<SUBMISSION>
<ACCESSION-NUMBER>0000950136-00-001582
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>6
<PERIOD>20000930
<FILING-DATE>20001114
<FILER>
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<CONFORMED-NAME>BLUEFLY INC
<CIK>0001030896
<ASSIGNED-SIC>5130
<IRS-NUMBER>133612110
<STATE-OF-INCORPORATION>NY
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
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<FILE-NUMBER>333-22895
<FILM-NUMBER>762485
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>42 WEST 39TH ST
<CITY>NEW YORK
<STATE>NY
<ZIP>10018
<PHONE>2129448000
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>42 WEST 39TH ST
<CITY>NEW YORK
<STATE>NY
<ZIP>10018
</MAIL-ADDRESS>
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<FORMER-CONFORMED-NAME>PIVOT RULES INC
<DATE-CHANGED>19970305
</FORMER-COMPANY>
</FILER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>QUARTERLY REPORT
<TEXT>

<PAGE>

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

(Mark One)

[X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      For the quarterly period ended September 30, 2000


[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      For the transition period from ______ to ______

                        Commission File Number: 333-22895

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

                                  BLUEFLY, INC.
        (Exact name of small business issuer as specified in its charter)

                New York                                13-3612110
     (State or other jurisdiction of       (I.R.S. Employer Identification No.)
     incorporation or organization)

    42 West 39th Street, New York, NY                      10018
(Address of principal executive offices)                (Zip Code)

                    Issuer's telephone number: (212) 944-8000

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

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

As of November 9, 2000, the issuer had outstanding 4,924,906 shares of Common
Stock, $.01 par value.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]

<PAGE>

                                  BLUEFLY, INC.
                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

Part I.  Financial Information

Item 1.  Financial Statements

         Consolidated Balance Sheets as of September 30, 2000 (unaudited)
               and December 31, 1999                                          3

         Consolidated Statements of Operations for the nine months ended
               September 30, 2000 and 1999 (unaudited)                        4

         Consolidated Statements of Operations for the three months ended
               September 30, 2000 and 1999 (unaudited)                        5

         Consolidated Statements of Cash Flows for the nine months ended
               September 30, 2000 and 1999 (unaudited)                        6

         Notes to Consolidated Financial Statements                           8


Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                            9

Part II. Other Information                                                   13

Item 2.  Changes in Securities and Use Of Proceeds                           13

Item 6.  Exhibits and Reports on Form 8-K                                    14

Signatures                                                                   15

<PAGE>

PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS

                                  BLUEFLY, INC.
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,   DECEMBER 31,
                                                                     2000           1999
                                                                     ----           ----
<S>                                                              <C>             <C>
                            ASSETS
Current assets
    Cash                                                         $    906,000    $  7,934,000
    Inventories, net                                                7,934,000       7,020,000
    Accounts receivable                                               886,000         381,000
    Prepaid expenses                                                  763,000         212,000
    Other current assets                                              136,000         487,000
                                                                 ------------    ------------
        Total current assets                                       10,625,000      16,034,000

Property and equipment, net                                         1,294,000       1,037,000

Other assets                                                          150,000          38,000
                                                                 ------------    ------------
                                                                 $ 12,069,000    $ 17,109,000
                                                                 ============    ============


          LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities
    Accounts payable                                             $  2,962,000    $  4,287,000
    Accrued expenses and other current liabilities                  2,086,000       2,236,000
                                                                 ------------    ------------
        Total current liabilities                                   5,048,000       6,523,000

Note payable (net of $321,000 of unamortized discount)             11,679,000              --
                                                                 ------------    ------------
                                                                   16,727,000       6,523,000
                                                                 ------------    ------------
Commitments

Redeemable preferred stock - $.01 par value; 2,000,000 shares
    authorized and 500,000 shares issued and outstanding
    (liquidation preference:  $20 per share plus accrued           10,886,000      10,285,000
    dividends)

Shareholders' equity (deficit)
    Common stock - $.01 par value; 15,000,000 shares
        authorized and 4,924,906 shares issued and
        outstanding                                                    49,000          49,000
    Additional paid-in capital                                     17,387,000      17,483,000
    Accumulated deficit                                           (32,980,000)    (17,231,000)
                                                                 ------------    ------------
                                                                  (15,544,000)        301,000
                                                                 ------------    ------------
                                                                 $ 12,069,000    $ 17,109,000
                                                                 ============    ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                        3
<PAGE>

                                  BLUEFLY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                         NINE MONTHS ENDED
                                                           SEPTEMBER 30,
                                                   ----------------------------
                                                       2000            1999
                                                       ----            ----
<S>                                                <C>             <C>
Net sales                                          $ 11,100,000    $  1,909,000
Cost of sales                                         8,603,000       1,455,000
                                                   ------------    ------------
     Gross profit                                     2,497,000         454,000



Selling, marketing and fulfillment expenses          14,310,000       6,267,000
General and administrative expenses                   3,765,000       2,038,000
                                                   ------------    ------------
      Total                                         (18,075,000)     (8,305,000)

Operating loss from continuing operations           (15,578,000)     (7,851,000)

Interest (expense) income, net                         (171,000)        283,000

Loss from continuing operations                     (15,749,000)     (7,568,000)
                                                   ------------    ------------

Discontinued operations - Note 2

      Income from discontinued operations                    --          63,000
                                                   ------------    ------------

Net loss                                           $(15,749,000)   $ (7,505,000)

Preferred stock dividends                              (601,000)       (140,000)
                                                   ------------    ------------
Net loss available to common shareholders          $(16,350,000)   $ (7,645,000)
                                                   ============    ============

Basic and diluted (loss) income per common share
     Continuing operations                         $      (3.32)   $      (1.62)
     Discontinued operations                                 --             .01
                                                   ------------    ------------
           Net loss per common share               $      (3.32)   $      (1.61)
                                                   ============    ============

Weighted average common shares outstanding            4,924,906       4,763,074
                                                   ============    ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                        4
<PAGE>

                                  BLUEFLY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED
                                                     SEPTEMBER 30,
                                              --------------------------
                                                  2000           1999
                                              -----------    -----------
<S>                                           <C>            <C>
Net sales                                     $ 3,215,000    $   863,000
Cost of sales                                   2,621,000        656,000
                                              -----------    -----------
     Gross profit                                 594,000        207,000

Selling, marketing and fulfillment expenses     3,889,000      2,664,000
General and administrative expenses             1,307,000      1,003,000
                                              -----------    -----------
      Total                                    (5,196,000)    (3,667,000)

Operating loss                                 (4,602,000)    (3,460,000)

Interest (expense) income, net                   (179,000)       111,000
                                              -----------    -----------

Net loss                                      $(4,781,000)   $(3,349,000)

Preferred stock dividends                        (202,000)      (140,000)
                                              -----------    -----------

Net loss available to common shareholders     $(4,983,000)   $(3,489,000)
                                              ===========    ===========

Basic and diluted loss per common share       $     (1.01)   $     (0.71)
                                              ===========    ===========

Weighted average common shares outstanding      4,924,906      4,901,749
                                              ===========    ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                        5
<PAGE>

                                  BLUEFLY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                   NINE MONTHS ENDED
                                                                                     SEPTEMBER 30,
                                                                              ----------------------------
                                                                                  2000            1999
                                                                              ------------    ------------
<S>                                                                           <C>             <C>
Cash flows from operating activities

  Loss from continuing operations                                             $(15,749,000)   $ (7,568,000)

  Adjustments to reconcile loss from continuing operations to net cash used
     in operating activities:
     Depreciation and amortization                                                 560,000          83,000
     Common stock issued for service                                                    --           7,000
     Changes in operating assets and liabilities:
     (Increase) decrease in
          Inventories                                                             (914,000)     (4,025,000)
          Accounts receivable                                                     (505,000)       (553,000)
          Other current assets                                                     352,000          (9,000)
          Prepaid expenses                                                        (551,000)        (68,000)
          Other assets                                                             (25,000)        (22,000)
     Increase (decrease) in
          Accounts payable                                                      (1,325,000)      2,036,000
          Accrued expenses and other current liabilities                          (150,000)        479,000
                                                                              ------------    ------------
    Net cash used in operating activities - continuing operations              (18,307,000)     (9,640,000)
                                                                              ------------    ------------


  Income from discontinued operations                                                   --          63,000
  Adjustments to reconcile income from discontinued operations to net
    cash provided by operating activities:
      Changes in operating assets and liabilities:
          (Increase) decrease in
             Non-factored receivables                                                   --         187,000
          Increase (decrease) in
             Income taxes payable                                                       --         195,000
                                                                              ------------    ------------

Net cash provided by operating activities - discontinued operations                     --         445,000
                                                                              ------------    ------------
Net cash used in operating activities                                          (18,307,000)     (9,195,000)
                                                                              ------------    ------------
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                        6
<PAGE>

                                  BLUEFLY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                               NINE MONTHS ENDED
                                                                                 SEPTEMBER 30,
                                                                         ----------------------------
                                                                             2000            1999
                                                                         ------------    ------------
<S>                                                                      <C>             <C>
Cash flows from investing activities
  Purchase of property and equipment                                         (721,000)       (478,000)
  Funds deposited with factor                                                      --       2,264,000
                                                                         ------------    ------------

Net cash (used in) provided by investing activities                          (721,000)      1,786,000
                                                                         ------------    ------------

Cash flows from financing activities - continuing operations
    Proceeds from notes payable                                            12,000,000              --
    Net proceeds from warrant redemption and unit purchase option                  --       7,067,000
    Net proceeds from option exercises                                             --         245,000
    Net proceeds from issuance of Preferred Stock                                  --       9,943,000
                                                                         ------------    ------------

Net cash provided by financing activities - continuing operations          12,000,000      17,255,000
                                                                         ------------    ------------

Cash flows from financing activities - discontinued operations
  Net change in due to/from factor                                                 --         171,000
                                                                         ------------    ------------
Net cash provided by financing activities - discontinued operations                --         171,000
                                                                         ------------    ------------

Net cash provided by financing activities                                  12,000,000      17,426,000
                                                                         ------------    ------------

Net (decrease) increase in cash                                            (7,028,000)     10,017,000
Cash balance - beginning of period                                          7,934,000       2,830,000
                                                                         ------------    ------------
Cash balance - end of period                                             $    906,000    $ 12,847,000
                                                                         ============    ============

Supplemental disclosure of cash flow information:
     Cash paid during the period for:
         Income taxes                                                    $         --    $     15,000
                                                                         ============    ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                        7
<PAGE>

                                  BLUEFLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2000

NOTE 1 - BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
Bluefly, Inc. and its wholly owned subsidiary (the "Company"). All significant
intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 3.10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The results of
operations of any interim period are not necessarily indicative of the results
of operations to be expected for the fiscal year. For further information, refer
to the consolidated financial statements and accompanying footnotes included in
the Company's Form 10-KSB/A for the year ended December 31, 1999. There have
been no changes in significant accounting policies since December 31, 1999. The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has sustained net
losses and negative cash flows from operations since the formation of
Bluefly.com. The Company's ability to meet its obligations in the ordinary
course of business is dependent on its ability to establish profitable
operations or raise additional financing through public or private equity
financing, collaborative or other arrangements with corporate sources, or other
sources to fund operations. Although the Company has entered into definitive
agreements relating to new financing (see Note 4 below), there can be no
assurance that such financing will be consummated, or that any additional
financing or other sources of capital will be available to the Company upon
acceptable terms, or at all. The inability to obtain additional financing, when
needed, would have a material adverse effect on the Company's business,
financial condition and results of operations.

NOTE 2 - THE COMPANY

The Company is a leading Internet retailer of designer fashions and home
accessories at outlet store prices. The Company's full service Web store
("Bluefly.com" or "Web Site") sells over 350 brands of designer apparel,
accessories and house and home products at discounts of up to 75%. Bluefly.com,
which launched in September 1998, also offers information on current fashion
trends.

In June 1998, the Company's Board of Directors voted to discontinue the
operations of its golf sportswear division and devote all of the Company's
energy and resources to building Bluefly.com.

NOTE 3 - NOTES PAYABLE

In March 2000, the Company obtained a commitment from affiliates of Soros
Private Equity Partners ("Soros") to provide, at the Company's option, up to $15
million of financing at any time during 2000 on terms reflecting market rates
for such financings at the time such financing is provided (the "Soros
Commitment"). As of September 30, 2000, Soros had provided the Company with an
aggregate of $12 million in convertible debt financing pursuant to the Soros
Commitment, in the form of notes that bear interest at a rate of 8% per annum
and are due in January 2002 (the "Soros Notes"). In October 2000, the Company
received the final $3 million of the Soros Commitment in the form of additional
Soros Notes, bringing the aggregate principal amount of the Soros Notes
outstanding to $15 million. Under the terms of the New Soros Financing (as
hereinafter defined) the Soros Notes would convert into preferred stock. See
Note 4 below. In connection with the Soros Commitment and Soros Notes, the
Company has granted Soros warrants (the "Soros Warrants") pursuant to which
Soros has the right to purchase up to 375,000 shares of Common Stock at an
exercise price equal to $2.29, exercisable at any time during the 5 years
following issuance. The Soros Warrants have been valued at $465,000 using the
Black Scholes option pricing model and, accordingly, the Company has recorded a
credit to additional paid in capital and a debt discount, which is being
amortized over the life of the debt.

NOTE 4 - NEW SOROS FINANCING

On November 13, 2000, the Company entered into an agreement with Soros pursuant
to which affiliates of Soros have agreed to invest up to an additional $15
million in the Company, subject to certain conditions (the "New Soros
Financing"). Under the terms of the agreement, Soros has invested an additional
$5 million in the form of a note (the "New Note"), convertible into preferred
stock at a price of $2.34 per share. The agreement requires the Company to offer
the public shareholders of the Company, as of a date to be determined, the right
to purchase up to an aggregate of $20 million of Common Stock at $2.34 per
share. If the public shareholders purchase less than $20 million of Common
Stock, Soros would purchase the difference between $20 million and the amount
purchased by the public shareholders, up to a total $10 million, all at the rate
of $2.34 per share. As part of the transaction, and subject to shareholder
approval, the Soros Notes (referred to in Note 3), as well as the New Note,
would be converted into preferred stock at a price of $2.34 per share, and the
conversion price of the preferred stock previously issued to

                                       8
<PAGE>

                                  BLUEFLY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2000

Soros and other investors would be reduced to $2.34 per share. All of the
preferred stock would earn dividends at the rate of 8% per year, payable in cash
or stock, at the Company's option, upon conversion. The preferred stock issued
pursuant to the New Soros Financing would be convertible into shares of Common
Stock of the Company on a one-for-one basis.

Assuming the transaction is consummated, Soros would own a majority of the
Company's voting and equity interests. In addition, the preferred stock will
provide Soros with veto rights over certain Company actions and will allow Soros
to control any vote of the Company's board of directors.

Closing of the New Soros Financing requires approval by the shareholders of the
Company and is subject to certain other closing conditions. The New Note bears
interest at the rate of 11% until it is converted. There can be no assurance
that the shareholders will approve the New Soros Financing or that the New Soros
Financing will be consummated. If it is not consummated, the Soros Notes and the
New Note are due and payable on May 1, 2001.

NOTE 5 - EARNINGS (LOSS) PER SHARE

The Company has determined Earnings (Loss) Per Share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Basic earnings (loss) per share excludes dilution and is computed by
dividing earnings (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period.

Diluted earnings (loss) per share is computed by dividing earnings (loss)
available to common shareholders by the weighted average number of common shares
outstanding for the period, adjusted to reflect potentially dilutive securities.
Due to the loss from continuing operations, options and warrants to purchase
2,677,481 shares of Common Stock and Preferred Stock convertible into 952,381
shares of Common Stock were not included in the computation of diluted earnings
per share because the result of the exercise of such would be antidilutive.

NOTE 6 - RECLASSIFICATIONS

Certain amounts in the consolidated financial statements of the prior period
have been reclassified to conform to the current period presentation for
comparative purposes.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OVERVIEW

The Company is a leading Internet retailer of designer fashions and home
furnishings at outlet store prices. The Company offers an extensive selection of
designer products from over 350 brands.

The Company derives revenue primarily from the sale of designer products on its
Web Site. Revenue is recognized when goods are shipped to the Company's
customers, which occurs only after credit card authorization. The Company
processes merchandise returns and bears the credit risk for these transactions.
The Company generally permits returns for any reason within 90 days of the sale.
Accordingly, the Company reserves for estimated future returns and bad debt at
the time of shipment based on historical data. However, the Company's future
return and bad debt rates could differ significantly from historical patterns.

The Company has incurred substantial costs to develop its Web Site and
infrastructure. In order to expand its business, the Company intends to invest
in sales, marketing, merchandising, operations, information systems, site
development and additional personnel to support these activities. The Company,
therefore, expects to continue to incur substantial operating losses for the
foreseeable future.

The Company's quarterly net sales increased to $3,215,000 for the third quarter
of 2000, an increase of over 273% compared to net sales during the third quarter
of 1999 of $863,000. In addition, average order size increased to $100.86 from
$95.83 for the same period in the prior year.

According to Media Metrix data, Bluefly.com had approximately 376,000 average
monthly unique visitors during the third quarter of 2000, approximately 39%
higher than the 271,000 average monthly unique visitors attracted during the
third quarter of 1999. During the quarter, the Company added approximately
24,500 new customers, a 164% increase over the 9,280 customers added in the
third

                                       9
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2000

quarter of 1999. Repeat customers accounted for approximately 51% of the
Company's revenues, up from 35% in the third quarter of 1999.

Gross revenue per unique visitor was $4.01 for the third quarter, 167% higher
than the $1.50 gross revenue per unique visitor generated in the third quarter
of 1999. Customer acquisition costs (which the Company defines as total
advertising expenditures during the quarter (excluding staff related costs)
divided by new customers acquired in the quarter) improved 68% to $57.45 per new
customer during the third quarter of 2000 from $178.66 per new customer
acquisition cost during the third quarter of 1999.

In order to accommodate increased inventory levels and higher volumes of order
fulfillment, the Company moved to a larger, more robust fulfillment center. The
new facility has over four times the amount of square footage available than in
the old facility. The Company completed the move in early October 2000.

Bluefly.com was launched in September 1998. In June 1998, prior to the launch of
Bluefly.com, the Company discontinued its Pivot Rules division, which marketed a
collection of golf sportswear in order to devote all of its resources to
building Bluefly.com.

RESULTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999

NET SALES: For the nine months ended September 30, 2000, gross sales (revenue
from product sales before any adjustment for reserves) totaled $15,411,000. The
Company recorded a provision for returns and credit card chargebacks and other
discounts of $4,311,000, or approximately 28% of gross sales. The reserve
allowance takes into account the Company's 90-day return policy and actual
experience to date, which may vary over time. After the necessary provisions for
returns, credit card chargebacks and adjustments for uncollected sales taxes,
the Company's net sales for the nine months ended September 30, 2000 were
$11,100,000. This represents an increase of over 481% compared to net sales for
the same period in 1999, in which net sales totaled $1,909,000.

COST OF SALES: Cost of sales for the nine months ended September 30, 2000
totaled $8,603,000, resulting in gross margin of approximately 22.5%. Cost of
sales consists of the cost of product sold to customers, in-bound shipping
costs, inventory reserves, commissions and packing materials. Cost of sales for
the nine months ended September 30, 1999 were $1,455,000, resulting in gross
margin of 23.8%. The Company believes that the decrease in gross margin resulted
from the reduction of sales price of certain items that the Company sought to
(i) sell before its move to its new fulfillment center, as well as (ii) convert
into cash needed for holiday buys. This decrease in margin was partially offset
by revenue generated from certain promotional programs that were not in place in
1999.

SELLING, MARKETING AND FULFILLMENT EXPENSES: Selling, marketing and fulfillment
expenses totaled $14,310,000 for the nine months ended September 30, 2000,
representing costs associated with online strategic marketing relationships,
print advertising, Web Site hosting, inventory management, fulfillment costs,
outbound shipping costs (net of shipping revenue), and customer service. Of the
total selling, marketing and fulfillment expenses for the nine months ended
September 30, 2000, marketing expenses related to online and print advertising
totaled approximately $7,397,000 while Web site hosting costs totaled
approximately $1,593,000. Approximately $1,280,000 of the total relates to
fulfillment costs, and approximately $426,000 represents outbound shipping costs
(net of shipping revenue). Selling, marketing and fulfillment expenses for the
same period in 1999 were approximately $6,267,000. Of the total selling,
marketing and fulfillment expenses for the nine months ended September 30, 1999,
marketing expenses related to online and print advertising totaled approximately
$3,824,000 while Web site hosting costs totaled approximately $243,000.
Approximately $290,000 of the total related to fulfillment costs, and
approximately $105,000 represents outbound shipping costs (net of shipping
revenue).

The increase in fulfillment costs and outbound shipping costs in this period
compared to the same period in 1999, is largely attributable to increased sales
volume as well as the move to the new fulfillment center as there was some
overlap in costs during the month of August due to the Company's need to
maintain the old fulfillment center as the new fulfillment center was commencing
operations. The increase in Web site hosting costs results from the Company's
efforts to improve the speed of its Web site and effectively handle growth in
traffic to the Web site. Marketing expenses related to online and print
advertising as a percentage of total selling, marketing and fulfillment
expenses, decreased for the nine month period ended September 30, 2000 by
approximately 9% as compared to the same period in 1999.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$3,765,000 for the nine months ended September 30, 2000 compared to $2,038,000
for the same period in 1999. General and administrative expenses include
salaries and related expenses, insurance costs, accounting and legal fees,
depreciation and other office related expenses. The increase in general and
administrative expenses in this period, as compared to 1999, was largely the
result of an increase in employees, and their related benefits as well as
increased professional fees. The Company has increased its head count across all
departments. The average number of employees

                                       10
<PAGE>


                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2000

employed by the Company for the nine month period ended September 30, 1999 was
30, compared to the average number of employees employed by the Company for the
nine month period ended September 30, 2000 of 85.

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999

NET SALES: For the three months ended September 30, 2000, gross sales (revenue
from product sales before any adjustment for reserves) totaled $4,546,000. The
Company recorded a provision for returns and credit card chargebacks and other
discounts of $1,331,000, or approximately 29% of gross sales. The reserve
allowance takes into account the Company's 90-day return policy and actual
experience to date, which may vary over time. After the necessary provisions for
returns, credit card chargebacks and adjustments for uncollected sales taxes,
the Company's net sales for the third quarter of 2000 were $3,215,000. This
represents an increase of over 272% compared to net sales for the three month
period ended September 30, 1999, in which net sales totaled $863,000.

COST OF SALES: Cost of sales for the three months ended September 30, 2000
totaled $2,621,000, resulting in gross margin of approximately 18.5%. Cost of
sales consists of the cost of product sold to customers, in-bound shipping
costs, inventory reserves and packing materials. Cost of sales for the three
months ended September 30, 1999 were $656,000, resulting in gross margin of
approximately 24%. The Company believes that the decrease in gross margin
resulted from the reduction of sales price of certain items that the Company
sought to (i) sell before its move to its new fulfillment center as well as (ii)
convert into cash needed for holiday buys. This decrease in margin was partially
offset by revenue generated from certain promotional programs that were not in
place in 1999.

SELLING, MARKETING AND FULFILLMENT EXPENSES: Selling, marketing and fulfillment
expenses totaled $3,889,000 for the three months ended September 30, 2000,
representing costs associated with online strategic marketing relationships,
print advertising, Web Site hosting, inventory management, fulfillment costs,
outbound shipping costs (net of shipping revenue), and customer service. Of the
total selling, marketing and fulfillment costs for the three months ended
September 30, 2000, marketing expenses related to online and print advertising
totaled approximately $1,407,000, while fulfillment expenses totaled
approximately $589,000. The costs of outbound shipping net of the related
shipping revenue totaled $34,000. Selling, marketing and fulfillment expenses
for the same period in 1999 were approximately $2,664,000. Marketing expenses
related to online and print advertising for the three months ended September 30,
1999 were approximately $1,657,000. Fulfillment expenses for the three months
ended September 30, 1999 totaled approximately $163,000 while the costs of
outbound shipping net of the related shipping revenue totaled $81,000.

The increase in fulfillment costs in this period, compared to 1999, is largely
attributable to increased sales volume as well as the move to the new
fulfillment center as there was some overlap in costs during the month of
August due to the Company's need to maintain the old fulfillment center as the
new fulfillment center was commencing operations. Outbound shipping costs (net
of the related revenue) decreased compared to the prior period as the Company
raised its shipping fee during July, from $3.95 to $5.95. The increased revenue
served to offset the overall shipping costs. The increase in Web site hosting
costs results from the Company's efforts to improve the speed of its Web site
and effectively handle the growth in traffic to the Web site. Marketing expenses
related to online and print advertising as a percentage of total selling,
marketing and fulfillment expenses, decreased for the three month period ended
September 30, 2000 by approximately 26% as compared to the same period in 1999.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$1,307,000 for the three months ended September 30, 2000 compared to $1,003,000
for the same period in 1999. General and administrative expenses include
salaries and related expenses, insurance costs, accounting and legal fees,
depreciation and other office related expenses. The increase in general and
administrative expenses in the third quarter 2000, as compared to 1999, was
largely the result of an increase in employees and their related benefits as
well as increased professional fees. The Company has increased its head count
across all departments, growing the Company from 56 employees as of September
30, 1999 to 88 as of September 30, 2000.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2000, the Company had approximately $5.58 million of working
capital, of which approximately $900,000 was in the form of cash. As of
September 30, 2000, the Company had $3.0 million of cash available under the
Soros Commitment described below. In October 2000, the Company drew down on the
remaining $3.0 million under the Soros Commitment.


In March 2000, the Company obtained a commitment from affiliates of Soros
Private Equity Partners ("Soros") to provide, at the Company's option, up to $15
million of financing at any time during 2000 on terms reflecting market rates
for such financings at the time such financing is provided (the "Soros
Commitment"). As of September 30, 2000, Soros had provided the Company with an
aggregate of $12 million in debt financing pursuant to the Soros Commitment, in
the form of notes that bear interest at a rate of 8% per annum and are due in
January 2002 (the "Soros Notes"). In October 2000, the Company received the
final $3.0 million under the Soros Commitment in the form of additional Soros
Notes, bringing the aggregate principal amount of Soros Notes to $15 million.
Under the terms of the New Soros Financing (as hereinafter defined), the Soros
Notes would convert into preferred stock. See discussion below. In connection
with the


                                       11
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2000

Soros Commitment and Soros Notes, the Company has granted Soros warrants (the
"Soros Warrants") pursuant to which Soros has the right to purchase up to
375,000 shares of Common Stock at an exercise price equal to $2.29, exercisable
at any time during the 5 years following issuance. The Soros Warrants have been
valued at $465,000 using the Black Scholes option pricing model and,
accordingly, the Company has recorded a credit to additional paid in capital and
a debt discount, that is being amortized over the life of the debt.

On November 13, 2000, the Company entered into an agreement with Soros pursuant
to which affiliates of Soros have agreed to invest up to an additional $15
million in the Company, subject to certain conditions (the "New Soros
Financing"). Under the terms of the agreement, Soros has invested an additional
$5 million in the form of a note (the "New Note"), convertible into preferred
stock at a price of $2.34 per share. The agreement requires the Company to offer
the public shareholders of the Company, as of a date to be determined, the right
to purchase up to an aggregate of $20 million of Common Stock at $2.34 per
share. If the public shareholders purchase less than $20 million of Common
Stock, Soros would purchase the difference between $20 million and the amount
purchased by the public shareholders, up to a total $10 million, all at the rate
of $2.34 per share. As part of the transaction, and subject to shareholder
approval, the Soros Notes, as well as the New Note, would be converted into
preferred stock at a price of $2.34 per share, and the conversion price of the
preferred stock previously issued to Soros and other investors would be reduced
to $2.34 per share. All of the preferred stock would earn dividends at the rate
of 8% per year, payable in cash or stock, at the company's option, upon
conversion. The preferred stock issued pursuant to the New Soros Financing would
be convertible into shares of Common Stock of the Company on a one-for-one
basis.

Assuming the transaction is consummated, Soros would own a majority of the
Company's voting and equity interests. In addition, the preferred stock will
provide Soros with veto rights over certain company actions and will allow Soros
to control any vote of the Company's board of directors.

Closing of the New Soros Financing requires approval by the shareholders of the
Company and is subject to certain other closing conditions. The New Note bears
interest at the rate of 11% until it is converted. There can be no assurance
that the shareholders will approve the New Soros Financing or that the New Soros
Financing will be consummated. If it is not consummated, the Soros Notes and the
New Note are due and payable on May 1, 2001.

In June 2000, the Company was advised by the Nasdaq Stock Market, Inc.
("Nasdaq") and the Boston Stock Exchange, that it is not in compliance with
their respective continued listing requirements (the "Listing Requirements")
because of its failure to satisfy Nasdaq's minimum net tangible assets
requirement and the Boston Stock Exchange's minimum shareholders' equity
requirement. The Company believes that the consummation of the New Soros
Financing would allow it to re-attain compliance with the Listing Requirements.
However, there can be no assurances that the New Soros Financing will be
consummated or that Nasdaq or the Boston Stock Exchange will allow the Company
to remain listed until the consummation of the New Soros Financing.

As of September 30, 2000, the Company has marketing and advertising commitments
of approximately $1.2 million through December 31, 2000. In addition, the
Company believes that in order to grow the business, the Company will need to
make additional marketing and advertising commitments in the future. However,
the Company's marketing budget is subject to a number of factors, including its
results of operations as well as its ability to raise additional capital.

In order to continue to expand its product offerings, the Company intends to
expand its relationships with suppliers of end-of-season and excess name brand
apparel and fashion accessories. The Company expects that its suppliers will
continue to include designers and retail stores that sell excess inventory as
well as third party end-of-season apparel aggregators. To achieve its goal of
offering a wide selection of top name brand designer clothing and fashion
accessories, the Company may acquire certain goods on consignment and may
explore leasing or partnering select departments with strategic partners and
distributors. Due to the Company's limited working capital, a number of its
suppliers have limited the Company's payment terms and, in some cases, have
required the Company to pay for merchandise in advance of delivery.

The Company expects to hire and train additional employees for the operations
and development of Bluefly.com. However, the Company's ability to hire such
employees is subject to a number of factors, including the Company's results of
operations as well as the Company's ability to raise additional capital.

The Company anticipates that the proceeds from the Soros Notes, the initial $5
million of the New Soros Financing, together with existing resources and cash
generated from operations, should be sufficient to satisfy the Company's current
cash requirements through the first quarter of 2001. However, the Company
intends to seek additional debt and/or equity financing in order to maximize the
growth of its business. The Company is exploring a secured inventory line of
credit. There can be no assurance that any additional financing or other sources
of capital will be available to the Company upon acceptable terms, or at all.
The inability to obtain additional financing, when needed, would have a material
adverse effect on the Company's business, financial condition and results of
operations.

                                       12
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2000

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain of the Commission's views in applying generally accepted accounting
principles to revenue recognition in financial statements. SAB 101 is not a rule
or interpretation of the Commission; however, it represents interpretations and
practices followed by the Division of Corporate Finance and Office of the Chief
Accountant in administering the disclosure requirements of the Federal
securities laws.

The Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board has addressed the "Accounting Treatment for Shipping and Handling Revenue
and Costs" in Issue 00-10. During its meetings it has reached a final consensus
that amounts billed, if any, for shipping and handling should be included in
revenue. However the EITF did not reach a conclusion on the treatment of the
related costs of shipping and handling.

According to SAB 101B, the implementation date for Issue 00-10, is the fourth
quarter of a registrant's fiscal year beginning after December 15, 1999 and
requires companies to reclassify all prior periods to conform with the current
period presentation. The Company will apply the interpretations outlined in SAB
101, and EITF Issue 00-10, in the fourth quarter of 2000, and will retroactively
reclassify shipping and handling revenues to conform with the new required
presentation.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This report may include statements that constitute "forward-looking" statements,
usually containing the words "believe", "project", "expect", or similar
expressions. These statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements. The risks and
uncertainties are detailed from time to time in reports filed by the company
with the Securities and Exchange Commission, including Forms 8-A, 8-K, 10-QSB,
and 10-KSB. These risks and uncertainties include, but are not limited to, the
following: the Company's limited working capital, need for additional capital
and potential inability to raise such capital; the competitive nature of the
business and the potential for competitors with greater resources to enter such
business; risks of litigation for sale of unauthentic or damaged goods and
litigation risks related to sales in foreign countries; consumer acceptance of
the Internet as a medium for purchasing apparel; recent losses and anticipated
future losses; potential adverse effects on gross margin resulting from mark
downs and allowances; the capital intensive nature of such business (taking into
account the need for advertising to promote such business); the dependence on
third parties and certain relationships for certain services, including
uncertainty arising from a lack of operating history with the company's new
fulfillment center; the successful hiring and retaining of personnel; the
dependence on continued growth of online commerce; rapid technological change;
online commerce security risks; the startup nature of the Internet business;
governmental regulation and legal uncertainties; management of potential growth;
and unexpected changes in fashion trends.

PART II  - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In connection with the Soros Commitment and the Soros Notes, the Company has
granted Soros warrants to purchase an aggregate of 375,000 shares of Common
Stock. The Soros Warrants have an exercise price of $2.29 and are exercisable
for a period of five years from issuance. The Company has granted warrants to
purchase 50,000 shares of Common Stock (the "Supplier Warrants") to a supplier
in return for an agreement that provides the Company with preferred pricing of,
and access to, the supplier's product. The Supplier Warrants have an exercise
price of $3.72 per share and are exercisable for a period of five years. The
issuance of the Soros Warrants and the Supplier Warrants were deemed to be
exempt from registration under the Securities Act of 1933, as amended (the
"Act") in reliance on Section 4(2) of the Act as a transaction by an issuer not
involving any public offering. The holder thereon represented their intentions
to acquire the securities for investment only and not with a view to any
distribution thereof and appropriate legends were fixed to the Soros Warrants
and the Supplier Warrants in connection therewith. The proceeds of the Soros
Notes are being used for working capital purposes.

                                       13
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2000

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) The following is a list of exhibits filed as part of this Report:

EXHIBIT NO.   DESCRIPTION
-----------   -----------

   +10.19     Service Agreement by and between the Company and Distribution
              Associates, Inc. dated July 27, 2000

    10.20     Note and Warrant Purchase Agreement, dated August 21, 2000, by and
              among the Company, Quantum Industrial Partners LDC and SFM
              Domestic Investments LLC

    10.21     Note and Warrant Purchase Agreement, dated October 2, 2000, by and
              among the Company, Quantum Industrial Partners LDC and SFM
              Domestic Investments LLC

    10.22     Letter Agreement, dated as of October 12, 2000, by and between the
              Company and Soros Private Equity Partners, LLC (incorporated by
              reference to the Company's Report on Form 8-K dated October 17,
              2000)

    10.23     Investment Agreement, dated as of November 13, 2000, by and
              among the Company, Newco, Quantum Industrial Partners LDC and
              SFM Domestic Investments LLC

    27        Financial Data Schedule.


+  Confidential treatment requested as to certain portions of this Exhibit.
   Such portions have been redacted.

(b) Reports on Form 8-K:

On October 17, 2000 the Company filed a Form 8-K under Item 5 announcing that it
had entered into a non-binding letter of intent with Soros Private Equity
Partners relating to a proposed investment in the Company by affiliates of Soros
Private Equity Partners.

                                       14
<PAGE>

                                  BLUEFLY, INC.
                               SEPTEMBER 30, 2000

                                   SIGNATURES

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


                                            BLUEFLY, INC.


                                            By: /s/ E. Kenneth Seiff
                                                -----------------------------
                                                E. Kenneth Seiff
                                                President


                                            By: /s/ Patrick C. Barry
                                                -----------------------------
                                                Patrick C. Barry
                                                Chief Financial Officer

November 14, 2000

                                       15

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.19
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>SERVICES AGREEMENT
<TEXT>

<PAGE>

                                                                   Exhibit 10.19

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

                               SERVICES AGREEMENT

        This Services Agreement (the "Agreement") dated as of July 27, 2000, by
and between Distribution Associates, Inc., doing business as National Catalog
Corporation, a Delaware corporation ("NCC"), and Bluefly, Inc., a New York
Corporation (the "Company").

                               W I T N E S S E T H

        WHEREAS, the Company conducts a direct to consumer business involving
the sale of certain merchandise (the "Merchandise") through an Internet site
(the "Site"); and

        WHEREAS, NCC is a provider of various services to direct marketing
enterprises, including, but not limited to, distribution, telemarketing and
order fulfillment services, and NCC will provide some or all of these services
to the Company as more particularly described herein; and

        WHEREAS, the Company desires that NCC provide Services (as such term is
hereinafter defined) in connection with the operation of its business and NCC
desires to provide such Services to the Company.

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

        1. Services. NCC shall provide the services set forth in Exhibit A
hereto (collectively, the "Services") in connection with the operation of the
Company's business upon the terms and conditions set forth in this Agreement.

        2. Service Levels. Certain of the Services are subject to the Service
Levels set forth in Exhibit B (the "Service Levels"). Such Service Levels define
certain minimum standards of performance which NCC shall maintain in the
rendering of the Services.

        3. Facility. The Services shall be performed, and the Company's
Merchandise shall be stored, at NCC's place of business

<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

in Martinsville, Virginia and/or at such other business locations as NCC and the
Company may agree from time to time (together, the "Facility"); provided,
however, that NCC may use out-sourced services (i) for inbound telemarketing,
and (ii) upon the occurrence of a Force Majeure. NCC shall remain responsible
for the efficient operation of any out-sourced services in accordance with the
Service Levels. The Facility shall at all times include safe, secure, clean and
adequate storage for all Bluefly Merchandise, both bin and hanging. The Facility
will include adequate space to support the Company's expected growth during the
Term based upon the Forecasts provided by the Company. NCC shall, at the
Company's sole option, allow employees of the Company to access the Facility
during normal working hours to observe and provide assistance to NCC in
connection with the performance of the Services.

        4. Set-up. Following execution of this Agreement, the parties hereto
shall work together to organize the various tasks which they agree must be
completed in order to effect a successful transition of the Company onto the
System and into the Facility, ("Set-Up Tasks"). Set-Up Tasks include, among
other things, the development of a chronological task list, personnel hiring and
training, Systems Services (as hereinafter defined in Section 5(a)), packing up,
shipping and receiving Merchandise, and the transfer of operational and
financial data to assist in the provision of telemarketing and distribution
services. Except as stated otherwise herein, each party shall bear its own costs
and expenses in carrying out Set-Up Tasks.

        5. Fees and Charges. In consideration for performance of the Services
during the Term, the Company shall pay to NCC the following fees and charges:

               (a) The Company shall pay NCC a fee of [***](the "Systems Fee")
for the services described in this Section 5(a). NCC has previously received
from the Company a [***] check, as prepayment of part or all of the Systems Fee,
and has commenced (i) assessing the communications resources required to connect
the Company and its Site to the Facility and the System, (ii) training Company
personnel to use the System, and (iii) migrating certain of the Company's
operations as reasonably necessary for NCC's performance under this Agreement
onto the System (the foregoing

                                       2
<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

items being collectively referred to herein as the "Systems Services"), as more
particularly set forth on Exhibit C hereto. As used herein, the term "System"
shall mean the Direct Marketing Management System together with various modules,
modifications and enhancements ("DMMS"), licensed to NCC by Applied Systems
Technologies, Inc. ("ASTI"), and includes all hardware and software owned or
operated by NCC used to operate DMMS for NCC or any other similar system
purchased or licensed by NCC.

               (b) (i) The Company shall also pay NCC during the Term of this
Agreement the fixed fees set forth on Exhibit D hereto (the "Fixed Fee Per
Order"), which fees may be adjusted from time to time as set forth herein. The
Fixed Fee Per Order shall not be applied to bulk shipments that occur outside
the normal course of the Company's business and only on an occasional basis.

                   (ii) The Fixed Fee Per Order will be based on the projected
12-month volume of Gross Orders (as hereinafter defined) at the beginning of
each Year of the Term, provided that, to the extent that such 12-month volume
exceeds projections, the Fixed Fee Per Order will be based upon the actual
volume of Gross Orders. At the end of each Year of the Term, the Fixed Fee Per
Order will be adjusted retroactively and the Company will receive a credit for
any overcharge or be invoiced for any undercharge. The Fixed Fee Per Order shall
be payable on such number of orders equal to the gross number of orders and
Merchandise exchange orders processed into the System as indicated on System
Report SLS929 (or such other report containing similar information), such orders
being hereinafter referred to as "Gross Orders"). The resulting product of the
Fixed Fee Per Order multiplied by the Gross Orders shall be hereinafter referred
to as the "Total Fixed Charge." In the event the Company institutes a continuity
program whereby goods are sent to customers on a regular basis pursuant to a
single order processed into the System, each regular dispatch of such goods
shall be treated as an individual Gross Order for purposes of calculating the
Total Fixed Charge. Backorders, cancelled orders occurring as a result of
"Stock-Outs" and returned orders shall not be included in the calculation of
Gross Orders. To the extent that the Company experiences product returns that
are the result of NCC's picking errors (including, without limitation, wrong
items shipped, duplicate items, items

                                       3
<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

mistakenly shipped, missing items or components or damaged items) ("Error-Based
Returns"), and such Error-Based Returns exceed [***] of all items shipped on a
Yearly basis, then NCC shall issue to the Company a credit in the amount of
[***] for each Error-Based Return in excess of [***] of units shipped. To the
extent that such Error-Based Returns exceed [***] of all items shipped on a
Yearly basis, then NCC shall issue the Company a credit as prescribed in this
section 5(b)(ii) plus an additional [***] for each Error-Based Return.

                   (iii) Except as otherwise set forth herein, the Total Fixed
Charge payable by the Company to NCC is intended to cover all the Fixed Costs
(as defined below) which NCC may incur (or for which NCC may become responsible)
in performing the Services under this Agreement. For the purposes of this
Agreement, "Fixed Costs" shall mean, (1) real estate and real property taxes,
(2) repairs and maintenance (including the cost of computer maintenance
contracts) and equipment additions and upgrades, (3) security, (4) executive and
management staff and supervisory staff in excess of the Supervisory Allocation
(as defined below), and (5) building and liability insurance.

                   (iv) The Fixed Fee Per Order shall be increased annually,
effective on each anniversary of the date hereof, by an amount equal to the
percentage increase, if any, in the Urban Wage Earners and Clerical
Workers-South-All Items consumer price index published by the U.S. Department of
Labor for the most recent twelve (12) month period ended immediately prior to
such dates, determined by comparing such index to such index quoted for the
twelve month period immediately preceding such twelve month period (the "C.P.I.
Adjustment").

               (c) The Company shall also pay to NCC the IT Fee, which shall be
the product of the IT Fee Per Order set forth on Exhibit D and the number of
Gross Orders for which the Company is required to pay the Fixed Fee Per Order.
The IT Fee will be projected, billed and adjusted in the same manner as the
Fixed Fee Per Order.

               (d) (i) The Company shall also pay to NCC the "Total Variable
Charge" in accordance with the terms of this Agreement. The "Total Variable
Charge" is calculated by multiplying (x) the

                                       4
<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

"Estimated Variable Cost Per Order" (as defined below) in respect of any Week
during the Term hereof, by (y) the total number of Gross Orders received in
respect of such Week.

