INNOVO GROUP INC
EX 10.7 INVENTORY SECURITY AGR JOE'S JEANS
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>10
<FILENAME>invsec_agr-joesjeans.txt
<DESCRIPTION>EX 10.7 INVENTORY SECURITY AGR JOE'S JEANS
<TEXT>


                                                                 August 20, 2002

Joe's Jeans, Inc.
5804 East Slauson Avenue
Commerce, California 90040

                          INVENTORY SECURITY AGREEMENT
                          ----------------------------

Ladies and Gentlemen:

This  agreement is being  executed by you to induce us to make loans or advances
to you and to induce us to enter  into or  continue  a  factoring  or  financing
arrangement  with you, and is executed in  consideration  of our doing or having
done any of the foregoing.

         1. ADVANCES

         1.1 We are  considering  making  advances to you in our sole discretion
and from time to lime of up to 500/a of the value of your Eligible Inventory (as
hereinafter  defined)  calculated  on the basis of the lower of cost or  market,
with cost  calculated on a first  in-first out basis;  provided  however,  in no
event shall the  outstanding  principal  amount of all advances  made  hereunder
exceed  $400,000.00 at any time.  Eligible Inventory shall mean the gross amount
of  your  Inventory  (as  hereinafter  defined)  that  is  subject  to a  valid,
exclusive, first priority and fully perfected security interest in our favor and
which any a) work-in-process, b) supplies, other than raw material, c) Inventory
not present in the United States of America,  d) Inventory  returned or rejected
e) Inventory to be returned to your suppliers,  f) Inventory in transit to third
parties (other than your agents or warehouses),  g) Inventory in possession of a
warehouseman,  bailee or other third party, unless such warehouseman,  bailee or
third party has executed a notice of security  interest  agreement  (in form and
substance  satisfactory  to us) and we have taken all other  action  required to
perfect  our  security  interest  in such  Inventory,  and h) less any  reserves
required by us in our reasonable discretion,  including for special order goods,
discontinued,  slow-moving and obsolete Inventory,  market value declines,  bill
and hold (deferred shipment), consignment sales and shrinkage.

         1.2 The  amount of the loans and  advances  made or to be made by us to
you, and the period of time during which they are to remain outstanding shall at
all times be in our sole  discretion.  The ratio of Eligible  Inventory  to such
loans and  advances  and to the other  Obligations  referred  to herein  must be
satisfactory  to us at all times,  and the  valuation and  acceptability  of the
Eligible  Inventory  is to be  determined  exclusively  by  us.  We are to be at
liberty,  from time to time,  without  responsibility  or  liability  to you, to
revise  any  limit  placed  by us on loans and  advances  or other  Obligations.
Furthermore, all such advances remain payable to us on demand.

         1.3  Nothing  contained  herein  shall  be  construed  as  limiting  or
modifying,  in any way, our right to: (a) hold any reserve we deem  necessary as
security for payment and performance of your Obligations,  and/or (b) change the
aforementioned advance rate or entirely cease making advances.


<PAGE>


         2. GRANT OF SECURITY INTEREST

         2.1 As security for the prompt payment in full of all  Obligations  (as
hereinafter defined) due by you from time to time to us, in conjunction with the
factoring or accounts receivable financing agreement between us, as amended from
time to time  (herein  the  "Agreement"),  you  hereby  pledge and grant to us a
continuing  general  lien upon,  and  security  interest  in  (herein  "Security
Interest"), the following described "Inventory":

         All present and hereafter acquired merchandise, inventory and
         goods,  and all  additions,  substitutions  and  replacements
         thereof,  wherever  located,  together  with  all  goods  and
         materials  used  or  usable  in  manufacturing,   processing,
         packaging or shipping  same;  in all stages of  production --
         from raw materials through  work-in-process to finished goods
         --and all proceeds of whatever sort.

