SECURITIES PURCHASE AGREEMENT Dated as of April 3, 2003

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Exhibit 10.2

FAO, INC.

Dated as of April 3, 2003

39,000 Shares

SERIES I CONVERTIBLE PREFERRED STOCK

TABLE OF CONTENTS

			Page
Section 1.		ISSUANCE OF SECURITIES	1
	Section 1.1.	Authorization	1
	Section 1.2.	Purchase and Sale of Securities; the Closing	1
	Section 1.3.	Subsequent Sale of Securities 2	1
	Section 1.4.	Representations of the Purchasers	2
Section 2.		REPRESENTATIONS OF THE COMPANY	4
	Section 2.1.	Organization and Authority of the Company	4
	Section 2.2.	Business, Properties and Other Information Regarding the Company	5
	Section 2.3.	Capital Stock	5
	Section 2.4.	Litigation; Observance of Statutes, Regulations and Orders	6
	Section 2.5.	Title to Property	6
	Section 2.6.	Taxes	7
	Section 2.7.	Compliance with Laws and Other Instruments of the Company	7
	Section 2.8.	Governmental Authorizations	7
	Section 2.9.	Licenses and Permits	7
	Section 2.10.	Compliance with ERISA	7
	Section 2.11.	Investment Company Act	8
	Section 2.12.	Environmental Compliance	8
	Section 2.13.	Maintenance of Insurance	9
	Section 2.14.	Labor Relations	9
	Section 2.15.	Assumptions or Guaranties of Indebtedness of Other Persons	9
	Section 2.16.	Disclosure	9
	Section 2.17.	Valid Issuance of Preferred and Common Stock	9
Section 3.		CONDITIONS OF CLOSING	9
	Section 3.1.	Proceedings Satisfactory	9
	Section 3.2.	Agreement Regarding Departments	9
	Section 3.3.	Representations True; Officer's Certificate	9
	Section 3.4.	Purchase Permitted by Applicable Laws	10
	Section 3.5.	Securities	10
	Section 3.6.	Registration Rights Agreement 11	10
	Section 3.7.	Shareholders Agreement	10
	Section 3.8.	Third-Party Consents	10
	Section 3.9.	Confirmation of Plan of Reorganization	10
	Section 3.10.	Total Investments	10
Section 4.		DEFINITIONS	10
	Section 4.1.	Definitions	10
	Section 4.2.	Accounting Terms	14
Section 5.		REGISTRATION, TRANSFER AND EXCHANGE OF SECURITIES; LOST SECURITIES	14
Section 6.		TAXES	15

Section 7.		LETTER CREDIT COMMITMENT	15
	Section 7.1.	LC Commitment	15
	Section 7.2.	Commitment Provisions	15
	Section 7.3.	Payments to Purchasers for Commitment	15
	Section 7.4.	Purchaser Compensation for LC Draws	15
	Section 7.5.	Limitations of Liability	16
	Section 7.6.	Cash Collateral	16
	Section 7.7.	ISP 98	16
	Section 7.8.	Agreements of LC Issuer	16
	Section 7.9.	Subordination to Outstanding Equipment Notes	16
Section 8.		MISCELLANEOUS	19
	Section 8.1.	Indemnification	19
	Section 8.2.	Expenses	19
	Section 8.3.	Amendments, Waiver and Consents	19
	Section 8.4.	Reliance on and Survival of Representations	19
	Section 8.5.	Successors	20
	Section 8.6.	Notices	20
	Section 8 .7.	Counterparts	20
	Section 8.8.	Governing Law	20
	Section 8.9.	Waiver of Jury Trial	20
	Section 8.10.	[Intentionally Omitted]	21
	Section 8.11.	Entire Agreement	21
	Section 8.12.	Exculpation Among Purchasers; Due Diligence	21
Schedules
SCHEDULE I—Purchasers			S-1
SCHEDULE 2.3—Capitalization			S-2
Exhibits
EXHIBIT A—Certificate of Designation			A-1
EXHIBIT B—Form of Preferred Stock Certificate			B-1
EXHIBIT C—Form of Registration Rights Agreement			C-1
EXHIBIT D—Form of Shareholders Agreement			D-1

FAO, INC.

SECURITIES PURCHASE AGREEMENT

Dated as of April 3, 2003

To each of the Purchasers
Listed on Schedule I hereto

Ladies and Gentlemen:

FAO, Inc., a Delaware corporation (the "Company"), hereby agrees with the Purchasers as follows:

Section 1. ISSUANCE OF SECURITIES.

Section 1.1. Authorization.

By the Initial Closing Date (as defined below), the Company will have duly authorized the issuance of 50,000 shares of its Series I Convertible Preferred Stock (the "Series I Preferred Stock") plus such shares as are issued by the Company in lieu of the payment of dividends thereon in cash. The Series I Preferred Stock shall have the rights, privileges and preferences set forth in a certificate of designation substantially in the form of Exhibit A.

As used herein, the term "Series I Preferred Stock" shall include all stock certificates originally issued pursuant to this Securities Purchase Agreement (the "Agreement") and all certificates delivered in substitution or exchange for any of such stock certificates or in lieu of the payment of dividends in cash and, where applicable, shall include the singular number as well as the plural. The Series I Preferred Stock issued to the Purchasers pursuant to this Agreement, and the certificates and other instruments from time to time evidencing the same, are herein sometimes collectively called the "Securities."

Section 1.2. Purchase and Sale of Securities; the Closing. The Company shall sell to the Purchasers and, subject to the terms and conditions hereof, the Purchasers shall purchase from the Company the Series I Preferred Stock, at an aggregate purchase price equal to the aggregate liquidation preference on the Series I Preferred Stock.

The closing (the "Initial Closing") of such purchase of the Securities shall be held at 2:00 p.m., Eastern time, on the Effective Date (the "Initial Closing Date"), at the principal executive office of the Company in King of Prussia, Pennsylvania, or at such other time or place as the parties hereto may mutually agree.

On the Initial Closing Date, the Company shall deliver to each Purchaser one or more certificates representing the Series I Preferred Stock set forth as being purchased by such Purchaser on Schedule I, registered in such Purchaser's name or in the name of such Purchaser's nominee in any denominations, all as such Purchaser may specify by notice delivered to the Company at least two days prior to the Initial Closing Date (or, in the absence of such notice, one certificate representing the Series I Preferred Stock, registered in such Purchaser's name), duly executed and dated the Initial Closing Date, against each Purchaser's delivery to the Company of immediately available funds in the amount of the purchase price.

Section 1.3 Subsequent Sale of Securities. If less than 39,000 shares of Series I Preferred Stock are sold at the Initial Closing, then, subject to the terms and conditions of this Agreement, the Company may sell the unsold remainder up to an aggregate of 39,000 shares of Series I Preferred Stock (as such, the "Remainder Shares") to such Persons as the Company may determine, on the same terms and conditions as those contained in this Agreement (the date of any such sale, a "Subsequent Closing Date" and such closing a "Subsequent Closing"). The purchasers of any Remainder Shares shall

become, by their purchase thereof, parties to this Agreement and the Registration Rights Agreement and shall acknowledge their obligations under this Agreement and the Registration Rights Agreement in a writing delivered to the Company.

