
                                                             Page 25 of 79 pages


                                   EXHIBIT E



                              INVESTMENT AGREEMENT


                                      among


                                 BLUEFLY, INC.,



                        QUANTUM INDUSTRIAL PARTNERS LDC,



                          SFM DOMESTIC INVESTMENTS LLC


                                       and


                               PILOT CAPITAL CORP.




                              Dated: July 27, 1999




<PAGE>
                                                             Page 26 of 79 pages

                              INVESTMENT AGREEMENT


                  INVESTMENT  AGREEMENT (the "Agreement"),  dated as of July 27,
1999, by and among Bluefly,  Inc., a New York corporation  (the "Company"),  and
the purchasers listed on Schedule 1 hereto (the "Initial Purchasers").

                  WHEREAS,  at the First Closing,  the Company wishes to sell to
each Initial  Purchaser,  and each Initial Purchaser wishes to purchase from the
Company, for the purchase price set forth opposite such Initial Purchaser's name
on Schedule 2.2 hereto,  the number of shares of Series A Convertible  Preferred
Stock,  par value $.01 per share and liquidation  value $20.00 per share, of the
Company  (the  "Series A  Preferred  Stock")  set forth  opposite  such  Initial
Purchaser's  name on Schedule 2.2 hereto,  for an aggregate of $5,000,000,  upon
the terms and subject to the  conditions set forth in this Agreement (the "First
Shares"); and

                  WHEREAS, at the Second Closing,  the Company wishes to sell to
the  Second  Closing  Purchasers  (together  with the  Initial  Purchasers,  the
"Purchasers"),  and the Second  Closing  Purchasers  wish to  purchase  from the
Company,  an aggregate of 250,000 shares of the Series A Preferred  Stock for an
aggregate of $5,000,000,  upon the terms and subject to the conditions set forth
in this Agreement (the "Second Shares," and together with the First Shares,  the
"Shares").

                  NOW,  THEREFORE,  in  consideration  of the  mutual  terms and
conditions  herein  contained,  and for good  and  valuable  consideration,  the
receipt and  sufficiency of which is hereby  acknowledged,  the parties  hereto,
intending to be legally bound, hereby agree as follows:

                             SECTION I. DEFINITIONS
                                        -----------

           1.1    Definitions.   As  used  in  this  Agreement,   the  following
definitions shall apply:

                  "1998  Form  10-KSB"  has the  meaning  set  forth in  Section
3.1(a).

                  "Act" means the  Securities  Act of 1933,  as amended,  or any
superseding  Federal  statute,   and  the  rules  and  regulations   promulgated
thereunder,  all as the same  shall be in effect at the  time.  References  to a
particular  section of the Securities  Act of 1933, as amended,  shall include a
reference to the comparable  section,  if any, of any such  superseding  Federal
statute.

                  "Action" means any action, complaint, petition, investigation,
suit or other  proceeding,  whether civil or criminal,  in law or in equity,  or
before any arbitrator or Governmental Entity.

                  "Affiliate"  shall mean any Person who is an  "affiliate"  (as
defined in Rule 12b-2 of the General  Rules and  Regulations  under the Exchange
Act) of, and any Person  controlling,  controlled  by, or under  common  control
with, any Purchaser. For the purposes of this Agreement,  "control" includes the
ability to have investment  discretion through contractual means or by operation
of law.

<PAGE>

                                                             Page 27 of 79 pages


                  "Agreement"  means this  Agreement as the same may be amended,
supplemented or modified in accordance with the terms hereof.

                  "Annual  Reports"  means the Company's  Annual Reports on Form
10-KSB for the years ended  December  31, 1998 and 1997,  each as filed with the
SEC (including, in each case, all amendments thereto filed with the SEC prior to
the date of this  Agreement,  all exhibits and  schedules  thereto and documents
incorporated  by reference  therein,  but excluding any amendments  thereto made
subsequent to the date hereof).

                  "Approved  Investors" has the meaning set forth in Section 2.4
of this Agreement.

                  "Audited  Financials" has the meaning set forth in Section 3.7
of this Agreement.

                  "Board  of  Directors"  means the  Board of  Directors  of the
Company.

                  "Business"  means the  business  of the  Company  and shall be
deemed to include  any of the  following  incidents  of such  business:  income,
operations, condition (financial or other), assets, properties and liabilities.

                  "Business Day" means any day other than a Saturday,  Sunday or
other day on which  commercial  banks in the State of New York are authorized or
required by law or executive order to close.

                  "By-Laws"  means  the  amended  and  restated  by-laws  of the
Company, as the same may have been amended and as in effect on the First Closing
Date.

                  "Capital Stock" means, with respect to any Person, any and all
shares,  interests,  participations,  rights in, or other  equivalents  (however
designated and whether voting or non-voting) of, such Person's capital stock.

                  "Certificate of Amendment to the Certificate of Incorporation"
means the  amendment  to the  Certificate  of  Incorporation  setting  forth the
designation,  number and relative  rights,  privileges and  restrictions  of the
Series A Preferred  Stock  adopted by the Board of Directors  and filed with the
Secretary of State of the State of New York on or before the First  Closing Date
substantially in the form attached hereto as Exhibit A.

                  "Certificate  of  Incorporation"   means  the  Certificate  of
Incorporation  of the Company,  as the same has been amended and as in effect on
the First Closing Date.

                  "Code" means the Internal Revenue Code of 1986, as amended, or
any successor statute thereto.

                  "Commission"  means the Securities and Exchange  Commission or
any similar agency then having jurisdiction to enforce the Securities Act.

                  "Common  Stock"  means the  Common  Stock,  par value $.01 per
share, of the Company and any other capital stock of the Company into which such
stock is reclassified or reconstituted.


<PAGE>

                                                             Page 28 of 79 pages


                  "Condition  of  the  Company"  means  the  assets,   business,
properties,   operations   or  financial   condition  of  the  Company  and  the
Subsidiaries, taken as a whole.

                  "Contract" means any agreement, arrangement, bond, commitment,
franchise,  indemnity,  indenture,  instrument, lease, license or understanding,
whether or not in writing.

                  "Contractual   Obligations"   means  as  to  any  Person,  any
provision  of  any  security   issued  by  such  Person  or  of  any  agreement,
undertaking, contract, indenture, mortgage, deed of trust or other instrument to
which such Person is a party or by which it or any of its property is bound.

                  "Encumbrance" means any claim, charge, easement,  encumbrance,
lease,  covenant,  security interest,  lien, option,  pledge,  rights of others,
restriction  (whether on voting,  sale,  transfer,  disposition  or  otherwise),
whether imposed by agreement,  understanding,  law, equity or otherwise,  except
for any restrictions on transfer  generally  arising under any applicable United
States federal or state securities law.

                  "Environmental  Laws"  means  federal,  state and local  laws,
principles of common law,  regulations  and codes,  as well as orders,  decrees,
judgments or injunctions  issued,  promulgated,  approved or entered  thereunder
relating  to  pollution,  protection  of the  environment  or public  health and
safety.

                  "ERISA" means the Employee  Retirement  Income Security Act of
1974, as amended (or any successor statute thereto).

                  "Exchange Act" means the  Securities  Exchange Act of 1934, as
amended (or any successor statute thereto), and the rules and regulations of the
Commission promulgated thereunder.

                  "Financials"  has the meaning set forth in Section 3.7 of this
Agreement.

                  "First  Closing"  has the  meaning set forth in Section 2.1 of
this Agreement.

                  "First  Closing Date" has the meaning set forth in Section 2.1
of this Agreement.

                  "First  Purchase  Price" has the  meaning set forth in Section
2.2 of this Agreement.

                  "First  Shares" has the  meaning  assigned to such term in the
Recitals to this Agreement.

                  "GAAP"  means  generally  accepted  United  States  accounting
principles in effect from time to time.

                  "Governmental  Authority"  means the  government of any state,
city,  locality or other political  subdivision  thereof,  any entity exercising
executive,  legislative,  judicial, regulatory or administrative functions of or
pertaining  to  government,  and  any  corporation  or  other  entity  owned  or
controlled,  through  stock or capital  ownership  or  otherwise,  by any of the
foregoing.


<PAGE>

                                                             Page 29 of 79 pages

                  "Governmental  Entity"  means any  government  or any  agency,
bureau, board, commission,  court, department,  official, political subdivision,
tribunal  or other  instrumentality  of any  government  of or within the United
States, whether federal, state or local.

                  "Initial  Purchasers" has the meaning assigned to such term in
the Recitals to this Agreement.

                  "Knowledge of the Company"  means the actual  knowledge of the
executive officers of the Company without investigation.

                  "Law"  means any  constitutional  provision,  statute or other
law, rule,  regulation,  or  interpretation  of any Governmental  Entity and any
Order.

                  "Licenses"   means  any   certificates,   permits,   licenses,
franchises,  consents,  approvals,  orders,  authorizations  and clearances from
appropriate Governmental Authorities.

                  "Lien"   means   any   mortgage,   deed  of   trust,   pledge,
hypothecation, assignment, encumbrance, lien (statutory or other) or preference,
priority,  right or other security  interest or preferential  arrangement of any
kind  or  nature  whatsoever  (excluding  preferred  stock  and  equity  related
preferences) including,  without limitation,  those created by, arising under or
evidenced by any  conditional  sale or other title retention  agreement,  or any
financing  lease having  substantially  the same  economic  effect as any of the
foregoing.

                  "Loss" means any action, cost, damage, disbursement,  expense,
liability,  loss,  deficiency,  diminution  in  value,  obligation,  penalty  or
settlement  of  any  kind  or  nature,  whether  foreseeable  or  unforeseeable,
including  but not limited  to,  interest or other  carrying  costs,  penalties,
legal,  accounting  and other  professional  fees and  expenses  incurred in the
investigation, collection, prosecution and defense of claims and amounts paid in
settlement,  that may be imposed on or  otherwise  incurred  or  suffered by the
specified Person.

                  "Material Adverse Effect" means a circumstance,  fact, change,
development  or effect (i) that could or could  reasonably be expected to have a
materially  adverse effect on the properties,  results of operations,  business,
domestic prospects or condition (financial or otherwise) of the Company taken as
a whole or (ii) that materially  adversely effects the ability of the Company to
consummate  the  transaction  contemplated  by this  Agreement  in any  material
respect  or impairs  or delays  the  ability of the  Company to effect the First
Closing or the Second Closing.

                  "NASDAQ"  means the NASDAQ  Small Cap  Market of the  National
Association of Securities Dealers, Inc. Automated Quotation System.

                  "Order" means any decree, injunction, judgment, order, ruling,
assessment or writ of any Governmental Entity.

                  "Person" means any individual, firm, corporation, partnership,
limited liability company,  trust,  incorporated or unincorporated  association,
joint venture,  joint stock company,  Governmental  Authority or other entity of
any kind,  and shall  include any  successor  (by merger or  otherwise)  of such
entity.

<PAGE>

                                                             Page 30 of 79 pages

                  "Proposed  Investors" has the meaning set forth in Section 2.4
of this Agreement.

                  "Purchasers"  has the  meaning  ascribed  to such  term in the
Recitals to this Agreement.

                  "Quarterly  Reports" means the Company's  Quarterly Reports on
Form 10-QSB for the quarters ended March 31, 1999,  September 30, 1998, June 30,
1998 and March 31, 1998, each as filed with the SEC.

                  "Registrable  Securities" means each of the following: (a) any
shares of Common Stock owned by a Purchaser  issued or issuable upon  conversion
of shares of Series A Preferred Stock, and (b) any shares of Common Stock issued
or issuable by the Company to any or all of the Purchasers  during the time that
any of such Purchasers are holders of shares of Common Stock or shares of Series
A Preferred Stock.

                  "Requirements of Law" means as to any Person, any law, treaty,
rule,  regulation,  right,  privilege,  qualification,  license or  franchise or
determination of an arbitrator or a court or other  Governmental  Authority or a
stock  exchange,  in each case  applicable or binding upon such Person or any of
its  property  or to which  such  Person or any of its  property  is  subject or
pertaining to any or all of the transactions contemplated or referred to herein.

                  "SEC" means the Securities and Exchange Commission.

                  "SEC  Documents"  means  the  Annual  Reports,  the  Quarterly
Reports and all other  documents  filed by the Company  with the SEC on or after
January 1, 1998 and prior to the date hereof  pursuant to Section 13 or 15(d) of
the Exchange Act  (including  all exhibits and  schedules  thereto and documents
incorporated  by  reference  therein),  but shall not include any portion of any
document  which is not  deemed  to be  filed  under  applicable  SEC  rules  and
regulations.

                  "Second  Closing"  has the meaning set forth in Section 2.3 of
this Agreement.

                  "Second Closing Date" has the meaning set forth in Section 2.3
of this Agreement.

                  "Second  Closing  Notice" has the meaning set forth in Section
2.4 of this Agreement.

                  "Second Closing  Purchasers" has the meaning  assigned to such
term in Section 2.4 of this Agreement.

                  "Second  Purchase  Price" has the meaning set forth in Section
2.4 of this Agreement.

                  "Second  Shares" has the meaning  assigned to such term in the
Recitals to this Agreement.

                  "Securities  Act" means the Securities Act of 1933, as amended
(or any  successor  statute  thereto),  and the  rules  and  regulations  of the
Commission promulgated thereunder.

<PAGE>

                                                             Page 31 of 79 pages


                  "Series A Preferred  Stock" has the  meaning  assigned to such
term in the Recitals to this Agreement.

                  "Shares" has the meaning assigned to such term in the Recitals
to this Agreement.

                  "Stockholder" has the meaning assigned to such term in Section
9.2(a) of this Agreement.

                  "Subsidiary"  means, as of the relevant date of determination,
with respect to any Person,  a corporation  or other entity of which 50% or more
of the voting power of the outstanding  voting equity  securities or 50% or more
of the outstanding economic equity interest is held, directly or indirectly,  by
such Person. Unless otherwise qualified,  or the context otherwise requires, all
references to a "Subsidiary" or to  "Subsidiaries" in this Agreement shall refer
to a Subsidiary or Subsidiaries of the Company.

                  "Transaction  Documents"  means  collectively,  this Agreement
(including the schedules  attached  hereto) and the  Certificate of Amendment to
the Certificate of Incorporation.

                  "Unaudited  Financials"  has the  meaning set forth in Section
3.7 of this Agreement.

                  SECTION II. PURCHASE AND SALE OF THE SHARES
                              -------------------------------

         2.1      First  Closing.  Subject to the terms and  conditions  of this
                  --------------
Agreement,  the closing of the sale and purchase of the First Shares (the "First
Closing")  shall take place at the offices of Paul,  Weiss,  Rifkind,  Wharton &
Garrison, 1285 Avenue of the Americas, New York, New York 10019-6064 on the date
hereof or on such other date and time as the Initial  Purchasers and the Company
may mutually agree (the "First Closing Date").