                   (ii) The "Estimated Variable Cost Per Order" for each Week
during the Term hereof shall be such amount as equals (x) the Adjusted Actual
Variable Costs (as defined below) of the preceding Month divided by (y) the
total number of Gross Orders for such preceding Month.

                   (iii) Within twenty (20) Business Days following the end of
each Month during the Term hereof, NCC shall reconcile Adjusted Actual Variable
Costs against the Total Variable Charge for such Month, and shall provide the
Company with a detailed copy of such reconciliation:

                        A. In the event that Adjusted Actual Variable Costs are
higher than the Total Variable Charge, then the Company shall pay the difference
between Adjusted Actual Variable Costs and the Total Variable Charge to NCC
within Ten (10) Business Days of a demand therefor; or

                        B. If the Total Variable Charge is higher than Adjusted
Actual Variable Costs, then NCC shall credit the difference between the Total
Variable Charge and Adjusted Actual Variable Costs against amounts owed by the
Company to NCC within Ten (10) Business Days, except with respect to any credit
arising out of the final Monthly reconciliation which shall be paid in cash
unless the Company owes other amounts to NCC at such time, in which case such
amount shall be credited against the amount owed.

                   (iv) NCC shall, on a Weekly basis, issue to the Company an
invoice in the amount equal to the Total Fixed Charge plus the Total Variable
Charge for such Week. Such invoice shall be due and payable within ten (10)
Business Days of the date of faxed receipt of such invoice and will be subject
to any credit balance in favor of the Company as a result of Section
5(c)(iii)(B) hereof.

              (e) The Company shall also pay NCC, within twenty (20) Business
Days of receipt of an invoice therefor, a monthly Account

                                       5
<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

Management Fee of [***]. The Account Management Fee shall be subject to a CPI
Adjustment.

               (f) The Company shall also pay NCC Space Fees, based on rates set
forth in Exhibit D. The Space Fees will be based on the square footage required
for pick locations and any reserve storage, and will not include any charge for
receiving areas, packing areas or shipping areas.

               (g) If the Company requests that NCC provide Special Services (as
defined in Section 9 herein), the Company shall pay NCC such amount(s) in
respect of such Special Services as shall be mutually agreed upon between the
Company and NCC (the "Special Services Costs"). Special Services Costs shall be
due and payable by the Company as agreed between the Company and NCC.

               (h) Upon the expiration of this Agreement or any termination
hereof, in addition to any other fees incurred in connection with this
Agreement, the Company shall pay NCC a fee (the "Close Down Fee") relating to
the various activities to be undertaken by NCC to disengage the Company from the
Facility and the System and cease the provision of Services hereunder (the
"Close Down"), including, among other things, such activities as removal of
Merchandise from racks, packing for shipment (if necessary), preparing freight
documents for shipment to the Company's designated destination and loading on
the trucks of the Company's designated carrier, together with the cost of any
necessary supplies, and transferring information from the System to the
successor designated by the Company. The amount of the Close Down Fee shall be
[***] of the actual costs incurred in connection with such close down; provided,
however, that NCC shall promptly upon the Company's request provide to the
Company a good faith written estimate of the Close Down Fee prior to the
commencement of close down activities. [***] of the reasonably estimated Close
Down Fee calculated in accordance with this Section 5(f) shall be paid on the
date that the majority of the Merchandise is shipped from the Facility. The
Company and NCC shall in good faith agree upon a reasonable schedule by which
the Close Down will be effected. After completion of all close-down activities,
NCC shall issue to the Company a final adjusted invoice reflecting charges
mutually agreed to pursuant to this Section 5(f), and an appropriate credit or
charge with respect to

                                       6
<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

any difference from previously invoiced amounts, and NCC or the Company, as
applicable, shall pay within Twenty (20) Business Days any resulting amount
owing to the other. NCC acknowledges that the success of the Company's business
will depend upon NCC's ability to pack and ship all of the Company's Merchandise
in a timely and professional manner upon a Close Down and that the failure to do
so would have a material adverse effect on the Company's business and that,
therefore, time will be of the essence.

               (i) With the exception of the fees set forth above, the Company
will not be charged for any additional fees without its prior written approval,
including, but not limited to, fees for inserts, e-mails, bins, racking and
other equipment.

               (j) NCC will credit the Company the following rebates on fees
charged under the Agreement (the "Rebates"): (i) as of June 30, 2001, the
Company shall be entitled to a rebate of [***] credited against its monthly bill
for June 2001; (ii) as of June 30, 2002, the Company shall be entitled to a
rebate of [***] credited against its monthly bill for June 2002; and (iii) as of
June 30, 2003, the Company shall be entitled to a rebate of [***] credited
against its monthly bill for June 2003. The Rebates will be considered as
credits against the Fixed Charges for the appropriate Year.

        6. Adjusted Actual Variable Costs. (a) "Adjusted Actual Variable Costs"
are [***] of those costs, charges or expenses, not included in Fixed Costs,
which are incurred by NCC in connection with its performance of the Services,
and are comprised of (i) all direct labor costs (including employee and Social
Security taxes, benefits and fringe benefits) for employees engaged in the
performance of Services whose salaries and benefits are not included in the
calculation of Total Fixed Charge, (ii) supervisory personnel costs up to an
amount that does not exceed [***] of the costs referred to in item (i) above
(the "Supervisory Allocation"), (iii) inbound and outbound telephone call
charges, (iv) packaging, and packaging supplies, office and data processing
supplies, (v) postage, (vi) common carrier, delivery, courier and other charges
for receiving and shipping Merchandise, (vii) costs in connection with
outsourced services referred to in Section 3 hereof, (viii) recurring costs
incurred in connection with the provision of redundant assets or services
provided to the Company

                                       7
<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

(such as alternate redundant telephone service into the Facility), installed or
maintained for back-up or disaster recovery purposes, (ix) costs incurred to
train employees and associates, both prior to and after the Commencement Date,
to handle the Company's business pursuant to the terms of this Agreement and (x)
non-management labor costs incurred to perform the Set-Up Tasks, such as in
receiving and unpacking Merchandise into the Facility. Adjusted Actual Variable
Costs do not include the Total Fixed Charge, the Systems Fee, the IT Fee, the
Account Maintenance Fee, the Space Fee, Special Services Costs and the Close
Down Fee (all as more particularly described elsewhere in this Agreement). The
level or amount of expenses to be incurred by NCC which comprise Adjusted Actual
Variable Costs includes costs, charges, and expenses incurred as a result of
NCC's errors in its provision of Services, so long as such errors are not
directly caused by NCC's gross negligence or intentional misconduct.
Notwithstanding the foregoing, except to the extent that NCC's actual labor
costs increase with wage rates in which case the limitations on Adjusted Actual
Variable Costs described below will increase proportionally, the Adjusted Actual
Variable Costs (excluding supervisors) shall, in no event, include more than (i)
[***] per item of costs associated with picking, packing and shipping
Merchandise and (ii) [***] per item of costs associated with receiving
Merchandise returned by customers. Throughout the Term, NCC shall make its best
efforts to minimize Adjusted Actual Variable Costs, including making
cost-minimizing trade-offs between the Space Fee and the Adjusted Actual
Variable Costs.

               (b) To the extent that the Adjusted Actual Variable Costs
incurred by NCC in the provision of Services for the Company pursuant to this
Agreement are not identifiable as the sole and unique responsibility of the
Company (for example, where the cost of labor has to be allocated between the
Company and other companies in the facility for which NCC provides services)
then, in calculating Adjusted Actual Variable Costs, NCC shall utilize the
allocation systems and procedures maintained from time to time by NCC (the
"Allocation System"), it being the parties' intention that the Allocation System
reflects, and allocates as fairly and accurately as possible, the Adjusted
Actual Variable Costs payable by the Company in respect of the Services
performed by or on behalf of NCC. The calculation by NCC of Adjusted Actual
Variable Costs shall be available for review by the Company upon request

                                       8
<PAGE>

therefor and with reasonable notice. The Allocation System shall not be
construed or manipulated to work more in the favor of either of the parties
hereto and against or in favor of the interests of any other company for whom
NCC is providing services.

        7. Disbursement Account. (a) During the Term of this Agreement, the
Company may, in its sole discretion, maintain at a bank jointly designated by
the Company and NCC, a disbursement account in respect of which NCC is an
authorized single signatory (the "Disbursement Account"). In the event such
Disbursement Account is authorized by the Company, NCC shall have the authority
to act singularly as a signatory in all transactions involving the Disbursement
Amount. The purpose of the Disbursement Account is to act as a fund to meet
certain Adjusted Actual Variable Costs paid by NCC on behalf of the Company,
including, for example, delivery services, shipping costs, packing materials,
stationery and other similar expenses. The Disbursement Account shall be funded
by the Company as appropriate to cover forecasted disbursements therefrom. If
the Disbursement Account is insufficient to meet any such cost or charge NCC
shall have no liability whatsoever for any losses or liabilities incurred by the
Company as a result of such insufficiency. NCC shall use reasonable efforts to
provide the Company with notice of such insufficiency of the Disbursement
Account. NCC shall provide the Company with a Monthly statement accounting for
disbursements from the Disbursement Account.

               (b) The Company and NCC shall agree in writing, prior to the
Commencement Date, which specific costs or charges the Company shall pay
directly to any third party vendor or supplier of goods or services in respect
of any cost or charge which is included in Adjusted Actual Variable Costs
hereunder. It is anticipated that such costs or charges shall include outbound
freight and packaging supplies. In the event that the Disbursement Account is
established as described in Section 7(a), then, at the Company's option and with
the consent of NCC, any such cost or charge may be paid by NCC from the
Disbursement Account. NCC shall have no liability to any third party vendor with
respect to any payment for goods or services provided to or utilized by NCC in
the performance of the Services described herein. In addition, NCC shall have no
liability for any losses or liability incurred as a result of the Company's
failure to pay any cost or charge for which it is responsible hereunder.

        8. Forecasts. (a) The Company (i) acknowledges the importance of
providing NCC with timely and accurate forecasts ("Forecasts"), at a minimum on
a Quarterly and Annual basis, of

                                       9
<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

its anticipated business activity, and that any failure by the Company to
provide such Forecasts may have a detrimental effect on NCC's ability to provide
the Services or meet the Service Levels, and (ii) recognizes and understands the
importance of keeping NCC informed at all times of schedule changes, fast and
slow selling items, Merchandise or vendor problems and all other material
business issues which would have an adverse effect upon the related performance
by NCC of its obligations hereunder.

               (b) In the event that the Company experiences a variance in
number or volume of more than [***] of any business activity for any Week from
the forecasted number or volume of such business activity for such Week, and has
not advised NCC in writing at least four (4) weeks prior to the Week that the
Company experiences such variance that such variance is forecasted, NCC shall
use its reasonable best efforts to meet the Service Levels applicable to the
Company's activities for such Week, but shall not be obligated to do so if NCC's
failure to meet the applicable service levels is a direct result of the variance
and of the Company's failure to provide a timely forecast of such variance.

               (c) The Company understands and acknowledges that NCC determines
the level of fixed infrastructure it requires to properly perform Services for
the Company by reference to the information contained the Forecasts. Such
Forecasts shall be reasonably related to, and consistent with, the actual
operating history of the Company, subject to deviations therefrom as reasonably
required by changes in circumstances, and the Company shall prepare such
Forecasts in good faith and shall use its best efforts to ensure that such
Forecasts are as accurate as possible.

        9. Special Services. The Company may at any time during the Term hereof
request NCC to perform additional services on its behalf not included in the
Systems Services, or the Services set forth on Exhibit A, such as modifications
or enhancements to the System, or additional services related to a new marketing
or merchandise program, or to change any Service Level ("Special Services"). The
Company shall notify NCC in writing of its particular requirements with respect
to such Special Services, and NCC shall use its best efforts to comply with such
requirements provided that the written notification is given in a timely manner
and the requirements and procedures are reasonable and not

                                       10
<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

economically burdensome.

        10. Merchandise. (a) NCC shall preserve and maintain Merchandise
received for the Company in good and marketable condition and in the same
condition as received. NCC will use its reasonable best efforts to be efficient
with respect to the space utilized to support the Company's business in NCC's
facility. At least once per Quarter, appropriate NCC personnel will review the
layout of Company Merchandise and pick locations in order to determine whether
any changes can be made to such layout in order to minimize Bluefly's fees under
the Agreement, and any suggested changes resulting from such review shall be
implemented promptly.

               (b) NCC shall receive Merchandise during normal business hours
direct from the Company's suppliers or from any other source on behalf of the
Company. The Company shall use its best efforts to transmit to NCC, at least
[***] prior to the receipt of such Merchandise, a copy of the purchase order by
which the Company ordered such Merchandise, or all requisite details of such
purchase order, to the extent not already entered into the System, so as to
permit NCC to identify the Merchandise as that of the Company.

               (c) The Company shall advise its Merchandise suppliers that
common carriers (other than United Parcel Service or any expedited delivery
services) should contact NCC at least [***] prior to delivery of Merchandise to
NCC and make a delivery appointment prior to arrival. Inbound shipments of
Merchandise arriving at NCC without [***] prior notice of such shipment may be
delayed depending upon the space and manpower NCC has available at the time of
arrival which may affect NCC's attainment of certain of the Service Levels. The
Company shall advise its Merchandise suppliers that each inbound shipment should
have a packing slip and each carton should be marked with the purchase order
number and Merchandise SKU number.

               (d) Merchandise shipped to NCC which cannot be processed by NCC
in the usual course of business is referred to herein as "Problem Merchandise."
Problem Merchandise includes, but is not limited to merchandise which is damaged
upon NCC's receipt of same, is the wrong style and/or color, has no or improper
identifying numbers or description. NCC shall submit to

                                       11
<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

the Company a report of Problem Merchandise within [***] of having received it
and shall use its best efforts to comply with the Company's written
instructions, if any, regarding the handling or disposition of such Problem
Merchandise. The Company acknowledges that Problem Merchandise cannot be stored
indefinitely and that all Problem Merchandise shall be processed into
Merchandise inventory or otherwise disposed of as set forth in this Section
10(d) within [***] of NCC submitting its report to the Company as set forth
above. NCC has the right to dispose of Problem Merchandise by returning it to
the Company or to the requisite Merchandise supplier on a freight collect basis
if the Company has not provided NCC with other directions within [***] of the
receipt of NCC's report on such Problem Merchandise.

               (e) The Company shall be solely responsible for selecting,
purchasing, paying for and arranging for the shipment to NCC of Merchandise, and
NCC shall not have and shall not represent that it has any authority to
undertake any of such activities on the Company's behalf.

               (f) In the event that Merchandise shipped by NCC to customers of
the Company is damaged or lost in shipment and NCC is notified of such event,
NCC shall promptly notify the Company of such event, store damaged and returned
Merchandise pending inspection by the carrier, file tracers for the lost
shipments and claims for damaged and lost shipments which originated from NCC,
and reimburse the Company for any money paid or credited to NCC as a result of
such claims within ten (10) Business Days of the receipt thereof.

               (g) NCC reserves the right to refuse, without liability of any
kind, to receive or accept Merchandise which, because of its nature or
condition, might cause, in NCC's reasonable judgment, infestation,
contamination, or damage to the Facility or to other goods in its custody. NCC
shall notify the Company of its refusal to accept any such Merchandise and the
reason for its refusal within [***] of such refusal. If NCC believes that any
Merchandise has caused or may cause damage to its Facility or to any other goods
in its custody, or has characteristics which make its storage illegal, NCC,
shall give reasonable notice to the Company of such determination and the basis
thereof. After receiving such notice from NCC, the Company

                                       12
<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

may, within [***] of such notice, elect to have NCC return such Merchandise to
the Company. NCC shall return such Merchandise to the Company within [***] of
the Company's notice of such election. All costs related to the return of such
Merchandise shall be borne by the Company. In the event that the Company does
not elect to have NCC return such Merchandise, NCC may dispose of such
Merchandise in any lawful manner and will incur no liability by reason of such
disposal, and the Company shall pay NCC any costs incurred by NCC in connection
with such disposal.

               (h) All Merchandise in the possession of NCC shall be and remain
the exclusive property of the Company and NCC acknowledges and agrees that it
shall acquire no right, title or interest in or to any Merchandise by reason of
this Agreement.

               (i) The Company shall actively maintain a program to continually
isolate and remove Non Moving Merchandise from the Facility. For purposes of the
Agreement, Non Moving Merchandise shall mean Merchandise that the Company does
not sell within one year of its delivery to the Facility and which has not been
offered for sale to customers for at least six months.

        11. Shrinkage.(a) All risk of loss and damage to Merchandise from any
cause prior to receipt by NCC into, and from and after the removal from, the
inventory of Merchandise maintained at the Facility, shall be borne by the
Company. NCC shall, however, reimburse the Company at the Company's net
Merchandise cost (or, if lower, the value of such Merchandise as shown on the
Company's perpetual inventory report) (i) [***] of all Inventory Shrinkage which
is equal to or less than[***], and (ii) [***] of all Inventory Shrinkage which
exceeds[***]. For purposes of this Agreement "Inventory Shrinkage" means the
quotient, expressed as a percentage of the value of Merchandise inventory shown
on the Company's perpetual inventory report, which results from dividing (x) the
aggregate of all Variances arising during any Year by (y) the total Merchandise
inventory receipts processed by NCC during the Year. For purposes of this
Section, a "Variance" shall mean the difference between the value of the
Merchandise inventory as determined from the perpetual inventory report on any
Count Date and the value of the Merchandise inventory (exclusive of markdowns
and price adjustments) established by a cycle count or physical inventory on
such date

                                       13
<PAGE>

(the "Count Date").

        12. Collections. NCC shall not be required to make any collection
efforts on the Company's behalf, and has no liability with respect to any
failure of the Company to collect on any amounts due to the Company from any
third party.

        13. Taxes. All fees, costs, charges and other amounts payable to NCC
hereunder for Services rendered by NCC to the Company are exclusive of
applicable sales and/or use taxes, if any, which are the responsibility of the
Company.

        14. Sales Taxes. NCC shall calculate for each sale of Merchandise made
by the Company to any customer, which is processed by NCC, sales and/or use
taxes according to rates, jurisdictions and other relevant information supplied
to NCC by the Company. Attached hereto as Exhibit E is a list prepared by the
Company of all jurisdictions in which the Company is required to collect sales
taxes and the applicable rate for each jurisdiction and the Company shall
promptly notify NCC of any changes to such information so as to keep such
information current during the Term of this Agreement, and the Company shall be
solely responsible for the accuracy of such information. All sales tax funds and
the requisite reporting forms shall be transmitted by the Company to the
appropriate authorities. The Company shall be responsible for the collection and
payment of all sales taxes and any penalties and interest thereon, the
preparation and filing of all sales tax documentation and the compliance with
all sales tax laws. NCC shall have no such responsibilities for payment or
collection of any such taxes unless otherwise required by law. The Company shall
indemnify NCC for all claims, suits, actions, debts, damages, costs, charges and
expenses, including court costs and attorneys' fees, incurred by NCC due to the
Company's failure to properly and timely file and pay applicable taxes,
including sales, use and tangible personal property taxes.

        15. Monetary Default. If the Company defaults on the payment of any
fees, charges, invoices or other amounts due and payable to NCC pursuant to this
Agreement (hereinafter a "Monetary Obligation"), and such Monetary Obligation is
not subject to a Dispute Notice (defined below), NCC shall (i) charge a finance
charge of 1.5% per month of the amount of a Monetary Obligation and (ii) upon
Twenty (20) Business Days prior written notice of such default terminate this
Agreement unless Company cures such default within Twenty (20) Business Days of
receiving such notice. In the event that the Company reasonably in good faith
disputes the amount or payment of such Monetary Obligation (a "Monetary

                                       14
<PAGE>

Dispute") and reports its reasons therefor to NCC in writing (a "Dispute
Notice"), NCC agrees to work diligently and in good faith with the Company to
resolve the dispute for a period of up to Twenty (20) Business Days from the
date of the Dispute Notice, provided, however, that (i) during such period NCC
shall continue to perform Services, (ii) the Company shall be current in and
shall continue to make payments to NCC relating to all costs hereunder, other
than such amount that is subject to the Dispute Notice and (iii) in the event
that NCC and the Company are unable to resolve the Monetary Dispute, then the
amount in dispute shall be deposited into escrow with an escrow agent mutually
acceptable to both NCC and the Company until such dispute is resolved in
accordance with Section 27 hereto. In the event such dispute is resolved and to
the extent the Company owes any amount to NCC, the Company shall pay such amount
to NCC within ten (10) Business Days of the resolution of such dispute. In the
event such dispute is not resolved pursuant to Section 27 or the Company has not
deposited into escrow such amount in dispute, NCC shall have the right to stop
providing Services and/or terminate this Agreement without further notice. The
Company shall not set-off any amount against invoices submitted by NCC in
respect of the Services performed hereunder against any claim, damage, action,
cost or expense which may be asserted against NCC at any time.

        16. Term and Termination. (a) The term of this Agreement shall commence
on the date hereof and shall expire thirty-six (36) months from such date (the
"Initial Term"). This Agreement shall be renewed for successive one year terms
unless either party notifies the other in writing of its intent not to renew at
least one hundred eighty (180) days prior to the expiration of the Term.

               (b) Except as otherwise provided, herein, this Agreement may be
terminated prior to expiration of the Term under any of the following
circumstances:

                   (i) Either party may terminate this Agreement, effective
immediately upon the giving of written notice to the other, if the other party
files a petition in bankruptcy or files for a reorganization or for the
appointment of a receiver or trustee of all or substantially all of such party's
property, or makes an assignment or petitions for or enters into an arrangement
for the benefit of creditors, or if a petition in bankruptcy is filed against
the other party which is not discharged within ninety (90) days thereafter.

                   (ii) Neither NCC nor the Company shall be liable for any
delay or failure in performance under this Agreement or

                                       15
<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

interruption of service resulting, directly or indirectly, from acts of God,
civil or military authority, act of public enemies, war, accidents, fire,
explosions, earthquakes, floods, the elements, strikes or any cause beyond the
reasonable control of such party (a "Force Majeure"), so long as, following the
cessation of such Force Majeure, such party uses its reasonable efforts to
resume its performance hereunder. For purposes of this section, any failure in
performance due to or arising out of the change in the millennium as may arise
before, during or after the year 2000 shall not be considered a Force Majeure
event. In the event that, following a Force Majeure, NCC is unable substantially
to perform Services for a period in excess of twenty (20) Business Days, the
Company shall have the right to terminate this Agreement upon written notice to
NCC with immediate effect.

                   (iii) If either party hereto is in breach of a material
obligation under this Agreement (other than a default involving a Monetary
Obligation, which default is addressed in Section 15 hereof) due to any reason
other than Force Majeure, the party alleging such breach shall give written
notice to the other party specifying the nature of the breach (such breach being
sometimes referred to herein as a "Default"). In the event that such breaching
party in good faith disputes the existence of a Default and reports its reasons
therefore to the other party in writing, the parties agree to work diligently to
resolve the dispute. In the event the parties are unable to resolve such
dispute, such dispute shall be resolved in accordance with the provisions of
Section 27 hereof. If there is no dispute with respect to the Default, the party
in breach shall have ten (10) Business Days in which to cure the Default (the
"Cure Period"), to the extent curable. If, after the Cure Period, such breaching
party has not cured such Default, the other party will have the right to
terminate this Agreement upon thirty (30) days prior written notice.

                   (iv) In the event of a material change in control of NCC or a
sale of all or substantially all of its assets whereupon there is a material
change in the management of NCC or a material negative effect in the financial
position of NCC or the resulting entity (an "NCC Change of Control"), the
Company may terminate this Agreement by providing NCC with thirty (30) days
written notice of such termination at any time during the six (6) month period
following such NCC Change of Control.

                                       16
<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

                   (v) In the event that NCC receives [***] Service Deficiency
Notices during any consecutive [***] period during the term hereof, the Company
may, within [***] of the [***] such deficiency, terminate this Agreement upon
[***] prior written notice to NCC. For purposes hereof, a "Service Notice
Deficiency" shall mean a written notice from the Company that NCC has failed to
perform a Service in accordance with the Service Levels. In respect of Service
Levels measured on a daily basis, NCC shall not be deemed to have failed to meet
any such Service Level unless and until such failure continues for more than
[***] out of any [***] consecutive Business Days.

        17. Representations and Warranties (a) NCC and the Company each hereby
individually represent and warrant to the other party that (i) it has the full
authority and legal right to carry out the terms of this Agreement; (ii) the
terms of this Agreement will not violate the terms of any agreement, contract or
other instrument to which it is a party and no consent or authorization of any
other person, firm or corporation is a condition precedent to this Agreement;
(iii) it has taken all action necessary to authorize the execution and delivery
of this Agreement; and (iv) this Agreement is a legal, valid, and binding
obligation of NCC and the Company, as the case may be, enforceable in accordance
with its terms, except as limited by bankruptcy and other laws of general
application relating to or affecting the enforcement of creditors' rights.

               (b) In addition, the Company hereby warrants and represents that:

                   (i) it has and will use commercially reasonable efforts to
continue to have for the Term of this Agreement, all necessary authority from
all of the corporations, partnerships and individuals whose products are offered
for sale by the Company to use their trademarks, service marks and other
intellectual property for the purposes of conducting the Company's business
other than that which would not have a materially adverse effect on the
operation of the Company. The Company at its sole discretion may cease sale and
distribution of products for which it ceases to have the requisite authority. To
the best of the Company's knowledge, the Company's business as it relates to the
Merchandise and NCC's performance of Services hereunder does not and will not
cause the Company to infringe or violate any patents, trademarks, service marks,
trade names, copyrights, licenses,

                                       17
<PAGE>

trade secrets or other intellectual property rights of any other person or
entity; and

                   (ii) the Company does not currently hold a material portion
of its inventory on a consignment basis, and, to the extent that the Company
intends to hold a material portion of its inventory on a consignment basis in
the future, it will(i) first notify NCC of such intent, (ii) manage such
consigned inventory, in all material respects (including turn, space
requirements, inventory levels, and other significant business ratios), in the
same manner as inventory in which the Company holds title, and (iii) enter into
good faith negotiations with NCC to recognize and adjust for the impact on NCC's
costs and infrastructure of such consigned inventory.

              (c) NCC hereby warrants and represents that:

                   (i) Year 2000 Compliance. NCC hereby represents and warrants
that its data and information systems used in the performance of its obligations
hereunder are Year 2000 Compliant. For purposes of this Agreement, "Year 2000
Compliant" shall mean that a party's data and information systems will not be
materially affected by any inability to, individually and in combination,
completely and accurately address, present, produce, store and calculate data
involving dates before, on or after January 1, 2000; specifically: (i) no value
for current date will cause any interruption in operation; (ii) date-based
functionality will behave consistently when dealing with dates before, on or
after January 1, 2000; (iii) such party's data and information systems will not
produce abnormal endings or incorrect results when working with dates before, on
or after January 1, 2000; (iv) in all interfaces and data storage, the century
will be specified explicitly and will be unambiguously derived; and (v) year
2000 will be recognized as a leap year.

                   (ii) The integration of the Company's business into NCC's
facility shall be completed within sixty (60) days of the execution of this
Agreement. Real-Time interfacing shall be available on or about October 1, 2000.

                   (iii) It understands that the success of the Company's
business depends on NCC's ability to (X) process quickly and in a professional
manner all customer orders and returns, (Y) provide the Company's customer
service representatives with the information and cooperation necessary to
maintain the highest industry standards of customer service and (Z) receive
Merchandise in a timely and professional manner.

                   (iv) Attached hereto as Exhibit F are audited

                                       18
<PAGE>

financial statements of Distribution Associates, Inc. as of December 31, 1999
and for the year then ended (the "Audited Financial Statements"). The Audited
Financial Statements are true and complete in all material respects and are
presented in accordance with generally accepted accounting principles. There has
been no material adverse change in the financial condition of NCC since December
31, 1999.

        18. Indemnification. (a) NCC agrees to indemnify and hold the Company
and its officers, directors, employees, shareholders and its affiliates harmless
against any and all claims, suits, actions, debts, damages, costs, charges, and
expenses including, without limitation court costs and reasonable attorneys'
fees, which the Company may at any time incur by reason of a breach of an
obligation or representation of this Agreement by NCC (a "Company Loss").
Insurance proceeds available from either parties' insurance coverage shall be
first applied to such Company Loss. The foregoing indemnification by NCC shall
include without limitation all claims made by NCC employees, Company employees
or other persons for personal injury or property damage sustained on NCC
premises arising out of NCC's or its employees or agents handling, storage,
shipment or other activities with respect to the merchandise in connection with
the provision of the services hereunder.

               (b) The Company agrees to indemnify and hold NCC and its
officers, directors, employees, shareholders and its affiliates harmless against
any and all claims, suits, actions, debts, damages, costs, charges, and
expenses, including without limitation court costs and reasonable attorneys fees
which NCC may at any time incur by reason of (i) a defect or claimed defect in
any Merchandise or any product liability suits relating to the Merchandise, (ii)
the proper performance hereunder of its obligations to the Company in accordance
with the Company's instructions, or (iii) a breach of an obligation or
representation of this Agreement by the Company (an "NCC Loss"). Insurance
proceeds available from either parties' insurance coverage shall be first
applied to such NCC Loss.

               (c) The indemnification obligations set forth in Sections 18 (a)
and 18 (b) shall apply only to claims made against the respective indemnified
party by third parties.

               (d) A party hereto seeking indemnity hereunder is referred to as
the "Indemnified Party" and the other party to which indemnity is sought
hereunder is referred to herein as the "Indemnifying Party".

               (e) An Indemnified Party under this Agreement shall,

                                       19
<PAGE>

with respect to claims asserted against such party by any third party, give
written notice to the Indemnifying Party of any liability which might give rise
to a claim for indemnity under this Agreement within thirty (30) Business Days
of the receipt of any written claim from any such third party, but not later
than twenty (20) days prior to the date any answer or responsive pleading is due
or ten (10) Business Days after notice of the action, whichever is later, and
with respect to other matters for which the Indemnified Party may seek
indemnification, give prompt written notice to the Indemnifying Party of any
liability which might give rise to a claim for indemnity; provided, however,
that any failure to give such notice will not waive any rights of the
Indemnified Party except to the extent the rights of the Indemnifying Party are
materially prejudiced.

               (f) The Indemnifying Party shall have the right, at its election,
to take over the defense or settlement of such claim by giving written notice to
the Indemnified Party at least fifteen (15) days prior to the time when an
answer or other responsive pleading or notice with respect thereto is required
or ten (10) days after notice, whichever is later. If the Indemnifying Party
makes such election, it may conduct the defense of such claim through counsel of
its choosing (subject to the Indemnified Party's approval of such counsel, which
approval shall not be unreasonably withheld), shall be solely responsible for
the expenses of such defense and shall be bound by the results of its defense or
settlement of the claim. The Indemnifying Party shall not settle any such claim
without prior notice to and consultation with the Indemnified Party, and no such
settlement involving any equitable relief or which might have an adverse effect
on the Indemnified Party may be agreed to without the written consent of the
Indemnified Party (which consent shall not be unreasonably withheld). So long as
the Indemnifying Party is diligently contesting any such claim in good faith,
the Indemnified Party may pay or settle such claim only at its own expense and
the Indemnifying Party will not be responsible for the fees of separate legal
counsel to the Indemnified Party, unless such representation of both parties by
the same counsel would result in a conflict of interest. If the Indemnifying
Party does not make such election, or having made such election does not, in the
reasonable opinion of the Indemnified Party proceed diligently to defend such
claim, then the Indemnified Party may (after written notice to the Indemnifying
Party), at the expense of the Indemnifying Party, take over the defense of and
proceed to handle such claim in its discretion and the Indemnifying Party shall
be bound by any defense or settlement that the Indemnified Party may make in
good faith with respect to such claim.

               (g) The parties agree to cooperate in defending such

                                       20
<PAGE>

third party claims and the Indemnified Party shall provide such cooperation and
such access to its books, records and properties as the Indemnifying Party shall
reasonably request with respect to any matter for which indemnification is
sought hereunder; and the parties hereto agree to cooperate with each other in
order to ensure the proper and adequate defense thereof.

               (h) With regard to claims of third parties for which
indemnification is payable hereunder, such indemnification shall be paid by the
Indemnifying Party upon the earlier to occur of: (i) the entry of a judgment
against the Indemnified Party and the expiration of any applicable appeal
period, or if earlier, ten (10) days prior to the date that the judgment
creditor has the right to execute the judgment; (ii) the entry of an
unappealable judgment or final appellate decision against the Indemnified Party;
or (iii) a settlement of the claim provided that, if a judgment or settlement
provides that payments may be made in installments, that the indemnification
payments required to be made hereunder in connection therewith shall be payable
in a like manner. Notwithstanding the foregoing, provided that there is no
dispute as to the applicability of indemnification and the Company and NCC agree
in writing, the reasonable expenses of counsel to the Indemnified Party shall be
reimbursed on a current basis by the Indemnifying Party if such expenses are a
liability of the Indemnifying Party.

               (i) Notwithstanding the foregoing neither party shall be liable
to the other for any lost profits, loss of goodwill or any other special
incidental or consequential damages of any nature whatsoever.

        19. Insurance. NCC shall not be responsible for the provision or
maintenance of any insurance coverage for the Merchandise or any other assets of
the Company. NCC agrees to maintain at all times during the Term insurance
coverage on the Facility at the levels and in respect of such risks set forth in
Exhibit G hereto.

        20. Compliance with Laws. Each party shall comply with all laws, rules
and regulations, whether local, state, or federal, applicable to the sale of
Merchandise and to the providing of Services, but only to the extent such laws,
rules and regulations are applicable to such party, including without limitation
the applicable postal regulations and the Federal Trade Commission Rules on Mail
Order Merchandise.

        21. Inspections. (a) The Company or its agents shall, during normal
business hours, (i) have the right to inspect the Merchandise located at NCC's
place of business; (ii) have the right to inspect the books and records of NCC
pertaining to

                                       21
<PAGE>

Merchandise and the Services rendered by NCC to the Company pursuant to this
Agreement and (iii) have the right to have its employees assist NCC in the
completion of the Services, as provided herein, provided such assistance dues
not unreasonably interfere with NCC's normal operations.

               (b) Visits by Management representatives of NCC to the Company at
its offices may be arranged between the Company and NCC at mutually agreed
times.

        22. Confidentiality; Exclusivity.(a) Company and NCC acknowledge that,
in the course of performing their obligations under this Agreement, each party
may acquire confidential information about the other party, its business
activities and operations, its technical information and trade secrets, of a
highly confidential and proprietary nature, including without limitation,
marketing records and plans, information relating to suppliers, forecasts and
strategies, merchandising records, customer records and mailing lists, cost
structures, allocation and pass through procedures, staffing levels, systems
information, technology, technical information, know-how, computer programs, and
general financing and business plans and information (all such information
relating to the Company or NCC being "Confidential Information" and the party to
whom such Confidential Information relates being the "Proprietary Party"). Each
party will hold the other party's Confidential Information in strict confidence
and will use reasonable precautions to prevent the unauthorized disclosure or
access to the other party's Confidential Information. Each party shall employ at
least those precautions that such party employs to protect its own confidential
or proprietary information. NCC agrees that it shall take commercially
reasonable efforts to ensure that access to areas in the Facility in which the
Company's Merchandise is stored is limited to representatives of the Company and
representatives of NCC who need to access such areas in order to perform
Services for the Company pursuant to this Agreement. NCC and the Company agree
that each will not, during the Term hereof or thereafter and unless otherwise
instructed by the Proprietary Party in writing, (i) divulge, furnish, disclose,
or make accessible to any third party (other than directors, officers,
employees, agents advisors and potential investors of either party hereto) any
of the other's Confidential Information or (ii) make use of any of the other's
Confidential Information, other than as reasonably necessary for performance
under this Agreement; provided, however, that Confidential Information shall not
include any information which (i) at the time of disclosure by the other party
or thereafter is generally available to and known by the public other than
through any action or inaction of such party, (ii) was available to the other
party on a non-confidential basis from a source other than

                                       22
<PAGE>

the Proprietary Party, provided that such source is not bound by a
confidentiality agreement, or contractual or fiduciary obligation with the
Proprietary Party, or (iii) has been independently acquired or developed by
other party by persons without access to such information and without use of any
Confidential Information of the Proprietary Party, and without violating any
obligations under this Agreement, or of any other agreement between the Company
and NCC. Each party, with prior written notice to the Disclosing Party, may
disclose such Confidential Information to the minimum extent possible that is
required to be disclosed to a governmental or regulatory approval, or pursuant
to the lawful requirement or request of a governmental entity or agency,
provided that reasonable measures are taken to guard against further disclosure,
including without limitation, seeking appropriate confidential treatment or a
protective order, or assisting the other party to do so.

               (b) During the Term of this Agreement, the Company shall grant to
NCC the non-exclusive right to use the name and logo of the Company and
applicable trademarks of the Company (the "Trademarks") in connection only with
the performance of Services by NCC on behalf of the Company pursuant to this
Agreement (e.g. on packing slips or other forms utilized in the fulfillment
process). All use of Trademarks shall be subject to prior approval by the
Company in writing and shall inure to the Company's benefit. NCC shall not have
any rights to use any trademarks, tradenames, logos or other such marks of any
of the Company's vendors.

               (c) NCC agrees that the Company's customer lists and related
customer data and information will not be made available for use by NCC, its
affiliates, representatives or anyone else including, but not limited to, any
other person or entity for which NCC performs services, without the Company's
specific prior written permission.

               (d) Neither NCC, nor any of its affiliates, shall provide
services to a Competitive Business for the Term of this Agreement and for a
period of three (3) months thereafter. For purposes hereof, a "Competitive
Business" means a business that generates more than twenty percent (20%) of its
revenues through the sale of multiple brands of fashion products at prices that
are consistently discounted to retail prices, exclusive of any "sale" items.

               (e) The parties mutually agree that any breach of the provisions
of this Section 22 shall cause irreparable harm to the non-breaching party and
that, in the event of such breach, the non-breaching party shall have, in
addition to any and all

                                       23
<PAGE>

remedies pursuant to this Agreement, the right to an injunction, specific
performance or other equitable relief.

        23. Notices. Any and all notices and communications provided for in this
Agreement shall be given in writing. Such notices and communications shall be
deemed given when received, when delivered by hand, by confirmed facsimile
transmission, by overnight courier or when deposited in the United States Mail,
Registered or Certified, return receipt requested with proper postage prepaid,
and addressed as follows:


               (a) If to NCC:

               National Catalog Corporation
               67 Holly Hill Lane
               Greenwich, CT 06830
               Attn:  James Hersh
               Facsimile:  (203) 625-4767

               with a copy to:

               Kane Kessler, P.C.
               1350 Avenue of the Americas
               New York, NY 10019
               Attn:  Robert L. Lawrence, Esq.
               Facsimile:  (212) 245-3009

               (b) If to the Company:

               Bluefly, Inc.
               42 West 39th Street, Ninth Floor
               New York, NY 10018
               Attn:  Bob Stevens
               Facsimile:  (212) 354-3400

               with a copy to:

               Bluefly, Inc.
               42 West 39th Street, Ninth Floor
               New York, NY 10018
               Attn:  Jon Freedman
               Facsimile:  (212) 840-1903

                                       24
<PAGE>

or to such other address as NCC or the Company may designate to the other in
writing.

        24. Successors and Assigns.

        This Agreement shall inure to the benefit of and be binding upon the
parties and their successors and permitted assigns. This Agreement may be
assigned by the Company without the prior written consent of NCC, in connection
with a sale or transfer of all or substantially all of the Company's business or
stock, provided that such sale or transfer does not result in a material change
in the management of the Company or a material adverse change in the financial
position of the Company. NCC shall not delegate any duties under this Agreement
without the prior written consent of the Company, except to the extent necessary
to handle emergency situations in the event of a Force Majeure. Any such
subcontract or delegation shall require that the subcontractors are subject to
the terms and conditions of this Agreement and NCC shall be fully responsible
for any Services performed by a subcontractor as if it had performed such
Services.

        25. Waiver and Amendment. Any term or provision of this Agreement may be
amended, and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only by a writing signed by all parties hereto. The waiver by a party of any
breach hereof or default in the performance hereof shall not be deemed to
constitute a waiver of any other default or any succeeding breach or default.
This Agreement may not be amended or supplemented by any party hereto except
pursuant to a written amendment executed by both parties.

        26. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE, WITHOUT REGARD TO
CONFLICTS OF LAW PRINCIPLES.

        27. Disputes; Arbitration.

              (a) Any controversy or claim arising out of or relating to this
Agreement or the breach thereof, whether common law or statutory, shall be
settled exclusively by arbitration in New York, NY using the American
Arbitration Association. The arbitration shall be heard before three
arbitrators, one to be chosen by the Company, one to be chosen by NCC, and the
third to be chosen by those two arbitrators.

                                       25
<PAGE>

              (b) The arbitrators shall apply the internal law of the State of
New York in determining the rights, obligations, and liabilities of the parties.
The arbitrators shall not have the power to alter, modify, amend, add to or
subtract from any term or provision to this Agreement, nor to grant injunctive
relief, including interim relief, of any nature. Such injunctive relief may be
pursued by NCC or the Company, as the case may be, from the federal and state
courts located in New York, New York. The availability of such relief shall
depend upon proofs and showings required under the applicable law. In all other
respects, the commercial rules of the American Arbitration Association shall
govern the arbitration. Judgment on the award of the arbitrators may be entered
by any court having jurisdiction to do so, and the parties to the Agreement
hereby irrevocably consent and submit to the personal jurisdiction of the
federal and state courts of the State of New York for this purpose as well as
for any and all other purposes in connection with this Agreement.

              (c) The failure or refusal of either party to submit to
arbitration as provided in this Agreement shall constitute a breach of this
Agreement. If judicial action is commenced in order to compel arbitration, and
if arbitration is in fact compelled, the party that shall have resisted
arbitration shall be required to pay to the other party all costs and expenses,
including reasonable attorneys' fees, that it incurs in compelling arbitration.
All other fees and charges of the American Arbitration Association shall be
borne as the arbitrators shall determine in their award.

        28. Computer Programs. The Company acknowledges that all computer
programs, including DMMS as modified and licensed by NCC, used by NCC in
connection with the performance of its obligations under this Agreement are
either the property of NCC (including but not limited to those developed by NCC
and modifications or new programs developed by NCC for the Company) or licensed
by NCC and the Company has no rights or interests whatsoever in such programs by
virtue of this Agreement, other than NCC's obligation to perform the Services
pursuant to the provisions hereof.

        29. Certain Terms. For purposes hereof, "Business Day" shall mean any
day other than (1) a Saturday or Sunday or (2) a day when the Federal Reserve
Bank of New York is not open; "Week" or "Weekly" shall mean the seven day period
commencing on Sunday and ending on the following Saturday; "Quarter" or
"Quarterly" shall mean any calendar quarter of any Year during the Term hereof,
and "Year" shall mean any calendar year during the Term hereof. In the event
that the Term of this Agreement includes any period that comprises less than a
full calendar year, then, in

                                       26
<PAGE>

respect of any such period, the word "Year" shall mean such shortened period.
For purposes hereof, "Month" or "Monthly" shall mean a period consisting of four
(4) Weeks except in the case of the first month in each Quarter, which shall
consist of five (5) Weeks, and "Year" shall mean any calendar year during the
term hereof.