         2.2 The Security Interest in the Inventory shall extend and attach to:

         (a) All Inventory which is presently in existence and which is owned by
you or in which you have any ownership interest, and all Inventory which you may
purchase or in which you may acquire any ownership interest at any time and from
time to time in the future,  whether such  Inventory is in transit or in your or
our constructive,  actual or exclusive possession, or is held by others for your
account;

         (b) All Inventory wherever located, including,  without limitation, all
Inventory  which may be located on your  premises  or upon the  premises  of any
carriers,  forwarding agents, truckers,  warehousemen,  vendors, selling agents,
finishers,  converters,   processors,  or  other  third  persons  who  may  have
possession of the Inventory; and

         (c) All  Inventory  and any  portion  thereof  which  may be  returned,
rejected,  reclaimed or repossessed by either of us from your customers, as well
as to all supplies, goods, incidentals, packaging materials, and any other items
which contribute to the finished goods or products  manufactured or processed by
you, or to the sale, promotion or shipment thereof.

         3. OBLIGATIONS SECURED

         The  Security  Interest  granted  hereunder  and any  lien or  security
interest that we now or hereafter  have in any of your other assets,  collateral
or property,  secure the payment and performance of all of your now existing and
future  indebtedness  and  obligations  to us,  whether  absolute or contingent,
whether  arising under the Agreement,  this agreement or any other  agreement or
arrangement  between us, by operation of law or otherwise  including ledger debt
(which is  indebtedness  for goods and services  purchased by you from any party
whose  accounts  receivable  are factored or financed by us),  and  indebtedness
arising under any guaranty,  credit  enhancement or other credit support granted
by us in your  favor,  including  any  accommodation  extended  with  respect to
applications for letters of credit,  our acceptance of drafts or our endorsement
of  notes  or other  instruments  for  your  account  and  benefit  (herein  the
"Obligations").   Obligations  shall  also  include,  without  limitation,   all
interest,  commissions,  financing  and service  charges,  and expenses and fees
chargeable to and due from you under this


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<PAGE>


agreement,  the Agreement or any other agreement or arrangement which may be now
or hereafter entered into between us.

         4. REPRESENTATIONS. WARRANTIES AND COVENANTS

         4.1 You agree to  safeguard,  protect  and hold all  Inventory  for our
account and make no  disposition  thereof  except in the regular  course of your
business as herein  provided.  You represent and warrant that  Inventory will be
sold and shipped by you to your  customers  only in the ordinary  course of your
business  and then only on open  account  and on terms not  exceeding  the terms
currently being extended by you to your customers, provided that all proceeds of
all sales (including cash, accounts receivable,  checks, notes,  instruments for
the payment of money and similar proceeds) are forthwith transferred,  assigned,
endorsed,  and turned  over and  delivered  to us.  Invoices  covering  sales of
Inventory  are to be assigned to us in  accordance  with the  provisions  of the
Agreement,  and the proceeds thereof (if collected by you) are to be turned over
to us in  accordance  with  the  provisions  of the  Agreement.  Cash  sales  of
Inventory,  or sales in which a lien upon or security  interest in the Inventory
is retained by you shall only be made by you with our written approval,  and all
proceeds of such sales shall not be  commingled  with your other  property,  but
shall be segregated,  held by you in trust for us as our exclusive property, and
shall be delivered  immediately  by you to us in the identical  form received by
you. Upon the sale, exchange,  or other disposition of the Inventory,  as herein
provided,  the Security  Interest  provided for herein  shall,  without break in
continuity and without further formality or act, continue in, and attach to, all
proceeds,   including  any  instruments  for  the  payment  of  money,  accounts
receivable,  contract rights,  documents of title,  shipping documents,  chattel
paper and all  other  cash and  non-cash  proceeds  of such  sale,  exchange  or
disposition.  As to any such sale, exchange or other disposition,  we shall have
all of the rights of an unpaid seller, including stopping in transit,  replevin,
rescission and reclamation.

         4.2 You hereby  warrant and represent  that you are solvent;  that this
Security Interest constitutes and shall at all times constitute a first and only
lien on the Inventory; that you are, or will be at the time additional Inventory
is acquired  by you,  the  absolute  owner of the  Inventory  with full right to
pledge, sell, consign, transfer and create a Security Interest therein, free and
clear of any and all claims or liens in favor of  others;  that you will at your
expense  forever  warrant and, at our request,  defend the same from any and all
claims and demands of any other person;  and that you will not grant,  create or
permit to exist,  any lien upon or security  interest in the  Inventory,  or any
proceeds, in favor of any other person.