         2.2      Transactions  at the  First  Closing.  At the  First  Closing,
                  ------------------------------------
subject  to the terms and  conditions  of this  Agreement,  each of the  Initial
Purchasers  severally  (and not  jointly)  shall  purchase  and acquire from the
Company,  and the Company shall issue and sell to each Initial  Purchaser,  such
number  of shares of Series A  Preferred  Stock as are set forth  opposite  such
Initial  Purchaser's  name on Schedule  2.2 for an aggregate  purchase  price of
                              -------------
$5,000,000 (the "First Purchase Price"). At the First Closing, the Company shall
deliver to each Initial  Purchaser duly executed  certificates  representing the
number of shares of Series A Preferred  Stock set forth  opposite  such  Initial
Purchaser's  name on Schedule 2.2 hereto,  each  registered  in the name of such
                     ------------
Initial  Purchaser or its  nominees,  with  appropriate  issue  stamps,  if any,
affixed  at the  expense  of the  Company,  free and clear of any Lien,  against
payment by each  Initial  Purchaser of the portion of the First  Purchase  Price
payable in respect thereof as set forth opposite such Initial  Purchaser's  name
on Schedule 2.2 hereto by wire  transfer of  immediately  available  funds to an
   ------------
account  designated  in a notice  delivered  by the  Company  not later than one
Business Day prior to the First Closing Date.

         2.3      Second  Closing.  Subject to the terms and  conditions of this
                  ---------------
Agreement,  the  closing  of the sale and  purchase  of the Second  Shares  (the
"Second  Closing")  shall take place at the  offices  of Paul,  Weiss,  Rifkind,
Wharton & Garrison,  1285 Avenue of the Americas,  New York, New York 10019-6064

<PAGE>

                                                             Page 32 of 79 pages

on August 24, 1999, at 10:00 a.m., New York City time, or on such other date and
at such other time as the Second Closing Purchasers and the Company may mutually
agree (the "Second Closing Date").

         2.4      Transactions  at the Second  Closing.  Not later than five (5)
                  ------------------------------------
Business  Days  prior to the  Second  Closing  Date,  subject  to the  terms and
conditions of this Agreement,  the Initial  Purchasers  shall deliver a schedule
(the "Second Closing Notice") to the Company setting forth the allocation of the
Second  Shares among one or more of the Initial  Purchasers  and the persons set
forth on the Second Closing Notice (the "Proposed Investors"). The Company shall
have the right to approve the Proposed  Investors,  which  approval shall not be
unreasonably  withheld  or  delayed,  provided  that any Second  Closing  Notice
submitted for approval by the Initial Purchasers and not reasonably  disapproved
in writing by the Company  within three (3) Days after  receipt  shall be deemed
approved.  On the Second  Closing Date such  approved  Proposed  Investors  (the
"Approved  Investors,"  and together with the Initial  Purchasers  listed on the
Second  Closing  Notice,  the "Second  Closing  Purchasers")  severally (and not
jointly)  shall  purchase and acquire from the  Company,  and the Company  shall
issue and sell to each such Second Closing  Purchaser,  such number of shares of
Series  A  Preferred  Stock  as are  set  forth  opposite  such  Second  Closing
Purchaser's name on the Second Closing Notice for an aggregate purchase price of
$5,000,000 (the "Second  Purchase  Price").  At the Second Closing,  the Company
shall  deliver to each  Second  Closing  Purchaser  duly  executed  certificates
representing the number of shares of Series A Preferred Stock set forth opposite
such Second Closing Purchaser's name, each registered in the name of such Second
Closing  Purchaser or its  nominees,  with  appropriate  issue  stamps,  if any,
affixed  at the  expense  of the  Company,  free and clear of any Lien,  against
payment  by each such  Second  Closing  Purchaser  of the  portion of the Second
Purchase  Price  payable in respect  thereof as set forth  opposite  such Second
Closing  Purchaser's  name on the  Second  Closing  Notice by wire  transfer  of
immediately  available funds to an account  designated in a notice  delivered by
the Company not later than one Business Day prior to the Second Closing Date.

                  SECTION III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
                               ---------------------------------------------

                  The Company  hereby  represents  and  warrants to each Initial
Purchaser as follows:

         3.1      Corporate Existence and Power.
                  -----------------------------


                  (a)     The Company is a corporation  duly organized,  validly
          existing and in good standing under the laws of the State of New York.
          The Company has the corporate  power and  authority to own,  lease and
          operate its properties and to conduct its business as described in the
          Company's annual report on Form 10-KSB for the year ended December 31,
          1998 (the "1998  Form  10-KSB").  The  Company  is duly  qualified  to
          transact business as a foreign  corporation and is in good standing in
          each  jurisdiction  in  which  the  conduct  of  its  business  or its
          ownership,   leasing  or   operation   of   property   requires   such
          qualification,  other than any failure to be so  qualified  or in good
          standing as would not singly or in the  aggregate  with all such other
          failures reasonably be expected to have a Material Adverse Effect.

<PAGE>

                                                             Page 33 of 79 pages

                  (b)     True,  correct and complete  copies of the Certificate
          of  Incorporation  (other than the  Certificate  of  Amendment  to the
          Certificate of Incorporation to be filed pursuant to the terms hereof)
          and the By-Laws as in effect on the date hereof have been  provided by
          the Company to the Initial Purchasers.

          3.2     Power and Authority.  The Company has all requisite  corporate
                  -------------------
power and  authority  to execute and deliver this  Agreement  and to perform its
obligations under this Agreement. The execution, delivery and performance by the
Company  of  this  Agreement  and  each  of the  Transaction  Documents  and the
consummation by the Company of the  transactions  contemplated  hereby have been
duly authorized and approved by the Board of Directors and no further  corporate
action on the part of the Company  (other than the filing of the  Certificate of
Amendment to the  Certificate  of  Designation)  is  necessary to authorize  the
execution,  delivery  and  performance  by the Company of this  Agreement or the
consummation by the Company of the transactions  contemplated  hereby. The Board
of Directors has duly adopted the Certificate of Amendment to the Certificate of
Designation.  This Agreement has been duly executed and delivered by the Company
and is a valid and binding  obligation of the Company,  enforceable  against the
Company in accordance with its terms, except as enforceability may be limited by
applicable  bankruptcy,  insolvency,  reorganization,  fraudulent  conveyance or
transfer,  moratorium or similar laws  affecting the  enforcement  of creditors'
rights  generally  or  by  equitable   principles   relating  to  enforceability
(regardless of whether considered in a proceeding at law or in equity).

         3.3      No  Contravention,   Conflict,  Breach,  Etc.  The  execution,
                  --------------------------------------------
delivery and performance of this Agreement and each Transaction  Document by the
Company and the consummation of the transactions contemplated hereby and thereby
will not conflict with,  contravene or result in a breach or violation of any of
the terms and  provisions  of, or constitute a default  under,  or result in the
creation or imposition of any  Encumbrance  upon any assets or properties of the
Company  or  any  of  its  Subsidiaries  or  cause  the  Company  or  any of its
Subsidiaries to be required to redeem,  repurchase or offer to repurchase any of
their respective  indebtedness  under (i) the certificate of incorporation,  the
by-laws  or  other  organizational  document  of  the  Company  or  any  of  its
Subsidiaries,  (ii)  any  material  Law of  any  Governmental  Authority  having
jurisdiction  over  the  Company  or  any of its  Subsidiaries  or any of  their
respective  assets,  properties or operations or (iii) any indenture,  mortgage,
loan  agreement,  note or other  material  agreement or instrument  for borrowed
money,  any guarantee of any agreement or instrument  for borrowed  money or any
material  lease,  permit,  license or other agreement or instrument to which the
Company or any of its  Subsidiaries is a party or by which the Company or any of
its  Subsidiaries  is  bound  or to  which  any of  the  assets,  properties  or
operations of the Company or any of its Subsidiaries is subject.

         3.4      Consents.  Except as set forth on  Schedule  3.4,  no consent,
                  --------                           -------------
approval, authorization, order, registration, filing or qualification of or with
any (i) Governmental  Authority,  (ii) stock exchange on which the securities of
the Company are traded or (iii) other Person  (whether  acting in an individual,
fiduciary  or other  capacity) is required to be made or obtained by the Company
or any of its  Subsidiaries  for the execution,  delivery and performance by the
Company of this Agreement and each  Transaction  Document to which it is a party
and the consummation of the transactions contemplated hereby and thereby, except
consents which are not material to the business or operations of the Company and
its Subsidiaries, taken as a whole.

<PAGE>

                                                             Page 34 of 79 pages

         3.5      Subsidiaries.  Schedule 3.5 sets forth a complete and accurate
                  ------------   ------------
list of all of the  Subsidiaries of the Company  together with their  respective
jurisdictions of incorporation or organization. Except for its Subsidiaries, the
Company holds no equity,  partnership,  joint  venture or other  interest in any
Person.  True and complete copies of the certificate of  incorporation,  by-laws
and other organizational  documents of the Subsidiaries as in effect on the date
hereof have been provided by the Company to the  Purchasers.  Each Subsidiary of
the Company has been duly incorporated or organized and is validly existing as a
corporation  or  other  legal  entity  in good  standing  under  the laws of the
jurisdiction of its  incorporation or  organization,  has the corporate or other
organizational  power and authority to own, lease and operate its properties and
to conduct its business as currently conducted and is duly qualified to transact
business as a foreign  corporation or other legal entity and is in good standing
in each  jurisdiction  in which the conduct of its  business  or its  ownership,
leasing or operation of property  requires  such  qualification,  other than any
failure to be so  qualified  or in good  standing  as would not singly or in the
aggregate with all such other failures reasonably be expected to have a Material
Adverse Effect.  All of the outstanding  capital stock of each Subsidiary of the
Company  has  been  duly  authorized  and  validly  issued,  is  fully  paid and
nonassessable   and  is  owned  by  the  Company,   directly  or  through  other
Subsidiaries of the Company, free and clear of any Encumbrance, and there are no
rights  granted  to or in  favor  of  any  third  party  (whether  acting  in an
individual,  fiduciary  or  other  capacity),  other  than  the  Company  or any
Subsidiary of the Company,  to acquire any such capital  stock,  any  additional
capital stock or any other  securities of any such  Subsidiary.  There exists no
restriction,  other than those pursuant to applicable law or regulation,  on the
payment of cash dividends by any Subsidiary.

         3.6      SEC Documents.
                  -------------

                  (a)     The  Company  has  made   available   to  the  Initial
          Purchasers true and complete copies of all SEC Documents.

                  (b)     As  of  its  filing  date,  each  SEC  Document  filed
          pursuant to the Exchange  Act (i)  complied in all  material  respects
          with the applicable  requirements of the Exchange Act and (ii) did not
          contain any untrue  statement of a material  fact or omit to state any
          material fact necessary in order to make the statements  made therein,
          in the light of the  circumstances  under  which they were  made,  not
          misleading.

                   (c)    Each final registration  statement filed with the SEC,
          as  amended  or  supplemented  prior to the  First  Closing  Date,  if
          applicable,  pursuant  to the Act,  as of the date such  statement  or
          amendment  became or will become effective (i) complied or will comply
          in all material  respects with the applicable  requirements of the Act
          and  (ii)  did not or will  not  contain  any  untrue  statement  of a
          material fact or omit to state any material fact required to be stated
          therein or necessary to make the statements therein not misleading (in
          the case of any prospectus,  in light of the circumstances under which
          they were made).

          3.7     Financial  Statements.  The audited  financial  statements and
                  ---------------------
notes  included in the SEC Documents  (the "Audited  Financials")  comply in all
material  respects with the  requirements  of the Exchange Act and the rules and
regulations  of the SEC  thereunder,  were  prepared  in  accordance  with  GAAP
consistently applied throughout the period involved except as noted therein, and

<PAGE>

                                                             Page 35 of 79 pages

fairly  present in all material  respects the  financial  condition,  results of
operations,  cash flows and changes in  shareholders'  equity of the Company and
its Subsidiaries at the dates and for the periods presented.  Since December 31,
1998, except as disclosed in the SEC Documents or as previously disclosed to the
Initial  Purchasers  in  writing,  the  Company has not  incurred  any  material
liabilities  other than in the ordinary  course of business of the Company,  and
there has been no change,  and no development  or event  involving a prospective
change,  which has had or could  reasonably  be  expected  to have,  a  Material
Adverse Effect. The unaudited quarterly  consolidated  financial  statements and
the related notes  included in the SEC  Documents,  previously  delivered by the
Company to the  Purchasers  (the  "Unaudited  Financials"  and together with the
Audited Financials,  the "Financials"),  fairly present in all material respects
the financial condition, results of operations and cash flows of the Company and
its Subsidiaries at the dates and for the periods to which they relate,  subject
to normal year-end  adjustments,  and have been prepared in accordance with GAAP
applied on a consistent  basis except as otherwise  stated therein and have been
prepared on a basis  consistent  with that of the audited  financial  statements
referred to above  subject to normal  year-end  adjustments  except as otherwise
stated therein.

         3.8      No Existing  Violation,  Default,  Etc.  The Company is not in
                  --------------------------------------
violation (i) of any provision of its Certificate of  Incorporation,  By-Laws or
other  organizational  documents or (ii) of any  applicable  Law or  regulation,
which violation has or would  reasonably be expected to have a Material  Adverse
Effect. No breach,  event of default or event that, but for the giving of notice
or the lapse of time or both,  would constitute an event of default exists under
any indenture,  mortgage, loan agreement,  note or other agreement or instrument
for borrowed  money,  any guarantee of any agreement or instrument  for borrowed
money or any lease, permit, license or other agreement to which the Company is a
party or by which the Company is bound or to which any of the properties, assets
or operations  of the Company is subject,  which  breach,  event of default,  or
event  that,  but for the  giving of notice or the lapse of time or both,  would
constitute  an event of default,  has or would  reasonably be expected to have a
Material Adverse Effect.

         3.8      Licenses and Permits.  The Company and its  Subsidiaries  have
                  --------------------
such Licenses as are necessary to own, lease or operate their  properties and to
conduct  their  businesses  in the manner  described in the SEC Documents and as
currently  owned or leased and  conducted and all such Licenses are valid and in
full force and effect  except such Licenses that the failure to have or to be in
full force and effect  individually  or in the aggregate have not had, and would
not  reasonably  be expected to have,  a Material  Adverse  Effect.  None of the
Company or any of its  Subsidiaries  has  received  any written  notice that any
violations  are being or have been alleged in respect of any such License and no
proceeding  is pending  or, to the  Knowledge  of the  Company,  threatened,  to
suspend,  revoke or limit any such License the effect of which would  reasonably
be expected to have a Material Adverse Effect.  The Company and its Subsidiaries
are in compliance with their respective  obligations  under such Licenses,  with
such  exceptions as individually or in the aggregate have not had, and would not
reasonably  be expected to have,  a Material  Adverse  Effect,  and no event has
occurred that allows, or after notice or lapse of time would allow,  revocation,
suspension,  limitation or termination  of such Licenses,  except such events as
have not had, or would not  reasonably  be expected to have, a Material  Adverse
Effect.