        30. Relationship of Parties.Nothing contained in this Agreement shall be
construed to imply a joint venture, partnership or principal/agent relationship
between the parties, but the relationship shall be one of independent
contractors, except where specifically provided in this Agreement and then only
for the limited purposes thereof. Except as specifically set forth herein,
neither party by virtue of this Agreement shall have any right, power or
authority to act on behalf of, or create any obligations, express or implied,
binding the other party, and NCC and the Company shall not be obligated,
separately or jointly, to any third party by virtue of this Agreement.

        31. Severability. If any one or more provisions of this Agreement shall
be invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired provided, however, that in such case the parties agree
to use their best efforts to achieve the purpose of the invalid provision by a
new legally binding provision.

        32. Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party shall be deemed cumulative with
and not exclusive of any other remedy conferred hereby or by law, or in equity
on such party, and the exercise of any one remedy shall not preclude the
exercise of any other.

        33. Further Assurances. The parties hereto shall execute and deliver or
cause to be executed and delivered such further instruments, documents and
conveyances and shall take such other action as may be reasonably required to
more effectively carry out terms and provisions of this Agreement.

        34. [RESERVED]

        35. Entire Agreement. This Agreement, and any exhibits and addenda
attached hereto, contain and embody the entire agreement of the parties hereto,
and no prior or contemporaneous representations, inducements, or agreements,
oral or otherwise, made between the parties or with any third party relating to
the subject matter hereof which are not contained in this Agreement or in the
exhibits or addenda, if any, shall be of any force or

                                       27
<PAGE>

effect.

        36. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.

        37. Section Headings. The section headings contained herein are inserted
for convenience only and shall not affect the meaning or interpretation of any
provisions of this Agreement.

        38. Survival. The provisions of Sections 5(f), 17, 18 and 22-37 shall
survive the termination of this Agreement indefinitely.

        39. Promotion. NCC will not advertise or publicly promote its
relationship with the Company without the Company's prior written consent in
each instance, not to be unreasonably withheld. To the extent that NCC chooses
to advertise or promote its business by listing clients in advertising, press
releases or other documents, and the Company' consents to NCC's proposed use of
its name in connection therewith, NCC will list the Company at least as
prominently as any other client.

                                       28
<PAGE>

         IN WITNESS WHEREOF, the Company has executed this Agreement effective
the date first above written and NCC has executed and accepted this Agreement
effective the same date.


                                       BLUEFLY, INC.


                                       By: /s/ Jonathan Freedman
                                           -----------------------------------
                                           Name:  Jonathan Freedman
                                           Title: VP of Corporate Development


                                       DISTRIBUTION ASSOCIATES, INC.


                                       By: /s/ James Hersh
                                           -----------------------------------
                                           Name:  James Hersh
                                           Title: Vice President

                                       29
<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

                                    EXHIBIT A

                                    SERVICES

1.  Access to, through inquiry mode only, NCC's order entry fulfillment system
    (the "System" as elsewhere defined in this Agreement).

2.  Order Entry via electronic download.

3.  Assign, with the Company's assistance, a mutually acceptable full-time
    Account Manager, who shall act as the principal day to day liaison between
    the parties.

4.  If previously agreed between the Parties in writing, NCC will answer
    customer service telephone and email inquiries and resolve customer problems
    during days and hours of operation as agreed between NCC and the Company.

5.  Make staff available for training at the Company's reasonable request.

6.  Make available to the Company an agreed set of System Reports via a
    telecommunications link at such times and at such schedule as the parties
    shall agree.

7.  Receive Merchandise against purchase orders provided by the Company either
    electronically or by hard copy as agreed between the parties.

    A.   Sign for the number of cartons received.

    B.   Perform quantity checks on [***] of the Merchandise and inspection for
         quality, authenticity, damage-in-transit, etc. on [***] of the total
         number of units in

<PAGE>

         Portions of this exhibit have been omitted pursuant to a request for
         confidential treatment. The omitted portions, marked "[***]," have been
         separately filed with the Securities and Exchange Commission.

         each style, subject to the Company's right to increase the inspection
         percentage from [***] to up to [***] for particular styles or classes
         of Merchandise in its sole discretion.

         a.   Non-problem Merchandise: process into active, reserve or
              back-order status, as appropriate.

         b.   Problem Merchandise:

              1.   Segregate

              2.   Notify Company, in such form and at such times as agreed
                   between the parties.

8.  Pick/pack/ship back-ordered Merchandise according to specifications set
    forth by the Company.

9.  Pick/pack/ship active or reserve Merchandise according to specifications set
    forth by the Company.

10. Write or print gift cards, as specified by the Company.

11. Gift wrap, as specified by the Company.

12. Insert additional materials including, but not limited to product samples
    into outbound shipments, and use any specific packaging materials, per
    Company's instructions.

13. Process customer exchanges.

14. Process Customer returns:

    A.   Receive returned Merchandise.

<PAGE>

    B.   Inspect returned Merchandise.

    C.   Process returned Merchandise in accordance with mutually agreed upon
         specifications with respect to (i) refurbishment (including, without
         limitation, folding, steaming and performing minor repairs), (ii)
         holding it pending receipt of RA number, (iii) returning it to active
         or reserve inventory, (iv) returning it to the vendor of such
         Merchandise, if so directed by the Company and (v) setting it aside for
         liquidation or special handling.

    D.   Notify Company and any Merchandise vendor, if applicable, of returned
         Merchandise in such form and such times as agreed between the parties
         via standard reports and screens.

15. Provide warehouse security.

16. Perform and report results of cycle counts in a manner which is agreed
    between the parties.

17. Perform a complete physical inventory each year, at such times and in such
    manner as is agreed between the Parties.

18. Batch and process credit orders to (credit card processor) at such times and
    in such manner as is agreed between the Parties. Deposit receipts to Company
    designated accounts.

19. Maintain and operate a drop ship program as agreed between the parties.
    [???]

20. Generate credit card credits in accordance with the Company's written
    instructions.

21. Maintain sales tax schedules in accordance with the Company's written
    instructions.

22. Create and dispatch customer notices in accordance with the Company's
    written instructions.

23. Maintain customer file records on tape and remit such files to the Company's
    service

<PAGE>

    Portions of this exhibit have been omitted pursuant to a request for
    confidential treatment. The omitted portions, marked "[***]," have been
    separately filed with the Securities and Exchange Commission.

    bureau or other parties in accordance with the Company's written
    instructions.

24. Maintain a backup and "disaster recovery" system and procedures in
    accordance with NCC specifications. On an annual basis, perform tests of
    these systems and procedures.

25. Provide close-down services as described herein.

26. Provide for computer programming and system design on a mutually agreed upon
    basis.

27. Provide assistance to the Company in responding to credit card charge backs.

28. NCC will initially dedicate a core group of [***] hourly employees to
    perform receiving and returns processing functions. The size of the core
    group will be mutually agreed upon as the receiving and returns volume
    warrants. Members of the core group will be trained in Company/NCC
    processes, including (without limitation) incoming quality assurance and
    inspection on received and returned goods Members of the core group may not
    be assigned to other clients without the prior written consent of the
    Company.

29. With the prior consent of NCC, which shall not be unreasonably withheld, the
    Company shall have the right to incentivize NCC employees with Company's
    stock options or otherwise.

30. Procure packaging supplies and materials on behalf of the Company, as
    requested.

31. Allow the Company to select multiple forms of shipping, including but not
    limited to USPS, UPS, Federal Express and others to be mutually agreed upon.
    The Company will be assigned shipping account numbers that allow it to take
    advantage of volume discounts granted

<PAGE>

    to NCC.

32. Provide staff available to help the Company to develop and maintain its
    brand image by responding to customer service needs, including, without
    limitation, investigating the status of individual items and orders,
    expediting orders in special situations, assisting where necessary in
    retrieving from stock items required for promotional events, and undertaking
    special projects.

33. Adequate labor and facilities shall be available for receiving, returns,
    picking, packing and shipping five (5) days per week throughout the course
    of the Term. In addition, during December and other peak periods, NCC will
    provide additional shifts and additional days per week as warranted to meet
    the Service Levels.

<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

                                    EXHIBIT B

                                 SERVICE LEVELS

         1. [***] carton count check in Merchandise receiving with a notation on
Bill of Lading of all discrepancies (over, short, damaged in transit).

         2. Quality control check of [***] of all merchandise received, in
accordance with instructions of the Company, inspecting selected items for any
damage in transit and comparison against original sample for matching
characteristics and quality, provided that the Company may increase the quality
control percentage up to [***] on particular styles or classes of Merchandise at
its sole discretion.

         3. Merchandise dock to stock on clean (non-problem) receipts in by
noon, the frequency of performance should average [***] to stock by next
Business Day from receipt and [***] stocked second Business Day after receipt.

         4. All orders to be printed/picked up/packed/shipped by the next
Business Day after release from the System. All orders with customer requested
"Express Shipping" released and printed by [***] will be processed that same
Business Day.

         5. Cycle Counts will be performed on a rotating basis so that the
entire inventory is counted once a quarter.

         6. Complete physical inventories will be performed from time to time
and NCC shall provide Company's auditors, lenders, investors and other
representatives reasonable assistance

<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

and access to the Facility and NCC personnel during normal business hours for
purposes of performing such audits.

         7. Returned orders with: wrong item shipped, duplicate items shipped,
missing component from package, insufficient quantity or damaged in picking,
packing or transit due to improper packing are not to exceed [***] of total
orders shipped on a yearly basis.

         8. Response time on all Customer Service calls is to be [***] by the
next Business Day and [***] by the second Business Day from the initial call or
receipt of letter. All letters are to be date stamped upon receipt and calls
noted in the proper field within the System.

         9. Returns processing to monetary transaction and restock of saleable
merchandise, on returns by 12 Noon (EST), will be [***] processed not more than
[***] after receipt and the remaining [***] processed not more than [***] after
receipt. All return information shall be communicated at least once daily via
upload to the Company's server.

         10. NCC shall receive data from the Company and transmit data to the
Company as often as agreed by the parties but in no event less frequently than
[***]. NCC shall, at least[***], provide the Company with complete data on
orders shipped including tracking numbers (if applicable), returns received and
inventory adjustments. These data flows will occur on the same day as the
associated physical activities.

         11. Each week, the senior operating executives at NCC will be available
to meet (in person or via telephone as the parties shall determine is necessary)
and comprehensively review the Services in order to identify and jointly seek to
implement any productivity and methods improvements that can reasonable be
expected to reduce costs to the Company and otherwise improve the level of the
Services performed by NCC.

<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

                                    EXHIBIT C

                                SYSTEMS SERVICES

1.  User Licenses

    The standard agreement will provide up to [***] remote concurrent user
licenses, additional licenses will cost [***] each.

2.  Data

    NCC Agrees to provide basic data entry services required to establish the
following files (a) item master related data, (b) summary vendor related data,
and (c) summary customer list data. The Company will provide NCC with the data
for the listed files.

3.  Data Storage and Processing

    NCC will support the use and storage of all transactional data to the extent
that its use and creation is provided for by DMMS. In particular NCC will store
the following amounts of historical data and maintain on-line as Confidential
Information of Company: (a) 24-months of order detail data (b) all summary
customer data (c) all item related data (d) all source code related data (e) all
summary vendor related data. Other mutually agreed upon data can be stored
provided the Company agrees to bear the costs of additional storage capacity.
Once the order detail data has reached its time limit it will be removed from
NCC's system and placed on an off line storage media (e.g. tape) with an
indefinite retention period and provided to Company. Online reports will be
available for viewing and printing for 45 days after creation of the report
after which they will be removed from NCC's system.

<PAGE>

4.  Computer Forms

    NCC will provide a standard set of document formats. The Company will be
able to select one color and logo for these standard forms. If the Company
chooses to develop custom forms then the Company will be responsible for the
cost of their development and ongoing costs of supply. These responsibilities
will include, but are not limited to, custom programming, graphic design, and
printing. The Company assumes responsibility for graphically designing and
approving all forms used by NCC on its behalf although NCC retains the right of
final approval, not to be unreasonably withheld or delayed, of all forms subject
to the ability of NCC's printing equipment to adequately handle the forms. These
forms include at least the packing slip, back order notice, checks, and others
used for customer correspondence.

5.  Data Communications

    In the event the Company decides to use a dedicated connection to NCC
computer systems the Company agrees to use whichever network service provider
NCC selects. The Company will be responsible for the usage and installation of
the data circuit between the Company's site and NCC's facility. The Company will
be responsible for all Company premise equipment required to connect the network
service to the Company's network. The Company will be responsible for installing
and maintaining a backup link to NCC's facilities if the Company chooses to have
a back up link. The Company will be responsible for all upgrades to their
computers or new purchases required to connect their equipment to NCC's AS/400
using the provided wide area network.

    In the event the Company decides to maintain a dialup non-dedicated
connection to NCC's computer systems the Company will be responsible for all
Company premise hardware, software and usage costs associated with the
connection.

    The Company agrees to provide a person capable of installing, configuring
and maintaining all software and hardware required for correct operation of the
Company's PC's, printers and local area network when connected to the NCC wide
area network. If the Company does not have

<PAGE>

a person available initially, NCC at its discretion will temporarily provide
such a person at the Company's expense. NCC will not be responsible for any
interruption of service created by equipment or network malfunctions.

6.  Computer System Availability

    NCC's computer system will be available to the Company at its offices seven
(7) days per week, twenty-four (24) hours each day except (i) as a result of a
daily backup which will start between 4:00 a.m. and 6:00 a.m. CST and last up to
one (1) hour, and (ii) on selected Sundays during the term hereof according to a
schedule published by NCC and given to the Company to perform required system
maintenance. NCC will not be responsible for any interruption of service caused
by system malfunctions; however, NCC shall use its best efforts to repair any
such system malfunction as quickly as possible.

7.  Job Execution

    NCC reserves the right to manage the execution of all jobs on NCC's AS/400.

8.  Service Bureaus

    The Company will be responsible for contacting all service bureaus including
but not limited to, credit card clearing houses, EDI enabling companies, catalog
mailing services, list management services, mailing houses, order providers and
catalog request providers and making arrangements to have NCC's software
provider develop any required interfaces to either import or export data from or
to NCC's computer systems. The cost of all custom programming will be borne by
the Company other than that which is required to provide the Company with EDI
services. The Company will be responsible for approving the final formats and
validating the integrity of all exchanged data. NCC and the Company will develop
a mutually agreeable schedule of data transfers to service bureaus. The cost of
additional transfers will be borne by the Company, except that the cost of using
an EDI enabling company will be borne by NCC.

<PAGE>

9.  System Modifications

    The Company may request modifications to NCC's computer systems and DMMS to
support its operations. The Company agrees to bear the cost of all requested
modifications. NCC retains the right to deny any requests if in NCC's or its
software developer's (ASTI) reasonable opinion the installation of the requested
modification will have a material detrimental effect on the operation of NCC's
computer systems. All requests will follow a standard formal procedure of
request, analysis, approval, development, testing, verification and
installation.

10. Documentation and Reports

    NCC will provide the Company with the reports listed as an attachment to
this exhibit. Requests for additional information or reports must be submitted
by the Company.

11. DMMS System Table and File Maintenance

    NCC agrees to maintain all agreed upon DMMS system tables and files. In the
event these tables or files are incorrectly maintained it is NCC's
responsibility to make the corrections in the tables and files and correct any
problems caused by the incorrect data.

12. DMMS Usability and Compatibility

    It is the Company's responsibility to assess the usability of NCC's computer
system to determine its usability and compatibility with the Company's business.
It is the Company's responsibility to identify incompatibilities and short
comings and make requests for modification as required.

13. Defects in DMMS

    In the event that either NCC or the Company finds defects with the DMMS
system, each agrees to advise the other in writing of the precise nature of the
problem along with examples, and any other assistance each may request in
determining the nature of the problem. NCC does not warrant or guarantee the
results but will use its best efforts to correct any

<PAGE>

such error within a reasonable period of time. NCC shall be responsible for the
costs associated with curing any such defects.

14. Help Desk Support

    NCC will provide help desk support to Company from 7:00 a.m. EST to 5:00
p.m. EST Monday through Friday. The support will consist of best effort attempts
to resolve the problem immediately. In the event a problem cannot be handled
immediately a help desk ticket will be opened and forwarded to the party most
able to respond to the problem. In the event it is suspected there is a defect
in DMMS then the provision under "Defects in DMMS" should be followed.

    In the event of an emergency outside the normal hours of support a list of
phone numbers will be provided where assistance can be obtained.

15. Data Protection

    NCC will perform a nightly save of all the Company's critical data and store
it offsite in a safety deposit box at a local bank.

16. System Security

    The Company agrees to establish a reasonable computer system security
policy, implement it and enforce it. NCC will not be responsible for loss of
data or operational functionality caused by breaches of security resulting from
an inadequate security policy, implementation or enforcement by the Company. The
Company also agrees not to allow any unauthorized access to the NCC network
through its web site.

17. NCC's Covenants

    NCC shall maintain and update the computer system in the ordinary course of
its business and in accordance with the then current IBM published guidelines.
NCC shall not distribute, delete, modify, copy or destroy any of the Company's
system data, or use it for any purposes

<PAGE>

other than in performance of NCC's obligations hereunder, without Company's
prior written authorization.

REPORTS TO BE INCLUDED:

ACD Reports
    1.   Total calls received
    2.   Total calls abandoned
    3.   ASA
    4.   AHT
DMMS Reports
    1.   ACT900R    Refunds Payable
    2.   ACT901R    Inventory Reconciliation
    3.   ACT901R1   Inventory Reconciliation
    4.   INV905     Backorder Report by Item
    5.   INV929R2   Daily Inventory Adjustment Recap
    6.   ORD506R    Listing of Deposit Totals
    7.   ORD934R1   Credit Card charges and Credits
    8.   ORD941A    Daily Shipped Sales Report
    9.   ORD941D    Daily Shipped Sales Report-Sales Tax
    10.  ORD971R    Item SKU information by Prefix
    11.  ORD980R    Miscellaneous Charge Report-Recap
    12.  RCV990R    Daily Applied Receiving Report
    13.  RCV925R    Location Report
    14.  REF971R    Returned Merchandise Report
    15.  SLS900     Source Recap by Season
    16.  SLS927-929 Demand by Source

NCC also agrees to make the reports listed in Exhibit J available to the Company
at no charge at intervals specified by the Company. The Company agrees only to
request reports reasonably required for the efficient operation of its business.

<PAGE>

TABLE OF CONTENTS

--------------------------------------------------------------------------------
REPORT #      REPORT NAME                        REPORT PURPOSE
--------------------------------------------------------------------------------
ACT900R       Refunds Payable                    This report enables you to
                                                 track and balance the amount of
                                                 payables carried on a daily
                                                 basis resulting from refunds.
--------------------------------------------------------------------------------
ACT901R       Inventory Reconciliation           This report provides a
                                                 mechanism for tracking and
                                                 balancing the number of units
                                                 in inventory on a daily basis.
--------------------------------------------------------------------------------
ACT901R1      Inventory Reconciliation           This report is used to track
                                                 and balance inventory
                                                 adjustments by type.
--------------------------------------------------------------------------------
INV905        Backorder Report By Item #         This report displays backorder
                                                 information by item number and
                                                 is used to monitor backordered
                                                 quantities and due dates,
                                                 retail values, and cost values.
--------------------------------------------------------------------------------
INV929R2      Daily Inventory Adjustment Recap   This daily report summarizes
                                                 information for each inventory
                                                 adjustment entered on the
                                                 reporting day.
--------------------------------------------------------------------------------

<PAGE>

--------------------------------------------------------------------------------
ORD506R       Listing of Deposit Totals          This report provides a summary
                                                 of the deposit transactions
                                                 sent to the credit card
                                                 processor on the given day.
--------------------------------------------------------------------------------
ORD934R1      Credit Card Charges and Credits    This report runs at the end of
                                                 each day to provide a detailed
                                                 listing of all credit card
                                                 charges and credits received
                                                 from each credit card
                                                 processor.
--------------------------------------------------------------------------------
ORD941A       Daily Shipped Sales Report         This is the core report for
                                                 tracking daily sales
                                                 information. It is driven by
                                                 the shipment disposition
                                                 records and provides a method
                                                 for totaling and reconciling
                                                 sales dollars to shipped sales
                                                 and credit card on a daily
                                                 basis.
--------------------------------------------------------------------------------
ORD941D       Daily Shipped Sales Report         This report provides you with a
              - Sales Tax                        daily listing of tax amounts
                                                 charged for corresponding
                                                 shipped sales.
--------------------------------------------------------------------------------
ORD971R       Item SKU Information by Prefix     This report displays demand and
                                                 SKU information by prefix.
--------------------------------------------------------------------------------
ORD980R       Miscellaneous Charge Report        Report displays orders which
              - Recap                            have miscellaneous charges
                                                 applied to them and is used to
                                                 audit and post miscellaneous
                                                 charges to the appropriate
                                                 accounts.
--------------------------------------------------------------------------------
RCV990R       Daily Applied Receiving Report     This report provides accounting
                                                 with a report of receivers
                                                 approved for payment.
--------------------------------------------------------------------------------

<PAGE>

--------------------------------------------------------------------------------
RCV925R       Location Report                    This report provides the
                                                 product manager with a listing
                                                 of items which have been
                                                 'located' in the system using
                                                 one of the receiving methods.
                                                 The data is displayed by
                                                 warehouse and sequential
                                                 receiving I.D. number.
--------------------------------------------------------------------------------
REF971R       Returned Merchandise               Report Report lists details of
                                                 returns and summaries of
                                                 month-to-date totals by
                                                 customer/category and location,
                                                 and is used to monitor returns
                                                 by category.
--------------------------------------------------------------------------------
SLS900        Source Recap By season             This report is triggered by the
                                                 'Season First' field in the
                                                 Source Master and allows the
                                                 list manager to display a
                                                 detailed view of all source
                                                 codes within a single season.
--------------------------------------------------------------------------------

<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

                                    EXHIBIT D

                                   BLUEFLY.COM


[***]

<PAGE>







                                    EXHIBIT E

                             SALES TAX JURISDICTIONS


New York
Illinois

<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

                                    EXHIBIT F

                            NCC FINANCIAL STATEMENTS

[***]

<PAGE>

Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked "[***]," have been
separately filed with the Securities and Exchange Commission.

                                    EXHIBIT G

                         NCC'S CERTIFICATE OF INSURANCE

[***]

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.20
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>NOTE AND WARRANT PURCHASE AGREEMENT
<TEXT>

<PAGE>


                       NOTE AND WARRANT PURCHASE AGREEMENT



                                      among



                                 BLUEFLY, INC.,


                         QUANTUM INDUSTRIAL PARTNERS LDC


                                       and


                          SFM DOMESTIC INVESTMENTS LLC















                             Dated: August 18, 2000

<PAGE>

                                TABLE OF CONTENTS

                                                                            Page

Section 1.     DEFINITIONS....................................................2
        1.1    Definitions.  .................................................2
        1.2    Note Purchase Agreement........................................2
        1.3    Other Definitions..............................................3

Section 2.     PURCHASE AND SALE OF THE SECURITIES............................3
        2.1    Closing........................................................3
        2.2    Transactions at the Closing....................................3

Section 3.     REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................4

Section 4.     REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS...............5

Section 5.     CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE........5
        5.1    Representations and Warranties.................................5
        5.2    Compliance with this Agreement.................................5
        5.3    Securities.....................................................5
        5.4    Consents and Approvals.........................................5

Section 6.     CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE...........6
        6.1    Representations and Warranties.................................6
        6.2    Compliance with this Agreement.................................6
        6.3    Consents and Approvals.........................................6
        6.4    Payment of Purchase Price......................................6

Section 7.     COVENANTS......................................................7
        7.1    Covenants of the Company.......................................7
        7.2    Mutual Covenants. .............................................7

Section 8.     INDEMNIFICATION................................................7

Section 9.     REGISTRATION RIGHTS............................................8

Section 10.    TERMINATION OF AGREEMENT.......................................9
        10.1   Termination....................................................9
        10.2   Survival.......................................................9

                                        i
<PAGE>

Section 11.    MISCELLANEOUS..................................................9
        11.1   Survival of Representations, Warranties and Covenants..........9
        11.2   Notices........................................................9
        11.3   Successors and Assigns.........................................9
        11.4   Amendment and Waiver...........................................9
        11.5   Counterparts..................................................10
        11.6   Headings......................................................10
        11.7   GOVERNING LAW.................................................10
        11.8   Severability..................................................10
        11.9   Rules of Construction.........................................10
        11.10  Entire Agreement..............................................10
        11.11  Fees..........................................................10
        11.12  Publicity; Confidentiality....................................11
        11.13  Further Assurances............................................11

EXHIBITS

A-1     Form of Warrant
A-2     Form of Senior Convertible Note

SCHEDULES

3       Capitalization

                                       ii
<PAGE>

                       NOTE AND WARRANT PURCHASE AGREEMENT

         NOTE AND WARRANT PURCHASE AGREEMENT (the "Agreement"), dated as of
August 18, 2000, by and among Bluefly, Inc., a New York corporation (the
"Company"), and the purchasers listed on Schedule 1 hereto (the "Purchasers").

         WHEREAS, pursuant to an Investment Agreement dated as of July 27, 1999,
by and among the Company, the Purchasers, The Lynch Foundation, Peter Lynch and
Pilot Domestic Trust (the "Investment Agreement"), each of the Purchasers has
invested in shares of the Company's Series A Preferred Stock;

         WHEREAS, pursuant to a Note and Warrant Purchase Agreement, dated as of
March 28, 2000, by and among the Company and the Purchasers (the "Note Purchase
Agreement"), the Purchasers, jointly but not severally, purchased senior
convertible notes in the aggregate amount of $3,000,000 (the "First Round
Notes") and warrants exercisable in the aggregate for 175,000 shares of common
stock of the company (the "First Round Warrants") and committed (the "Standby
Commitment") to provide to the Company up to an aggregate of $12,000,000 (the
"Commitment Amount") at any time prior to January 1, 2001 in one or more
tranches as requested by the Company;

         WHEREAS, pursuant to a Note and Warrant Purchase Agreement, dated as of
May 16, 2000, by and among the Company and the Purchasers (the "Second Note
Purchase Agreement"), the Purchasers purchased and the Company sold senior
convertible notes in the aggregate amount of $3,000,000 (the "Second Round
Notes") and warrants exercisable for 50,000 shares of common stock of the
Company (the "Second Round Warrants");

         WHEREAS, pursuant to a Note and Warrant Purchase Agreement, dated as of
June 28, 2000, by and among the Company and the Purchasers (the "Third Note
Purchase Agreement"), the Purchasers purchased and the Company sold senior
convertible notes in the aggregate amount of $3,000,000 (the "Third Round
Notes") and warrants exercisable for 50,000 shares of common stock of the
Company (the "Third Round Warrants" and together with the First Round Warrants
and the Second Round Warrants, the "Original Warrants");

         WHEREAS, the Company wishes to draw, and the Purchasers wish to provide
the Company with an additional $3,000,000 from the Commitment Amount (the "Third
Draw"); and

         WHEREAS, in connection with the Third Draw (i) the Company wishes to
sell and the Purchasers wish to purchase a senior convertible promissory note,
in the

<PAGE>

                                                                               2

aggregate principal amount set forth opposite such Purchaser's name on
Schedule 2.2 hereto, having the terms and conditions set forth in the form of
Note attached hereto as Exhibit A-1 (the "Senior Convertible Notes"), and (ii)
the parties have agreed to revise the terms of the Original Warrants and to
consolidate the Original Warrants with the securities being issued pursuant to
the Third Draw so that, after payment of the purchase price set forth in Section
2.2, in the aggregate each Purchaser will own a warrant having the terms and
conditions set forth in the form of Warrant attached hereto as Exhibit A-2 (the
"Warrants" and, together with the Senior Convertible Notes, the "Securities").

         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 1. DEFINITIONS

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

         "Certificate of Incorporation" means the Certificate of Incorporation
of the Company, as the same was amended pursuant to Section 5.6 of the
Investment Agreement and as in effect on the Closing Date.

         "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 adversely effects the ability of the Company to consummate
the transactions contemplated by this Agreement in any material respect or
impairs or delays the ability of the Company to effect the Closing.

         "Next Round Financing" means the closing of a private placement of Next
Round Securities which results in gross proceeds to the Company of $10 million
in one or more tranches.

         "Next Round Securities" means the Company's Common Stock or securities
convertible into or exercisable for the Company's Common Stock in the Next Round
Financing.

         "Transaction Documents" means collectively, this Agreement (including
the schedules attached hereto), the Senior Convertible Notes and the Warrants.

         1.2 Note Purchase Agreement. Capitalized terms not otherwise defined
herein shall have the meanings set forth for such terms in the Note Purchase
Agreement.

<PAGE>

                                                                               3

         1.3 Other Definitions. The following terms are defined in the section
referred to opposite such term.


Term                                        Section

Agreement                                   Recitals
Closing                                     2.1
Closing Date                                2.1
Commitment Amount                           Recitals
Draw                                        Recitals
Investment Agreement                        Recitals
Note Purchase Agreement                     Recitals
Purchase Price                              2.2
Purchasers                                  Recitals
Securities                                  Recitals
Senior Convertible Notes                    Recitals
Standby Commitment                          Recitals
Warrants                                    Recitals

SECTION 2. PURCHASE AND SALE OF THE SECURITIES

         2.1 Closing. Subject to the terms and conditions of this Agreement, the
closing of the sale and purchase of the Securities (the "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 Purchasers and the Company may mutually agree (the "Closing
Date").

         2.2 Transactions at the Closing. At the Closing, subject to the terms
and conditions of this Agreement, each of the Purchasers severally (and not
jointly) shall purchase and acquire from the Company, and the Company shall
issue and sell to the Purchasers, Senior Convertible Notes and Warrants for an
aggregate purchase price of $3,000,000 (the "Purchase Price") and the
cancellation of the Original Warrants. At the Closing, the Company shall deliver
to each Purchaser a duly executed Senior Convertible Note, in the aggregate
principal amount set forth opposite such Purchaser's name on Schedule 2.2
hereto, and a duly executed Warrant to purchase the amount of shares of Common
Stock set forth opposite such Purchaser's name on Schedule 2.2 hereto, each
registered in the name of such 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 Purchaser of the portion of the Purchase Price
payable in respect thereof as set forth opposite such Purchaser's name on
Schedule 2.2 hereto by wire transfer of immediately available funds to an
account designated by the Company and delivery to the Company of the Original
Warrants for cancellation.

         (a) Standby Commitment. Upon payment of the Purchase Price and the
delivery of the Securities, the Commitment Amount shall be reduced to

<PAGE>

                                                                               4

$3,000,000, which may be drawn and/or reduced by the Company as provided in the
Note Purchase Agreement.

SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

         The Company hereby represents and warrants to each Purchaser that the
representations and warranties of the Company contained in Section 3 of the Note
Agreement are true and correct in all material respects as of the date hereof
and as of the Closing Date as if made at and on such dates, except that (i) the
references therein to Section 2.1 are hereby amended to refer to Section 1.1 and
(ii) the representations of the Company at Section 3(d) of the Note Purchase
Agreement are reaffirmed as follows:

         Capitalization. As of the date hereof, the issued and outstanding
capital stock of the Company consists of 4,924,906 shares of Common Stock and
500,000 shares of Series A Preferred Stock. As of the Closing Date, the
authorized capital stock of the Company will consist of 15,000,000 shares of
Common Stock (of which 50,000 shares shall have been reserved for the Purchasers
in connection with the transactions contemplated hereby) and 2,000,000 shares of
Preferred Stock, $.01 par value, of which 500,000 shares shall have been
designated Series A Preferred Stock. As of the first closing of the Next Round,
sufficient numbers of shares of Next Round Securities and, as appropriate, of
shares of Common Stock into which such shares of Next Round Securities are
convertible or for which they are exercisable, shall be authorized and reserved
as required by the documents to be negotiated in connection with the Next Round
and as necessary to permit conversion of the maximum amount then potentially
payable by the Company under the Senior Convertible Notes into Next Round
Securities.

         All such shares of Capital Stock of the Company are or shall have been
duly authorized and (a) in the case of shares of Common Stock or Next Round
Securities issued upon conversion of the Senior Convertible Notes or exercise of
the Warrants, shall be fully paid and non-assessable upon such conversion, and
(b) in the case of shares of Common Stock issued upon conversion, exchange,
and/or exercise of such Next Round Securities, shall be fully paid and
non-assessable upon the conversion, exchange, or payment of the exercise price
contemplated by the Next Round Securities.

         Except as set forth in Schedule 3 of this Agreement, as contemplated by
the Investment Agreement, the Note Purchase Agreement, the Second Note Purchase
Agreement, the Third Note Purchase Agreement, or this Agreement, there are no
shares of capital stock of the Company reserved for issuance. Except for (a) the
Warrants, (b) the Senior Convertible Notes, (c) the Original Notes, (d) the Next
Round Securities (including those into which the Senior Convertible Notes are
convertible), (e) the Series A Preferred, and (f) as set forth in Schedule 3 of
this Agreement, 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 exercisable for shares of
Capital Stock or other securities of the Company or any of its Subsidiaries.
Except as set forth in Schedule 3 to this Agreement, as required by the
Transaction

<PAGE>

                                                                               5

Documents (as such term is defined in the Note Purchase Agreement), neither the
Company nor any Subsidiary is obligated in any manner to issue shares of its
Capital Stock or other securities. Except as contemplated hereby and for
relevant state and federal securities laws, there are no restrictions on each
Purchaser's ability to transfer shares of Capital Stock of the Company.

SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

         Each of the Purchasers hereby represents and warrants (severally as to
itself and not jointly) to the Company that the representations and warranties
of such Purchaser contained in Section 4 of the Note Purchase Agreement are true
and correct in all material respects as of the date hereof and as of the Closing
Date as if made at and on such dates, except that the references therein to
Section 2.1 are hereby amended to refer to Section 1.1.

SECTION 5. CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE

         The obligation of the Purchasers to purchase the Securities and to pay
the Purchase Price, and to perform any obligations hereunder shall be subject to
the satisfaction as determined by, or waiver by, the Purchasers of the following
conditions on or before the Closing Date:

         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 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 any variance in such representation and warranty
following such date may only be the result of activities or transactions which
have taken place after the date hereof and 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 as of the Closing Date.

         5.3 Securities. At the Closing, the Company shall have delivered to
each of the Purchasers a Senior Convertible Note and a Warrant pursuant to
Section 2.2 hereof.

         5.4 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 the issuance
of the Senior

<PAGE>

                                                                               6

Convertible Notes, and any Shares of Common Stock issuable upon exercise of the
Warrants) by, or enforcement against, the Company of this Agreement (other than
the Next Round Financing or the drawdown of the Standby Commitment) 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 Purchasers shall
have been furnished with appropriate evidence thereof.

SECTION 6. CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE

         The obligations of the Company to issue and sell the Senior Convertible
Notes and the Warrants 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 Closing Date:

         6.1 Representations and Warranties. The representations and warranties
of the Purchasers contained in Section 4 hereof shall be true and correct at and
on the 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
any variance in such representation and warranty following such date may only be
the result of activities or transactions which have taken place after the date
hereof and which are contemplated by this Agreement.

         6.2 Compliance with this Agreement. The 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 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 the
purchase of the Senior Convertible Notes and the Warrants, but excluding the
conversion of the Senior Convertible Notes, the exercise of the Warrants, and
the conversion or exercise of the Next Round Securities) 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. The Company shall have received the
Purchase Price and the Original Warrants for cancellation.

<PAGE>

                                                                               7

SECTION 7. COVENANTS

         7.1 Covenants of the Company. The Company hereby covenants and agrees
with the Purchasers with respect to this Section 7, so long as they hold any
Capital Stock of the Company -- except to the extent that a particular section
of this Section 7 provides for an earlier termination, as follows:

              (a) 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.

              (b) Reservation of Securities. The Company shall at all times
reserve and keep available out of its authorized shares of Capital Stock, solely
for the purpose of issue or delivery upon conversion or exercise of the
Securities and of the conversion or exercise of shares of Capital Stock issued
upon such conversion or exercise, the number of shares of each class of Capital
Stock that are required to be issued upon such conversion or exercise. The
Company shall issue such shares of Capital Stock in accordance with the terms of
this Agreement, the other Transaction Documents and the Certificate of
Incorporation, and otherwise comply with the terms hereof and thereof.

              (c) Registration and Listing. To the extent the reservation of any
shares of Capital Stock required to be reserved pursuant to Section 7.2 of this
Agreement requires registration with or approval of any Governmental Authority
under any Federal or state or other applicable law before such shares of Capital
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 Capital
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 exercise of the Warrants or the conversion or exchange of Next
Round Securities into which the Senior Convertible Notes are convertible.

         7.2 Mutual Covenants. The parties agree that the anti-dilution
provision of Section 6(e)(ii) of the Certificate of Amendment of the Certificate
of Incorporation shall not apply as a result of the issuance of the Warrants.

SECTION 8. INDEMNIFICATION.

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

<PAGE>

                                                                               8

and controlling 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 $15,000,000.

              (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 (excluding the Standby
Commitment) of the Purchasers contained in any Transaction Document.
Notwithstanding the foregoing, the Purchasers' liability pursuant to this
Section 8 shall in no event exceed $3,000,000.

SECTION 9. REGISTRATION RIGHTS.

              (a) The Company and each of the Purchasers hereby agree and
acknowledge that the shares of Common Stock for which the Warrants are
exercisable and any Common Stock issuable upon the conversion or exchange of the
Next Round Securities are Registrable Securities, as such term is defined in the
Investment Agreement, and that, until the closing of the Next Round, the
provisions of Section 9 of the Investment Agreement shall apply to all Persons
of record holding the Senior Convertible Notes or the Warrants (or any shares of
Registrable Securities issued, directly or indirectly, as a result of a
conversion under a Senior Convertible Note or as a result of an exercise of a
Warrant).

              (b) Upon completion of the Next Round, the Purchasers shall have
the option to decide whether the registration rights and related provisions set
forth in Section 9 of the Investment Agreement shall apply to the Warrants or
whether the registration rights and related provisions agreed to in the final
documentation negotiated in connection with the Next Round Financing shall
apply.

<PAGE>

SECTION 10. TERMINATION OF AGREEMENT

         10.1 Termination. For purposes of clarification: (1) the Company shall
have no obligation to issue securities pursuant to the Standby Commitment and
(2) the Purchasers shall have no obligations to fund the Standby Commitment
after the earlier of (i) that date on which the Company has received from the
Purchasers financing proceeds aggregating $15 million or (ii) December 31, 2000.

         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 non-breaching 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.

SECTION 11. 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 Closing Date.

         11.2 Notices. All notices, demands and other communications provided
for or permitted hereunder shall be made in the manner set forth in the
Investment Agreement.

         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 Purchasers may assign
any of its rights under this Agreement to any of its Affiliates but any such
assignment shall not relieve any 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

<PAGE>

                                                                              10

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.

         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, 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, except those set forth in the Transaction
Documents (as such term is defined in the Investment Agreement).

         11.11 Fees. Upon the 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 $15,000 in the aggregate.

<PAGE>

                                                                              11

         11.12 Publicity; Confidentiality. The provisions of Section 11.12 of
the Note Purchase Agreement shall apply with respect to this Agreement and the
transactions contemplated by this Agreement and the Transaction Documents.

         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.

         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:

<PAGE>

                                                                  EXHIBIT A-1 to
                                                                NOTE AND WARRANT
                                                              PURCHASE AGREEMENT

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED,
QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES 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 SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER SUCH ACT OR LAWS AND NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY
AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES.

                                                               WARRANT NO. [___]

                                     WARRANT

                       TO PURCHASE SHARES OF COMMON STOCK

                                       OF

                                  BLUEFLY, INC.

         THIS IS TO CERTIFY THAT ____________ or its registered assigns (the
"Holder"), is the owner of the right to subscribe for and to purchase from
BLUEFLY, INC., a New York corporation (the "Company"), [___________(1)_] (the
"Number Issuable"), fully paid, duly authorized and non-assessable shares of
Common Stock at a price per share equal to $___(2) (the "Exercise Price"), at
any time, in whole or in part, prior to 5:00 PM New York City time, on March 28,
2005 (the "Expiration Date") all on the terms and subject to the conditions
hereinafter set forth (the "Warrants").

         The Number Issuable is subject to further adjustment from time to time
pursuant to the provisions of Section 2 of this Warrant Certificate.

         Capitalized terms used herein but not otherwise defined shall have the
meanings given to them in Section 12 hereof.

--------------
(1) The total will be 50,000 shares split between QIP and SFM Domestic
    Investments.
(2) The Exercise Price will equal the average of the Market Price on each of the
    20 trading days immediately preceding the date of issuance of the Warrant,
    which as of today would be about $2.46.

<PAGE>

                                                                               2

         Section 1. Exercise of Warrants.

              (a) Subject to the last paragraph of this Section 1, the Warrants
evidenced hereby may be exercised, in whole or in part, by the Holder hereof at
any time or from time to time, on or after the date hereof and prior to the
Expiration Date upon delivery to the Company at the principal executive office
of the Company in the United States of America, of (A) this Warrant Certificate,
(B) a written notice stating that such Holder elects to exercise the Warrants
evidenced hereby in accordance with the provisions of this Section 1 and
specifying the number of Warrants being exercised and the name or names in which
the Holder wishes the certificate or certificates for shares of Common Stock to
be issued and (C) payment of the Exercise Price for such Warrants, which shall
be payable by any one or any combination of the following: (i) cash; (ii)
certified or official bank check payable to the order of the Company; (iii) by
the surrender (which surrender shall be evidenced by cancellation of the number
of Warrants represented by any Warrant Certificate presented in connection with
a Cashless Exercise (as defined below)) of a Warrant or Warrants (represented by
one or more relevant Warrant Certificates), and without the payment of the
Exercise Price in cash, in return for the delivery to the surrendering Holder of
such number of shares of Common Stock equal to the number of shares of the
Common Stock for which such Warrant is exercisable as of the date of exercise
(if the Exercise Price were being paid in cash or certified or official bank
check) reduced by that number of shares of Common Stock equal to the quotient
obtained by dividing (x) the aggregate Exercise Price (assuming no Cashless
Exercise) to be paid by (y) the Market Price of one Share of Common Stock on the
Business Day which immediately precedes the day of exercise of the Warrant; or
(iv) by the delivery of shares of the Common Stock having a value (as defined by
the next sentence) equal to the aggregate Exercise Price to be paid, that are
either held by the Holder or are acquired in connection with such exercise, and
without payment of the Exercise Price in cash. Any share of Common Stock
delivered as payment for the Exercise Price in connection with an In-Kind
Exercise (as defined below) shall be deemed to have a value equal to the Market
Price of one Share of Common Stock on the Business Day which immediately
precedes the day of exercise of the Warrants. An exercise of a Warrant in
accordance with clause (iii) is herein referred to as a "Cashless Exercise" and
an exercise of a Warrant in accordance with clause (iv) is herein referred to as
an "In-Kind Exercise." The documentation and consideration, if any, delivered in
accordance with subsections (A), (B) and (C) are collectively referred to herein
as the "Warrant Exercise Documentation."

