is also a joint venture partner in 10 Incredible Universe stores with Tandy Corporation. Management plans to open one store in the third quarter and less than 10 stores for the entire fiscal year. Capital expenditures related to the Company's seven new stores, store remodels and the automation of the distribution facility were $3.7 million for the first half of 1995. The Company expects that the total capital expenditures for fiscal 1995 will be slightly less than the original plan of $10.6 million, net of construction allowances. Any excess cash flow will be used primarily to retire debt. Total retail square footage is estimated to be approximately 2.2 million at the end of the 1995 fiscal year.

The terms of the Company's revolving credit and long-term debt agreements require the Company to meet certain financial and operating ratios, and limit the Company's ability, among other things, to incur indebtedness, to make certain investments and to pay dividends. The foregoing restrictions, as well as the possibility that certain of the financial ratios may not be maintained, could limit the Company's ability to obtain future financing and to engage in certain corporate activities.

-10- PROVISION FOR BUSINESS RESTRUCTURING

During the fourth quarter of 1994 the Company undertook a comprehensive examination of store profitability and adopted a business restructuring plan that included the closing of 143 stores out of 712 stores then open and operating. As a result of the restructuring plan, the Company recorded a pre-tax charge of $21 million against earnings. The components of the restructuring charge included approximately $8.7 million in reserves for future cash outlays, and approximately $12.3 million in asset write-offs.

Fifty-two stores were closed in the second quarter of 1995 bringing the total closures to 103 through the end of the second quarter of 1995. Asset write-offs charged to the reserve account totaled $2.5 million in the second quarter of 1995 and $4.7 million since the inception of the business restructuring plan. Cash expenditures charged to the store closing reserve totaled $1.6 million in the second quarter of 1995 and $4.0 million since the inception of the business restructuring plan.

The cash outflows for store closings in the first two quarters and outflows for the remainder of the year have been financed and will continue to be financed through disposition of merchandise inventory from the closed stores. The timing of continued store closures will depend somewhat on the Company's ability to negotiate reasonable lease termination agreements and continued review of the opportunities to accelerate the closing of underperforming stores.

Annual sales associated with the stores closed in the second quarter of 1995 totaled $25.5 million in 1994. Because the store closures will not be completed until early 1996, the Company will not receive most of the earnings or cash flow benefits from the restructuring program until fiscal 1996.

-11- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

PART II: OTHER INFORMATION

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

The Company's 1995 Annual Meeting of Shareholders was held on July 14, 1995. At the meeting, all of management's nominees for directors were elected to the Board of Directors. In addition, the amendment to the 1990 Stock Option Plan for Non-Employee Directors were approved, with 8,863,984 votes for, 256,419 votes against, and 12,132 votes withheld.

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

(A) Exhibits

Exhibit No. Description Page No. ------

4.1 Amended and Restated Note Agreement

4.2 Amended and Restated Revolving Credit Agreement

(B) Reports on Form 8-K - None.

Omitted from this Part II are items which are not applicable or to which the answer is negative for the periods covered.

-12- TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

SIGNATURES

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

TRANS WORLD ENTERTAINMENT CORPORATION

September 12, 1995 By: /s/ ROBERT J. HIGGINS ------Robert J. Higgins President and Director (Principal Executive Officer) September 12, 1995 By: /s/ JOHN J. SULLIVAN ------John J. Sullivan Senior Vice President - Finance Chief Financial Officer (Chief Financial and Accounting Officer)

-13- TRANS WORLD ENTERTAINMENT CORPORATION

and

RECORD TOWN, INC.

AMENDED AND RESTATED

NOTE AGREEMENT

Dated as of June 29, 1995

$17,500,000

VARIABLE RATE SENIOR NOTES DUE JULY 31, 1996

TABLE OF CONTENTS

Page

1. THE NOTES 1 1.1 Background 1 1.2 Authorization of Amendment and Restatement 1 1.3 Amendment and Restatement 2 1.4 Acquisition for Investment 3 1.5 Failure of Conditions 3 1.6 Expenses; Issue Taxes 3

2. WARRANTIES AND REPRESENTATIONS 4 2.1 Subsidiaries 4 2.2 Corporate Organization and Authority 5 2.3 Business, Property, Debt, Liens and Restrictions 5 2.4 Financial Statements; Material Adverse Change 5 2.5 Full Disclosure 6 2.6 Pending Litigation; Compliance with Law 6 2.7 Title to Properties 7 2.8 Patents and Trademarks 7 2.9 Sale of Notes is Legal and Authorized; Obligations are Enforceable 7 2.10 No Defaults 8 2.11 Governmental Consent 8 2.12 Taxes 8 2.13 Margin Securities 8 2.14 ERISA 9 2.15 Company Actions 9 2.16 Restated Credit Agreement; Restated 1993 Noteholder Agreement 9

3. CLOSING CONDITIONS 10 3.1 Opinions of Counsel 10 3.2 Compliance with this Agreement 10 3.3 Private Placement Number 10 3.4 Other Purchasers 10 3.5 Restated Credit Agreement 10 3.6 Restated 1993 Noteholder Agreement 10 3.7 Intercreditor Agreement 11 3.8 Restructuring Fee 11 3.9 Expenses 11 3.10 Interest on Existing Notes 11 3.11 Subsidiary Guaranties 11 3.12 Proceedings Satisfactory 11

4. DIRECT PAYMENT 12

TABLE OF CONTENTS (continued)

Page 5. REPAYMENTS 12 5.1 Mandatory Early Repayments 12 5.2 Early Repayment Option 12 5.3 Notice of Optional Repayment 12 5.4 Repayment Upon Change of Control 13 5.5 Repayment Upon Material Asset Sale 13

6. REGISTRATION; SUBSTITUTION OF NOTES 14 6.1 Registration of Notes 14 6.2 Exchange of Notes 14 6.3 Replacement of Notes 14

7. COMPANY BUSINESS COVENANTS 14 7.1 Payment of Taxes and Claims 15 7.2 Maintenance of Properties and Corporate Existence 15 7.3 Maintenance of Office 16 7.4 Liens and Encumbrances 16 7.5 Limitations On Debt Incurrence; Prepayments and Amendments 18 7.6 Subsidiary Debt 18 7.7 Current Ratio 18 7.8 Maintenance of Ownership 18 7.9 Fixed Charge Ratio 19 7.10 Tangible Net Worth 19 7.11 Tangible Net Worth of Record Town 19 7.12 Distributions and Investments 19 7.13 Sale of Property and Subsidiary Stock 19 7.14 Merger and Consolidation 19 7.15 Guaranties 20 7.16 ERISA Compliance 20 7.17 Transactions with Affiliates 20 7.18 Tax Consolidation 20 7.19 Acquisition of Notes 20 7.20 Lines of Business 21 7.21 Required Subsidiary Guaranties 21 7.22 Limitations on Preferred Stock 21 7.23 Limitation on Inventory Turnover 21 7.24 Maintenance of Consolidated EBITDA 21 7.25 Limitation on Capital Expenditures 22 7.26 Limitation on Leases 22 7.27 Limitation on Sale and Leaseback 22 7.28 Limitation on Changes in Fiscal Year 22 7.29 Limitation on Debt to Consolidated Tangible Net Worth 22 7.30 Store Openings and Closings 23

TABLE OF CONTENTS (continued)

Page

7.31 No Amendment of Debt Instruments 23

8. INFORMATION AS TO COMPANY 23 8.1 Financial and Business Information 23 8.2 Officers' Certificates 26 8.3 Accountants' Certificates 26 8.4 Inspection 26 8.5 Quarterly Meetings 27 8.6 Additional Financial Information 27

9. EVENTS OF DEFAULT 27 9.1 Nature of Events 27 9.2 Default Remedies 28 9.3 Annulment of Acceleration of Notes 29

10. INTERPRETATION OF THIS AGREEMENT 29 10.1 Terms Defined 29 10.2 Accounting Principles 38 10.3 Directly or Indirectly 38 10.4 Governing Law 39

11. MISCELLANEOUS 39 11.1 Notices 39 11.2 Reproduction of Documents 39 11.3 Survival 39 11.4 Successors and Assigns 40 11.5 Amendment and Waiver 40 11.6 Duplicate Originals 40

EXHIBIT A -- Purchaser Information EXHIBIT B -- Form of Note EXHIBIT C -- Disclosure Schedules EXHIBIT D -- Form of Matthew H. Mataraso Legal Opinion EXHIBIT E -- Form of Jones, Day, Reavis & Pogue Legal Opinion EXHIBIT F -- Form of Subsidiary Guaranty

TRANS WORLD ENTERTAINMENT CORPORATION RECORD TOWN, INC. 38 Corporate Circle Albany, New York 12203

AMENDED AND RESTATED NOTE AGREEMENT

$17,500,000

Variable Rate Senior Notes due July 31, 1996

As of June 29, 1995

TO EACH OF THE PURCHASERS LISTED ON EXHIBIT A

Dear Purchaser:

Trans World Entertainment Corporation (formerly Trans World Music Corp., the "Company"), a New York corporation, and Record Town, Inc. ("Record Town"), a New York corporation and a Wholly-Owned Restricted Subsidiary of the Company, hereby jointly and severally agree with you as follows:

1. THE NOTES

1.1 Background.

Pursuant to the Note and Security Agreement dated as of June 20, 1991 (the "Existing Note Agreement"), the Company issued Seventeen Million Five Hundred Thousand Dollars ($17,500,000) in aggregate principal amount of its nine and eighteen one-hundredths percent (9.18%) Notes due June 30, 1998 (the "Existing Notes"). The Existing Notes have been unconditionally guaranteed by Record Town and are substantially in the form of Attachment B attached to the Existing Note Agreement. The aggregate principal amount of Existing Notes currently outstanding is Seventeen Million Five Hundred Thousand Dollars ($17,500,000). The Company has requested the amendment and restatement, in their entirety, of the Existing Note Agreement and the Existing Notes as provided for in this Agreement.

1.2 Authorization of Amendment and Restatement.

Each of the Company and Record Town hereby authorizes, agrees and consents to the Amendment and Restatement in their entirety of the Existing Note Agreement and the Existing Notes as provided for herein. The Existing Notes, as amended and restated by Exhibit B to this Agreement, shall be hereinafter referred to individually as a "Note" and, collectively, as the "Notes". The obligations of the Company and Record Town under the Notes and this Agreement shall be guaranteed on a senior basis by all Required Guarantors. The Company and Record Town hereby authorize the execution and delivery to the Purchaser of the Notes, which Notes shall:

(a) be substituted in the place of the Existing Notes;

(b) be dated the Effective Date;

(c) mature on July 31, 1996;

(d) bear interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance thereof at a rate equal to the greater of

(i) one and fifty one-hundredths percent (1.5%) per annum over the Prime Rate, or

(ii) ten and fifty one-hundredths percent (10.5%) per annum; but in no event at a rate which exceeds the highest rate allowed by applicable law, payable monthly (in arrears) on the final day of each calendar month in each year, commencing on July 31, 1995, until the principal amount thereof shall be due and payable;

(e) bear interest, payable on demand, on any overdue principal (including any overdue prepayment of principal) and (to the extent permitted by applicable law) on any overdue installment of interest, at a rate equal to the greater of (i) one and fifty one-hundredths percent (1.5%) per annum over the rate otherwise applicable thereto, or

(ii) twelve percent (12.0%) per annum; but in no event at a rate which exceeds the highest rate allowed by applicable law; and

(f) be in the form of the Note set out in Exhibit B hereto.

The term "Notes" as used herein shall include each Note delivered pursuant to any provision of this Agreement, and each Note delivered in substitution or exchange for any such Note. Whether or not specifically provided in any particular Section of this Agreement, Record Town will be jointly and severally liable with the Company for all obligations under the Notes and this Agreement.

1.3 Amendment and Restatement.

Subject to the satisfaction of the conditions precedent set forth in Section 3 of this Agreement, you, by your execution of this Agreement, hereby agree and consent to the Amendment and Restatement in its entirety of the Existing Note Agreement by this Agreement and the termination of the Waiver Agreement, and, upon the satisfaction of such conditions precedent, the Existing Note Agreement and the Waiver Agreement shall be deemed so amended and restated or terminated, as the case may be. Subject to the satisfaction of the conditions precedent set forth in Section 3 of this Agreement, you, by your execution of this Agreement, hereby agree and consent to the Amendment and Restatement in their entirety of the Existing Notes and the substitution of the Notes therefor. On the Effective Date, the Company agrees, subject to the satisfaction of the conditions precedent set forth in Section 3 of this Agreement, to execute and deliver to you the aggregate principal amount of Notes set forth opposite your name on the schedule attached to this Agreement as Exhibit A, in replacement of your Existing Notes. Contemporaneously with the receipt by you of such Notes, you agree to re-deliver to the Company for cancellation the Existing Notes held by you. All amounts owing under, and evidenced by, the Existing Notes as of the Effective Date shall continue to be outstanding under, and shall after the Effective Date be evidenced by, the Notes, and shall be payable in accordance with this Agreement.

1.4 Acquisition for Investment.

You represent to the Company and Record Town, and by agreeing to the amendmentand restatement of the Existing Note Agreement and the substitution of the Notes for the Existing Notes it is specifically understood and agreed, that you are acquiring the Notes for investment for your own account and the account of your affiliated entities and with no present intention of distributing or reselling the Notes or any part thereof to anyone other than an affiliated entity, but without prejudice to your right at all times to:

(a) sell or otherwise dispose of all or any part of the Notes under a registration statement filed under the Securities Act, or in a transaction exempt from the registration requirements of the Securities Act;

(b) have control over the disposition of all of your assets to the fullest extent required by any applicable insurance law.

It is understood that, in making the representations set out in Sections 2.9 and 2.11 hereof, the Company and Record Town are relying, to the extent applicable, upon your representation in the immediately preceding sentence.

1.5 Failure of Conditions.

If the conditions specified in Section 3 hereof have not been fulfilled on or prior to June 30, 1995, this Agreement shall terminate, and the Existing Note Agreement and the Existing Notes shall continue to be in full force and effect.

1.6 Expenses; Issue Taxes.

(a) Generally. Whether or not the transactions contemplated by this Agreement are consummated, the Company will promptly (and in any event within thirty (30) days of receiving any statement or invoice therefor) pay all expenses relating to this Agreement, including but not limited to:

(i) the cost of reproducing this Agreement, any Subsidiary Guaranty, the Notes and the other documents delivered in connection with this Agreement;

(ii) the reasonable fees and disbursements of your special counsel and financial advisor; (iii) your out-of-pocket expenses;

(iv) all expenses relating to any Subsidiary Guaranty;

(v) all expenses relating to any amendments or waivers pursuant to the provisions of this Agreement or "workouts" with respect hereto; and

(vi) all costs and expenses, including attorneys' fees, incurred by the holder of any Note in attending any meeting held pursuant to Section 8.5 or enforcing any rights under this Agreement or in the Notes or in responding to any subpoena or other legal process issued in connection with this Agreement or the transactions contemplated hereby, including without limitation, costs and expenses incurred in any bankruptcy case.

The Company will also pay all taxes in connection with the issuance and sale of the Notes and in connection with any modification of the Notes and will save you harmless against any and all liabilities with respect to such taxes.

(b) Special Counsel and Financial Advisor. Without limiting the generality of the foregoing, it is agreed and understood that the Company will pay, on the Effective Date, the fees and disbursements of your special counsel and financial advisor which are reflected in the statements of your special counsel and financial advisor, respectively, delivered on or before the Effective Date; and promptly upon receipt of supplemental statements after the Effective Date, the Company will pay such additional fees and disbursements of your special counsel and financial advisor which were not reflected in the statements of your special counsel and financial advisor, respectively, on the Effective Date.

(c) Survival. The obligations of the Company under this Section 1.6 shall survive the payment of the Notes and the termination of this Agreement.

2. WARRANTIES AND REPRESENTATIONS

To induce you to enter into this Agreement, the Company and Record Town jointly and severally warrant and represent to you that as of the Effective Date each of the following statements will be true and correct:

2.1 Subsidiaries.

Part 2.1 of Exhibit C to this Agreement correctly identifies:

(a) each of the Company's Subsidiaries (indicating which Subsidiaries are Restricted Subsidiaries), its jurisdiction of incorporation and the percentage of its Voting Stock owned by the Company and by each other Subsidiary, and

(b) each of the Company's Affiliates (other than Subsidiaries) and the nature of their affiliation.

The Company and each Subsidiary is the legal and beneficial owner of all of the shares of Voting Stock it purports to own of each Subsidiary, free and clear in each case of any Lien. All such shares have been duly issued and are fully paid and nonassessable.

2.2 Corporate Organization and Authority.

The Company, and each Subsidiary,

(a) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation,

(b) has all requisite power and authority and all necessary licenses, permits, franchises and other governmental authorizations to own and operate its Properties and to carry on its business as now conducted and as presently proposed to be conducted, and

(c) has duly qualified and is authorized to do business and is in good standing as a foreign corporation in each jurisdiction where the character of its Properties or the nature of its activities makes such qualification necessary.

2.3 Business, Property, Debt, Liens and Restrictions.

(a) The Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995 filed by the Company with the Securities and Exchange Commission and previously delivered to you correctly describes the general nature of the business and principal Properties of the Company and its Subsidiaries.

(b) Part 2.3(b) of Exhibit C to this Agreement correctly lists all outstanding Debt of (including all Guaranties of the Company and the Subsidiaries of such Debt), and all Liens (other than those permitted by Clauses (1) - (6) of Section 7.4(a)) on Property of, the Company and its Restricted Subsidiaries. Neither the Company nor any Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its Property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Section 7.4(a).

(c) Neither the Company nor any Subsidiary is a party to any agreement, or subject to any charter or other corporate restriction, which restricts its right or ability to incur Debt, other than this Agreement, the Restated 1993 Noteholder Agreement and the Restated Credit Agreement.

2.4 Financial Statements; Material Adverse Change.

(a) (i) The consolidated balance sheet of the Company and its Subsidiaries as of January 28, 1995 and the related statements of income, retained earnings and changes in cash flows for the fiscal year ended on such date, all accompanied by reports thereon containing opinions without qualification, by KPMG Peat Marwick LLP, independent certified public accountants, (ii) the consolidated balance sheets of the Company and its Subsidiaries as of January 29, 1994, January 30, 1993, February 1, 1992 and February 2, 1991 and the related statements of income, retained earnings and changes in cash flows for the fiscal years ended on such dates, all accompanied by reports thereon containing opinions without qualification, by Ernst & Young LLP, independent certified public accountants, and (iii) the consolidated balance sheet of the Company and its Subsidiaries as of April 29, 1995 and the related statements of income, retained earnings and changes in cash flows for the three months ended on such date, copies of which have been delivered to you, have been prepared in accordance with generally accepted accounting principles consistently applied, and present fairly the financial position of the Company and its Subsidiaries as of such dates and the results of their operations for such periods. Such consolidated financial statements include the accounts of all Subsidiaries for all periods during which a subsidiary relationship has existed.

(b) Since January 28, 1995, there have been no materially adverse changes in the Properties, business, prospects, operating results or condition (financial or otherwise) of either Record Town or of the Company and its Subsidiaries, taken as a whole.

2.5 Full Disclosure.

The financial statements referred to in Section 2.4 do not, nor does this Agreement or any written statement furnished by or on behalf of the Company or Record Town to you in connection with this Agreement, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading, in light of the circumstances under which they were made. There is no agreement, restriction or other factual matter which the Company has not disclosed to you in writing which materially affects adversely nor, so far as the Company can now reasonably foresee, will materially affect adversely the Properties, business, prospects, operating results or condition (financial or otherwise) of either Record Town or the Company and its Subsidiaries, taken as a whole, or the ability of the Company or Record Town to perform this Agreement and the Notes.

2.6 Pending Litigation; Compliance with Law.

There are no proceedings or investigations pending, or to the knowledge of the Company or Record Town threatened, against or affecting the Company or any Subsidiary in or before any court, governmental authority or agency or arbitration board or tribunal which, individually or in the aggregate, might materially and adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of either Record Town or the Company and its Subsidiaries, taken as a whole, or the ability of Record Town or the Company to perform this Agreement and the Notes. Neither the Company nor any Subsidiary is in default with respect to any order, decree or judgment of any court, governmental authority or agency or arbitration board or tribunal or in violation of any laws or governmental rules or regulations where such default or violation might materially and adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of either Record Town or the Company and its Subsidiaries, taken as a whole, or the ability of the Company or Record Town to perform this Agreement and the Notes.

2.7 Title to Properties.

The Company, and each Subsidiary, has good and marketable title in fee simple (or its equivalent under applicable law) to all the real Property, and has good title to all the other Property, it purports to own, including that reflected in the most recent balance sheet referred to in Section 2.4 (except as sold or otherwise disposed of in the ordinary course of business), free from Liens not permitted by Section 7.4(a). 2.8 Patents and Trademarks.

The Company, and each Subsidiary, owns or possesses all the patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing necessary for the present and planned future conduct of its business, without any known conflict with the rights of others.