<PAGE>

                                                             Page 36 of 79 pages

         3.10     Title to  Properties.  The Company and its  Subsidiaries  have
                  --------------------
sufficient  title to all material  properties  (real and personal)  owned by the
Company  and any such  Subsidiary  that are  necessary  for the  conduct  of the
business  of the  Company  and  any  such  Subsidiary  as  described  in the SEC
Documents  filed  with  the SEC  prior  to the  date of  this  Agreement  and as
currently  conducted,  free and  clear of any  Encumbrance  that may  materially
interfere  with the conduct of its business,  and all material  properties  held
under lease by the Company and the Subsidiaries are held under valid, subsisting
and enforceable leases.

         3.11     Intellectual  Property.  There  are no  intellectual  property
                  ----------------------
rights  or  other  intangible  property  rights  (other  than  standard  license
agreements and other related  rights  acquired by the Company or under which the
Company is the licensee in connection with the Company's use of  administrative,
ministerial,  accounting and financial  office  automation  software and related
products)  including,   without  limitation,  (i)  trademarks,   service  marks,
fictitious or assumed names,  trade dress,  trade names,  brand names,  Internet
domain  names,  designs,  logos,  or  corporate  names,  whether  registered  or
unregistered,  and all registrations and applications for registration  thereof;
(ii)  copyrights,  including  all renewals  and  extensions  thereof,  copyright
registrations  and  applications for registration  thereof,  and  non-registered
copyrights; (iii) trade secrets, concepts, ideas, designs, research,  processes,
procedures,  techniques,  methods,  know-how,  data,  mask  works,  discoveries,
inventions,   modifications,   extensions,   improvements,  formulae  and  other
proprietary  rights  (whether or not  patentable or subject to  copyright,  mask
work,  or  trade  secret  protection);  and  (iv)  computer  software  programs,
including,  without limitation,  all source code, object code, and documentation
related  thereto,   patents,  patent  applications,   and  other  patent  rights
(including any divisions, continuations,  continuations-in-part,  substitutions,
or reissues thereof,  whether or not patents are issued on any such applications
and whether or not any such  applications are modified or resubmitted)  owned or
licensed by the  Company or any of its  Subsidiaries  ("Intellectual  Property")
other than as  previously  disclosed in writing to the Initial  Purchasers or as
disclosed  in  Schedule  3.11.  Except  as  disclosed  in  Schedule  3.11  or as
               --------------                              --------------
previously  disclosed to the Initial Purchasers in writing: (i) the Company owns
or possesses sufficient legal rights to all Intellectual  Property necessary for
its business as presently  conducted  without any  conflict or  infringement  of
rights of others; (ii) other than those contracts,  agreements,  and instruments
required  to be filed  as an  exhibit  to the 1998  Form  10-KSB,  there  are no
material  outstanding options,  licenses,  or agreements of any kind relating to
the Intellectual Property nor is the Company bound by or a party to any material
options,  licenses,  or agreements of any kind with respect to the  intellectual
property of any other person or entity;  (iii) to the  Knowledge of the Company,
the  Company has not  infringed  upon or  otherwise  violated  the  intellectual
property rights of any third party;  (iv) other than as previously  disclosed to
the Initial  Purchasers in writing or as set forth on Schedule 3.11, the Company
                                                      -------------
has not  received  any  claim,  charge,  demand,  notice or other  communication
alleging  that the  Company  has  violated  or, by  conducting  its  business as
proposed,  would violate any intellectual property rights of any other person or
entity;  (v) other than as  previously  disclosed to the Initial  Purchasers  in
writing or as set forth on  Schedule  3.11,  the Company is unaware of any facts
                            --------------
that would  form a  reasonable  basis for an action or claim by others  alleging
infringement by the Company of Intellectual  Property of others; and (vi) all of
the Company's  Intellectual  Property is owned by the Company, free and clear of
all liens and encumbrances and held in the Company's name. None of the execution
or delivery of any  Transaction  Documents,  or the carrying on of the Company's
business by the  employees of the  Company,  will  conflict  with or result in a
breach of the terms,  conditions,  or  provisions  of, or  constitute  a default

<PAGE>

                                                             Page 37 of 80 pages


under,   any  contract,   covenant  or  instrument   related  to  the  Company's
Intellectual  Property or Related Intellectual  Property.  The Company has taken
all action reasonably  necessary and desirable to maintain and protect each item
of  Intellectual  Property  owned by the  Company.  Each  employee,  officer and
director of the  Company has  executed an  agreement  regarding  inventions  and
confidentiality  substantially  in the form or forms  delivered  to the  Initial
Purchasers.  The Company is unaware of uncited prior art that is more  pertinent
than the art  already  of  record in the U.S.  Patent  and  Trademark  Office in
connection   with  the  patents  and  patent   applications   of  the  Company's
Intellectual Property.

         3.12     Environmental Matters. To the Company's Knowledge, the Company
                  ---------------------
and its  Subsidiaries  and their  operations and properties are and have been in
compliance in all material respects with all applicable  Environmental Laws, and
no material expenditures are or, to the Company's Knowledge, will be required in
order to  comply  with any  applicable  Environmental  Laws.  There is no civil,
criminal or administrative  judgment,  action,  suit,  demand,  claim,  hearing,
notice of violation, investigation,  proceeding, notice or demand letter pending
or to the  Company's  Knowledge,  threatened  against  the Company or any of its
Subsidiaries  pursuant to Environmental  Laws which could reasonably be expected
to result in a material  fine,  penalty or other  obligation,  cost or  expense.
There are no past or  present  events,  conditions,  circumstances,  activities,
practices, incidents,  agreements, actions or plans which may prevent compliance
by the Company or any of its Subsidiaries with, or which have given rise to, or,
to the Company's Knowledge, will give rise to, material liability to the Company
or any of its Subsidiaries under Environmental Laws.

         3.13     Capitalization.  As of the First  Closing  Date,  after giving
                  --------------
effect to the transactions  contemplated hereby, the authorized capital stock of
the Company will  consist of  15,000,000  shares of Common  Stock and  2,000,000
shares of Preferred  Stock,  $.01 par value,  of which 500,000  shares have been
designated  Series A  Preferred  Stock and, as of the First  Closing  Date after
giving effect to the transaction contemplated hereby, the issued and outstanding
capital stock of the Company  shall consist of 4,894,706  shares of Common Stock
and 250,000 shares of Series A Preferred Stock. All such shares of Capital Stock
of  the  Company  have  been  duly  authorized  and  upon  payment  therefor  as
contemplated by the Transaction  Documents,  all such shares shall be fully paid
and  non-assessable.  The First  Shares to be  issued at the First  Closing  are
convertible  into  476,190  shares of Common  Stock and the Second  Shares to be
issued at the Second  Closing  are  convertible  into  476,190  shares of Common
Stock,  subject  to  antidilution  provisions  set forth in the  Certificate  of
Amendment to the Certificate of  Incorporation.  Except as set forth in Schedule
3.13 and  except  as  contemplated  by this  Agreement,  there  are no shares of
capital stock of the Company reserved for issuance. The First Shares when issued
upon payment  therefor and the Second Shares when issued upon payment  therefore
and the shares of Common Stock when issued upon  conversion  of the Shares,  are
duly  authorized  and,  when so issued,  will be fully paid and  non-assessable.
Except for the Shares and as set forth in Schedule  3.13,  there are no options,
warrants or other rights to purchase shares of Capital Stock or other securities
of the Company or any of its  Subsidiaries,  or securities  convertible  into or
exchangeable  for shares of Capital Stock or other  securities of the Company or
any of its Subsidiaries, nor, except as required by the Transaction Documents or
as set forth in Schedule 3.13, is the Company or any Subsidiary obligated in any
manner  to issue  shares of its  Capital  Stock or other  securities.  Except as

<PAGE>

                                                             Page 38 of 79 pages


contemplated  hereby and for relevant state and federal  securities  laws, there
are no  restrictions  on the  Purchaser's  ability to transfer shares of Capital
Stock of the Company.

         3.14     Employee Benefits.

                  (a)     Except for the plans  described  in the SEC  Documents
          filed  with  the SEC  prior to the date of this  Agreement  and  those
          listed in Schedule 3.14 (the "Benefit  Plans"),  there are no employee
                    -------------
          benefit  plans  or  arrangements  of  any  type  (including,   without
          limitation, plans described in Section 3(3) of the Employee Retirement
          Income Security Act of 1974, as amended and the regulations thereunder
          ("ERISA")  under  which the  Company  has or in the future  could have
          directly,  or indirectly through a Commonly  Controlled Entity (within
          the meaning of Sections  414(b),  (c),  (m) and (o) of the Code),  any
          material  liability with respect to any current or former  employee of
          the Company or any Commonly Controlled Entity. No such Benefit Plan is
          a   "multiemployer   plan"   (within  the  meaning  of  ERISA  Section
          4001(a)(3)) or subject to Title IV of ERISA and, the Company has never
          contributed  to, or had any  obligation  to  contribute  to,  any such
          multiemployer plan or any plan subject to Title IV of ERISA.

                  (b)     With  respect to each Benefit  Plan:  (i) such Benefit
          Plan has been  maintained  and  administered  at all times in material
          compliance with its terms and applicable law and  regulation;  (ii) no
          event has occurred and to the  Knowledge of the Company,  there exists
          no circumstance under which the Company could directly,  or indirectly
          through a Commonly  Controlled  Entity,  incur any material  liability
          under ERISA, the Code or otherwise;  (iii) there are no actions, suits
          or claims  pending or, to the  Knowledge of the  Company,  threatened,
          with  respect to any Benefit Plan or against the assets of any Benefit
          Plan with respect to which suits management of the Company  reasonably
          believes  the Company  could incur any  material  liability;  (iv) all
          contributions and premiums due and owing to any Benefit Plan have been
          made  or  paid  on  a  timely  basis  and  no   "accumulated   funding
          deficiency,"  as  defined  in Code  Section  412,  has been  incurred,
          whether or not waived;  and (v) if such Benefit Plan is intended to be
          qualified under Section 401(a) of the Code, such Benefit Plan has been
          determined  to be so  qualified  and each  trust  created  under  such
          Benefit Plan has been  determined  to be exempt from tax under Section
          501(a) of the Code and to the  Knowledge of the Company,  no event has
          occurred since the date of such  determinations,  including  effective
          changes in laws or regulations or  modifications to the Benefit Plans,
          that would adversely affect such qualification or tax exempt status.

                  (c)     The Company has no Postretirement  Benefit  Obligation
          (as defined in Statement of Financial Accounting Standards No. 106) in
          respect of post-retirement health and medical benefits for current and
          former  employees  of the  Company.  No  condition  exists  that would
          prevent the Company from amending or  terminating  any plan  providing
          health or medical  benefits in respect of current or former  employees
          of the Company.

                  (d)     No  employee or former  employee  of the Company  will
          become entitled to any bonus,  retirement,  severance, job security or

<PAGE>

                                                             Page 39 of 79 pages

          similar  benefit or enhanced such benefit  (including  acceleration of
          vesting or exercise of an incentive award,  stock option or restricted
          security) as a result of the transactions contemplated hereby.

                  (e)     All persons  classified by the Company as  independent
          contractors  satisfy  the  requirements  of  applicable  law  to be so
          classified  and the Company has no obligation  to provide  benefits to
          any such person under any Benefit Plan.

         3.15     Taxes. The Company and its  Subsidiaries  have filed or caused
                  -----
to be filed,  or have properly  filed  extensions  for, all material Tax returns
that are  required  to be filed and have paid or caused to be paid all  material
Taxes as shown on said returns and on all material assessments received by it to
the extent that such Taxes have become due,  except Taxes the validity or amount
of which is being  contested in good faith by appropriate  proceedings  and with
respect to which  adequate  reserves,  in  accordance  with GAAP,  have been set
aside. The Company and its Subsidiaries  have paid or caused to be paid, or have
established reserves that the Company or such Subsidiaries reasonably believe to
be adequate in all material respects,  for all Tax liabilities applicable to the
Company and its  Subsidiaries  for all fiscal years that have not been  examined
and reported on by the taxing  authorities  (or closed by applicable  statutes).
Schedule 3.15 sets forth the tax year through which United States Federal income
-------------
tax returns of the Company and its  Subsidiaries  have been examined and closed.
For purposes of this Section 3.15,  "Tax" or "Taxes"  means any federal,  state,
county, local, foreign and other taxes (including,  without limitation,  income,
profits,  premium,  estimated,  excise,  sales, use, occupancy,  gross receipts,
franchise,   ad  valorem,   severance,   capital  levy,  production,   transfer,
withholding,  employment, unemployment compensation, payroll and property taxes,
import duties and other  governmental  charges and assessments),  whether or not
measured  in  whole  or in  part  by net  income,  and  including  deficiencies,
interest,  additions to tax or interest, and penalties with respect thereto, and
including expenses  associated with contesting any proposed  adjustments related
to any of the foregoing.

         3.16     Litigation.  Except as  previously  disclosed  to the  Initial
                  ----------
Purchasers in writing or in SEC  Documents  filed with the SEC prior to the date
of  this  Agreement,   there  are  no  pending  actions,   suits,   proceedings,
arbitrations or investigations,  royalty or other audits, complaints, against or
affecting  the  Company or any of its  Subsidiaries  or any of their  respective
properties,  assets or  operations,  or with respect to which the Company or any
such  Subsidiary  is  responsible  by way of indemnity  or  otherwise  (together
"Litigation  Claims"),  that are required under the Exchange Act to be described
in such SEC Documents or that could singly,  or in the aggregate,  with all such
other  Litigation  Claims,  reasonably  be expected  to have a Material  Adverse
Effect and, to the  Knowledge  of the  Company,  no such  Litigation  Claims are
threatened.

         3.17     Labor   Relations.   Neither   the  Company  nor  any  of  its
                  -----------------
Subsidiaries is engaged in any unfair labor practice. Except as disclosed in the
SEC Documents  filed with the SEC prior to the date of this  Agreement or as set
forth on Schedule 3.17, (a) no grievance or arbitration  proceeding  arising out
of or under collective  bargaining agreements is pending or, to the Knowledge of
the Company,  threatened against the Company or any of its Subsidiaries;  (b) no
strike,  material  labor dispute,  slowdown or stoppage has occurred  within the
past 36 months or is pending or, to the  Knowledge  of the  Company,  threatened
against the Company,  any of its  Subsidiaries  or any material  supplier of the
Company;  (c) neither the Company nor any of its  Subsidiaries is a party to any

<PAGE>

                                                             Page 40 of 79 pages


collective  bargaining  agreement  or  contract;  and  (d) no  union  organizing
activities  are taking  place that  affect the  employees  of the Company or any
Subsidiary.