On any Subsequent Closing Date, the Company shall deliver to each purchaser on such Subsequent Closing Date (a "Subsequent Purchaser") one or more certificates representing the Series I Preferred Stock purchased by such Subsequent Purchaser on such Subsequent Closing Date, registered in such Subsequent Purchaser's name or in the name of such Subsequent Purchaser's nominee in any denominations, all as such Subsequent Purchaser may specify by notice delivered to the Company at least two days prior to the Subsequent Closing Date (or, in the absence of such notice, one certificate representing the Series I Preferred Stock, registered in such Subsequent Purchaser's name), duly executed and dated the Subsequent Closing Date, against each Subsequent Purchaser's delivery to the Company of immediately available funds in the amount of the purchase price. The certificate or certificates provided to a Subsequent Purchaser shall accrue dividends from the date of issuance and shall have the same conversion rate as provided in the Series I Preferred Stock sold at the Initial Closing.

The Company agrees that if it sells any Remainder Shares on terms more favorable than those offered to the Purchasers in this Agreement (including but not limited to a more favorable price, greater registration rights or additional Company representations and warranties), then the Company shall enter into an amendment hereto giving the Purchasers equivalent terms. The Purchasers and the Company agree that the Agreement Regarding Licensed Departments and the exclusion of Saks Incorporated from the obligations of the Purchasers set forth in Section 7 hereof shall not be deemed to be more favorable terms for purposes of this Securities Purchase Agreement.

Section 1.4. Representations of the Purchasers. Each Purchaser represents and warrants to the Company that:

(a): Authorization.

Such Purchaser has full power and authority to enter into this Agreement, and that this Agreement, when executed and delivered, will constitute a valid and legally binding obligation of the Purchaser.

(b): Purchase Entirely for Own Account.

This Agreement is made with such Purchaser in reliance upon the Purchaser's representation to the Company, which by its execution of this Agreement such Purchaser hereby confirms, that the Securities to be purchased by such Purchaser will be acquired for investment for such Purchaser's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, such Purchaser further represents that such Purchaser does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities.

(c): Reliance Upon Purchasers' Representations.

Such Purchaser understands that the Securities are not registered under the Securities Act on grounds that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof, and that the Company's reliance on such exemption is predicated on such Purchasers' representations set forth herein. Such Purchaser realizes that the basis for the exemption may not be present if, notwithstanding such representations, such Purchaser has in mind merely acquiring the Securities

for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. Such Purchaser has no such intention.

(d): Investment Experience.

Such Purchaser represents that it is experienced in evaluating and investing in private placement transactions and acknowledges that it is able to fend for itself, can bear the economic risk of such Purchaser's investment, and has such knowledge and experience in financial and business matters that such Purchaser is capable of evaluating the merits and risks of the investment in the Securities. Such Purchaser also represents that it has not been organized for the purpose of acquiring the Securities.

(e): Accredited Investor.

(1) The term "Accredited Investor" as used herein refers to:

(i) A person or entity who is a director or executive officer of the Company;

(ii) Any bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934 as amended; any insurance company as defined in Section 2(13) of the Securities Act; any investment company registered under the Investment Company Act of 1940 as amended or a business development company as defined in Section 2(a)(48) of that act; any Small Business Investment Company licensed by the United States Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958 as amended; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 as amended, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are Accredited Investors;

(iii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940 as amended;

(iv) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

(v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of the purchase exceeds $1,000,000;

(vi) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

(vii) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment; or

(viii) Any entity in which all of the equity owners are Accredited Investors.

As used in this Section 1.4(e)(1), the term "net worth" means the excess of total assets over total liabilities. For the purpose of determining a person's net worth, the principal residence owned by an individual should be valued at fair market value, including the cost of improvements, net of current encumbrances. As used in this Section 1.4 (e)(1), "income" means actual economic income, which may differ from adjusted gross income for income tax purposes. Accordingly, the Purchaser should consider whether it should add any or all of the following items to the Purchaser's gross income for income tax purposes in order to reflect more accurately the Purchaser's actual economic income: any amounts attributable to tax-exempt income received, losses claimed as a limited partner in any limited partnership, deductions claimed for depletion, contributions to an ▇▇▇ or ▇▇▇▇▇ retirement plan, and alimony payments.

(2) Such Purchaser further represents to the Company that, except as otherwise disclosed to the Company in writing prior to such Purchaser's execution hereof, it is an Accredited Investor.

(f): Restricted Securities.

The Purchaser understands that the Securities may not be sold, transferred, or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Securities or an available exemption from registration under the Securities Act, the Securities must be held indefinitely. The Purchaser acknowledges that in connection with the purchase and sale of the Securities hereunder, the Purchaser and the Company will enter into a Registration Rights Agreement substantially in the form attached hereto as Exhibit C.

(g): Legends.

To the extent applicable, each certificate or other document evidencing any of the Securities shall be endorsed with the legends substantially in the form set forth below:

(1) The following legend:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE PROPOSED TRANSACTION DOES NOT REQUIRE REGISTRATION OR QUALIFICATION UNDER FEDERAL OR STATE SECURITIES LAWS, OR UNLESS THE PROPOSED TRANSACTION IS REGISTERED OR QUALIFIED AS REQUIRED.

THE SECURITIES, AND THE COMMON STOCK ISSUABLE UPON CONVERSION THEREOF, ARE SUBJECT TO THE PROVISIONS OF A SHAREHOLDERS AGREEMENT AMONG THE ISSUER AND THE ORIGINAL PURCHASERS OF THE SECURITIES.

(2) Any legend imposed or required by applicable state securities laws.

Section 2. REPRESENTATIONS OF THE COMPANY. The Company represents and warrants to each of the Purchasers as of the date hereof and as of the Closing Date that:

Section 2.1. Organization and Authority of the Company.

(a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite power and authority to own or hold under lease the property it purports to own or hold under lease and to transact the business it transacts and proposes to transact. The Company has all requisite power and authority to execute and deliver this Agreement, the Securities, and any other documents or agreements contemplated hereby and thereby, to perform its obligations hereunder and thereunder and to consummate the

transactions contemplated hereunder and thereunder. The Company is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which the character of the properties owned or held under lease by it or the nature of the business transacted by it requires such qualification except such jurisdictions, if any, in which the failure to be so qualified or in good standing will not have a Material Adverse Effect on the Company.

(b) The execution, delivery and performance of this Agreement, the Securities, and any other documents or agreements to which the Company is a party contemplated hereby and thereby, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized and approved by the Board of Directors and its Special Committee of Independent Directors. Each of this Agreement, the Securities, and any other document or agreement to which the Company is a party contemplated hereby or thereby has been (or on the Closing Date will have been) duly authorized, executed and delivered by, and each is (or, when duly executed and delivered on the Closing Date, will be) the valid and binding obligation of, the Company, enforceable in accordance with its terms, except as may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws or by legal or equitable principles relating to or limiting creditors' rights generally.

Section 2.2. Business, Properties and Other Information Regarding the Company.

(a) The Company has delivered to each of the Purchasers copies of the (i) audited report of the Company's independent accountants for the fiscal year ended February 2, 2002 containing balance sheets of the Company as of the last day of the fiscal year ended February 2, 2002, and the related statements of operations, shareholders' equity and cash flows of the Company for the fiscal year ended February 2, 2002 and (ii) the unaudited balance sheets and the related statements of operations, shareholders' equity and cash flows of the Company for the periods ended May 4, 2002, August 3, 2002 and November 2, 2002 (such financial statements being referred to collectively herein as the "Financial Statements").