2.9 Sale of Notes is Legal and Authorized; Obligations are Enforceable.

(a) Sale of Notes is Legal and Authorized. Each of the issuance, sale and delivery of the Notes by the Company and Record Town, the execution and delivery hereof by each of the Company and Record Town and compliance by each of the Company, Record Town and each other Subsidiary with all of the provisions hereof and of the Notes:

(i) is within the corporate powers of the Company, Record Town and each such Subsidiary, respectively; and

(ii) is legal and does not conflict with, result in any breach of any of the provisions of, constitute a default under, or result in the creation of any Lien upon any Property of the Company or any Subsidiary under the provisions of, any agreement, charter instrument, bylaw, or other instrument to which the Company or any Subsidiary is a party or by which any of them or their respective Properties may be bound.

(b) Obligations are Enforceable. Assuming the due execution and delivery by the Purchasers of this Agreement, each of this Agreement and the Notes has been duly authorized by all necessary action on the part of each of the Company and Record Town, has been executed and delivered by duly authorized officers of each of the Company and Record Town and constitutes the legal, valid and binding obligation of each of the Company and Record Town, enforceable in accordance with its terms except that the enforceability hereof and of the Notes may be:

(i) limited by applicable bankruptcy, reorganization, arrangement, insolvency, moratorium or other similar laws affecting the enforceability of creditors' rights generally; and

(ii) subject to the availability of equitable remedies.

2.10 No Defaults.

No event has occurred and no condition exists which, upon the issuance of the Notes and the execution and delivery of this Agreement, would constitute a Default or an Event of Default. Neither the Company nor any Subsidiary is in violation in any respect of any term of any charter instrument, by-law or other instrument to which it is a party or by which it or any of its Property may be bound.

2.11 Governmental Consent.

Neither the nature of the Company or of any Subsidiary, or of any of their respective businesses or Properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offer, issue, sale or delivery of the Notes or the execution, delivery and performance of this Agreement is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any governmental authority on the part of the Company or any Subsidiary in connection with the execution, delivery and performance of this Agreement or the offer, issue, sale or delivery of the Notes.

2.12 Taxes.

(a) All tax returns required to be filed by the Company or any Subsidiary in any jurisdiction have in fact been filed, and all taxes, assessments, fees and other governmental charges upon the Company or any Subsidiary, or upon any of their respective Properties, income or franchises, which are due and payable have been paid. Neither the Company nor any Subsidiary knows of any proposed additional tax assessment against it. Federal income tax returns of the Company and its Subsidiaries have been audited by the Internal Revenue Service or the statute of limitations has run for all years to and including the fiscal year ending February 1, 1992 and there is no liability for such tax asserted against the Company or any Subsidiary for that or any prior year.

(b) The provisions for taxes on the books of the Company and each Subsidiary are adequate for all open years, and for its current fiscal period. The amount of the reserve for Federal income taxes reflected in the consolidated balance sheet of the Company and its Subsidiaries as of January 28, 1995 is an adequate provision for such Federal income taxes, if any, as may be payable by the Company and its Subsidiaries for the fiscal years 1992 through 1994, the only open years.

2.13 Margin Securities. None of the transactions contemplated in this Agreement will violate or result in a violation of Section 7 of the Exchange Act or any regulations issued pursuant thereto, including, without limitation, Regulations G, T and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II or require that any filing be made under any thereof. Neither the Company nor any Subsidiary owns or intends to carry or purchase any "margin stock" within the meaning of said Regulation G, including margin stock originally issued by it.

2.14 ERISA.

Neither the Company nor any Related Person of the Company now maintains any "employee pension benefit plan", as such term is defined in Section 3 of ERISA (herein referred to as a "Pension Plan"), nor has the Company nor any Related Person maintained a Pension Plan in the past. No employee of the Company or of any of its Related Persons is entitled, as the result of current employment by the Company or any Subsidiary, to participate in any "multiemployer pension plan" as such term is defined in Section 4001(a)(3) of ERISA.

2.15 Company Actions.

Neither the Company, Record Town nor any other Subsidiary has taken any action or permitted any condition to exist which would have been prohibited by Section 7 if such Section had been binding and effective at all times during the period from January 28, 1995 to and including the Effective Date.

2.16 Restated Credit Agreement; Restated 1993 Noteholder Agreement.

(a) The Company has delivered to the Purchaser true, complete and correct copies of each of the Restated Credit Agreement and the Restated 1993 Noteholder Agreement (together, the "Other Restructuring Documents"), together with all exhibits, schedules and disclosure letters referred to therein or delivered pursuant thereto, and all amendments thereto, waivers relating thereto and other side letters or agreements affecting the terms thereof. None of such documents and agreements has been amended or supplemented, nor have any of the provisions thereof been waived, except pursuant to a written agreement or instrument which has heretofore been consented to by the Purchaser and no consent or waiver has been granted by the Company or any Subsidiaries thereunder. Each of the Other Restructuring Documents has been duly executed and delivered by the Company, and, to the best of the Company's knowledge, by each other party thereto and is a legal, valid and binding obligation of the Company, and, to the best of the Company's knowledge, of each other party thereto, enforceable, in all material respects, in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the rights of creditors generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).

(b) The representations and warranties of the Company, any Subsidiary and each other party to the Other Restructuring Documents are, to the best of the Company's knowledge, true and correct in all material respects on the Effective Date as if made on and as of such date. Such representations and warranties, together with the definitions of all defined terms used therein, are by this reference deemed incorporated herein mutatis mutandis, and the Purchaser is entitled to rely on the accuracy of such representations and warranties.

(c) To the best of the Company's knowledge, each party to the Other Restructuring Documents has complied in all material respects with all terms and provisions contained therein on its part to be observed.

3. CLOSING CONDITIONS

The amendment and restatement of the Existing Note Agreement and the Existing Notes, and the substitution of the Notes for the Existing Notes are subject to the satisfaction, on or before June 30, 1995, of the following conditions precedent:

3.1 Opinions of Counsel.

You shall have received from

(a) Matthew H. Mataraso, counsel for the Company and Record Town, and

(b) Jones, Day, Reavis & Pogue, special counsel for the Company and Record Town, closing opinions, each dated as of the Effective Date, substantially in the respective forms set forth in Exhibits D and E hereto and as to such other matters as you may reasonably request. This Section 3.1 shall constitute direction by the Company to such counsel to deliver such closing opinions to you. 3.2 Compliance with this Agreement.

The Company and Record Town shall have performed and complied with all agreements and conditions contained herein which are required to be performed or complied with by the Company and Record Town, respectively, on or prior to the Effective Date, and such performance and compliance shall remain in effect on the Effective Date.

3.3 Private Placement Number.

The Company shall have obtained from Standard & Poor's Corporation and furnished to you a private placement number for the Notes.

3.4 Other Purchasers.

The Company, Record Town and all holders of Notes shall have entered into this Agreement and each party thereto shall be prepared to perform its respective obligations hereunder.

3.5 Restated Credit Agreement.

The Company, Record Town and the Banks shall have entered into the Restated Credit Agreement, which agreement, and all documents and instruments executed and delivered in connection therewith, shall be in form and substance satisfactory to you.

3.6 Restated 1993 Noteholder Agreement.

The Company, Record Town and each of the 1993 Noteholders shall have entered into an agreement amending the Existing 1993 Noteholder Agreement, which agreement, and all documents and instruments executed and delivered in connection therewith, shall be in form and substance satisfactory to you.

3.7 Intercreditor Agreement.

You, each of the 1993 Noteholders and the Banks shall have executed and delivered an Intercreditor Agreement (the "Intercreditor Agreement"), and such Intercreditor Agreement, and all documents and instruments executed and delivered in connection therewith, shall be in form and substance satisfactory to all parties thereto, and such Intercreditor Agreement shall be in full force and effect.

3.8 Restructuring Fee.

In consideration of your willingness to enter into the transactions contemplated hereby, the Company shall have paid to each Purchaser, and each Purchaser shall have received, a restructuring fee equal to the product of:

(a) twenty-five one-hundredths of one percent (0.25%); times

(b) the outstanding principal amount of the Notes held by such Purchaser on the Effective Date.

Such payment shall be made by wire transfer of immediately available funds to the account to which the Company is obligated to make payments of interest in respect of the Notes.

3.9 Expenses.

All fees and disbursements required to be paid pursuant to Section 1.6(a)(ii), Section 1.6(a)(iii) and Section 1.6(b) hereof shall have been paid in full.

3.10 Interest on Existing Notes.

The Company shall have paid to you all accrued interest on the Existing Notes to (but not including) the Effective Date at the rate of 11.18% per annum.

3.11 Subsidiary Guaranties

Each Subsidiary (other than Record Town) shall have executed and delivered an agreement to the effect and substantially in the form of Exhibit F hereto unconditionally guarantying payment of the Notes.

3.12 Proceedings Satisfactory.

All proceedings taken in connection with the issuance of the Notes and all documents and papers relating thereto shall be satisfactory to you and your special counsel. You and your special counsel shall have received copies of such documents and papers as you or they may reasonably request in connection therewith, all in form and substance satisfactory to you and your special counsel.

4. DIRECT PAYMENT

The Company agrees that, notwithstanding any provision in this Agreement or the Notes to the contrary, it will pay all sums becoming due to any institutional holder of Notes in the manner provided in Exhibit A or in any other manner as any institutional holder may designate to the Company in writing (without presentment of or notation on the Notes).

5. REPAYMENTS

5.1 Mandatory Early Repayments.

(a) In addition to paying the entire remaining principal amount and interest due on the Notes at maturity, the Company and Record Town agree on a joint and several basis to repay, and there shall become due and payable, Six Hundred Twenty-Five Thousand and 00/100 Dollars ($625,000.00) principal amount of the Notes on June 30, 1995 and One Million and 00/100 Dollars ($1,000,000.00) principal amount of the Notes on January 31, 1996. Each such repayment shall be at one hundred percent (100%) of the principal amount repaid, together with interest accrued thereon to the date of repayment.

(b) The early repayment of any of the Notes pursuant to Section 5.2 or Section 5.5 or the acquisition of the Notes by the Company or any Subsidiary shall not reduce or otherwise affect the obligations of the Company or Record Town to make any repayment required by Section 5.1(a). If at any time one or more holders of the Notes shall be repaid in whole pursuant to Section 5.4 (each such repayment herein called an "Extraordinary Repayment"), then the principal amount of the Notes required to be repaid pursuant to Section 5.1(a) on each principal payment date following such Extraordinary Repayment shall be automatically reduced to an amount which equals the product of (i) the principal amount of the Notes required to be repaid on such date multiplied (ii) by a fraction the numerator of which shall equal $47,500,000 minus the cumulative aggregate principal amount repaid pursuant to Section 5.4 after giving effect to such Extraordinary Repayment and the denominator of which shall equal $47,500,000.

5.2 Early Repayment Option.

Subject to Section 7.5(b) of this Agreement, the Company and Record Town may prepay the Notes, in whole or in part, at any time at a price equal to the principal amount to be repaid together with interest on the principal amount so repaid accrued to the repayment date. All such optional repayments shall be allocated among the outstanding Notes held by each holder, as nearly as may be practicable, on a pro rata basis in proportion to the respective unpaid principal amounts so held.

5.3 Notice of Optional Repayment.

The Company will give notice of any optional repayment of the Notes to each holder of the Notes not less than ten (10) days nor more than sixty (60) days before the date fixed for repayment, specifying:

(a) such date;

(b) the principal amount of the Notes and of such holder's Notes to be repaid on such date; and

(c) the accrued interest applicable to the repayment.

Notice of repayment having been so given, the principal amount of the Notes specified in such notice, together with the accrued interest thereon, shall become due and payable on the repayment date.

5.4 Repayment Upon Change of Control.

The Company or Record Town will repay, and there shall be due and payable on the forty-fifth (45th) day following notice by the Company to the holders of Notes of a proposed Change of Control pursuant to Section 8.1(i) (or on the next succeeding Business Day if such forty-fifth (45th) day is not a Business Day), all of the Notes held by each holder of Notes; provided, that a holder of any Note may give notice to the Company on or before the thirtieth (30th) day following receipt by such holder of such notice from the Company, that such holder elects to forego such repayment pursuant to this Section 5.4, of the Notes held by it. Any such repayment must be effective prior to the effective time of any proposed Change of Control. The amount required to be paid to such holder shall be equal to one hundred percent (100%) of the principal amount of the Notes so repaid, together with interest accrued thereon to the date of repayment.

If the Company shall fail to provide the notice required by Section 8.1(i), any holder of the Notes upon acquisition of knowledge of the failure by the Company to comply with the notice requirements of Section 8.1(i) may give notice to the Company of such failure. The Company shall immediately provide a copy of such notice to each other holder of the Notes and for purposes of the foregoing provisions of this Section 5.4, the date upon which such notice was given by such holder to the Company shall be deemed to be the date of notice by the Company of such proposed Change of Control.

5.5 Repayment Upon Material Asset Sale.

Not more than two Business Days following the consummation of any sale of Property of the Company or its Subsidiaries in one transaction or a series of related transactions, other than a sale of inventory in the ordinary course of the Company's business or in connection with store closings, which sale results in net proceeds equal to or greater than $500,000, the Company and Record Town will repay, and there shall become due and payable, an amount equal to the product of (a) the net proceeds of such sale multiplied by (b) a fraction, the numerator of which shall equal $17,500,000 and the denominator of which is $140,000,000. Nothing in this Section 5.5 shall be deemed to permit such an asset sale without the consent of the Purchaser obtained in accordance with Sections 7.13 and 11.5 of this Agreement.

6. REGISTRATION; SUBSTITUTION OF NOTES

6.1 Registration of Notes.

The Company will cause to be kept at its office maintained pursuant to Section 7.3, a register for the registration and transfer of the Notes. The names and addresses of the holders of the Notes, the transfer thereof and the names and addresses of the transferees of any of the Notes will be registered in the register. The Person in whose name any Note is registered shall be deemed and treated as the owner and holder thereof for all purposes of this Agreement, and the Company shall not be affected by any notice or knowledge to the contrary.

6.2 Exchange of Notes.

Upon surrender of any Note to the Company at its office maintained pursuant to Section 7.3, the Company, upon request, will execute and deliver, at its expense (except as provided below), new Notes in exchange therefor, in denominations of at least One Hundred Thousand Dollars ($100,000) (except as may be necessary to reflect any principal amount not evenly divisible by One Hundred Thousand Dollars ($100,000)), in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note (a) shall be payable to such Person as the surrendering holder may request and (b) shall be dated and bear interest from the date to which interest has been paid on the surrendered Note or dated the date of the surrendered Note if no interest has been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any transfer.

6.3 Replacement of Notes.

Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note and

(a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided, if the holder of the Note is an institutional investor, its own agreement of indemnity shall be deemed to be satisfactory), or

(b) in the case of mutilation, upon surrender and cancellation of the Note, the Company at its expense will execute and deliver a new Note of like tenor, dated and bearing interest from the date to which interest has been paid on the lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest has been paid thereon.

7. COMPANY BUSINESS COVENANTS

The Company and Record Town covenant that on and after the date of this Agreement until the Notes are paid in full:

7.1 Payment of Taxes and Claims.

The Company, and each Subsidiary, will pay, before they become delinquent,

(a) all taxes, assessments and governmental charges or levies imposed upon it or its Property other than deficiencies which arise in the ordinary course and are identified through audits and with respect to which (i) adequate book reserves have been established with respect thereto and (ii) such amounts due are paid by the Company or such Subsidiary immediately upon final determination that such amounts are due, and

(b) all claims or demands of any kind (including but not limited to those of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons) which, if unpaid, might result in the creation of a Lien upon its Property; provided, that items in clauses (a) and (b) above need not be paid while being contested in good faith and by appropriate proceedings, if and for so long as (i) adequate book reserves have been established with respect thereto and (ii) the owning Person's title to its Property is not materially adversely affected and its use of the Property in the ordinary course of its business is not materially interfered with.

7.2 Maintenance of Properties and Corporate Existence.

The Company will, and will cause each Subsidiary to:

(a) Property. Maintain its Property in good condition, subject to ordinary wear and tear, and make all necessary renewals, replacements, additions, betterments and improvements thereto; provided that nothing contained in this Section 7.2 shall prevent the Company from closing any specific store location pursuant to Section 7.13 hereof;

(b) Insurance. Maintain, with financially sound and reputable insurers, insurance with respect to its Properties and business against such casualties and contingencies, of such types (including public liability, larceny, embezzlement or other criminal misappropriation insurance) as is customary in the case of corporations of established reputations engaged in the same or a similar business and similarly situated, and in amounts acceptable to the Purchaser.

(c) Financial Records. Keep accurate books of records and accounts in which full and correct entries will be made of all its business transactions, and will reflect in its financial statements adequate accruals and appropriations to reserves, all in accordance with generally accepted accounting principles;

(d) Corporate Existence and Rights. Do or cause to be done all things necessary (i) to preserve and keep in full force and effect its existence, rights and franchises and (ii) to maintain each Restricted Subsidiary as a Restricted Subsidiary, except as otherwise permitted by Sections 7.13 and 7.14; and

(e) Compliance with Law. Not be in violation of any laws, ordinances, orders, judgments or decrees or governmental rules and regulations to which it is subject and will not fail to maintain any licenses, permits, franchises or other governmental authorizations necessary to the ownership of its Properties or to the conduct of its business, if such violation or failure to maintain might reasonably be expected to materially adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town or the Company and its Subsidiaries, taken as a whole.

7.3 Maintenance of Office.

The Company and Record Town each will maintain an office in the State of New York where notices, presentations and demands in respect of this Agreement or the Notes may be made upon it. Such offices shall be maintained at 38 Corporate Circle, Albany, New York 12203 until such time as the Company shall notify the holders of the Notes of a change of location.

7.4 Liens and Encumbrances.

(a) Negative Pledge. Neither the Company nor any Restricted Subsidiary will (1) cause or permit or (2) agree or consent to cause or permit in the future (upon the happening of a contingency or otherwise), any of its Property, whether now owned or hereafter acquired, to be subject to a Lien except:

(1) Liens securing the payment of taxes, assessments, governmental charges or levies, or the claims or demands of mechanics, carriers, warehousemen, landlords and other like Persons, provided, that (A) they do not in the aggregate materially reduce the value of any Properties subject to such Liens or materially interfere with their use in the ordinary course of business and (B) if appropriate, all claims which such Liens secure are being actively contested in good faith and by appropriate proceedings;

(2) Liens incurred or deposits made in the ordinary course of business (A) in connection with worker's compensation, unemployment insurance, social security and other like laws, or (B) to secure the performance of letters of credit, bids, tenders, sales contracts, leases, statutory obligations, surety, appeal and performance bonds and other similar obligations in each case not incurred in connection with the borrowing of money, the obtaining of advances or the payment of the deferred purchase price of Property (except for payment of the purchase price of inventory acquired with the use of letters of credit in the ordinary course of business);

(3) Liens on Property of a Restricted Subsidiary, provided, they secure only obligations owing to the Company or another Restricted Subsidiary;

(4) Liens created by or resulting from any litigation or proceedings that are being contested in good faith, and Liens arising out of judgments or awards against the Company or any Restricted Subsidiary, provided, that (A) the Company or such Restricted Subsidiary is in good faith prosecuting an appeal or proceedings for review of such Liens incurred by the

Company or any Restricted Subsidiary for the purpose of obtaining a stay or discharge in the course of any legal proceeding to which the Company or such Restricted Subsidiary is a party, so long as the Company has set aside adequate accounting reserves; and (B) such Liens do not in the aggregate materially reduce the value of any of the Properties subject to the Liens or materially interfere with their use in the ordinary conduct of the owning company's business;

(5) Liens or deposits in connection with leases, subleases, easements, rights of way, restrictions and other similar encumbrances granted to others in the ordinary course of business so long as they do not in the aggregate materially reduce the value of any Properties subject to the Liens;

(6) Easements, rights-of-way, or restrictions and other similar encumbrances incurred in the ordinary course of business and not interfering with the ordinary conduct of the business of the Company or any Restricted Subsidiary;

(7) Purchase Money Mortgages or conditional sale, finance lease or other title retention agreements or other Liens incurred, taken subject to or assumed in connection with the purchase, lease, improvement or construction of Property or to secure indebtedness incurred solely for the purpose of financing the acquisition, lease, construction or improvement of any of such Property to be subject to such mortgages, agreements or other Liens, provided, however, that such Purchase Money Mortgages (A) shall be permitted by Section 7.5(a)(iv) and (B) shall not encumber any assets of the Company other than the Property so purchased;

(8) Liens arising by operation of law and in the ordinary course of business in the form of rights of setoff, appropriation and application against the deposits and credits of the Company or any Restricted Subsidiary in favor of the banks where such deposits or credits are located, and including any rights arising pursuant to a participation or similar contractual agreement among any such bank and other banks which are members of a group providing credit to the Company whereby such bank agrees to share such rights of setoff with other banks which are members of such group; and

(9) Liens set forth on Part 2.3(b) of Exhibit C hereto.

(b) Equal and Ratable Lien; Equitable Lien. In case any Property is subjected to a Lien in violation of Section 7.4(a), the Company will make or cause to be made provision whereby the Notes will be secured equally and ratably with all other obligations secured thereby, and in any case the Notes shall have the benefit, to the full extent that, and with such priority as, the holders may be entitled thereto under applicable law, of an equitable Lien on such Property securing the Notes. Such violation of Section 7.4(a) shall constitute an Event of Default hereunder, whether or not any such provision is made pursuant to this Section 7.4(b).