              (b) As promptly as practicable, and in any event within five (5)
Business Days after receipt of the Warrant Exercise Documentation, the Company
shall deliver or cause to be delivered (A) certificates representing the number
of validly issued, fully paid and nonassessable shares of Common Stock specified
in the Warrant Exercise Documentation, (B) if applicable, cash in lieu of any
fraction of a share, as hereinafter provided, and (C) if less than the full
number of Warrants evidenced hereby are being exercised or used in a Cashless
Exercise, a new Warrant Certificate or Certificates, of like tenor, for the
number of Warrants evidenced by this Warrant Certificate, less the number of
Warrants then being exercised and/or used in a Cashless Exercise. Such exercise
shall

<PAGE>

                                                                               3

be deemed to have been made at the close of business on the date of delivery of
the Warrant Exercise Documentation so that the Person entitled to receive shares
of Common Stock upon such exercise shall be treated for all purposes as having
become the record holder of such shares of Common Stock at such time.

              (c) The Company shall pay all expenses incurred by the Company in
connection with and taxes and other governmental charges (other than income
taxes of the Holder) that may be imposed in respect of, the issue or delivery of
any shares of Common Stock issuable upon the exercise of the Warrants evidenced
hereby. The Company shall not be required, however, to pay any tax or other
charge imposed in connection with any transfer involved in the issue of any
certificate for shares of Common Stock, as the case may be, in any name other
than that of the registered holder of the Warrant evidenced hereby.

              (d) In connection with the exercise of any Warrants evidenced
hereby, no fractions of shares of Common Stock shall be issued, but in lieu
thereof the Company shall pay a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest multiplied by the Market
Price for one Share of Common Stock on the Business Day which immediately
precedes the day of exercise. If more than one (1) such Warrant shall be
exercised by the holder thereof at the same time, the number of full shares of
Common Stock issuable on such exercise shall be computed on the basis of the
total number of Warrants so exercised.

         Section 2. Certain Adjustments.

              (a) The number of shares of Common Stock purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
as follows:

                   (i) Stock Dividends, Subdivision, Combination or
Reclassification of Common Stock. If at any time after the date of the issuance
of this Warrant the Company shall (i) pay a dividend on Common Stock in shares
of its capital stock, (ii) combine its outstanding shares of Common Stock into a
smaller number of shares, (iii) subdivide its outstanding shares of Common Stock
as the case may be, or (iv) issue by reclassification of its shares of Common
Stock any shares of capital stock of the Company, then, on the record date for
such dividend or the effective date of such subdivision or split-up, combination
or reclassification, as the case may be, the number and kind of shares to be
delivered upon exercise of this Warrant will be adjusted so that the Holder will
be entitled to receive the number and kind of shares of capital stock that such
Holder would have owned or been entitled to receive upon or by reason of such
event had this Warrant been exercised immediately prior thereto, and the
Exercise Price will be adjusted as provided below in paragraph 2(a)(v).

                   (ii) Extraordinary Distributions. If at any time after the
date of issuance of this Warrant, the Company shall distribute to all holders of
Common Stock (including any such distribution made in connection with a
consolidation or merger

<PAGE>

                                                                               4

in which the Company is the continuing or surviving corporation and Common Stock
is not changed or exchanged) cash, evidences of indebtedness, securities or
other assets (excluding (i) ordinary course cash dividends to the extent such
dividends do not exceed the Company's retained earnings and (ii) dividends
payable in shares of capital stock for which adjustment is made under Section
2(a)(i) or rights, options or warrants to subscribe for or purchase securities
of the Company), then in each such case the number of shares of Common Stock to
be delivered to such Holder upon exercise of this Warrant shall be increased so
that the Holder thereafter shall be entitled to receive the number of shares of
Common Stock determined by multiplying the number of shares such Holder would
have been entitled to receive immediately before such record date by a fraction,
the denominator of which shall be the Exercise Price on such record date minus
the then fair market value (as reasonably determined by the Board of Directors
of the Company in good faith) of the portion of the cash, evidences of
indebtedness, securities or other assets so distributed or of such rights or
warrants applicable to one share of the Common Stock (provided that such
denominator shall in no event be less than $.01) and the numerator of which
shall be the Exercise Price.

                   (iii) Reorganization, etc. If at any time after the date of
issuance of this Warrant any consolidation of the Company with or merger of the
Company with or into any other Person (other than a merger or consolidation in
which the Company is the surviving or continuing corporation and which does not
result in any reclassification of, or change (other than a change in par value
or from par value to no par value or from no par value to par value, or as a
result of a subdivision or combination) in, outstanding shares of either Common
Stock) or any sale, lease or other transfer of all or substantially all of the
assets of the Company to any other person (each, a "Reorganization Event"),
shall be effected in such a way that the holders of the Common Stock shall be
entitled to receive cash, stock, other securities or assets (whether such cash,
stock, other securities or assets are issued or distributed by the Company or
another Person) with respect to or in exchange for the Common Stock, then, upon
exercise of this Warrant, the Holder shall have the right to receive the kind
and amount of cash, stock, other securities or assets receivable upon such
Reorganization Event by a holder of the number of shares of the Common Stock
that such holder would have been entitled to receive upon exercise of this
Warrant had this Warrant been exercised immediately before such Reorganization
Event, subject to adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 2(a). The Company
shall not enter into any of the transactions referred to in this Section
2(a)(iii) unless effective provision shall be made so as to give effect to the
provisions set forth in this Section 2(a)(iii).

                   (iv) Carryover. Notwithstanding any other provision of this
Section 2(a), no adjustment shall be made to the number of shares of either
Common Stock to be delivered to the Holder (or to the Exercise Price) if such
adjustment represents less than .05% of the number of shares to be so delivered,
but any lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment that together with any
adjustments so carried forward shall amount to .05% or more of the number of
shares to be so delivered.

<PAGE>

                                                                               5

                   (v) Exercise Price Adjustment. Whenever the Number Issuable
upon the exercise of the Warrant is adjusted as provided pursuant to this
Section 2(a), the Exercise Price per share payable upon the exercise of this
Warrant shall be adjusted by multiplying such Exercise Price immediately prior
to such adjustment by a fraction, of which the numerator shall be the Number
Issuable upon the exercise of the Warrant immediately prior to such adjustment,
and of which the denominator shall be the Number Issuable immediately
thereafter; provided, however, that the Exercise Price for each Share of the
Common Stock shall in no event be less than the par value of a share of such
Common Stock.

              (b) Notice of Adjustment. Whenever the Number Issuable or the
Exercise Price is adjusted, as herein provided, the Company shall promptly mail
by first class mail, postage prepaid, to the Holder, notice of such adjustment
or adjustments setting forth the Number Issuable and the Exercise Price after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.

         Section 3. No Redemption. The Company shall not have any right to
redeem any of the Warrants evidenced hereby.

         Section 4. Notice of Certain Events. In case at any time or from time
to time (i) the Company shall declare any dividend or any other distribution to
the holders of Common Stock, (ii) the Company shall authorize the granting to
the holders of Common Stock of rights or warrants to subscribe for or purchase
any additional shares of stock of any class or any other right, (iii) the
Company shall authorize the issuance or sale of any other shares or rights which
would result in an adjustment to the Number Issuable pursuant to Section
2(a)(i), (ii), or (iii), or (iv) there shall be any capital reorganization or
reclassification of Common Stock of the Company or consolidation or merger of
the Company with or into another Person, or any sale or other disposition of all
or substantially all the assets of the Company, or (v) there shall be a
voluntary or involuntary dissolution, liquidation or winding up of the Company,
then, in any one or more of such cases the Company shall mail to the Holder at
such Holder's address as it appears on the transfer books of the Company, as
promptly as practicable but in any event at least 10 days prior to the date on
which the transactions contemplated in Section 2(a)(i), (ii), or (iii), a notice
stating (a) the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants or, if a record is not to be taken,
the date as of which the holders of record of either Common Stock to be entitled
to such dividend, distribution, rights or warrants are to be determined, or (b)
the date on which such reclassification, consolidation, merger, sale,
conveyance, dissolution, liquidation or winding up is expected to become
effective. Such notice also shall specify the date as of which it is expected
that the holders of record of the Common Stock shall be entitled to exchange the
Common Stock for shares of stock or other securities or property or cash
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, conveyance, dissolution, liquidation or winding up.

<PAGE>

                                                                               6

         Section 5. Certain Covenants. The Company covenants and agrees that all
shares of Capital Stock of the Company which may be issued upon the exercise of
the Warrants evidenced hereby will be duly authorized, validly issued and fully
paid and nonassessable. The Company shall at all times reserve and keep
available for issuance upon the exercise of the Warrants, such number of its
authorized but unissued shares of Common Stock as will from time to time be
sufficient to permit the exercise of all outstanding Warrants, and shall take
all action required to increase the authorized number of shares of Common Stock
if at any time there shall be insufficient authorized but unissued shares of
Common Stock to permit such reservation or to permit the exercise of all
outstanding Warrants.

         Section 6. Registered Holder. The persons in whose names this Warrant
Certificate is registered shall be deemed the owner hereof and of the Warrants
evidenced hereby for all purposes. The registered Holder of this Warrant
Certificate, in their capacity as such, shall not be entitled to any rights
whatsoever as a stockholder of the Company, except as herein provided.

         Section 7. Transfer of Warrants. Any transfer of the rights represented
by this Warrant Certificate shall be effected by the surrender of this Warrant
Certificate, along with the form of assignment attached hereto, properly
completed and executed by the registered Holder hereof, at the principal
executive office of the Company in the United States of America, together with
an appropriate investment letter and opinion of counsel, if deemed reasonably
necessary by counsel to the Company to assure compliance with applicable
securities laws. Thereupon, the Company shall issue in the name or names
specified by the registered Holder hereof and, in the event of a partial
transfer, in the name of the registered Holder hereof, a new Warrant Certificate
or Certificates evidencing the right to purchase such number of shares of Common
Stock as shall be equal to the number of shares of Common Stock then purchasable
hereunder.

         Section 8. Denominations. The Company covenants that it will, at its
expense, promptly upon surrender of this Warrant Certificate at the principal
executive office of the Company in the United States of America, execute and
deliver to the registered Holder hereof a new Warrant Certificate or
Certificates in denominations specified by such Holder for an aggregate number
of Warrants equal to the number of Warrants evidenced by this Warrant
Certificate.

         Section 9. Replacement of Warrants. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant Certificate and, in the case of loss, theft or destruction, upon
delivery of an indemnity reasonably satisfactory to the Company (in the case of
an insurance company or other institutional investor, its own unsecured
indemnity agreement shall be deemed to be reasonably satisfactory), or, in the
case of mutilation, upon surrender and cancellation thereof, the Company will
issue a new Warrant Certificate of like tenor for a number of Warrants equal to
the number of Warrants evidenced by this Warrant Certificate.

<PAGE>

                                                                               7

         Section 10. Governing Law. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED
BY, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE.

         Section 11. Rights Inure to Registered Holder. The Warrants evidenced
by this Warrant Certificate will inure to the benefit of and be binding upon the
registered Holder thereof and the Company and their respective successors and
permitted assigns. Nothing in this Warrant Certificate shall be construed to
give to any Person other than the Company and the registered Holder thereof any
legal or equitable right, remedy or claim under this Warrant Certificate, and
this Warrant Certificate shall be for the sole and exclusive benefit of the
Company and such registered Holder. Nothing in this Warrant Certificate shall be
construed to give the registered Holder hereof any rights as a Holder of shares
of either Common Stock until such time, if any, as the Warrants evidenced by
this Warrant Certificate are exercised in accordance with the provisions hereof.

         Section 12. Definitions. For the purposes of this Warrant Certificate,
the following terms shall have the meanings indicated below:

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

         "Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock (or equivalent ownership interests in a Person not a corporation)
whether now outstanding or hereafter issued, including, without limitation, all
Next Round Securities or Series A Preferred Shares and any rights, warrants or
options to purchase such Person's capital stock.

         "Common Stock" shall mean the common stock of the Company.

         "Market Price" shall mean, per share of Common Stock, on any date
specified herein: (a) if the Common Stock is not then listed or admitted to
trading on any national securities exchange but is designated as a national
market system security, the average of the closing bid and ask price of the
Common Stock on such date; or (b) if there shall have been no trading on such
date or if the Common Stock is not so designated, the average of the reported
closing bid and asked price of the Common Stock, on such date as shown by NASDAQ
and reported by any member firm of the NYSE selected by the Company; or (c) if
neither (a) nor (b) is applicable, the Fair Market Value per share determined in
good faith by the Board of Directors of the Company which shall be deemed to be
Fair Market Value unless holders of at least 15% of Common Stock issued or
issuable upon exercise of the Warrants request that the Company obtain an
opinion of a nationally recognized investment banking firm chosen by the Company
(who shall bear the expense) and reasonably acceptable to such requesting
holders of the Warrants, in

<PAGE>

                                                                               8

which event the Fair Market Value shall be as determined by such investment
banking firm.

         "Note and Warrant Purchase Agreement" shall mean that certain note and
warrant purchase agreement between the Company, the Holder and ___________ dated
August __, 2000 as the same may be amended from time to time in accordance with
its terms.

         "NYSE" shall mean the New York Stock Exchange, Inc.

         "Person" shall mean any individual, corporation, limited liability
company, partnership, trust, incorporated or unincorporated association, joint
venture, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.

         Section 10. 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, courier
services or personal delivery, (a) if to the Holder of a Warrant, at such
Holder's last known address appearing on the books of the Company; and (b) if to
the Company, at its principal executive office in the United States located at
the address designated for notices in the Note and Warrant Purchase Agreement,
or such other address as shall have been furnished to the party given or making
such notice, demand or other communication. All such notices and communications
shall be deemed to have been duly given: (i) when delivered by hand, if
personally delivered; (ii) when delivered to a courier if delivered by
commercial overnight courier service; and (iii) five (5) Business Days after
being deposited in the mail, postage prepaid, if mailed.

         IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed as of the Issue Date.

                                       BLUEFLY, INC.


                                       By:
                                          -----------------------------------
                                          Name:
                                          Title:

<PAGE>

                                                                               9

                            [Form of Assignment Form]

                  [To be executed upon assignment of Warrants]

         The undersigned hereby assigns and transfers this Warrant Certificate
to ___________________ whose Social Security Number or Tax ID Number is
_________________ and whose record address is
_____________________________________, and irrevocably appoints ________________
as agent to transfer this security on the books of the Company. Such agent may
substitute another to act for such agent.

                                       Signature:


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


                                       Signature Guarantee:


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


Date:
     --------------------------------

<PAGE>

                                                                  EXHIBIT A-2 to
                                                                NOTE AND WARRANT
                                                              PURCHASE AGREEMENT

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.

                                  BLUEFLY, INC.

                             SENIOR CONVERTIBLE NOTE


$
 ---------------
New York, New York                                               August __, 2000

         FOR VALUE RECEIVED, the undersigned, BLUEFLY, INC., a New York
corporation (the "Payor" or the "Company"), promises to pay to the order of
_________ or its registered assign (the "Payee"), the principal sum of _________
DOLLARS ($_________) and interest on the outstanding principal balance as set
forth herein.

         1. Securities Purchase Agreement. This Senior Convertible Note is the
Senior Convertible Note issued pursuant to the Note and Warrant Purchase
Agreement, dated as of August __, 2000, among the Payor, the Payee and _________
(the "Securities Purchase Agreement"). The Payee is entitled to the benefits of
(and subject to the obligations expressly contained in) this Senior Convertible
Note and the Securities Purchase Agreement and may enforce the agreements of the
Payor contained herein and therein and exercise the remedies provided for hereby
and thereby or otherwise available in respect hereto and thereto. Capitalized
terms used herein without definition shall have the meaning ascribed to such
terms in the Securities Purchase Agreement.

         2. Interest Rate; Payment.

              (a) The outstanding principal balance of this Senior Convertible
Note shall bear interest at an annual rate equal to 8% per annum, with interest
accruing, from and including the date hereof, on a cumulative, compounding
basis. Interest shall be computed on the basis of a 365- or 366-day year, as the
case may be, and the actual number of days elapsed, and shall be payable only
upon repayment of the principal on any Repayment Date (as defined below).

              (b) The outstanding balance of any amount owed under this Senior
Convertible Note which is not paid when due shall bear interest at the rate of
2%

<PAGE>

                                                                               2

per annum (the "Default Interest") above the rate that would otherwise be in
effect under this Senior Convertible Note with the Default Interest accruing,
from and including such due date, on a cumulative, compounding basis.

              (c) The outstanding principal and all accrued and unpaid interest
shall be paid in full no later than January 2, 2002 (the "Maturity Date"),
unless repaid earlier pursuant to the provisions of Section 3 (the date of any
payment pursuant to Section 3 and the Maturity Date, collectively referred to as
a "Repayment Date"). On a Repayment Date, the Payor shall pay the applicable
amount of principal and interest in lawful money of the United States of America
by wire or bank transfer of immediately available funds to an account designated
by the Payee in writing from time to time.

         (3) Prepayment.

              (a) Mandatory Prepayment.

                   (i) Upon the occurrence of an Event of Default (as defined in
Section 5), the outstanding principal of and all accrued interest on this Senior
Convertible Note shall be accelerated and shall automatically become immediately
due and payable, without presentment, demand, protest or notice of any kind, all
of which are expressly waived by the Payor, notwithstanding anything contained
herein to the contrary.

                   (ii) The Payee shall, at its sole option, have the right to
require the Payor to pay the outstanding principal of and all accrued interest
on this Senior Convertible Note upon the occurrence of any of the following
events: (1) Payor entering into an agreement to effectuate any sale or other
disposition of all or substantially all of its assets, in one transaction or in
a series of transactions, (2) the Company entering into an agreement to
effectuate any consolidation or merger into another entity, or (3) any sale of a
majority of the outstanding equity of the Company (or any other event that
constitutes a Change of Control of the Payor), in one transaction or in a series
of transactions. Immediately upon the occurrence of either of the events set
forth in clauses (1) or (2) above, or immediately upon obtaining knowledge that
any person has entered into an agreement to effectuate, the event set forth in
clause (3) above, the Payor shall give written notice of such event to the
Payee. Change of Control means any Person or "group" (within the meaning of
Section 13(d)(3) of the Exchange Act) other than a Principal Shareholder,
becoming the beneficial owner, directly or indirectly, of outstanding shares of
stock of the Company entitling such Person or Persons to exercise 50% or more of
the total votes entitled to be cast at a regular or special meeting, or by
action by written consent, of the stockholders of the Company in the election of
directors (the term "beneficial owner" shall be determined in accordance with
Rule 13d-3 of the Exchange Act).

                   (iii) Any mandatory prepayment under this Section 3(a) shall
include payment of reasonable costs and expenses, if any, associated with such
prepayment.

<PAGE>

                                                                               3

              (b) Optional Prepayment. The Payor may prepay all or any portion
of this Senior Convertible Note, at any time, by paying an amount equal to the
outstanding principal amount of this Senior Convertible Note, or the portion of
this Senior Convertible Note called for prepayment, together with interest
accrued and unpaid thereon to the date of prepayment and any other amounts due
under this Senior Convertible Note and the Securities Purchase Agreement,
without penalty or premium.

         4. Mandatory Conversion.

              (a) This Senior Convertible Note plus interest accrued and unpaid
thereon shall be automatically converted simultaneously with the Next Round
Financing (the "Triggering Event') into that number of fully paid and
non-assessable Next Round Securities which is equal to the quotient obtained by
dividing the then outstanding principal amount of this Senior Convertible Note
plus interest accrued and unpaid thereon to the date of conversion by the price
per Next Round Security paid in the Next Round Financing.

              (b) Promptly after the Triggering Event the Company shall deliver
or cause to be delivered to the holder of this Senior Convertible Note a
certificate or certificates representing the number of fully paid and
non-assessable shares of Next Round Securities into which this Senior
Convertible Note may be converted. Such conversion shall be deemed to have been
made simultaneously with the conclusion of the Next Round Financing, so that the
rights of the holder as a holder of this Senior Convertible Note shall cease
with respect to this Senior Convertible Note at such time (including, without
limitation, the right to receive the principal of this Senior Convertible Note
other than in the form of Next Round Securities), interest shall cease to accrue
hereon and the person or persons entitled to receive the Next Round Securities
deliverable upon conversion of this Senior Convertible Note shall be treated for
all purposes as having become the record holders of such Next Round Securities
at such time, and such conversion shall be at the conversion rate in effect at
such time.

              (c) The Company covenants that it will at all times reserve and
keep available out of its authorized Next Round Securities (at such time as such
Securities are authorized) solely for the purpose of issue or delivery upon
conversion of this Senior Convertible Note as herein provided, such number of
Next Round Securities as shall then be issuable or deliverable upon the
conversion of this Senior Convertible Note. The Company covenants that all Next
Round Securities which shall be so issuable or deliverable shall, when issued or
delivered, be duly and validly issued and fully paid and non-assessable.

         5. Events of Default. An "Event of Default" shall occur if:

              (a) the Payor shall default in the payment of the principal of or
interest payable on this Senior Convertible Note, when and as the same shall
become due and payable, whether at maturity or at a date fixed for prepayment or
by acceleration or

<PAGE>

                                                                               4

otherwise and such default with respect to the payment of interest shall
continue unremedied for two days;

              (b) the Payor shall fail to observe or perform any covenant or
agreement contained in this Senior Convertible Note, the Securities Purchase
Agreement or the Warrants and such failure shall continue for five business days
after Payor receives notice of such failure;

              (c) any representation, warranty, certification or statement made
by or on behalf of the Payor in this Senior Convertible Note or the Securities
Purchase Agreement or in any certificate, writing or other document delivered
pursuant hereto shall prove to have been incorrect in any material respect when
made;

              (d) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (A) relief
in respect of Payor or of a substantial part of Payor's respective property or
assets, under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other Federal or state bankruptcy, insolvency,
receivership or similar law (any such law, a "Bankruptcy Law"), (B) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for a substantial part of the property or assets of any Payor,
(C) the winding up or liquidation of any Payor; and such proceeding or petition
shall continue undismissed for 60 days, or an order or decree approving or
ordering any of the foregoing shall be entered;

              (e) the Payor shall (A) voluntarily commence any proceeding or
file any petition seeking relief under a Bankruptcy Law, (B) consent to the
institution of or the entry of an order for relief against it, or fail to
contest in a timely and appropriate manner, any proceeding or the filing of any
petition described in clause d, (C) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator, conservator or similar official for
a substantial part of the property or assets of the Payor, (D) file an answer
admitting the material allegations of a petition filed against it in any such
proceeding, (E) make a general assignment for the benefit of creditors, (F)
become unable, admit in writing its inability or fail generally to pay its debts
as they become due or (G) take any action for the purpose of effecting any of
the foregoing;

              (f) one or more judgments or orders for the payment of money in
excess of $250,000 in the aggregate shall be rendered against the Payor and such
judgment(s) or order(s) shall continue unsatisfied and unstayed for a period of
30 days;

              (g) the Payor shall default in the payment of any principal,
interest or premium, or any observance or performance of any covenants or
agreements, with respect to indebtedness (excluding trade payables and other
indebtedness entered into in the ordinary course of business) in excess of
$50,000 in the aggregate for borrowed money or any obligation which is the
substantive equivalent thereof and such default shall continue for more than the
period of grace, if any, or of any such

                                       5
<PAGE>

Indebtedness or obligation shall be declared due and payable prior to the stated
maturity thereof;

              (h) the Payor shall incur any indebtedness senior to this Senior
Convertible Note; or

              (i) any material provisions of this Senior Convertible Note, the
Securities Purchase Agreement, or the Warrants shall terminate or become void or
unenforceable or the Payor shall so assert in writing.

         6. Senior Status. The indebtedness evidenced by this Senior Convertible
Note is senior in right of payment to all other indebtedness of the Payor and
Payor agrees not to incur any indebtedness, which by its terms is senior in
right of payment to this Senior Convertible Note.

         7. Suits for Enforcement.

              (a) Upon the occurrence of any one or more Events of Default, the
holder of this Senior Convertible Note may proceed to protect and enforce its
rights by suit in equity, action at law or by other appropriate proceeding,
whether for the specific performance of any covenant or agreement contained in
the Securities Purchase Agreement or in aid of the exercise of any power granted
in this Senior Convertible Note, or may proceed to enforce the payment of this
Senior Convertible Note, or to enforce any other legal or equitable right it may
have as a holder of this Senior Convertible Note.

              (b) The holder of this Senior Convertible Note may direct the
time, method and place of conducting any proceeding for any remedy available to
itself.

              (c) In case of any Event of Default under the Securities Purchase
Agreement, the Payor will pay to the holder of this Senior Convertible Note such
amounts as shall be sufficient to cover the reasonable costs and expenses of
such holder due to such Event of Default, including without limitation, costs of
collection and reasonable fees, disbursements and other charges of counsel
incurred in connection with any action in which the holder prevails.

         8. Notices. All notices, demands and other communications provided for
or permitted hereunder shall be made in the manner and to the addresses set
forth in Section 11.2 of the Securities Purchase Agreement.

         9. Successors and Assigns. This Senior Convertible Note shall inure to
the benefit of and be binding upon the successors and permitted assigns of the
parties hereto. The Payor may not assign any of its rights under this Senior
Convertible Note without the prior written consent of Payee. The Payee may
assign all or a portion of their rights or obligations under this Senior
Convertible Note to an Affiliate without the prior written consent of the Payor.

<PAGE>

                                                                               6

         10. Amendment and Waiver.

              (a) No failure or delay on the part of the Payor or Payee 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. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Payor or
Payee at law, in equity or otherwise.

              (b) Any amendment, supplement or modification of or to any
provision of this Senior Convertible Note, any waiver of any provision of this
Senior Convertible Note and any consent to any departure by the Payor from the
terms of any provision of this Senior Convertible Note, shall be effective (i)
only if it is made or given in writing and signed by the Payor and the Payee and
(ii) only in the specific instance and for the specific purpose for which made
or given.

         11. Headings. The headings in this Senior Convertible Note are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.

         12. GOVERNING LAW. THIS SENIOR CONVERTIBLE NOTE SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.

         13. Costs and Expenses. The Payor hereby agrees to pay on demand all
reasonable out-of-pocket costs, fees, expenses, disbursements and other charges
(including but not limited to the fees, expenses, disbursements and other
charges of Paul, Weiss, Rifkind, Wharton & Garrison, special counsel to the
Payee) of the Payee arising in connection with any consent or waiver granted or
requested hereunder or in connection herewith, and any renegotiation, amendment,
work-out or settlements of this Senior Convertible Note or the indebtedness
arising hereunder.

         14. Waiver of Jury Trial and Setoff. The Payor hereby waives trial by
jury in any litigation in any court with respect to, in connection with, or
arising out of this Senior Convertible Note or any instrument or document
delivered pursuant to this Senior Convertible Note, or the validity, protection,
interpretation, collection or enforcement thereof, or any other claim or dispute
howsoever arising, between any Payor and the Payee; and the Payor hereby waives
the right to interpose any setoff or counterclaim or cross-claim in connection
with any such litigation, irrespective of the nature of such setoff,
counterclaim or cross-claim except to the extent that the failure so to assert
any such setoff, counterclaim or cross-claim would permanently preclude the
prosecution of the same.

         15. Consent to Jurisdiction. The Payor hereby irrevocably consents to
the nonexclusive jurisdiction of the courts of the State of New York and of any
federal court located in such State in connection with any action or proceeding
arising out of or

<PAGE>

                                                                               7

relating to this Senior Convertible Note or any document or instrument delivered
pursuant to this Agreement.

         16. 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 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.

         17. Entire Agreement. This Senior Convertible Note, the Warrants and
the Securities Purchase Agreement is 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 hereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein. This Senior
Convertible Note supersedes all prior agreements and understandings between the
parties with respect to such subject matter.

         18. Further Assurances. The Payor 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 Senior Convertible Note.

                                       BLUEFLY, INC.


                                       By:
                                          --------------------------------
                                          Name:
                                          Title:

<PAGE>

                                                                    Schedule 3.4


                                                                    SCHEDULE 2.2

                            SHARES AND PURCHASE PRICE

                                        Purchase Price and
                                       Aggregate Principal
                                         Amount of Senior
              Purchaser                  Convertible Note    Number of Warrants
              ---------                  ----------------    ------------------

Quantum Industrial Partners LDC              $2,904,900           314,697.5

SFM Domestic Investments LLC                 $   95,100            10,302.5
                                             ----------           ---------
TOTAL                                        $3,000,000           325,000
                                             ==========           =========

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.21
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>NOTE AND WARRANT PURCHASE AGREEMENT
<TEXT>

<PAGE>

                                                                   Exhibit 10.21


                       NOTE AND WARRANT PURCHASE AGREEMENT



                                      among



                                 BLUEFLY, INC.,


                         QUANTUM INDUSTRIAL PARTNERS LDC


                                       and


                          SFM DOMESTIC INVESTMENTS LLC















                             Dated: October 2, 2000

<PAGE>

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

Section 1.     DEFINITIONS....................................................2
        1.1    Definitions.  .................................................2
        1.2    Note Purchase Agreement........................................2
        1.3    Other Definitions..............................................2

Section 2.     PURCHASE AND SALE OF THE SECURITIES............................3
        2.1    Closing........................................................3
        2.2    Transactions at the Closing....................................3

Section 3.     REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................3

Section 4.     REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS...............5

Section 5.     CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE........5
        5.1    Representations and Warranties.................................5
        5.2    Compliance with this Agreement.................................5
        5.3    Securities.....................................................5
        5.4    Consents and Approvals.........................................5

Section 6.     CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE...........6
        6.1    Representations and Warranties.................................6
        6.2    Compliance with this Agreement.................................6
        6.3    Consents and Approvals.........................................6
        6.4    Payment of Purchase Price......................................6

Section 7.     COVENANTS......................................................6
        7.1    Covenants of the Company.......................................6
        7.2    Mutual Covenants. .............................................7

Section 8.     INDEMNIFICATION................................................7

Section 9.     REGISTRATION RIGHTS............................................8

Section 10.    END OF STANDBY COMMITMENT......................................8

Section 11.    MISCELLANEOUS..................................................8
        11.1   Survival of Representations, Warranties and Covenants..........8
        11.2   Notices........................................................8
        11.3   Successors and Assigns.........................................9

                                       i
<PAGE>

                                                                            Page
                                                                            ----

        11.4   Amendment and Waiver...........................................9
        11.5   Counterparts...................................................9
        11.6   Headings.......................................................9
        11.7   GOVERNING LAW..................................................9
        11.8   Severability...................................................9
        11.9   Rules of Construction.........................................10
        11.10  Entire Agreement..............................................10
        11.11  Fees..........................................................10
        11.12  Publicity; Confidentiality....................................10
        11.13  Further Assurances............................................10

EXHIBITS

A-1     Form of Warrant
A-2     Form of Senior Convertible Note

SCHEDULES

3       Capitalization

                                       ii
<PAGE>

                       NOTE AND WARRANT PURCHASE AGREEMENT

         NOTE AND WARRANT PURCHASE AGREEMENT (the "Agreement"), dated as of
October 2, 2000, by and among Bluefly, Inc., a New York corporation (the
"Company"), and the purchasers listed on Schedule 1 hereto (the "Purchasers").

         WHEREAS, pursuant to an Investment Agreement dated as of July 27, 1999,
by and among the Company, the Purchasers, The Lynch Foundation, Peter Lynch and
Pilot Domestic Trust (the "Investment Agreement"), each of the Purchasers has
invested in shares of the Company's Series A Preferred Stock;

         WHEREAS, pursuant to a Note and Warrant Purchase Agreement, dated as of
March 28, 2000, by and among the Company and the Purchasers (the "Note Purchase
Agreement"), the Purchasers, jointly but not severally, purchased senior
convertible notes in the aggregate amount of $3,000,000 (the "First Round
Notes") and warrants exercisable in the aggregate for 175,000 shares of common
stock of the company (the "First Round Warrants") and committed (the "Standby
Commitment") to provide to the Company up to an aggregate of $12,000,000 (the
"Commitment Amount") at any time prior to January 1, 2001 in one or more
tranches as requested by the Company;

         WHEREAS, pursuant to previous draws on the Standby Commitment, the
Purchasers have purchased additional notes (together with the First Round Notes,
the "Additional Notes") in the aggregate amount of $9,000,000 and additional
warrants (together with the First Round Warrants, the "Additional Warrants") to
purchase in the aggregate 150,000 shares of common stock of the Company;

         WHEREAS, the Company wishes to draw on the Standby Commitment and the
Purchasers wish to provide the Company with an additional $3,000,000 from the
Commitment Amount (the "Fourth Draw"); and

         WHEREAS, in connection with the Fourth Draw (i) the Company wishes to
sell and the Purchasers wish to purchase a senior convertible promissory note,
in the aggregate principal amount set forth opposite such Purchaser's name on
Schedule 2.2 hereto, having the terms and conditions set forth in the form of
Note (the "Senior Convertible Notes") attached hereto as Exhibit A-1 and (ii)
the Purchasers will each receive a warrant having the terms and conditions set
forth in the form of Warrant attached hereto as Exhibit A-2 (the "Warrants" and,
together with the Senior Convertible Notes, the "Securities").

         NOW, THEREFORE, in consideration of the mutual terms and conditions
herein contained, and for good and valuable consideration, the receipt and
sufficiency of

<PAGE>

                                                                               2

which is hereby acknowledged, the parties hereto, intending to be
legally bound, hereby agree as follows:

SECTION 1. DEFINITIONS

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

         "Certificate of Incorporation" means the Certificate of Incorporation
of the Company, as the same was amended pursuant to Section 5.6 of the
Investment Agreement and as in effect on the Closing Date.

         "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 adversely effects the ability of the Company to consummate
the transactions contemplated by this Agreement in any material respect or
impairs or delays the ability of the Company to effect the Closing.

         "Next Round Financing" means the closing of a private placement of Next
Round Securities which results in gross proceeds to the Company of $10 million
in one or more tranches.

         "Next Round Securities" means the Company's Common Stock or securities
convertible into or exercisable for the Company's Common Stock in the Next Round
Financing.

         "Transaction Documents" means collectively, this Agreement (including
the schedules attached hereto), the Senior Convertible Notes and the Warrants.

         1.2 Note Purchase Agreement. Capitalized terms not otherwise defined
herein shall have the meanings set forth for such terms in the Note Purchase
Agreement.

         1.3 Other Definitions. The following terms are defined in the section
referred to opposite such term.


Term                                               Section

Additional Notes                                   Recitals
Additional Warrants                                Recitals
Agreement                                          Recitals
Closing                                            2.1
Closing Date                                       2.1
Commitment Amount                                  Recitals

<PAGE>

                                                                               3

Fourth Draw                                        Recitals
Investment Agreement                               Recitals
Note Purchase Agreement                            Recitals
Purchase Price                                     2.2
Purchasers                                         Recitals
Securities                                         Recitals
Senior Convertible Notes                           Recitals
Standby Commitment                                 Recitals
Warrants                                           Recitals

SECTION 2. PURCHASE AND SALE OF THE SECURITIES

         2.1 Closing. Subject to the terms and conditions of this Agreement, the
closing of the sale and purchase of the Securities (the "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 Purchasers and the Company may mutually agree (the "Closing
Date").

         2.2 Transactions at the Closing. At the Closing, subject to the terms
and conditions of this Agreement, each of the Purchasers severally (and not
jointly) shall purchase and acquire from the Company, and the Company shall
issue and sell to the Purchasers, Senior Convertible Notes and Warrants for an
aggregate purchase price of $3,000,000 (the "Purchase Price"). At the Closing,
the Company shall deliver to each Purchaser a duly executed Senior Convertible
Note, in the aggregate principal amount set forth opposite such Purchaser's name
on Schedule 2.2 hereto, and a duly executed Warrant to purchase the amount of
shares of Common Stock set forth opposite such Purchaser's name on Schedule 2.2
hereto, each registered in the name of such 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 Purchaser of the portion of the
Purchase Price payable in respect thereof as set forth opposite such Purchaser's
name on Schedule 2.2 hereto by wire transfer of immediately available funds to
an account designated by the Company.

              (a) Standby Commitment. Upon payment of the Purchase Price and the
delivery of the Securities, the Commitment Amount shall be reduced to zero and
no further amount is available to the Company pursuant to the Note Purchase
Agreement.

SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

         The Company hereby represents and warrants to each Purchaser that the
representations and warranties of the Company contained in Section 3 of the Note
Purchase Agreement are true and correct in all material respects as of the date
hereof and as of the Closing Date as if made at and on such dates, except that
(i) the references therein to Section 2.1 are hereby amended to refer to Section
1.1 and (ii) the

<PAGE>

                                                                               4

representations of the Company at Section 3(d) of the Note Purchase Agreement
are reaffirmed as follows:

         Capitalization. As of the date hereof, the issued and outstanding
capital stock of the Company consists of 4,924,906 shares of Common Stock and
500,000 shares of Series A Preferred Stock. As of the Closing Date, the
authorized capital stock of the Company will consist of 15,000,000 shares of
Common Stock (of which 50,000 shares shall have been reserved for the Purchasers
in connection with the transactions contemplated hereby) and 2,000,000 shares of
Preferred Stock, $.01 par value, of which 500,000 shares shall have been
designated Series A Preferred Stock. As of the first closing of the Next Round,
sufficient numbers of shares of Next Round Securities and, as appropriate, of
shares of Common Stock into which such shares of Next Round Securities are
convertible or for which they are exercisable, shall be authorized and reserved
as required by the documents to be negotiated in connection with the Next Round
and as necessary to permit conversion of the maximum amount then potentially
issuable by the Company under the Senior Convertible Notes.

         All such shares of Capital Stock of the Company are or shall have been
duly authorized and (a) in the case of shares of Common Stock or Next Round
Securities issued upon conversion of the Senior Convertible Notes or exercise of
the Warrants, shall be fully paid and non-assessable upon such conversion, and
(b) in the case of shares of Common Stock issued upon conversion, exchange,
and/or exercise of such Next Round Securities, shall be fully paid and
non-assessable upon the conversion, exchange, or payment of the exercise price
contemplated by the Next Round Securities.

         Except as set forth in Schedule 3 of this Agreement, as contemplated by
the Investment Agreement, the Note Purchase Agreement or any of the agreements
pursuant to which Additional Notes and Additional Securities were issued or this
Agreement, there are no shares of capital stock of the Company reserved for
issuance. Except for (a) the Warrants, (b) the Senior Convertible Notes, (c) the
Additional Notes and Additional Warrants, (d) the Next Round Securities
(including those into which the Senior Convertible Notes are convertible), (e)
the Series A Preferred, and (f) as set forth in Schedule 3 of this Agreement,
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 exercisable for shares of Capital Stock or other
securities of the Company or any of its Subsidiaries. Except as set forth in
Schedule 3 to this Agreement, as required by the Transaction Documents (as such
term is defined in the Note Purchase Agreement), or as required by the
Transaction Documents (as such term is defined in this Agreement), neither the
Company nor any Subsidiary is obligated in any manner to issue shares of its
Capital Stock or other securities. Except as contemplated hereby and for
relevant state and federal securities laws, there are no restrictions on each
Purchaser's ability to transfer shares of Capital Stock of the Company.

<PAGE>

                                                                               5

SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

         Each of the Purchasers hereby represents and warrants (severally as to
itself and not jointly) to the Company that the representations and warranties
of such Purchaser contained in Section 4 of the Note Purchase Agreement are true
and correct in all material respects as of the date hereof and as of the Closing
Date as if made at and on such dates, except that the references therein to
Section 2.1 are hereby amended to refer to Section 1.1.

SECTION 5. CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE

         The obligation of the Purchasers to purchase the Securities and to pay
the Purchase Price, and to perform any obligations hereunder shall be subject to
the satisfaction as determined by, or waiver by, the Purchasers of the following
conditions on or before the Closing Date:

         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 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 any variance in such representation and warranty
following such date may only be the result of activities or transactions which
have taken place after the date hereof and 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 as of the Closing Date.

         5.3 Securities. At the Closing, the Company shall have delivered to
each of the Purchasers a Senior Convertible Note and a Warrant pursuant to
Section 2.2 hereof.

         5.4 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 the issuance
of the Senior Convertible Notes, and any shares of Common Stock issuable upon
exercise of the Warrants) by, or enforcement against, the Company of this
Agreement (other than the Next Round Financing or the drawdown of the Standby
Commitment) 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

<PAGE>

                                                                               6

Material Adverse Effect, and each of the Purchasers shall have been furnished
with appropriate evidence thereof.

SECTION 6. CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE

         The obligations of the Company to issue and sell the Senior Convertible
Notes and the Warrants 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 Closing Date:

         6.1 Representations and Warranties. The representations and warranties
of the Purchasers contained in Section 4 hereof shall be true and correct at and
on the 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
any variance in such representation and warranty following such date may only be
the result of activities or transactions which have taken place after the date
hereof and which are contemplated by this Agreement.

         6.2 Compliance with this Agreement. The 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 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 the
purchase of the Senior Convertible Notes and the Warrants, but excluding the
conversion of the Senior Convertible Notes, the exercise of the Warrants, and
the conversion or exercise of the Next Round Securities) 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. The Company shall have received the
Purchase Price.

SECTION 7. COVENANTS

         7.1 Covenants of the Company. The Company hereby covenants and agrees
with the Purchasers with respect to this Section 7, so long as they hold any
Capital Stock of the Company -- except to the extent that a particular section
of this Section 7 provides for an earlier termination, as follows:

<PAGE>

                                                                               7

              (a) 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.

              (b) Reservation of Securities. The Company shall at all times
reserve and keep available out of its authorized shares of Capital Stock, solely
for the purpose of issue or delivery upon conversion or exercise of the
Securities and of the conversion or exercise of shares of Capital Stock issued
upon such conversion or exercise, the number of shares of each class of Capital
Stock that are required to be issued upon such conversion or exercise. The
Company shall issue such shares of Capital Stock in accordance with the terms of
this Agreement, the other Transaction Documents and the Certificate of
Incorporation, and otherwise comply with the terms hereof and thereof.

              (c) Registration and Listing. To the extent the reservation of any
shares of Capital Stock required to be reserved pursuant to Section 7.2 of this
Agreement requires registration with or approval of any Governmental Authority
under any Federal or state or other applicable law before such shares of Capital
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 Capital
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 exercise of the Warrants or the conversion or exchange of Next
Round Securities into which the Senior Convertible Notes are convertible.

         7.2 Mutual Covenants. The parties agree that the anti-dilution
provision of Section 6(e)(ii) of the Certificate of Amendment of the Certificate
of Incorporation shall not apply as a result of the issuance of the Warrants.

SECTION 8. INDEMNIFICATION.

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

<PAGE>

                                                                               8

Document. Notwithstanding the foregoing, the Company's liability pursuant to
this Section 8 shall in no event exceed $15,000,000.

              (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 (excluding the Standby
Commitment) of the Purchasers contained in any Transaction Document.
Notwithstanding the foregoing, the Purchasers' liability pursuant to this
Section 8 shall in no event exceed $3,000,000.

SECTION 9. REGISTRATION RIGHTS.

              (a) The Company and each of the Purchasers hereby agree and
acknowledge that the shares of Common Stock for which the Warrants are
exercisable and any Common Stock issuable upon the conversion or exchange of the
Next Round Securities are Registrable Securities, as such term is defined in the
Investment Agreement, and that, until the closing of the Next Round, the
provisions of Section 9 of the Investment Agreement shall apply to all Persons
of record holding the Senior Convertible Notes or the Warrants (or any shares of
Registrable Securities issued, directly or indirectly, as a result of a
conversion under a Senior Convertible Note or as a result of an exercise of a
Warrant).