The Financial Statements fairly present the financial position of the Company as of the respective dates of such balance sheets and the results of the Company's operations for the respective periods covered by such statements of operations, shareholders' equity and cash flows. The Financial Statements are true, accurate and complete in all material respects and have been prepared in accordance with GAAP consistently applied throughout the periods involved. Since November 2, 2002, the Company has continued to experience operating losses and has filed for reorganization under Chapter 11 of the federal Bankruptcy Code, as disclosed in the reports filed by the Company pursuant to the Exchange Act.

(b) As of their respective dates, neither the Financial Statements nor any certificate executed by the Company in connection with the transactions contemplated hereby and thereby, contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

Section 2.3. Capital Stock.

(a) The authorized capital stock of the Company on the Closing Date is expected to consist of approximately 500,000,000 shares of Common Stock (on a pre-split basis) and 5,000,000 shares of preferred stock (on a pre-split basis) ("Preferred Stock") with the exact numbers to be provided by a certificate of the Company on the Closing Date (the "Capital Stock Certification"). On the Closing Date, the Company expects that there will be outstanding such shares of Common Stock, shares of Series I Preferred Stock convertible into shares of Common Stock and warrants for the purchase of shares of Common Stock, all in the amounts with such conversion terms as are set forth in the Schedule 2.3 on a pre-split basis. All such shares of Common Stock and Preferred

Stock outstanding on the Closing Date will have been duly and validly issued and be fully paid and nonassessable.

(b) On the Closing Date, the Company will not have outstanding any capital stock or other securities convertible into or exchangeable for any of its capital stock or any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements (contingent or otherwise) providing for the issuance of, or any calls, commitments or claims of any character relating to, any of its capital stock or any securities convertible into or exchangeable for any of its capital stock, other than the capital stock noted in Sections 2.3(a) and 7.

(c) The Company does not have any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any of its capital stock or obligation evidencing the right of the holder thereof to purchase any of its capital stock, other than the Company's obligation to repurchase stock owned by an employee under the Company's Employee Stock Purchase Plan after such employee elects to withdraw from such plan. There is not in effect any agreement by the Company pursuant to which any holders of securities of the Company have a right to cause the Company to register such securities under the Securities Act, other than the registration rights set forth in the Registration Rights Agreement dated as of the date hereof with respect to Common Stock issuable upon conversion of the Series I Preferred Stock and certain other shares of Common Stock formerly subject to registration rights prior to the Bankruptcy Case Proceedings.

Section 2.4. Litigation; Observance of Statutes, Regulations and Orders.

(a) There are no actions, suits or proceedings pending or, to the best knowledge of the Company, threatened against or affecting the Company or any of its properties in any court or before any arbitrator of any kind or before or by any Governmental Body except the Bankruptcy Case Proceedings, litigation disclosed in the Company's Exchange Act Documents (as defined herein) and actions, suits or proceedings arising in the ordinary course of business which individually or in the aggregate, if adversely determined, would not have a Material Adverse Effect on the Company or materially adversely affect its ability to perform its obligations under this Agreement, the Securities, and any other document or agreement contemplated hereby or thereby. The Company may have an indemnification obligation with respect to a class action suit brought against its chief executive officer and two of its directors filed February 19, 2003 in the Eastern District of Pennsylvania but does not currently believe that such case will have a Material Adverse Effect on the Company.

(b) The Company is not in default under any order of any court, arbitrator or Governmental Body, or subject to or a party to any Order of any court or Governmental Body arising out of any action, suit or proceeding under any statute or other law respecting antitrust, monopoly, restraint of trade, unfair competition or similar matters. The Company is not in violation of any statute or other rule or regulation of any Governmental Body the violation of which would have a Material Adverse Effect on the Company or materially adversely affect its ability to perform its obligations under this Agreement, the Securities, and any other document or agreement contemplated hereby or thereby.

Section 2.5. Title to Property.

(a) The Company has good and marketable title to its real properties and good and merchantable title to each of its other properties as are reflected on the Financial Statements, except for personal property sold or otherwise disposed of in the ordinary course of business and personal property and leases disposed of through the Bankruptcy Case Proceedings. All properties of the Company are free and clear of all Liens, other than Permitted Liens.

(b) The Company enjoys full and undisturbed possession under all leases necessary in any material respect for the operation of its business (the "Leases"). None of the Company's Leases

contains any unusual or burdensome provisions which, individually or in the aggregate, are likely to materially impair the operation of the business of the Company. On the Closing Date, the Company's Leases will be valid and subsisting and in full force and effect, and there will be no existing material defaults by the Company or events that with notice or lapse of time or both would constitute material defaults by the Company under any of the Leases, except as may exist until cure payments are made in accordance with the Plan of Reorganization (as defined below).

Section 2.6. Taxes. The Company has filed all tax returns which are required to have been filed in any jurisdiction, and has paid all taxes shown to be due and payable on such returns and all other taxes and assessments payable by the Company to the extent the same have become due and payable and before they have become delinquent, except for any taxes and assessments the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company has set aside on its books reserves (segregated to the extent required by GAAP) deemed by it to be adequate. The Company knows of no proposed material tax assessment against the Company and in the opinion of the Company all tax liabilities are adequately provided for on the books of the Company.

Section 2.7. Compliance with Laws and Other Instruments of the Company. The consummation of the transactions contemplated by this Agreement and the execution, delivery and performance of the terms and provisions of this Agreement, the Securities, or any other document or agreement contemplated hereby or thereby will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company under, any material indenture, mortgage, deed of trust, bank loan or credit agreement, corporate charter, by-laws or other material agreement or instrument to which the Company is a party or by which the Company or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any Order of any court, arbitrator or Governmental Body applicable to the Company, or (iii) violate any provision of any statute or other rule or regulation of any Governmental Body applicable to the Company.

Section 2.8. Governmental Authorizations. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Body is required for the issuance of the Securities or the valid execution and delivery of the Securities or for the performance by the Company of this Agreement, the Securities, and any other documents or agreements contemplated hereby and thereby other than filings of Securities Act Form D and similar filings.

Section 2.9. Licenses and Permits. The Company possesses all licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names, or rights thereto, required to conduct its business substantially as now conducted and as currently proposed to be conducted, without known conflict with the rights of others.

Section 2.10. Compliance with ERISA.

(a) Neither the Company nor any Related Person (as defined below) has breached the fiduciary rules of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or engaged in any transaction in connection with which the Company or any Related Person could be subjected to a suit for damages, a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), in any such case which would be materially adverse to the Company. For purposes of this Section 2.10, a "Related Person" shall mean any trade or business, whether or not incorporated, which, together with the Company, would be treated as a single employer under Section 414 of the Code.

(b) Neither any employee pension benefit plan (as defined in Section 3(2) of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the

Company or any Related Person or with respect to which the Company or any Related Person is or has been obligated to contribute (a "Plan") nor any trust created under any Plan has been terminated within the meaning of Title IV of ERISA since September 2, 1974 under circumstances that could result in liability which could be materially adverse to the Company. Other than premiums due and owing in the normal course, no liability to the Pension Benefit Guaranty Corporation (the "PBGC") has been incurred and remains unsatisfied or is expected by the Company to be incurred with respect to any Plan by the Company or any Related Person which is or would be materially adverse to the Company. There has been no reportable event (within the meaning of Section 4043(b) of ERISA) or any other event or condition with respect to any Plan which presents a risk of termination of any such Plan by the PBGC under circumstances which in any case could result in liability which would be materially adverse to the Company.