         3.18     Inventory,   Etc.  The   inventory  of  the  Company  and  its
                  ----------------
Subsidiaries is in good and merchantable  condition,  and suitable and usable or
salable in the ordinary  course of business for the purposes for which intended,
subject to a reasonable reserve for obsolescence and out-of-date inventory,  and
is recorded in the Financials in accordance  with GAAP and consistent  with past
practice.  The Company has in place reasonable procedures to ensure that it does
not purchase  counterfeit  articles  and, to the  Knowledge of the Company,  the
inventory does not contain any  counterfeit  articles.  The Company has good and
valid title to all of the inventory and other personal property reflected on the
March 31, 1999  Unaudited  Financials as being owned by it (other than inventory
and other property that has been subsequently  sold or otherwise  disposed of in
the  ordinary  course  of  business).   Neither  the  Company  nor  any  of  its
Subsidiaries  knows  of  any  existing  fact  or  circumstance  which  would  be
reasonably  likely to adversely affect the supply of materials  available to the
Company or any of its Subsidiaries.

         3.19     Receivables.  All accounts and notes  receivable  reflected on
                  -----------
the March 31, 1999 Unaudited  Financials,  and all accounts and notes receivable
arising subsequent to the March 31, 1999 Unaudited  Financials,  (i) have arisen
in the ordinary course of business of the Company or its  Subsidiaries  and (ii)
subject only to a reserve for bad debts and normal returns, credits, adjustments
and warranty  coverage,  in each case  reflected in the March 31, 1999 Unaudited
Financials in accordance with GAAP and consistent with past practice,  have been
collected or, subject to the occurrence of unforeseen events occurring after the
date hereof,  are  collectible in the ordinary course of business of the Company
and its  Subsidiaries  in the aggregate  recorded  amounts thereof in accordance
with their terms.

         3.20     Investment  Company.   Neither  the  Company  nor  any  Person
                  -------------------
controlling  the  Company  is, and no such  Person  after  giving  effect to the
transactions  contemplated  hereby will be, an "investment  company"  within the
meaning of the Investment Company Act of 1940, as amended.

         3.21     Insurance.  The  Company  has in full  force  and  effect  (i)
                  ---------
general  liability,  (ii)  directors  and  officers,  and (iii) media  insurance
policies,  in each  case,  with  financially  sound  and  responsible  insurance
companies,  with extended coverage,  sufficient in amount (subject to reasonable
deductions) in respect of its properties that might be damaged or destroyed.

         3.22     Exemption from Registration; Restrictions on Offer and Sale of
                  --------------------------------------------------------------
Same or Similar  Securities.  Assuming the representations and warranties of the
---------------------------
Initial  Purchasers  set forth in Section 4 hereof  are true and  correct in all
material  respects,  the  offer and sale of the  Shares  made  pursuant  to this
Agreement will be exempt from the registration  requirements of the Act. Neither
the Company nor any Person  acting on its behalf  has,  in  connection  with the
offering  of the  Shares  engaged  in (i) any form of  general  solicitation  or
general  advertising  (as those terms are used within the meaning of Rule 502(c)
under the Act),  (ii) any action  involving a public offering within the meaning
of  Section  4(2) of the  Act,  or (iii)  any  action  that  would  require  the
registration  under the Act of the offering  and sale of the Shares  pursuant to
this Agreement or that would violate  applicable  state securities or "blue sky"

<PAGE>

                                                             Page 41 of 79 pages

laws.  The Company has not made and will not prior to the Second  Closing  make,
directly or indirectly,  any offer or sale of shares of its Capital Stock, if as
a result the offer and sale of the  securities  contemplated  hereby,  or any of
them, could fail to be entitled to exemption from the registration  requirements
of the Act. As used  herein,  the terms  "offer"  and "sale"  have the  meanings
specified in Section 2(3) of the Act.

         3.23     Contracts.  True and complete copies of all material contracts
                  ---------
of the Company  required to be filed as exhibits to SEC Documents have been made
available to the Initial Purchasers by the Company.  Neither the Company nor any
of its Subsidiaries nor, to the Knowledge of the Company,  any other party is in
breach of or in default  under any such  contract  except for such  breaches and
defaults as in the aggregate  have not had, and would not reasonably be expected
to, have a Material Adverse Effect.

         3.24     No  Material  Adverse  Change.  Since  April 1, 1999:  (a) the
                  -----------------------------
Company  and its  Subsidiaries  have not  incurred  any  material  liability  or
obligation (indirect,  direct or contingent),  or entered into any material oral
or written agreement or other transaction, that is not in the ordinary course of
business or that would  reasonably  be expected to result in a Material  Adverse
Effect;  (b) the Company and its  Subsidiaries  have not  sustained  any loss or
interference  with its  business  or  properties  from fire,  flood,  windstorm,
accident or other calamity (whether or not covered by insurance) that has had or
that would reasonably be expected to have a Material  Adverse Effect;  (c) there
has  been  no  material  change  in the  indebtedness  of the  Company  and  its
Subsidiaries;  (d)  there  has  been no  dividend  or  distribution  of any kind
declared, paid or made by the Company or any of its Subsidiaries on any class of
its capital stock;  (e) neither the Company nor any of its Subsidiaries has made
(nor does it propose to make) (i) any material change in its accounting  methods
or practices or (ii) any material  change in the  depreciation  or  amortization
policies or rates  adopted by it, in either  case,  except as may be required by
law or applicable accounting standards;  and (f) there has been no event causing
a Material  Adverse  Effect,  nor any development  that would,  singly or in the
aggregate, reasonably be expected to result in a Material Adverse Effect.

         3.25     Trade  Relations.  Except as set forth in Schedule  3.25 or as
                  ----------------
previously  disclosed  in writing to the  Initial  Purchasers,  there  exists no
actual or, to the Company's Knowledge,  threatened termination,  cancellation or
limitation  of,  or  any  adverse   modification  or  change  in,  the  business
relationship of the Company or any of its Subsidiaries with, any customer or any
group of customers whose purchases are individually or in the aggregate material
to the business of the Company or any of its Subsidiaries,  or with any material
supplier, and, to the Company's Knowledge,  there exists no present condition or
state of fact or  circumstances  that  would  materially  adversely  affect  the
Condition  of the Company or, to the  Company's  Knowledge,  prevent the Company
from  conducting  its  business  after  the  consummation  of  the  transactions
contemplated by this Agreement and each of the other Transaction  Documents,  in
substantially  the same  manner  in which  such  business  has  heretofore  been
conducted and described in the SEC Documents.

         3.26     Broker's,  Finder's or Similar  Fees.  There are no  brokerage
                  ------------------------------------
commissions, finder's fees or similar fees or commissions payable by the Company
in connection with the transactions  contemplated hereby based on any agreement,
arrangement or understanding  with the Company or any of its Subsidiaries or any
action taken by any such entity.

<PAGE>

                                                             Page 42 of 79 pages

         3.27     Disclosure;  Agreement and Other  Documents.  The  Transaction
                  -------------------------------------------
Documents and each of the  certificates  furnished to the Initial  Purchasers by
the Company in  connection  with the purchase and sale of the Shares at or prior
to the First Closing, taken as a whole, do not contain any untrue statement of a
material  fact or omit to state a material  fact  necessary in order to make the
statements  contained herein or therein, in the light of the circumstances under
which they were made, not misleading.

                  SECTION IV. REPRESENTATIONS AND WARRANTIES
                           OF THE INITIAL PURCHASERS

                  Each of the Initial  Purchasers hereby represents and warrants
(severally as to itself and not jointly) to the Company as follows:

         4.1      Existence  and  Power.  Such  Initial  Purchaser  (a) is  duly
                  ---------------------
organized  and  validly  existing  under  the  laws of the  jurisdiction  of its
formation and (b) has the requisite power and authority to execute,  deliver and
perform its obligations  under this Agreement and each of the other  Transaction
Documents to which it is a party.

         4.2      Authorization;  No Contravention.  The execution, delivery and
                  --------------------------------
performance  by such Initial  Purchaser of this  Agreement and each of the other
Transaction  Documents to which it is a party and the transactions  contemplated
hereby and thereby,  including,  without  limitation,  the purchase of the First
Shares,  (a) have been  duly  authorized  by all  necessary  action,  (b) do not
contravene the terms of such Initial Purchaser's  organizational  documents,  or
any amendment  thereof,  and (c) do not violate,  conflict with or result in any
breach or  contravention  of or the creation of any Lien under,  any Contractual
Obligation  of such  Purchaser,  or any  Requirement  of Law  applicable to such
Initial Purchaser.

         4.3      Governmental Authorization; Third Party Consents. No approval,
                  ------------------------------------------------
consent, compliance, exemption, authorization, or other action by, or notice to,
or filing with, any Governmental  Authority or any other Person, and no lapse of
a waiting  period  under a  Requirement  of Law,  is  necessary  or  required in
connection  with the  execution,  delivery or  performance  (including,  without
limitation,  the purchase of the First Shares) by, or enforcement against,  such
Initial Purchaser of this Agreement,  each of the other Transaction Documents to
which it is a party and the transactions contemplated hereby or thereby.

         4.4      Binding   Effect.   This  Agreement  and  each  of  the  other
                  ----------------
Transaction  Documents  to which  it is a party  have  been  duly  executed  and
delivered by such Initial Purchaser and constitute the legal,  valid and binding
obligations of such Initial Purchaser, enforceable against it in accordance with
its terms,  except as  enforceability  may be limited by applicable  bankruptcy,
insolvency,  reorganization,  fraudulent  conveyance or transfer,  moratorium or
similar laws  affecting the  enforcement  of creditors'  rights  generally or by
equitable   principles   relating  to  enforceability   (regardless  of  whether
considered in a proceeding at law or in equity).

         4.5      Purchase for Own  Account.  The First Shares to be acquired by
                  -------------------------
such Initial Purchaser  pursuant to this Agreement are being or will be acquired
for its own account and with no intention  of  distributing  or  reselling  such
First Shares or any part thereof in any  transaction  that would be in violation
of the securities  laws of the United States of America,  or any state,  without
prejudice, however, to the rights of such Initial Purchaser at all times to sell

<PAGE>

                                                             Page 43 of 79 pages

or otherwise  dispose of all or any part of such First Shares under an effective
registration   statement  under  the  Act,  or  under  an  exemption  from  such
registration  available  under  the  Act,  and  subject,  nevertheless,  to  the
disposition of such Initial  Purchaser's  property being at all times within its
control. If such Initial Purchaser should in the future decide to dispose of any
of the First Shares,  such Initial Purchaser  understands and agrees that it may
do so only in compliance with the Act and applicable  state  securities laws, as
then in effect.  Such Initial  Purchaser  agrees to the  imprinting,  so long as
required  by law,  of a legend on  certificates  representing  the First  Shares
substantially to the following effect:

         "THE  SECURITIES   REPRESENTED  BY  THIS   CERTIFICATE  HAVE  NOT  BEEN
         REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
         THE  SECURITIES  LAWS OF ANY  STATE  AND  MAY NOT BE SOLD OR  OTHERWISE
         DISPOSED OF EXCEPT  PURSUANT  TO AN  EFFECTIVE  REGISTRATION  STATEMENT
         UNDER THE ACT AND APPLICABLE  STATE  SECURITIES  LAWS OR PURSUANT TO AN
         APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT."

         4.6      Accreditation;  Sophistication; Other Securities Laws Matters.
                  -------------------------------------------------------------
Each Initial  Purchaser (a) is an  "accredited  investor"  within the meaning of
Rule 501 under the Act; (b) has sufficient knowledge and experience in investing
in  companies  similar to the Company so as to be able to evaluate the risks and
merits of its  investment  in the  Company and is able  financially  to bear the
risks  thereof;  (c) has had an  opportunity  to review  the SEC  Documents  and
exhibits  thereto and discuss the Company's  business,  management and financial
affairs with the Company's management; and (d) is a resident of the jurisdiction
listed next to its name on Schedule  2.2 hereto for purposes of state "blue sky"
securities law purposes.

         4.7      Broker's,  Finder's or Similar  Fees.  There are no  brokerage
                  ------------------------------------
commissions, finder's fees or similar fees or commissions payable by the Initial
Purchasers  or any of them,  in connection  with the  transactions  contemplated
hereby based on any agreement,  arrangement or  understanding  with such Initial
Purchaser or any action taken by such Initial Purchaser.

         4.8      Financial  Resources.  Each  of  the  Initial  Purchasers  has
                  --------------------
adequate  financial  resources  to meet its  payment  obligations  at the  First
Closing and the Second Closing.

                    SECTION V. CONDITIONS TO THE OBLIGATION
                           OF THE PURCHASERS TO CLOSE

                  The  obligation  of the Initial  Purchasers  to  purchase  the
Shares and to pay the First Purchase Price, and of the Second Closing Purchasers
to pay the Second Purchase Price, and to perform any obligations hereunder shall
be subject  to the  satisfaction  as  determined  by, or waiver by, the  Initial
Purchasers of the following conditions on or before the First Closing Date or in
the case of Sections 5.9 and 5.12, by the Second Closing Purchasers on or before
the Second Closing Date.


<PAGE>

                                                             Page 44 of 79 pages

         5.1      Representations   and  Warranties.   The  representations  and
                  ---------------------------------
warranties  of the  Company  contained  in  Section  3 hereof  shall be true and
correct in all material  respects at and on the First Closing Date as if made at
and on such date,  except to the extent  that any  representation  and  warranty
expressly  speaks as of an earlier date, in which case such  representation  and
warranty  is true and correct as of such date and except for any  activities  or
transactions  which  may have  taken  place  after  the date  hereof  which  are
contemplated by this Agreement.

         5.2      Compliance  with  this  Agreement.   The  Company  shall  have
                  ---------------------------------
performed and complied in all material  respects with all of its  agreements and
conditions  set forth herein that are required to be performed or complied  with
by the Company on or before the First Closing Date.

         5.3      Secretary's  Certificate.  The Initial  Purchasers  shall have
                  ------------------------
received  a  certificate  from  the  Company,  in  form  and  substance  Initial
Purchasers,  dated the  First  Closing  Date and  signed  by a  secretary  or an
assistant  secretary of the Company,  certifying (a) that the attached copies of
the  Certificate of  Incorporation,  the By-Laws and resolutions of the Board of
Directors of the Company approving this Agreement, each of the other Transaction
Documents and the transactions  contemplated  hereby and thereby,  are all true,
complete and correct and remain unamended and in full force and effect,  and (b)
as to the  incumbency  and  specimen  signature  of each  officer of the Company
executing this Agreement,  each of the other Transaction Documents and any other
document delivered in connection herewith on behalf of the Company.

         5.4      Officers'  Certificate.  The  Initial  Purchasers  shall  have
                  ----------------------
received a certificate from the Company,  in form and substance  satisfactory to
the Initial Purchasers, dated the First Closing Date and signed by the Company's
chief   executive   officer  and  its   treasurer,   certifying   that  (a)  the
representations  and warranties of the Company contained in Section 3 hereof are
true and correct in all material  respects on the First Closing Date and (b) the
Company has  performed  and complied  with in all  material  respects all of the
agreements and conditions set forth or contemplated  herein that are required to
be  performed  or complied  with by the  Company on or before the First  Closing
Date.