              (b) Upon completion of the Next Round, the Purchasers shall have
the option to decide whether the registration rights and related provisions set
forth in Section 9 of the Investment Agreement shall apply to the Warrants or
whether the registration rights and related provisions agreed to in the final
documentation negotiated in connection with the Next Round Financing shall
apply.

SECTION 10. END OF STANDBY COMMITMENT

         The parties agree that the sale of the Securities pursuant to this
Agreement constitutes the final draw under the Standby Commitment and the
Purchasers shall have no further obligation to fund any amounts under the Note
Purchase Agreement.

SECTION 11. 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 Closing Date.

         11.2 Notices. All notices, demands and other communications provided
for or permitted hereunder shall be made in the manner set forth in the
Investment Agreement.

<PAGE>

                                                                               9

         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 Purchasers may assign
any of its rights under this Agreement to any of its Affiliates but any such
assignment shall not relieve any 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.

         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.

<PAGE>

                                                                              10

         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, 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, except those set forth in the Transaction
Documents (as such term is defined in the Investment Agreement).

         11.11 Fees. Upon the 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 $15,000 in the aggregate.

         11.12 Publicity; Confidentiality. The provisions of Section 11.12 of
the Note Purchase Agreement shall apply with respect to this Agreement and the
transactions contemplated by this Agreement and the Transaction Documents.

         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.

         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:

<PAGE>

                                                                              11

                                       QUANTUM INDUSTRIAL PARTNERS LDC


                                       By:
                                          -----------------------------------
                                          Name:
                                          Title:


                                       SFM DOMESTIC INVESTMENTS LLC


                                       By:
                                          -----------------------------------
                                          Name:
                                          Title:

<PAGE>

                                                                  EXHIBIT A-2 to
                                                                NOTE AND WARRANT
                                                              PURCHASE AGREEMENT

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED,
QUALIFIED, APPROVED OR DISAPPROVED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES 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 SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER SUCH ACT OR LAWS AND NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR STATE REGULATORY
AUTHORITY HAS PASSED ON OR ENDORSED THE MERITS OF THESE SECURITIES.

                                                               WARRANT NO. [___]

                                     WARRANT

                       TO PURCHASE SHARES OF COMMON STOCK

                                       OF

                                  BLUEFLY, INC.

         THIS IS TO CERTIFY THAT ____________ or its registered assigns (the
"Holder"), is the owner of the right to subscribe for and to purchase from
BLUEFLY, INC., a New York corporation (the "Company"), [___________(1)_] (the
"Number Issuable"), fully paid, duly authorized and non-assessable shares of
Common Stock at a price per share equal to $ 2.29 (the "Exercise Price"), at any
time, in whole or in part, prior to 5:00 PM New York City time, on March 28,
2005 (the "Expiration Date") all on the terms and subject to the conditions
hereinafter set forth (the "Warrants").

         The Number Issuable is subject to further adjustment from time to time
pursuant to the provisions of Section 2 of this Warrant Certificate.

         Capitalized terms used herein but not otherwise defined shall have the
meanings given to them in Section 12 hereof.

         Section 1. Exercise of Warrants.

              (a) Subject to the last paragraph of this Section 1, the Warrants
evidenced hereby may be exercised, in whole or in part, by the Holder hereof at
any time or from time to time, on or after the date hereof and prior to the
Expiration Date upon

--------------
(1) The total will be 50,000 shares split between QIP and SFM Domestic
    Investments.


<PAGE>

                                                                               2

delivery to the Company at the principal executive office of the Company in the
United States of America, of (A) this Warrant Certificate, (B) a written notice
stating that such Holder elects to exercise the Warrants evidenced hereby in
accordance with the provisions of this Section 1 and specifying the number of
Warrants being exercised and the name or names in which the Holder wishes the
certificate or certificates for shares of Common Stock to be issued and (C)
payment of the Exercise Price for such Warrants, which shall be payable by any
one or any combination of the following: (i) cash; (ii) certified or official
bank check payable to the order of the Company; (iii) by the surrender (which
surrender shall be evidenced by cancellation of the number of Warrants
represented by any Warrant Certificate presented in connection with a Cashless
Exercise (as defined below)) of a Warrant or Warrants (represented by one or
more relevant Warrant Certificates), and without the payment of the Exercise
Price in cash, in return for the delivery to the surrendering Holder of such
number of shares of Common Stock equal to the number of shares of the Common
Stock for which such Warrant is exercisable as of the date of exercise (if the
Exercise Price were being paid in cash or certified or official bank check)
reduced by that number of shares of Common Stock equal to the quotient obtained
by dividing (x) the aggregate Exercise Price (assuming no Cashless Exercise) to
be paid by (y) the Market Price of one Share of Common Stock on the Business Day
which immediately precedes the day of exercise of the Warrant; or (iv) by the
delivery of shares of the Common Stock having a value (as defined by the next
sentence) equal to the aggregate Exercise Price to be paid, that are either held
by the Holder or are acquired in connection with such exercise, and without
payment of the Exercise Price in cash. Any share of Common Stock delivered as
payment for the Exercise Price in connection with an In-Kind Exercise (as
defined below) shall be deemed to have a value equal to the Market Price of one
Share of Common Stock on the Business Day which immediately precedes the day of
exercise of the Warrants. An exercise of a Warrant in accordance with clause
(iii) is herein referred to as a "Cashless Exercise" and an exercise of a
Warrant in accordance with clause (iv) is herein referred to as an "In-Kind
Exercise." The documentation and consideration, if any, delivered in accordance
with subsections (A), (B) and (C) are collectively referred to herein as the
"Warrant Exercise Documentation."

              (b) As promptly as practicable, and in any event within five (5)
Business Days after receipt of the Warrant Exercise Documentation, the Company
shall deliver or cause to be delivered (A) certificates representing the number
of validly issued, fully paid and nonassessable shares of Common Stock specified
in the Warrant Exercise Documentation, (B) if applicable, cash in lieu of any
fraction of a share, as hereinafter provided, and (C) if less than the full
number of Warrants evidenced hereby are being exercised or used in a Cashless
Exercise, a new Warrant Certificate or Certificates, of like tenor, for the
number of Warrants evidenced by this Warrant Certificate, less the number of
Warrants then being exercised and/or used in a Cashless Exercise. Such exercise
shall be deemed to have been made at the close of business on the date of
delivery of the Warrant Exercise Documentation so that the Person entitled to
receive shares of Common Stock upon such exercise shall be treated for all
purposes as having become the record holder of such shares of Common Stock at
such time.

<PAGE>

                                                                               3

              (c) The Company shall pay all expenses incurred by the Company in
connection with and taxes and other governmental charges (other than income
taxes of the Holder) that may be imposed in respect of, the issue or delivery of
any shares of Common Stock issuable upon the exercise of the Warrants evidenced
hereby. The Company shall not be required, however, to pay any tax or other
charge imposed in connection with any transfer involved in the issue of any
certificate for shares of Common Stock, as the case may be, in any name other
than that of the registered holder of the Warrant evidenced hereby.

              (d) In connection with the exercise of any Warrants evidenced
hereby, no fractions of shares of Common Stock shall be issued, but in lieu
thereof the Company shall pay a cash adjustment in respect of such fractional
interest in an amount equal to such fractional interest multiplied by the Market
Price for one Share of Common Stock on the Business Day which immediately
precedes the day of exercise. If more than one (1) such Warrant shall be
exercised by the holder thereof at the same time, the number of full shares of
Common Stock issuable on such exercise shall be computed on the basis of the
total number of Warrants so exercised.

         Section 2. Certain Adjustments.

              (a) The number of shares of Common Stock purchasable upon the
exercise of this Warrant and the Exercise Price shall be subject to adjustment
as follows:

                   (i) Stock Dividends, Subdivision, Combination or
Reclassification of Common Stock. If at any time after the date of the issuance
of this Warrant the Company shall (i) pay a dividend on Common Stock in shares
of its capital stock, (ii) combine its outstanding shares of Common Stock into a
smaller number of shares, (iii) subdivide its outstanding shares of Common Stock
as the case may be, or (iv) issue by reclassification of its shares of Common
Stock any shares of capital stock of the Company, then, on the record date for
such dividend or the effective date of such subdivision or split-up, combination
or reclassification, as the case may be, the number and kind of shares to be
delivered upon exercise of this Warrant will be adjusted so that the Holder will
be entitled to receive the number and kind of shares of capital stock that such
Holder would have owned or been entitled to receive upon or by reason of such
event had this Warrant been exercised immediately prior thereto, and the
Exercise Price will be adjusted as provided below in paragraph 2(a)(v).

                   (ii) Extraordinary Distributions. If at any time after the
date of issuance of this Warrant, the Company shall distribute to all holders of
Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation and Common Stock is not changed or exchanged) cash, evidences of
indebtedness, securities or other assets (excluding (i) ordinary course cash
dividends to the extent such dividends do not exceed the Company's retained
earnings and (ii) dividends payable in shares of capital stock for which
adjustment is made under Section 2(a)(i) or rights, options or warrants to
subscribe

<PAGE>

                                                                               4

for or purchase securities of the Company), then in each such case the number of
shares of Common Stock to be delivered to such Holder upon exercise of this
Warrant shall be increased so that the Holder thereafter shall be entitled to
receive the number of shares of Common Stock determined by multiplying the
number of shares such Holder would have been entitled to receive immediately
before such record date by a fraction, the denominator of which shall be the
Exercise Price on such record date minus the then fair market value (as
reasonably determined by the Board of Directors of the Company in good faith) of
the portion of the cash, evidences of indebtedness, securities or other assets
so distributed or of such rights or warrants applicable to one share of the
Common Stock (provided that such denominator shall in no event be less than
$.01) and the numerator of which shall be the Exercise Price.

                   (iii) Reorganization, etc. If at any time after the date of
issuance of this Warrant any consolidation of the Company with or merger of the
Company with or into any other Person (other than a merger or consolidation in
which the Company is the surviving or continuing corporation and which does not
result in any reclassification of, or change (other than a change in par value
or from par value to no par value or from no par value to par value, or as a
result of a subdivision or combination) in, outstanding shares of either Common
Stock) or any sale, lease or other transfer of all or substantially all of the
assets of the Company to any other person (each, a "Reorganization Event"),
shall be effected in such a way that the holders of the Common Stock shall be
entitled to receive cash, stock, other securities or assets (whether such cash,
stock, other securities or assets are issued or distributed by the Company or
another Person) with respect to or in exchange for the Common Stock, then, upon
exercise of this Warrant, the Holder shall have the right to receive the kind
and amount of cash, stock, other securities or assets receivable upon such
Reorganization Event by a holder of the number of shares of the Common Stock
that such holder would have been entitled to receive upon exercise of this
Warrant had this Warrant been exercised immediately before such Reorganization
Event, subject to adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 2(a). The Company
shall not enter into any of the transactions referred to in this Section
2(a)(iii) unless effective provision shall be made so as to give effect to the
provisions set forth in this Section 2(a)(iii).

                   (iv) Carryover. Notwithstanding any other provision of this
Section 2(a), no adjustment shall be made to the number of shares of either
Common Stock to be delivered to the Holder (or to the Exercise Price) if such
adjustment represents less than .05% of the number of shares to be so delivered,
but any lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment that together with any
adjustments so carried forward shall amount to .05% or more of the number of
shares to be so delivered.

                   (v) Exercise Price Adjustment. Whenever the Number Issuable
upon the exercise of the Warrant is adjusted as provided pursuant to this
Section 2(a), the Exercise Price per share payable upon the exercise of this
Warrant shall be adjusted by multiplying such Exercise Price immediately prior
to such adjustment by a

<PAGE>

                                                                               5

fraction, of which the numerator shall be the Number Issuable upon the exercise
of the Warrant immediately prior to such adjustment, and of which the
denominator shall be the Number Issuable immediately thereafter; provided,
however, that the Exercise Price for each Share of the Common Stock shall in no
event be less than the par value of a share of such Common Stock.

              (b) Notice of Adjustment. Whenever the Number Issuable or the
Exercise Price is adjusted, as herein provided, the Company shall promptly mail
by first class mail, postage prepaid, to the Holder, notice of such adjustment
or adjustments setting forth the Number Issuable and the Exercise Price after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.

         Section 3. No Redemption. The Company shall not have any right to
redeem any of the Warrants evidenced hereby.

         Section 4. Notice of Certain Events. In case at any time or from time
to time (i) the Company shall declare any dividend or any other distribution to
the holders of Common Stock, (ii) the Company shall authorize the granting to
the holders of Common Stock of rights or warrants to subscribe for or purchase
any additional shares of stock of any class or any other right, (iii) the
Company shall authorize the issuance or sale of any other shares or rights which
would result in an adjustment to the Number Issuable pursuant to Section
2(a)(i), (ii), or (iii), or (iv) there shall be any capital reorganization or
reclassification of Common Stock of the Company or consolidation or merger of
the Company with or into another Person, or any sale or other disposition of all
or substantially all the assets of the Company, or (v) there shall be a
voluntary or involuntary dissolution, liquidation or winding up of the Company,
then, in any one or more of such cases the Company shall mail to the Holder at
such Holder's address as it appears on the transfer books of the Company, as
promptly as practicable but in any event at least 10 days prior to the date on
which the transactions contemplated in Section 2(a)(i), (ii), or (iii), a notice
stating (a) the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants or, if a record is not to be taken,
the date as of which the holders of record of either Common Stock to be entitled
to such dividend, distribution, rights or warrants are to be determined, or (b)
the date on which such reclassification, consolidation, merger, sale,
conveyance, dissolution, liquidation or winding up is expected to become
effective. Such notice also shall specify the date as of which it is expected
that the holders of record of the Common Stock shall be entitled to exchange the
Common Stock for shares of stock or other securities or property or cash
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, conveyance, dissolution, liquidation or winding up.

         Section 5. Certain Covenants. The Company covenants and agrees that all
shares of Capital Stock of the Company which may be issued upon the exercise of
the Warrants evidenced hereby will be duly authorized, validly issued and fully
paid and nonassessable. The Company shall at all times reserve and keep
available for issuance upon the exercise of the Warrants, such number of its
authorized but unissued shares of

<PAGE>

                                                                               6

Common Stock as will from time to time be sufficient to permit the exercise of
all outstanding Warrants, and shall take all action required to increase the
authorized number of shares of Common Stock if at any time there shall be
insufficient authorized but unissued shares of Common Stock to permit such
reservation or to permit the exercise of all outstanding Warrants.

         Section 6. Registered Holder. The persons in whose names this Warrant
Certificate is registered shall be deemed the owner hereof and of the Warrants
evidenced hereby for all purposes. The registered Holder of this Warrant
Certificate, in their capacity as such, shall not be entitled to any rights
whatsoever as a stockholder of the Company, except as herein provided.

         Section 7. Transfer of Warrants. Any transfer of the rights represented
by this Warrant Certificate shall be effected by the surrender of this Warrant
Certificate, along with the form of assignment attached hereto, properly
completed and executed by the registered Holder hereof, at the principal
executive office of the Company in the United States of America, together with
an appropriate investment letter and opinion of counsel, if deemed reasonably
necessary by counsel to the Company to assure compliance with applicable
securities laws. Thereupon, the Company shall issue in the name or names
specified by the registered Holder hereof and, in the event of a partial
transfer, in the name of the registered Holder hereof, a new Warrant Certificate
or Certificates evidencing the right to purchase such number of shares of Common
Stock as shall be equal to the number of shares of Common Stock then purchasable
hereunder.

         Section 8. Denominations. The Company covenants that it will, at its
expense, promptly upon surrender of this Warrant Certificate at the principal
executive office of the Company in the United States of America, execute and
deliver to the registered Holder hereof a new Warrant Certificate or
Certificates in denominations specified by such Holder for an aggregate number
of Warrants equal to the number of Warrants evidenced by this Warrant
Certificate.

         Section 9. Replacement of Warrants. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant Certificate and, in the case of loss, theft or destruction, upon
delivery of an indemnity reasonably satisfactory to the Company (in the case of
an insurance company or other institutional investor, its own unsecured
indemnity agreement shall be deemed to be reasonably satisfactory), or, in the
case of mutilation, upon surrender and cancellation thereof, the Company will
issue a new Warrant Certificate of like tenor for a number of Warrants equal to
the number of Warrants evidenced by this Warrant Certificate.

         Section 10. Governing Law. THIS WARRANT CERTIFICATE SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED
BY, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE.

<PAGE>

                                                                               7

         Section 11. Rights Inure to Registered Holder. The Warrants evidenced
by this Warrant Certificate will inure to the benefit of and be binding upon the
registered Holder thereof and the Company and their respective successors and
permitted assigns. Nothing in this Warrant Certificate shall be construed to
give to any Person other than the Company and the registered Holder thereof any
legal or equitable right, remedy or claim under this Warrant Certificate, and
this Warrant Certificate shall be for the sole and exclusive benefit of the
Company and such registered Holder. Nothing in this Warrant Certificate shall be
construed to give the registered Holder hereof any rights as a Holder of shares
of either Common Stock until such time, if any, as the Warrants evidenced by
this Warrant Certificate are exercised in accordance with the provisions hereof.

         Section 12. Definitions. For the purposes of this Warrant Certificate,
the following terms shall have the meanings indicated below:

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

         "Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock (or equivalent ownership interests in a Person not a corporation)
whether now outstanding or hereafter issued, including, without limitation, all
Next Round Securities or Series A Preferred Shares and any rights, warrants or
options to purchase such Person's capital stock.

         "Common Stock" shall mean the common stock of the Company.

         "Market Price" shall mean, per share of Common Stock, on any date
specified herein: (a) if the Common Stock is not then listed or admitted to
trading on any national securities exchange but is designated as a national
market system security, the average of the closing bid and ask price of the
Common Stock on such date; or (b) if there shall have been no trading on such
date or if the Common Stock is not so designated, the average of the reported
closing bid and asked price of the Common Stock, on such date as shown by NASDAQ
and reported by any member firm of the NYSE selected by the Company; or (c) if
neither (a) nor (b) is applicable, the Fair Market Value per share determined in
good faith by the Board of Directors of the Company which shall be deemed to be
Fair Market Value unless holders of at least 15% of Common Stock issued or
issuable upon exercise of the Warrants request that the Company obtain an
opinion of a nationally recognized investment banking firm chosen by the Company
(who shall bear the expense) and reasonably acceptable to such requesting
holders of the Warrants, in which event the Fair Market Value shall be as
determined by such investment banking firm.

         "Note and Warrant Purchase Agreement" shall mean that certain Note and
Warrant Purchase Agreement between the Company, the Holder and ___________ dated

<PAGE>

                                                                               8

October 2, 2000 as the same may be amended from time to time in accordance with
its terms.

         "NYSE" shall mean the New York Stock Exchange, Inc.

         "Person" shall mean any individual, corporation, limited liability
company, partnership, trust, incorporated or unincorporated association, joint
venture, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.

         Section 10. 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, courier
services or personal delivery, (a) if to the Holder of a Warrant, at such
Holder's last known address appearing on the books of the Company; and (b) if to
the Company, at its principal executive office in the United States located at
the address designated for notices in the Note and Warrant Purchase Agreement,
or such other address as shall have been furnished to the party given or making
such notice, demand or other communication. All such notices and communications
shall be deemed to have been duly given: (i) when delivered by hand, if
personally delivered; (ii) when delivered to a courier if delivered by
commercial overnight courier service; and (iii) five (5) Business Days after
being deposited in the mail, postage prepaid, if mailed.

         IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed as of the Issue Date.

                                       BLUEFLY, INC.

                                       By:
                                          -----------------------------------
                                          Name:
                                          Title:

<PAGE>

                                                                               9

                            [Form of Assignment Form]

                  [To be executed upon assignment of Warrants]

         The undersigned hereby assigns and transfers this Warrant Certificate
to ___________________ whose Social Security Number or Tax ID Number is
_________________ and whose record address is
_____________________________________, and irrevocably appoints ________________
as agent to transfer this security on the books of the Company. Such agent may
substitute another to act for such agent.

                                       Signature:


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


                                       Signature Guarantee:


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




Date:
     --------------------------------

<PAGE>

                                                                  EXHIBIT A-1 to
                                                                NOTE AND WARRANT
                                                              PURCHASE AGREEMENT

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.

                                  BLUEFLY, INC.

                             SENIOR CONVERTIBLE NOTE


$
 ---------------
New York, New York                                               October 2, 2000

         FOR VALUE RECEIVED, the undersigned, BLUEFLY, INC., a New York
corporation (the "Payor" or the "Company"), promises to pay to the order of
_________ or its registered assign (the "Payee"), the principal sum of _________
DOLLARS ($_________) and interest on the outstanding principal balance as set
forth herein.

         1. Securities Purchase Agreement. This Senior Convertible Note is the
Senior Convertible Note issued pursuant to the Note and Warrant Purchase
Agreement, dated as of the date hereof, among the Payor, the Payee and _________
(the "Securities Purchase Agreement"). The Payee is entitled to the benefits of
(and subject to the obligations expressly contained in) this Senior Convertible
Note and the Securities Purchase Agreement and may enforce the agreements of the
Payor contained herein and therein and exercise the remedies provided for hereby
and thereby or otherwise available in respect hereto and thereto. Capitalized
terms used herein without definition shall have the meaning ascribed to such
terms in the Securities Purchase Agreement.

         2. Interest Rate; Payment.

              (a) The outstanding principal balance of this Senior Convertible
Note shall bear interest at an annual rate equal to 8% per annum, with interest
accruing, from and including the date hereof, on a cumulative, compounding
basis. Interest shall be computed on the basis of a 365- or 366-day year, as the
case may be, and the actual number of days elapsed, and shall be payable only
upon repayment of the principal on any Repayment Date (as defined below).

              (b) The outstanding balance of any amount owed under this Senior
Convertible Note which is not paid when due shall bear interest at the rate of
2%

<PAGE>

                                                                               2

per annum (the "Default Interest") above the rate that would otherwise be in
effect under this Senior Convertible Note with the Default Interest accruing,
from and including such due date, on a cumulative, compounding basis.

              (c) The outstanding principal and all accrued and unpaid interest
shall be paid in full no later than January 2, 2002 (the "Maturity Date"),
unless repaid earlier pursuant to the provisions of Section 3 (the date of any
payment pursuant to Section 3 and the Maturity Date, collectively referred to as
a "Repayment Date"). On a Repayment Date, the Payor shall pay the applicable
amount of principal and interest in lawful money of the United States of America
by wire or bank transfer of immediately available funds to an account designated
by the Payee in writing from time to time.

         (3) Prepayment.

              (a) Mandatory Prepayment.

                   (i) Upon the occurrence of an Event of Default (as defined in
Section 5), the outstanding principal of and all accrued interest on this Senior
Convertible Note shall be accelerated and shall automatically become immediately
due and payable, without presentment, demand, protest or notice of any kind, all
of which are expressly waived by the Payor, notwithstanding anything contained
herein to the contrary.

                   (ii) The Payee shall, at its sole option, have the right to
require the Payor to pay the outstanding principal of and all accrued interest
on this Senior Convertible Note upon the occurrence of any of the following
events: (1) Payor entering into an agreement to effectuate any sale or other
disposition of all or substantially all of its assets, in one transaction or in
a series of transactions, (2) the Company entering into an agreement to
effectuate any consolidation or merger into another entity, or (3) any sale of a
majority of the outstanding equity of the Company (or any other event that
constitutes a Change of Control of the Payor), in one transaction or in a series
of transactions. Immediately upon the occurrence of either of the events set
forth in clauses (1) or (2) above, or immediately upon obtaining knowledge that
any person has entered into an agreement to effectuate, the event set forth in
clause (3) above, the Payor shall give written notice of such event to the
Payee. Change of Control means any Person or "group" (within the meaning of
Section 13(d)(3) of the Exchange Act), other than Payee and its Affiliates,
becoming the beneficial owner, directly or indirectly, of outstanding shares of
stock of the Company entitling such Person or Persons to exercise 50% or more of
the total votes entitled to be cast at a regular or special meeting, or by
action by written consent, of the stockholders of the Company in the election of
directors (the term "beneficial owner" shall be determined in accordance with
Rule 13d-3 of the Exchange Act).

                   (iii) Any mandatory prepayment under this Section 3(a) shall
include payment of reasonable costs and expenses, if any, associated with such
prepayment.

<PAGE>

                                                                               3

              (b) Optional Prepayment. The Payor may prepay all or any portion
of this Senior Convertible Note, at any time, by paying an amount equal to the
outstanding principal amount of this Senior Convertible Note, or the portion of
this Senior Convertible Note called for prepayment, together with interest
accrued and unpaid thereon to the date of prepayment and any other amounts due
under this Senior Convertible Note and the Securities Purchase Agreement,
without penalty or premium.

         4. Mandatory Conversion.

              (a) This Senior Convertible Note plus interest accrued and unpaid
thereon shall be automatically converted simultaneously with the Next Round
Financing (the "Triggering Event') into that number of fully paid and
non-assessable Next Round Securities which is equal to the quotient obtained by
dividing the then outstanding principal amount of this Senior Convertible Note
plus interest accrued and unpaid thereon to the date of conversion by the price
per Next Round Security paid in the Next Round Financing.

              (b) Promptly after the Triggering Event the Company shall deliver
or cause to be delivered to the holder of this Senior Convertible Note a
certificate or certificates representing the number of fully paid and
non-assessable shares of Next Round Securities into which this Senior
Convertible Note may be converted. Such conversion shall be deemed to have been
made simultaneously with the conclusion of the Next Round Financing, so that the
rights of the holder as a holder of this Senior Convertible Note shall cease
with respect to this Senior Convertible Note at such time (including, without
limitation, the right to receive the principal of this Senior Convertible Note
other than in the form of Next Round Securities), interest shall cease to accrue
hereon and the person or persons entitled to receive the Next Round Securities
deliverable upon conversion of this Senior Convertible Note shall be treated for
all purposes as having become the record holders of such Next Round Securities
at such time, and such conversion shall be at the conversion rate in effect at
such time.

              (c) The Company covenants that it will at all times reserve and
keep available out of its authorized Next Round Securities (at such time as such
Securities are authorized) solely for the purpose of issue or delivery upon
conversion of this Senior Convertible Note as herein provided, such number of
Next Round Securities as shall then be issuable or deliverable upon the
conversion of this Senior Convertible Note. The Company covenants that all Next
Round Securities which shall be so issuable or deliverable shall, when issued or
delivered, be duly and validly issued and fully paid and non-assessable.

         5. Events of Default. An "Event of Default" shall occur if:

              (a) the Payor shall default in the payment of the principal of or
interest payable on this Senior Convertible Note, when and as the same shall
become due and payable, whether at maturity or at a date fixed for prepayment or
by acceleration or

<PAGE>

                                                                               4

otherwise and such default with respect to the payment of interest shall
continue unremedied for two days;

              (b) the Payor shall fail to observe or perform any covenant or
agreement contained in this Senior Convertible Note, the Securities Purchase
Agreement or the Warrants and such failure shall continue for five business days
after Payor receives notice of such failure;

              (c) any representation, warranty, certification or statement made
by or on behalf of the Payor in this Senior Convertible Note or the Securities
Purchase Agreement or in any certificate, writing or other document delivered
pursuant hereto shall prove to have been incorrect in any material respect when
made;

              (d) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (A) relief
in respect of Payor or of a substantial part of Payor's respective property or
assets, under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other Federal or state bankruptcy, insolvency,
receivership or similar law (any such law, a "Bankruptcy Law"), (B) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for a substantial part of the property or assets of any Payor,
(C) the winding up or liquidation of any Payor; and such proceeding or petition
shall continue undismissed for 60 days, or an order or decree approving or
ordering any of the foregoing shall be entered;

              (e) the Payor shall (A) voluntarily commence any proceeding or
file any petition seeking relief under a Bankruptcy Law, (B) consent to the
institution of or the entry of an order for relief against it, or fail to
contest in a timely and appropriate manner, any proceeding or the filing of any
petition described in clause d, (C) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator, conservator or similar official for
a substantial part of the property or assets of the Payor, (D) file an answer
admitting the material allegations of a petition filed against it in any such
proceeding, (E) make a general assignment for the benefit of creditors, (F)
become unable, admit in writing its inability or fail generally to pay its debts
as they become due or (G) take any action for the purpose of effecting any of
the foregoing;

              (f) one or more judgments or orders for the payment of money in
excess of $250,000 in the aggregate shall be rendered against the Payor and such
judgment(s) or order(s) shall continue unsatisfied and unstayed for a period of
30 days;

              (g) the Payor shall default in the payment of any principal,
interest or premium, or any observance or performance of any covenants or
agreements, with respect to indebtedness (excluding trade payables and other
indebtedness entered into in the ordinary course of business) in excess of
$50,000 in the aggregate for borrowed money or any obligation which is the
substantive equivalent thereof and such default shall continue for more than the
period of grace, if any, or of any such

<PAGE>

                                                                               5

Indebtedness or obligation shall be declared due and payable prior to the stated
maturity thereof;

              (h) the Payor shall incur any indebtedness senior to this Senior
Convertible Note; or

              (i) any material provisions of this Senior Convertible Note, the
Securities Purchase Agreement, or the Warrants shall terminate or become void or
unenforceable or the Payor shall so assert in writing.

         6. Senior Status. The indebtedness evidenced by this Senior Convertible
Note is senior in right of payment to all other indebtedness of the Payor and
Payor agrees not to incur any indebtedness, which by its terms is senior in
right of payment to this Senior Convertible Note.

         7. Suits for Enforcement.

              (a) Upon the occurrence of any one or more Events of Default, the
holder of this Senior Convertible Note may proceed to protect and enforce its
rights by suit in equity, action at law or by other appropriate proceeding,
whether for the specific performance of any covenant or agreement contained in
the Securities Purchase Agreement or in aid of the exercise of any power granted
in this Senior Convertible Note, or may proceed to enforce the payment of this
Senior Convertible Note, or to enforce any other legal or equitable right it may
have as a holder of this Senior Convertible Note.

              (b) The holder of this Senior Convertible Note may direct the
time, method and place of conducting any proceeding for any remedy available to
itself.

              (c) In case of any Event of Default under the Securities Purchase
Agreement, the Payor will pay to the holder of this Senior Convertible Note such
amounts as shall be sufficient to cover the reasonable costs and expenses of
such holder due to such Event of Default, including without limitation, costs of
collection and reasonable fees, disbursements and other charges of counsel
incurred in connection with any action in which the holder prevails.

         8. Notices. All notices, demands and other communications provided for
or permitted hereunder shall be made in the manner and to the addresses set
forth in Section 11.2 of the Securities Purchase Agreement.

         9. Successors and Assigns. This Senior Convertible Note shall inure to
the benefit of and be binding upon the successors and permitted assigns of the
parties hereto. The Payor may not assign any of its rights under this Senior
Convertible Note without the prior written consent of Payee. The Payee may
assign all or a portion of their rights or obligations under this Senior
Convertible Note to an Affiliate without the prior written consent of the Payor.

<PAGE>

                                                                               6

         10. Amendment and Waiver.

              (a) No failure or delay on the part of the Payor or Payee 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. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Payor or
Payee at law, in equity or otherwise.

              (b) Any amendment, supplement or modification of or to any
provision of this Senior Convertible Note, any waiver of any provision of this
Senior Convertible Note and any consent to any departure by the Payor from the
terms of any provision of this Senior Convertible Note, shall be effective (i)
only if it is made or given in writing and signed by the Payor and the Payee and
(ii) only in the specific instance and for the specific purpose for which made
or given.

         11. Headings. The headings in this Senior Convertible Note are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.

         12. GOVERNING LAW. THIS SENIOR CONVERTIBLE NOTE SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.

         13. Costs and Expenses. The Payor hereby agrees to pay on demand all
reasonable out-of-pocket costs, fees, expenses, disbursements and other charges
(including but not limited to the fees, expenses, disbursements and other
charges of Paul, Weiss, Rifkind, Wharton & Garrison, special counsel to the
Payee) of the Payee arising in connection with any consent or waiver granted or
requested hereunder or in connection herewith, and any renegotiation, amendment,
work-out or settlements of this Senior Convertible Note or the indebtedness
arising hereunder.

         14. Waiver of Jury Trial and Setoff. The Payor hereby waives trial by
jury in any litigation in any court with respect to, in connection with, or
arising out of this Senior Convertible Note or any instrument or document
delivered pursuant to this Senior Convertible Note, or the validity, protection,
interpretation, collection or enforcement thereof, or any other claim or dispute
howsoever arising, between any Payor and the Payee; and the Payor hereby waives
the right to interpose any setoff or counterclaim or cross-claim in connection
with any such litigation, irrespective of the nature of such setoff,
counterclaim or cross-claim except to the extent that the failure so to assert
any such setoff, counterclaim or cross-claim would permanently preclude the
prosecution of the same.

         15. Consent to Jurisdiction. The Payor hereby irrevocably consents to
the nonexclusive jurisdiction of the courts of the State of New York and of any
federal court located in such State in connection with any action or proceeding
arising out of or

<PAGE>

                                                                               7

relating to this Senior Convertible Note or any document or instrument delivered
pursuant to this Agreement.

         16. 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 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.

         17. Entire Agreement. This Senior Convertible Note, the Warrants and
the Securities Purchase Agreement is 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 hereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein. This Senior
Convertible Note supersedes all prior agreements and understandings between the
parties with respect to such subject matter.

         18. Further Assurances. The Payor 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 Senior Convertible Note.

                                       BLUEFLY, INC.


                                       By:
                                          ----------------------------------
                                          Name:
                                          Title:

<PAGE>

                                                                    Schedule 3.4

                                                                    SCHEDULE 2.2


                            SHARES AND PURCHASE PRICE

                                        Purchase Price and
                                       Aggregate Principal
                                         Amount of Senior
              Purchaser                  Convertible Note    Number of Warrants
              ---------                  ----------------    ------------------

Quantum Industrial Partners LDC              $2,904,900            48,415

SFM Domestic Investments LLC                 $   95,100             1,585
                                             ----------            ------
TOTAL                                        $3,000,000            50,000
                                             ==========            ======

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.23
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>INVESTMENT AGREEMENT
<TEXT>

<PAGE>

                                                                   Exhibit 10.23

                              INVESTMENT AGREEMENT

         INVESTMENT AGREEMENT (the "Agreement"),dated as of November 13, 2000,
by and among Bluefly, Inc., a New York corporation (the "Company"), Bluefly
Merger Sub, Inc., a Delaware corporation ("NewCo") and the purchasers listed on
Schedule 1 hereto (the "Purchasers").

         WHEREAS, pursuant to an Investment Agreement, dated as of July 27,
1999, by and among the Company, the Purchasers, The Lynch Foundation, Peter
Lynch and Pilot Domestic Trust, each of the Purchasers has invested in shares of
the Company's Series A Convertible Preferred Stock, par value $.01 per share
(the "Series A Stock");

         WHEREAS, pursuant to a Note and Warrant Purchase Agreement, dated as of
March 28, 2000, by and among the Company and the Purchasers, the Purchasers
purchased senior convertible notes in the aggregate amount of $3,000,000 (the
"First Round Notes") and warrants exercisable in the aggregate for 175,000
shares of common stock of the Company ("First Round Warrants") and committed
(the "Standby Commitment") to provide to the Company up to an aggregate of
$12,000,000 at any time prior to January 1, 2001;

         WHEREAS, in subsequent drawings under the Standby Commitment, the
Purchasers have purchased additional senior convertible notes in the aggregate
principal amount of $12,000,000 (the "Additional Notes" and together with the
First Round Notes, the "Original Notes") and warrants exercisable for 200,000
shares of common stock of the Company (together with the First Round Warrants,
the "Purchasers' Warrants");

         WHEREAS, the Company wishes to sell to the Purchasers and the
Purchasers wish to purchase from the Company subordinated convertible notes in
the aggregate principal amount of $5 million (collectively, the "New Notes"),
which will be convertible into a new series of preferred stock of the Company
Series B Convertible Preferred Stock, par value $.01 per share (the "Series B
Stock"), and the Company and the Purchasers wish to amend the Original Notes to
provide for their conversion into shares of Series B Stock and make certain
other changes;

         WHEREAS, the Company intends to offer 8,547,009 shares (the "Rights
Shares") of Common Stock (as defined below) to holders of Common Stock (the
"Rights Offering") at a price of $2.34 a share (the "Common Share Price") and
the Purchasers will purchase up to 4,273,504 of the Rights Shares at the Common
Share Price if they are not subscribed for in the Rights Offering;

         WHEREAS, as an inducement to the Purchasers to purchase the New Notes
and the Rights Shares, the Company has agreed to amend the terms of the Series A
Stock;

         WHEREAS, the Company has determined that it is advisable to merge the
Company with and into NewCo, a wholly-owned subsidiary of the Company, with

<PAGE>

NewCo to be the Surviving Corporation (as defined below) for the purpose of
reincorporating the Company in Delaware;

         WHEREAS, a special committee comprised of independent directors of the
Board of Directors of the Company (the "Special Committee") has (i) determined
that the transactions contemplated by this Agreement are fair to, and in the
best interests of, the Company and the shareholders of the Company, and (ii)
resolved to approve and recommend this Agreement and the transactions
contemplated hereby to the Board of Directors, subject to the terms and
conditions hereof.

         WHEREAS, the Board of Directors of the Company has (i) determined that
the transactions contemplated by this Agreement are fair to, and in the best
interests of, the Company and the shareholders of the Company, (ii) resolved to
approve and adopt this Agreement and the transactions contemplated hereby
subject to the terms and conditions hereof and (iii) decided to recommend to
shareholders of the Company that they approve all matters in connection with
this Agreement that are required to be approved by the shareholders; and

         WHEREAS, the parties to this Agreement desire to set forth their
understanding with respect to matters described herein;

         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 1 DEFINITIONS

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

         "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 Authority.

         "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
exercise investment discretion through contractual means or by operation of law.

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

<PAGE>

         "Annual Reports" means the Company's Annual Reports on Form 10-KSB or
Form 10-K, as the case may be, for the years ended December 31, 1998 and 1999,
each as filed with the SEC and December 31, 2000, to be filed with the SEC
(including, in each case, all amendments thereto filed with the SEC prior to the
Applicable Closing Date, all exhibits and schedules thereto and documents
incorporated by reference therein, but excluding any amendments thereto made
subsequent to the Applicable Closing Date).

         "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 date hereof.

         "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 Merger (Delaware)" means the Plan and Agreement of
Merger of the Company with and into NewCo to be filed with the Secretary of
State of the State of Delaware, in the form of Exhibit A.

         "Certificate of Merger (New York)" means the Certificate of Merger of
the Company with and into NewCo to be filed with the Secretary of State of the
State of New York, in the form of Exhibit B.

         "Change of Control" means any of the following: (i) any person or
"group" (within the meaning of Section 13(d)(3) of the Exchange Act) becoming
the beneficial owner, directly or indirectly, of outstanding shares of Capital
Stock of the Company entitling such Person or Persons to exercise 50% or more of
the total votes entitled to be cast at a regular or special meeting, or by
action by written consent, of the shareholders of the Company in the election of
directors (the term "beneficial owner" shall be determined in accordance with
Rule 13d-3 of the Exchange Act); (ii) a majority of the Board of Directors of
the Company shall consist of Persons other than Continuing Directors; (iii) a
recapitalization, reorganization, merger, consolidation or similar transaction,
in each case with respect to which all or substantially all the Persons who were
the respective beneficial owners, directly or indirectly, of the outstanding
shares of Capital Stock of the Company immediately prior to such
recapitalization, reorganization, merger, consolidation or similar transaction,
will own less than 50% of the combined

<PAGE>

voting power of the then outstanding shares of Capital Stock of the Company
resulting from such recapitalization, reorganization, merger, consolidation or
similar transaction; (iv) the sale or other disposition of all or substantially
all the assets of the Company in one transaction or in a series of related
transactions; (v) any transaction occurs (other than one described in (iv) or
(vi)), the result of which is that the Common Stock is not required to be
registered under Section 12 of the Exchange Act and in which the holders of
Common Stock of the Company do not receive common stock of the Person surviving
such transaction which is required to be registered under Section 12 of the
Exchange Act; or (vi) immediately after any merger, consolidation,
recapitalization or similar transaction, a "group" (within the meaning of
Section 13(d)(3) of the Exchange Act), other than a group that includes
Purchasers and/or their Affiliates, shall be the beneficial owners, directly or
indirectly, of outstanding shares of Capital Stock of the Company (or any Person
surviving such transaction) entitling them collectively to exercise 50% or more
of the total voting power of shares of Capital Stock of the Company (or the
surviving Person in such transaction) and in connection with or as a result of
such transaction, the Company (or such surviving Person) shall have incurred or
issued additional indebtedness such that the total indebtedness so incurred or
issued equals at least 50% of the consideration payable in such transaction.

         "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.

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

         "Continuing Director" mean any member of the Board of Directors on the
latest Closing Date and any other member of the Board of Directors who shall be
recommended or elected to succeed or become a Continuing Director by a majority
of Continuing Directors who are then members of the Board of Directors

         "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,

<PAGE>

deed of trust or other instrument to which such Person is a party or by which it
or any of its property is bound.

         "Delaware Certificate" means the Certificate of Incorporation of NewCo,
to be filed with the Secretary of State of the State of Delaware as an exhibit
to the Certificate of Merger (Delaware), in the form attached hereto as Exhibit
C.

         "Encumbrance" means any claim, charge, easement, hypothecation,
assignment, preference, priority, preferential arrangement of any kind or nature
whatsoever (excluding preferred stock and equity-related preferences),
encumbrance, lease, covenant, security interest, lien (statutory or other),
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 U. S. 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.

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

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

         "Governmental Authority" means the government of any domestic or
foreign state, city, locality or other political subdivision thereof, any
agency, bureau, board, commission, count, department, official, tribunal or any
other instrumentality of any such government, 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.

         "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 Authority and any Order.

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

<PAGE>

         "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 or
NewCo to consummate the transactions contemplated by this Agreement in any
respect or impairs or delays the ability of the Company to effect the First
Closing, the Second Closing or the Third Closing.

         "Merger" means the merger of the Company into NewCo, in accordance with
the Certificate of Merger (Delaware).

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

         "NewCo" means a corporation to be formed under the laws of the State of
Delaware and wholly-owned by the Company.

         "New York Certificate" means the Certificate of Incorporation of the
Company, as the same has been amended and in effect on the date hereof.

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

         "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.

         "Quarterly Reports" means the Company's Quarterly Reports on Form
10-QSB or Form 10-Q, as the case may be, for the quarters ended September 30,
2000, June 30, 2000, March 31, 2000, September 30, 1999, June 30, 1999 and March
31, 1999, each as filed with the SEC.

         "Related Registrable Securities" means, with respect to the Common
Stock issuable upon conversion or exchange of the Series B Stock, any securities
of the Company issued or issuable with respect to such shares of Common Stock by
way of a

<PAGE>

dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise.

         "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 B Stock, (b) any shares of Common Stock owned by a Purchaser issued or
issuable upon exercise of the Purchasers' Warrants and (c) Related Registrable
Securities.

         "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, 1999
and prior to any Applicable Closing Date 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.

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

         "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.

         "Surviving Corporation" means the surviving entity in the Merger, which
shall be a Delaware corporation. From and after the effective time of the
Merger, all references herein to the Company shall mean the Surviving
Corporation.

         "Transaction Documents" means collectively, this Agreement (including
the schedules attached hereto), the Certificate of Merger (New York), the
Certificate of Merger (Delaware), the New Notes and the Amended Notes.