(c) Neither the Company nor any Related Person has within the past six years contributed, or had any obligation to contribute, to a single employer plan that has at least two contributing sponsors not under common control or has ceased operations at a facility under circumstances which could result in liability under Section 4068(f) of ERISA.

(d) There is no multiemployer plan (within the meaning of Section 4001(a)(3) of ERISA) to which the Company or any Related Person is or has ever been obligated to contribute under Title IV of ERISA.

(e) No accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any Plan. Full payment has been made within the time required under Section 412 of the Code of all amounts that the Company or any of its Related Persons is required under the terms of each Plan and applicable law to have paid as contributions to such Plan as of the date hereof. Each Plan satisfies the minimum funding standard of Section 412 of the Code.

(f) Neither the Company nor any Related Person has engaged in any transaction that could result in the incurrence of any liabilities under Section 4069 or Section 4212 of ERISA.

(g) The Company is not a party in interest with respect to any employee benefit pension plan, except for the Company's Employee Stock Ownership Plan and 401(k) Plan and securities of the Company are not employer securities with respect to any employee benefit pension plan other than the above listed plans. For such purpose, the term "employee benefit pension plan" shall have the meaning assigned to such term in Section 3 of ERISA and the term "employer security" shall have the meaning assigned to such term in Section 407(d)(1) of ERISA. The execution and delivery of this Agreement, the Securities and any other agreements or instruments executed in connection herewith and therewith will not involve any transaction which is subject to the prohibitions of Section 406 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975 of the Code.

Section 2.11. Investment Company Act. The Company is not an investment company or a person directly or indirectly controlled by or acting on behalf of an investment company within the meaning of the Investment Company Act of 1940, as amended.

Section 2.12. Environmental Compliance. The Company has obtained and is in compliance with all permits, licenses, and other authorizations that are required under all Environmental Laws (as hereinafter defined), including laws relating to emissions, discharges, releases or threatened releases of contaminants into the environment (including, without limitation, ambient air, surface water, ground water or land) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of contaminants, except to the extent that failure to have any such permit, license or other authorization does not have a Material Adverse Effect on the Company.

Section 2.13. Maintenance of Insurance. The Company carries insurance covering its properties and business adequate and customary for the type and scope of the properties and business.

Section 2.14. Labor Relations. To the best knowledge of the Company, no material unfair labor practice complaint or sex, age, race or other discrimination claim has been brought during the last five years against the Company before the National Labor Relations Board, the Equal Employment Opportunity Commission or any other Governmental Body. During that period, the Company has complied in all material respects with all applicable laws relating to the employment of labor, including, without limitation, those relating to immigration, wages, hours and collective bargaining.

Section 2.15. Assumptions or Guaranties of Indebtedness of Other Persons. The Company has not assumed, guaranteed, endorsed or otherwise become directly or contingently liable (including, without limitation, liability by way of agreement, contingent or otherwise, to purchase, to provide funds for payment, to supply funds to or otherwise invest in the debtor or otherwise to assure the creditor against loss) on any Indebtedness of any other Person, other than its wholly-owned subsidiaries.

Section 2.16. Disclosure. The Company has provided or made available to Purchaser copies of its Annual Report on Form 10-K for the fiscal year ended February 2, 2002 (including all amendments thereto), and its quarterly reports on Form 10-Q for the periods ended May 4, 2002, August 3, 2002 and November 2, 2002, which include the Financial Statements (the "Exchange Act Documents"). Such documents are true, accurate and complete as of their respective dates in all material respects. Neither this Agreement, the Financial Statements, the Exchange Act Documents nor any other agreement, document, certificate or written statement furnished to the Purchasers by or on behalf of the Company in connection with the transactions contemplated hereby contains any untrue statement of a material fact.

Section 2.17. Valid Issuance of Preferred and Common Stock. The Series I Preferred Stock that is being purchased by the Purchasers hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws. The Common Stock issuable upon conversion of the Series I Preferred Stock being purchased under this Agreement has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Series I Preferred Stock, as set forth in the Certificate of Designation, will be duly and validly issued, fully paid, and nonassessable and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws.

Section 3. CONDITIONS OF CLOSING. Except as otherwise noted, each Purchaser's obligation to purchase and pay for the Securities to be purchased by such Purchaser on the Closing Date shall be subject to the satisfaction on or before the Closing Date of the conditions hereinafter set forth.

Section 3.1. Proceedings Satisfactory. All proceedings taken on or prior to the Closing Date in connection with the issuance of the Securities and the consummation of the transactions contemplated hereby and all documents and papers relating thereto shall be reasonably satisfactory in form and substance to the Purchasers, and they shall have received copies of such documents, papers, and certificates of officers of the Company, all in form and substance reasonably satisfactory to the Purchasers, as they may reasonably request in connection therewith.

Section 3.2. Agreement Regarding Licensed Departments. Solely with respect to the obligation of Saks, the Agreement Regarding Licensed Departments shall be effective and no substantive breach thereof shall have occurred.

Section 3.3. Representations True; Officer's Certificate. All representations and warranties of the Company contained in Section 2 shall be true in all material respects, in each case on and as of the

Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date; the Company shall have performed all agreements on its part required to be performed under this Agreement on or prior to the Closing Date; the Company shall not have consolidated with, merged into, or sold, leased or otherwise disposed of its properties as an entirety or substantially as an entirety to any Person; all conditions specified in Section 3 shall have been satisfied to the reasonable satisfaction of the Purchasers; and the Purchasers shall have received a certificate signed by the President or the principal financial officer of the Company, dated the Closing Date, certifying to the effect that all conditions specified in Section 3 shall have been satisfied.

Section 3.4. Purchase Permitted by Applicable Laws. The sale by the Company and the payment for the Securities to be purchased by the Purchasers (i) shall not be prohibited by any applicable law or governmental regulation, release, interpretation or opinion, (ii) shall not subject any Purchaser to any penalty under or pursuant to any applicable law or governmental regulation, and (iii) shall be permitted by the laws and regulations of the jurisdictions to which any Purchaser is subject.

Section 3.5. Securities. The Securities shall have been duly issued by the Company in the form attached as Exhibit B, with only such changes or additions as the Purchasers shall, in their reasonable judgment, require and all governmental charges payable in connection therewith shall have been paid (or payment shall have been provided for) in full, and shall be in full force and effect and no term or condition thereof shall have been amended, modified or waived without each Purchaser's prior written consent. A Certificate of Designation in substantially the form of Exhibit A shall have been filed with the Secretary of State of the State of Delaware and shall be effective.

Section 3.6. Registration Rights Agreement. The Company shall have entered into the Registration Rights Agreement substantially in the form set forth as Exhibit C hereto.

Section 3.7. Shareholders Agreement. The Company and each Purchaser shall have entered into the Shareholders Agreement substantially in the form set forth as Exhibit D hereto.

Section 3.8. Third-Party Consents. The Company shall have received all third-party and Governmental Body consents and waivers referred to in Section 2.8 above or otherwise necessary to permit consummation of the transactions contemplated hereunder.

Section 3.9. Confirmation of Plan of Reorganization. All of the conditions precedent to the Effective Date, as such term is defined in the First Amended Joint Plan of Reorganization of FAO, Inc., and its Debtor Subsidiaries pursuant to the Bankruptcy Case Proceedings (the "Plan of Reorganization"), shall have been satisfied in accordance with the terms of the Plan of Reorganization on or before May 15, 2003. The Plan of Reorganization shall not have been amended nor shall any condition to the Effective Date have been waived in any respect that materially adversely affects any Purchaser without, in each case, the written consent of such Purchaser.