7.5 Limitations On Debt Incurrence; Prepayments and Amendments.

Neither the Company nor any Restricted Subsidiary will:

(a) be or become liable for any Adjusted Funded Debt other than: (i) the Notes; (ii) the 1993 Notes; (iii) indebtedness not to exceed $75,000,000 in aggregate principal amount (the "Credit Agreement Debt") outstanding under the Restated Credit Agreement; (iv) indebtedness to others incurred for the purpose of purchasing equipment, to the extent permitted by Section 7.25, used or useful in the ordinary course of business of the Company or its Subsidiaries (provided that the aggregate amount of all such indebtedness shall not exceed $2,000,000 in any fiscal year); and (v) other indebtedness outstanding on the Effective Date and reflected on the consolidated balance sheet of the Company as of January 28, 1995,

(b) make any optional prepayment of any Debt or consent to any optional reduction of the Commitment if, as a result thereof, the amount of the Commitment and the outstanding principal amounts of the Notes and of the 1993 Notes do not bear the same relative proportion to one another as was the case on the Effective Date, or (c) amend any agreement governing or evidencing any Debt.

7.6 Subsidiary Debt.

No Restricted Subsidiary, except for Record Town, will become liable for, have outstanding, or permit its Property to be subject to, any Prior Indebtedness.

7.7 Current Ratio.

As of the last day of the first, second and fourth fiscal quarters of the Company during each fiscal year, Consolidated Current Assets shall be not less than 140% of Consolidated Current Liabilities. As of the last day of the third fiscal quarter of the Company during each fiscal year, Consolidated Current Assets shall be not less than 125% of Consolidated Current Liabilities. For purposes of computations made to determine compliance with this Section 7.7, the actual cash balance of the Company and the Restricted Subsidiaries shall be deemed to be reduced by the amount thereof in excess of the product of $10,000 multiplied by the number of retail stores of the Company and the Restricted Subsidiaries actually open for business on the date of such computation, and any such excess shall be deemed to reduce accounts payable.

7.8 Maintenance of Ownership.

The Company shall at all times directly or indirectly own, free and clear of all Liens (except as otherwise permitted by Section 7.4(a)(4)), 100% of the outstanding capital stock of Record Town.

7.9 Fixed Charge Ratio.

The Company shall maintain, at the end of each of the first, second and third fiscal quarter of each fiscal year, Consolidated Income Available for Fixed Charges of not less than 120% of Consolidated Fixed Charges for the immediately preceding 12 month period. The Company shall maintain, at the end of the fourth fiscal quarter of each fiscal year, Consolidated Income Available for Fixed Charges of not less than 115% of Consolidated Fixed Charges for the immediately preceding 12 month period.

7.10 Tangible Net Worth.

The Company will maintain Consolidated Tangible Net Worth of not less than $103,000,000 at the end of each of the first three fiscal quarters of each fiscal year, and $112,000,0000 at the end of each fiscal year.

7.11 Tangible Net Worth of Record Town.

The Company will at all times cause Record Town to maintain Tangible Net Worth of not less than $10,000,000.

7.12 Distributions and Investments.

Neither the Company nor any Restricted Subsidiary will declare, make or become obligated to make any Distribution or make or become obligated to make any Restricted Investment.

7.13 Sale of Property and Subsidiary Stock.

Neither the Company nor any Restricted Subsidiary will (x) sell, lease, or otherwise transfer any of its Property (including, without limitation, the sale or discount of accounts receivable or notes receivable), or (y) permit any Restricted Subsidiary to issue or transfer any shares of its stock or any other Securities exchangeable or convertible into its stock (such stock and other Securities being called "Subsidiary Stock"), if the effect would be to reduce the direct or indirect proportionate interest of the Company in the outstanding Subsidiary Stock of the Restricted Subsidiary whose shares are the subject of the transaction, provided that these restrictions do not apply to:

(1) the issue of directors' qualifying shares; and

(2) the transfer of Property (other than Subsidiary Stock) in the ordinary course of business.

7.14 Merger and Consolidation.

The Company will not, and will not permit any Restricted Subsidiary to, be a party to any merger or consolidation or sell, lease or otherwise transfer all or substantially all of its Property.

7.15 Guaranties.

Neither the Company nor any Restricted Subsidiary will become liable for any Guaranty (except a Guaranty of any indebtedness, dividend or other obligation as to which the Company or a Restricted Subsidiary of which the Company enjoys at least 80% of the Economic Benefit is the primary obligor), unless (i) such Guaranty is permitted by Sections 7.5, 7.6 and 7.7, to the extent applicable, and (ii) the maximum amount of indebtedness, dividend or other obligation being guaranteed can be mathematically determined at the time the Guaranty is issued.

7.16 ERISA Compliance.

Neither the Company nor any Related Person will at any time permit any Pension Plan maintained by it to:

(i) engage in any "prohibited transaction" as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as amended, or described in Section 406 of ERISA;

(ii) incur any "accumulated funding deficiency" as such term is defined in Section 302 of ERISA, whether or not waived; or

(iii) terminate under circumstances which could result in the imposition of a Lien on the Property of the Company or any Restricted Subsidiary pursuant to Section 4068 of ERISA.

7.17 Transactions with Affiliates.

Neither the Company nor any Restricted Subsidiary will enter into any transaction, including, without limitation, the purchase, sale or exchange of Property or the rendering of any service, with any Affiliate except upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate.

7.18 Tax Consolidation.

The Company will not file or consent to the filing of any consolidated income tax return with any Person other than a Subsidiary.

7.19 Acquisition of Notes.

Neither the Company nor any Restricted Subsidiary nor any Affiliate will, directly or indirectly, acquire or make any offer to acquire any Notes unless the Company or such Restricted Subsidiary or Affiliate has offered to acquire Notes, pro rata, from all holders of the Notes and upon the same terms. In case the Company acquires any Notes, such Notes shall thereafter be cancelled and no Notes shall be issued in substitution therefor.

7.20 Lines of Business.

Neither the Company nor any Subsidiary will engage in any line of business if as a result thereof the business of the Company and its Subsidiaries taken as a whole would not be substantially the same as what it was at January 28, 1995 as described in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.

7.21 Required Subsidiary Guaranties.

The Company shall cause its Subsidiaries other than Record Town to enter into a guaranty of the Notes pursuant to an agreement to the effect and substantially in the form of Exhibit F hereto. Each Subsidiary required to execute a Subsidiary Guaranty pursuant to the provisions of Section 3.11 or this Section 7.21 shall be a "Required Guarantor".

7.22 Limitations on Preferred Stock.

Neither the Company, Record Town nor any other Restricted Subsidiary will issue (i) any Preferred Stock which by its terms (or by the terms of any Security into which it is convertible or for which it is exchangeable) is exchangeable for Debt at the option of the holder thereof on or prior to July 31, 2000 or (ii) any Special Preferred Stock unless the issuance of such Special Preferred Stock is permitted at such time pursuant to Section 7.5.

7.23 Limitation on Inventory Turnover.

The Company will not permit Inventory Turnover to fall below the following amounts at the end of the following fiscal quarters of each fiscal year:

Fiscal Quarter Amount ______

First .3 Second .6 Third .7 Fourth 1.4 7.24 Maintenance of Consolidated EBITDA.

The Company shall maintain Consolidated EBITDA at not less than the following amounts for each of the periods set out below:

Period (dates inclusive) Amount ______

1/29/95 to 4/29/95 ($1,000,000) 1/29/95 to 7/29/95 ($2,000,000) 1/29/95 to 10/28/95 ($2,000,000) 1/29/95 to 2/3/96 $24,000,000 2/4/96 to 5/4/96 ($1,000,000)

7.25 Limitation on Capital Expenditures.

The Company and the Restricted Subsidiary shall not make capital expenditures which, in the aggregate, exceed the following amounts in the following fiscal years:

Period (dates inclusive) Amount ______

1/29/95 to 2/3/96 $10,600,000 2/4/96 to 7/31/96 $6,000,000

7.26 Limitation on Leases.

Neither the Company nor any Restricted Subsidiary shall be or become liable under any agreement for the lease, hire or use of any personal property if the sum of (a) the aggregate maximum amount of all obligations of the Company and its Restricted Subsidiaries pursuant to all such agreements in the current or any future fiscal year plus (b) the aggregate outstanding indebtedness permitted under Section 7.5(a)(iv) hereof would exceed $2,000,000. Anything contained in this Section to the contrary notwithstanding, this provision shall not apply to a Financing Lease.

7.27 Limitation on Sale and Leaseback.

Neither the Company nor any Restricted Subsidiary shall enter into any arrangement with any Person whereby the Company or any Restricted Subsidiary shall sell or transfer any Property, whether now owned or hereafter acquired, and thereafter rent or lease such Property or other Property which the Company or such Restricted Subsidiary intends to use for substantially the same purpose or purposes as the Property being sold or transferred.

7.28 Limitation on Changes in Fiscal Year.

The Company shall not permit its fiscal year or the fiscal year of any Restricted Subsidiary to end on a day other than the Saturday closest to the last day of January, or change the method of determining fiscal quarters.

7.29 Limitation on Debt to Consolidated Tangible Net Worth.

The Company shall not permit the ratio of (a) total liabilities of the Company and its Restricted Subsidiaries to (b) Consolidated Tangible Net Worth to exceed:

(i) 2.15 to 1.0 at any fiscal year-end;

(ii) 2.30 to 1.0 as of the end of the first fiscal quarter of each fiscal year;

(iii) 2.50 to 1.0 as of the end of the second fiscal quarter of each fiscal year; and

(iv) 3.0 to 1.0 as of the end of the third fiscal quarter of each fiscal year.

For purposes of computations made to determine compliance with this Section 7.29, (x) Consolidated Tangible Net Worth shall be deemed to be reduced by the amount (the "Excess") by which cash on hand or cash equivalents as reflected on the Company's balance sheet exceeds the product of $10,000 multiplied by the number of retail stores of the Company and the Restricted Subsidiaries actually open for business on the date of computation, and (y) the Excess shall be deemed to reduce total liabilities dollar for dollar.

7.30 Store Openings and Closings.

(a) Store Openings. The Company shall not, and shall not permit any Restricted Subsidiary to, (i) open any new store other than relocations and twenty-two (22) new stores, in each case, to the extent specifically provided for during the period from the Effective Date through July 31, 1996 in the Company's business plan as presented to the Purchaser on January 23, 1995 (the "Business Plan"), or (ii) enter into any lease in connection with or for the purpose of opening any new store other than the seventeen (17) new leases specifically provided for during the period from the Effective Date through July 31, 1996 in the Business Plan, provided, however, that the capital expenditures with respect to the opening of a new store may not exceed, in the aggregate, Ten Million Six Hundred Thousand Dollars ($10,600,000) during the 1995 fiscal year, and Six Million Dollars ($6,000,000) during the 1996 fiscal year, and provided, further, that in the ordinary course of business the Company and Record Town may enter into renewals of existing store leases.

(b) Store Closings. As of the end of each fiscal quarter, the number of retail stores closed during the period from January 29, 1995 through such date shall be not less than the number of retail stores scheduled for closure during such period as set forth in the Business Plan.

7.31 No Amendment of Debt Instruments.

The Company shall not, without the prior written consent of the Purchaser, amend, modify or supplement any of the terms of the Other Restructuring Documents (other than any such amendment, modification or change which would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon).

8. INFORMATION AS TO COMPANY

8.1 Financial and Business Information.

The Company will deliver to you, and to each other institutional holder of outstanding Notes, and, in the case of 8.1(b) below, to the National Association of Insurance Commissioners, Securities Valuation Office, 195 Broadway, 19th Floor, New York, New York 10007:

(a) Quarterly Statements. Within sixty (60) days after the end of each of the first three quarterly fiscal periods in each fiscal year of the Company, two copies of:

(i) a consolidated balance sheet of the Company and its consolidated subsidiaries and of the Company and its Restricted Subsidiaries as at the end of that quarter, and

(ii) consolidated statements of income, retained earnings and cash flows of the Company and its consolidated subsidiaries, and of the Company and its Restricted Subsidiaries, for that quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with that quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail and certified by a principal financial officer of the Company as presenting fairly the financial condition of the companies being reported upon and as having been prepared in accordance with generally accepted accounting principles consistently applied;

(b) Annual Statements. Within ninety (90) days after the end of each fiscal year of the Company, two copies of:

(i) a consolidating and consolidated balance sheet of the Company and its consolidated subsidiaries, and of the Company and its Restricted Subsidiaries, as at the end of that year, and

(ii) consolidating and consolidated statements of income, retained earnings and cash flows of the Company and its consolidated subsidiaries, and of the Company and its Restricted Subsidiaries, for that year, setting forth in each case in comparative form the figures for the previous fiscal year, and, in the case of such consolidated financial statements, accompanied by an opinion of independent certified public accountants of recognized national standing stating that such financial statements fairly present the financial condition of the companies being reported upon and have been prepared in accordance with generally accepted accounting principles consistently applied (except for changes in application in which such accountants concur), and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances;

(c) Audit Reports. Promptly upon receipt thereof, one copy of each other report submitted to the Company or any Subsidiary by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any Subsidiary;

(d) SEC and Other Reports. Promptly upon their becoming available one copy of each report, notice or proxy statement sent by the Company to stockholders generally, and of each periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by the Company with, or received by the Company in connection therewith from, any securities exchange or the Securities and Exchange Commission or any successor agency;

(e) ERISA. Immediately upon becoming aware of the occurrence of any

(i) "reportable event" as such term is defined in Section 4043 of ERISA, or

(ii) "accumulated funding deficiency" as such term is defined in Section 302 of ERISA, or

(iii) "prohibited transaction", as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as amended, or described in Section 406 of ERISA, in connection with any Pension Plan or any trust created thereunder, a notice specifying the nature thereof, what action the Company or a Related Person is taking or proposes to take with respect thereto, and, when known, any action taken by the Internal Revenue Service with respect thereto;

(f) Notice of Default or Event of Default. Immediately upon becoming aware of the existence of any Default or Event of Default hereunder or a Default or Event of Default under the Restated Credit Agreement (as defined therein), or a Default or Event of Default under the Restated 1993 Noteholder Agreement (as defined therein), a notice describing its nature and the action the Company is taking with respect thereto;

(g) Notice of Claimed Default. Immediately upon becoming aware that the holder of any Note or of any Debt or Security of the Company or any Subsidiary has given notice or taken any other action with respect to a claimed default or Event of Default, a notice specifying the notice given or action taken by such holder, the nature of the claimed default or Event of Default and the action the Company is taking with respect thereto;

(h) Report on Proceedings. Within fifteen (15) days after the Company obtains knowledge thereof, notice of any litigation (provided, that notice need not be given of any litigation fully covered by insurance and with respect to which such coverage is not disputed) or any governmental proceeding pending against the Company or any Subsidiary in which the damages sought exceed Five Hundred Thousand Dollars ($500,000) or which might otherwise materially adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town or of the Company and its Subsidiaries, taken as a whole, or of any Guarantor;

(i) Change of Control. Not later than two (2) Business Days after knowledge that a Change of Control is proposed to occur, a notice specifying (1) the date on which such proposed Change of Control is expected to occur and describing such Change of Control in detail, and (2) that each holder of Notes shall be repaid in full at par pursuant to Section 5.4 unless the Company receives a notice from the holder within thirty (30) days of such holder's receipt of the Company's notice, or as otherwise provided in Section 5.4, indicating that such holder elects to forego the Section 5.4 repayment; and

(j) Requested Information. With reasonable promptness, such other data and information as from time to time may be reasonably requested.

8.2 Officers' Certificates.

Each set of financial statements delivered pursuant to Section 8.1(a) or 8.1(b) will be accompanied by a certificate of the President or a Vice President and the Treasurer or an Assistant Treasurer of the Company setting forth:

(a) Covenant Compliance -- the information (including detailed calculations) required in order to establish compliance with the requirements of Section 7 during the period covered by the income statements being furnished; and

(b) Event of Default -- a statement that the signers have reviewed the relevant terms of this Agreement and have made, or caused to be made, under their supervision, a review of the transactions and condition of the Company and its Subsidiaries from the beginning of the period covered by the income statements being furnished and that the review has not disclosed the existence during such period of any Default or Event of Default or, if any such Default or Event of Default existed or exists, describing its nature and the action the Company has taken with respect thereto. 8.3 Accountants' Certificates.

Each set of annual financial statements delivered pursuant to Section 8.1(b) will be accompanied by a certificate of the accountants who certify such financial statements, stating that they have reviewed this Agreement and whether, in making their audit, they have become aware of any Default or Event of Default, and, if any Default or Event of Default then exists, describing its nature.

8.4 Inspection.

The Company will permit your representatives and the representatives of each other institutional holder of the Notes, at the Company's expense, to visit and inspect any of the Properties of the Company or any Subsidiary, to examine and make copies and abstracts of all their books of account, records, and other papers, and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants (and by this provision the Company authorizes said accountants to discuss the finances and affairs of the Company and its Subsidiaries) all at reasonable times and as often as may be reasonably requested. All nonpublic information furnished to you pursuant to this Agreement shall be treated as confidential information by you. You agree to use your reasonable efforts to refrain from disclosing such information to any other Person (excluding any of your officers, employees, agents or counsel), except (1) in connection with selling or otherwise realizing upon your interest in the Notes, (2) as may be necessary or desirable in connection with a request by governmental agency, regulatory or supervisory authority or court having or claiming jurisdiction over you including, without limitation, the National Association of Insurance Commissioners, (3) information obtained from a third party which is not subject to the provisions of this Section 8.4, (4) information is otherwise publicly available, (5) in connection with the enforcement of your rights hereunder or under the Note and (6) disclosures to other Purchasers or any subsequent holders of the Notes.

8.5 Quarterly Meetings.

Within thirty (30) days after the end of each fiscal quarter of the Company, Robert J. Higgins, and such other representatives of the Company as the Purchaser may request, shall make themselves available at a reasonably convenient location to meet with representatives of the Purchaser to discuss the Company's budget, Business Plan and other finances and affairs of the Company, provided, however, that this requirement may be waived with respect to any quarter by the holders of not less than seventy-five percent (75%) of the outstanding principal amount of the Notes.

8.6 Additional Financial Information.

The Company shall promptly deliver monthly unaudited financial statements (substantially consistent with the requirements of Part I, Item 1 of Form 10-Q under the Securities Exchange Act of 1934, as amended) to each holder of Notes; provided, that the Company shall not be obligated to provide such financial statements during any fiscal quarter if at the end of each of the four immediately preceding fiscal quarters, Consolidated Income Available for Fixed Charges for the preceding twelve (12) month period is greater than 150% of Consolidated Fixed Charges for such immediately preceding twelve (12) month period.

9. EVENTS OF DEFAULT.

9.1 Nature of Events.

An "Event of Default" shall exist if any of the following occurs and is continuing:

(a) Principal Payments. Failure to make any payments of principal on any Note on or before the date such payment is due;

(b) Interest Payments. Failure to pay interest or any other amount on any Note on or before the fifth (5th) day after the date such payment is due;

(c) Particular Covenant Defaults. Failure to comply with any covenant contained in Sections 7.2, 7.4 through 7.31, or 8.1;

(d) Other Defaults. Failure to comply with any other provision of this Agreement, which continues for a period of thirty (30) days or more;

(e) Warranties or Representations. Any warranty or representation by or on behalf of the Company or Record Town contained herein or in any instrument delivered in compliance with or in reference hereto or thereto shall prove to have been false or misleading in any material respect or any warranty or representation by or on behalf of any Subsidiary contained in a Subsidiary Guaranty shall prove to have been false or misleading in any material respect;

(f) Default on Other Debt. Failure by the Company or any Restricted Subsidiary, to make any payment due on any other Debt or Security which individually or in the aggregate and including the face amount thereof plus accrued interest thereon, exceeds Two Million Dollars ($2,000,000), or any event shall occur or any condition shall exist, the effect of which is to cause (or permit any holder of such other Debt or Security or a trustee to cause) such other Debt or Security, or a portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment;

(g) Involuntary Bankruptcy Proceedings. A custodian, receiver, liquidator or trustee of the Company or any Restricted Subsidiary, or of any of the Property of either, is appointed or takes possession and such appointment or possession remains in effect for more than sixty (60) days; or the Company, or any Restricted Subsidiary, is adjudicated bankrupt or insolvent; or an order for relief is entered under the Federal Bankruptcy Code against the Company or any Restricted Subsidiary; or any of the Property of either is sequestered by court order and the order remains in effect for more than sixty (60) days; or a petition is filed against the Company or any Restricted Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and is not dismissed within sixty (60) days after filing;

(h) Voluntary Petitions. The Company, or any Restricted Subsidiary, files a petition in voluntary bankruptcy or seeking relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under any such law;

(i) Assignments for Benefit of Creditors, etc. The Company or a Restricted Subsidiary makes an assignment for the benefit of its creditors, or generally fails to pay its debts as they become due, or consents to the appointment of or taking possession by a custodian, receiver, liquidator or trustee of the Company, or a Restricted Subsidiary, or of all or any part of the Property of either;

(j) Undischarged Final Judgments. Final judgment or judgments for the payment of money aggregating in excess of Five Hundred Thousand Dollars ($500,000) is or are outstanding against one or more of the Company and its Restricted Subsidiaries and any one of such judgments has been outstanding for more than thirty (30) days from the date of its entry and has not been discharged in full or stayed; or

(k) Other Restructuring Documents. Failure to comply with any provision under the Other Restructuring Documents such that an Event of Default (as defined therein) shall occur, whether or not such Event of Default is waived by the 1993 Noteholders or the Banks.