         5.5      Documents.  The Initial  Purchasers  shall have received true,
                  ---------
complete and correct copies of such documents as they may reasonably  request in
connection  with  or  relating  to the  issue  and  sale of the  Shares  and the
transactions   contemplated   hereby,  all  in  form  and  substance  reasonably
satisfactory to the Initial Purchasers.

         5.6      Filing of  Certificate  of  Amendment  to the  Certificate  of
                  --------------------------------------------------------------
Incorporation.  The Certificate of Amendment to the Certificate of Incorporation
-------------
shall have been duly filed by the  Company  with the  Secretary  of State of the
State of New York in accordance with the General Corporation Law of the State of
New York.

         5.7      Opinion of Counsel. The Initial Purchasers shall have received
                  ------------------
an opinion of counsel to the Company,  dated the First Closing Date, relating to
the transactions contemplated hereby or referred to herein, substantially in the
form attached hereto as Exhibit B.
                        ---------

         5.8      Approval of Counsel to the Initial Purchasers. All actions and
                  ---------------------------------------------
proceedings  hereunder and all documents required to be delivered by the Company
hereunder  or  in  connection  with  the   consummation   of  the   transactions

<PAGE>

                                                             Page 45 of 79 pages

contemplated  hereby, and all other related matters,  shall have been acceptable
to Paul, Weiss, Rifkind, Wharton & Garrison,  counsel to the Initial Purchasers,
in their reasonable judgment as to their form and substance.

         5.9      Shares.  At the First Closing and the Second  Closing,  as the
                  ------
case may be, the Company shall have  delivered to each of the  Purchasers  stock
certificates  in  definitive  form  representing  the number of Shares set forth
opposite such Purchaser's name on Schedule 2.2 and/or the Second Closing Notice,
as the case may be, registered in the name of such Purchaser.

         5.10     Consents   and    Approvals.    All   consents,    exemptions,
                  ---------------------------
authorizations, or other actions by, or notices to, or filings with Governmental
Authorities  and other  Persons in respect of all  Requirements  of Law and with
respect to those  Contractual  Obligations of the Company which are necessary or
required in connection with the execution,  delivery or performance  (including,
without  limitation,  the  issuance  of the Shares  and  shares of Common  Stock
issuable upon conversion of the Shares) by, or enforcement  against, the Company
of this Agreement and each of the other  Transaction  Documents  shall have been
obtained  and be in full  force and  effect,  except for  consents,  exceptions,
authorizations  or other actions which would not have a Material Adverse Effect,
and each of the Initial  Purchasers  shall have been furnished with  appropriate
evidence thereof.

         5.11     No  Litigation.  As of the First  Closing,  no  action,  suit,
                  --------------
proceeding,  claim or dispute shall have been brought or otherwise  arisen on or
before the First Closing Date, at law, in equity,  in  arbitration or before any
Governmental  Authority against the Company or any of its Subsidiaries  which is
reasonably  likely to (a) have a material adverse effect on the Condition of the
Company or (b) have a material  adverse  effect on the ability of the Company to
perform its  obligations  under this  Agreement or any of the other  Transaction
Documents.

         5.12     No Material Judgment or Order. There shall not be on the First
                  -----------------------------
Closing  Date or on the Second  Closing  Date any Order of a court of  competent
jurisdiction  or any  ruling  of any  Governmental  Authority  or any  condition
imposed under any Requirement of Law which would, in the reasonable  judgment of
the Purchasers,  (a) prohibit or restrict (i) the purchase of the Shares or (ii)
the consummation of the transactions contemplated by this Agreement, (b) subject
the  Purchasers  to any material  penalty or other  onerous  condition  under or
pursuant to any Requirement of Law if the Shares were to be purchased  hereunder
or (c)  restrict  the  operation  of the  business  of the Company or any of the
Subsidiaries  as  conducted  on the date  hereof in a manner  that  would have a
material adverse effect on the Condition of the Company.

         5.13     No Material  Adverse  Change.  From the date hereof  until the
                  ----------------------------
First  Closing  Date,  there shall have been no material  adverse  change in the
Condition of the Company.

                    SECTION VI. CONDITIONS TO THE OBLIGATION
                             OF THE COMPANY TO CLOSE

                  The  obligations  of the  Company to issue and sell the Shares
and to  perform  its  other  obligations  hereunder,  shall  be  subject  to the
satisfaction  as  determined  by, or waiver  by, the  Company  of the  following
conditions  on or before the First  Closing Date or the Second  Closing Date, as
applicable:

<PAGE>

                                                             Page 46 of 79 pages

         6.1      Representations  and Warranties.  (i) The  representations and
                  -------------------------------
warranties of the Initial Purchasers contained in Section 4 hereof shall be true
and  correct  at and on the First  Closing  Date as if made at and on such date,
except to the extent that any representation and warranty expressly speaks as of
an earlier  date,  in which case such  representation  and  warranty is true and
correct as of such date and except for any activities or transactions  which may
have taken place after the date hereof which are contemplated by this Agreement,
and (ii) to the extent that any Second Closing  Purchaser is not also an Initial
Purchaser,  such Second  Closing  Purchaser  shall deliver at the Second Closing
Date, an instrument in the form of Exhibit C attached  hereto,  which instrument
will (x) affirm that the representations  and warranties  contained in Section 4
hereof were true and correct as to such Second  Closing  Purchaser at and on the
Second  Closing  Date as if made at and on such date,  except to the extent that
any representation and warranty expressly speaks as of an earlier date, in which
case such  representation  and  warranty is true and correct as of such date and
except for any activities or  transactions  which may have taken place after the
date hereof  which are  contemplated  by this  Agreement  and (y) agree that the
Second  Closing  Purchasers  shall be bound by this Agreement and shall have all
the  obligations,  rights  and  remedies  owed by or  available  to the  Initial
Purchasers hereunder.

         6.2      Compliance with this Agreement.  The Initial  Purchasers shall
                  ------------------------------
have  performed  and  complied  in all  material  respects  with  all  of  their
agreements  and conditions set forth herein that are required to be performed or
complied with by the Purchasers on or before the First Closing Date.

         6.3      Consents   and    Approvals.    All   consents,    exemptions,
                  ---------------------------
authorizations,   or  other   actions  by,  or  notices  to,  or  filings  with,
Governmental Authorities and other Persons in respect of all Requirements of Law
and with respect to those  Contractual  Obligations of the Purchasers  which are
necessary or required in connection with the execution,  delivery or performance
(including,  without  limitation,  the  purchase of the Shares and the shares of
Common Stock issuable upon conversion of the Shares) by, or enforcement against,
the Purchasers of this  Agreement  shall have been obtained and be in full force
and effect, and the Company shall have been furnished with appropriate  evidence
thereof.

         6.4      Payment of Purchase Price. At the First Closing and the Second
                  -------------------------
Closing,  as the case may be, the Company shall have received the First Purchase
Price and the Second Purchase Price, as the case may be.

         6.5      No Material Judgment or Order. There shall not be on the First
                  -----------------------------
Closing  Date or on the Second  Closing  Date any Order of a court of  competent
jurisdiction  or any  ruling  of any  Governmental  Authority  or any  condition
imposed under any Requirement of Law which would, in the reasonable  judgment of
the  Company,  (a)  prohibit or restrict  (i) the sale of the Shares or (ii) the
consummation of the  transactions  contemplated by this Agreement or (b) subject
the Company to any penalty or other onerous  condition  under or pursuant to any
Requirement of Law if the Shares were to be sold hereunder.


<PAGE>

                                                             Page 47 of 79 pages

                  SECTION VII. AFFIRMATIVE COVENANTS

                  The Company  hereby  covenants and agrees with the  Purchasers
with respect to this Section 7, and the Initial  Purchasers  hereby covenant and
agree with the  Company  with  respect to Section  7.5, so long as any shares of
Series A Preferred  Stock or shares of Common Stock issuable upon the conversion
thereof are outstanding,  except to the extent that a particular section of this
Section 7 provides for an earlier termination, as follows:

         7.1      SEC Filings.  From and after the date of this  Agreement,  the
                  -----------
Company agrees that it will use commercially reasonable efforts to file with the
SEC, within the time periods specified in the SEC's rules and regulations for as
long as they  are  applicable  to the  Company,  (i) all  quarterly  and  annual
financial  information  required  to be filed  with the SEC on Forms  10-QSB and
10-KSB,  (ii) all current reports  required to be filed with the SEC on Form 8-K
and (iii) any other information required to be filed with the SEC.

         7.2      Reservation of Shares.  The Company shall at all times reserve
                  ---------------------
and keep available out of its authorized shares of Common Stock,  solely for the
purpose of issue or delivery upon  conversion of the Shares,  as provided in the
Certificate of Amendment to the Certificate of Incorporation and the Certificate
of  Incorporation,  the number of shares of Common Stock that may be issuable or
deliverable  upon such  conversion  or  exercise.  The Company  shall issue such
shares of Common  Stock in  accordance  with the  terms of this  Agreement,  the
Certificate of Incorporation, the Certificate of Amendment to the Certificate of
Incorporation  (in  the  case  of the  shares  of  Common  Stock  issuable  upon
conversion  of the  Shares),  and  otherwise  comply  with the terms  hereof and
thereof.

         7.3      Registration  and  Listing.  If any  shares  of  Common  Stock
                  --------------------------
required to be reserved for purposes of conversion of the Shares, as provided in
the  Certificate  of  Amendment to the  Certificate  of  Incorporation,  require
registration with or approval of any Governmental Authority under any Federal or
state or other  applicable  law before such shares of Common Stock may be issued
or delivered upon conversion or exercise,  the Company will in good faith and as
expeditiously  as  possible  cause  such  shares  of  Common  Stock  to be  duly
registered  or  approved,  as the case may be.  So long as the  shares of Common
Stock are quoted on the NASDAQ or listed on any  national  securities  exchange,
the Company will, if permitted by the rules of such system or exchange, quote or
list and keep quoted or listed on such system or exchange,  upon official notice
of issuance,  all shares of Common Stock issuable or deliverable upon conversion
of the Shares.

         7.4      Director  and Officer  Liability  Insurance.  The Company will
                  -------------------------------------------
maintain director and officer liability insurance which is commercially standard
for a company similarly situated to the Company.

        7.5       Second Closing. At the Second Closing,  the Initial Purchasers
                  --------------
shall  purchase  any  and  all  Second  Shares  not  purchased  by the  Approved
Investors.

                          SECTION VIII. INDEMNIFICATION

                  (a)     Except as  otherwise  provided in this  Section 8, the
          Company  agrees to  indemnify,  defend and hold  harmless each Initial
          Purchaser and its Affiliates and their respective officers, directors,
          agents,  employees,  subsidiaries,  partners,  members and controlling

<PAGE>

                                                             Page 48 of 79 pages


         persons to the fullest extent permitted by law from and against any and
         all claims, losses,  liabilities,  damages,  deficiencies,  judgements,
         assessments, fines, settlements, costs or expenses (including interest,
         penalties  and  reasonable  fees,  disbursements  and other  charges of
         counsel)  (collectively,  "Losses")  based  upon,  arising  out  of  or
         otherwise  in  respect  of  any  inaccuracy  in or  any  breach  of any
         surviving  representation,  warranty,  covenant  or  agreement  of  the
         Company  contained in any  Transaction  Document.  Notwithstanding  the
         foregoing,  the Company's liability pursuant to this Section 8 shall in
         no event exceed $10,000,000.

                  (b)     Except as  otherwise  provided in this  Section 8, the
         Purchasers,  severally and not jointly, agree to indemnify,  defend and
         hold  harmless  the Company  and its  respective  officers,  directors,
         agents,  employees,  subsidiaries,  partners,  members and  controlling
         persons to the fullest extent permitted by law from and against any and
         all Losses  based upon,  arising out of or  otherwise in respect of any
         inaccuracy in or any breach of any surviving representation,  warranty,
         covenant or agreement of the  Purchasers  contained in any  Transaction
         Document.  Notwithstanding  the foregoing,  the  Purchasers'  liability
         pursuant to this Section 8 shall in no event exceed $10,000,000.

                        SECTION IX. REGISTRATION RIGHTS.

                  The Company hereby agrees to provide  registration rights with
respect to the Registrable Securities as set forth below.

         9.1      Securities Subject to this Agreement.
                  ------------------------------------

                  (a)     Registrable  Securities.  For  the  purposes  of  this
                          -----------------------
         Section  9,  Registrable   Securities  will  cease  to  be  Registrable
         Securities  when such  Registrable  Securities  are sold and  otherwise
         transferred  pursuant  to Rule  144  under  the  Act or a  registration
         statement  covering  such  Registrable  Securities  has  been  declared
         effective under the Act by the SEC and such Registrable Securities have
         been disposed of pursuant to such effective registration statement.

                  (b)     Holders of Registrable Securities.  A Person is deemed
                          ---------------------------------
         to be a holder of Registrable  Securities  whenever such Person owns of
         record  Registrable  Securities,  or holds a warrant to purchase,  or a
         security   convertible   into  or  exercisable  or  exchangeable   for,
         Registrable  Securities  whether or not such  acquisition or conversion
         has actually been effected and disregarding any legal restrictions upon
         the  exercise  of such  rights.  If the  Company  receives  conflicting
         instructions,  notices  or  elections  from  two or more  persons  with
         respect to the same  Registrable  Securities,  the Company may act upon
         the basis of the  instructions,  notice or election  received  from the
         registered owner of such Registrable Securities. Registrable Securities
         issuable  upon  exercise  of an option or upon  conversion  of  another
         security shall be deemed  outstanding  for the purposes of this Section
         9.

         9.2      Demand Registration.
                  -------------------

                  (a)     Request for Demand Registration. At any time after the
                          -------------------------------
         date hereof, so long as the Purchasers own Registrable  Securities,  on
         an as-converted  basis,  equal to at least 1/3 of the Shares,  then the

<PAGE>

                                                             Page 49 of 79 pages

         holders  of  25.0%  of  the  outstanding  Registrable  Securities  (the
         "Stockholders")  may make a written  request (the "Demand  Notice") for
         registration  of  Registrable  Securities  under the Act, and under the
         securities  or blue sky  laws of any  jurisdiction  designated  by such
         holder or holders (a "Demand Registration"); provided, that the Company
                                                      --------
         will not be required to effect more than three Demand  Registrations in
         the aggregate at the request of the holders of  Registrable  Securities
         pursuant to this Section 9.2(a);  provided,  further,  that the Company
                                           --------   -------
         shall not be required to effect more than one registration  pursuant to
         this section in any six-month  period.  Notwithstanding  the foregoing,
         the Company  shall not be  required  to effect any Demand  Registration
         unless the anticipated  aggregate proceeds to the selling holders would
         equal or exceed $5,000,000.  Upon a request for a Demand  Registration,
         the  Company  shall use its best  efforts to prepare  and file with the
         SEC, as soon as reasonably practicable, a registration statement for an
         offering to be made on a continuous  basis  pursuant to Rule 415 of the
         Act (or any  successor  rule or  similar  provision  then in effect) (a
         "Shelf  Registration  Statement")  registering  the resale from time to
         time by the Stockholders  thereof of their Registrable  Securities (the
         "Demand  Shelf  Registration").  Within  fifteen  (15)  days  after the
         receipt of the Demand  Notice,  the Company  shall give written  notice
         thereof to all holders  holding  Registrable  Securities and include in
         such  registration all Registrable  Securities held by a holder thereof
         with  respect to which the Company has  received  written  requests for
         inclusion  therein  at least ten (10) days  prior to the  filing of the
         Demand Shelf Registration.