Section 3.10. Total Investments. At least 27,000 shares of the Series I Preferred Stock shall have been issued to the Purchasers, and the Company shall have received at least $27 million in payment therefor.

Section 4. DEFINITIONS.

Section 4.1. Definitions. Except as otherwise specified or as the context may otherwise require, the following terms shall have the respective meanings set forth below whenever used in this Agreement:

"Affiliate" means a Person (i) that directly or indirectly controls, or is controlled by, or is under common control with, the Company, (ii) that beneficially owns ten percent (10%) or more of the Voting Stock of the Company, or (iii) ten percent (10%) or more of the Voting Stock (or in the case of a Person which is not a corporation, ten percent (10%) or more of the equity interest) of which is owned by the Company. 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.

"Agreement" has the meaning ascribed thereto in Section 1.1.

"Agreement Regarding Licensed Departments" means the Agreement Regarding Licensed Departments of even date with this Agreement between Saks and the Company.

"Bankruptcy Case Proceedings" means all proceedings and actions relating to the Chapter 11 Bankruptcy Case In re: FAO, Inc., a Delaware corporation, et al., Debtors, filed on January 13, 2003 in the U.S. Bankruptcy Court for the District of Delaware (Case No. 03-10119 (LK)).

"Board of Directors" means either the Board of Directors of the Company or any duly authorized committee of that board.

"Business Day" means any day other than a Saturday, Sunday or a day on which banks in the State of California are required or permitted to close.

"Capital Lease" means any lease of property that, in accordance with GAAP, should be capitalized on the lessee's balance sheet or for which the amount of the asset and liability thereunder, if so capitalized, should be disclosed in a note to such balance sheet; and "Capital Lease Obligation" means the amount of the liability with respect to a Capital Lease that should be so capitalized or disclosed.

"Closing" has the meaning ascribed thereto in Section 1.2.

"Closing Date" has the meaning ascribed thereto in Section 1.2.

"Code" has the meaning ascribed thereto in Section 2.10.

"Commission" means the Securities and Exchange Commission and any other similar or successor agency of the federal government administering the Securities Act and the Exchange Act.

"Common Stock" has the meaning ascribed thereto in Section 1.1.

"Commitment" means the liability of a Purchaser (other than Saks) to provide an LC pursuant to Section 7, which shall be in the same proportion that the number of shares of Series I Preferred Stock originally purchased by such Purchaser hereunder bears to (i) the total number of shares of Series I Preferred Stock sold hereunder minus (ii) the number of such shares sold to Saks.

"Company" means FAO, Inc., a Delaware corporation.

"Conversion Price" means the conversion price of the Series I Preferred Stock, as defined in Section IV.A.(i) of its Certificate of Designation.

"Effective Date" has the meaning ascribed thereto in Section 3.9.

"Environmental Law" or "Environmental Laws" mean any law or Order relating to the regulation or protection of human health, safety or the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes into the environment (including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes.

"ERISA" has the meaning ascribed thereto in Section 2.10.

"Exchange Act" means the Securities Exchange Act of 1934, as amended, and any similar or successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at any applicable time.

"Exchange Act Documents" has the meaning ascribed thereto in Section 2.16.

"Financial Statements" has the meaning ascribed thereto in Section 2.2.

"GAAP" means generally accepted accounting principles as in effect at the time of application to the provisions hereof.

"Governmental Body" means any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, foreign or domestic, or any financial or other rating agency.

"Guarantee" means any guarantee or other contingent liability, direct or indirect, with respect to any Indebtedness of another person, through an agreement or otherwise, including, without limitation, (i) any endorsement (otherwise than for collection or deposit in the ordinary course of business) or discount with recourse or undertaking substantially equivalent to or having similar economic effect of a guarantee with respect to any such Indebtedness, and (ii) any agreement (A) to purchase, or to advance or supply funds for the payment or purchase of, any such Indebtedness of another, (B) to purchase, sell or lease property, products, materials or supplies, or transportation or services, primarily for the purpose of enabling such other person to pay such Indebtedness or to assure the owner thereof against loss regardless of the delivery or non-delivery of the property, products, materials or supplies or transportation or services, or (C) to make any loan, advance, capital contribution or other investment in such other person to assure a minimum equity, working capital or other balance sheet condition for any date, or to provide funds for the payment of any liability, dividend or stock liquidation payment, or otherwise to supply funds to or in any manner invest in such other person. The amount of any Guarantee shall be equal to the outstanding principal amount of the Indebtedness guaranteed, unless some lesser limitation is specifically stated in such Guarantee.

"Holder" means each of the Purchasers and any other Person that becomes a registered holder of any of the Series I Preferred Stock as registered on the books of the Company.

"Indebtedness" means any obligation for borrowed money or for which interest is customarily paid, but in any event shall include without limitation (i) any obligation owed for all or any part of the purchase price of property, services or other assets or for the cost of property or other assets constructed or of improvements thereto, other than accounts payable included in current liabilities and incurred in respect of property purchased or services rendered in the ordinary course of business, (ii) any obligations secured by any Lien in respect of property even though the person owning the property has not assumed or become liable for the payment of such obligation, (iii) any Capital Lease Obligation, (iv) any Guarantee with respect to Indebtedness (of the kind otherwise described in this definition) of another person, and (v) obligations in respect of letters of credit, surety bonds and completion bonds.

"Initial Equity Capitalization" means the total number of shares of Common Stock outstanding as of the Closing Date and into which all securities of the Company outstanding as of the Closing Date that are convertible into, are exchangeable for or have other rights exercisable for, shares of Common Stock, may be converted, exchanged or otherwise exercised.

"Kayne Purchasers" means ▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇, and their respective affiliates and successors.

"Leases" has the meaning ascribed thereto in Section 2.5.

"Lien" means, as to any person, any mortgage, lien, pledge, charge, security interest or other encumbrance in or on, or any interest or title of any vendor, lessor, lender or other secured party to or of the person under any Indebtedness, conditional sale or other title retention agreement or Capital Lease with respect to, any property or asset of the person, or the signing or filing of a financing statement which names the person as debtor, or the signing of any security agreement authorizing any other party as the secured party thereunder to file any financing statement.

"Material Adverse Effect" means, with respect to any Person, a material adverse effect on the business, prospects, properties, condition (financial or otherwise) or operations of such Person.

"Order" means any order, writ, injunction, decree, judgment, award, determination, direction or demand.

"Original Purchasers" means the original purchasers of Series I Preferred Stock under this Agreement, including the purchasers of any Remainder Shares hereunder.

"PBGC" means the Pension Benefit Guaranty Corporation.