9.2 Default Remedies.

(a) If an Event of Default described in Sections 9.1(g) through 9.1(i) occurs, the entire outstanding principal amount of the Notes automatically shall become immediately due and payable, without the taking of any action on the part of any holder of the Notes or any other Person and without the giving of any notice with respect thereto. If an Event of Default described in Section 9.1(a) or 9.1(b) exists, any holder of Notes may, at its option, exercise any right, power or remedy permitted by law, including but not limited to the right by notice to the Company to declare the Notes held by such holder to be immediately due and payable. The Company shall notify each holder of its receipt of any such notice from any other and of the contents such notice. If any other Event of Default exists, the holder or holders of at least fifty-one percent (51%) in outstanding principal amount of the Notes (exclusive of Notes owned by the Company, Restricted Subsidiaries and Affiliates) may exercise any right, power or remedy permitted by law, including but not limited to the right by notice to the Company to declare all the outstanding Notes immediately due and payable. Upon any acceleration the principal of the Notes declared due or automatically becoming due shall become immediately due and payable together with all interest accrued thereon without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company will immediately pay the entire principal of and interest accrued on such Notes.

(b) No course of dealing or delay or failure on the part of any holder of the Notes to exercise any right shall operate as a waiver of such right or otherwise prejudice such holder's rights, powers and remedies. The Company will pay or reimburse the holders of the Notes, to the extent permitted by law, for all costs and expenses, including but not limited to reasonable attorneys' fees, incurred by them in collecting any sums due on the Notes or in otherwise enforcing any of their rights. 9.3 Annulment of Acceleration of Notes.

If a declaration is made pursuant to Section 9.2(a), the holders of at least seventy-five percent (75%) of the outstanding principal amount of the Notes (exclusive of Notes owned by the Company, Restricted Subsidiaries and Affiliates) may annul such declaration and the consequences thereof if no judgment or decree has been entered for the payment of any monies due pursuant to such declaration and if all sums payable under the Notes and this Agreement (except principal or interest which has become due solely by reason of such declaration) have been duly paid. No such annulment shall extend to or waive any subsequent Default or Event of Default.

10. INTERPRETATION OF THIS AGREEMENT

10.1 Terms Defined.

As used in this Agreement (including Exhibits), the following terms have the respective meanings set forth below or in the Section indicated:

Adjusted Funded Debt -- with respect to any Person, means, without duplication:

(1) liabilities for borrowed money, other than Current Debt;

(2) liabilities secured by any Lien existing on Property owned by the Person (whether or not those liabilities have been assumed), other than Current Debt;

(3) the aggregate amount of Guaranties by the Person, other than Guaranties of Current Liabilities of other Persons;

(4) the aggregate Redemption Price of all outstanding Special Preferred Stock of such Person; and

(5) any other obligations (other than deferred taxes), including without limitation, Financing Leases, which are required by generally accepted accounting principles to be shown as liabilities on its balance sheet and which are payable or which are unpaid more than one year from their creation.

Adjusted Tangible Assets -- all assets except the following:

(1) deferred assets, other than prepaid insurance, prepaid supplies and prepaid taxes;

(2) patents, copyrights, trademarks, tradenames, franchises, good will, experimental or research and development expense and other similar intangibles;

(3) Restricted Investments;

(4) unamortized debt discount and expense;

(5) assets located and notes and receivables due from obligors domiciled outside the United States, Puerto Rico or Canada; and

(6) interests in any Subsidiary or joint venture in which the Company owns less than 49% of the Voting Stock.

Affiliate -- a Person (other than a Restricted Subsidiary) (1) which, directly or indirectly, controls, or is controlled by, or is under common control with, the Company, (2) which owns 5% or more of the Voting Stock of the Company or (3) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is owned by the Company or a Subsidiary. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

Banks -- means, collectively, Chemical Bank, Chase Manhattan Bank, N.A., NBD Bank, N.A. and NatWest Bank N.A. (formerly National Westminster Bank USA).

Business Day -- any day other than a Saturday, Sunday or other day on which commercial banking institutions in Connecticut, Massachusetts or New York are authorized or obligated by law or executive order to be closed.

Business Plan -- Section 7.30(a).

Change of Control -- any of the following

(1) a Person or group of Persons acting in concert (other than a Permitted Holder) becoming the beneficial owner of more than 50% (by number of votes) of the Voting Stock of the Company; or (2) a majority of the board of directors of the Company is replaced within any two-year period, excluding replacements due to resignations initiated by the incumbent board of directors or resignations due to the death or disability of any members of the incumbent board of directors.

Commitment -- the obligation of the Banks to make loans and extend letters of credit pursuant to the Restated Credit Agreement.

Company -- the introductory sentence hereof.

Consolidated Current Assets -- at any date, means the amount at which the current assets of the Company and all Restricted Subsidiaries would be shown on a consolidated balance sheet of such Persons at such date, after eliminating inter-company items, in accordance with generally accepted accounting principles.

Consolidated Current Liabilities -- at any date, means the amount at which the current liabilities of the Company and all Restricted Subsidiaries (excluding, for purposes of computing current liabilities, indebtedness under the Notes and the 1993 Notes) would be shown on a consolidated balance sheet of such Persons at such date, plus (without duplication) the aggregate amount of their Guaranties of current liabilities of other Persons outstanding at such date.

Consolidated EBITDA -- with respect to any period means, Consolidated Net Income for such period plus, to the extent deducted in determining Consolidated Net Income, depreciation and amortization expenses, interest expenses with respect to Debt and all federal, state and foreign income taxes.

Consolidated Fixed Charges -- with respect to the Company and its Restricted Subsidiaries means for any period the sum of: (1) interest expenses with respect to their liabilities for borrowed money for such period, (2) imputed interest expenses on capitalized lease obligations for such period, and (3) fixed minimum rental expenses of real estate leases for such period, in each case determined on a consolidated basis.

Consolidated Income Available For Fixed Charges -- with respect to the Company and all Restricted Subsidiaries, means for any period the sum of (1) Consolidated EBITDA, and (2) all fixed minimum rent expenses with respect to leases of real property, in each case determined on a consolidated basis for such period.

Consolidated Net Income -- for any period, means net earnings after income taxes of the Company and each Restricted Subsidiary (only for the period during which it is a Restricted Subsidiary) determined on a consolidated basis, provided that there shall be excluded therefrom after giving effect to any related tax effect:

(1) any gain arising from any write-up of assets;

(2) any net gain or loss arising from the sale or disposition of capital assets (or reserves relating thereto);

(3) items classified as extraordinary or nonrecurring (including any restructuring reserves);

(4) any writeoff of deferred financing costs; and

(5) the cumulative effect of changes in accounting principles in the year of adoption of such change.

Consolidated Tangible Net Worth -- at any date means, the excess of (i) all amounts that would in conformity with GAAP be included in shareholders' equity on a consolidated balance sheet of the Company prepared as of such date, over (ii) the aggregate amount carried as of such date as consolidated assets on the books of the Company consisting of (x) goodwill, licenses, patents, trademarks, unamortized debt discount and expense, and other intangibles, (y) the cost of investments in excess of the net asset value thereof at the time of acquisition by the Company, and (z) writeups in the value of assets of the Company subsequent to the Effective Date.

Credit Agreement Debt -- Section 7.5.

Current Debt -- with respect to any Person means all its liabilities for borrowed money and all liabilities secured by any Lien existing on Property owned by that Person (whether or not those liabilities have been assumed) which, in either case, are payable on demand or within one year from their creation, plus the aggregate amount of all Guaranties by that Person of such liabilities of other Persons, but specifically excluding at all times all of the debt (whenever due) classified as long term debt on the consolidated balance sheet of the Company as of January 28, 1995. Current Liabilities -- at any date, means the amount at which the current liabilities of a Person would be shown on a balance sheet at such date, plus (without duplication) the aggregate amount of their Guaranties of current liabilities of other Persons outstanding at such date after eliminating intercompany items, in accordance with generally accepted accounting principles.

Debt -- with respect to any Person, means its Current Debt and Adjusted Funded Debt.

Default -- an event or condition which will, with the lapse of time or the giving of notice or both, become an Event of Default.

Disqualified Preferred Stock -- means, with respect to any Person, any Preferred Stock of such Person which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is redeemable or is exchangeable for Debt, in whole or in part, on or prior to July 31, 2000.

Distribution -- means:

(1) dividends or other distributions in respect of capital stock of the Company (except distributions of such stock pursuant to a stock split or stock dividend; provided that no stock dividend shall be paid in any capital stock of the Company other than its common stock).

(2) the redemption or acquisition of such stock or of warrants, rights or other options to purchase such stock (except when solely in exchange for such stock) unless made, contemporaneously, from the net proceeds of a sale of such stock.

Any Distribution of Property other than cash shall be valued at fair market value.

Economic Benefit -- with respect to Section 7.15 shall mean all rights, of whatever nature and with respect to all classes of capital stock of, or equity interests in, an entity to participate in any distribution with respect to such capital stock or equity interests, whether in the form of dividends, upon liquidation or otherwise.

Effective Date -- means the date (not later than June 30, 1995) upon which all of the conditions set forth in Section 3 shall have been satisfied.

ERISA -- means the Employee Retirement Income Security Act of 1974, as amended from time to time.

Event of Default -- Section 9.1.

Excess -- Section 7.29.

Exchange Act -- means the Securities Exchange Act of 1934, as amended.

Existing 1993 Noteholder Agreement -- means that certain Note Agreement, dated as of July 2, 1993, and amended as of January 30, 1994, among the Company, Record Town and each of the 1993 Noteholders.

Existing Note Agreement -- Section 1.1.

Existing Notes -- Section 1.1.

Extraordinary Repayment -- Section 5.1(b).

Financing Lease -- any lease which is shown or is required to be shown in accordance with generally accepted accounting principles as a liability on a balance sheet of the lessee thereunder.

GAAP -- means generally accepted accounting principles in effect in the United States of America, at the time of the applicable report, applied in a manner consistent with that employed in the preparation of the financial statements described in Section 8.1.

Guarantors -- means at any time each direct or indirect Subsidiary, if any, of the Company meeting the requirements of Section 7.21.

Guaranty -- by any Person means all obligations of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including obligations incurred through an agreement, contingent or otherwise, by such Person:

(i) to purchase such indebtedness or obligation or any Property or assets constituting security therefor, (ii) to advance or supply funds

(1) for the purchase or payment of such indebtedness or obligation, or

(2) to maintain working capital or any balance sheet or income statement condition;

(iii) to lease Property, or to purchase Securities or other Property or services, primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of the primary obligor to make payment of the indebtedness or obligation; or

(iv) otherwise to assure the owner of the indebtedness or obligation against loss; but excluding endorsements in the ordinary course of business of negotiable instruments for deposit or collection.

The amount of any Guaranty shall be deemed to be the maximum amount for which such Person may be liable as guarantor, upon the occurrence of any contingency or otherwise, under or by virtue of its Guaranty.

Intercreditor Agreement -- Section 3.7.

Inventory Turnover -- means, at a particular date, the "Cost of Sales" as disclosed on the Company's year-to-date consolidated statements of income divided by the "Merchandise Inventory" amount set forth on the Company's consolidated balance sheets for such date.

Lien -- any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether the interest is based on common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purposes of this Agreement, the Company or a Restricted Subsidiary shall be deemed to be the owner of any Property which it has acquired or holds subject to a Financing Lease or a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes, and such retention or vesting shall be deemed to create a Lien on the Property.

1993 Noteholders -- means Hartford Life Insurance Company, Hartford Accident and Indemnity Company, The Equitable Life Assurance Society of the United States, Equitable Variable Life Insurance Company, Massachusetts Mutual Life Insurance Company and Phoenix American Life Insurance Company.

1993 Notes -- means those notes issued and sold to the 1993 Noteholders by the Company pursuant to the Existing 1993 Noteholder Agreement, of which the aggregate principal amount of $47,500,000 is currently outstanding.

Notes -- Section 1.2.

Other Restructuring Documents -- Section 2.16.

Pension Plan -- Section 2.15.

Permitted Holder -- means collectively Robert J. Higgins and his estate, spouse, children, heirs, legatees, and legal representatives, and any bona fide trust of which one or more of the foregoing are the sole beneficiaries or the grantors thereof and over which trust one or more of the foregoing acts as trustee and possesses the power to direct the management thereof.

Person -- an individual, partnership, corporation, trust or unincorporated organization, and a government or agency or political subdivision thereof.

Preferred Stock -- means, with respect to any Person, any class or classes of capital stock (however designated) which is preferred as to the payment of dividends or distributions or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over any other class of capital stock of such person.

Prime Rate -- means, with respect to any month, the highest prime rate of interest that is charged to the Company or Record Town by any of the Banks at any time during such month with respect to borrowings under the Restated Credit Agreement.

Prior Indebtedness -- means without duplication:

(1) unsecured Adjusted Funded Debt and Current Debt of Restricted Subsidiaries, other than Record Town (except for debt to the Company or a Restricted Subsidiary);

(2) Adjusted Funded Debt and Current Debt of the Company and its Restricted Subsidiaries, other than Record Town (except for debt to the Company or a Restricted Subsidiary), secured by any Lien on the Property of the Company or any Restricted Subsidiary; and

(3) the redemption or liquidation value (whichever is greater) of all equity Securities of Restricted Subsidiaries (other than common stock) which are not legally and beneficially owned by the Company and its Restricted Subsidiaries.

For purposes of this definition only, Adjusted Funded Debt and Current Debt of Restricted Subsidiaries shall not include the Guaranties by the Restricted Subsidiaries of the obligations of the Company under this Agreement.

Property -- any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.

Purchase Money Mortgage -- any Lien on Property existing at the time of the original acquisition by the Company or a Restricted Subsidiary of such Property or granted or retained in connection with the acquisition or improvement by the Company or a Restricted Subsidiary of such Property in order to permit or facilitate the financing of such acquisition or improvement.

Purchasers -- shall mean the purchasers listed on Exhibit A attached hereto.

Record Town -- the introductory sentence hereof.

Redemption Price -- with respect to any Special Preferred Stock, the highest aggregate price at which such Special Preferred Stock is redeemable at any time or under any circumstance on or prior to July 31, 2000.

Related Person -- any Person (whether or not incorporated) which is under common control with the Company within the meaning of Section 414(c) of the Internal Revenue Code of 1986, as amended, or of Section 4001(b) of ERISA.

Required Guarantor -- Section 7.21.

Restated Credit Agreement -- means those separate Amended and Restated Revolving Credit Agreements, dated as of the date hereof, among the Company, Record Town and each of the Banks.

Restated 1993 Noteholder Agreement -- means that certain Amended and Restated Note Agreement, dated as of the date hereof, among the Company, Record Town and each of the 1993 Noteholders.

Restricted Investments -- all Property, including all investments in any Person, whether by acquisition of stock, indebtedness, other obligation or security, or by loan, advance, capital contribution, or otherwise, except:

(1) investments in one or more Restricted Subsidiaries or any corporation which concurrently with such investment becomes a Restricted Subsidiary;

(2) Property to be used in the ordinary course of business;

(3) current assets arising from the sale of goods and services in the ordinary course of business;

(4) advances to and guaranties of loans to employees for expenses incurred in the ordinary course of business;

(5) investments in direct obligations of the United States with final maturities not in excess of one year from the date of acquisition;

(6) investments in certificates of deposit maturing within one year from the date of acquisition issued by a bank organized under the laws of the United States having capital, surplus, and undivided profits, aggregating at least $100,000,000;

(7) investments in commercial paper issued by any corporation organized under the laws of the United States rated in the highest category by Moody's Investors Service, Inc. or Standard & Poor's Corporation;

(8) investments in money market funds registered under the Investment Company Act of 1940 which invest in securities which are permitted under clause (5), (6), or (7) above;

(9) investments in tax-exempt municipal bonds maturing not more than one year from the date of issue and which have at least a "MIG-1" rating from Moody's Investors Services, Inc. or an "SP-1" rating from Standard and Poor's Corporation;

(10) guaranties by the Company of long-term leases of Restricted Subsidiaries; and

(11) investments in licensed departments or retail (including, without limitation, retail mail order) joint ventures in the music, video, or entertainment businesses.

Restricted Subsidiary -- Record Town, Media Logic and any other Subsidiary,

(1) organized under the laws of the United States or a jurisdiction thereof;

(2) which conducts substantially all of its business and has substantially all of its Property within the United States; and

(3) which has been designated by the Company as a Restricted Subsidiary by notice to each of the holders of the Notes outstanding at the time.

Once the Company has designated any Subsidiary as a Restricted Subsidiary, it may not terminate such designation.

Securities Act -- means the Securities Act of 1933, as amended.

Security -- shall have the same meaning as in Section 2(1) of the Securities Act of 1933, as amended.

Special Preferred Stock -- any Preferred Stock which by its terms (or by the terms of any Security into which it is convertible or for which it is exchangeable) is either redeemable at the option of the holder thereof or is automatically redeemable upon the happening of any event (other than the occurrence of a stated specific date of mandatory redemption thereof).

Subsidiary -- a corporation, partnership or entity of which at least 80% of the outstanding Voting Stock is at the time, directly or indirectly, owned or controlled by the Company.

Subsidiary Guaranty -- a guaranty of the Notes to the effect and substantially in the form of Exhibit F hereto.

Subsidiary Stock -- Section 7.13.

Tangible Net Worth -- at any time means the shareholders' equity of any company (including Preferred Stock, but not including Disqualified Preferred Stock), excluding any patents, copyrights, trademarks, tradenames, franchises, goodwill, experimental expense and other similar intangible assets.

Voting Stock -- Securities or other interests the holders of which are ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or Persons performing similar functions).

Waiver Agreement -- means the letter agreement dated as of January 28, 1995, as amended, among the Company, Record Town and the Purchasers.

Wholly-Owned Restricted Subsidiary -- any Restricted Subsidiary, all of the equity Securities (except directors' qualifying shares) of which are owned by the Company and/or the Company's other Wholly-Owned Restricted Subsidiaries.

10.2 Accounting Principles.

Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made under this Agreement, this shall be done in accordance with generally accepted accounting principles at the time in effect, to the extent applicable, except where such principles are inconsistent with the requirements of this Agreement.

10.3 Directly or Indirectly.

Where any provision in this Agreement refers to any action which a Person is prohibited from taking, the provision shall be applicable whether such action is taken directly or indirectly by such Person, including actions taken by or on behalf of any partnership in which such Person is a general partner and all liabilities of such partnerships shall be considered liabilities of such Person for purposes of this Agreement.

10.4 Governing Law. This Agreement and the Notes shall be governed by and construed in accordance with New York law.

11. MISCELLANEOUS

11.1 Notices.

(a) All notices or other communications under this Agreement or the Notes shall be in writing and shall be mailed by first class mail, postage prepaid,

(i) if to you, in the manner provided in Exhibit A to this Agreement, or in any other manner as you may have advised the Company in writing, or

(ii) if to the Company or Record Town, at its address shown at the beginning of this Agreement, or at such other address as it may have furnished in writing to you and all other holders of the Notes.

(b) Any notice so addressed and mailed by registered or certified mail shall be deemed to be given when so mailed.

11.2 Reproduction of Documents.

This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by you at the closing hereunder (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to you, may be reproduced by you by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that any such reproduction shall, to the extent permitted by applicable law, be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence.

11.3 Survival.

All warranties, representations, and covenants made by the Company or Record Town herein or on any certificate or other instrument delivered by it or on its behalf under or in reference to this Agreement shall be considered to have been relied upon by you and shall survive the delivery to you of the Notes regardless of any investigation made by you or on your behalf. All statements in any such certificate or other instrument shall constitute warranties and representations by the Company and Record Town hereunder.

11.4 Successors and Assigns.

This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, except that the Company's right to require you to accept the Notes in accordance with Section 1.3 shall be personal to the Company and shall not be assignable or transferable to any other Person (including successors at law) whether voluntarily or involuntarily. The provisions of this Agreement are intended to be for the benefit of all holders, from time to time, of the Notes, and shall be enforceable by any holder, whether or not an express assignment to such holder of rights under this Agreement has been made by you or your successor or assign.

11.5 Amendment and Waiver.

This Agreement may be amended, and the observance of any term of this Agreement may be waived, with (and only with) the written consent of the Company, Record Town and the holders of at least seventy-five percent (75%) of the outstanding principal amount of the Notes (exclusive of Notes owned by the Company, Restricted Subsidiaries and Affiliates); provided, that no such amendment or waiver of any of the provisions of Sections 1 through 4 shall be effective as to you unless consented to by you in writing; and provided further, that no such amendment or waiver shall, without the written consent of the holders of all the outstanding Notes, (i) subject to Section 9.3, change the amount or time of any repayment or payment of principal or the rate or time of payment of interest, (ii) amend Section 7.21, (iii) amend Section 9, or (iv) amend this Section 11.5. Executed or true and correct copies of any amendment or waiver effected pursuant to the provisions of this Section 11.5 shall be delivered by the Company to each holder of outstanding Notes promptly following the date on which the same shall become effective. No such amendment or waiver shall extend to or affect any provision or obligation not expressly amended or waived.

11.6 Duplicate Originals. Two or more duplicate originals of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument.

[The remainder of this page has been intentionally left blank.] [The next page is the signature page.]

If this Agreement is satisfactory to you, please so indicate by signing the acceptance at the foot of a counterpart of this Agreement and return such counterpart to the Company, whereupon this Agreement will become binding between us in accordance with its terms.