         4.3 You agree to comply with the  requirements of all state and federal
laws in order to grant to us a valid and perfected  first  Security  Interest in
the Inventory.  We are hereby authorized by you to file any financing statements
or  amendments  covering the  Inventory  whether or not your  signature  appears
thereon.  To the extent  permitted by  applicable  law, you authorize us to sign
your name,  or to file  financing  statements  or  continuations  or  amendments
without your signature, all in order to create, perfect or maintain our security
interest in the Inventory. You agree to do whatever we may request, from time to
time,  by  way  of;  leasing  warehouses;  filing  notices  of  lien,  financing
statements, amendments, renewals and continuations thereof; cooperating with our
agents  and  employees;   keeping  Inventory  records;  obtaining  waivers  from
landlords and mortgagees;  and performing such further acts as we may require in
order to effect the purposes of this agreement.


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         4.4 You  agree  to  maintain  insurance  on the  Inventory  under  such
policies  of  insurance,  with such  insurance  companies,  in such  amounts and
covering  such  risks  as are at all  times  satisfactory  to us.  All  policies
covering the  Inventory  are to be made payable to us, in case of loss,  under a
standard  non-contributory  "mortgagee",  "lender" or "secured party" clause and
are to contain  such other  provisions  as we may  require to fully  protect our
interest in the  Inventory  and to any payments to be made under such  policies.
All original  policies or true copies thereof are to be delivered to us, premium
prepaid,  with the loss payable  endorsement in our favor, and shall provide for
not less than thirty (30) days prior written notice to us of the exercise of any
right  of  cancellation.  At  your  request,  or if you  fail to  maintain  such
insurance, we shall arrange for such insurance,  but at your expense and without
any responsibility on our part for: obtaining the insurance, the solvency of the
insurance companies, the

adequacy of the coverage, or the collection of claims. The insurance we purchase
may not pay any  claims  made by you or  against  you in  connection  with  your
Inventory.  You are  responsible  for the  costs  of this  insurance,  including
interest and any other charges we may impose in connection  with the purchase of
this  insurance.  The costs of this insurance may be more than insurance you can
buy on your own. You may still obtain insurance of your own choosing, subject to
the terms and conditions of this paragraph 4.4, on the Inventory. If you provide
us with proof that you have obtained  adequate  insurance on your Inventory,  we
will cancel the  insurance  that we purchased  and refund or credit any unearned
premiums to you. In the event that we purchase  such  insurance,  we will notify
you of said purchase  within  thirty (30) days after the date of such  purchase.
If,  within  thirty (30) days after the date notice was sent to you, you provide
us with proof that you had adequate  insurance on your  Inventory as of the date
we also purchased insurance and that you continue to have the insurance that you
purchased  yourself,  we will cancel the  insurance  that we  purchased  without
charging  you any  costs,  interest,  or other  charges in  connection  with the
insurance  that we  purchased.  Unless  we  shall  otherwise  agree  with you in
writing,  we shall have the sole  right,  in our name or yours,  to file  claims
under any insurance policies,  to receive,  receipt and give acquittance for any
payments  that  may  be  payable   thereunder,   and  to  execute  any  and  all
endorsements, receipts, releases, assignments,  reassignments or other documents
that may be necessary to effect the collection,  compromise or settlement of any
claims under any such insurance policies.

         4.5 You agree to pay,  when due,  all  taxes,  assessments,  claims and
other charges  (herein  "taxes")  lawfully levied or assessed upon the Inventory
unless  such  taxes  are  being  diligently  contested  in good  faith by you by
appropriate proceedings and adequate reserves are established in accordance with
GMP.  Notwithstanding the foregoing,  if such taxes remain unpaid after the date
fixed for the payment thereof, and a lien therefor shall be claimed which in our
opinion might create a valid obligation  having priority over the rights granted
to us herein,  we may then,  without  notice to you,  on your  behalf,  pay such
taxes,  and the amount thereof shall be an Obligation  secured hereby and due to
us on demand.  "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time and for the period as to
which such accounting principles are to apply.