"Permitted Liens" means:

(a) Liens for taxes, assessments, or governmental charges or claims the payment of which is not yet past due or that are being contested in good faith by appropriate proceedings and for which adequate reserves have been established;

(b) statutory Liens of landlords, carriers, warehousemen, mechanics, or materialmen, and other Liens imposed by law and incurred in the ordinary course of business, that are for sums not yet delinquent for a period of more than thirty (30) days or are being contested in good faith, if reserves or other appropriate provisions, if any, as shall be required by GAAP, shall have been made therefor;

(c) Liens incurred or deposits or pledges made in the ordinary course of business in connection with workers' compensation, unemployment insurance, and other types of social security laws;

(d) any attachment or judgment Lien; provided that (i) the time for the appeal or petition for rehearing of such judgment lien shall not have expired; (ii) the Company in good faith shall be prosecuting an appeal or proceeding for review with respect to which execution has been stayed pending such appeal or which is vacated or discharged within thirty (30) days of the termination of such stay; or (iii) with respect to which payment in full above any applicable deductible is covered by insurance (so long as no reservation of rights has been made by the insurer in connection with such coverage), and Liens incurred to secure any surety bonds, appeal bonds, supersedeas bonds, or other instruments serving a similar purpose in connection with the appeal of any such judgment or any proceeding to which the Company is a party;

(e) minor survey exceptions, easements and licenses, reservations of, or rights of others for, rights-of-way, highway and railroad crossings, sewers, electric lines, telegraph and telephone lines, and other similar purposes, or zoning or other restrictions or similar charges with respect to the use of real properties not incurred in connection with Indebtedness of the Company or materially detracting from the value of such properties; and

(f) any Lien on the Company's assets or properties to secure payment to a lender to the Company.

"Person" shall include an individual, a corporation, an association, a partnership, a limited liability company, a limited liability partnership, a trust or estate, a government, foreign or domestic, and any agency or political subdivision thereof, or any other entity.

"Plan of Reorganization" shall have the meaning ascribed thereto in Section 3.9.

"Purchasers" means the Purchasers listed on Schedule I hereto and their successors and assigns.

"Remainder Shares" has the meaning ascribed thereto in Section 1.3.

"Retained Securities" means the Common Stock not previously sold by any of the Original Purchasers that is issued or issuable upon conversion of the Series I Preferred Stock.

"Saks" shall mean Saks Incorporated, a Tennessee corporation.

"Securities" has the meaning ascribed thereto in Section 1.1.

"Securities Act" means the Securities Act of 1933, as amended, and any similar or successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at any applicable time.

"Voting Stock" means any equity security entitling the holder of such security to vote at meetings of shareholders except an equity security which entitles the holder of such security to vote only upon the occurrence of some contingency, unless that contingency shall have occurred and be continuing.

Section 4.2. Accounting Terms. All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP, all computations made pursuant to this Agreement shall be made in accordance with GAAP, and all balance sheets and other financial statements shall be prepared in accordance with GAAP, except in the case of unaudited financial statements which are subject to year-end audit adjustments and the absence of footnotes.

Section 5. REGISTRATION, TRANSFER AND EXCHANGE OF SECURITIES; LOST SECURITIES. The Company shall keep at its principal executive office a register in which, subject to such reasonable regulations as it may prescribe, but at its expense (other than transfer taxes, if any), it shall provide for the registration and transfer of the Securities.

The Securities may not be sold, transferred, pledged or hypothecated unless the proposed transaction does not require registration or qualification under federal or state securities laws or unless the proposed transaction is registered or qualified as required.

The Holder of any of the Securities may, at such Holder's option, surrender the same for transfer or exchange at the principal executive office of the Company, accompanied in the case of a transfer or assignment by a written instrument of transfer or assignment in form satisfactory to the Company duly executed by the registered Holder thereof or by such Holder's attorney duly authorized in writing. In case any Holder shall so request the transfer, assignment or exchange of any Security, the Company at its expense shall execute and deliver in exchange therefor one or more new Securities, as may be requested by such Holder, in the same denomination or denominations as the Securities or Securities so surrendered.

The Company and any agent of the Company may treat the Person in whose name any Security is registered as the owner of such Security for the purpose of receiving payment of dividends and for all other purposes whatsoever.

Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of any Security, and (in case of loss, theft or destruction) of indemnity reasonably satisfactory to it, upon surrender and cancellation of such Security or receipt of such indemnity, the Company shall make and deliver in lieu of such Security a new Security in the same denomination.

Notwithstanding the foregoing provisions of this Section, if any Security of which any Purchaser or any other institutional Holder is the owner is lost, stolen or destroyed, then the affidavit of such Purchaser or such Holder's Treasurer or Assistant Treasurer (or other responsible official), setting forth

the name of the owner of such Security and the circumstances with respect to such loss, theft or destruction, shall be accepted as satisfactory evidence thereof, and no indemnity shall be required as a condition to the execution and delivery by the Company of a new Security in lieu of such Security (or as a condition to the payment thereof, if due and payable) other than a Purchaser's or such Holder's written agreement to indemnify the Company.

Section 6. TAXES. The Company shall pay all taxes (including interest and penalties), other than taxes imposed on the income of the Purchasers, which may be payable in respect of the execution and delivery of this Agreement or of the execution and delivery of any of the Common Shares or of any amendment of, or waiver or consent under or with respect to, this Agreement or any of the Common Shares and shall save each Purchaser harmless against any loss or liability resulting from nonpayment or delay in payment of any such tax.

Section 7. LETTER OF CREDIT COMMITMENT

Section 7.1 LC Commitment. Notwithstanding anything herein to the contrary, the obligations of the Purchasers contained in this Section 7 shall not apply to Saks. The Company may request that the Purchasers cause the issuance of a letter of credit in favor of the Company's senior lenders (the "LC") on the terms set forth in this Section 7. The Purchasers shall not be required to comply with more than one request by the Company for an LC pursuant to this Section 7.

Section 7.2 Commitment Provisions. The Purchasers shall cause the issuance of the LC so requested by the Company provided that:

(a) The aggregate stated amount of the LC shall not exceed $5 million;

(b) The expiry of the LC shall not be later than November 30, 2003;

(d) The Company shall execute such documentation to apply for and support the issuance of the LC as may be required by the issuer of the LC, which may be one of the Company's senior lenders (the "LC Issuer").

Section 7.3 Payments to Purchasers for Commitment. The Company shall pay to the Purchasers (other than Saks), pro rata in proportion to each Purchaser's Commitment, the following compensation for the Purchasers' performance of its obligations under this Section 7:

(a) On the Closing Date, the Company shall pay to the Purchasers $100,000; and

(b) If the Company makes a request for an LC, then within 20 days after the LC has been issued, the Company shall issue to the Purchasers five-year warrants exercisable at the Conversion Price to purchase an amount of Common Stock equal to three percent (3%) of the Initial Equity Capitalization or, if the stated amount of the LC is less than $5 million, a pro-rata portion of such three percent (3%).

In addition, the Company shall pay on demand all customary issuance, processing, negotiation, amendment and administrative fees and other amounts charged by the Issuer on account of, or in respect to, the LC.

Section 7.4 Purchaser Compensation for LC Draws. If the LC is drawn upon by the beneficiary thereof, the Company shall provide to the Purchasers (other than Saks), pro rata in proportion to each Purchaser's Commitment, the following compensation:

(a) One-year senior notes (the "LC Notes") of the Company in an aggregate principal amount equal to the stated amount of the LC, secured by a perfected first priority lien (subject to Section 7.9) on the Company's equipment bearing interest at a rate of ten percent (10%) per

annum and subject to an intercreditor agreement with the Company's senior lenders regarding limitations on foreclosure of collateral and other remedies, and

(b) If the LC Notes have not been repaid on or before November 30, 2003, five-year warrants exercisable at the Conversion Price to purchase an amount of Common Stock equal to four percent (4%) of the Initial Equity Capitalization or, if the stated amount of the LC is less than $5 million, a pro-rata portion of such four percent (4%).