                  (b)     Effective Demand  Registration.  A registration  shall
                          ------------------------------
         not  constitute  a Demand  Registration  until it has become  effective
         under  the Act and  remains  effective  until  the  earlier  of the (i)
         completion of any offering of securities  thereunder  and (ii) the date
         nine months (plus any Blackout Period,  as defined below) from the date
         on which it first became effective under the Act (unless withdrawn upon
         the written  request of the  holders).  The Company  shall use its best
         efforts to cause any  registration  statement filed pursuant to Section
         9.2(a) to be declared  effective  under the Act as soon as  practicable
         (and shall promptly  notify in writing the  Stockholders  once any such
         registration statement has been declared effective).

                  (c)     Blackout Periods. If the Demand Shelf Registration (or
                          ----------------
         any Subsequent Shelf Registration, as defined below) is interfered with
         by any stop order,  injunction or other order or requirement of the SEC
         or any other  governmental  agency or court,  the Company shall use its
         best efforts to obtain the prompt  withdrawal  of any order  suspending
         the effectiveness  thereof (including,  without  limitation,  amend the
         registration  statement  concerned in a manner  reasonably  expected to
         obtain  the  withdrawal  of  the  order  suspending  the  effectiveness
         thereof),  and such Demand Shelf  Registration (or any Subsequent Shelf
         Registration)  will be deemed  not to have been  effective  during  the
         period  of  such   interference   until  the  offering  of  Registrable
         Securities pursuant to such Shelf Registration Statement (or Subsequent
         Shelf  Registration   Statement)  may  legally  resume  (the  "Blackout
         Period").


                  (d)     Subsequent  Shelf  Registration.  Notwithstanding  the
                          -------------------------------
         foregoing  paragraph,  if prior  to the  date  nine  months  (plus  any
         Blackout Period) from the date the Demand Shelf  Registration  covering

<PAGE>

                                                             Page 50 of 79 pages

         the Registrable  Securities has been declared  effective under the Act,
         the  Company  has failed to obtain the  withdrawal  of any stop  order,
         injunction or other order suspending the  effectiveness  within 60 days
         of  such  cessation  of  effectiveness,   the  Company  shall  file  an
         additional Shelf  Registration  covering the Registrable  Securities (a
         "Subsequent Shelf Registration"). If a Subsequent Shelf Registration is
         filed,  the Company shall use its best efforts to cause the  Subsequent
         Shelf  Registration  to be declared  effective  as soon as  practicable
         after such filing and to keep such Registration  Statement continuously
         effective  until the earlier of the (i)  completion  of any offering of
         securities  thereunder;  (ii) expiration of the nine month  anniversary
         (plus any  Blackout  Period,  as defined  below)  from date on which it
         first became effective under the Act (unless withdrawn upon the written
         request  of the  holders);  and (iii)  date  another  Subsequent  Shelf
         Registration  covering the  Registrable  Securities  has been  declared
         effective  under  the Act.  If the  registration  required  under  this
         Section 9 is deemed not to have been  effected  then the Company  shall
         continue to be obligated to effect a registration statement pursuant to
         this Section 9.

                  (e)     Underwriting  Procedures.  If holders of a majority of
                          ------------------------
         the  Registrable  Securities  included  in the Demand  Registration  so
         elect,  the offering of such  Registrable  Securities  pursuant to such
         Demand  Registration  shall  be  in  the  form  of  a  firm  commitment
         underwritten  offering and the  managing  underwriter  or  underwriters
         selected for such offering shall be a nationally  recognized investment
         banking firm  selected by the Company with the consent of such holders,
         which  consent  will  not  be  unreasonably  delayed  or  withheld  (an
         "Approved  Underwriter").  In such event,  if the Approved  Underwriter
         advises the Company in writing that in its opinion the aggregate amount
         of  such  securities  requested  to be  included  in such  offering  is
         sufficiently  large to have a material adverse effect on the success of
         such offering,  the Company shall include in such registration only the
         aggregate  amount of  securities  that in the  opinion of the  Approved
         Underwriter  may be sold without any such material  adverse  effect and
         shall first reduce (to zero,  if  necessary)  the amount of  securities
         sought to be included  therein by each holder who wishes to participate
         in  the  Demand   Registration   through  the  exercise  of  piggy-back
         registration  rights as contemplated by Section 9.3 as a group, if any,
         and then, if such reduction is not sufficient,  as to the  Stockholders
         as a group,  pro rata within  each group  (including  other  holders of
         Common Stock who may have registration rights which are pari passu with
         the  Registrable   Securities)  based  on  the  number  of  Registrable
         Securities included in the request for Demand Registration,  the amount
         of  Registrable  Securities to be included by each  Stockholder in such
         registration.  To  the  extent  more  than  10.0%  of  the  Registrable
         Securities  so  requested  to  be  registered  are  excluded  from  the
         offering,  then the holders of such  Registrable  Securities shall have
         the right to one additional Demand  Registration under this Section 9.2
         with respect to such Registrable Securities.

                  (f)     Deferral   of   Registration.    Notwithstanding   the
                          ----------------------------
         foregoing,  if,  at  any  time  prior  to  the  effective  date  of the
         registration  statement  with  respect  to a Demand  Registration,  the
         Company  is: (i)  pursuing  an  underwritten  offering of shares of its
         Capital Stock for its own account,  or engaged in or proposes to engage
         in (A) financing, (B) acquisition of the capital stock or substantially
         all the assets of any other person  (other than in the ordinary  course

<PAGE>

                                                             Page 51 of 79 pages

         of business) or (C) any  disposition of material  assets (other than in
         the  ordinary  course of  business),  any tender  offer or any  merger,
         consolidation,  corporate  reorganization  or  restructuring  or  other
         similar transaction; and (ii) the Board of Directors, using good faith,
         determines that it would be seriously  detrimental to the Company for a
         registration  statement to be filed at such time, the Company may defer
         the  filing of a  registration  statement  with  respect  to any Demand
         Registration  required by this  Section 9.2 until a date not later than
         120 days from the date of the Deferral  Notice (as defined  below) (the
         "Deferral Period"). If the Board of Directors of the Company makes such
         determination,  the Company  shall give written  notice (the  "Deferral
         Notice")  of  such   determination   to  the  holders  of   Registrable
         Securities; provided, that, the Company may exercise its right to delay
         a Demand Registration  hereunder only once in any twelve-month  period.
         The Company shall notify the holders of the  expiration of the Deferral
         Period and shall cause the  registration  statement with respect to the
         Demand Registration to be filed on the fifth Business Day following the
         expiration  of the Deferral  Period (the  "Withdrawal  Period") (or, if
         registration on such date is not  practicable,  as promptly as possible
         thereafter)  unless,  prior to the expiration of the Withdrawal Period,
         the holders holding a majority of Registrable Securities to be included
         in any such  Demand  Registration,  by written  notice to the  Company,
         withdraw the request  made under this Section 9.2, in which case,  such
         request  shall not count as one of the Demand  Registrations  permitted
         hereunder  and the  Company  shall  pay all  Registration  Expenses  in
         connection with such registration.

         9.3      Piggy-Back  Registration.  If the  Company  proposes to file a
                  ------------------------
registration  statement  under the Securities Act with respect to an offering by
the Company for its own account or for the account of a Stockholder  pursuant to
Section 9.2 of any class of security  (other than a  registration  statement  on
Form S-4 or S-8 or any  successor  forms  thereto),  then the Company shall give
written  notice of such  proposed  filing to each of the holders of  Registrable
Securities  (other than any  Stockholders),  and such notice  shall  describe in
detail the proposed  registration  and distribution and shall offer such holders
(other  than any  Stockholders)  the  opportunity  to  register  the  number  of
Registrable  Securities as each such holder may request.  The Company shall, and
shall use  commercially  reasonable  efforts (within ten (10) days of the notice
provided for in the  preceding  sentence) to cause the managing  underwriter  or
underwriters of a proposed underwritten offering (the "Company Underwriter") to,
permit the  holders of  Registrable  Securities  who have  requested  in writing
(within ten (10) days of the giving of the notice of the proposed  filing by the
Company) to participate in the  registration  for such offering (the "Requesting
Holders") to include such  Registrable  Securities  in such offering on the same
terms and  conditions as the  securities  of the Company  included  therein.  In
connection  with any offering under this Section 9.3 involving an  underwriting,
the Company shall not be required to include any Registrable  Securities in such
underwriting  unless the holders thereof accept the terms of the underwriting as
agreed upon between the Company and the underwriters  selected by it. If, in the
opinion of the Company  Underwriter,  the  registration  of all, or part, of the
Registrable  Securities  which  the  Requesting  Holders  have  requested  to be
included would materially and adversely  affect such public  offering,  then the

<PAGE>

                                                             Page 52 of 79 pages

Company  shall be  required to include in the  underwriting  only that number of
Registrable  Securities,  if any, which the Company Underwriter  believes may be
sold without  causing such adverse  effect,  and the amount of  securities to be
offered in the  underwriting  shall be allocated  first, to the Company based on
the number of shares it desires to sell in the underwritten offering for its own
account;  and thereafter pro rata among the Stockholders  based on the number of
shares  otherwise  proposed to be included therein by the  Stockholders.  If the
number  of  Registrable  Securities  to  be  included  in  the  underwriting  in
accordance  with the foregoing is less than the total number of shares which the
Requesting Holders of Registrable Securities have requested to be included, then
such Requesting  Holders shall  participate in the  underwriting  pro rata based
upon their total ownership of the  Registrable  Securities and such other shares
of Common Stock as are  requested  to be included by other  holders of shares of
Common Stock which have registration rights. If any Requesting Holder would thus
be entitled to include more shares than such holder  requested to be registered,
the excess shall be allocated among other Requesting Holders pro rata based upon
their total ownership of Registrable  Securities and such other shares of Common
Stock.

         9.4      Holdback Agreements.
                  -------------------

                  (a)     Restrictions  on Public Sale by Holders of Registrable
                          ------------------------------------------------------
         Securities.  To the extent not  inconsistent  with  applicable law, the
         ----------
         Purchasers  agree that in connection with a registered  public offering
         of the  Company's  equity  securities,  they will not effect any public
         sale or distribution of any Registrable Securities or of any securities
         convertible  into or exchangeable  or exercisable for such  Registrable
         Securities,  including a sale pursuant to Rule 144 under the Securities
         Act,  during the 10 days prior to, and during the 90 days beginning on,
         the effective date of the Company's  registration  statement (except as
         part of such registration),  if and to the extent reasonably  requested
         by the  Company  in writing  in the case of a  non-underwritten  public
         offering or to the extent  reasonably  requested by the  Underwriter in
         writing in the case of an underwritten public offering.

                  (b)     Restrictions  on  Public  Sale  by  the  Company.  The
                          ------------------------------------------------
         Company agrees not to effect any public sale or  distribution of any of
         its  equity   securities,   or  any  securities   convertible  into  or
         exchangeable or exercisable for such equity securities (except pursuant
         to  registrations  on Forms S-4 or S-8 of the Act or any  successor  or
         other forms not available for registering equity securities for sale to
         the public) during the 10 Business Days prior to, and during the 30 day
         period beginning on the effective date of any registration statement in
         which the holders of Registrable  Securities are  participating  unless
         such registration statement also relates to securities being offered by
         the Company.

         9.5      Registration Procedures.
                  -----------------------

                  (a)     Obligations of the Company.  Whenever  registration of
                          --------------------------
         Registrable  Securities has been  requested  pursuant to Section 9.2 of
         this Agreement,  the Company shall use reasonable efforts to effect the
         registration and sale of such Registrable Securities in accordance with
         the intended method of distribution thereof, and in connection with any
         such request, the Company shall, as soon as reasonably practicable:

                          i.        prepare  and file with the SEC (in any event
                  not later than sixty  (60)  days,  subject to Section  9.2(f),
                  after  receipt of a request to file a  registration  statement
                  with  respect  to   Registrable   Securities)  a  registration
                  statement, and use its best efforts to cause such registration
                  statement  to  become  effective  under  the  Act;   provided,
                                                                       --------
                  however,  that  before  filing  a  registration  statement  or
                  -------
                  prospectus  or any  amendments  or  supplements  thereto,  the
                  Company shall (A) provide counsel selected by the holders of a
                  majority of the  Registrable  Securities  being  registered in
                  such registration  ("Holders' Counsel") with an opportunity to

<PAGE>

                                                             Page 53 of 79 pages

                  participate in the preparation of such registration  statement
                  and each  prospectus  included  therein (and each amendment or
                  supplement  thereto) to be filed with the SEC, which documents
                  shall be subject to the review of  Holders'  Counsel,  and (B)
                  notify the  Holders'  Counsel and each  seller of  Registrable
                  Securities  of any stop order issued or  threatened by the SEC
                  and take all reasonable  action  required to prevent the entry
                  of such stop order or to remove it if entered;

                          ii.       prepare   and   file   with   the  SEC  such
                  amendments and supplements to such registration  statement and
                  the  prospectus  used  in  connection   therewith  as  may  be
                  necessary to keep such registration  statement effective for a
                  period which will  terminate when all  Registrable  Securities
                  covered by such registration statement have been sold (but not
                  before the  expiration of the ninety (90) day period  referred
                  to in  Section  4(3) of the Act and  Rule 174  thereunder,  if
                  applicable),  and comply with the  provisions  of the Act with
                  respect to the  disposition of all securities  covered by such
                  registration  statement  during such period in accordance with
                  the intended methods of disposition by the sellers thereof set
                  forth in such registration statement;

                          iii.      furnish  to  each   seller  of   Registrable
                  Securities,  prior to filing a registration statement,  copies
                  of such registration statement as is proposed to be filed, and
                  thereafter   such  number  of  copies  of  such   registration
                  statement, each amendment and supplement thereto (in each case
                  including all exhibits  thereto),  the prospectus  included in
                  such  registration   statement   (including  each  preliminary
                  prospectus)  and such other  documents as each such seller may
                  reasonably  request in order to facilitate the  disposition of
                  the Registrable Securities owned by such seller;

                          iv.       use   reasonable   efforts  to  register  or
                  qualify   such   Registrable   Securities   under  such  other
                  securities  or blue  sky  laws of  such  jurisdictions  as any
                  seller of  Registrable  Securities  requests,  and to continue
                  such  qualification in effect in such jurisdiction for as long
                  as is permissible  pursuant to the laws of such  jurisdiction,
                  or for as long as any such  seller  requests  or until  all of
                  such Registrable  Securities are sold,  whichever is shortest,
                  and  do any  and  all  other  acts  and  things  which  may be
                  reasonably necessary or advisable to enable any such seller to
                  consummate  the  disposition  in  such  jurisdictions  of  the
                  Registrable   Securities  owned  by  such  seller;   provided,
                  however, that the Company shall not be required to (A) qualify
                  generally  to do business in any  jurisdiction  where it would
                  not  otherwise  be required  to qualify  but for this  Section
                  9.5(a)(iv),  (B)  subject  itself  to  taxation  in  any  such
                  jurisdiction  or (C) consent to general  service of process in
                  any such jurisdiction;