Very truly yours,

TRANS WORLD ENTERTAINMENT CORPORATION

By /s/ Robert J. Higgins ______Name: Robert J. Higgins Title: President

RECORD TOWN, INC.

By /s/ Robert J. Higgins ______Name: Robert J. Higgins Title: President

Accepted:

AETNA LIFE INSURANCE COMPANY

By /s/ Peter C. Nilsen ______Name: Peter C. Nilsen Title: Investment Manager

EX-4.2 3 AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT

AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT

TRANS WORLD ENTERTAINMENT CORP. (formerly Trans World Music Corp.) RECORD TOWN, INC.

and

CHASE MANHATTAN BANK, N.A.

DATED AS OF June 29, 1995

TABLE OF CONTENTS

SECTION 1. DEFINITIONS 2 Section 1.1 Defined Terms 2 Section 1.2 Use of Defined Terms 16 Section 1.3 Accounting Terms 17

SECTION 2. AMOUNT AND TERMS OF CREDIT 17 Section 2.1 The Commitment 17 Section 2.2 The Note 18 Section 2.3 Letters of Credit 19 Section 2.4 Notice of Borrowing 21 Section 2.5 Fees 21 Section 2.6 Termination or Reduction of Commitment 22 Section 2.7 Prepayments 24 Section 2.8 Computation of Interest and Commitment Fee; Payments 26 Section 2.9 Requirements of Law 26 Section 2.10 Use of Proceeds 29

SECTION 3. CONDITIONS OF BORROWING 30 Section 3.1 Conditions of Effectiveness 30 Section 3.2 Conditions of All Loans 33

SECTION 4. REPRESENTATIONS AND WARRANTIES 34 Section 4.1 Corporate Existence 35 Section 4.2 Corporate Power and Authorizatio 35 Section 4.3 No Legal Bar to Loans 36 Section 4.4 No Material Litigation 36 Section 4.5 No Default 37 Section 4.6 Ownership of Properties; Liens 37 Section 4.7 Taxes 37 Section 4.8 Financial Condition 38 Section 4.9 Filing of Statements and Reports 38 Section 4.10 ERISA 39 Section 4.11 Environmental Matters 40 Section 4.12 Insurance 41 Section 4.13 Insurance Debt Restructuring Documents 42 Section 4.14 Accuracy and Completeness of Information 43 Section 4.15 Labor Matters 44 Section 4.16 Leaseholds, Permits, etc. 45 Section 4.17 Subsidiaries 45 Section 4.18 Existing Indebtedness 46 Section 4.19 Company Actions 46

SECTION 5. AFFIRMATIVE COVENANTS 46 Section 5.1 Financial Statements 47 Section 5.2 Payment of Obligations 50 Section 5.3 Maintenance of Properties; Insurance 50 Section 5.4 Notices 50 Section 5.5 Conduct of Business and Maintenance of Existence 52 Section 5.6 Inspection of Property, Books and Records 52 Section 5.7 Hazardous Material 53 Section 5.8 Subsidiary Guarantees 53 Section 5.9 Compliance with Law 54 Section 5.10 Maintenance of Office 54 Section 5.11 Quarterly Meetings 54

SECTION 6. NEGATIVE COVENANTS 55 Section 6.1 Limitation of Indebtedness 55 Section 6.2 Limitation on Liens 56 Section 6.3 Limitation on Contingent Obligations 58 Section 6.4 Limitation on Capital Expenditures 59 Section 6.5 Prohibition of Fundamental Changes 59 Section 6.6 Limitations on Dividends and StockAcquisitions 60 Section 6.7 Limitation on Investments, Loans and Advances 60 Section 6.8 Prohibition of Certain Prepayments 62 Section 6.9 Limitation on Leases 62 Section 6.10 Limitation on Sale and Leaseback 63 Section 6.11 Limitation on Current Ratio 63 Section 6.12 Maintenance of Consolidated Tangible Net Worth 63 Section 6.13 Limitation on Debt to Consolidated Tangible Net Worth 64 Section 6.14 Limitation on Inventory Turnover 64 Section 6.15 No Amendment of Debt Instruments 65 Section 6.16 Maintenance of Accounts 66 Section 6.17 Limitation on Transactions With Affiliates 66 Section 6.18 Limitation on Chages in Fiscal Year 66 Section 6.19 Limitation on Lines of Business 67 Section 6.20 Minimum Consolidated EBITDA 67 Section 6.21 Limitation on Material Asset Sales 67 Section 6.22 Maintenance of Ownership 67 Section 6.23 Tangible Net Worth of Record Town 67 Section 6.24 Tax Consolidation 68 Section 6.25 Limitations on Preferred Stock 68 Section 6.26 New Stores and Leases 68 Section 6.27 Fixed Charge Ratio 69

SECTION 7. EVENTS OF DEFAULT 69 Section 7.1 Events of Default 69

SECTION 8. MISCELLANEOUS 75 Section 8.1 Limited Role of Bank 75 Section 8.2 Choice of Law Construction 76 Section 8.3 Consent to Jurisdiction 76 Section 8.4 Waiver of Jury Trial 77 Section 8.5 Notices 77 Section 8.6 Entire Agreement; No Waiver; Cumulative Remedies; Amendments; Setoff 79 Section 8.7 Reference to Subsidiaries and Guarantors 80 Section 8.8 Captions 80 Section 8.9 Exhibits and Schedules 81 Section 8.10 Payment of Fees 81 Section 8.11 Survival of Agreements 81 Section 8.12 Successors and Assigns 81 Section 8.13 Interest 85

Execution 86

Schedule I Bank Percentages Schedule II Liens Schedule III Subsidiaries Schedule IV Existing Indebtedness Exhibit A Form of Note Exhibit B Guarantee Exhibit C Monthly Reports

CREDIT AGREEMENT

AMENDED AND RESTATED CREDIT AGREEMENT, dated as of June 29, 1995, between TRANS WORLD ENTERTAINMENT CORP. (formerly known as Trans World Music Corp.), a New York corporation (herein called the "Company"), RECORD TOWN, INC., a New York corporation ("Record Town" and together with the Company, the "Companies"), and CHASE MANHATTAN BANK, N.A. (the "Bank").

WHEREAS, the Company is party to separate identical credit agreements (collectively, the "Existing Credit Agreements") dated as of June 11, 1993, as amended, with each of the Bank and Chemical Bank, NatWest Bank N.A. and NBD Bank (collectively, the "Other Banks" and, together with the Bank, the "Banks");

WHEREAS, the Company is party to a certain Note and Security Agreement dated June 20, 1991, with Aetna Life Insurance Company (the "Existing Aetna Agreement") and a certain Note Agreement dated as of July 2, 1993, as amended (the "Existing Note Agreement" and together, with the Existing Aetna Agreement, the "Existing Insurance Company Agreements"), with the Noteholders party thereto (the "Noteholders");

WHEREAS, as part of a global restructuring of the Company's funded indebtedness, the Companies and each of the Banks and Noteholders have agreed to amend and restate each of the Existing Credit Agreements and the Existing Insurance Company Agreements in the form of the Bank Credit Agreements and the Insurance Debt Restructuring Documents, respectively.

NOW THEREFORE, in consideration of the mutual premises and covenants contained herein, the Companies and the Bank agree as follows:

W I T N E S S E T H:

SECTION 1.

DEFINITIONS

Section 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings, unless the context otherwise requires:

"Accumulated Funding Deficiency" shall have the meaning set forth in Section 302 of ERISA.

"Adjusted Tangible Assets" shall mean, at any date, all assets of the Company, whether owned directly or indirectly, as reported on its consolidated balance sheets, less reserves for depreciation, obsolescence, amortization, valuation and other appropriate reserves required by GAAP, except:

(i) deferred assets, other than prepaid insurance and prepaid taxes;

(ii) patents, copyrights, trademarks, trade names, franchises, good will, experimental expense, and other similar intangibles;

(iii) investments permitted pursuant to Section 6.7 of this Agreement;

(iv) unamortized debt discount and expense;

(v) assets located and notes and receivables due from obligors domiciled outside the United States of America, Puerto Rico or Canada; and

(vi) interests in any Subsidiary or joint venture in which the Company owns less than 49% of the Voting Stock.

"Aetna Debt" shall mean the indebtedness outstanding, not to exceed $17,500,000, in respect of the Aetna Note Agreement.

"Aetna Note Agreement" shall mean the Amended and Restated Note and Security Agreement dated the date hereof between the Company and Aetna Life Insurance Company

"Affiliate" shall mean any Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, the Company or any Subsidiary. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 5% or more of the Voting Stock of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.

"Agreement" shall mean this Amended and Restated Credit Agreement and any amendments or supplements hereto.

"Application(s)" shall mean each of the commercial Letter of Credit applications and standby Letter of Credit applications referred to in Section 2.3 hereof.

"Assignee" shall have the meaning set forth in Section 8.12(c).

"Bank Credit Agreements" shall mean, collectively, this Agreement and the other substantially identical agreements dated the date hereof between the Companies and the Other Banks.

"Bank Outstandings" shall mean the aggregate amount of Loans and Letter of Credit Outstandings under the Bank Credit Agreements.

"Bank's Pro Rata Share" of any sum or amount shall be computed by multiplying such sum or amount by a fraction, the numerator of which is 10 and the denominator of which is 75.

"Business Day" shall mean a day other than a Saturday, Sunday or other day on which the Bank is authorized to close under the laws of the State of New York.

"Change of Control" shall mean either of the following:

(1) a Person or group of Persons acting in concert (other than a Permitted Holder) becoming the beneficial owner of more than 50% (by number of votes) of the Voting Stock of either of the Companies; or

(2) a majority of the board of directors of the Company is replaced within any two-year period, excluding replacements due to resignations initiated by the incumbent board of directors or resignations due to the death or disability of any members of the incumbent board of directors.

"Code" shall mean the Internal Revenue Code of 1986, as amended from time to time.

"Commitment" shall have the meaning set forth in Section 2.1, as from time to time reduced in accordance with the Agreement.

"Commitment Period" shall mean the period from and including the date hereof to but not including the Termination Date, or such earlier date as the Commitment shall terminate as provided herein.

"Commonly Controlled Entity" shall mean an entity, whether or not incorporated, which is under common control with the Company within the meaning of Section 4001 of ERISA.

"Consolidated EBITDA" means, with respect to the Company and its Subsidiaries for any period, the Consolidated Net Income for such period plus, to the extent deducted in determining such Consolidated Net Income, depreciation and amortization expense, interest expenses with respect to the Company's liabilities for borrowed money and capitalized leases, and all federal, state and foreign income taxes.

"Consolidated Fixed Charges" shall mean with respect to the Company and its Subsidiaries, at any date, the sum of: (1) interest expenses with respect to its liabilities for borrowed money, (2) imputed interest expense on capitalized lease obligations, and (3) all fixed minimum rent expenses of real estate leases, in each case determined on a consolidated basis.

"Consolidated Income Available for Fixed Charges" with respect to the Company and its Subsidiaries, means for any period the sum of: (1) Consolidated EBITDA and (2) all fixed minimum rent expenses of real estate leases, in each case determined on a consolidated basis.

"Consolidated Net Income" means for any period, the aggregate net income of the Company and its Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP, provided that there shall be excluded therefrom after giving effect to any related tax effect, (a) gains and losses from sales of assets or reserves relating thereto, (b) items classified as extraordinary or non-recurring (including any restructuring reserves), (c) the write-off of deferred financing costs and (d) the cumulative effect of changes in accounting principles in the year of adoption of such change.

"Consolidated Tangible Net Worth" shall mean, at any time, the amount by which (i) all amounts that would, in conformity with GAAP, be included in shareholders' equity on the Consolidated Balance Sheets of the Company and its Subsidiaries, exceeds (ii) the aggregate amount carried as assets on the books of the Company and its Subsidiaries for goodwill, licenses, patents, trademarks, unamortized debt discount and expense, and other intangibles as determined in conformity with GAAP, for cost of investments in excess of net assets at the time of acquisition by the Company or any Subsidiary, and for any write-up in the book value of any assets of the Company or any Subsidiary resulting from reevaluation thereof subsequent to the date hereof.

"Default" shall mean any of the events specified in Section 7 hereof, whether or not any requirement for the giving of notice or the lapse of time or both or any other condition has been satisfied.

"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.

"Event of Default" shall mean any of the events specified in Section 7 hereof, provided that any requirement for the giving of notice or the lapse of time or both has been satisfied.

"Fiscal Year" shall mean the fiscal year of the Company which ends on the Saturday closest to January 31.

"GAAP" shall mean generally accepted accounting principles in effect in the United States of America, at the time of the applicable report, applied in a manner consistent with that employed in the preparation of the financial statements described in Section 4.8.

"Guarantee" shall mean any guarantee referred to in Sections 3.1(c), 3.1(d) and 5.8 hereof.

"Guarantor" shall mean any guarantors required pursuant to Sections 3.1(c) or 3.1(d).

"Insolvency" shall mean with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of such term as used in Section 4245 of ERISA.

"Insurance Company Debt" shall mean, collectively, the Aetna Debt and the Note Agreement Debt and any refinancing of such Debt in whole or in part provided, however, that no such refinancing of the Insurance Company debt shall provide for (i) a greater amount of indebtedness, (ii) a higher interest rate on borrowed amounts or, (iii) greater mandatory amortization of the Insurance Company Debt prior to the Termination Date than that required as of the date hereof under the terms of the Insurance Company Restructuring Documents.

"Insurance Debt Restructuring Documents" shall mean the Aetna Note Agreement and Note Agreement.

"Inventory Turnover" shall mean, at a particular date, the "Cost of Sales" as disclosed on the Company's year-to-date consolidated statements of income divided by the "Merchandise Inventory" amount set forth on the Company's consolidated balance sheets for such date.

"Letters of Credit" shall mean any and all commercial letters of credit and standby letters of credit, including any and all Subsidiary Letters of Credit, issued by the Bank for the account of the Companies hereunder under the terms of any Application.

"Letter of Credit Commitment" shall mean the Bank's Pro Rata Share of $1,000,000.

"Letter of Credit Outstandings" shall mean, at a particular time, the sum of the amount then available to be drawn under any Letters of Credit then outstanding plus the amounts of any drawings on any Letters of Credit honored by the Bank, which have not been reimbursed by the Companies.

"Letter of Credit Termination Date" shall mean the first Business Day which falls on or after the date which is 30 days prior to the Termination Date.

"Loans" shall mean any advance made by the Bank to or for the benefit of the Company under the terms and conditions of this Agreement including the amounts of any drawings on any Letters of Credit honored by the Bank, which have not been reimbursed by the Companies. "Loan Documents" shall mean any and all of the Agreement, the Note, any Application, any agreements or documents referred to in Section 3 hereof and all other documents and instruments executed in connection herewith.

"Material Asset Sale" shall mean a sale of Property of the Company or its Subsidiaries in one or more of a series of related transactions, other than sales of inventory in the ordinary course of the Company's business or in connection with store closings, resulting in Net Asset Sale Proceeds equal to or greater than $500,000.00.

"Multiemployer Plan" shall mean a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

"Net Asset Sale Proceeds" shall mean, with respect to any asset sale, the fair market value of the aggregate amount of consideration received by the Company or any Subsidiary, as the case may be, from such asset sale, after (a) provision for all income or other taxes payable as a result of such asset sale and (b) payment of all brokerage commissions and other reasonable fees and expenses related to such asset sale. For purposes of this definition, the fair market value of non-cash consideration shall be determined in good faith by the Board of Directors of the Company.

"Note Agreement" shall mean that certain Amended and Restated Note Agreement, dated the date hereof, among the Company and the insurance companies listed as purchasers thereof.

"Note Agreement Debt" shall mean the indebtedness outstanding, not to exceed $47,500,000, in respect of the Note Agreement.

"Note" shall mean the promissory note and all attachments thereto described in Section 2.2 hereof.

"Participants" shall have the meaning set forth in Section 8.1(b) hereof.

"PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA.

"Permitted Holder" shall mean Robert J. Higgins, his spouse, any of his children and his estate, heirs and legal representatives, and any bona fide trust of which one or more of the foregoing are the sole beneficiaries and over which one or more of the foregoing acts as trustee and possesses the power to direct the management thereof.

"Person" shall mean an individual, partnership, corporation, business trust, joint stock company trust, unincorporated association, joint venture, government authority or other entity of whatever nature.

"Plan" shall mean at any particular time, any employee benefit plan which is covered by ERISA and in respect of which the Company or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA.

"Preferred Stock" shall mean, with respect to any Person, any class or classes of capital stock (however designated) which is preferred as to the payment of dividends or distributions or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over any other class of capital stock of such Person.

"Prime Rate" shall mean the fluctuating rate of interest publicly announced by the Bank at its principal office from time to time as its Prime Rate, which Prime Rate is not intended to be the lowest rate of interest charged by the Bank to its borrowers.

"Property" shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.

"Real Property" has the meaning set forth in Section 4.11(a) hereto.

"Reorganization" shall mean, with respect to any Multiemployer Plan, the condition that such Plan is in reorganization within the meaning of such term as used in Section 4241 of ERISA.

"Reportable Event" shall mean any of the events set forth in Section 4043(b) of ERISA, other than those events as to which the 30-day notice period is waived under subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg. e 2615.

"Responsible Officer" shall mean with respect to any certificate, report or notice to be delivered or given hereunder or knowledge of any Default or Event of Default hereunder, unless the context otherwise requires, the president, chief executive officer, chief financial officer, principal accounting officer or treasurer of the Company or Record Town or other executive officer of the Company or Record Town who in the normal performance of his or her operational duties would have knowledge of the subject matter relating to such certificate, report or notice.

"Restricted Subsidiary" shall mean a Subsidiary,

(i) organized under the laws of the United States or a jurisdiction thereof;

(ii) which conducts substantially all of its business and has substantially all of its Property within the United States; and

(iii) a Subsidiary so designated by the Company.

"Significant Subsidiary" shall mean any Subsidiary that has, as of the balance sheet date for the Company's most recent fiscal quarter, in excess of $500,000 in Adjusted Tangible Assets.

"Single Employer Plan" shall mean any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan.

"Subsidiary" shall mean, as of any date, any corporation more than 50% of whose issued and outstanding Voting Stock (except directors' qualifying shares, if required by law) on such date is owned by the Company, directly or through one or more Subsidiaries.

"Subsidiary Letter of Credit" shall mean any commercial letters of credit or standby letters of credit issued by the Bank for the account of any Subsidiary.

"Subsidiary Letter of Credit Outstandings" shall mean at a particular time, the sum of the amount of any Subsidiary Letters of Credit then outstanding plus the amount of any drawings on any Subsidiary Letters of Credit honored by the Bank, which have not been reimbursed by the Subsidiary.

"Tangible Net Worth" of any Person shall mean, at any time, the amount by which (i) all amounts that would, in conformity with GAAP, be included in shareholders' equity on the balance sheets of such Person, exceeds (ii) the aggregate amount carried as assets on the books of such Person for (a) goodwill, licenses, patents, trademarks, unamortized debt discount and expense, and other intangibles as determined in conformity with GAAP, (b) cost of investments in excess of net assets at the time of acquisition by such Person, and (c) any write-up in the book value of any assets of such Person resulting from reevaluation thereof subsequent to the date hereof.

"Termination Date" shall mean July 31, 1996.

"Variable Rate" shall mean the rate equal to the sum of (x) the Prime Rate plus (y) 1.50%.

"Voting Stock" shall mean the shares of capital stock and any other securities of any Person entitled to vote generally for the election of directors of such Person or any other securities (including, without limitation, rights and options), convertible into, exchangeable into or exercisable for, any of the foregoing (whether or not presently exercisable, convertible or exchangeable).

Section 1.2 Use of Defined Terms. All terms defined in this Agreement shall have the defined meanings when used in the Note, certificates, reports or other documents made or delivered pursuant to this Agreement unless the context shall otherwise require.

Section 1.3 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP.

SECTION 2.

AMOUNT AND TERMS OF CREDIT

Section 2.1 The Commitment. (a) Subject to the terms and conditions of this Agreement, the Bank agrees to make Loans to the Companies and, at the sole discretion of the Bank, issue Letters of Credit for the account of the Company, or Subsidiary Letters of Credit for the account of a Subsidiary, at any time and from time to time during the Commitment Period in an aggregate principal amount equal to the Bank's Pro Rata Share of the Bank Outstandings at such time, but not exceeding the sum of $10,000,000.00 at any one time outstanding (herein, as the same shall be reduced from time to time pursuant to Section 2.6 hereof, called the "Commitment"). During the Commitment Period, the Companies may use the Commitment by borrowing, repaying and reborrowing and by having Letters of Credit issued on their behalf, or Subsidiary Letters of Credit issued on behalf of a Subsidiary, all in accordance with the terms and conditions of this Agreement. Notwithstanding anything to the contrary contained herein, the Commitment shall be reduced by any Letter of Credit Outstandings and all Loans made under this Agreement shall mature and be due and payable on the Termination Date.

(b) The credit agreement between the Bank and the Company dated June 11, 1993, as amended, and the Waiver Agreement dated as of January 31, 1995, as amended, are hereby terminated and/or amended and restated in their entireties as provided herein as of the date of this Agreement.