Section 7.5 Limitations of Liability. The Purchasers shall not be liable to the Company on account of:

(a) The delay or refusal of the LC Issuer to issue the LC;

(b) The action or inaction of the LC Issuer or a Purchaser on account of or in respect to, any LC;

(d) The form, sufficiency, correctness, genuineness, authority of any person signing, falsification or legal effect of, any documents called for under any LC if such documents on their face appear to be in order; or

(e) Any inaccuracy, interruption, error or delay in transmission or delivery by post or electronic means, or for the inaccuracy of translation;

except, in each case, where there is a specific finding in a judicial proceeding (in which the Purchasers had an opportunity to be heard), that the subject action or omission to act was in bad faith, grossly negligent or constituted willful misconduct, by or of the Purchasers.

Section 7.6 Cash Collateral. The Purchasers shall, to the extent required by the LC Issuer, provide cash collateral for the LC pro rata in proportion to each Purchaser's Commitment.

Section 7.7 ISP98. Except to the extent otherwise expressly provided under this Section or agreed in writing between the LC Issuer and the Company, the LC will be governed by the International Standby Practices ISP98 (adopted by the International Chamber of Commerce on April 6, 1998) and any respective subsequent revisions thereof.

Section 7.8 Agreements of LC Issuer. The Purchasers shall cause the LC Issuer to agree that:

(a) any action taken or omitted by the LC Issuer, its correspondents, or any advising, negotiating or paying bank with respect to the LC and the related drafts and documents, shall be done in good faith and in compliance with law; and

(b) the Company shall not be required to indemnify the LC Issuer, its correspondents or any advising, negotiating or paying bank with respect to any LC for any claims, damages, losses, liabilities, costs or expenses to the extent caused by (x) willful misconduct or gross negligence of the LC Issuer, its correspondents, or any advising, negotiating or paying bank with respect to the LC in determining whether a request presented under the LC complied with the terms and conditions of the LC or (y) the LC Issuer's failure to pay under the LC after presentation to it of a request strictly complying with the terms and conditions of such LC.

Section 7.9 Subordination to Outstanding Equipment Notes.

(a) The Purchasers, for themselves and their successors, each agree that the payment of the principal of or any other amounts due on the LC Notes is subordinated in right of payment, to the extent and in the manner stated in this Section 7.9, to the prior payment in full of all Senior Debt. For purposes hereof, "Senior Debt" means the principal of, interest on (including any interest

accruing after the commencement of any bankruptcy proceeding or which would have accrued but for such proceeding whether or not allowed) and other amounts due on or with respect to $4 million in aggregate principal amount of Equipment Notes issued to affiliates of ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Capital Advisors, L.P., ▇▇▇▇▇▇▇ ▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇▇ under the Bankruptcy Case Proceedings.

(b) Anything in the LC Note to the contrary notwithstanding, no payment or other distribution on account of principal of or redemption of, or other amounts due on the LC Notes, and no redemption, purchase, or other acquisition of LC Notes, shall be made by or on behalf of the Company (i) unless full payment of amounts then due for principal and interest and of all other amounts then due on all Senior Debt has been made or duly provided for in cash pursuant to the terms of the instrument, if any, governing such Senior Debt, (ii) if, at the time of such payment, redemption, purchase or other acquisition, or immediately after giving effect thereto, there shall exist under any Senior Debt, or any agreement pursuant to which any Senior Debt is issued, any default, which default shall not have been cured or waived and which default shall have resulted in the full amount of such Senior Debt being due and payable or (iii) if, at the time of such payment, redemption, purchase or other acquisition, the Purchasers shall have received written notice from the holders of any Senior Debt or their representative or representatives (a "Payment Blockage Notice") that there exists under such Senior Debt, or any agreement pursuant to which such Senior Debt is issued, any default, which default shall not have been cured or waived, permitting the holders thereof to declare the full amount of such Senior Debt due and payable, but only for the period (the "Payment Blockage Period") commencing on the date of receipt of the Payment Blockage Notice and ending (unless earlier terminated by notice given to the Purchasers by the holders of such Senior Debt) on the earlier of (a) the date on which such event of default shall have been cured or waived or (b) 180 days from the receipt of the Payment Blockage Notice unless payment or distribution with respect to the LC Notes is otherwise not then permitted. Upon termination of a Payment Blockage Period, payments on account of principal of the LC Notes (other than amounts due and payable by reason of the acceleration of the maturity of the LC Notes) and redemptions, purchases or other acquisitions may be made by or on behalf of the Company, if otherwise permitted hereunder. Notwithstanding anything herein to the contrary, (A) only one Payment Blockage Notice may be given during any period of 360 consecutive days with respect to the same event of default and any other events of default on the same Senior Debt existing and known to the person giving such notice at the time of such notice and (B) no new Payment Blockage Period may be commenced by the holder or holders of the same Senior Debt or their representative or representatives during any period of 360 consecutive days unless all events of default which were the object of the immediately preceding Payment Blockage Notice, and any other event of default on the same Senior Debt existing and known to the Person giving such notice at the time of such notice, have been cured or waived.

In the event that, notwithstanding the provisions of this Section 7.9(b), payments are made by or on behalf of the Company in contravention of the provisions of this Section 7.9(b), such payments shall be held by the Purchasers in trust for the benefit of, and shall be paid over to and delivered to, the holders of Senior Debt or their representative for application to the payment of all Senior Debt remaining unpaid to the extent necessary to pay all Senior Debt in full accordance with the terms of such Senior Debt, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt.

(c) The Company shall give prompt written notice to the Purchasers of any event of default under any Senior Debt or under any agreement pursuant to which any Senior Debt may have been issued.

So long as any Senior Debt remains unpaid, the Purchasers shall not accelerate, or cause to be accelerated, the LC Notes, or exercise any remedies with respect to any event of default

occurring with respect to the LC Notes for a period of no less than 180 days after the Purchasers have delivered to the holders of the Senior Debt notice of the occurrence of any event of default. If the event of default is cured or waived or shall have ceased to exist within such 180 day period (and payment of all amounts then due on the LC Notes without acceleration shall constitute a cure of any Event of Default resulting from the failure to make such payment when due), then the Purchasers shall not be entitled to declare the LC Notes due prior to their stated maturity because of such event of default.

(d) Upon (a) any acceleration of the principal amount due on the LC Note because of an event of default or (b) any distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or any other dissolution, winding up, liquidation or reorganization of the Company):

(i) the holders of the Senior Debt shall first be entitled to receive payment in full of the principal thereof, the interest thereon and any other amounts due thereon before the Purchasers are entitled to receive payment on account of the principal of or any other amounts due on the LC Notes.

(ii) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than securities of the Company as reorganized or readjusted or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in this Section with respect to the LC Note, to the payment in full without diminution or modification by such plan of all Senior Debt), to which the Purchaser would be entitled except for the provisions of this Section, shall be paid by the liquidating trustee or agent or other person making such a payment or distribution, directly to the holders of Senior Debt (or their representative(s) or trustee(s) acting on their behalf), ratably according to the aggregate amounts remaining unpaid on account of the principal of or interest on and other amounts due on the Senior Debt held or represented by each, to the extent necessary to make payment in full of all Senior Debt remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Debt; and

(iii) in the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than securities of the Company as reorganized or readjusted or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in this Section with respect to the LC Notes, to the payment in full without diminution or modification by such plan of all Senior Debt) shall be received by the Purchasers before all Senior Debt is paid in full in cash, such payment or distribution shall be held in trust for the benefit of, and be paid over to upon request by a holder of the Senior Debt, the holders of the Senior Debt remaining unpaid (or their representatives) or trustee(s) acting on their behalf, ratably as aforesaid, for application to the payment of such Senior Debt until all such Senior Debt shall have been paid in full, after giving effect to any concurrent payment or distribution to the holders of such Senior Debt.