                          v.        use   reasonable   efforts   to  cause   the
                  Registrable  Securities covered by such registration statement
                  to be registered  with or approved by such other  governmental
                  agencies or  authorities  as may be necessary by virtue of the
                  business and operations of the Company to enable the seller or
                  sellers  of   Registrable   Securities   to   consummate   the
                  disposition of such Registrable Securities;

<PAGE>

                                                             Page 54 of 79 pages

                          vi.       notify each seller of Registrable Securities
                  at any time when a prospectus  relating thereto is required to
                  be delivered  under the Act, upon discovery  that, or upon the
                  happening  of any event as a result of which,  the  prospectus
                  included  in such  registration  statement  contains an untrue
                  statement  of a material  fact or omits to state any  material
                  fact  required to be stated  therein or  necessary to make the
                  statements   therein   not   misleading   in   light   of  the
                  circumstances  under  which  they were made,  and the  Company
                  shall  promptly  prepare a  supplement  or  amendment  to such
                  prospectus  and furnish to each seller a reasonable  number of
                  copies of a supplement  to or an amendment of such  prospectus
                  as may be necessary so that,  after delivery to the purchasers
                  of such  Registrable  Securities,  such  prospectus  shall not
                  contain  an untrue  statement  of a  material  fact or omit to
                  state any  material  fact  required  to be stated  therein  or
                  necessary to make the  statements  therein not  misleading  in
                  light of the circumstances under which they were made;

                          vii.      enter into and perform customary  agreements
                  (including an  underwriting  agreement in customary  form with
                  the  Approved  Underwriter,  if any,  selected  as provided in
                  Section  9.2) and take such other  actions  as are  reasonably
                  required  in  order  to  facilitate  the  disposition  of such
                  Registrable Securities;

                          viii.     make  available for inspection by any seller
                  of   Registrable   Securities,    any   managing   underwriter
                  participating in any disposition pursuant to such registration
                  statement,  Holders'  Counsel and any attorney,  accountant or
                  other  agent  retained  by any  such  seller  or any  managing
                  underwriter  (each,  an  "Inspector"  and  collectively,   the
                  "Inspectors"),   during   regular   business  hours  and  upon
                  reasonable  advance  notice,  all financial and other records,
                  pertinent  corporate  documents and  properties of the Company
                  (collectively, the "Records") as shall be reasonably necessary
                  to enable them to exercise their due diligence responsibility,
                  and cause the Company's officers, directors and employees, and
                  the independent public  accountants of the Company,  to supply
                  all information  reasonably requested by any such Inspector in
                  connection with such registration statement;

                          ix.       if such sale is pursuant to an  underwritten
                  offering,  obtain a "cold  comfort"  letter from the Company's
                  independent  public accountants in customary form and covering
                  such matters of the type customarily covered by "cold comfort"
                  letters  as  Holders'  Counsel  or  the  managing  underwriter
                  reasonably requests;

                          x.        furnish,  at the  request  of any  seller of
                  Registrable   Securities  on  the  date  such  securities  are
                  delivered  to the  underwriters  for  sale  pursuant  to  such
                  registration or, if such securities are not being sold through
                  underwriters,  on the date  the  registration  statement  with
                  respect to such  securities  becomes  effective,  an  opinion,
                  dated such date, of counsel  representing  the Company for the

<PAGE>

                                                             Page 55 of 79 pages

                  purposes of such registration,  addressed to the underwriters,
                  if any, and to the seller making such  request,  covering such
                  legal matters with respect to the  registration  in respect of
                  which  such   opinion  is  being  given  as  such  seller  may
                  reasonably  request  and  are  customarily  included  in  such
                  opinions;

                          xi.       otherwise use  reasonable  efforts to comply
                  with all applicable rules and regulations of the SEC, and make
                  available  to its  security  holders,  as soon  as  reasonably
                  practicable  but no later than  fifteen  (15) months after the
                  effective  date of the  registration  statement,  an  earnings
                  statement  covering a period of twelve (12)  months  beginning
                  after the effective date of the registration  statement,  in a
                  manner which  satisfies the provisions of Section 11(a) of the
                  Act;


                          xii.      cause all such Registrable  Securities to be
                  listed on each securities exchange on which similar securities
                  issued by the  Company  are then  listed  (including  NASDAQ),
                  provided,   that  the  applicable  listing   requirements  are
                  satisfied;

                          xiii.     cooperate  with each  seller of  Registrable
                  Securities   and  each   underwriter   participating   in  the
                  disposition   of  such   Registrable   Securities   and  their
                  respective  counsel in connection with any filings required to
                  be made with the National  Association of Securities  Dealers,
                  Inc. (the "NASD"); and

                          xiv.      use  reasonable  efforts  to take all  other
                  steps necessary to effect the  registration of the Registrable
                  Securities contemplated hereby.

                  (b)     Notice to  Discontinue.  Each  holder  of  Registrable
         Securities  agrees that,  upon  receipt of any written  notice from the
         Company of the happening of any event of the kind  described in Section
         9.5(a)(vi),  such holder shall  forthwith  discontinue  disposition  of
         Registrable  Securities pursuant to the registration statement covering
         such  Registrable  Securities until such holder's receipt of the copies
         of the  supplemented  or  amended  prospectus  contemplated  by Section
         9.5(a)(vi)  and,  if so  directed by the  Company,  such  holder  shall
         deliver to the Company (at the  Company's  expense)  all copies,  other
         than  permanent  file copies then in such holder's  possession,  of the
         prospectus covering such Registrable Securities which is current at the
         time of  receipt of such  notice.  If the  Company  shall give any such
         notice,   the  Company  shall  extend  the  period  during  which  such
         registration  statement shall be maintained  effective pursuant to this
         Agreement  (including  without  limitation  the period  referred  to in
         Section  9.5(a)(ii))  by the number of days  during the period from and
         including  the date of the giving of such  notice  pursuant  to Section
         9.5(a)(vi)  to and  including  the date  when  the  holder  shall  have
         received  the  copies  of  the   supplemented  or  amended   prospectus
         contemplated by and meeting the requirements of Section 9.5(a)(vi).

         9.6      Registration  Expenses.  The  Company  shall pay all  expenses
                  ----------------------
(other than underwriting  discounts and commissions) arising from or incident to
the Company's  performance of, or compliance with,  Section 9 of this Agreement,
including  without  limitation,   (i)  SEC,  stock  exchange,  NASDAQ  and  NASD
registration and filing fees, (ii) all fees and expenses  incurred by Company in
complying with securities or blue sky laws (including  reasonable fees,  charges
and  disbursements of counsel in connection with blue sky  qualifications of the

<PAGE>

                                                             Page 56 of 79 pages

Registrable  Securities),  (iii) all printing,  messenger and delivery expenses,
and (iv) the fees,  charges and  disbursements  of counsel to the Company and of
its  independent  public  accountants  and any other  accounting and legal fees,
charges and expenses incurred by the Company  (including  without limitation any
expenses  arising  from  any  special  audits  incident  to or  required  by any
registration  or  qualification)  in  connection  with any  Demand  Registration
pursuant to the terms of this Agreement, regardless of whether such registration
statement is declared  effective.  All of the expenses described in this Section
9.6 are referred to herein as "Registration Expenses."

         9.7      Indemnification; Contribution.

                  (a)     Indemnification by the Company.  The Company agrees to
                          ------------------------------
         indemnify,  to the  fullest  extent  permitted  by law,  each holder of
         Registrable Securities, its officers,  directors,  partners, employees,
         advisors and agents and each Person who controls (within the meaning of
         the Act or the  Exchange  Act) such holder from and against any and all
         losses, claims, damages, liabilities and expenses (including reasonable
         costs of  investigation)  arising out of or based upon any  untrue,  or
         alleged  untrue,   statement  of  a  material  fact  contained  in  any
         registration   statement,   prospectus  or  preliminary  prospectus  or
         notification  or offering  circular (as amended or  supplemented if the
         Company shall have furnished any amendments or supplements  thereto) or
         arising out of or based upon any omission or alleged  omission to state
         therein a material fact  required to be stated  therein or necessary to
         make the statements therein not misleading,  except insofar as the same
         are caused by or contained in any  information  furnished in writing to
         the  Company by such holder  expressly  for use therein or a failure by
         such holder to deliver an updated  prospectus  that has been filed with
         the SEC.  The Company  shall also  indemnify  any  underwriters  of the
         Registrable  Securities,  their  officers,  directors and employees and
         each Person who controls such  underwriters  (within the meaning of the
         Act and the  Exchange  Act) to the same extent as  provided  above with
         respect  to  the   indemnification   of  the  holders  of   Registrable
         Securities.

                  (b)     Indemnification  by Holders.  In  connection  with any
                          ---------------------------
         registration  statement in which a holder of Registrable  Securities is
         participating  pursuant to Section 9.2 or 9.3 hereof,  each such holder
         shall furnish to the Company in writing such  information  with respect
         to such holder as the Company may  reasonably  request in writing or as
         may be required by law for use in connection with any such registration
         statement or prospectus and each holder,  by its  participation in such
         registration,  agrees to indemnify, to the extent permitted by law, the
         Company,  any underwriter  retained by the Company and their respective
         directors, officers, employees and each Person who controls the Company
         or such  underwriter  (within the  meaning of the Act and the  Exchange
         Act) to the same extent as the foregoing  indemnity from the Company to
         the holders of Registrable  Securities,  but solely with respect to any
         such information furnished in writing by or on behalf of such holder.

                  (c)     Conduct  of  Indemnification  Proceedings.  Any Person
                          -----------------------------------------
         entitled  to  indemnification   hereunder  (the  "Registration   Rights
         Indemnified  Party")  agrees  to  give  prompt  written  notice  to the
         indemnifying party (the "Registration Rights Indemnifying Party") after
         the receipt by the Registration Rights Indemnified Party of any written
         notice  of  the  commencement  of  any  action,  suit,   proceeding  or
         investigation   or  threat  thereof  made  in  writing  for  which  the

<PAGE>

                                                             Page 57 of 79 pages

         Registration Rights Indemnified Party intends to claim  indemnification
         or contribution pursuant to this Agreement;  provided, that the failure
                                                      --------
         so to notify  the  Registration  Rights  Indemnifying  Party  shall not
         relieve the  Registration  Rights  Indemnifying  Party of any liability
         that it may have to the Registration Rights Indemnified Party hereunder
         unless,  and only to the  extent  that,  such  failure  results  in the
         Registration  Rights  Indemnifying  Party's  forfeiture of  substantial
         rights or  defenses.  If notice of  commencement  of any such action is
         given to the Registration  Rights Indemnifying Party as above provided,
         the  Registration  Rights  Indemnifying  Party  shall  be  entitled  to
         participate  in and, to the extent it may wish,  jointly with any other
         Registration Rights  Indemnifying Party similarly  notified,  to assume
         the defense of such action at its own expense,  with counsel  chosen by
         it and reasonably  satisfactory to such Registration Rights Indemnified
         Party. The Registration  Rights  Indemnified Party shall have the right
         to employ  separate  counsel in any such action and  participate in the
         defense thereof,  but the fees and expenses of such counsel (other than
         reasonable  costs of  investigation)  shall be paid by the Registration
         Rights   Indemnified   Party   unless  (i)  the   Registration   Rights
         Indemnifying Party agrees to pay the same, (ii) the Registration Rights
         Indemnifying  Party  fails to assume the  defense of such  action  with
         counsel  satisfactory to the Registration  Rights  Indemnified Party in
         its  reasonable  judgment,  (iii) the named  parties to any such action
         (including  any  impleaded  parties)  have been advised by such counsel
         that either (A) representation of such Registration  Rights Indemnified
         Party  and the  Registration  Rights  Indemnifying  Party  by the  same
         counsel  would  be   inappropriate   under   applicable   standards  of
         professional  conduct  or (B) there may be one or more  legal  defenses
         available  to the  Registration  Rights  Indemnified  Party  which  are
         different  from or  additional to those  available to the  Registration
         Rights  Indemnifying  Party. No Registration  Rights Indemnifying Party
         shall,  without the prior written consent of each  Registration  Rights
         Indemnified  Party,  settle,  compromise or consent to the entry of any
         judgment  unless such  settlement,  compromise  or consent  includes an
         unconditional release of the Registration Rights Indemnified Party from
         all  liability   relating   thereto.   In  either  of  such  cases  the
         Registration  Rights  Indemnifying  Party  shall  not have the right to
         assume the defense of such action on behalf of such Registration Rights
         Indemnified Party. No Registration  Rights  Indemnifying Party shall be
         liable for any  settlement  entered into  without its written  consent,
         which  consent  shall  not be  unreasonably  withheld,  conditioned  or
         delayed.

                  (d)     Contribution.  If the indemnification  provided for in
                          ------------
         this Section 9.7 from the Indemnifying Party is applicable by its terms
         but unavailable to a Registration Rights Indemnified Party hereunder in
         respect  of  any  losses,  claims,  damages,  liabilities  or  expenses
         referred  to  therein,   then  the  Indemnifying   Party,  in  lieu  of
         indemnifying  such  Registration   Rights   Indemnified   Party,  shall
         contribute  to the amount paid or payable by such  Registration  Rights
         Indemnified  Party  as  a  result  of  such  losses,  claims,  damages,
         liabilities or expenses in such proportion as is appropriate to reflect
         the relative fault of the Registration  Rights  Indemnifying  Party and
         Registration  Rights  Indemnified  Party in connection with the actions
         which  resulted  in  such  losses,  claims,  damages,   liabilities  or
         expenses, as well as any other relevant equitable  considerations.  The

<PAGE>

                                                            Pages 58 of 79 pages

         relative  faults of such  Registration  Rights  Indemnifying  Party and
         Registration  Rights Indemnified Party shall be determined by reference
         to, among other things,  whether any action in question,  including any
         untrue or alleged  untrue  statement of a material  fact or omission or
         alleged omission to state a material fact, has been made by, or relates
         to information supplied by, such Registration Rights Indemnifying Party
         or Registration  Rights  Indemnified  Party, and the parties'  relative
         intent, knowledge,  access to information and opportunity to correct or
         prevent such action.  The amount paid or payable by a party as a result
         of the losses,  claims,  damages,  liabilities and expenses referred to
         above shall be deemed to include,  subject to the limitations set forth
         in Sections 9.7(a), 9.7(b) and 9.7(c), any legal or other fees, charges
         or expenses  reasonably  incurred by such party in connection  with any
         investigation or proceeding.