<PAGE>

         1.2 Additional Definitions. The following terms are defined in the
section set forth opposite such term.

Term                                                              Section
Additional Notes                                                 Preamble
Agreement                                                        Preamble
Amended Notes                                                     2.1(b)
Applicable Closing Date                                              5
Approved Underwriter                                              13.2(e)
Audited Financials                                                  3.7
Basic Subscription Right                                          2.3(b)
Blackout Period                                                   13.2(c)
Common Share Price                                               Preamble
Company                                                          Preamble
Company Shareholders Meeting                                       3.28
Company Underwriter                                                10.3
Conditional Subscription                                            2.4
Conversion Stock                                                  11.7(b)
Deferral Notice                                                   13.2(f)
Deferral Period                                                   13.2(f)
Delivery Date                                                     11.7(c)
Demand Notice                                                     13.2(a)
Demand Registration                                               13.2(a)
Demand Shelf Registration                                         13.2(a)
ERISA                                                             3.14(a)
Excess Shares                                                     2.3(b)
Expiration Date                                                   2.3(c)
Financials                                                          3.7
First Closing                                                     2.1(a)
First Closing Date                                                2.1(a)
First Round Notes                                                Preamble

<PAGE>

First Round Warrants                                             Preamble
Holders' Counsel                                                13.5(a)(ii)
HSR Act                                                             9.4
Inspector                                                      13.5(a)(viii)
Intellectual Property                                              3.11
Letter                                                            11.7(c)
NASD                                                           13.5(a)(xiii)
New Notes                                                        Preamble
Original Notes                                                   Preamble
Oversubscription Privilege                                        2.3(b)
Prospectus                                                        3.28(c)
Proxy Statement                                                   3.28(a)
Public                                                              2.4
Purchasers                                                       Preamble
Purchasers' Warrants                                             Preamble
Record Date                                                       2.3(a)
Records                                                        13.5(a)(viii)
Registration Expenses                                              13.6
Registration Rights Indemnified Party                             13.7(c)
Registration Rights Indemnifying Party                            13.7(c)
Registration Statement                                            3.28(b)
Reporting Agreement                                               11.7(a)
Requesting Holders                                                 13.3
Requisite Company Vote                                             3.29
Rights Offering                                                  Preamble
Rights Shares                                                    Preamble
Second Closing                                                      2.2
Second Closing Date                                                 2.2
Series A Stock                                                   Preamble
Series B Stock                                                   Preamble
Shelf Registration Statement                                      13.2(a)

<PAGE>

Special Committee                                                Preamble
Standby Commitment                                               Preamble
Stockholder                                                       13.2(a)
Subsequent Shelf Registration                                     13.2(d)
Tax Returns                                                       11.7(a)
Treasury Regulations                                              11.7(b)
Unaudited Financials                                                3.7
Underlying Share                                                  2.3(b)
USRPHC                                                            11.7(b)
Withdrawal Period                                                 13.2(f)

SECTION 2 ISSUANCE OF THE NOTES AND SHARES; RIGHTS OFFERING

         2.1 Issuance of Notes.

              (a) Subject to the terms and conditions of this Agreement, the
closing of the sale and purchase of the New Notes (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 at 10:00 a.m. on November
__, 2000 or on such other date and at such other time as the Purchasers and the
Company may mutually agree (the "First Closing Date"). On the First Closing
Date, subject to the terms and conditions of this Agreement, each of the
Purchasers severally (and not jointly) shall purchase and acquire from the
Company, and the Company shall issue and sell to the Purchasers, New Notes, in
the form attached as Exhibit D and in the amounts set forth opposite each
Purchaser's name on Schedule 1 hereto, for an aggregate purchase price of
$5,000,000. At the First Closing, the Company shall deliver to each Purchaser a
duly executed New Note, in the aggregate principal amount set forth opposite
such Purchaser's name on Schedule 1 hereto, registered in the name of such
Purchaser or its nominees, with appropriate issue stamps, if any, affixed at the
expense of the Company, against payment by each Purchaser of the purchase price
set forth opposite such Purchaser's name on Schedule 1 hereto by wire transfer
of immediately available funds to an account designated by the Company not less
than two Business Days prior to the First Closing.

              (b) At the First Closing, subject to the terms and conditions of
this Agreement, the Company shall issue amended Subordinated Convertible Notes
in the form of Exhibit E (the "Amended Notes") to each Purchaser in an aggregate
principal amount equal to and in exchange for the Original Notes held by such
Purchaser. Schedule 2.1 sets forth a list of Original Notes.

<PAGE>

         2.2 Transactions at the Second Closing. The New Notes and the Amended
Notes will automatically be converted into shares of Series B Stock at a closing
(the "Second Closing") to occur (the "Second Closing Date") as soon as
reasonably practicable following the satisfaction or waiver of the conditions
set forth in Articles 5 and 7. 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. At the Second Closing, the Company
shall deliver to each Purchaser duly executed certificates representing the
shares of Series B Stock into which the New Notes and Amended Notes are
converted. Each certificate shall be registered in the name of such Purchaser or
its nominees, with appropriate issue stamps, if any, affixed at the expense of
the Company, free and clear of any Encumbrance, and shall be delivered against
delivery by the Purchasers of the New Notes and Amended Notes.

         2.3 Third Closing.

              (a) Rights Offering

                   (i) On a date (the "Record Date") to be determined by the
Board of Directors in accordance with the Delaware Certificate and Bylaws of the
Company and the applicable rules of the NASDAQ but which is (x) at least five
days prior to the effective date of the Registration Statement and (y) as soon
as practicable after the consummation of the Merger, the Company shall declare a
dividend (subject to the Registration Statement becoming effective at a future
date) to all holders of Common Stock of record as of the Record Date of
transferable rights (each right to purchase one share of Common Stock is
hereinafter referred to as a "Right") to acquire in the aggregate 8,547,009
shares of Common Stock at a price per share equal to the Common Share Price. As
soon as practicable following the effective date of the Registration Statement,
the Company will distribute such Rights to such holders of Common Stock.

                   (ii) Each Right shall entitle the holder thereof to acquire
(the "Basic Subscription Privilege") one share of Common Stock (an "Underlying
Share") at the Common Share Price. All holders of Rights who exercise the Basic
Subscription Privilege may also subscribe for additional Underlying Shares that
are not otherwise purchased pursuant to the exercise of Rights ("Excess Shares")
at the Common Share Price, if any (the "Oversubscription Privilege"). If an
insufficient number of Excess Shares are available to satisfy fully all
elections to exercise the Oversubscription Privilege, the available Excess
Shares shall be prorated among holders who exercise their Oversubscription
Privilege. The "Rights Offering" means the offering of Underlying Shares to
holders of Rights pursuant to both the Basic Subscription Privilege and the
Oversubscription Privilege.

                   (iii)The expiration date of the Rights Offering (the
"Expiration Date") shall be no later than the date which is 45 calendar days
following the date (subject to the Company's right to extend such date for a
period not to exceed 20 days)

<PAGE>

upon which the Prospectus is first sent to holders of record of the Common Stock
as of the Record Date. The Prospectus shall be sent to such holders on or about
the effective date of the Registration Statement.

                   (iv) Except as otherwise provided by this Agreement, the
terms of the Rights Offering shall be set forth in the Prospectus forming a part
of the Registration Statement which terms shall be reasonably satisfactory to
the Purchasers and the Special Committee.

                   (v) The Company agrees to support the Rights Offering through
the development and implementation of a timely coordinated "roadshow" to current
stockholders.

                   (vi) The Purchasers hereby waive their right to purchase
shares in the Rights Offering pursuant to the preemptive rights granted in
Section 8 of the Certificate of Amendment of the Certificate of Incorporation of
the Company, dated July 27, 1999.

              (b) Conditional Subscription. Subject to the terms and conditions
contained in this Agreement, if all Underlying Shares are not purchased pursuant
to the Rights Offering (including pursuant to the Oversubscription Privilege),
the Purchasers and the Company hereby agree that, immediately following the
Expiration Date, the Purchasers shall subscribe for at the Common Share Price,
such number of shares of Common Stock (the "Conditional Subscription"), equal to
the lesser of (i) the total number of shares of Common Stock available to be
purchased by holders of Rights (the "Public"), minus the total number of shares
of Common Stock actually purchased by the Public, and (ii) 4,273,504 shares of
Common Stock.

              (c) Third Closing. Subject to the terms and conditions of this
Agreement, the closing of the sale and purchase of the Conditional Subscription
(the "Third Closing") shall take place at the offices of Paul, Weiss, Rifkind,
Wharton & Garrison, 1285 Avenue of the Americas, New York, New York 10019-6064
as soon as practicable following the satisfaction or waiver of the conditions
set forth in Articles 5 and 8 with respect to the Third Closing (the "Third
Closing Date").

              (d) Transactions at the Third Closing. At the Third Closing, the
Company will sell to and the Purchasers will purchase the shares subject to the
Conditional Subscription, if any, at a price per share equal to the Common Share
Price. At the Third Closing, the Company shall deliver to each Purchaser duly
executed certificates representing the number of shares purchased by it pursuant
to the Conditional Subscription. Each certificate shall be registered in the
name of such Purchaser or its nominees, with appropriate issue stamps, if any,
affixed at the expense of the Company, free and clear of any Encumbrance, and
shall be delivered against payment by each Purchaser in an amount equal to the
product of the Common Share Price multiplied by the number of shares of Common
Stock to be purchased by that Purchaser, by wire

<PAGE>

transfer of immediately available funds to an account specified in a notice
delivered by the Company.

SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND NEWCO

         Each of the Company and NewCo, jointly and severally, hereby represents
and warrants to each 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 and NewCo is, and
on the Second Closing Date the Surviving Corporation will be, a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company has the corporate power and authority to own, lease and
operate its properties and to conduct its business as currently conducted and as
contemplated to be conducted. 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.

              (b) True, correct and complete copies of the New York Certificate
and the By-Laws as in effect on the date hereof have been provided by the
Company to the Purchasers.

              (c) NewCo is a newly-formed entity that has heretofore conducted
no business, owns no properties or assets and is subject to no liabilities other
than its obligations under this Agreement.

<PAGE>

         3.2 Power and Authority.

              (a) Each of the Company and NewCo 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
each of the Company and NewCo of this Agreement and each of the Transaction
Documents to which it is a party and the consummation by each of them of the
transactions contemplated hereby and thereby have been duly authorized and
approved by the Board of Directors of each of them and no further corporate
action on the part of either the Company or NewCo is necessary to authorize the
execution, delivery and performance by the Company and NewCo of this Agreement
or the consummation by each of them of the transactions contemplated hereby
(assuming the Requisite Company Vote is obtained). This Agreement has been duly
executed and delivered by the Company and NewCo and is a valid and binding
obligation of each of them, enforceable against the Company and NewCo 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).

              (b) As of the Second Closing Date, the Board of Directors of the
Company will have duly adopted the Certificate of Merger (New York) and the
Board of Directors of NewCo will have duly adopted the Certificate of Merger
(Delaware). No further corporate action (including any shareholder approvals) on
the part of the Company will be necessary as of the Second Closing Date to
authorize the amendment of the terms of the Series A Stock, issuance of the
Series B Stock or the Merger, other than filing the Certificate of Merger (New
York) with the Secretary of State of the State of New York and Certificate of
Merger (Delaware) with the Secretary of State of the State of Delaware.

         3.3 No Contravention, Conflict, Breach, Etc. The execution, delivery
and performance of this Agreement and each Transaction Document to which it is a
party by the Company and NewCo 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 NewCo or
cause the Company or any of its Subsidiaries or NewCo to be required to redeem,
repurchase or offer to repurchase any of their respective indebtedness under (i)
the charter documents or by-laws of the Company or any of its Subsidiaries or
NewCo, (ii) any material Law of any Governmental Authority having jurisdiction
over the Company or any of its Subsidiaries or NewCo 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,

<PAGE>

permit, license or other agreement or instrument to which the Company or any of
its Subsidiaries or NewCo is a party or by which the Company or any of its
Subsidiaries or NewCo is bound or to which any of the assets, properties or
operations of the Company or any of its Subsidiaries or NewCo 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 or NewCo for the execution, delivery and performance
by the Company or NewCo 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.

         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.

<PAGE>

         3.6 SEC Documents.

              (a) The Company has made available to the 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 Applicable Closing Date, pursuant to the
Securities 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 Securities 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 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,
1999, except as disclosed in the SEC Documents filed prior to the date hereof or
as previously disclosed to the 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.

<PAGE>

         3.8 No Existing Violation, Default, Etc. The Company is not in
violation (i) of any provision of the New York Certificate as of the First
Closing Date or the Delaware Certificate as of the Second Closing Date and Third
Closing Date, its 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.

         3.9 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.

         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 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,

<PAGE>

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
Purchasers or as disclosed in Schedule 3.11. Except as disclosed in Schedule
3.11 or as previously disclosed to the 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 Company's annual report on Form 10-KSB
for the year ended December 31, 1999, 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 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 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 under, any contract, covenant or instrument related to
the Company's 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 Purchasers. The Company is
unaware of uncited prior art that is more pertinent than the art already of
record in the U.S. Patent

<PAGE>

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.

              (a) As of the date hereof, the authorized capital stock of the
Company consists 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 Stock. As of the date hereof, the issued and outstanding capital stock
of the Company consists of 4,924,906 shares of Common Stock and 500,000 shares
of Series A Stock. All such shares of Capital Stock of the Company have been
duly authorized and are fully paid and non-assessable.

              (b) As of the Second Closing Date, immediately following the
consummation of the Merger, the authorized capital stock of the Surviving
Corporation will consist of 40,000,000 shares of Common Stock and 25,000,000
shares of Preferred Stock, $.01 par value, of which 500,000 shares will have
been designated Series A Stock and 9,000,000 shares will have been designated
Series B Stock. As of the Second Closing Date, the issued and outstanding
capital stock of the Surviving Corporation will consist of 4,924,906 shares of
Common Stock (excluding shares that may be issued after the date hereof upon
exercise of stock options identified on Schedule 3.13), 500,000 shares of Series
A Stock and 8,547,009 shares of Series B Stock (excluding shares of Series B
Stock issued upon conversion of New Notes and Amended Notes as a result of the
accrued and unpaid interest on the Notes). All such shares of Capital Stock of
the Surviving Corporation will be duly authorized and upon conversion of the
Amended Notes and the New Notes, each as contemplated by the Transaction
Documents, all such shares shall be fully paid and non-assessable. Immediately
prior to the Second Closing Date, the 500,000 shares of Series A Stock will be
convertible into 952,380 shares of Common Stock and each share of Series B Stock
will be converted into one share of

<PAGE>

Common Stock, in each case subject to antidilution provisions set forth in the
Delaware Certificate.

              (c) As of the Third Closing Date, the Surviving Corporation shall
have the same authorized capital stock as it had on the Second Closing Date, but
the issued and outstanding capital stock will consist of a minimum of 9,198,410
and a maximum of 13,471,915 shares of Common Stock (excluding shares that may be
issued after the date hereof upon exercise of stock options identified on
Schedule 3.13), after giving effect to the Rights Offering.

              (d) 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 shares of Common Stock issuable upon
conversion of the Series A Stock and upon exercise of the Purchasers' Warrants
and payment of the exercise price set forth in the Purchasers' Warrants are, and
on the First Closing Date will be, duly authorized and, when so issued, will be
fully paid and non-assessable. The shares of Common Stock issuable upon
conversion of the Series B Stock, when issued, will be duly authorized and, when
issued on conversion of the New Notes and the Amended Notes in accordance with
their terms, will be fully paid and non-assessable. At the Third Closing, the
shares of Common Stock purchased by the Purchasers, upon payment of the purchase
price for such shares, will be fully paid and non-assessable. At the (1) First
Closing, except for (i) the Purchasers' Warrants, (ii) the Amended Notes, (iii)
the New Notes, (iv) the Series A Stock and the Series B Stock and (v) as set
forth in Schedule 3.13, and (2) at the Second Closing and Third Closing, except
for (i) the Purchasers' Warrants, (ii) the Series A Stock, (iii) the Series B
Stock and (iv) as set forth on 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
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.

<PAGE>

         3.14 Employee Benefits.

              (a) Except for the plans described in the SEC Documents 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 similar benefit or
enhanced

<PAGE>

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 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

<PAGE>

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 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 had, as of June 30, 2000, good
and valid title to all of the inventory and other personal property reflected on
the balance sheet included in the Unaudited Financials dated as of June 30, 2000
will have good and valid title to all inventory or personal property reflected
on the balance sheet included in any SEC Document filed after the date hereof.
Except as set forth on Schedule 3.18, 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
balance sheet included in the Unaudited Financials as of June 30, 2000, and all
accounts and notes receivable arising subsequent to June 30, 2000, (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 Unaudited
Financials as of June 30, 2000 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.

<PAGE>

         3.22 Exemption from Registration; Restrictions on Offer and Sale of
Same or Similar Securities. Assuming the representations and warranties of the
Purchasers set forth in Section 4 hereof are true and correct in all material
respects, the offer and sale of the New Notes, the issuance of the Series B
Stock upon conversion of the New Notes and the Amended Notes and the issuance of
Common Stock upon conversion of the Series B Stock will be exempt from the
registration requirements of the Securities Act. Neither the Company nor any
Person acting on its behalf has, in connection with the offering of the New
Notes, the Amended Notes, the Series A Stock or the Series B Stock 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 Securities Act), (ii) any
action involving a public offering within the meaning of Section 4(2) of the
Securities Act, or (iii) any action that would require the registration under
the Securities Act of the offering and sale of any such securities pursuant to
this Agreement or that would violate applicable state securities or "blue sky"
laws. The Rights Offering will not result in the failure of the New Notes to be
entitled to exemption from the registration requirements of the Securities Act.

         3.23 Contracts. True and complete copies of all material contracts of
the Company required to be filed since August 1, 1999 as exhibits to SEC
Documents have been made available to the 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. Except as set forth
on Schedule 3.23, the transactions contemplated by this Agreement will not
constitute a change of control under, require the consent of or giving of notice
to, any third party pursuant to, or accelerate vesting or lapse of repurchase
rights under, any material contract to which the Company or any of its
Subsidiaries is a party. There are no amounts that will be payable to any
officers or other employees of the Company as a result of the transactions
contemplated by this Agreement.

<PAGE>

         3.24 No Material Adverse Change. Since June 30, 2000, except as
disclosed on Schedule 3.24, (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 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. Except as set forth on
Schedule 3.26, 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>

         3.27 Disclosure; Agreement and Other Documents. The Transaction
Documents and each of the instruments furnished to the Purchasers by the Company
(i) at or prior to the First Closing in connection with the purchase and sale of
the New Notes and Amended Notes, (ii) at or prior to the Second Closing in
connection with the purchase and sale of the Series B Stock, and (iii) at or
prior to the Third Closing in connection with the sale and purchase of shares of
Common Stock pursuant to the Conditional Subscription, 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.

         3.28 Proxy Statement/Registration Statement/Prospectus.

         (a) The proxy statement (as amended or supplemented, the "Proxy
Statement") to be sent to the Company shareholders in connection with the
special meeting called for the purpose of voting on the Merger, the amendment of
the terms of the Series A Stock and the authorization and issuance of the Series
B Stock (the "Company Shareholders Meeting"), will comply in all material
respects with the requirements of the Exchange Act and the rules and regulations
thereunder, and will not (i) on the date the Proxy Statement is first mailed to
the Company shareholders, and (ii) at the time of the Company Shareholders
Meeting, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or shall omit to state any material fact necessary in
order to make the statements made therein not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Company
Shareholders Meeting which has become false or misleading.

         (b) The registration statement (as amended or supplemented, the
"Registration Statement") filed with the SEC in connection with the Rights
Offering will comply in all material respects with the requirements of the
Securities Act and with the rules and regulations thereunder and will not, at
the time the Registration Statement is declared effective by the SEC or on the
Third Closing Date, contain any statement which, at such time and in light of
the circumstances under which it shall be made, is false or misleading with
respect to any material fact, or shall omit to state any material fact necessary
in order to make the statements made therein not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the registration of the Rights Shares which has
become false or misleading. The Rights Offering will be completed under an
effective Registration Statement.

         (c) Each preliminary prospectus and the final prospectus to be sent to
the Company stockholders in connection with the Rights Offering (each a
"Prospectus"), will comply in all material respects with the requirements of the
Securities Act and with the rules and regulations thereunder and will not (i) on
the date the Prospectus is first delivered to the Company stockholders, and (ii)
at any time prior to the conclusion of the

<PAGE>

Rights Offering, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or shall omit to state any material fact necessary in
order to make the statements made therein not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the sale of the Rights Shares which has become
false or misleading.

         (d) If at any time prior to the Company Shareholders Meeting or the
conclusion of the Rights Offering, as the case may be, any event relating to the
Company or its Subsidiaries or any of their respective affiliates, officers or
directors should be discovered by the Company which should be set forth in an
amendment or a supplement to the Proxy Statement, Prospectus or Registration
Statement, as the case may be, the Company shall reasonably promptly inform the
Purchasers and shall take such steps as shall be necessary or, in the judgment
of the Purchasers desirable, to correct promptly and file with the SEC such
amendment or supplement (and to the extent appropriate, disseminate it to all
holders of Common Stock). Notwithstanding any other representation made in this
Section 3.28, the Company makes no representation or warranty with respect to
any written information supplied by the Purchasers expressly for the purpose of
being contained in any of the foregoing documents referred to in this Section
3.28.

         3.29 Vote Required. The affirmative vote by Company stockholders
representing (a) a majority of the Common Stock and Series A Stock voting
together as a single class (or in the case of the vote on the issuance of
securities to the Purchasers and the change of control effected thereby, a
majority of the shares voted, so long as a quorum is present) and (b) a majority
of the Series A Stock voting as a single class (clauses (a) and (b) being the
"Requisite Company Vote") are the only votes of the holders of any class or
series of the Company's Capital Stock necessary under the New York Certificate,
the rules of NASDAQ, the New York Business Corporation Law or the Delaware
General Corporation Law to approve the Merger, the amendment of the terms of the
Series A, the issuance of the Series B Stock, the issuance of shares of Common
Stock upon conversion of the Series A Stock and the Series B Stock by the
holders thereof and the consummation of the transactions contemplated hereby.

         3.30 Privacy of Customer Information. The Company (a) does not use any
of the customer information it receives through its website or otherwise in an
unlawful manner, or in a manner which violates the Company's privacy policy or
the privacy rights of its customers; (b) has not collected any customer
information through its website in an unlawful manner or in violation of its
privacy policy and (c) has adequate security measures in place to protect the
customer information it receives through its website and which it stores in its
computer systems from illegal use by third parties or use by third parties in a
manner which violates the rights of privacy of its customers, except in the case
of clauses (a) and (b) for Company actions that singly or in the aggregate would
not have a Material Adverse Effect. The Company makes representations to its
customers as to the nature of its security measures with respect to customer
information it receives

<PAGE>

through its website, as set forth in the privacy policy on the Company's website
and as described on Schedule 3.30, and abides by the terms of such privacy
policy.

SECTION 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

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

         4.1 Existence and Power. Such 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.

         4.2 Authorization; No Contravention. The execution, delivery and
performance by such Purchaser of this Agreement and the transactions
contemplated hereby, including the purchase of the New Notes and shares of
Common Stock pursuant to the Conditional Subscription, (a) have been duly
authorized by all necessary action, (b) do not contravene the terms of such
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 Encumbrance under, any Contractual Obligation of such Purchaser,
or any Requirement of Law.

         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 the purchase
of the New Notes and shares of Common Stock pursuant to the Conditional
Subscription) by, or enforcement against, such Purchaser of this Agreement and
the transactions contemplated hereby.

         4.4 Binding Effect. This Agreement has been duly executed and delivered
by such Purchaser and constitutes the legal, valid and binding obligations of
such 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 New Notes to be acquired by such
Purchaser pursuant to this Agreement and the shares of Series B Stock issuable
upon conversion of the Original Notes and New Notes are being or will be
acquired for its own account and with no intention of distributing or reselling
the New Notes or shares of Series B Stock 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,

<PAGE>

to the rights of such Purchaser at all times to sell or otherwise dispose of all
or any part of the New Notes and the shares Series B Stock 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 Purchaser's property being at all times within its control.
If such Purchaser should in the future decide to dispose of any of the New Notes
or shares of Series B Stock, such 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 Purchaser agrees to the imprinting, so long as required by
law, of a legend on certificates representing the New Notes and shares of Series
B Stock 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
Purchaser (a) is an "accredited investor" within the meaning of Rule 501 under
the Securities 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 1 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
Purchasers or any of them, in connection with the transactions contemplated
hereby based on any agreement, arrangement or understanding with such Purchaser
or any action taken by such Purchaser.

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

<PAGE>

SECTION 5 CONDITIONS TO THE OBLIGATION OF THE PURCHASERS TO CLOSE AT EACH
          CLOSING

         The (a) obligation of the Purchasers to purchase the New Notes and
shares of Common Stock under the Conditional Subscription, and to perform any
obligations hereunder related to the purchase of the New Notes and Conditional
Subscription and (b) the automatic conversion of the New Notes and Amended Notes
into shares of Series B Stock shall be subject to the satisfaction as determined
by, or waiver by, the Purchasers of the following conditions on or before the
applicable date of Closing (each an "Applicable Closing Date").

         5.1 Representations and Warranties. The representations and warranties
of the Company and NewCo contained in Section 3 hereof shall be true and correct
in all material respects at and on the Applicable Closing Date, as if made at
and on such date, except (i) 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 (ii) 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. Each of the Company and NewCo shall
have performed and complied in all material respects with all of the agreements
and conditions set forth herein that are required to be performed or complied
with by the Company or NewCo on or before the Applicable Closing Date.

         5.3 Secretary's Certificate. The Purchasers shall have received a
certificate from the Company and NewCo, in form and substance satisfactory to
the Purchasers, dated the Applicable Closing Date and signed by a secretary or
an assistant secretary of the Company, certifying (a) that the attached copies
of the charter documents of such Person as in effect on such date and
resolutions of the Board of Directors of such Person approving this Agreement,
the other Transaction Documents to which it is a party 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 such Person executing this Agreement, each
of the other Transaction Documents to which it is a party and any other document
delivered in connection herewith on behalf of the Company or NewCo.

         5.4 Officers' Certificate. The Purchasers shall have received a
certificate from the Company and NewCo, in form and substance satisfactory to
the Purchasers, dated the Applicable Closing Date and signed by such Person's
chief executive officer and its treasurer, certifying that (a) the
representations and warranties of such Person contained in Section 3 hereof are
true and correct in all material respects on the Applicable Closing Date, except
those which speak as of a particular date, which shall be true and correct as of
such date, and (b) such Person has performed and complied in all material
respects with all of the agreements and conditions set forth or contemplated

<PAGE>

herein that are required to be performed or complied with by such Person on or
before the Applicable Closing Date.

         5.5 Documents. The Purchasers shall have received true, complete and
correct copies of such documents as they may reasonably request in connection
with or relating to the transactions to be contemplated on such Applicable
Closing Date, all in form and substance reasonably satisfactory to the
Purchasers.

         5.6 Opinion of Counsel. The Purchasers shall have received an opinion
of counsel to the Company, dated the Applicable Closing Date, relating to the
transactions contemplated hereby or referred to herein, substantially in the
form attached hereto as Exhibit F-1, F-2 and F-3, respectively.

         5.7 Approval of Counsel to the Purchasers. All actions and proceedings
hereunder and all documents required to be delivered by the Company or NewCo
hereunder or in connection with the consummation of the transactions
contemplated hereby, and all other related matters, shall have been acceptable
to Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Purchasers, in their
reasonable judgment as to their form and substance.

         5.8 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 Merger, the amendment of the terms of the Series A Stock,
issuance of the New Notes, Amended Notes, the Series B Stock and shares of
Common Stock) 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 on the Applicable Closing Date, except for consents, exceptions,
authorizations or other actions which would not have a Material Adverse Effect,
and each of the Purchasers shall have been furnished with appropriate evidence
thereof.

         5.9 No Litigation. No action, suit, proceeding, claim or dispute shall
have been brought or otherwise arisen on or before the Applicable Closing Date,
at law, in equity, in arbitration or before any Governmental Authority against
the Company or any of its Subsidiaries or NewCo which is reasonably likely to
have a Material Adverse Effect.

         5.10 No Material Judgment or Order. There shall not be on the
Applicable 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 New Notes or the Conditional
Subscription, (ii) the issuance of the Amended Notes or shares of the Series B
Stock, (iii) the Merger, (iv) the Rights Offering,

<PAGE>

(v) the amendment of the terms of the Series A Stock, (vi) the issuance of
shares of Common Stock upon conversion of the Series A Stock or Series B Stock
or (vii) 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 New Notes or shares of Common Stock
under the Conditional Subscription were to be purchased hereunder or the Amended
Notes and shares of Series B Stock were to be issued hereunder or any shares of
Series A Stock or Series B Stock were converted into shares of Common Stock 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.

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

SECTION 6 CONDITIONS TO THE OBLIGATION OF THE PURCHASERS ON THE FIRST CLOSING

         In addition to the conditions contained in Section 5, the obligations
of the Purchasers to purchase the New Notes and exchange the Original Notes for
the Amended Notes, shall be subject to the satisfaction as determined by, or
waiver by, the Purchasers of the following conditions on or before the First
Closing Date:

         6.1 Securities. At the First Closing, the Company shall have delivered
to each of the Purchasers a New Note in definitive form in the principal amount
set forth opposite such Purchaser's name on Schedule 1, registered in the name
of such Purchaser and the Amended Notes.

SECTION 7 CONDITIONS TO THE OBLIGATION OF THE PURCHASERS ON THE SECOND CLOSING

         In addition to the conditions contained in Section 5, the conversion of
the New Notes and Amended Notes into shares of Series B Stock, shall be subject
to the satisfaction as determined by, or waiver by, the Purchasers of the
following conditions on or before the Second Closing Date:

         7.1 Charter Documents. As of the Second Closing Date, the Certificate
of Merger shall have been duly filed by the Company with the Secretary of State
of the State of New York and the Certificate of Ownership and Merger shall have
been duly filed by NewCo with the Secretary of State of the State of Delaware.
The Merger shall be completed in accordance with its terms and the Surviving
Corporation shall have assumed all the obligations of the Company under this
Agreement.

<PAGE>

         7.2 Securities. At the Second Closing, the Company shall have delivered
to each of the Purchasers stock certificates in definitive form representing the
shares of Series B Stock issuable upon conversion of the New Notes and the
Amended Notes.

         7.3 Shareholder Approval. Prior to the Second Closing Date, the
Purchasers shall have received evidence reasonably satisfactory to them that the
Requisite Company Vote shall have been obtained.

SECTION 8 CONDITIONS TO THE OBLIGATION OF THE PURCHASERS ON THE THIRD CLOSING

         In addition to the conditions contained in Section 5, the obligations
of the Purchasers to purchase the shares under the Conditional Subscription
shall be subject to the satisfaction as determined by, or waiver by, the
Purchasers of the following conditions on or before the Third Closing Date:

         8.1 Rights Offering and Merger. Prior to the Third Closing Date, the
Rights Offering shall have concluded.

         8.2 Securities. At the Third Closing, the Company shall have delivered
to each of the Purchasers stock certificates in definitive form representing
that number of shares of Common Stock to be purchased by such Purchaser.

SECTION 9 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE

         The obligations of the Company to perform its obligations hereunder on
any Applicable Closing Date shall be subject to the satisfaction as determined
by, or waiver by, the Company of the following conditions on or before the
Applicable Closing Date:

         9.1 Representations and Warranties. The representations and warranties
of the Purchasers contained in Section 4 hereof shall be true and correct at and
on the Applicable 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.

         9.2 Compliance with this Agreement. The 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 Applicable Closing Date.

<PAGE>

         9.3 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 New Notes and the Conditional Subscription) 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.

         9.4 Hart-Scott-Rodino. Prior to the Second Closing Date, any Person
required in connection with the transactions contemplated under this Agreement
to file a notification and report form in compliance with the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, and the rules and regulations promulgated
thereunder (the "HSR Act"), shall have filed such form and the waiting period
specified in the HSR Act, including any extensions thereof, shall have expired.

         9.5 Shareholder Approval. Prior to the Second Closing Date, the Company
shall hae obtained the Requisite Company Vote.

         9.6 Payment of Purchase Price. At the First Closing, the Company shall
have received the Original Notes and the applicable purchase price for the New
Notes. At the Second Closing, the Company shall have received the New Notes and
Amended Notes for conversion into shares of Series B Stock. At the Third
Closing, the Company shall have received payment for the Conditional
Subscription.

         9.7 No Material Judgment or Order. There shall not be on the Applicable
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 New Notes or the Conditional Subscription, (ii)
the issuance of the Amended Notes or shares of the Series B Stock, (iii) the
Merger, (iv) the Rights Offering, (v) the amendment of the terms of the Series
A, (vi) the issuance of shares of Common Stock upon conversion of the Series A
Stock or Series B Stock, or (vii) consummation of the transactions contemplated
by this Agreement, (b) subject the Company to any material penalty or other
onerous condition under or pursuant to any Requirement of Law if the New Notes
or shares of Common Stock under the Conditional Subscription were to be
purchased hereunder or the Amended Notes or shares of Series B Stock were to be
issued hereunder or any shares of Series A Stock or Series B Stock were
converted into shares of Common Stock 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.

<PAGE>

SECTION 10 COVENANTS REGARDING THE RIGHTS OFFERING, SHAREHOLDERS MEETING AND THE
           MERGER

         10.1 Registration Statement. As soon as reasonably practicable, the
Company shall file with the SEC the Registration Statement in connection with
the Rights Offering and with respect to the Rights and the Underlying Shares and
shall use its best efforts to effect the registration of the Rights and the
Underlying Shares. The Company shall provide the Purchasers and their respective
counsel with drafts of the Registration Statement and a copy of any written
comments or telephonic notification of any oral comments the Company may receive
from the SEC or its staff with respect to the Registration Statement promptly
after the receipt thereof. The Company will address in good faith any comments
the Purchasers may make with respect to the Registration Statement. The Company
shall provide the Purchasers and their respective counsel with a reasonable
opportunity to participate in all communications with the SEC and its staff,
including any meetings and telephone conferences, relating to the issuance of
the Rights or the Underlying Shares.

         10.2 Proxy Statement.

         (a) Concurrent with the preparation and filing with the SEC of the
Registration Statement, the Company will prepare and file with the SEC, and the
Purchasers will cooperate with the Company in such preparation and filing, a
preliminary Proxy Statement relating to the Company Shareholders Meeting and use
its best efforts to furnish the information required to be included by the SEC
in a proxy statement, and, after consultation with the Purchasers, to respond
promptly to any comments made by the SEC with respect to the preliminary proxy
statement and shall use its best efforts to cause a definitive Proxy Statement
to be mailed to its shareholders as soon as reasonably practicable. The Company
shall provide the Purchasers and their respective counsel with a copy of any
written comments or telephonic notification of any oral comments the Company may
receive from the SEC or its staff with respect to the Proxy Statement promptly
after the receipt thereof. The Company shall provide the Purchasers and their
respective counsel with a reasonable opportunity to participate in all
communications with the SEC and its staff, including any meetings and telephone
conferences, relating to the Information Statement.

         10.3 Shareholders' Meeting. The Company shall call and hold the Company
Shareholders Meeting as promptly as practicable. The Company shall recommend,
and use its best efforts (through its agents or otherwise) to solicit from its
shareholders proxies in favor of, the adoption of this Agreement, and shall take
all other action necessary or, in the judgment or the Purchasers, advisable to
secure the Requisite Company Vote.

         10.4 The Merger. Immediately upon receipt of the Requisite Company
Vote, the Company shall file the Certificate of Merger with the Secretary of
State of the State

<PAGE>

of New York and a Certificate of Ownership and Merger with the Secretary of
State of the State of Delaware.

SECTION 11 AFFIRMATIVE COVENANTS

         The Company hereby covenants and agrees with the Purchasers with
respect to this Section 11, so long as the Purchasers hold any New Notes, any
Amended Notes, any shares of Series B Stock or any shares of Common Stock issued
on the conversion thereof, except to the extent that a particular section of
this Section 11 provides for an earlier termination, as follows:

         11.1 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-Q and 10-K
(or any successor forms), (ii) all current reports required to be filed with the
SEC on Form 8-K (or any successor forms) and (iii) any other information
required to be filed with the SEC.

         11.2 Reservation of Shares. The Company shall at all times reserve and
keep available out of its authorized shares of Series B Stock, solely for the
purpose of issue or delivery upon conversion of the New Notes and the Amended
Notes, as provided in the New Notes and Amended Notes, as the case may be, the
number of shares of Series B Stock that may be issuable or deliverable upon such
conversion. The Company shall issue such shares of Series B Stock in accordance
with the terms of this Agreement, the New Notes, the Amended Notes, and the
Delaware Certificate and otherwise comply with the terms hereof and thereof. 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 Series B Stock, as provided in the Delaware Certificate, the
number of shares of Common Stock that may be issuable or deliverable upon such
conversion. The Company shall issue such shares of Common Stock in accordance
with the terms of this Agreement, the Delaware Certificate and otherwise comply
with the terms hereof and thereof.

         11.3 Registration and Listing. If any shares of Common Stock required
to be reserved for purposes of conversion of the Series B Stock, as provided in
the Delaware Certificate, 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, 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

<PAGE>

or exchange, upon official notice of issuance, all shares of Common Stock
issuable or deliverable upon conversion of the Series A Stock and Series B
Stock.

         11.4 Director and Officer Liability Insurance. For so long as the
Purchasers own either 20% of the shares of Series A Stock issued on the Issue
Date (as defined in the Delaware Certificate) or 20% of the Series B Stock
issued on the Issue Date, the Company will maintain director and officer
liability insurance reasonably satisfactory to the Purchasers.

         11.5 Change of Control Provision. For so long as there are any shares
of Series A Stock or Series B Stock outstanding, the Company will not agree to,
or take any action to, approve or otherwise facilitate any merger or
consolidation or Change of Control (including granting approvals required under
applicable anti-takeover statutes), unless provision has been made for the
holders of Series A Stock and Series B Stock to receive from the acquiror or any
other Person (other than the Company) as a result of and in connection with the
transaction an amount in cash equal to their respective aggregate liquidation
preference for the shares of Series A Stock and Series B Stock held by them, as
set forth in the Delaware Certificate. The other parties hereto agree that
irreparable damage would occur in the event that the provisions of this Section
11.5 were not performed in accordance with their terms and that the Purchasers
shall be entitled to specific performance of the terms of this Section 11.5 in
addition to any other remedies at law or in equity.

         11.6 Board of Directors. For so long as the Purchasers own either 20%
of the shares of Series A Stock issued on the Issue Date or 20% of the Series B
Stock issued on the Issue Date, the Board of Directors shall be comprised of
seven members.

         11.7 Tax Matters.

              (a) The parties hereto agree and acknowledge that unless otherwise
required in the opinion of outside counsel to the relevant party, to comply with
its obligations under the Code, to comply with its obligations under the Code,
(x) as a result of a change in Law, (y) as a result of any dividends paid in
Common Stock pursuant to the Delaware Certificate as may be required by Section
305(b)(2) of the Code or (z) as a result of distributions on the Common Stock
that are also made on the Series B Stock as a result of the Series B
participation rights, (i) no party hereto will take the position that any amount
will be includable in income with respect to the Series B Stock under Section
305 of the Code and that all parties shall file all income, franchise and other
material tax returns, reports, forms and other such documents ("Tax Returns")
accordingly (the "Reporting Agreement") and (ii) no party hereto shall take any
position inconsistent with the Reporting Agreement upon examination of any Tax
Return, in any refund claim, in any litigation or otherwise.

              (b) The Company covenants that it will not become a "United States
real property holding corporation" (a "USRPHC") as that term is defined in
Section

<PAGE>

897(c)(2) of the Code and the Treasury Regulations promulgated thereunder
("Treasury Regulations") at any time while any Purchaser owns any of the Series
B Stock (or any Common Stock of the Company obtained upon a conversion of the
Series B Stock (the "Conversion Stock")).

              (c) In the event that a Purchaser desires to sell or dispose of
any of the Series B Stock or Conversion Stock, and upon demand by such
Purchaser, the Company agrees to deliver to such Purchaser a letter (the
"Letter") which complies with Sections 1.1445-2(c)(3) and 1.897-2(h) of the
Treasury Regulations, addressed to such Purchaser, stating that the Company is
not, and has not been, a USRPHC during the period equal to the lesser of (i) the
period beginning five years prior to the date of the Letter through the date of
the Letter and (ii) the period from the date of this Agreement through the date
of the Letter. The Letter shall be delivered to the Purchaser one business day
prior to the close of any sale or disposition of the Stock or Conversion Stock
by the Purchaser (the "Delivery Date"). The Letter shall be dated as of the
Delivery Date and signed by a corporate officer who must verify under penalties
of perjury that the statement is correct to his knowledge and belief pursuant to
Section 1.897-2(h) of the Treasury Regulations.

SECTION 12 INDEMNIFICATION.

              (a) Except as otherwise provided in this Section 12, the Company
and NewCo agrees to indemnify, defend and hold harmless each Purchaser and its
Affiliates and their respective officers, directors, agents, employees,
subsidiaries, partners, members and controlling 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 representation,
warranty, covenant or agreement of the Company or NewCo contained in any
Transaction Document.

              (b) Except as otherwise provided in this Section 12, 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
representation, warranty, covenant or agreement of the Purchasers contained in
this Agreement. Notwithstanding the foregoing, each Purchaser's liability
pursuant to this Section 8 shall in no event exceed the amount of such
Purchaser's investment under this Agreement.

<PAGE>

SECTION 13 REGISTRATION RIGHTS.

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

         13.1 Securities Subject to this Agreement.

              (a) Registrable Securities. For the purposes of this Section 13,
Registrable Securities will cease to be Registrable Securities when such
Registrable Securities are sold and otherwise transferred pursuant to Rule 144
under the Securities Act or a registration statement covering such Registrable
Securities has been declared effective under the Securities 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 13.

<PAGE>

         13.2 Demand Registration.

              (a) Request for Demand Registration. At any time after the date
hereof, the holders of 25.0% of the outstanding Registrable Securities
(determined on an as-converted basis) (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 any Demand Registration pursuant to
this Section 13.2(a) in which the aggregate anticipated proceeds to the holders
requesting such registration is less than $3,000,000 but will be required to
effect an unlimited number of Demand Registrations in which the anticipated
aggregate proceeds to the selling holders equal or exceed $3,000,000; provided,
further, that the Company will not be required to effect more than one
registration pursuant to this section in any six-month period. 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
Securities 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. The Company represents and warrants that, except as set
forth on Schedule 13.2, no Person (other than the holders of Series A Stock)
currently is, and covenants that no Person shall ever be, entitled to piggy-back
registration rights on any Demand Registration under this Section 13.2.

              (b) Effective Demand Registration. A registration shall not
constitute a Demand Registration until it has become effective under the
Securities 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) after the date on which it first became
effective under the Securities 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 13.2(a) to be declared effective under the
Securities Act as soon as practicable (and shall promptly notify the
Stockholders in writing 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 Authority, 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

<PAGE>

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) after the
date the Demand Shelf Registration covering 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 Securities Act. If the registration required under this Section 13 is
deemed not to have been effected then the Company shall continue to be obligated
to effect a registration statement pursuant to this Section 13.