Section 2.2 The Note. The Company shall execute and deliver to the Bank a Note, substantially in the form annexed hereto as Exhibit "A" (the "Note"), with appropriate insertions therein. The Note shall be used to evidence such borrowing, repayment and reborrowing hereunder. The Note shall bear interest as follows:

(a) During the Commitment Period, each Loan shall bear interest on the unpaid principal amount thereof at a rate per annum equal to the higher of (i) 10.5% and (ii) the Variable Rate. Interest on Loans shall be payable monthly on the first Business Day of each month commencing on the first such date after a Loan is made and upon payment or prepayment in full of the unpaid principal amount thereof.

(b) If an Event of Default shall have occurred hereunder, and for so long as such Event of Default shall be continuing, the principal amount of Loans then outstanding shall thereafter bear interest at a rate per annum which is 2% above the rate which would otherwise be applicable pursuant to the terms of this Section 2.2.

Section 2.3 Letters of Credit. (a) The Company shall execute and deliver to the Bank an appropriate Application for issuance of any Letter of Credit in the form being used by the Bank at the time of any request to issue a Letter of Credit, with appropriate insertions therein (hereafter "Application"). Upon receipt thereof, the Bank, in its sole discretion, will issue a commercial Letter of Credit or standby Letter of Credit, as required, on behalf of the designated beneficiary for the account of the Company with the requested face amount and expiration date.

(b) Each Letter of Credit shall expire no later than the Letter of Credit Termination Date.

(c) Notwithstanding anything to the contrary contained herein, (I) the Letter of Credit Outstandings shall not exceed the Letter of Credit Commitment and (II) the sum of (i) the aggregate outstanding principal amount of the Loans plus (ii) the aggregate Letter of Credit Outstandings shall not exceed the lesser of (x) the Commitment and (y) the Bank's Pro Rata Share of the Bank Outstandings.

(d) The expiration of an undrawn Letter of Credit shall be deemed a repayment of Loans in an amount equal to the face amount of such expired Letter of Credit. If there is no default in existence at the time of such Letter of Credit expiration, the Company shall adjust its immediately following borrowings or repayments under the Credit Agreements to ensure that the share of the Bank Outstandings of each Bank and its respective assigns shall equal the percentage set forth on Schedule I hereto opposite such Bank's name. Whenever a Default exists under this Agreement, the Bank shall be obligated to purchase from each of the other Banks and their respective assigns participations in loans outstanding under each such Bank's respective Bank Credit Agreement in the amount necessary to ensure that after such purchases, the Banks' and their respective assigns respective share of the Bank Outstandings shall equal the percentage set forth on Schedule I hereto opposite such Bank's name. The Bank hereby agrees that upon the expiration of undrawn letters of credit issued by any of the other Banks at such time as a default is continuing under such Bank's Credit Agreement, the Bank will sell participations in the Loans to the other Banks and their respective assigns to the extent necessary to ensure that the respective share of the Bank Outstandings at such time of each Bank and its respective assigns shall equal the applicable percentage set forth on Schedule I hereto.

(e) The payment by the Bank of a draft drawn under any Letter of Credit or Subsidiary Letter of Credit shall constitute for all purposes of this Agreement the making of a Loan, in the amount of such draft.

Section 2.4 Notice of Borrowing. The Company shall give the Bank prior telephonic notice of the date and the amount of each borrowing pursuant to the Commitment no later than 1:00 p.m. on the borrowing date. On the date specified in such notice, the Bank will make the proceeds of such Loan available to the Companies by credit to an account of the Companies maintained with the Bank, in immediately available funds. Each borrowing pursuant to the Commitment shall be in an aggregate principal amount of $100,000 or any whole multiple thereof.

Section 2.5 Fees. (a) The Company agrees to pay to the Bank a commitment fee for the period from and including the date hereof to and including the Termination Date, computed at the rate of 1/4 of 1% per annum on the average daily unused portion of the Commitment in effect during the period for which payment is made; all Letter of Credit outstandings shall be included in calculating the used portion of the Commitment. Such commitment fee shall be payable to the Bank on the first Business Day of each August, November, February and May of each year, commencing on August, 1995, and ending on the Termination Date.

(b) The Company agrees to pay to the Bank all fees and customary and usual charges in connection with the Letters of Credit as required under the Applications.

Section 2.6 Termination or Reduction of Commitment. (a) The Company shall have the right, upon not less than three (3) Business Days prior written notice to the Bank, to terminate the Commitment in whole at any time, or to reduce the Commitment in part from time to time or to accelerate the Termination Date. Any termination of the Commitment shall be accompanied by payment in full of the unpaid principal amount of the Note, together with accrued interest thereon, and the payment of any commitment fee then accrued hereunder. Any acceleration of the Termination Date also shall be accompanied by the payment of any commitment fee then accrued hereunder and the deposit with the Bank of cash in the amount of all Letter of Credit Outstandings. All cash so deposited shall be used to reimburse the Bank for any amounts due to the Bank under any Letter of Credit which has been drawn upon after the acceleration of the Termination Date and not reimbursed by the Company. Any partial reduction in the Commitment shall be in an aggregate principal amount of $500,000 or a multiple thereof and shall reduce permanently the Commitment then in effect hereunder.

(b) On the dates set forth below, the Commitment shall be automatically reduced by the Bank's Pro Rata Share of the following amounts:

June 30, 1995 $2,678,571.43

January 31, 1996 $4,285,714.29

(c) Not more than two Business Days following the consummation of a Material Asset Sale, the Commitment shall be automatically reduced by an amount equal to the product of (i) the Net Asset Proceeds of such sale multiplied by (ii) a fraction, the numerator of which is 10 and the denominator of which is 140.

(d) In addition to, and without duplication of, the Commitment reductions required by Subsection (c) above and those occurring on June 30, 1995, January 31, 1996 and July 31, 1996, simultaneously with any payment of Insurance Company Debt, the Commitment shall be automatically reduced by an amount equal to the product of (i) the aggregate amount of such payment of Insurance Company Debt multiplied by (ii) a fraction, the numerator of which is 10 and the denominator of which is 65.

(e) All reductions and terminations of the Commitment and the respective commitments of the Other Banks shall be made concurrently such that the reduction of the Commitment shall be equal to the Bank's Pro Rata Share of the aggregate reduction of all the Banks' respective commitments made at such time.

(f) The Commitment once terminated or reduced may not be reinstated or increased.

Section 2.7 Prepayments. (a) The Company may prepay any Loan without premium or penalty in whole at any time or in any part from time to time. Partial prepayments of the Note shall be made in conjunction with prepayments of the notes held by the Other Banks such that the Bank's prepayment shall be in a principal amount equal to the Bank's Pro Rata Share of the aggregate amount of the partial prepayments made to the Banks at such time and shall be in the principal amount of $100,000 or multiples thereof together with payment of accrued interest thereon to the date of the prepayment.

(b) The Company shall notify the Bank of any prepayment no later than 12:00 noon on the date thereof.

(c) If, at any time whether before or after giving effect to any termination or reduction of the Commitment pursuant to Section 2.6, the sum of (i) the outstanding aggregate principal amount of the Loans and (ii) the Letter of Credit Outstandings exceeds the lesser of (x) the amount of the Commitment and (y) the Bank's Pro Rata Share of the Bank Outstandings, the Company shall pay or prepay Loans and, to the extent the Loans have been repaid in full, cash collateralize outstanding Letters of Credit, on the date of such termination or reduction in an aggregate principal amount equal to such excess, together with interest thereon accrued to the date of such payment or prepayment.

(d) The Company agrees that commencing December 15 of each Fiscal Year through the day the Company begins the clean-up required in subsection (e) below, the Company shall apply all cash and cash equivalents in excess of $10,000,000 ratably among the Banks in proportion to their respective commitments to reduce or cash collateralize the amounts outstanding under the Bank Credit Agreements.

(e) For a period of not less than 15 consecutive days during the period commencing on December 25 and ending on the last day of each Fiscal Year, the aggregate outstanding principal amount of Bank Outstandings shall be reduced to zero and any outstanding Letters of Credit shall be fully cash collateralized, provided, that subsequent to the last day of the Fiscal Year the Company shall be permitted to reborrow all amounts so used to cash collateralize outstanding Letters of Credit.

Section 2.8 Computation of Interest and Commitment Fee; Payments. Commitment fees, if any, and interest shall be calculated on the basis of a 360 day year for the actual days elapsed. Any change in the applicable interest rate on a Loan resulting from a change in the Prime Rate shall become effective as of the opening of business on the day on which such change in the Prime Rate shall become effective. All payments (including prepayments) by the Companies on account of principal and interest on Loans and the commitment fee hereunder shall be made to the Bank at its office located at One Chase Square, Rochester, New York 14643, in lawful money of the United States of America in immediately available funds. If any payment on a Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and interest thereon shall be payable at the then applicable rate during such extension. The Company hereby authorizes and directs the Bank to charge any account of the Company maintained at any office of the Bank with the amount of any such commitment fee, interest or principal when the same becomes due and payable under the terms of this Agreement, the Note, the Applications or any other document executed in connection herewith or therewith.

Section 2.9 Requirements of Law. (a) In the event of a change after the date hereof in any law, regulation, treaty or directive or in the interpretation or application thereof or compliance by the Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority, agency or instrumentality:

(i) does or shall subject the Bank to any tax of any kind whatsoever with respect to this Agreement, the Note, the Applications or any loans made hereunder, or changes the basis of taxation of payments to the Bank of principal, commitment fee, interest or any other amount payable hereunder (except for changes in the rate of any tax presently imposed on the Bank); or

(ii) does or shall impose on the Bank any other condition; and the result of any of the foregoing is to increase the cost to the Bank of issuing or maintaining any Letter of Credit or Subsidiary Letter of Credit or of making, renewing (or maintaining) advances or extensions of credit to the Companies or to reduce any amount receivable from the Companies thereunder then, in any such case, the Companies shall promptly pay to the Bank, upon its demand, any additional amounts necessary to compensate the Bank for such additional cost or reduced amount receivable which the Bank deems to be material as determined by the Bank with respect to this Agreement, the Note, the Letters of Credit issued hereunder or the Loans made hereunder. If the Bank becomes entitled to claim any additional amounts pursuant to this Section 2.9(a), it shall promptly notify the Companies of the event by reason of which it has become so entitled. A certificate setting forth calculations as to any additional amounts payable pursuant to the foregoing sentence submitted by the Bank to the Companies shall be conclusive in the absence of manifest error.

(b) If after the date hereof, the Bank shall have determined that the adoption or amendment of or change to or in any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) or any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Bank's capital as a consequence of its obligations hereunder to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies with respect to capital adequacy) by an amount deemed by the Bank to be material, then from time to time, within 15 days after demand by the Bank, the Companies shall pay to the Bank such additional amount or amounts as will compensate the Bank for such reduction. The Bank will promptly notify the Companies of any event of which it has knowledge, occurring after the date hereof, which will entitle the Bank to compensation pursuant to this Section 2.9(b). The Companies shall not be liable in respect of any reduced amount of any sum received or receivable by the Bank pursuant to this Section 2.9(b) with respect to any sums or fees payable hereunder or accrued by the Bank prior to the date that is 60 calendar days following the date of the notice to the Companies that is required hereunder, regardless of when such interest or fees are payable. Section 2.10 Use of Proceeds. (a) Neither of the Companies is engaged principally, nor as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any "margin stock" as such term or terms of similar purport and effect shall be defined in Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. No part of the proceeds of any borrowing hereunder will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. If requested by the Bank, the Company will furnish to the Bank a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in said Regulation U and to the foregoing effect. No part of the proceeds of the loans hereunder will be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation X of said Board of Governors.

(b) The proceeds of the Loans shall be used for general corporate purposes of the Companies.

SECTION 3.

CONDITIONS OF BORROWING

Section 3.1 Conditions of Effectiveness. The obligation of the Bank to make the initial loan hereunder shall be subject to the fulfillment of the following conditions precedent:

(a) Legal Opinions. There shall have been delivered to the Bank on the date of such Loan (i) an opinion of Matthew H. Mataraso, Esq., counsel to the Companies, in form and substance reasonably satisfactory to the Bank, dated the date hereof, to the same effect as Sections 4.1, 4.2, 4.3, 4.4 and 4.5 hereof and to the further effect that this Agreement, the Guarantees, and the Note have been duly authorized, executed and delivered by a duly authorized officer of the Companies and the Guarantors respectively, and (ii) an opinion of Jones, Day, Reavis & Pogue, special counsel to the Companies, in form and substance reasonably satisfactory to the Bank, dated the date hereof, to the effect that this Agreement, the Guarantees, and the Note constitute valid obligations of the Companies and the Guarantors respectively, are legally binding upon them and enforceable (except as may be limited by any applicable bankruptcy, reorganization, insolvency, moratorium or other similar law affecting creditors' rights generally and general equitable principles) in accordance with their terms.

(b) Corporate Proceedings. Each of the Companies shall have furnished to the Bank (in form and substance satisfactory to the Bank) a copy, certified by an appropriate officer of each of the Companies on the date of such loan, of the resolutions of the Board of Directors of each of the Companies authorizing all borrowings herein provided for and the execution, delivery and performance of this Agreement, the Note and any other documents required to be executed in connection herewith.

(c) Subsidiary Guarantee. Media Logic shall have executed and delivered to the Bank the Guarantee, substantially in the form of Exhibit "B" annexed hereto and made a part hereof, of the prompt and unconditional payment of all present and future obligations and liabilities of the Companies to the Bank, accompanied by a copy (in form and substance satisfactory to the Bank) of the resolutions of the Board of Directors of such guarantor and certified by an appropriate officer of such guarantor, authorizing the execution, delivery and performance by such guarantor of the Guarantee and of the delivery of the same to the Bank.

(d) Additional Guarantees. In addition to the Guarantee of Media Logic as required pursuant to Section 3.1(c) hereof, the Company shall provide further guarantees to the Bank from Subsidiaries so that at all times including the date hereof Subsidiaries having in the aggregate Tangible Net Worth and Adjusted Tangible Assets which contribute at least 90% of the Consolidated Tangible Net Worth and Adjusted Tangible Assets, respectively, of the Company shall be either obligors or guarantors of the Loan. Furthermore, the Company will provide a guaranty from any Subsidiary having Tangible Net Worth and Adjusted Tangible Assets equal to 5% or more of the Consolidated Tangible Net Worth and Consolidated Adjusted Tangible Assets, respectively, of the Company.

(e) Insurance Company Restructuring Documents. The Companies shall have entered into the Insurance Company Restructuring Documents in form and substance satisfactory to the Bank.

(f) Payment of Fees and Expenses. The Company shall have paid to the Bank in immediately available funds a fee in an amount equal to $25,000.00 and all expenses incurred by the Bank in connection herewith including, without limitation, the reasonable fees and expenses of Wachtell, Lipton, Rosen & Katz and Policano and Manzo incurred in connection herewith.

(g) Interest on Existing Notes. The Company shall have paid to the Bank all accrued interest on amounts outstanding under its Existing Credit Agreement to (but not including) the Effective Date at the Variable Rate, and additional interest on such outstanding amounts for the period from April 28, 1995 to (but not including) the Effective date at a rate equal to the excess, if any, of the rate which would have been payable on the Note pursuant to Section 2.2(a) if the Note had been outstanding at all times from and after April 28, 1995, and the Variable Rate.

Section 3.2 Conditions of All Loans. The obligation of the Bank to make any Loan to be made by it or issue any Letter of Credit hereunder shall be subject to the following conditions precedent:

(a) Representations and Warranties; No Default. The representations and warranties contained in Section 4 hereof shall be true and correct on the date of the making of such Loans or issuing such Letters of Credit, and no Default or Event of Default shall have occurred and be continuing on such date. Each borrowing by the Company or issuance of a Letter of Credit hereunder shall constitute a representation by the Company as of the date of each such borrowing that the conditions contained in the foregoing sentence have been satisfied and the Company is not aware of any condition which, after notice or lapse of time or both, could become a Default or Event of Default.

(b) Legal Matters. All other instruments and legal and corporate proceedings in connection with the transactions contemplated by this Agreement shall be satisfactory, in form and substance to the Bank and its counsel, and counsel to the Bank shall have received copies of all documents which it may have reasonably requested in connection therewith.

SECTION 4.

REPRESENTATIONS AND WARRANTIES

In order to induce the Bank to enter into this Agreement and to make the Loans or issue Letters of Credit herein provided for, each of the Companies hereby represents and warrants to the Bank that:

Section 4.1 Corporate Existence. The Companies and each Subsidiary is organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power to own its assets and to transact the business in which it is presently engaged, and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification.

Section 4.2 Corporate Power and Authorization. The Companies have the corporate power, authority and legal right to make, deliver and perform this Agreement, the Applications and the Note and to borrow hereunder and have taken all necessary corporate action to authorize the borrowings on the terms and conditions of this Agreement, the Applications and the Note. No consent of any other party (including stockholders of the Companies), and no consent, license, approval or authorization of, or registration or declaration with, any governmental authority, bureau or agency is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement, the Applications or the Note with respect to the Companies. This Agreement is, and the Note when delivered hereunder will be, legal, valid and binding obligations of the Companies enforceable against the Companies in accordance with their respective terms.

Section 4.3 No Legal Bar to Loans. The execution, delivery and performance of this Agreement, the Applications and the Note by the Companies, will not violate any provision of any existing law or regulation or of any order or decree of any court or governmental instrumentality, or of the respective Certificates of Incorporation or By-Laws of the Companies, or of any mortgage, indenture, contract or other agreement to which either of the Companies is a party or by which the Companies and any of their properties or assets may be bound, and will not result in the creation or imposition of any lien, charge or encumbrance on, or security interest in, any of its properties pursuant to the provisions of such mortgage, indenture, contract or other agreement.

Section 4.4 No Material Litigation. No litigation or administrative proceedings of or before any court, tribunal or governmental body is presently pending, or, to the knowledge of the Companies, threatened against the Company or any Subsidiary or any of its or their properties or with respect to this Agreement, the Applications or the Note, which, if adversely determined, would, in the opinion of the Company, have a material adverse effect on the business, assets or financial condition of the Company or such Subsidiary.

Section 4.5 No Default. The Companies are not in default in any material manner in the payment or performance of any of their respective obligations or in the performance of any material contract, agreement or other instrument to which either is a party or by which either of the Companies or any of their assets may be bound, and no Default hereunder has occurred and is continuing. Section 4.6 Ownership of Properties; Liens. The Company and each Subsidiary has good and marketable title to all of their respective properties and assets, real and personal, and none of such properties and assets are subject to any mortgage, lien, pledge, charge, encumbrance, security interest or title retention or other security agreement or arrangement of any nature whatsoever other than Permitted Liens and except as listed on Schedule II hereto.

Section 4.7 Taxes. The Company and each Subsidiary has filed or caused to be filed all tax returns which to the knowledge of the Company are required to be filed, and has paid all taxes shown to be due and payable on said returns or on any assessments made against them (other than those being contested in good faith by appropriate proceedings for which adequate reserves have been provided on the books of the Company or its Subsidiary, as the case may be), and no tax liens have been filed and, to the best knowledge of the Company, no material claims are being asserted with respect to any taxes.

Section 4.8 Financial Condition. The consolidated balance sheet of the Company and its Subsidiaries as of January 28, 1995 and the related statements of income, retained earnings and cash flow for the fiscal period ended on said date, heretofore furnished to the Bank, present fairly the consolidated financial condition of the Company and its Subsidiaries, taken as a whole, as of the date of said balance sheet, and the consolidated results of their operations for such period. All such financial statements have been prepared in accordance with GAAP applied on a basis consistent with that of the preceding year, and since the date of the financial statement mentioned above, there has been no material adverse change in the condition, financial or otherwise, of the Company and such Subsidiaries, taken as a whole, from that shown by said statement as of said date. Neither the Company nor any of its Subsidiaries had any material obligation, liability or commitment, direct or contingent, which is required by GAAP to be disclosed and is not reflected in the foregoing consolidated statements (and the related notes thereto) as of said date.

Section 4.9 Filing of Statements and Reports. The Company and each Subsidiary has filed copies of all statements and reports which, to the knowledge of the Company, are required to be filed with any governmental authority, agency, commission, board or bureau.

Section 4.10 ERISA. No Reportable Event has occurred during the immediately preceding six-year period with respect to any Plan, and each Plan has complied and has been administered in all material respects with applicable provisions of ERISA and the Code. The present value of all benefits vested under each Single Employer Plan maintained by the Company or any Commonly Controlled Entity (based on those assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed the value of the assets of such Plan allocable to such vested benefits. Neither the Company nor any Commonly Controlled Entity has during the immediately preceding six-year period had a complete or partial withdrawal liability from any Multiemployer Plan and neither the Company nor any Commonly Controlled Entity would become subject to any liability under ERISA if the Company or any Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the most recent valuation date applicable thereto. Neither the Company nor any Commonly Controlled Entity has received notice that any Multiemployer Plan is in Reorganization or Insolvent nor, to the best knowledge of the Company, is any such Reorganization or Insolvency reasonably likely to occur. The present value (determined using actuarial and other assumptions which are reasonable in respect of the benefits provided and the employees participating) of the liability of the Company and each Commonly Controlled Entity for post retirement benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section (1) of ERISA) does not, in the aggregate, exceed the assets under all such Plans allocable to such benefits.

Section 4.11 Environmental Matters. (a) To the best knowledge of the Company, none of the real property owned or leased at 38 Corporate Circle, Albany, New York, by the Company or any Subsidiary (such Property, the "Real Property") contains, or has previously contained, any hazardous or toxic waste or substances or underground storage tanks.