Subject to the payment in full of all Senior Debt, the Purchasers shall be subrogated to the rights of the holders of Senior Debt to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Debt until the principal of the LC Notes shall be paid in full. For purposes of such subrogation, no such payments or distributions to the holders of Senior Debt of cash, property or securities that otherwise would have been payable or distributable to the Purchasers shall, as between the Company, its creditors other than the holders of Senior Debt, and the Purchasers, be

deemed to be a payment by the Company to or on account of the Senior Debt, it being understood that the provisions of this Section are and are intended solely for the purpose of defining the relative rights of the Purchasers, on the one hand, and the holders of Senior Debt, on the other hand.

Nothing contained in this Section is intended to or shall impair, as between the Company and its creditors, other than the holders of Senior Debt, the obligation of the Company, which is absolute and unconditional, to pay to the Purchasers the principal of the LC Notes as and when the same shall become due and payable in accordance with the terms of the LC Notes, or is intended to or shall affect the relative rights of the Purchasers and creditors of the Company, other than holders of Senior Debt, nor shall anything herein or therein prevent the Purchasers from exercising all remedies otherwise permitted by applicable law upon default under the LC Notes, subject to the rights, if any, under this Section of the holders of Senior Debt in respect of cash, property and securities of the Company received upon the exercise of any such remedy. Upon distribution of assets of the Company referred to in this Section, the Purchasers shall be entitled to rely upon a certificate of the liquidating trustee or agent or other person making any distribution to the Purchasers for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Debt and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section.

Section 8. MISCELLANEOUS.

Section 8.1. Indemnification. The Company hereby agrees to indemnify, exonerate and hold each Purchaser and each of their respective partners and Affiliates, and their shareholders, officers, directors, employees and agents, free and harmless from and against any and all actions, causes of action, suits, litigation, losses, liabilities and damages, investigations or proceedings instituted by any Governmental Body or any other Person, and expenses in connection therewith, including without limitation reasonable attorneys' fees and disbursements, incurred by the indemnitee or any of them as a result of, or arising out of, or relating to (a) any transaction financed or to be financed in whole or in part directly or indirectly with proceeds from the sale by the Company of any Securities hereunder (including in connection with the LC), or (b) the execution, delivery, performance or enforcement of this Agreement or any instrument contemplated hereby by any of the indemnitees, except in each such case to the extent any such indemnified liabilities arise on account of such indemnitee's gross negligence, willful misconduct or bad faith.

Section 8.2. Expenses. The Company and Purchasers each agree to pay all their own costs and expenses in connection with the preparation, execution and delivery of this Agreement, the Securities and other instruments and documents to be delivered hereunder.

Section 8.3. Amendments, Waiver and Consents. Subject to the provisions of Section 1.3, any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and, to the extent that such amendment would materially adversely affect the rights of any Purchaser under this Agreement in the aggregate, the written consent of such Purchaser. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities have been converted), each future holder of all such securities, and the Company.

Section 8.4. Reliance on and Survival of Representations. All agreements, representations and warranties of the Company contained in this Agreement and in any certificates or other instruments delivered pursuant to this Agreement shall (i) be deemed to be material and to have been relied upon by the Purchasers, notwithstanding any investigation heretofore or hereafter made by any Purchaser or on such Purchaser's behalf, and (ii) survive the execution and delivery of this Agreement and the Securities, and shall continue in effect so long as any Security is outstanding.

Section 8.5. Successors. This Agreement shall bind and inure to the benefit of and be enforceable by the Company, each of the Purchasers, and the Purchasers' respective successors, and, in addition, shall inure to the benefit of and be enforceable by each Person who shall from time to time be a Holder of any of the Securities. None of the Purchasers or the Company may assign its respective rights under this Agreement.

Section 8.6. Notices. All notices and other communications provided for in this Agreement shall be in writing and delivered, telecopied or mailed, first class postage prepaid, addressed:

(a) If to the Company:

FAO, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇ ▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: Legal
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇

with a copy to:

Fulbright & ▇▇▇▇▇▇▇▇ L.L.P.
▇▇▇ ▇. ▇▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇▇▇, Esq.
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇

(b) If to the Holders, at the addresses set forth on the applicable signature page (in the case of any Purchaser) and as may be designated by notice to the Company.

Any such notice or communication shall be deemed to have been duly given when delivered, telecopied or mailed as aforesaid. Each party may designate by notice in writing a new address to which any notice, demand, request or communication may thereafter be so given, served or sent. Each notice, demand, request, or communication which shall be mailed, delivered or transmitted in the manner described above shall be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt, the affidavit of messenger or (with respect to a telecopy) the confirmation being deemed conclusive (but not exclusive) evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation.

Section 8.7. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

Section 8.8. Governing Law. This Agreement and the Securities and (unless otherwise provided) all amendments, supplements, waivers and consents relating hereto or thereto shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws principles thereof.

Section 8.9. Waiver of Jury Trial. EACH PURCHASER, EACH HOLDER, BY ITS ACCEPTANCE OF ANY OF THE SECURITIES, AND THE COMPANY, EACH HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE SECURITIES, OR ANY OTHER AGREEMENTS RELATING TO THE SECURITIES OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation, contract claims, tort

claims, breach of duty claims and all other common law and statutory claims. The Purchasers and the Company each acknowledge that this waiver is a material inducement to enter into a business relationship, that each has already relied on the waiver in entering into this Agreement, and that each shall continue to rely on the waiver in their related future dealings. The Purchasers and the Company further represent and warrant that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, THE SECURITIES, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE SECURITIES. In the event of litigation, this Agreement may be filed as a written consent to a trial by the Court.

Section 8.10 [Intentionally omitted]

Section 8.11 Entire Agreement. This Agreement, including the other writings referred to herein (including without limitation the effective versions of the Exhibits to this Agreement) or delivered pursuant hereto, constitutes the entire agreement among the parties hereto with respect to the transactions contemplated herein, and it supersedes all prior oral or written agreements, commitments or understandings with respect to the matters provided for herein.

Section 8.12 Exculpation Among Purchasers; Due Diligence. Each Purchaser acknowledges that such Purchaser is not relying upon any Person other than the Company in making its investment or decision to invest in the Company. Each Purchaser agrees that no Purchaser nor the respective controlling persons, officers, directors, partners, agents or employees of any Purchaser shall be liable for any action taken or omitted to be taken at any time by any of them in connection with the Series I Preferred Stock (and the Common Stock issued upon conversion of the Series I Preferred Stock). Each Purchaser acknowledges that it is aware that the Company filed for protection under chapter 11 of the federal Bankruptcy Code on January 13, 2003 and will be emerging from bankruptcy simultaneously with the consummation of this Agreement. In addition, each Purchaser acknowledges that it is relying only on the representations and warranties of the Company set forth in this Agreement and the Registration Rights Agreements and that it has had an opportunity to request and has received any information it wanted to evaluate in performing its diligence and making its decision to purchase the Series I Preferred Stock.

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Each Purchaser is requested to sign the form of acceptance in the space provided below whereupon this Agreement shall become a binding agreement between such Purchaser and the Company.

		Very truly yours,
		FAO, INC.
		By:		/s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ Executive Vice President