              (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 13.3 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

<PAGE>

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
13.2 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) a financing, (B) an acquisition of the capital stock
or substantially all the assets of any other person (other than in the ordinary
course 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 13.2 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 13.2, 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.

         13.3 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 13.2 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

<PAGE>

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
13.3 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 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.

         13.4 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
Securities Act or any successor or other forms not available for registering
equity securities for sale to the public) during the

<PAGE>

ten 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.

         13.5 Registration Procedures.

              (a) Obligations of the Company. Whenever registration of
Registrable Securities has been requested pursuant to Section 13.2 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 13.2(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 Securities
         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 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 Securities Act and Rule 174
         thereunder, if applicable), and comply with the provisions of the
         Securities 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

<PAGE>

         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 13.5(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;

                   (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 13.2) and take
         such other actions as are reasonably required in order to facilitate
         the disposition of such Registrable Securities;

<PAGE>

                   (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 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 Securities 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

<PAGE>

         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 13.5(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 13.5(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 13.5(a)(ii)) by the number of days during the period from
and including the date of the giving of such notice pursuant to Section
13.5(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 13.5(a)(vi).

         13.6 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 13 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
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
13.6 are referred to herein as "Registration Expenses."

<PAGE>

         13.7 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 Securities 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 and made available to such person for delivery to a
purchaser. 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 Securities 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 13.2 or 13.3 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 Securities
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
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

<PAGE>

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 13.7 from the Registration Rights 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 Registration Rights 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 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

<PAGE>

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 13.7(a), 13.7(b) and 13.7(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 13.7(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 Securities Act) shall be entitled to contribution from any person.

         13.8 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 Securities Act), all to the extent required from time to time to enable such
holder to sell Registrable Securities without registration under the Securities
Act within the limitation of the exemptions provided by (a) Rule 144 under the
Securities 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 14 TERMINATION OF AGREEMENT

         14.1 Termination. This Agreement may be terminated as follows:

              (a) at any time, by mutual written consent of the Company and the
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
November 15, 2000, if the First 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 14.1(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 9 has not been
satisfied or waived

<PAGE>

and cannot be satisfied, other than as a result of a breach by the Company, with
respect to the Second Closing on or prior to May 1, 2001, and with respect to
the Third Closing on or prior to August 1, 2001; or

              (d) at the election of the Purchasers, if any one or more of the
conditions to its obligation to close set forth in Section 5, 6, 7 or 8 has not
been satisfied or waived and cannot be satisfied or waived, other than as a
result of a breach by the Purchasers, with respect to the Second Closing on or
prior to March 15, 2001; and with respect to the Third Closing on or prior to
May 1, 2001; or

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

              (f) at the election of the Purchasers if there has been a material
breach 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 ten days after written notice from the Purchasers.

         14.2 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 14.1(a) or Section
14.1(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. Notwithstanding the foregoing, if this Agreement is
terminated following the Second Closing but prior to the Third Closing, the
provisions of Sections 11.2, 11.3, 11.4, 11.5 and 11.6, Articles 12, 13 and 15
shall survive such termination and remain in effect so long as the Purchasers
hold any of the share of Series B Stock issued upon conversion of the New Notes
and the Amended Notes.

SECTION 15 MISCELLANEOUS

         15.1 Survival of Representations, Warranties and Covenants. The
representations and warranties contained herein shall survive for a period of
eighteen months following the date of the latest closing hereunder. All
covenants and agreements made by the Company in this Agreement shall survive the
execution and delivery of this Agreement and the issuance of the New Notes, the
Amended Notes, the Conditional Subscription and the shares of Series B Stock
issuable upon conversion of the New Notes and Amended Notes and the Common Stock
issuable upon conversion of the Series B Stock.

<PAGE>

         15.2 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 10106
                          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: James Dubin, Esq. and
                                     Paul D. Ginsberg, Esq.

                   (ii)   if to SFM Domestic Investments LLC:

                          Soros Fund Management LLC
                          888 Seventh Avenue
                          New York, NY 10106
                          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: James Dubin, Esq. and

<PAGE>

                                     Paul D. Ginsberg, Esq.

                   (iii)  if to the Company:

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

                          with a copy to:

                          Swidler Berlin Shereff Friedman, LLP
                          405 Lexington Avenue
                          New York, New York 10174
                          Telecopy:  (212) 891-9598
                          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.

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

         15.4 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

<PAGE>

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.

         15.5 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.

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

         15.7 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.

         15.8 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.

         15.9 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.

         15.10 Entire Agreement. This Agreement, together with the exhibits and
schedules hereto, and the other Transaction Documents, 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.

         15.11 Fees. At the First Closing and from time to time thereafter, the
Company shall promptly 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
$200,000 in the aggregate.

<PAGE>

         15.12 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 under this clause
(iii) 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 Company in order to comply with any
Requirement of Law, (v) to such Purchaser's or the 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 Series A Stock, Series B Stock or Common Stock.

              (b) Unless substantially in the form previously disclosed, the
Purchasers shall have the opportunity to review and reasonably modify any
provision of any public 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.

         15.13 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.

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

<PAGE>

15.15 Waiver of Liquidation Payment. The Company and the Purchasers agree that
under Section 5.4.2(i) of the Delaware Certificate the amount of the Series B
Liquidation Payment is determined by a formula that is based, in part, on the
sum of (a) the amount invested by the Purchasers in shares of Common Stock
pursuant to the Conditional Subscription obligation under Section 2.3(b)
of this Agreement less the Purchasers' cost of the shares of Common Stock
theretofore sold and (b) the aggregate Series B Face Value, plus accrued and
unpaid dividends thereon, of the shares of Series B Stock received by the
Purchasers upon conversion of the New Notes and Amended Notes. In the event that
the Series B Liquidation Payment is determined under Section 5.4.2(i) of the
Delaware Certificate (and not under Section 5.4.2(ii) of the Delaware
Certificate), the Purchasers hereby waive their entitlement to proceeds, if any,
payable on Liquidation to holders of Common Stock with respect to the shares of
Common Stock, if any, purchased by the Purchasers pursuant to the Conditional
Subscription obligation under Section 2.3(b) of this Agreement that are still
held by the Purchasers or their Affiliates at the time of Liquidation in an
amount up to the Common Stock Investment Amount. The terms "Series B Liquidation
Payment," "Liquidation," "Series B Face Value" and "Common Stock Investment
Amount" shall have the meanings ascribed to such terms in the Delaware
Certificate.

                  [Remainder of page intentionally left blank.]

<PAGE>

         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: /s/ Jonathan P. Freedman
                                           -----------------------------------
                                           Name:  Jonathan P. Freedman
                                           Title: VP of Corporate Development


                                       QUANTUM INDUSTRIAL PARTNERS LDC


                                       By: /s/ Michael C. Neus
                                           -----------------------------------
                                           Name: Michael C. Neus
                                           By:   Attorney-In-Fact


                                       SFM DOMESTIC INVESTMENTS LLC


                                       By: /s/ Michael C. Neus
                                           -----------------------------------
                                           Name: Michael C. Neus
                                           By:   Attorney-In-Fact

<PAGE>

                                                                      Schedule 1

                            SHARES AND PURCHASE PRICE

                                                                   Applicable
                                                Principal         Percentage of
                                                Amount of          Conditional
              Purchaser                         New Notes         Subscription
              ---------                         ---------         ------------
Quantum Industrial Partners LDC                 $4,841,500           96.83%
(principal place of business: Curacao)
SFM Domestic Investments LLC                      $158,500            3.17%
(principal place of business: New York)

<PAGE>

                                  SCHEDULE 3.4

                                    CONSENTS

1. The Company will be required to file an application to list the shares of
common stock sold in the Rights Offering and the shares of common stock issuable
upon exercise of the Series A Stock and the Series B Stock with the Nasdaq
SmallCap Market and the Boston Stock Exchange.

2. The consummation of the transactions contemplated by the Agreement and the
Transaction Documents are subject to the approval of the Company's shareholders.

3. The consummation of the transactions contemplated by the Agreement and the
Transaction Documents may require the Company and/or the Purchasers to make a
filing under the Hart-Scott-Rodino Act and to obtain government approval or
await the expiration of the applicable waiting period.

<PAGE>

                                  SCHEDULE 3.5

                                  SUBSIDIARIES

1.  Clothesline Corporation, a New York corporation.

2. Bluefly Merger Sub, Inc., a Delaware corporation.

<PAGE>

                                  SCHEDULE 3.11

                              INTELLECTUAL PROPERTY

1. Service mark applications have been made for the following marks: Bluefly;
The Outlet Store In Your Home; MyCatalog; Please.com Again; Fly Buys; Flypaper
and Fabulous Fashion. Fierce Prices. The applications for Bluefly, The Outlet
Store In Your Home and Please.com Again have been granted. The other
applications are pending.

2. The Company has the following domain names: bluefly.com, blue-fly.com,
blue-fly.net, bluefly.net, blueflyorg, blufly.com, blufly.net, begolf.com,
teenfly.com, blu-fly.com, blu-fly.net, bluelfy.com,
saveupto75percenton350designerbrands.com, brandoutlet.com,
350designerbrandsatoutletstoreprices.com, bestoff.com, best-off.com,
madisonavenuedesignerbrandsathugesavings.com, red-fly.com, green-fly.com,
orangefly.com, orange-fly.com.

3. The Company possesses a number of other intellectual property rights,
including copyright protection for information contained on its Web Site,
miscellaneous trade secrets and know-how and other similar intellectual
property.

<PAGE>

                                  SCHEDULE 3.13

                                 CAPITALIZATION

1. 4,337,018 shares of common stock (including 2,837,018 shares that are subject
to shareholder approval) are reserved for issuance under the Company's 1997
stock option plan, of which options to purchase 4,265,643 shares of common stock
(including 2,837,018 shares of common stock that are subject to shareholder
approval) were outstanding as of October 15, 2000 and options to purchase 88,269
shares of common stock had been exercised.

2. 514,700 shares of common stock are reserved for issuance under the Company's
2000 stock option plan, all of which were outstanding as of October 15, 2000.

3. 11,500 shares of common stock are reserved for issuance upon the exercise of
Underwriters Purchase Options and an additional 13,850 shares of common stock
are reserved for issuance upon the exercise of warrants underlying the
Underwriters Purchase Options.

4. 50,000 shares of common stock are reserved for issuance upon the exercise of
warrants issued to a supplier of the Company.

5. 375,000 shares of common stock are reserved for issuance upon the exercise of
the Purchasers' Warrants.

<PAGE>

                                  SCHEDULE 3.14

                                EMPLOYEE BENEFITS

1. The Company has adopted a 1997 Stock Option Plan pursuant to which 4,337,018
shares of common stock have been reserved for issuance pursuant to options
granted thereunder, of which 2,837,018 shares are subject to shareholder
approval. Shareholder approval for those shares that have not yet been approved
will be sought at the next annual meeting of shareholders.

2. The Company has adopted a 2000 Stock Option Plan pursuant to which 514,700
shares of common stock have been reserved for issuance pursuant to options
granted thereunder.

3. The Company has adopted a vacation, sick leave and personal leave policy.

4. The Company has entered into employment agreements with each of Ken Seiff,
Patrick Barry, Jonathan Morris, Bob Stevens, Jonathan Freedman, Andreas
Turanski, and Martin Keane. Each such employment agreement includes severance
arrangements.

5. The Company provides health, disability and dental insurance coverage for its
employees and eligible family members.

6. The Company has adopted a 401(k) program.

7. The Company has adopted a subsidized gym membership program.

<PAGE>

                                  SCHEDULE 3.15

                                      TAXES

The Company's federal income tax returns for 1998 and 1999 have been filed.

<PAGE>

                                  SCHEDULE 3.17

                                 LABOR RELATIONS

None.

<PAGE>

                                  SCHEDULE 3.18

                                 INVENTORY, ETC.

         Due to the Company's limited working capital, a number of its suppliers
have limited the Company's payment terms and, in some cases, have required the
Company to pay for merchandise in advance of delivery.

<PAGE>

                                  SCHEDULE 3.23

                                    CONTRACTS

The following contracts contain change of control and/or non-assignment clauses
that require the Company to obtain consents and/or waiver in connection with the
transactions contemplated by the Agreement:

1. Directors & Officers Insurance Policy, underwritten by National Union Fire
Insurance Company (excess by Chubb)

2. Commercial Excess Liability (Umbrella) Insurance Policy, underwritten by
Travelers Indemnity Company.

3. Workers Compensation and Employers Liability Policy, underwritten by
Travelers Indemnity Company.

4. Commercial Inland Marine Policy, underwritten by Travelers Indemnity Company.

5. Commercial General Liability Policy, underwritten by Travelers Indemnity
Company.

6. Internet Professional Liability Policy, underwritten by American
International Specialty Lines Insurance Company.

7. Employment Agreement, dated as of December 22, 1999, by and between the
Company and E. Kenneth Seiff.

8. Software License Agreement, dated as of February 22, 2000, by and between the
Company and Quest Software, Inc.

9. Services Agreement, dated as of July 27, 2000, by and between the Company and
Distribution Associates, Inc.

10. Agreement, dated as of December 3, 1999, by and between the Company and
Hearst Communications, Inc.

11. Customer Agreement, by and between the Company and EMC Corporation.

12. Service Order Form, dated July 2, 1998, by and between the Company and DIGEX
Incorporated.

<PAGE>

13. Standard Agreement for Consulting Services, dated as of October 1, 1999, by
and between the Company and Cintra Software & Services, Inc.

14. Master Services Agreement, by and between the Company and Akamai
Technologies, Inc.

15. Passport Wallet Service Agreement, dated as of October 4, 1999, by and
between the Company and Microsoft Corporation.

16. Merchant Agreement, dated as of September 17, 1999, by and between the
Company and Inktomi Corporation.

17. Shopping Channel Promotional Agreement, dated as of August 7, 2000, by and
between the Company and America Online, Inc.

<PAGE>

                                  SCHEDULE 3.25

                                 TRADE RELATIONS

Due to the Company's limited working capital, a number of its suppliers have
limited the Company's payment terms and, in some cases, have required the
Company to pay for merchandise in advance of delivery.

<PAGE>

                                  SCHEDULE 3.26

                       BROKER'S, FINDER'S OR SIMILAR FEES

An investment banking fee of $250,000 is due to Credit Suisse First Boston in
connection with the execution of the Agreement.

<PAGE>

                                  SCHEDULE 13.2

                          PIGGYBACK REGISTRATION RIGHTS

1. Holders of the Company's Underwriter Purchase Options ("UPO's") hold certain
piggyback registration rights with respect to the UPO's and the underlying
securities.

2. A supplier who holds a warrant to purchase 50,000 shares of the Common Stock
holds certain piggyback registration rights with respect thereof.

<PAGE>

                                               Exhibit A to Investment Agreement

                          AGREEMENT AND PLAN OF MERGER

                                       OF

                                  BLUEFLY, INC.
                            (a New York corporation)

                                       AND

                            BLUEFLY MERGER SUB, INC.
                            (a Delaware corporation)

         Agreement and Plan of Merger entered into on November __, 2000 by
Bluefly, Inc., a New York corporation, and Bluefly Merger Sub, Inc., a Delaware
Corporation.

         WHEREAS Bluefly, Inc. is a business corporation of the State of New
York with its principal office therein located in City of New York, County of
New York; and

         WHEREAS the total number of shares of stock which Bluefly, Inc. has
authority to issue is _________ of which __________ shares are Common Stock, par
value of $.01 each, and ________is Preferred Stock.

         WHEREAS Bluefly Merger Sub, Inc. is a business corporation of the
State of Delaware with its registered office therein located at                ,
City of                    , County of                    ; and

         WHEREAS the total number of shares of stock which Bluefly Merger Sub,
Inc. has authority to issue is [_____] shares of common stock, par value $[____]
per share; and

         WHEREAS, all of the outstanding shares of stock of Bluefly Merger Sub,
Inc. are held by Bluefly, Inc.; and

         WHEREAS the New York Business Corporation Law permits a merger of a
business corporation of the State of New York with and into a business
corporation of another jurisdiction; and

<PAGE>

         WHEREAS the Delaware General Corporation Law permits the merger of a
business corporation of another jurisdiction with and into a business
corporation of the State of Delaware; and

         WHEREAS Bluefly, Inc. and Bluefly Merger Sub, Inc. and their respective
Boards of Directors thereof deem it advisable and to the advantage, welfare, and
best interests of the corporations and their respective stockholders to merge
Bluefly, Inc. with and into Bluefly Merger Sub, Inc., pursuant to the provisions
of the New York Business Corporation law and the Delaware General Corporation
Law upon the terms and conditions hereinafter set forth;

         NOW, THEREFORE, in consideration of the premises and of the mutual
agreement of the parties hereto, being thereunto duly entered into by Bluefly,
Inc. and approved by a resolution adopted by its Board of Directors and being
thereunto duly entered into by Bluefly Merger Sub, Inc. and approved by a
resolution adopted by its Board of Directors, the Agreement of Merger and the
terms and conditions thereof and the mode of carrying the same into effect,
together with any provisions required or permitted to be set forth therein, are
hereby determined and agreed upon as hereinafter set forth.

         1. Bluefly, Inc. shall, pursuant to the provisions of the New York
Business Corporation Law and the provisions of the Delaware General Corporation
Law, be merged with and into Bluefly Merger Sub, Inc., which shall be the
surviving corporation from and after the effective time of the merger, and which
is sometimes hereinafter referred to as the "surviving corporation". The
separate existence of Bluefly, Inc., which is sometimes hereinafter referred to
as the "terminating corporation", shall cease at the effective time of the
merger in accordance with the provisions of the New York Business Corporation
Law.

         2. At the effective time of the merger, the name of the surviving
corporation shall be changed to Bluefly, Inc. and the Certificate of
Incorporation of the surviving corporation shall be amended to read in its
entirety as set forth in Exhibit A hereto.

         3. The present by-laws of the surviving corporation will be the by-laws
of the surviving corporation and will continue in full force and effect until
changed, altered or amended as therein provided and in the manner prescribed by
the provisions of the Delaware General Corporation Law.

         4. The directors and officers in office of the surviving corporation at
the effective time of the merger will be the members of the first Board of
Directors and the first officers of the surviving corporation, all of whom shall
remain in office and shall hold their directorships and offices until the
election and qualification of their respective successors or until their tenure
is otherwise terminated in accordance with the Certificate of Incorporation and
by-laws of the surviving corporation.

<PAGE>

         5. At the effective time of the merger, each issued share of Common
Stock of the terminating corporation shall be converted into one share of Common
Stock of the surviving corporation and each share of preferred stock of the
terminating corporation shall be converted into one share of Preferred Stock of
the surviving corporation. The issued shares of the surviving corporation
outstanding immediately prior to the effective time of the merger shall be
canceled and cease to exist without being converted into any stock or other
consideration whatsoever.

         6. In the event that this Agreement and Plan of Merger shall have been
duly approved and adopted on behalf of the terminating corporation in accordance
with the provisions of the New York Business Corporation Law and on behalf of
the surviving corporation in accordance with the provisions of the Delaware
General Corporation Law, the corporations agree that they will cause to be
executed and filed and recorded any document or documents prescribed by the laws
of the State of New York and by the laws of the State of Delaware, and that they
will cause to be performed all necessary acts within the State of New York and
the State of Delaware and elsewhere to effectuate the merger herein provided
for.

         7. The Board of Directors and the proper officers of the terminating
corporation and of the surviving corporation are hereby authorized, empowered,
and directed to do any and all acts and things, and to make, execute, deliver,
file, and record any and all instruments, papers, and documents which shall be
or become necessary, proper, or convenient to carry out or put into effect any
of the provisions of this Agreement and Plan of Merger or of the merger herein
provided for.

<PAGE>

         IN WITNESS WHEREOF, this Agreement and Plan of Merger is hereby
executed on behalf of each of the constituent corporations parties by a duly
authorized officer thereof.

Executed on this __ day of November, 2000.

                                       BLUEFLY MERGER SUB, INC.

                                       By:
                                          --------------------------------------
                                          Name:
                                          Title:

                                       BLUEFLY, INC.

                                       By:
                                          --------------------------------------
                                          Name:
                                          Title:

<PAGE>

                                                            EXHIBIT B to the
                                                            Investment Agreement

                              CERTIFICATE OF MERGER

                                       OF

                                  BLUEFLY, INC.

                                      INTO

                            BLUEFLY MERGER SUB, INC.

            (Pursuant to Section 907 of the Business Corporation Law)


         It is hereby certified, upon behalf of each of the constituent
corporations herein named, as follows:

         FIRST: The Board of Directors of each of BLUEFLY, INC. and BLUEFLY
MERGER SUB, INC. has duly adopted a plan of merger setting forth the terms and
conditions of the merger of said corporation.

         SECOND: The name of the foreign constituent corporation, which is to be
the surviving corporation, and which is hereinafter sometimes referred to as the
"surviving constituent corporation", is BLUEFLY MERGER SUB, INC. The
jurisdiction of its incorporation is Delaware; and the date of its incorporation
therein is October 31, 2000.

         The Application for Authority in the State of New York of the surviving
constituent corporation to transact business as a foreign corporation therein
was filed by the Department of State of the State of New York on          , 19 .

         THIRD: The name of the domestic constituent corporation, which is being
merged into the surviving constituent corporation, and which is hereinafter
sometimes referred to as the "merged constituent corporation", is BLUEFLY, INC.
and the name under which it was formed is Pivot Corporation. The date upon which
its certificate of incorporation was filed with the Department of State is April
8, 1991.

         FOURTH: As to each of the constituent corporations, the plan of merger
sets forth the designation and number of outstanding shares of each class and
series, the specification of the classes and series entitled to vote on the plan
of merger, and the specification of each class and series entitled to vote as a
class on the plan of merger, as follows:

<PAGE>

                            BLUEFLY MERGER SUB, INC.

Designation of             Number of          Designation        Classes and
each outstanding           outstanding        of class and       series entitled
class and series           shares of          series enti-       to vote as a
of shares                  each class         tled to vote       class

Common
Series A Convertible
Preferred Stock
Series B Convertible
Preferred Stock

                                  BLUEFLY INC.

Designation of             Number of          Designation        Classes and
each outstanding           outstanding        of class and       series entitled
class and series           shares of          series enti-       to vote as a
of shares                  each class         tled to vote       class

Common
Series A Convertible
Preferred Stock
Series B Convertible
Preferred Stock

         FIFTH: The merger herein certified was authorized in respect of the
merged constituent corporation by the vote of at least two-thirds of all
outstanding shares of the corporation entitled to vote on the plan of merger
under the Certificate of Incorporation and by the class vote of the holders of
at least a majority of the holders of Series A Convertible Preferred Stock.

         SIXTH: All fees and taxes (including penalties and interest)
administered by the Department of Taxation and Finance of the State of New York
which are now due and payable by the constituent domestic corporation have been
paid and a cessation franchise tax report (estimated or final) through the
anticipated date of merger has been filed by the constituent domestic
corporation. The said report, if estimated, is subject to amendment. The
surviving foreign corporation agrees that it will within 30 days after the
filing of the certificate of merger file the cessation tax report, if an
estimated report was previously filed, and promptly pay to the Department of
Taxation and Finance of the State of New York all fees and taxes (including
penalties and interest), if any, due to the Department of Taxation and Finance
by the constituent domestic corporation.

         SEVENTH: The merger herein certified is permitted by the laws of the
jurisdiction of incorporation of the surviving constituent corporation and is in
compliance with said laws.

<PAGE>

         EIGHTH: The surviving constituent corporation agrees that it may be
served with process in the State of New York in any action or special proceeding
for the enforcement of any liability or obligation of the merged constituent
corporation, for the enforcement of any liability or obligation of the surviving
constituent corporation for which the surviving constituent corporation is
previously amenable to suit in the State of New York, and for the enforcement,
as provided in the Business Corporation Law of the State of New York, of the
right of shareholders of the merged constituent corporation to receive payment
for their shares against the surviving constituent corporation.

         NINTH: The surviving constituent corporation agrees that, subject to
the provisions of section 623 of the Business Corporation Law of the State of
New York, it will promptly pay to the shareholders of the merged constituent
corporation the amount, if any, to which they shall be entitled under the
provisions of the Business Corporation Law of the State of New York relating to
the rights of shareholders to receive payment for their shares.

         TENTH: The surviving constituent corporation hereby designates the
Secretary of State of the State of New York as its agent upon whom process
against it may be served in the manner set forth in paragraph (b) of section 306
of the Business Corporation Law of the State of New York in any action or
special proceeding. The post office address within the State of New York to
which the said Secretary of State shall mail a copy of any process against the
surviving corporation served upon him is: 42 W. 39th Street, 9th floor, New
York, N.Y. 10018.

         IN WITNESS WHEREOF, I have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that the
statements contained therein have been examined by me and are true and correct.

Executed on this 13th day November, 2000.

                                       BLUEFLY, INC.


                                       By:
                                          ---------------------------------
                                          Ken Seiff, President

<PAGE>

                                                                Exhibit C to the
                                                            Investment Agreement

                          CERTIFICATE OF INCORPORATION

                                       OF

                                  BLUEFLY, INC.

         1. Name. The name of the corporation is BLUEFLY, INC. (the
"Corporation").

         2. Address; Registered Office and Agent. The address of the
Corporation's registered office is ______________________, City of
_____________, County of _________________, State of Delaware; and its
registered agent at such address is _______________________________.

         3. Purposes. The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law.

         4. Number of Shares

              4.1 The total number of shares of stock that the Corporation shall
have authority to issue is: sixty-five million (65,000,000) of which forty
million (40,000,000) shall be shares of Common Stock of the par value of $.01
("Common Stock") and twenty-five million (25,000,000) shall be shares of
Preferred Stock of the par value of $.01 each ("Preferred Stock").

              4.2 The designation, relative rights, preferences and limitations
of the shares of each class are as follows:

                   4.2.1 Other than the shares of the series of Preferred Stock,
the terms of which are specified in this Certificate, the shares of Preferred
Stock may be issued from time to time in one or more series having such number
and such distinctive serial designations, as shall hereafter be stated and
expressed in the resolution or resolutions providing for the issue of such
shares of Preferred Stock from time to time adopted by the Board pursuant to
authority so to do which is hereby vested in the Board. Each series of shares of
Preferred Stock (a) may have such voting powers, full or limited, or may be
without voting powers; (b) may be subject to redemption at such time or times
and at such prices; (c) may be entitled to receive dividends (which may be
cumulative or non-cumulative) at such rate or rates, on such conditions and at
such times, and payable

<PAGE>

in preference to, or in such relation to, the dividends payable on any other
class or classes or series of stock; (d) may have such rights upon the
dissolution of, or upon any distribution of the assets of, the Corporation; (e)
may be made convertible into or exchangeable for, shares of any other class or
classes or of any other series of the same or any other class or classes of
shares of the Corporation at such price or prices or at such rates of exchange
and with such adjustments; (f) may be entitled to the benefit of a sinking fund
to be applied to the purchase or redemption of shares of such series in such
amount or amounts; (g) may be entitled to the benefit of conditions and
restrictions upon the creation of indebtedness of the Corporation or any
subsidiary, upon the issue of any additional shares (including additional shares
of such series or of any other series) and upon the payment of dividends or the
making of other distributions on, and the purchase, redemption or other
acquisition by the Corporation or any subsidiary of, any outstanding shares of
the Corporation and (h) may have such other relative, participating, optional or
other special rights, qualifications, limitations or restrictions thereof; all
as shall be stated in said resolution or resolutions providing for the issue of
such shares of Preferred Stock.

                   4.2.2 Except as otherwise provided by law, elsewhere in this
Certificate or by the resolution or resolutions providing for the issue of any
series of shares of Preferred Stock, the holders of outstanding shares of Common
Stock shall exclusively possess voting power for the election of directors and
for all other purposes, each holder of record of shares of Common Stock being
entitled to one vote for each share of Common Stock standing in its, his or her
name on the books of the Corporation. Except as otherwise provided elsewhere in
this Certificate or by the resolution or resolutions providing for the issue of
any series of shares of Preferred Stock, the holders of shares of Common Stock
shall be entitled, to the exclusion of the holders of shares of Preferred Stock
of any and all series, to receive such dividends as from time to time may be
declared by the Board. Except as otherwise provided elsewhere in this
Certificate or by the resolution or resolutions providing for the issue of any
series of shares of Preferred Stock, in the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
after payment shall have been made to the holders of shares of Preferred Stock
of the full amount to which they shall be entitled as provided elsewhere in this
Certificate or pursuant to the resolution or resolutions providing for the issue
of any series of shares of Preferred Stock, the holders of shares of Common
Stock shall be entitled, to the exclusion of the holders of shares of Preferred
Stock of any and all series, to share, ratably according to the number of shares
of Common Stock held by them, in all remaining assets of the Corporation
available for distribution to its stockholders.

                   4.2.3 Subject to the provisions of this Certificate of
Incorporation and except as otherwise provided by law, the stock of the
Corporation, regardless of class, may be issued for such consideration and for
such corporate purposes as the Board may from time to time determine.

<PAGE>

         5. Preferred Stock

              5.1 Designation/Ranking. There shall be two series of Preferred
Stock which shall be designated, respectively, as "Series A Convertible
Preferred Stock" (referred to herein as the "Series A Convertible Preferred
Stock") and "Series B Convertible Preferred Stock" (referred to herein as
"Series B Convertible Preferred Stock" and together with the Series A
Convertible Preferred Stock, the "Convertible Preferred Stock"). The Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock shall rank
pari passu with each other and senior to the Corporation's Common Stock and all
other Preferred Stock of the Corporation ranking junior to the Convertible
Preferred Stock, with respect to the payment of distributions on liquidation,
dissolution or winding up of the Corporation and with respect to the payment of
dividends.

              5.2 The number of shares constituting the Series A Convertible
Preferred Stock shall be 500,000 shares. The number of shares constituting the
Series B Convertible Preferred Stock shall be 9,000,000.

              5.3 Dividends.

                   5.3.1 The holders of Convertible Preferred Stock shall be
entitled to receive, out of funds legally available for such purpose, dividends
which shall accrue at the rate of 8% per annum of the Face Value of such stock
and shall compound annually, payable only upon: (i) the conversion of the
Convertible Preferred Stock pursuant to Section 5.8; (ii) Liquidation (as
defined in Section 5.4) of the Corporation under Section 5.4 or (iii) a
redemption of the Convertible Preferred Stock under Section 5.9. Except in
connection with a Liquidation Payment made under Section 5.4 or a redemption
payment made under Section 5.9 (which in each case shall require payment in
cash), the Corporation, in its sole discretion, may elect to pay such dividends
in shares of Common Stock, in which case such Common Stock dividends shall be
equal to the number of shares of Common Stock obtained by dividing the cash
value of such dividend by the Current Market Price (as defined in Section
5.8.5(iv)) on the business day prior to the date of payment.

                   5.3.2 Dividends on each share of Convertible Preferred Stock
shall be cumulative and shall accrue from the date of issuance of such share of
Convertible Preferred Stock. The date on which the Corporation initially issues
any share of Convertible Preferred Stock shall be deemed to be its "Issue Date,"
regardless of the number of times transfer of such shares is made on the stock
records maintained by or for the Corporation and regardless of the number of
certificates that may be issued to evidence such share.

<PAGE>

                   5.3.3 In addition to the right to receive dividends pursuant
to Section 5.3.1 above, each holder of a share of Convertible Preferred Stock
shall have the right, at any time after the Issue Date, if the Board of
Directors of the Corporation shall declare a dividend or make any other
distribution (including, without limitation, in cash or other property or
assets, but excluding any stock split effected as a stock dividend), to holders
of shares of Common Stock, to receive, out of funds legally available therefor,
a dividend or distribution in an amount equal to the amount of such dividend or
distribution receivable by a holder of the number of shares of Common Stock into
which such share of Convertible Preferred Stock is convertible on the record
date for such dividend or distribution. Any such amount shall be paid to the
holders of shares of Convertible Preferred Stock at the same time such dividend
or distribution is made to the holders of Common Stock.

              5.4 Liquidation

                   5.4.1 Series A. Upon any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary (a "Liquidation"), each
holder shall be paid for each share of Series A Convertible Preferred Stock held
by it, before any distribution or payment is made upon any stock ranking junior
to the Series A Convertible Preferred Stock, an amount equal to the greater of
(i) $20 per share (the "Series A Face Value") plus, in the case of each share,
an amount equal to all accrued but unpaid dividends thereon, through the date
payment thereof is made, and (ii) the amount that the holder of such share of
the Series A Convertible Preferred Stock would receive if it were to convert
such share of Series A Convertible Preferred Stock into share(s) of Common Stock
immediately prior to such Liquidation. The holders of Series A Convertible
Preferred Stock shall not be entitled to any further payment (such amount
payable with respect to one share of Series A Convertible Preferred Stock being
sometimes referred to as the "Series A Liquidation Payment" and with respect to
all shares of Series A Convertible Preferred Stock being sometimes referred to
as the "Series A Liquidation Payments").

                   5.4.2 Series B Convertible Preferred Stock. Upon any
Liquidation, each holder shall be paid for each share of Series B Convertible
Preferred Stock held by it, before any distribution or payment is made upon any
stock ranking junior to the Series B Convertible Preferred Stock, an amount
equal to the greater of: (i) the sum of (x) the Series B Face Value plus (y) in
the case of each such share, an amount equal to all accrued and unpaid
dividends thereon through the date payment therefore is made plus (z) the
Per Share Common Stock Investment Amount and (ii) the amount that the holder
of such share of the Series B Convertible Preferred Stock would receive if
it were to convert such share of Series B Convertible Preferred Stock into
shares of Common Stock immediately prior to such Liquidation (such amount
payable with respect to one share of Series B Convertible Preferred Stock being
sometimes referred to as the "Series B Liquidation Payment" and together with
the Series A Liquidation Payment, the "Liquidation Payment" and with respect to
all shares of Series B Convertible Preferred Stock being sometimes referred to
as the

<PAGE>

"Series B Liquidation Payments" and together with the Series A Liquidation
Payments, the "Liquidation Payments").

         For the purpose of this Section 5.4.2, the following terms shall have
the following definitions:

         "Common Stock Investment Amount" means the dollar amount, which amount
shall not be less than zero, equal to the difference of (i) the aggregate amount
invested by Quantum Industrial Partners LDC and SFM Domestic Investments LLC or
their affiliates (the "Purchasers") in the Common Stock of the Corporation
pursuant to the conditional subscription obligation under Section 2.3(b) of the
Investment Agreement, dated as of November 13, 2000, among the Corporation,
Bluefly Merger Sub, Inc. and the Purchasers (the "New Investment Agreement")
minus (ii) an amount equal to the product of (A) the aggregate number of shares
of Common Stock purchased pursuant to the Conditional Subscription (as defined
in the New Investment Agreement), which are sold by the Purchasers at any time
prior to the date of measurement and (B) $2.34 (as adjusted to reflect
combinations and splits and the like with respect to the Common Stock).

         "Per Share Common Stock Investment Amount" means the quotient obtained
by dividing (i) the Common Stock Investment Amount by (ii) number of shares of
Series B Convertible Preferred Stock outstanding at the time of measurement.
"Series B Face Value" means an amount equal to $2.34 per share of Series B
Convertible Preferred Stock.

                   5.4.3 If upon such Liquidation, the assets to be distributed
among the holders of Convertible Preferred Stock shall be insufficient to permit
payment to the holders of Convertible Preferred Stock of the Liquidation
Payments, then the entire assets of the Corporation to be so distributed shall
be distributed ratably among the holders of Convertible Preferred Stock. Upon
any such Liquidation after the holders of Convertible Preferred Stock shall have
been paid in full the Liquidation Payments to which they shall be entitled, the
remaining net assets of the Corporation may be distributed to the holders of
securities ranking junior to the Convertible Preferred Stock.

                   5.4.4 Written notice of such Liquidation stating a payment
date, the amount of the Liquidation Payments and the place where said
Liquidation Payments shall be payable, shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or
telex, not less than 10 days prior to the payment date stated therein, to the
holders of record of Convertible Preferred Stock, such notice to be addressed to
each such holder at its address as shown by the records of the Corporation.

<PAGE>

                   5.4.5 The Convertible Preferred Stock shall, with respect to
distribution of assets and rights upon Liquidation rank senior to each class or
series of capital stock of the Corporation hereafter created which does not
expressly provide that it ranks on a parity with or is senior to the Convertible
Preferred Stock with respect to distribution of assets and rights upon the
liquidation, dissolution or winding up of the Corporation.

              5.5 Voting Rights of the Series A Convertible Preferred Stock.

                   5.5.1 In addition to any other vote required by law or this
Certificate, so long as at least 60% of the shares of Series A Convertible
Preferred Stock outstanding on August 26, 1999 (the "Series A Issue Date")
remain outstanding, the Corporation may take the following actions only with the
approval of the holders of a majority of the shares of Series A Convertible
Preferred Stock voting separately as a class:

                        (i) liquidate the Corporation or acquire another
business entity;

                        (ii) create a joint venture, partnership or one or more
non-wholly owned subsidiaries requiring an investment in cash or kind of more
than $500,000;

                        (iii) sell Corporation assets, which individually or in
the aggregate exceed $2,000,000;

                        (iv) incur indebtedness in excess of $1,000,000 or
impose a lien against or encumber assets of the Corporation in excess of
$1,000,000 (other than a financing secured by inventory or a financing required
in connection with the optional redemption of the Convertible Preferred Stock in
accordance with Section 7);

                        (v) enter into or amend any contract not contemplated by
an approved budget or in excess of $250,000 in any one year or $1 million over
the life of the contract in the aggregate;

                        (vi) issue or sell securities of the Corporation
(excluding securities issuable upon exercise of options under the stock option
or employee incentive plans existing on October 12, 2000 or as a result of the
conversion of the Convertible

<PAGE>

Preferred Stock or any notes and warrants of the Corporation outstanding as of
the effective date of this Certificate);

                        (vii) declare dividends, repurchase or redeem securities
of the Corporation or debt, except to the extent such debt is due in accordance
with its terms and except for dividends, repurchases or redemption applicable to
the Convertible Preferred Stock or any notes of the Corporation outstanding as
of the effective date of this Certificate;

                        (viii) make capital expenditures in excess of 110% of
capital expenditures set forth in the annual budget;

                        (ix) grant registration rights or register securities
under the Securities Act of 1933, as amended, except pursuant to any
registration rights agreement of the Corporation outstanding as of the effective
date of this Certificate or registrations on Form S-8 or similar forms;

                        (x) enter into any contract with an affiliate;

                        (xi) amend the Corporation's Certificate of
Incorporation or Bylaws;

                        (xii) increase or decrease the number of members of the
Corporation's Board of Directors or the voting rights of the directors;

                        (xiii) change the Corporation's independent public
accountants;

                        (xiv) approve the annual budget, and any changes to the
business plan and five year budget and any successor thereto;

                        (xv) adopt or amend employment contracts with
Corporation officers and senior executive managers with authority equivalent to
that of Executive Vice Presidents; or

                        (xvi) amend or alter the New Investment Agreement.

                   5.5.2 For so long as at least 20% of the shares of Series A
Convertible Preferred Stock outstanding on the Series A Issue Date remain
outstanding, the holders of the Series A Convertible Preferred Stock voting
separately as a class, shall be entitled to elect one (1) director to the Board
of Directors (hereafter referred to as the "Class A Director") upon a vote of a
majority of the outstanding shares of Series A

<PAGE>

Convertible Preferred Stock. For so long as at least 60% of the shares of the
Series A Convertible Preferred Stock outstanding on the Series A Issue Date
remain outstanding, the Class A Director shall be entitled to seven votes on any
action taken by the Board of Directors.

                   5.5.3 Notwithstanding anything set forth herein, with the
exception of any action duly approved by the holders of Series A Convertible
Preferred Stock pursuant to Section 5.5.1 above, at any time when any shares of
Series A Convertible Preferred Stock are outstanding, except where the vote or
written consent of the holders of a greater number of shares of the Corporation
is required by law or by this Certificate, and in addition to any other vote
required by law or the Corporation's Certificate of Incorporation, without the
approval of the holders of at least two-thirds (66 2/3%) of the then outstanding
shares of Series A Convertible Preferred Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be) separately as a series, the
Corporation will not (i) effect any transaction or other action that would
adversely affect the rights, preferences, powers (including voting powers) and
privileges of the Series A Convertible Preferred Stock or (ii) merge or
consolidate with another Person, sell all or substantially all of the assets of
the corporation or enter into a transaction which results in or take any action
which facilitates a Change of Control. "Change of Control" means any person or
"group" (within the meaning of Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), other than any group that includes
holders of Convertible Preferred Stock and/or their Affiliates, becoming the
beneficial owner, directly or indirectly, of outstanding shares of stock of the
Corporation entitling such Person or Persons to exercise 50% or more of the
total votes entitled to be cast at a regular or special meeting, or by action by
written consent, of the shareholders of the Corporation in the election of
directors (the term "beneficial owner" shall be determined in accordance with
Rule 13d-3 of the Exchange Act).

              5.6 Voting Rights of Series B Convertible Preferred Stock

                   5.6.1 In addition to any other vote required by law or this
Certificate, so long as at least 40% of the shares of Series B Convertible
Preferred Stock issued on the Issue Date remain outstanding the Corporation may
take the following actions only with the approval of the holders of a majority
of the shares of Series B Convertible Preferred Stock voting separately as a
class:

                   (i) liquidate the Corporation or acquire another business
entity;

                   (ii) create a joint venture, partnership or one or more
non-wholly owned subsidiaries requiring an investment in cash or kind of more
than $500,000;

<PAGE>

                   (iii) sell Corporation assets, which individually or in the
aggregate exceed $2,000,000;

                   (iv) incur indebtedness in excess of $1,000,000 or impose a
lien against or encumber assets of the Corporation in excess of $1,000,000
(other than a financing secured by inventory or a financing required in
connection with the optional redemption of the Convertible Preferred Stock in
accordance with Section 5.9);

                   (v) enter into or amend any contract not contemplated by an
approved budget or in excess of $250,000 in any one year or $1 million over the
life of the contract in the aggregate;

                   (vi) issue or sell securities of the Corporation (excluding
securities issuable upon exercise of options under the stock option or employee
incentive plans existing on October 12, 2000 or as a result of the conversion of
the Convertible Preferred Stock or any notes and warrants of the Corporation
outstanding as of the effective date of this Certificate);

                   (vii) declare dividends, repurchase or redeem securities of
the Corporation or debt, except to the extent such debt is due in accordance
with its terms and except for dividends, repurchases or redemption applicable to
the Convertible Preferred Stock or any notes of the Corporation outstanding as
of the effective date of this Certificate;

                   (viii) make capital expenditures in excess of 110% of capital
expenditures set forth in the annual budget;

                   (ix) grant registration rights or register securities under
the Securities Act of 1933, as amended, except pursuant to any registration
rights agreement of the Corporation outstanding as of the effective date of this
Certificate or registrations on Form S-8 or similar forms;

                   (x) enter into any contract with an affiliate;

                   (xi) amend the Corporation's Certificate of Incorporation or
Bylaws;

                   (xii) increase or decrease the number of members of the
Corporation's Board of Directors or the voting rights of the directors;

<PAGE>

                   (xiii) change the Corporation's independent public
accountants;

                   (xiv) approve the annual budget, and any changes to the
business plan and five year budget and any successor thereto;

                   (xv) adopt or amend employment contracts with Corporation
officers and senior executive managers with authority equivalent to that of
Executive Vice Presidents; or

                   (xvi) amend or alter the New Investment Agreement.