(b) To the best knowledge of the Company, the Real Property is in compliance with all applicable federal, state and local environmental standards and requirements affecting such Real Property, and there are no environmental conditions which could interfere with the continued use of the Real Property.

(c) Neither the Company nor any Subsidiary has received any notices of violations or advisory action by regulatory agencies regarding environmental control matters or permit compliance.

(d) Hazardous waste has not been transferred from any of the Real Property to any other location which is not in compliance with all applicable environmental laws, regulations or permit requirements. (e) With respect to the Real Property, there are no proceedings, governmental administrative actions or judicial proceedings pending or, to the best knowledge of the Company or any Subsidiary, contemplated under any federal, state or local law regulating the discharge of hazardous or toxic materials or substances into the environment, to which the Company or any Subsidiary is named as a party.

Section 4.12 Insurance. All policies of insurance of any kind or nature maintained by or issued to the Company or to any Subsidiaries, including, without limitation, policies of life, fire, theft, product liability, public liability, property damage, other casualty, employee fidelity, worker's compensation, employee health and welfare, title, property and liability insurance, are in full force and effect in all material respects and are of a nature and provide such coverage as is sufficient and as is customarily carried by companies of similar size and character.

Section 4.13 Insurance Debt Restructuring Documents. (a) The Company has delivered to the Bank true, complete and correct copies of each of the Insurance Debt Restructuring Documents (including all exhibits, schedules and disclosure letters referred to therein or delivered pursuant thereto, if any) and all amendments thereto, waivers relating thereto and other side letters or agreements affecting the terms thereof. None of such documents and agreements has been amended or supplemented, nor have any of the provisions thereof been waived, except pursuant to a written agreement or instrument which has heretofore been consented to by the Bank and no consent or waiver has been granted by the Company or any Subsidiaries thereunder. Each of the Insurance Debt Restructuring Documents has been duly executed and delivered by the Company and, to the best of the Company's knowledge, by each other party thereto and is a legal, valid and binding obligation of the Company, and, to the best of the Company's knowledge, of each other party thereto, enforceable, in all material respects, in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the rights of creditors generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).

(b) The representations and warranties of the Company, any Subsidiary and each other party to the Insurance Debt Restructuring Documents are, to the best of the Company's knowledge, true and correct in all material respects on the date hereof as if made on and as of such date. Such representations and warranties, together with the definitions of all defined terms used therein, are by this reference deemed incorporated herein mutatis mutandis, and each Bank is entitled to rely on the accuracy of such representations and warranties.

(c) To the best of the Company's knowledge, each party to the Insurance Debt Restructuring Documents has complied in all material respects with all terms and provisions contained therein on its part to be observed.

Section 4.14 Accuracy and Completeness of Information. All information, reports and other papers and data with respect to the Company and the Subsidiaries furnished to the Bank by the Companies, or on behalf of the Companies, were, at the time so furnished, complete and correct in all material respects, or have been subsequently supplemented by other information, reports or other papers or data, to the extent necessary to give the Bank a true and accurate knowledge of the subject matter in all material respects. All projections with respect to the Company and the Subsidiaries were prepared and presented in good faith by the Company based upon facts and assumptions that the Company believes to be reasonable in light of current and foreseeable conditions, it being recognized by the Bank that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. No document furnished or statement made in writing to the Bank by or on behalf of the Company in connection with the negotiation, preparation or execution of this Agreement contains any untrue statement of a material fact, or omits to state any such material fact necessary in order to make the statements contained therein not misleading, in either case which has not been corrected, supplemented or remedied by subsequent documents furnished or statements made in writing to the Bank.

Section 4.15 Labor Matters. There are no strikes pending or, to the Company's knowledge, threatened against the Company or any of the Subsidiaries which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on the Company's business taken as a whole. The hours worked and payments made to employees of the Company and the Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable requirement of law. All material payments due from the Company and the Subsidiaries, on account of wages and employee health and welfare insurance and other benefits have been paid or accrued as a liability on the books of the Company or such Subsidiary.

Section 4.16 Leaseholds, Permits, etc. Each of the Company and the Subsidiaries possesses or has the right to use, all leaseholds, easements, franchises and permits and all authorizations and other rights which are material to and necessary for the conduct of its business. Except for such noncompliance with the foregoing which could not reasonably be expected to have a material adverse effect, all the foregoing are in full force and effect, and each of the Company and the Subsidiaries, as the case may be, is in substantial compliance with the foregoing without any known conflict with the valid rights of others. No event has occurred which permits, or after notice or lapse of time or both would permit, the revocation or termination of any such leasehold, easement, franchise, license or other right, which termination or revocation, considered as a whole, could reasonably be expected to have a material adverse effect on the Company's business taken as a whole.

4.17 Subsidiaries. Schedule III to this Agreement correctly identifies:

(a) each of the Company's Subsidiaries, its jurisdiction of incorporation and the percentage of its Voting Stock owned by the Company and by each other Subsidiary, and

(b) each of the Company's Affiliates (other than Subsidiaries) and the nature of their affiliation.

The Company and each Subsidiary is the legal and beneficial owner of all of the shares of Voting Stock it purports to own of each Subsidiary, free and clear in each case of any Lien. All such shares have been duly issued and are fully paid and nonassessable.

Section 4.18 Existing Indebtedness. Schedule IV hereto correctly lists indebtedness for borrowed money of the Company and the Subsidiaries existing on the date hereof including all guarantees of the Company and the Subsidiaries of such indebtedness.

Section 4.19 Company Actions. Neither the Company, Record Town nor any other Subsidiary has taken any action or permitted any condition to exist which would have been prohibited by Section 6 if such Section had been binding and effective at all times during the period from January 28, 1995 to and including the Effective Date.

SECTION 5.

AFFIRMATIVE COVENANTS

The Companies hereby covenant that so long as the Note, or any amounts owed in connection with any Letters of Credit or otherwise remain outstanding and unpaid or so long as the Commitment remains unterminated, the Companies will, unless otherwise consented to in writing by the Bank:

Section 5.1 Financial Statements. Furnish to the Bank: (a) as soon as available, but in any event not later than 90 days after the close of each Fiscal Year, a copy of the annual audit report for such year for the Company and its Subsidiaries, including therein consolidated balance sheets of the Company and its Subsidiaries as of the end of such fiscal year, and related consolidated statements of income, retained earnings and cash flow of the Company and its Subsidiaries for such fiscal year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal period, all in reasonable detail, prepared in accordance with GAAP, such financial statements certified by independent certified public accountants of recognized standing selected by the Company;

(b) as soon as available, but in any event not later than 60 days after the end of each of the first three quarterly periods of each Fiscal Year, unaudited consolidated balance sheets of the Company and its Subsidiaries as at the end of such fiscal quarter, and unaudited consolidated statements of income, retained earnings and cash flow of the Company and its Subsidiaries for the period from the beginning of such fiscal year to the end of such fiscal quarter, setting forth in comparative form the corresponding figures for the preceding fiscal period, all in reasonable detail, prepared in accordance with GAAP and certified by the chief financial officer of the Company (subject to normal year-end audit adjustment);

(c) concurrently with the delivery of the financial statements referred to in clause (a) above, the accountant's management letter and a certificate of such independent certified public accountants stating that in making the examination necessary for certifying such financial statements no knowledge was obtained of any Events of Default or Defaults hereunder, except as specifically indicated;

(d) concurrently with the delivery of the financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer of the Company certifying, to the best of his knowledge, that there are no Events of Default or Defaults thereunder except as specifically indicated, together with a computation by such chief financial officer (which shall be in reasonable detail) that substantiates compliance with Sections 6.11, 6.12, 6.13, 6.14 and 6.27 of this Agreement; (e) promptly after the same are sent, copies of all financial statements and reports which the Company sends to its stockholders, and promptly after the same are filed, notification of all financial statements and reports which the Company may make to, or file with any governmental authority, agency, commission board or bureau and thereafter copies of such statements and reports as reasonably requested by the Bank;

(f) as soon as possible and in any event within 30 days after the Company knows or has reason to know of the following events: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan to which the Company has an obligation to continue or (ii) the institution of proceedings or the taking of any other action by the PBGC, the Company or any Commonly Controlled Entity, or any Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Plan the Company shall deliver to the Bank a certificate of the chief financial officer of the Company setting forth the details thereof and the action that the Company or the Commonly Controlled Entity proposes to take with respect thereto;

(g) promptly, such additional financial information as the Bank may from time to time reasonably request; and

(h) the monthly reports and other information listed on Exhibit C hereto.

Section 5.2 Payment of Obligations. Pay and discharge, and cause the Subsidiaries to pay and discharge, at or before maturity, all of their respective material obligations and liabilities, in accordance with normal business practices, including without limitation tax liabilities, except where the same may be contested in good faith, and will maintain, and cause the Subsidiaries to maintain, in accordance with GAAP, reserves for the accrual of any of the same.

Section 5.3 Maintenance of Properties; Insurance. Keep and cause the Subsidiaries to keep, all properties useful and necessary in the business of the Company and the Subsidiaries in good working order and condition; will maintain, and cause the Subsidiaries to maintain, with financially sound insurance companies, insurance on all their properties in such amounts, acceptable to the Bank, as the Companies deem proper in accordance with business practices against such risks as are usually insured in the same general area and by companies engaged in the same or similar business; and will furnish to the Bank, upon written request all information as to the insurance carried.

Section 5.4 Notices. Within five Business Days after a Responsible Officer obtains knowledge thereof, give notice in writing to the Bank of (a) the existence of any Default under this Agreement or the other Bank Credit Agreements, the Insurance Debt Restructuring Documents, or any Applications or under any other material instrument or agreement of the Company or any Subsidiary or the existence of any fact or circumstance which, after notice or lapse of time or both, could become a Default or an Event of Default, (b) any notice delivered to the Company, or any other action taken by, any of the Banks or the Noteholders with respect to a claimed default or event of default under any of the other Bank Credit Agreements or the Insurance Debt Restructuring Documents, (c) any litigation, proceeding, investigation or dispute which may exist at any time between the Company or any Subsidiary and any governmental regulatory body which might substantially interfere with the normal business operations of the Company or any Subsidiary, (d) all litigation and proceedings affecting the Company or any Subsidiary in which the amount involved is $500,000 or more and not covered by insurance or in which injunctive or similar relief is sought, (e) any material change in the credit and payment terms provided to the Company and the Subsidiaries by their principal suppliers, (f) a proposed Change of Control which the Company reasonably expects to occur and (g) the proposed closing date of each Material Asset Sale provided, however, that in no event shall such notice be provided less than 10 Business Days prior to the actual consummation thereof.

Section 5.5 Conduct of Business and Maintenance of Existence. Continue, and cause the Subsidiaries to continue, to engage in business of the same general type as now conducted by the Company and the Subsidiaries, and preserve, renew and keep in full force and effect their corporate existence and take all reasonable action to maintain their rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing herein contained shall prevent the Company or any Subsidiary from discontinuing a part of its business which is not a substantial part of the business of the Company or such Subsidiary, if such discontinuance is, in the opinion of the Board of Directors of the Company, in the interest of the Company and not disadvantageous to the Bank.

Section 5.6 Inspection of Property, Books and Records. Permit, and cause the Subsidiaries to permit, any representatives of the Bank to (a) visit and inspect any of their respective properties, (b) conduct an environmental audit of any of their respective properties and (c) examine and make abstracts from any of the books and records of the Company and any Subsidiary at any reasonable time and as often as may reasonably be desired.

Section 5.7 Hazardous Material. Indemnify the Bank against any liability, loss, cost, damage, or expense (including, without limitation, reasonable attorneys' fees) arising from (a) the imposition or recording of a lien by any local, state, or federal government or governmental agency or authority pursuant to any federal, state or local statute or regulation relating to hazardous or toxic wastes or substances or the removal thereof ("Cleanup Laws"); (b) claims of any private parties regarding violations of Cleanup Laws; and (c) costs and expenses (including, without limitation, reasonable attorneys' fees and fees incidental to the securing of repayment of such costs and expenses) incurred by the Bank in connection with the removal of any such lien or in connection with compliance by the Bank with any statute, regulation or other issued pursuant to any Cleanup Laws by any local, state or federal government or governmental agency or authority.

Section 5.8 Subsidiary Guarantees. Subject to the terms of Section 3.1(d), cause any Subsidiary acquired after the date hereof to execute and deliver to the Bank a guarantee substantially in the form of the Guarantee annexed hereto as Exhibit "B," within ten days after the acquisition thereof, together with certified copies of the resolutions of the Board of Directors of such Subsidiary authorizing the execution, delivery and performance thereof with appropriate shareholder consents or approvals attached.

Section 5.9 Compliance with Law. Not be in violation of any laws, ordinances, orders, judgments or decrees or governmental rules and regulations to which it is subject and will not fail to maintain any licenses, permits, franchises or other governmental authorizations necessary to the ownership of its Properties or to the conduct of its business, if such violation or failure to maintain might reasonably be expected to materially adversely affect the Properties, business, prospects, operating results or condition (financial or otherwise) of Record Town or the Company and its Subsidiaries, taken as a whole.

Section 5.10 Maintenance of Office. The Company and Record Town each will maintain an office in the state of New York where notices, presentations and demands in respect of this Agreement or the Notes may be made upon it. Such offices shall be maintained at 38 Corporate Circle, Albany, New York 12203 until such time as the Company shall notify the Bank of a change of location.

Section 5.11 Quarterly Meetings. Within thirty (30) days after the end of each fiscal quarter of the Company, Robert J. Higgins, and such other representatives of the Company as the Banks may request, shall make themselves available at a reasonably convenient location to meet with representatives of the Banks to discuss the Company's budget, business plan and other finances and affairs of the Company, provided, however, that this requirement may be waived with respect to any quarter by the Banks holding not less than seventy-five percent (75%) of the Bank Outstandings.

SECTION 6.

NEGATIVE COVENANTS

The Companies hereby covenant that so long as the Note or any amounts owing in connection with the Letters of Credit or otherwise remain outstanding and unpaid or so long as the Commitment remains unterminated, the Companies will not, nor will they permit any Subsidiary to, directly or indirectly, without the prior written consent of the Bank:

Section 6.1 Limitation of Indebtedness. Create, incur, assume or suffer to exist, any indebtedness for borrowed money, or any indebtedness which constitutes the deferred purchase price of any property or assets, except (a) the Notes; (b) accounts payable (other than for borrowed money) incurred in the ordinary course of business as presently conducted provided that the same shall not be overdue or, if overdue, are being contested in good faith and by appropriate proceedings; (c) indebtedness between wholly-owned Subsidiaries and between any wholly-owned Subsidiary and the Company; (d) other indebtedness owing by the Company or any Subsidiary on the date of this Agreement and which was reflected on the balance sheet referred to in Section 4.8 hereof; (e) indebtedness to others incurred for the purpose of purchasing equipment, to the extent permitted by Section 6.4, used or useful in the ordinary course of the business of the Company or its Subsidiaries (provided that the aggregate amount of all such indebtedness shall not exceed $2,000,000 in any Fiscal Year); and (f) the Insurance Company Debt.

Section 6.2 Limitation on Liens. (a) Create, incur, assume or suffer to exist, any mortgage, pledge, lien, charge, security interest or encumbrance of any kind upon any of its property or assets, income or profits, whether now owned or hereafter acquired, except (i) the liens and security interests existing as of the date of this Agreement referred to in the financial statements referred to in Section 4.8 hereof, provided, however, that such liens and security interests shall not spread to cover other or additional indebtedness or property of the Company or any of its Subsidiaries; (ii) liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Company or such Subsidiary, as the case may be, in accordance with GAAP; (iii) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like liens arising in the ordinary course of business for sums which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings; (iv) pledges or deposits in connection with worker's compensation, unemployment insurance and other social security legislation; (v) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (vi) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company or the Subsidiaries; (vii) purchase money liens and security interests securing indebtedness permitted by Section 6.1(e) hereof, provided, however, that such liens and security interests shall not encumber any assets of the Company other than the equipment so purchased; and (viii) any rights of set off available to the Bank.

(b) In case any Property is subjected to a Lien in violation of Section 6.2(a), the Company will make or cause to be made provision whereby the Note will be secured equally and ratably with all other obligations secured thereby, and in any case the Note shall have the benefit, to the full extent that, and with such priority as, the holders may be entitled thereto under applicable law, or an equitable Lien on such Property securing the Note. Such violation of Section 6.2(a) shall constitute an Event of Default hereunder, whether or not any such provision is made pursuant to this Section 6.2(b).

Section 6.3 Limitation on Contingent Obligations. Assume, guarantee, indorse or otherwise in any way be or become responsible or liable for the obligations of any Person (all such transactions being herein called "guarantees"), whether by agreement to purchase or repurchase obligations, or by agreement to supply funds for the purpose of paying, or enabling such entity to pay, any obligations (whether through purchasing stock, making a loan, advance or capital contribution or by means of agreeing to maintain or cause such entity to maintain, a minimum working capital or net worth of any such entity, or otherwise), except (a) guarantees by indorsement of instruments for deposit or collection in the ordinary course of business; (b) existing guarantees in respect of existing indebtedness of Subsidiaries, provided that the indebtedness in respect of which such guarantees are given is permitted by Section 6.1 hereof; and (c) guarantees of the obligations of Subsidiaries (other than Record Town) under operating leases for retail locations used by the Company or any Subsidiary in the ordinary course of business provided that the aggregate exposure under such guarantees shall not exceed $1,000,000 at any time.

Section 6.4 Limitation on Capital Expenditures. Subject to Section 6.9 hereof, make capital expenditures not to exceed the following amounts in the following fiscal years:

Fiscal Year Amount ______

1995 $10,600,000 1996 6,000,000

Section 6.5 Prohibition of Fundamental Changes. Enter into any transaction of merger or consolidation or liquidate or dissolve itself (or suffer any liquidation or dissolution) or convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of related transactions, all or a substantial part of its property, business, or assets, including its accounts receivable, or stock or securities convertible into stock of any Subsidiary, except that: (a) any Subsidiary may be voluntarily liquidated, dissolved or merged into, or consolidated with, the Company (provided that the Company shall be the continuing or surviving corporation) or with or into any one or more wholly-owned Subsidiaries (provided that a wholly-owned Subsidiary shall be the continuing or surviving corporation and shall continue to be wholly-owned by the Company), and (b) any Subsidiary may sell, lease, transfer or otherwise dispose of any of its assets to the Company or to a wholly-owned Subsidiary.

Section 6.6 Limitations on Dividends and Stock Acquisitions. Declare or pay any dividends or make any other distribution (whether in cash or property) on any shares of its capital stock now or hereafter outstanding, or purchase, redeem, retire or otherwise acquire for value any shares of its capital stock or warrants or options therefor now or hereafter outstanding (all such dividends, distributions, purchases and other actions being hereinafter collectively called "Stock Payments") except that (a) a Subsidiary may make Stock Payments and (b) the Company may declare stock splits and pay dividends payable solely in shares of any class of its capital stock.

Section 6.7 Limitation on Investments, Loans and Advances. Make or suffer to exist any advances or loans to, or investments (by way of transfers of property, contributions to capital, acquisitions of stock, or securities or evidences of indebtedness, acquisitions of businesses or acquisitions of assets other than in the ordinary course of business, or otherwise) in, any person, firm, corporation or other business entity, except (a) investments in certificates of deposit issued by any of the Banks, provided, however, that such certificates of deposit shall have a maturity of one year or less from the date of purchase; (b) investments in direct obligations of the United

States of America or any agency thereof, or marketable obligations directly and fully guaranteed by the United States of America, or commercial paper, provided, however, that any such obligations or commercial paper shall have a maturity date of one year or less from the date of purchase and any such commercial paper is rated "A-1" by Standard & Poors Corporation (or has a similar rating by any similar nationally recognized organization which rates commercial paper) and provided further, however, that such investments shall be permitted solely at such times as there shall be no Loans outstanding under this Agreement and all Letters of Credit shall be fully cash collateralized; (c) investments in money market funds registered under the Investment Company Act of 1940 which invest in securities which are permitted under clause (b) above, provided, however, that such investments shall be permitted solely at such times as there shall be no Loans outstanding under this Agreement and all Letters of Credit shall be fully cash collateralized; and (d) loans and advances by the Company to, and investments by the Company in the stock of, any existing Subsidiary outstanding or in effect on the date hereof as set forth on Exhibit E; (e) stock or obligations issued in settlement of claims against any other person by reason of an event of bankruptcy or composition or readjustment of debt or reorganization of any debtor of the Company or any Subsidiary; (f) investments in financial instruments of the Bank; and (g) investments of new capital in licensed operations and joint ventures in specialty retailing in an aggregate amount not to exceed the sum of such investments made prior to the date hereof plus $5,000,000.

Section 6.8 Prohibition of Certain Prepayments. Without the prior written consent of the Bank, make any payments in any Fiscal Year in respect of the principal of any debt, with a maturity of more than one year, for borrowed money or for the deferred purchase price of property or services, except at the stated maturity of the Insurance Company Debt or as required by mandatory prepayment provisions relating thereto; provided, however, that the Company shall be permitted to make additional prepayments of the Insurance Company Debt but only to the extent that any such payment of the Insurance Company Debt shall be accompanied by a reduction of the Commitment as provided in Section 2.6 hereof.