                  The  parties  hereto  agree  that it  would  not be  just  and
equitable if contribution pursuant to this Section 9.7(d) were determined by pro
rata allocation or by any other method of allocation which does not take account
of  the  equitable  considerations  referred  to in  the  immediately  preceding
paragraph. No person guilty of fraudulent  misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person.

         9.8      Rule 144.  The Company  covenants  that for so long as it is a
                  --------
public  company  subject to the rules and  regulations  of the Exchange  Act, it
shall take such action as each holder of  Registrable  Securities may reasonably
request (including providing any information  necessary to comply with Rules 144
under the Act),  all to the  extent  required  from time to time to enable  such
holder to sell Registrable  Securities without registration under the Act within
the limitation of the exemptions provided by (a) Rule 144 under the Act, as such
rules may be amended from time to time, or (b) any similar rules or  regulations
hereafter  adopted by the SEC. The Company shall, upon the request of any holder
of  Registrable  Securities,  deliver to such holder a written  statement  as to
whether the Company has complied with such requirements.

                  SECTION X. TERMINATION OF AGREEMENT

         10.1     Termination. This Agreement may be terminated as follows:

                  (a)     at any time on or prior to the First  Closing Date, by
         mutual written consent of the Company and the Initial Purchasers; or

                  (b)     at the  election of the Company or the  Purchasers  by
         written  notice to the other parties  hereto after 5:00 p.m.,  New York
         City time on August 24, 1999, if the First  Closing and Second  Closing
         shall not have been consummated  pursuant  hereto,  unless such date is
         extended  by  the  mutual  written  consent  of  the  Company  and  the
         Purchasers;  provided,  however,  that  any  party  that  breaches  its
         obligations  under this  Agreement  shall not be permitted to terminate
         this Agreement pursuant to this Subparagraph 10.1(b); or

                  (c)     at the election of the Company,  if any one or more of
         the  conditions  to its  obligation to close set forth in Section 6 has
         not been  satisfied  or  waived  and the First  Closing  shall not have
         occurred on the scheduled First Closing Date; or

                  (d)     at the election of the Initial Purchasers,  if any one
         or more of the  conditions  to its  obligation  to close  set  forth in
         Section 5 has not been  satisfied or waived and the First Closing shall
         not have occurred on the scheduled First Closing Date; or


<PAGE>

                                                             Page 59 of 79 pages

                  (e)     at the  election  of the  Company  if there has been a
         material breach of any representation,  warranty, covenant or agreement
         of the Initial Purchasers contained in this Agreement,  which breach is
         incurable  or has not been cured by the  Initial  Purchasers  within 10
         days after written notice from the Company; or

                  (f)     at the election of the Initial Purchasers if there has
         been  a  material  breach  prior  to  the  First  Closing  Date  of any
         representation,   warranty,   covenant  or  agreement  of  the  Company
         contained in this Agreement,  which breach is incurable or has not been
         cured by the  Company  within 10 days  after  written  notice  from the
         Initial Purchasers.

         10.2     Survival. If this Agreement is terminated and the transactions
                  --------
contemplated hereby are not consummated as described above, this Agreement shall
become void and of no further force and effect;  provided,  however,  that (i) a
breaching party shall be liable to the non-breaching party for damages caused by
such breach; (ii) none of the parties hereto shall have any liability in respect
of a  termination  of this  Agreement  pursuant  to  Section  10.1(a) or Section
10.1(b);  and provided  further,  that none of the parties hereto shall have any
liability for speculative or unforeseeable  damages resulting from a termination
of this  Agreement.  In the event any of the Second Closing  Purchasers  fail to
purchase the Second Shares at the Second Closing, the Company may use any remedy
available to it at law or equity  against the Initial  Purchasers to enforce the
Initial Purchasers' obligations under Section 7.5.

                           SECTION XI. MISCELLANEOUS

         11.1     Survival of  Representations,  Warranties and  Covenants.  The
                  --------------------------------------------------------
representations and warranties,  covenants and agreements contained herein shall
survive for a period of eighteen months following the First Closing Date.

         11.2     Notices.   All  notices,   demands  and  other  communications
                  -------
provided  for or  permitted  hereunder  shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested,  telecopier,
courier service, overnight mail or personal delivery:

                  (i)      if to Quantum Industrial Partners LDC.:

                           Kaya Flamboyan 9,
                           Villemstad
                           Curacao
                           Netherlands-Antilles

                           with a copy to:

                           Soros Fund Management LLC
                           888 Seventh Avenue
                           New York, NY 10016
                           Telecopy: (212) 664-0544
                           Attn: Michael Neus, Esq.

                           and a copy to:

<PAGE>

                                                             Page 60 of 79 pages

                           Paul, Weiss, Rifkind, Wharton & Garrison
                           1285 Avenue of the Americas
                           New York, New York 10019-6064
                           Telecopy: (212) 757-3990
                           Attention: Matthew Nimetz, Esq.

                  (ii)     if to SFM Domestic Investments LLC:

                           Soros Fund Management LLC
                           888 Seventh Avenue
                           New York, NY 10016
                           Telecopy: (212) 664-0544
                           Attn: Michael Neus, Esq.

                                    and a copy to:

                           Paul, Weiss, Rifkind, Wharton & Garrison
                           1285 Avenue of the Americas
                           New York, New York 10019-6064
                           Telecopy: (212) 757-3990
                           Attention: Matthew Nimetz, Esq.

                  (iii)    if to Pilot Capital Corp.:

                           Pilot Capital Corp.
                           444 Madison Avenue
                           Suite 3203
                           New York, New York 10022
                           Attention: George McCabe
                           Facsimile: (212) 888-3453

                  (iv)     if to the Company:

                           Bluefly, Inc.
                           42 West 39th Street, 9th Floor
                           New York, New York 10018
                           Telecopy: (212) 354-3400
                           Attention: Jon Morris

<PAGE>

                                                             Page 61 of 79 pages

                           with a copy to:

                           Swidler Berlin Shereff Friedman, LLP
                           919 Third Avenue
                           New York, New York 10022
                           Telecopy: (212) 758-9526
                           Attention: Richard A. Goldberg, Esq.

                  All such  notices and  communications  shall be deemed to have
been duly given when delivered by hand, if personally delivered;  when delivered
by courier or overnight  mail,  if delivered by  commercial  courier  service or
overnight  mail;  five (5)  Business  Days after  being  deposited  in the mail,
postage prepaid,  if mailed; and when receipt is mechanically  acknowledged,  if
telecopied.

         11.3     Successors  and  Assigns.  This  Agreement  shall inure to the
                  ------------------------
benefit of and be  binding  upon the  successors  and  permitted  assigns of the
parties  hereto.  Subject to  applicable  securities  laws,  each of the Initial
Purchasers and Second Closing Purchasers may assign any of its rights under this
Agreement to any of its Affiliates but any such assignment shall not relieve any
Initial  Purchaser or Second Closing  Purchaser from its obligations  hereunder.
The Company may not assign any of its rights  under this  Agreement  and each of
the  other  Transaction  Documents,  except  to a  successor-in-interest  to the
Company, without the written consent of all of the Purchasers.

         11.4      Amendment and Waiver.
                   --------------------

                   (a)    No failure or delay on the part of the  Company or the
         Purchasers in exercising  any right,  power or remedy  hereunder  shall
         operate as a waiver thereof,  nor shall any single or partial  exercise
         of any such  right,  power or  remedy  preclude  any  other or  further
         exercise thereof or the exercise of any other right, power or remedy.

                  (b)     Any amendment, supplement or modification of or to any
         provision  of this  Agreement,  any  waiver  of any  provision  of this
         Agreement,  and any  consent  to any  departure  by the  Company or the
         Purchasers from the terms of any provision of this Agreement,  shall be
         effective  (i) only if it is made or given in writing and signed by the
         Company and the Purchasers,  and (ii) only in the specific instance and
         for the specific  purpose for which made or given.  Except where notice
         is specifically  required by this Agreement,  no notice to or demand on
         the  Company  in any case  shall  entitle  the  Company to any other or
         further notice or demand in similar or other circumstances.

         11.5     Counterparts.  This Agreement may be executed in any number of
                  ------------
counterparts and by the parties hereto in separate  counterparts,  each of which
when so  executed  shall be  deemed  to be an  original  and all of which  taken
together shall constitute one and the same agreement.

         11.6     Headings.  The headings in this Agreement are for  convenience
                  --------
of reference only and shall not limit or otherwise affect the meaning hereof.

         11.7     GOVERNING  LAW.  THIS  AGREEMENT  SHALL  BE  GOVERNED  BY  AND
                  --------------
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF.


<PAGE>

                                                             Page 62 of 70 pages

         11.8     Severability.  If any one or more of the provisions  contained
                  ------------
herein, or the application thereof in any circumstance, is held invalid, illegal
or  unenforceable  in any respect for any reason,  the  validity,  legality  and
enforceability of any such provision in every other respect and of the remaining
provisions  hereof shall not be in any way impaired,  unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof.

         11.9     Rules of Construction.  Unless the context otherwise requires,
                  ---------------------
"or" is not  exclusive,  and  references  to  sections or  subsections  refer to
sections or subsections of this Agreement.

         11.10    Entire Agreement.  This Agreement,  together with the exhibits
                  ----------------
and  schedules  hereto,  and the  other  Transaction  Documents,  excluding  the
Confidentiality  Agreement by and between Soros Private Equity Partners,  L.L.C.
and the  Company,  dated June 10,  1999,  are intended by the parties as a final
expression  of their  agreement  and  intended  to be a complete  and  exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject  matter  contained  herein and therein.  There are no  restrictions,
promises, warranties or undertakings,  other than those set forth or referred to
herein or therein.

         11.11    Fees. Upon the Second Closing, the Company shall reimburse the
                  ----
Purchasers for their reasonable  out-of-pocket  expenses  (including  attorney's
fees,   disbursements  and  other  charges)  incurred  in  connection  with  the
transactions contemplated by this Agreement; provided, however, that the Company
shall  not  be  obligated  to  reimburse  the   Purchasers  for  any  reasonable
out-of-pocket expenses in excess of $25,000 in the aggregate.

         11.12    Publicity; Confidentiality.
                  --------------------------

                  (a)     Except as may be  required  by  applicable  law or the
         rules of any  securities  exchange or market on which  shares of Common
         Stock are traded,  none of the parties  hereto  shall issue a publicity
         release  or  public  announcement  or  otherwise  make  any  disclosure
         concerning this Agreement, the transactions  contemplated hereby or the
         business and financial  affairs of the Company,  without prior approval
         by the other parties hereto;  provided,  however,  that nothing in this
                                       --------   -------
         Agreement  shall restrict any Purchaser or the Company from  disclosing
         information (i) that is already publicly available, (ii) that was known
         to such Purchaser or the Company on a  non-confidential  basis prior to
         its  disclosure by the Company or such  Purchaser,  as the case may be,
         (iii) that may be required or appropriate in response to any summons or
         subpoena  or in  connection  with any  litigation,  provided  that such
                                                             --------
         Purchaser  or the  Company,  as the  case may be,  will use  reasonable
         efforts to notify the Company or the Purchaser,  as the case may be, in
         advance  of  such  disclosure  so as  to  permit  the  Company  or  the
         Purchaser,  as the case may be, to seek a protective order or otherwise
         contest such disclosure, and such Purchaser or the Company, as the case
         may be, will use reasonable efforts to cooperate, at the expense of the
         Company,  with the  Company  or the  Purchaser,  as the case may be, in
         pursuing  any such  protective  order,  (iv) to the  extent  that  such
         Purchaser  or the  Company as the case may be  reasonably  believes  it
         appropriate  in order to protect its  investment in the Shares in order
         to comply with any  Requirement of Law, (v) to such  Purchaser's or the

<PAGE>

                                                             Page 63 of 79 pages


         Company's, as the case may be, officers,  directors, agents, employees,
         members,  partners,  controlling persons,  auditors or counsel, (vi) to
         Persons who are parties to similar confidentiality  agreements or (vii)
         to the prospective transferee who executes a confidentiality  agreement
         in connection with any contemplated  transfer of any of the Shares.  If
         any  announcement  is  required  by law or the rules of any  securities
         exchange  or market on which  shares of Common  Stock are  traded to be
         made by any party hereto,  prior to making such announcement such party
         will, to the extent  practicable,  deliver a draft of such announcement
         to the other  parties  and  shall  give the  other  parties  reasonable
         opportunity to comment thereon.

                  (b)     Unless substantially in the form previously disclosed,
         the  Purchasers  shall have the  opportunity  to review and  reasonably
         modify any provision of any publicly release or public  announcement or
         document  which is to be  released to the public or filed with the SEC,
         which  provision  mentions the  Purchasers or any of their  Affiliates,
         prior to the  release of such  document  to the public or the filing of
         such document with the SEC.

         11.13    Further  Assurances.  Each of the parties  shall  execute such
                  -------------------
documents  and  perform  such  further  acts  (including,   without  limitation,
obtaining  any  consents,  exemptions,  authorizations  or other  actions by, or
giving any notices to, or making any filings with, any Governmental Authority or
any other Person) as may be reasonably  required or desirable to carry out or to
perform the provisions of this Agreement.

         11.14    Schedules.  Anything disclosed on any schedule attached hereto
                  ---------
or  otherwise  disclosed  in writing to the Initial  Purchasers  shall be deemed
disclosed on all schedules attached hereto.



<PAGE>

                                                             Page 64 of 79 pages


                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Agreement to be executed and  delivered by their  respective  officers  hereunto
duly authorized on the date first above written.


                                  BLUEFLY, INC.


                                  By:    _______________________________

                                  Name:  _______________________________
                                  Title: _______________________________


                                  QUANTUM INDUSTRIAL PARTNERS LDC


                                  By:    _______________________________

                                  Name:  _______________________________
                                  Title: _______________________________


                                  SFM DOMESTIC INVESTMENTS LLC


                                  By:    _______________________________

                                  Name:  _______________________________
                                  Title: _______________________________

                                  PILOT CAPITAL CORP.

                                  By:    _______________________________

                                  Name:  _______________________________
                                  Title: _______________________________



<PAGE>

                                                             Page 65 of 79 pages

                                                                    Schedule 2.2
                                                                    ------------

                            SHARES AND PURCHASE PRICE
                            -------------------------


          Purchaser                      Shares of                Purchase Price
                                   Series A Preferred Stock
                                        Purchased From
                                        the Company

Quantum Industrial Partners LDC            232,388                    $4,647,760
(principal place of business: Curacao)

SFM Domestic Investments LLC                 7,612                      $152,240

Pilot Capital Corp.                         10,000                      $200,000



<PAGE>


                                                             Page 66 of 79 pages


EXHIBITS
--------

A        Certificate of Amendment to the Certificate of Incorporation
B        Form of Opinion
C        Second Closing Purchasers' Certificate


SCHEDULES
---------

1        Purchasers
2.2      Shares and Purchase Price
3.4      Consents
3.5      Subsidiaries
3.11     Intellectual Property
3.13     Options and Warrants
3.14     Benefit Plans
3.15     Taxes
3.17     Labor Relations
3.25     Trade Relations