4.6  Any and all  fees,  costs  and  expenses,  of  whatever  kind  and  nature,
(including any taxes, attorneys' fees or costs for insurance of any kind), which
we may incur in filing public notices; in preparing or filing documents,  making
title examinations; in protecting,  maintaining, or preserving the Inventory; in
enforcing  or  foreclosing  the Security  Interest  hereunder,  whether


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through  judicial  procedures or otherwise;  or in defending or prosecuting  any
actions or proceedings  arising out of or related to our  transactions  with you
under this arrangement, shall be borne and paid by you. If same are not promptly
paid by you, we may pay same on your behalf,  and the amount thereof shall be an
Obligation secured hereby and due to us on demand.

         4.7 You agree to comply with all acts, rules,  regulations,  and orders
of any legislative,  administrative or judicial body or official,  applicable to
the  Inventory  or any  part  thereof,  or to the  operation  of your  business;
provided  that  you  may  contest  any  acts,  rules,  regulations,  orders  and
directions of such bodies or officials in any reasonable  manner which will not,
in our  opinion,  adversely  affect  our  rights or  priority  in the  Inventory
hereunder.

         5. BOOKS AND RECORDS AND EXAMINATIONS

         5.1 You agree to maintain Books and Records pertaining to the Inventory
in such  detail,  form and  scope as we shall  reasonably  require.  "Books  and
Records" means your accounting and financial records (whether paper, computer or
electronic),  data,  tapes,  discs,  or other media,  and all  programs,  files,
records and procedure manuals relating thereto, wherever located.

         5.2 You agree that we or our agents may enter upon your premises at any
time during normal  business  hours,  and from time to time,  for the purpose of
inspecting the Inventory and any and all Books and Records  pertaining  thereto.
You agree to notify us  promptly  of any change in your name,  mailing  address,
principal  place of business or the location of the  Inventory.  You are also to
advise us promptly,  in sufficient detail, of any substantial change relating to
the type, quantity or quality of the Inventory,  or any event which would have a
material  effect  on the  value of the  Inventory  or on the  Security  Interest
granted to us herein.

         5.3 You agree to: execute and deliver to us, from time to time,  solely
for our convenience in maintaining a record of the Inventory,  such consignments
or written statements as we may reasonably require, designating,  identifying or
describing  the Inventory  pledged to us hereunder.  Your failure,  however,  to
promptly  give us such  consignments,  or other  statements  shall  not  affect,
diminish, modify or otherwise limit our Security Interest in the Inventory.

         6. EVENTS OF DEFAULT AND REMEDIES UPON DEFAULT

         6.1 It is an "Event of  Default"  under  this  agreement  if:  (a) your
business  ceases or a meeting of your creditors is called;  (b) any  bankruptcy,
insolvency, arrangement,  reorganization,  receivership or similar proceeding is
commenced  by or against you under any federal or state law;  (c) you breach any
representation,  warranty or covenant contained in this agreement;  (d) you fail
to pay any  Obligation  when due; or (e) there is an  occurrence  of an Event of
Default (as defined therein) under the Agreement.

         6.2 After the  occurrence of an Event of Default which is not waived by
us, we shall have the right,  with or without  notice to you, to  foreclose  the
Security Interest created herein by any available judicial procedure, or to take
possession of the Inventory without judicial process,  and to enter any premises
where the  Inventory  may be located for the purpose of taking  possession of or
removing  the   Inventory.   We  shall  have  the  right,   without   notice  or
advertisement,  to sell,  lease, or otherwise  dispose of all or any part of the
Inventory,  whether  in