Section 6.9 Limitation on Leases. Enter into any agreement, or be or become liable under any agreement, for the lease, hire or use of any personal property entered into in the ordinary course of business which would cause (a) the sum of (x) the aggregate maximum amount of all obligations of the Company and its Subsidiaries pursuant to such agreements plus (y) the aggregate outstanding indebtedness permitted under Section 6.1(e) hereof to exceed (b) $2,000,000 in any Fiscal Year. Anything contained in this Section 6.9 to the contrary notwithstanding, this provision shall not apply to retail store leases or leases required to be capitalized under generally accepted accounting principles.

Section 6.10 Limitation on Sale and Leaseback. Enter into any arrangement with any Person whereby the Company or any Subsidiary shall sell or transfer any personal property, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which the Company or such Subsidiary intends to use for substantially the same purpose or purposes as the property being sold or transferred.

Section 6.11 Limitation on Current Ratio. Permit the ratio of current assets to current liabilities of the Company to be less than 1.4 to 1.0 at the end of each of the first, second and fourth quarterly periods of each Fiscal Year and 1.25 to 1.0 at the end of the third quarterly period of each Fiscal Year, excluding for purposes of such computation of current liabilities, the Aetna Debt and the Note Agreement Debt. For all calculations herein, the actual cash balance of the Company shall be reduced by the amount in excess of $10,000 per retail store actually open for business on the date of such computation. Such excess shall be applied to reduce accounts payable in the pro forma computation of the Current Ratio under this Section 6.11.

Section 6.12 Maintenance of Consolidated Tangible Net Worth. Permit the Consolidated Tangible Net Worth to be less than an amount equal to $103,000,000 at the end of each of the first three quarterly periods of each Fiscal Year and $112,000,000 at the end of each Fiscal Year.

Section 6.13 Limitation on Debt to Consolidated Tangible Net Worth. Permit the ratio of (a) total liabilities to (b) Consolidated Tangible Net Worth to exceed (i) 2.15 to 1.0 at the end of any Fiscal Year; (ii) 2.3 to 1.0 as of the end of the first quarterly period of any Fiscal Year; (iii) 2.5 to 1.0 as of the end of the second quarterly period of any Fiscal Year; or (iv) 3.0 to 1.0 as of the end of the third quarterly period of any Fiscal Year. For all calculations herein, the actual cash balance shall be reduced by the amount in excess of $10,000 per retail store actually open for business on the date of such computation. Such excess shall be applied to reduce accounts payable in the pro forma computation of Debt to Consolidated Tangible Net Worth under this Section 6.13.

Section 6.14 Limitation on Inventory Turnover. Permit Inventory Turnover to fall below the following amounts at the end of the following quarterly periods of each Fiscal Year:

Fiscal Quarter Amount ______first .3 second .6 third .7 fourth 1.4

Section 6.15 No Amendment of Debt Instruments. Amend, modify or supplement or permit or consent to any amendment, modification or supplement of any of the terms of the other Bank Credit Agreements or the Insurance Debt Restructuring Documents (other than any such amendment, modification or change which would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon).

Section 6.16 Maintenance of Accounts. Maintain any cash balances or cash management accounts other than at one or more of the Banks, provided, however, that the Company may continue to maintain, in a manner consistent with past practices, existing store accounts at one or more other banks. Notwithstanding anything to the contrary contained in the preceding sentence, if another financial institution offers to provide cash management services to the Company on terms more favorable than those offered by the Banks, the Company shall provide the Banks with the opportunity to match such offer. If none of the Banks choose to match such offer, the Company shall be permitted to transfer its cash management account to the financial institution making such offer.

Section 6.17 Limitation on Transactions with Affiliates. Enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate (other than the Company or any wholly-owned Subsidiary) unless such transaction is (a) otherwise permitted under this Agreement, (b) in the ordinary course of the Company's or such Subsidiary's business and (c) upon fair and reasonable terms no less favorable to the Company or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate.

Section 6.18 Limitation on Changes in Fiscal Year. Permit the Fiscal Year of the Company to end on a day other than the Saturday closest to the last day of January or change the Company's method of determining fiscal quarters.

Section 6.19 Limitation on Lines of Business. Enter into any business, either directly or through any Subsidiary, except for those businesses in which the Company and its Subsidiaries are engaged on the date of this Agreement or which are reasonably related thereto.

Section 6.20 Minimum Consolidated EBITDA. Permit Consolidated EBITDA to be less than the following amounts for any of the following periods:

For the period from January 29, 1995 to April 29, 1995 ($1,000,000)

For the period from January 29, 1995 to July 29, 1995 ($2,000,000)

For the period from January 29, 1995 to October 28, 1995 ($2,000,000)

For the period from January 29, 1995 to February 3, 1996 $24,000,000

For the period from February 4, 1996 to May 4, 1996 ($1,000,000)

Section 6.21 Limitation on Material Asset Sales. Enter into a contract for or consummate a Material Asset Sale.

Section 6.22 Maintenance of Ownership. At any time fail to directly or indirectly own, free and clear of all Liens (except as otherwise permitted by Section 6.2(a)), 100% of the outstanding capital stock of Record Town.

Section 6.23 Tangible Net Worth of Record Town. Permit Record Town and Record Town's subsidiaries to maintain, at any time, Tangible Net Worth of less than $60,000,000 for each of the first three quarterly periods of each Fiscal Year and $70,000,000 at the end of each Fiscal Year.

Section 6.24 Tax Consolidation. File or consent to the filing of any consolidated income tax return with any Person other than a Subsidiary.

Section 6.25 Limitations on Preferred Stock. Issue, or permit Record Town or any other Restricted Subsidiary to issue, any Preferred Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) is exchangeable for debt at the option of the holder thereof on or prior to July 31, 2000.

Section 6.26 New Stores and Leases. (i) Open or permit any Restricted Subsidiary to open, any new store other than relocations and the 22 new stores, in each case, to the extent specifically provided for during the period from the Effective Date through July 31, 1996 in the Company's business plan as presented to the Banks on January 26, 1995, or (ii) enter or permit any Restricted Subsidiary to enter into any lease in connection with or for the purpose of opening any new store other than the 17 new leases specifically provided for during the period from the Effective Date through July 31, 1996 in the Company's business plan as presented to the Banks on January 26, 1995, provided, however, that in the ordinary course of business the Company and Record Town may enter into renewals of existing store leases.

Section 6.27 Fixed Charge Ratio. Maintain, at the end of each of the first, second and third quarterly periods of each Fiscal Year, Consolidated Income Available for Fixed Charges of less than 120% of Consolidated Fixed Charges for the immediately preceding 12 month period and, at the end of the Fiscal Year then ending, Consolidated Income Available for Fixed Charges of less than 115% of Consolidated Fixed Charges for the immediately preceding 12 month period.

SECTION 7.

EVENTS OF DEFAULT

Section 7.1 Events of Default. Upon the occurrence of any of the following:

(a) failure by the Companies to pay the principal of the Note or the principal amount of any obligations of the Companies in respect of any Letters of Credit, when due, or failure to pay any interest on the Note or any fee within five Business Days after any such interest or fee becomes due or failure to pay any other obligation of the Companies to the Bank when due, inclusive of any applicable grace or other cure period;

(b) if any representation or warranty made by the Companies in this Agreement or in any certificate, financial or other statement furnished at any time under or in connection with this Agreement shall prove to have been incorrect, untrue or misleading in any material respect when made;

(c) default by the Company in the observance or performance of any covenant or agreement contained in Section 5.1, Section 5.3, Section 5.4, Section 5.8, or Section 6 of this Agreement;

(d) default by the Company in the observance or performance of any other covenant or agreement contained in this Agreement and the continuance of the same for 30 days after notice of such default is given the Company by the Bank;

(e) if the Company or any Subsidiary shall (i) default in the payment of principal or interest on any obligation for borrowed money that has an outstanding balance of over $500,000 (other than the Note), or for the deferred purchase price of property that has an outstanding balance of over $500,000, in each case beyond the period of grace, if any, provided with respect thereto; (ii) default in the payment of principal or interest on any obligations for borrowed money or for the deferred purchase price of property, in each case beyond the period of grace, if any, if the aggregate principal amount of such obligations in default at any one time exceeds $2,000,000; or (iii) default in the performance or observance of any other term, condition or agreement contained in any such obligation or in any agreement relating thereto if the effect thereof is to cause or permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due prior to its stated maturity;

(f) (i) the Company or any of its Significant Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, or the Company or any of its Significant Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Company or any of its Significant Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above or seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its property, which case, proceeding or other action (x) results in the entry of any order for relief or (y) remains undismissed, undischarged or unbonded for a period of 45 days; or (iii) the Company or any of its Significant Subsidiaries shall take any action indicating its consent to, approval of, or acquiescence in, or in furtherance of, any of the acts set forth in its clause (i) or (ii) above; or (iv) the Company or any of its Significant Subsidiaries shall generally not, or shall be unable to, pay its debts as they become due or shall admit in writing its inability to pay its debts;

(g) (i) any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Bank, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Company or any Commonly Controlled Entity shall, or is, in the reasonable opinion of the Bank, likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could subject the Company or any of its Subsidiaries to any tax, penalty or other liabilities in the aggregate material in relation to the business, operations, property or financial or other condition of the Company;

(h) final judgment for the payment of money in excess of $500,000 (other than the insured claims) shall be rendered against the Company or any Significant Subsidiary and the same shall remain undischarged or unbonded for the period of 30 days during which execution of such judgment shall not be effectively stayed;

(i) default by any Guarantor upon its Guarantee of the Note pursuant to the terms thereof or if any such Guarantee shall cease to be in full force and effect or shall be declared to be null and void; or

(j) an Event of Default shall occur under any one or more of the Insurance Company Restructuring Documents whether or not such Event of Default is waived by Aetna or the Noteholders; or

(k) a Change of Control; then (i) if such event is an event specified in paragraph (f) above, then the Commitment shall immediately terminate and the Note and all obligations of the Company with respect to the Letters of Credit, together with accrued interest thereon shall be immediately due and payable without notice or demand and (ii) if such event is any other such event specified above the Bank may declare, by notice to the Companies, the Commitment immediately terminated and the Note, and all obligations of the Companies with respect to the Letters of Credit, to be forthwith due and payable, whereupon the Commitment shall be immediately terminated and the principal amount of the Note and all obligations of the Companies with respect to the Letters of Credit, together with accrued interest thereon and accrued fees, shall become immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived, anything contained herein, in the Note, or the Applications to the contrary notwithstanding. The Bank may exercise and enforce any and all other rights and remedies available to it, whether arising under this Agreement or the Notes or under applicable law, in any manner deemed appropriate by the Bank, including suit in equity, action at law, or other appropriate proceedings, whether for the specific performance (to the extent permitted by law) of any covenant or agreement contained in this Agreement or in the Notes or in aid of the exercise of any power granted in this Agreement or the Notes.

SECTION 8.

MISCELLANEOUS

Section 8.1 Limited Role of Bank. The relationship between the Companies and the Bank shall be solely that of borrower and lender, respectively. The Bank shall not have any fiduciary responsibilities to the Companies under the Loan Documents and no joint venture exists between the Companies and the Bank. The Companies and the Bank each hereby severally acknowledge that there are no representations, warranties, covenants, undertakings or agreements by the parties hereto as to the Loan Documents except as specifically provided herein and therein.

Section 8.2 Choice of Law Construction. The Loan Documents (other than those containing a contrary express choice of law provision) shall be construed in accordance with the internal laws (without reference to the law of conflicts) of the State of New York. If any provision of the Loan Documents shall be or become unenforceable or illegal under any law, the other provisions shall remain in full force and effect.

Section 8.3 Consent to Jurisdiction. (a) The Companies hereby irrevocably submit to the nonexclusive jurisdiction of any United States federal or New York State court sitting in New York City and/or Albany, New York in any action or proceedings arising out of or relating to any Loan or proceedings arising out of or relating to any Loan Documents and the Companies hereby irrevocably agree that all claims in respect of such action or proceedings may be heard and determined in any court and irrevocably waive any objection they may now or hereafter have as to the venue of any such action or proceeding brought in such a court or the fact that such court is an inconvenient forum.

(b) The Companies irrevocably and unconditionally consent to the service of process in any such action or proceedings in any of the aforesaid courts by the mailing of copies of such process to it, by certified or registered mail at its address specified in Section 8.5.

Section 8.4 WAIVER OF JURY TRIAL. THE BANK AND THE COMPANIES, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY RELATED INSTRUMENT OR AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY OF THEM. NEITHER THE BANK NOR THE COMPANIES SHALL SEEK TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE, ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY THE BANK OR THE COMPANIES EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY EACH OF THEM.

Section 8.5 Notices. (a) Except as otherwise provided in Section 2.4 hereof, all notices and other communications hereunder shall be in writing and shall be delivered or sent to the Companies at:

38 Corporate Circle Albany, New York 12203 Facsimile no. (518) 869-4819 Attention: Robert J. Higgins,

with a copy to

Matthew H. Mataraso 111 Washington Avenue Albany, New York 12210 Facsimile no. (518) 449-5812 and to the Bank at:

Chase Manhattan Bank, N.A. One Chase Square New York, NY 14643 Attention: Roger Odell, Vice President or to such other address as may be designated by the Companies or the Bank by notice to the other parties hereto. All notices and other communications shall be deemed to have been given at the time of actual delivery thereof to such address, or if sent by certified or registered mail, postage prepaid, to such address, on the third Business Day after the date of mailing, or, if sent by Federal Express or other recognized overnight deliver service, prepaid, to such address, on the Business Day following the date of deposit with such delivery service prior to such service's next day delivery deadline.

(b) Notice by the Companies to the Bank with respect to terminations or reductions of the Commitment pursuant to Section 2.6, requests for Loans pursuant to Section 2.4, and notices of prepayment pursuant to Section 2.7 shall be irrevocable and binding on the Companies.

(c) Any notice to be given by the Companies to the Bank pursuant to Section 2.4 may be given by telephone and all such notices shall be confirmed in writing in the manner provided in Section 8.5(a). Any such confirmation may be communicated to the Bank via facsimile at the number set forth in Section 8.5(a). Any such notice given by telephone shall be deemed effective upon receipt thereof by the party to whom such notice is to be given.

Section 8.6 Entire Agreement; No Waiver; Cumulative Remedies; Amendments; Setoff; Counterparts. (a) This Agreement and the other Loan Documents constitute the entire agreement among the parties hereto and thereto as to the subject matter hereof and thereof and supersede any previous agreement, oral or written, as to such subject matter.

(b) No failure to exercise and no delay in exercising, on the part of the Bank, any right, power or privilege hereunder or under the Note, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. No modification, or waiver of any provision of this Agreement, the Applications, or the Note, nor consent to any departure by the Company from the provisions hereof or thereof, shall be effective unless the same shall be in writing from the Bank and then such waiver or consent shall be effective only in the specific instance and for the purpose for which it is given. No notice to the Companies shall entitle the Companies to any other or further notice in other or similar circumstances unless expressly provided for herein. No course of dealing between the Companies and the Bank shall operate as a waiver of any of the rights of the Bank under this Agreement, the Applications or the Note.

(c) In addition to any rights or remedies of the Bank provided by law, upon the occurrence of any Event of Default, the Bank is hereby authorized, without notice to the Companies, to setoff and appropriate and apply all deposits (general and special) and other indebtedness at any time held or owing by the Bank to or for the credit or the account of the Companies against and on account of all obligations, liabilities and claims of the Companies to the Bank or any of the Other Banks, and in such amounts as the Bank may elect, although such obligations, liabilities and claims may be contingent or unmatured.

(d) This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument.

Section 8.7 Reference to Subsidiaries and Guarantors. If the Company has no Subsidiaries, and/or if there are no guarantors, then the provisions of this Agreement relating to Subsidiaries shall be deemed surplusage without affecting the applicability of the provisions of this Agreement to the Company alone.

Section 8.8 Captions. The captions of the various sections and subsections of this Agreement have been inserted only for the purposes of convenience, and shall not be deemed in any manner to modify, explain, enlarge or restrict any of the provisions of this Agreement.

Section 8.9 Exhibits and Schedules. The exhibits and Schedules hereto shall constitute integral parts of this Agreement.

Section 8.10 Payment of Fees. The Company agrees to pay all costs and expenses of the Bank in enforcing or preserving any of the rights and remedies available to the Bank under this Agreement, the Note, any Letters of Credit, any Applications, or under any other documents, instruments or writings executed and delivered to the Bank in connection herewith including, without limitation, reasonable legal fees, costs and disbursements.

Section 8.11 Survival of Agreements. All agreements, representations and warranties made herein and in any certificates delivered pursuant hereto shall survive the execution and delivery of this Agreement, the Note, and the making and renewal of Loans hereunder, and shall continue in full force and effect until such indebtedness of the Company under the Note has been paid in full.

Section 8.12 Successors and Assigns. (a) This Agreement shall be binding upon and inure to the benefit of the Companies and the Bank and their respective successors and assigns, except that the Companies may not transfer or assign any of their rights or interests hereunder without the prior written consent of the Bank.

(b) The Bank may, without the consent of the Company or the other Banks, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in the Loans, the Note, the Commitment or any other interest of the Bank hereunder and under the other Loan Documents ("Participations"); provided that (i) any such sale of participating interests must be in a minimum amount equal to the lesser of (A) $1,000,000 and (B) the Commitment then in effect, and (ii) after giving effect to any such sale, the Bank must have either (x) retained at least $1,000,000 of the Commitment not subject to any participating interests or (y) sold participating interests to Participants (or assignments to Assignees) in 100% of its Loans and the Commitment. In the event of any such sale by the Bank of a Participation, the Bank's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, the Bank shall remain solely responsible for the performance thereof, the Bank shall remain the holder of the Note for all purposes under this Agreement and the other Loan Documents, and the Companies shall continue to deal solely and directly with the Bank in connection with the Bank's rights and obligations under this Agreement and the other Loan Documents. Each of the Companies agree that if amounts outstanding under this Agreement and the Note are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement and any Note to the same extent as if the amount of its Participation were owing directly to it as the Bank under this Agreement of the Note. Each of the Parent and the Borrower also agrees that each Participant shall be entitled to the benefits of Section 2.9 with respect to its Participation in the Commitment and the Loans outstanding from time to time as if it were the Bank; provided, that no Participant shall be entitled to receive any greater amount pursuant to such Section than the Bank would have been entitled to receive in respect of the amount of the Participation transferred to such Participant had not such transfer occurred.

(c) The Bank may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time and from time to time, assign to either (1) any other bank or financial institution having capital surplus of at least $300,000,000 or (2) with the consent of the Company and each of the Other Banks, which consent shall not be unreasonably withheld or delayed, to any other Person (in each case, an "Assignee") all or any part of its rights and obligations under this Agreement and the Note; provided that (i) any such assignment must be in a minimum amount equal to the lesser of (x) $1,000,000 and (y) the Commitment, and (ii) after giving effect to any such assignment, the Bank shall have either (x) sold all its rights and obligations hereunder and under the Note or (y) retained at least $1,000,000 of the Commitment. The Bank shall notify the Company of each assignment and the identity of each Assignee. Upon notification to the Companies of an assignment, from and after the effective date of such assignment, (1) the Assignee thereunder shall be a party hereto and have the rights and obligations of the Bank hereunder with a Commitment as set forth therein and (2) the Bank shall, to the extent provided in such assignment, be released from its obligations under this Agreement (and, in the case of an assignment covering all or the remaining portion of the Bank's rights and obligations under this Agreement, the Bank shall cease to be a party hereto; provided that the provisions of Section 2.9 and Section 8.6 shall continue to benefit such assigning Lender to the extent required by such Sections).

(d) Each of the Companies authorizes the Bank to disclose to any Participant or Assignee (each, a "Transferee") and any prospective Transferee, any and all financial information in the Bank's possession concerning the Companies and their respective Affiliates which has been delivered to the Bank by or on behalf of the Companies pursuant to this Agreement or which has been delivered to the Bank by or on behalf of the Companies in connection with the Bank's credit evaluation of the Companies and their respective Affiliates prior to becoming a party to this Agreement.

(e) Nothing herein shall prohibit the Bank from pledging or assigning the Note to any Federal Reserve Bank in accordance with applicable law.

Section 8.13 Interest. Anything in this Agreement or in the Note to the contrary notwithstanding, the Bank shall not charge, take or receive, and the Companies shall not be obligated to pay, interest in excess of the maximum rate from time to time permitted by applicable law.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

(Corporate Seal)

TRANS WORLD ENTERTAINMENT CORP.

______By:______Attest Robert J. Higgins, President

(Corporate Seal) RECORD TOWN, INC.

______By:______Attest Robert J. Higgins, President CHASE MANHATTAN BANK, N.A.

______By:______Attest Name: Roger A. Odell Title: Vice President

5

THIS SCHEDULE CONTAINS DATA EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, AND THE CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.

0000795212 TRANS WORLD ENTERTAINMENT CORPORATION 1,000

Amount Item Description (in thousands, except per share data) ------ FEB-3-1996 JAN-29-1995 JUL-29-1995 6-MOS 8,248 0 0 0 207,640 238,119 176,137 88,041 331,573 150,909 66,327 0 0 97 109,165 331,573 216,204 216,204 141,235 141,235 84,646 0 7,319 (16,996) (6,781) 0 0 0 0 (10,215) (1.05) (1.05)