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its then condition or after further  preparation or processing,  in your name or
in ours, or in the name of such party as we may  designate,  either at public or
private  sale or at any  broker's  board,  in lots or in  bulk,  for cash or for
credit, with or without warranties or representations, and upon such other terms
and  conditions as we in our sole  discretion may deem  advisable,  and we shall
have the right to purchase at any such sale.  If notice of intended  disposition
of any said Inventory is required by law, five (5) days notice shall  constitute
reasonable   notification.   If  any  Inventory   shall   require   maintenance,
preparation,  or is in  process  or other  unfinished  state,  we shall have the
right,  at our  option,  to do  such  maintenance,  preparation,  processing  or
completion  of  manufacturing,  for the purpose of putting the Inventory in such
saleable  form as we shall deem  appropriate.  You  agree,  at our  request,  to
assemble the  Inventory  and to make it available to us at places which we shall
select, whether at your premises or elsewhere,  and to make available to us your
premises and facilities for the purpose of our taking possession of, removing or
putting the Inventory in saleable form. The proceeds of any such sale,  lease or
other  disposition of the Inventory  shall be applied first,  to the expenses of
taking, holding, storing, processing, preparing for sale, selling, and the like,
and  then to the  satisfaction  of your  Obligations  to us,  application  as to
particular  Obligations  or as to  principal  or  interest  to  be in  our  sole
discretion.  You shall be liable to us for,  and shall pay to us on demand,  any
deficiency which may remain after such sale, lease or other disposition,  and we
in turn  agree to remit to you,  or your  successors  or  assigns,  any  surplus
resulting therefrom.  The enumeration of the foregoing rights is not intended to
be  exhaustive  and the exercise of any right shall not preclude the exercise of
any other rights, all of which shall be cumulative.

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

         7. TERMINATION

         The  rights  and  Security  Interest  granted  to us  hereunder  are to
continue  in full force and  effect,  notwithstanding  the fact that the account
maintained in your name on our books may from time to time be  temporarily  in a
credit  position,  until  termination  of the Agreement and the final payment in
full of all Obligations due us by you.

         8. MISCELLANEOUS PROVISIONS

         8.1 This agreement and all attendant documentation,  as the same may be
amended  from time to time,  constitutes  the entire  agreement  between us with
regard to the subject  matter  hereof and  supersedes  any prior  agreements  or
understandings.  This  agreement can be changed only by a writing signed by both
of us and our failure or delay in exercising  any of our rights  hereunder  will
not constitute a waiver thereof,  unless such waiver is in writing and signed by
us,  or bar us from  exercising  any of our  rights  at any  time.  No course of
dealing  between us shall change or modify this  agreement.  A waiver on any one
occasion  shall not be construed as a bar to or waiver of any right or remedy on
any future  occasion.  The  validity,  interpretation  and  enforcement  of this
agreement shall be governed by the laws of the State of California.


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         8.2 This  agreement  binds and benefits  each of us and our  respective
successors  and  assigns,  provided,  however,  that  you  may not  assign  this
agreement or your rights hereunder without our prior written consent.

         8.3 If any provision of this  agreement is contrary to,  prohibited by,
or deemed invalid under, applicable laws or regulations,  such provision will be
inapplicable  and deemed  omitted to such extent,  but the remainder will not be
invalidated thereby and will be given effect so far as possible.

                [Remainder of this page intentionally left blank]

         9. JURY TRIAL WAIVER

         To the extent  permitted  by  applicable  law, we each hereby waive any
right  to a trial  by jury in any  action  or  proceeding  arising  directly  or
indirectly out of this agreement,  or any other agreement or transaction between
us or to which we are parties.

         If the foregoing is in accordance  with your  understanding,  please so
indicate  by  signing  and  returning  to us the  original  and one copy of this
agreement. The agreement shall take effect as of the date set forth above, after
being accepted below by one of our officers after which we shall forward a fully
executed copy to you for your files.



                                Very truly yours,



                                THE CIT GROUP / COMMERCIAL SERVICES, INC.

                                By:    /s/      Kulwant Kaur
                                       -----------------------------------
                                Title:         Account Executive
                                       -----------------------------------

Read and Agreed to:

JOE'S JEANS, INC.

By: /s/ Samuel J. Furrow
    ------------------------------

Title: Vice-President
    ------------------------------

                                       Accepted at Los Angeles, California

                                       THE CIT GROUP/COMMERCIAL SERVICES, INC.

                                       By:   /s/      Kulwant Kaur
                                             -----------------------------
                                       Title:         Account Executive
                                             -----------------------------



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