                   5.6.2 For so long as at least 20% of the shares of Series B
Convertible Preferred Stock outstanding on the Issue Date remain outstanding,
the holders of the Series B Convertible Preferred Stock voting separately as a
class, shall be entitled to elect one (1) director to the Board of Directors
(hereafter referred to as the "Class B Director") upon a vote of a majority of
the outstanding shares of Series B Convertible Preferred Stock. For so long as
at least 40% of the shares of the Series B Convertible Preferred Stock issued on
the Issue Date remain outstanding, the Class B Director shall be entitled to
seven votes on any action taken by the Board of Directors.

                   5.6.3 Notwithstanding anything set forth herein, with the
exception of any action duly approved by the holders of Series B Convertible
Preferred Stock pursuant to Section 5.6.1 above, at any time when any shares of
Series B Convertible Preferred Stock are outstanding, except where the vote or
written consent of the holders of a greater number of shares of the Corporation
is required by law or by this Certificate, and in addition to any other vote
required by law or this Certificate, without the approval of the holders of at
least two-thirds (66 2/3%) of the then outstanding shares of Series B
Convertible Preferred Stock, given in writing or by vote at a meeting,
consenting or voting (as the case may be) separately as a series, the
Corporation will not (i) effect any transaction or other action that would
adversely affect the rights, preferences, powers (including voting powers) and
privileges of the Series B Convertible Preferred Stock or (ii) merge or
consolidate with another Person, sell all or substantially all of the assets of
the corporation or enter into a transaction which results in or take any action
which facilitates a Change of Control.

              5.7 Voting Rights Generally

                   5.7.1 Holders of Convertible Preferred Stock shall be
entitled to notice of any stockholders' meeting. Except as otherwise required by
law, at any annual or special meeting of the Corporation's stockholders, or in
connection with

<PAGE>

any written consent in lieu of any such meeting, the holders of each outstanding
share of Convertible Preferred Stock shall be entitled to cast, in respect of
such share, the number of votes equal to the number of full shares of Common
Stock into which such share of Convertible Preferred Stock is then convertible
(calculated by rounding any fractional share up to the nearest whole number) on
the date for determination of stockholders entitled to vote at the meeting.
Except as set forth herein or otherwise required by law, the Convertible
Preferred Stock and the Common Stock shall vote together as a single class on
each matter submitted to the stockholders, and not by separate class or series.

                   5.7.2 A vacancy in any directorship elected by the holders of
the Series A Convertible Preferred Stock or Series B Convertible Preferred
Stock, as the case may be, shall be filled only by vote or written consent in
lieu of a meeting of the holders of the Series A Convertible Preferred Stock or
Series B Convertible Preferred Stock, as the case may be. Except as otherwise
required by applicable law, any member of the Board of Directors elected by the
holders of the Series A Convertible Preferred Stock or Series B Convertible
Preferred Stock, as the case may be, may only be removed by the vote of the
holders of not less than a majority of the Series A Convertible Preferred Stock
or Series B Convertible Preferred Stock, as the case may be, voting thereon.

                   5.7.3 Notwithstanding anything set forth herein, the Class A
Director and Class B Director shall not be entitled to vote on the question of
whether the Corporation exercises its right of redemption in Section 5.9 or the
incurrence of any debt or issuance of any equity to finance such optional
redemption.

              5.8 Conversions. The holders of shares of Convertible Preferred
Stock shall have the following conversion rights:

                   5.8.1 Right to Convert. Subject to the terms and conditions
of this Section 5.8.1, the holder of any share or shares of Convertible
Preferred Stock shall have the right, at its option at any time and from time to
time, to convert any such shares (or fractions thereof) of Convertible Preferred
Stock (except that upon any Liquidation, the right of conversion shall terminate
at the close of business on the business day immediately preceding the date
fixed for payment of the amount distributable on the Convertible Preferred
Stock) into such number of fully paid and nonassessable shares of Common Stock
as is obtained

                   (i) in the case of the Series A Convertible Preferred Stock,
by (x) multiplying the number of shares of Series A Convertible Preferred Stock
to be so converted by the Series A Face Value and (y) dividing the result by the
Series A Conversion Price (as defined below) applicable to such share,
determined as provided below, in effect on the date the certificate is
surrendered for conversion and

<PAGE>


                   (ii) in the case of the Series B Convertible Preferred Stock,
by (x) dividing the Series B Face Value by (y) the Series B Conversion Price
applicable to such share, determined as provided below, in effect on the date
the certificate is surrendered for conversion;

         plus, in either case, at the Company's option, either a number of
shares of Common Stock (valued at their Current Market Price on the Business Day
prior to the date of payment), or an amount in cash, as the case may be, equal
to any accrued but unpaid dividends on the shares of Convertible Preferred Stock
so converted.

         The initial Series A Conversion Price per share for shares of
Convertible Preferred Stock shall be $2.34 per share, as adjusted pursuant to
the further provisions of this Section 5.8 (each such price, or such price as
last adjusted, being referred to as the "Series A Conversion Price" or "Series B
Conversion Price" as applicable). Such rights of conversion shall be exercised
by the holder thereof by giving written notice that the holder elects to convert
a stated number of shares of Convertible Preferred Stock into Common Stock and
by surrender of a certificate or certificates for the shares to be so converted
to the Corporation at its principal office (or such other office or agency of
the Corporation as the Corporation may designate by notice in writing to the
holders of the Convertible Preferred Stock) at any time during its usual
business hours on the date set forth in such notice, together with a statement
of the name or names (with address) in which the certificate or certificates for
shares of Common Stock shall be issued.

                   5.8.2 Automatic Conversion of Series A Convertible Preferred
Stock. (a) One-quarter of the shares of Series A Convertible Preferred Stock
outstanding on the Issue Date shall automatically be converted, with no further
action on the part of the Corporation or the holder thereof, into such number of
fully paid and non-assessable shares of Common Stock and such other
consideration as is determined under Section 5.8.1 on the date, if any, after
November 1, 2001, on which the last sale price of the Common Stock on the NASDAQ
Small Cap Market or, if not quoted on the NASDAQ Small Cap Market, on any other
national securities exchange, has reached at least four times the Conversion
Price (the "Price Trigger") for 30 consecutive trading days during the prior 90
days. Following the 90th day after such date and every 90 days thereafter until
no shares of Series A Convertible Preferred Stock are outstanding, an additional
one-quarter of the shares of Series A Convertible Preferred Stock initially
outstanding shall automatically be converted on the date on which the Price
Trigger has been reached for 30 consecutive trading days during the 90-day
period; provided, that such automatic conversion shall occur (i) no more than
once during any 90-day period and (ii) only if at such time there exists an
effective registration statement filed by the Corporation under the Securities
Act of 1933 (the "Act") registering the resale of the shares of Common Stock to
be received upon conversion and the Corporation is obligated to maintain the
effectiveness thereof for at least 120 days after such conversion. The

<PAGE>

automatic conversion shall be effected on a pro rata basis among holders of
Series A Convertible Preferred Stock.

         (b) Immediately prior to the closing of a merger, sale of all or
substantially all of the Corporation's assets, or any combination thereof in
which the Corporation or its shareholders are to receive cash or marketable
securities with an aggregate value per share of Series A Convertible Preferred
Stock of at least three times the Conversion Price, each outstanding share of
Series A Convertible Preferred Stock shall automatically, with no further action
required to be taken by the Corporation or the holder thereof, be converted into
such number of fully paid and nonassessable shares of Common Stock and such
other consideration as is determined under Section 5.8.1.

         (c) Immediately after the conversion in Section 5.8.2(a) or (b), each
holder of shares of Series A Convertible Preferred Stock so converted shall be
deemed to be the holder of record of the Common Stock issuable upon conversion
of such holder's shares notwithstanding that the share register of the
Corporation shall then be closed or that certificates representing such Common
Stock shall not then be actually delivered to such person. Upon notice from the
Corporation, each holder of shares of Series A Convertible Preferred Stock so
converted shall promptly surrender to the Corporation, at any place where the
Corporation shall maintain a transfer agent for its Series A Convertible
Preferred Stock and Common Stock, certificates representing the shares so
converted, duly endorsed in blank or accompanied by proper instruments of
transfer. On the date of such automatic conversion, all rights with respect to
the shares of Series A Convertible Preferred Stock so converted, including the
rights, if any, to receive notices and to vote, will terminate, except only the
rights of holders thereof to (i) receive certificates for the number of shares
of Common Stock into which such shares of Series A Convertible Preferred Stock
have been converted, (ii) the payment of any accrued but unpaid dividends
thereon as provided herein and (iii) exercise the rights to which they are
entitled as holders of Common Stock.

                   5.8.3 Issuance of Certificates; Time Conversion Effected.
Promptly after the surrender of the certificate or certificates for the shares
of Convertible Preferred Stock to be converted as set forth above, the
Corporation shall issue and deliver, or cause to be issued and delivered, to the
holders, registered in such name or names as such holders may direct, a
certificate or certificates for the number of whole shares of Common Stock
issuable upon the conversion of such shares of Convertible Preferred Stock.

                   5.8.4 Fractional Shares; Partial Conversion. No fractional
shares of Common Stock shall be issued upon conversion of Convertible Preferred
Stock into Common Stock. If any fractional share of Common Stock would, except
for the provisions of the first sentence of this Subparagraph 6(d), be delivered

<PAGE>

upon such conversion, the Corporation, in lieu of delivering such fractional
share, shall pay to the holder surrendering the Convertible Preferred Stock for
conversion an amount in cash equal to the current market price of such
fractional share as determined in good faith by the Board of Directors of the
Corporation.

                   5.8.5 Antidilution Adjustments. The Series A Conversion Price
and the Series B Conversion Price shall be subject to adjustment as follows if
any of the events listed below occur after the effective date of this
Certificate (regardless of whether any shares of such series of Convertible
Preferred Stock are outstanding) but, with respect to a share of Convertible
Preferred Stock, prior to the conversion of such share of Convertible Preferred
Stock into Common Stock.

                   (i) In case the Corporation shall (x) pay a dividend or make
a distribution on its Common Stock in shares of its Common Stock, (y) subdivide
or reclassify its outstanding Common Stock into a greater number of shares, or
(z) combine or reclassify its outstanding Common Stock into a smaller number of
shares, the applicable Conversion Price in effect immediately prior to such
event shall be adjusted so that the holder of any share of the Convertible
Preferred Stock thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock which it would have owned or have
been entitled to receive after the happening of such event had the share of such
Convertible Preferred Stock been converted immediately prior to the happening of
such event. An adjustment made pursuant to this paragraph shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective on the effective date in the case of subdivision,
combination or reclassification. If any dividend or distribution is not paid or
made, the applicable Conversion Price then in effect shall be appropriately
readjusted.

                   (ii) In case the Corporation shall pay, issue or distribute
to its holders of capital stock any shares of capital stock of the Corporation
or evidences of indebtedness or cash or other assets (excluding (w) regular cash
dividends payable out of earnings in the ordinary course and distributed ratably
to the holders of Convertible Preferred Stock, (x) distributions paid from
retained earnings of the Corporation and distributed ratably to the holders of
Convertible Preferred Stock, (y) dividends or distributions referred to in
clause (i) above and (z) dividends or distributions paid or made to holders of
shares of Convertible Preferred Stock in the manner provided in Section 5.3
above) or rights, options or warrants to subscribe for or purchase any of its
securities then, in each such case, the applicable Conversion Price shall be
adjusted so that it shall equal the price determined by multiplying the
applicable Conversion Price in effect immediately prior to the date of the
distribution by a fraction the numerator of which shall be the applicable
Conversion Price less the then fair market value (as determined by the Board of
Directors, whose determination, if made in good faith, shall be conclusive) of
the portion of the capital stock, cash or assets or evidences of

<PAGE>

indebtedness so distributed, or of the subscription rights, options or warrants
so distributed or of such convertible or exchangeable securities, with respect
to one share of Common Stock, and the denominator of which shall be the
applicable Conversion Price in effect immediately prior to the date of the
distribution. Such adjustment shall be made whenever any such distribution is
made, and shall become effective retroactive to the record date for the
determination of stockholders entitled to receive such distribution. If any such
distribution is not made or if any or all of such rights, options or warrants
expire or terminate without having been exercised, the applicable Conversion
Price then in effect shall be appropriately readjusted.

                   (iii) Whenever the applicable Conversion Price is adjusted as
herein provided or as provided in Section 5.8.6(a), the Corporation shall
promptly file with the conversion agent (or, if there is no conversion agent,
the secretary of the Corporation) an officer's certificate setting forth such
Conversion Price after the adjustment and setting forth a brief statement of the
facts requiring the adjustment, which certificate shall be conclusive evidence
of the correctness of the adjustment. Promptly after delivery of the
certificate, the Corporation shall prepare a notice of the adjustment of such
Conversion Price setting forth such Conversion Price and the date on which the
adjustment becomes effective and shall mail the notice of such adjustment of the
applicable Conversion Price (together with a copy of the officer's certificate
setting forth the facts requiring such adjustment) to the holder of each share
of the Convertible Preferred Stock at such holder's last address as shown on the
stock books of the Corporation.

                   (iv) For the purpose of any computation under any provision
relating to the Convertible Preferred Stock, the "Current Market Price" per
share of Common Stock on any date shall be deemed to be the average of the daily
closing prices per share of Common Stock for the 30 consecutive trading days
immediately preceding such date. If on any such date the shares of Common Stock
are not listed or admitted for trading on any national securities exchange or
quoted by NASDAQ or a similar service, the Current Market Price for the Common
Stock shall be the fair market value of the Common Stock on such date as
determined in good faith by the Board of Directors of the Corporation.

<PAGE>

                   5.8.6 Series B Adjustment.

                        (a) In case the Corporation shall (i) sell or issue
shares of its Common Stock, (ii) issue rights, options or warrants to subscribe
for or purchase shares of Common Stock or (iii) issue or sell other rights for
the purchase of shares of Common Stock or securities convertible into or
exchangeable into shares of Common Stock, in the case of one or more of the
events described in the immediately preceding clauses (i), (ii) and (iii)
(excluding those issuances referred to in Section 5.8.6(b) (collectively, the
"Securities"), at a price per share (the "New Issue Price") less than the Series
B Conversion Price, then in each such case the Series B Conversion Price in
effect immediately prior to the issuance of such Securities shall be adjusted to
equal the New Issue Price. The adjustment provided for in this Subparagraph 6(f)
shall be made successively whenever any Securities are issued (provided,
however, that no further adjustments in the Series B Conversion Price shall be
made upon the subsequent exercise, conversion or exchange, as applicable of such
Securities pursuant to the original terms of such Securities) and shall become
effective immediately after such issuance. In determining whether any Securities
entitle the holders of the Common Stock to subscribe for or purchase shares of
Common Stock at less than the Series B Conversion Price, and in determining the
New Issue Price of the shares of Common Stock so offered, there shall be taken
into account any consideration received by the Corporation for such Securities,
any consideration required to be paid upon the exercise, conversion or exchange,
as applicable, of such Securities and the value of all such consideration (if
other than cash) shall be determined in good faith by the Board of Directors of
the Corporation.

                        (b) Notwithstanding the foregoing, the provisions of
this paragraph shall not apply to the issuance of: (x) any equity securities
issued at then fair market value pursuant to the Corporation's employee option
or stock incentive plan approved by the Board of Directors of the Corporation on
or prior to October 12, 2000, or (y) any equity securities issued at then fair
market value as consideration for services of non-employee third parties
provided to the Corporation (in an aggregate amount not to exceed 100,000 shares
of Common Stock in any fiscal year (as such number may be adjusted to reflect
stock splits, combinations and the like)).

                   5.8.7 Reorganization, Recapitalization or Reclassification.
If any capital reorganization, recapitalization or reclassification of the
capital stock of the Corporation (other than a merger or consolidation of the
Corporation in which the Corporation is the surviving corporation and which does
not result in a reclassification or change of outstanding shares of Common
Stock) or a merger or consolidation shall be effected in such a way that holders
of Common Stock shall be entitled to receive stock, securities or assets (other
than cash dividends payable out of earnings or surplus in the ordinary course of
business) with respect to or in exchange for Common Stock, then, as a condition
of such reorganization, recapitalization or

<PAGE>

reclassification, lawful and adequate provisions shall be made whereby each
holder of a share or shares of Convertible Preferred Stock shall thereupon have
the right to receive upon conversion of such share or shares of Convertible
Preferred Stock, upon the basis and upon the terms and conditions specified
herein and in lieu of the shares of Common Stock immediately theretofore
receivable upon the conversion of such share or shares of Convertible Preferred
Stock, such shares of stock, securities or assets as may be issued or payable
with respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately theretofore
receivable upon such conversion had such reorganization or reclassification not
taken place, and in any such case appropriate provisions shall be made with
respect to the rights and interests of such holder to the end that the
provisions hereof (including without limitation provisions for adjustments of
the Conversion Price) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of such conversion rights.

                   5.8.8 Other Notice. In case at any time:

                        (i) the Corporation shall declare any dividend upon its
Common Stock payable in cash or stock or make any other distribution to the
holders of its Common Stock;

                        (ii) the Corporation shall offer for subscription pro
rata to the holders of its Common Stock any additional shares of stock of any
class or other rights;

                        (iii) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or a consolidation or
merger of the Corporation with or into another entity or entities, or a sale,
lease, abandonment, transfer or other disposition of all or substantially all
its assets; or

                        (iv) there shall be a voluntary or involuntary
dissolution or winding up of the Corporation;

                   then, in any one or more of said cases, the Corporation shall
give, by delivery in person, certified or registered mail, return receipt
requested, telecopier or telex, addressed to each holder of any shares of
Convertible Preferred Stock at the address of such holder as shown on the books
of the Corporation, (i) at least 10 days' prior written notice of the date on
which the books of the Corporation shall close or a record shall be taken for
such dividend, distribution or subscription rights or for determining rights to
vote in respect of any such reorganization, reclassification, consolidation,
merger, disposition, dissolution or

<PAGE>

winding up and (ii) in the case of any such reorganization, reclassification,
consolidation, merger, disposition, dissolution or winding up, at least 10 days'
prior written notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause (i) shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto and such notice in accordance
with the foregoing clause (ii) shall also specify the date on which the holders
of Common Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, disposition, dissolution or winding up, as the case may
be.

                   5.8.9 Stock to be Reserved. The Corporation will at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the conversion of the Convertible Preferred
Stock as herein provided, such number of shares of Common Stock as shall then be
issuable upon the conversion of all outstanding shares of Convertible Preferred
Stock. The Corporation covenants that all shares of Common Stock which shall be
so issued shall be duly authorized, validly issued, fully paid and nonassessable
by the Corporation and free from all taxes, liens and charges with respect to
the issue thereof, and, without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action as may
be requisite to assure that the par value per share of the Common Stock is at
all times equal to or less than the Conversion Price in effect at the time. The
Corporation will take all such action as may be necessary to assure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirement of any national securities exchange or
quotation system upon which the Common Stock may be listed. The Corporation will
not take any action which results in any adjustment of the Conversion Price if
the total number of shares of Common Stock issued and issuable after such action
upon conversion of the Convertible Preferred Stock would exceed the total number
of shares of Common Stock then authorized by the Corporation's Certificate of
Incorporation.

                   5.8.10 Reissuance of Preferred Stock. Shares of Convertible
Preferred Stock that have been issued and reacquired in any manner, including
shares purchased or redeemed or exchanged or converted, shall not be reissued as
shares of Convertible Preferred Stock and shall (upon compliance with any
applicable provisions of the General Corporation Law of the State of Delaware)
have the status of authorized but unissued shares of Preferred Stock of the
Corporation undesignated as to series and may be designated or redesignated and
issued or reissued, as the case may be, as part of any series of Preferred Stock
of the Corporation other than Convertible Preferred Stock.

                   5.8.11 Issue Tax. The issuance of certificates for shares of
Common Stock upon conversion of Convertible Preferred Stock shall be made
without charge to the holders thereof for any issuance tax in respect thereof,
provided that the

<PAGE>

Corporation shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any certificate in a
name other than that of the holder of the Convertible Preferred Stock which is
being converted.

                   5.8.12 Closing of Books. The Corporation will at no time
close its transfer books against the transfer of any Convertible Preferred Stock
or of any shares of Common Stock issued or issuable upon the conversion of any
shares of Convertible Preferred Stock in any manner which interferes with the
timely conversion of such Convertible Preferred Stock, except as may otherwise
be required to comply with applicable laws.

                   5.8.13 Minimum Adjustment. No reduction of the Conversion
Price shall be made if the amount of any such reduction would be an amount less
than $.025, but any such amount shall be carried forward and reduction with
respect thereof shall be made at the time of and together with any subsequent
reduction which, together with such amount and any other amount or amounts so
carried forward, shall aggregate $.025 or more.

              5.9 Optional Redemption. The Corporation may redeem for cash all
but not less than all of the Convertible Preferred Stock on not less than 30
days written notice to the holders thereof, during the periods and at the prices
set forth below, plus all accrued but unpaid dividends thereon; provided that no
such redemption shall be permitted unless (x) at such time there exists an
effective registration statement filed by the Corporation under the Act
registering the resale of the shares of Common Stock to be received upon
conversion of the Convertible Preferred Stock and the Corporation is obligated
to maintain the effectiveness thereof for at least 120 days after the proposed
date or redemption and (y) if the redemption of Convertible Preferred Stock does
not meet the requirements of either Section 302(b)(2) or 302(b)(3) of the
Internal Revenue Code of 1986, as amended, then to avoid such treatment, the
Corporation shall offer to effect a redemption of Common Stock from the holders
of Convertible Preferred Stock or their designees, to the extent necessary to
meet the requirements of either one of such Sections, at a purchase price equal
to the Current Market Price on the date notice of redemption is given pursuant
to this Section 5.9.

--------------------------------------------------------------------------------
               Time Period                      Multiple of the Conversion Price
--------------------------------------------------------------------------------
November 13, 2002 through November 12, 2004                   4x
--------------------------------------------------------------------------------
November 13, 2004 through November 12, 2006                   4.5x
--------------------------------------------------------------------------------
On or after November 13, 2006                                 5x
--------------------------------------------------------------------------------

<PAGE>

              5.10 Adjustment of Face Value. In case the Corporation shall
subdivide or reclassify its outstanding Convertible Preferred Stock into a
greater number of shares or combine or reclassify its outstanding Convertible
Preferred Stock into a smaller number of shares, the Series A Face Value or
Series B Face Value, as the case may be, in effect immediately prior to such
event shall be adjusted to reflect such increase or decrease. An adjustment made
pursuant to this paragraph shall become effective on the effective date of
subdivision, combination or reclassification.

              5.11 Future Issuance of Shares; Preemptive Rights.

                   5.11.1 Offering Notice..11.1 Offering Notice. Except for (i)
capital stock or options to purchase capital stock of the Corporation which may
be issued to employees, consultants or directors of the Corporation pursuant to
a stock incentive plan or other employee benefit arrangement approved by the
Board of Directors, (ii) a subdivision of the outstanding shares of Common Stock
into a larger number of shares of Common Stock, (iii) capital stock issued as
full or partial consideration for a merger, acquisition, joint venture,
strategic alliance, license agreement or other similar non-financing
transaction, (iv) capital stock issued as full or partial consideration for
services (v) capital stock issued in connection with a publicly registered
offering, (vi) capital stock issued upon exercise, conversion or exchange of any
Preferred Stock, options or warrants, or (vii) capital stock purchased by any
Purchaser in the public market or from the Corporation, if the Corporation
wishes to issue any shares of capital stock or any other securities convertible
into or exchangeable for capital stock of the Corporation (collectively, "New
Securities") to any Person (the "Subject Purchaser"), then the Corporation shall
send written notice (the "New Issuance Notice") to the holders of the
Convertible Preferred Stock, which New Issuance Notice shall state (x) the
number of New Securities proposed to be issued and (y) the proposed purchase
price per share of the New Securities that the Corporation is willing to accept
(the "Proposed Price").

<PAGE>

                   5.11.2 Preemptive Rights; Exercise..11.2 Preemptive Rights;
Exercise.

                        (i) For a period of ten (10) days after the giving of
the New Issuance Notice as provided in Section 5.11.1, each initial holder of
the Convertible Preferred Stock or, as the case may be, their permitted
assignees pursuant to Section 11.3 of the Investment Agreement, dated as of July
27, 1999, amont the Company, the Purchasers, The Lynch Foundation, Peter Lynch
and Pilot Domestic Trust and Section 12.3 of the New Investment Agreement (each,
a "Preemptive Rightholder") shall have the right to purchase up to its
Proportionate Percentage (as hereinafter defined) of the New Securities at a
purchase price equal to the Proposed Price and upon the terms and conditions set
forth in the New Issuance Notice. Each Preemptive Rightholder shall have the
right to purchase up to that percentage of the New Securities determined by
dividing (a) a number equal to the number of shares of Common Stock into which
the shares of Convertible Preferred Stock then owned by such Preemptive
Rightholder are convertible by (b) the total of (x) the number of shares of
Common Stock then outstanding and (y) the number of shares of Common Stock into
which all outstanding shares of Preferred Stock are convertible (the
"Proportionate Percentage").

                        (ii) The right of each Preemptive Rightholder to
purchase the New Securities under subsection (i) above shall be exercisable by
delivering written notice of its exercise, prior to the expiration of the 10-day
period referred to in subsection (i) above, to the Corporation, which notice
shall state the amount of New Securities that the Preemptive Rightholder elects
to purchase as provided in Section 5.11.2(i). The failure of a Preemptive
Rightholder to respond within the 10-day period shall be deemed to be a waiver
of the Preemptive Rightholder's rights under Section 5.11.2(i); provided that
each Preemptive Rightholder may waive its, his or her rights under Section
5.11.2(i) prior to the expiration of the 10-day period by giving written notice
to the Corporation.

                        (iii) If, following the expiration of the 10-day period
referred to above, not all of the New Securities have been subscribed for by the
Subject Purchasers, each Preemptive Rightholder shall have the option to
increase that number of New Securities it has elected to purchase pursuant to
Section 5.11.2(i) by a proportionate amount.

                   5.11.3 Closing..11.3 Closing. The closing of the purchase of
New Securities subscribed for by the Preemptive Rightholders under Section
5.11.2 shall be held at the same time and place as the closing of the New
Securities subscribed for by the Subject Purchasers (the "Closing"). At the
Closing, the Corporation shall deliver certificates representing the New
Securities, and the New Securities shall be issued free and clear of all liens
and the Corporation shall so represent and warrant, and further represent and
warrant that the New Securities shall be, upon

<PAGE>

issuance of the New Securities to the Preemptive Rightholders and after payment
for the New Securities, duly authorized, validly issued, fully paid and
nonassessable by the Corporation. At the Closing, the Preemptive Rightholders
purchasing the New Securities shall deliver payment in full in immediately
available funds for the New Securities purchased by it, him or her. At the
Closing, all of the parties to the transaction shall execute any additional
documents that are otherwise necessary or appropriate.

                   5.11.4 Sale to Subject Purchaser. The Corporation may sell to
the Subject Purchaser all of the New Securities not purchased by the Preemptive
Rightholders on terms and conditions that are no more favorable to the Subject
Purchaser than those set forth in the New Issuance Notice; provided, however,
that the sale is bona fide and made pursuant to a contract entered into within
four (4) months of the earlier to occur of (i) the waiver by the Preemptive
Rightholders of their option to purchase the New Securities as provided in
Section 5.11.2 and (ii) the expiration of the 10-day period referred to in
Section 5.11.2. If such sale is not consummated within such four (4) month
period for any reason, then the restrictions provided for in this Section 5.11
shall again become effective, and no issuance and sale of New Securities may be
made thereafter by the Corporation without again offering the New Securities in
accordance with this Section 5.11. The closing of any issue and purchase
contemplated by this Section 5.11.4 shall be held at the time and place as the
parties to the transaction may agree.

                   5.11.5 Election of Directors. Members of the Board of
Directors of the Corporation (the "Board") may be elected either by written
ballot or by voice vote.

                   5.11.6 Limitation of Liability. No director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, provided that
this provision shall not eliminate or limit the liability of a director (a) for
any breach of such person's duty of loyalty to the Corporation or its
stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under section 174 of
the General Corporation Law or (d) for any transaction from which the director
derived any improper personal benefits.

         Any repeal or modification of the foregoing provision shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.

                   5.12 Transactions5.12 Transactions. In case of any merger or
consolidation of the Corporation or any capital reorganization, reclassification
or other change of outstanding shares of Common Stock (other than a change in
par value, or from par value to no par value, or from no par value to par value)
(each, a "Transaction"), the Corporation shall execute and deliver to each
holder of Convertible Preferred Stock at

<PAGE>

least twenty (20) Business Days prior to effecting such Transaction a
certificate stating that the holder of each share of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock shall have the right to
receive in such Transaction, in exchange for each share of Series A Convertible
Preferred Stock or Series B Convertible Preferred Stock, as the case may be, a
security identical to (and not less favorable than) the Series A Convertible
Preferred Stock or Series B Preferred Stock, as the case may be, and provision
shall be made therefor in the agreement, if any, relating to such Transaction.
Any certificate delivered pursuant to this Section 5.12 shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Section 5.8 hereof. The provisions of this Section
5.12 and any equivalent thereof in any such certificate similarly shall apply to
successive transactions.

         6. Indemnification.

              6.1 To the extent not prohibited by law, the Corporation shall
indemnify any person who is or was made, or threatened to be made, a party to
any threatened, pending or completed action, suit or proceeding (a
"Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Corporation
to procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director or
officer of the Corporation, or, at the request of the Corporation, is or was
serving as a director or officer of any other corporation or in a capacity with
comparable authority or responsibilities for any partnership, joint venture,
trust, employee benefit plan or other enterprise (an "Other Entity"), against
any judgments, fines, penalties, excise taxes, amounts paid in settlement and
costs, charges and expenses (including attorneys' fees, disbursements and other
charges). Persons who are not directors or officers of the Corporation (or
otherwise entitled to indemnification pursuant to the preceding sentence) may be
similarly indemnified in respect of service to the Corporation or to an Other
Entity at the request of the Corporation to the extent the Board at any time
specifies that such persons are entitled to the benefits of this Section 6.

              6.2 The Corporation shall, from time to time, reimburse or advance
to any director or officer or other person entitled to indemnification hereunder
the funds necessary for payment of expenses, including attorneys' fees and
disbursements, incurred in connection with any Proceeding, in advance of the
final disposition of such Proceeding; provided, however, that, if required by
the General Corporation Law, such expenses incurred by or on behalf of any
director or officer or other person may be paid in advance of the final
disposition of a Proceeding only upon receipt by the Corporation of an
undertaking, by or on behalf of such director or officer (or other person
indemnified hereunder), to repay any such amount so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right of

<PAGE>

appeal that such director, officer or other person is not entitled to be
indemnified for such expenses.

              6.3 The rights to indemnification and reimbursement or advancement
of expenses provided by, or granted pursuant to, this Section 6 shall not be
deemed exclusive of any other rights to which a person seeking indemnification
or reimbursement or advancement of expenses may have or hereafter be entitled
under any statute, this Certificate of Incorporation, the By-laws of the
Corporation (the "By-laws"), any agreement, any vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office.

              6.4 The rights to indemnification and reimbursement or advancement
of expenses provided by, or granted pursuant to, this Section 6 shall continue
as to a person who has ceased to be a director or officer (or other person
indemnified hereunder) and shall inure to the benefit of the executors,
administrators, legatees and distributees of such person.

              6.5 The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of an Other Entity, against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not the
Corporation would have the power to indemnify such person against such liability
under the provisions of this Section 6, the By-laws or under section 145 of the
General Corporation Law or any other provision of law.

              6.6 The provisions of this Section 6 shall be a contract between
the Corporation, on the one hand, and each director and officer who serves in
such capacity at any time while this Section 6 is in effect and any other person
entitled to indemnification hereunder, on the other hand, pursuant to which the
Corporation and each such director, officer, or other person intend to be, and
shall be, legally bound. No repeal or modification of this Section 6 shall
affect any rights or obligations with respect to any state of facts then or
theretofore existing or thereafter arising or any proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts.

              6.7 The rights to indemnification and reimbursement or advancement
of expenses provided by, or granted pursuant to, this Section 6 shall be
enforceable by any person entitled to such indemnification or reimbursement or
advancement of expenses in any court of competent jurisdiction. The burden of
proving that such indemnification or reimbursement or advancement of expenses is
not

<PAGE>

appropriate shall be on the Corporation. Neither the failure of the Corporation
(including its Board, its independent legal counsel and its stockholders) to
have made a determination prior to the commencement of such action that such
indemnification or reimbursement or advancement of expenses is proper in the
circumstances nor an actual determination by the Corporation (including its
Board, its independent legal counsel and its stockholders) that such person is
not entitled to such indemnification or reimbursement or advancement of expenses
shall constitute a defense to the action or create a presumption that such
person is not so entitled. Such a person shall also be indemnified for any
expenses incurred in connection with successfully establishing his or her right
to such indemnification or reimbursement or advancement of expenses, in whole or
in part, in any such proceeding.

              6.8 Any director or officer of the Corporation serving in any
capacity with (a) another corporation of which a majority of the shares entitled
to vote in the election of its directors is held, directly or indirectly, by the
Corporation or (b) any employee benefit plan of the Corporation or any
corporation referred to in clause (a) shall be deemed to be doing so at the
request of the Corporation.

              6.9 Any person entitled to be indemnified or to reimbursement or
advancement of expenses as a matter of right pursuant to this Section 6 may
elect to have the right to indemnification or reimbursement or advancement of
expenses interpreted on the basis of the applicable law in effect at the time of
the occurrence of the event or events giving rise to the applicable Proceeding,
to the extent permitted by law, or on the basis of the applicable law in effect
at the time such indemnification or reimbursement or advancement of expenses is
sought. Such election shall be made by a notice in writing to the Corporation,
at the time indemnification or reimbursement or advancement of expenses is
sought; provided, however, that if no such notice is given, the right to
indemnification or reimbursement or advancement of expenses shall be determined
by the law in effect at the time indemnification or reimbursement or advancement
of expenses is sought.

<PAGE>

         7. Adoption, Amendment and/or Repeal of By-Laws. Subject to such vote
of stockholders as may be required by Section 5 of this Certificate of
Incorporation, the Board may from time to time adopt, amend or repeal the
By-laws of the Corporation; provided, however, that any By-laws adopted or
amended by the Board may be amended or repealed, and any By-laws may be adopted,
by the stockholders of the Corporation by such vote as may be required by
Section 5 of this Certificate of Incorporation plus the vote of the holders of a
majority of the shares of stock of the Corporation entitled to vote in the
election of directors of the Corporation.

         8. Documents. A copy of any document referred to herein will be
furnished to any stockholder of record upon written request to the Corporation's
secretary.

         IN WITNESS WHEREOF, the undersigned have executed this Certificate as
of the 13th date of November, 2000.


                                            ----------------------------
                                            E. Kenneth Seiff, President

<PAGE>

                                                                    EXHIBIT D TO
                                                            INVESTMENT AGREEMENT

         THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT
BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.

                                  BLUEFLY, INC.

                          SUBORDINATED CONVERTIBLE NOTE

$
 -------------------
New York, New York                                             November 13, 2000

         FOR VALUE RECEIVED, the undersigned, BLUEFLY, INC., a New York
corporation (the "Payor" or the "Company"), promises to pay to the order of
____________ or its registered assign (the "Payee"), the principal sum of
____________ DOLLARS ($________) and interest on the outstanding principal
balance as set forth herein.

         1. Investment Agreement. This Subordinated Convertible Note is one of
the Subordinated Convertible Notes issued pursuant to the Investment Agreement,
dated as of November 13, 2000, among the Payor, Bluefly Merger Sub, Inc., the
Payee and ____________ (the "Investment Agreement"). The Payee is entitled to
the benefits of (and subject to the obligations expressly contained in) this
Subordinated Convertible Note and the Investment Agreement and may enforce the
agreements of the Payor contained herein and therein and exercise the remedies
provided for hereby and thereby or otherwise available in respect hereto and
thereto. Capitalized terms used herein without definition shall have the meaning
ascribed to such terms in the Investment Agreement.

         2. Interest Rate; Payment.

<PAGE>

         (a) The outstanding principal balance of this Subordinated Convertible
Note shall bear interest at an annual rate equal to 11% per annum, with interest
accruing, from and including the date hereof, on a cumulative, compounding
basis. Interest shall be computed on the basis of a 365- or 366-day year, as the
case may be, and the actual number of days elapsed, and shall be payable only
(i) upon repayment of the principal on any Repayment Date (as defined below) in
cash or (ii) upon conversion pursuant to Section 4 either in cash or, at the
Company's option, in shares of Series B Stock.

         (b) The outstanding balance of any amount owed under this Subordinated
Convertible Note which is not paid when due shall bear interest at the rate of
2% per annum (the "Default Interest") above the rate that would otherwise be in
effect under this Subordinated Convertible Note with the Default Interest
accruing, from and including such due date, on a cumulative, compounding basis.

         (c) The outstanding principal and all accrued and unpaid interest shall
be paid in full on May 1, 2001 (the "Maturity Date"), unless repaid earlier
pursuant to the provisions of Section 3, or unless this Subordinated Convertible
Note is earlier converted in accordance with Section 4 (the date of any payment
pursuant to Section 3 and the Maturity Date, collectively referred to as a
"Repayment Date"). On a Repayment Date, the Payor shall pay the applicable
amount of principal and interest in lawful money of the United States of America
by wire or bank transfer of immediately available funds to an account designated
by the Payee in writing from time to time.

    3. Prepayment.

         (a) Mandatory Prepayment.

              (i) Upon the occurrence of an Event of Default (under Section 6
(d) or (e), the outstanding principal of and all accrued interest on this
Subordinated Convertible Note shall be accelerated and shall automatically
become immediately due and payable, without presentment, demand, protest or
notice of any kind, all of which are expressly waived by the Payor,
notwithstanding anything contained herein to the contrary.

              (ii) The Payee shall, at its sole option, have the right to
require the Payor to pay the outstanding principal of and all accrued interest
on this Subordinated Convertible Note upon the occurrence of any of the
following events: (1) an Event of Default under Section 6(a), (b), (c), (f), (g)
or (h), (2) Payor entering into an agreement to effectuate any sale or other
disposition of all or substantially all of its assets, in one transaction or in
a series of transactions, (3) the Company entering into an agreement (other than
the Investment Agreement) to effectuate any consolidation or merger into another
entity, or (4) any sale (other than the sale contemplated by the Investment
Agreement) of a majority of the outstanding equity of the Company (or any other
event that constitutes a Change of Control (as defined below) of the Payor), in
one transaction or in a series of transactions. Immediately upon the occurrence
of either of the events set forth in clauses (1), (2) or (3) above, or
immediately upon obtaining knowledge that any person has entered into an
agreement to effectuate, the event set forth in clause (4) above, the Payor
shall give written notice of such event

<PAGE>

to the Payee. Change of Control means any Person or "group" (within the meaning
of Section 13(d)(3) of the Exchange Act) other than Payee and its Affiliates or
any group that includes Payee and/or its Affiliates, becoming the beneficial
owner, directly or indirectly, of outstanding shares of stock of the Company
entitling such Person or Persons to exercise 50% or more of the total votes
entitled to be cast at a regular or special meeting, or by action by written
consent, of the stockholders of the Company in the election of directors (the
term "beneficial owner" shall be determined in accordance with Rule 13d-3 of the
Exchange Act).

              (iii) Any mandatory prepayment under this Section 3(a) shall
include payment of reasonable costs and expenses, if any, associated with such
prepayment.

         (b) No Optional Prepayment. The Payor may not prepay this Subordinated
Convertible Note.

    4. Mandatory Conversion.

         (a) This Subordinated Convertible Note (plus interest accrued and
unpaid thereon) shall be automatically converted on the Second Closing Date (as
defined in the Investment Agreement) into that number of fully paid and
non-assessable shares of Series B Stock which is equal to the quotient obtained
by dividing the principal amount of this Subordinated Convertible Note (plus
interest accrued and unpaid thereon to the date of conversion) by the Conversion
Price (as defined below).

         (b) At the Second Closing (as defined in the Investment Agreement), the
Company shall deliver or cause to be delivered to the holder of this
Subordinated Convertible Note a certificate or certificates representing the
number of fully paid and non-assessable shares of Series B Stock into which this
Subordinated Convertible Note may be converted. Such conversion shall be deemed
to have been made simultaneously with the Second Closing so that the rights of
the holder as a holder of this Subordinated Convertible Note shall cease with
respect to this Subordinated Convertible Note at such time (including, without
limitation, the right to receive the principal of this Subordinated Convertible
Note other than in the form of shares of Series B Stock), interest shall cease
to accrue hereon and the person or persons entitled to receive the shares of
Series B Stock deliverable upon conversion of this Subordinated Convertible Note
shall be treated for all purposes as having become the record holders of such
shares of Series B Stock at such time, and such conversion shall be at the
conversion rate in effect at such time.

         (c) The Company covenants that it will at all times reserve and keep
available out of its authorized Series B Stock (at such time as such Series B
Stock is authorized) solely for the purpose of issue or delivery upon conversion
of this Subordinated Convertible Note as herein provided, such number of shares
of Series B Stock as shall then be issuable or deliverable upon the conversion
of this Subordinated Convertible Note. The Company covenants that all shares of
Series B Stock which shall be so issuable or deliverable shall, when issued or
delivered, be duly and validly issued and fully paid and non-assessable.

<PAGE>

         (d) No fractional shares of Series B Stock shall be issued upon
conversion of this Note and the Corporation shall, in lieu of issuing any
fractional share, pay cash equal to the product of such fraction multiplied by
the Current Market Price (as defined in the Certificate of Incorporation of
Bluefly, Inc., a Delaware corporation, attached as Exhibit C to the Investment
Agreement) of the number of shares of Common Stock into which one share of
Series B Stock is converted on the applicable date of conversion of this
Subordinated Convertible Note.

    5. Conversion Price; Antidilution Adjustments.

         (a) Conversion Price. The initial Conversion Price shall be $2.34
("Conversion Price"), subject to adjustment as set forth in subsection (b)
below.

         (b) Antidilution Adjustments. In case the Company shall (x) pay a
dividend or make a distribution on any of its securities in shares of Series B
Stock, (y) subdivide or reclassify its outstanding Series B Stock into a greater
number of shares, or (z) combine or reclassify its outstanding Series B Stock
into a smaller number of shares, the applicable Conversion Price in effect
immediately prior to such event shall be adjusted so that the Payee shall be
entitled to receive the number of shares of Series B Stock which it would have
owned or have been entitled to receive after the happening of such event had
this Subordinated Convertible Note been converted immediately prior to the
happening of such event. An adjustment made pursuant to this paragraph shall
become effective immediately after the record date in the case of a dividend or
distribution and shall become effective on the effective date in the case of
subdivision, combination or reclassification. If any dividend or distribution is
not paid or made, the applicable Conversion Price then in effect shall be
appropriately readjusted.

         (c) Certificate as to Adjustments. Upon any increase or decrease in the
Conversion Price, the Payor shall within a reasonable period (not to exceed ten
(10) days) following any of the foregoing transactions deliver to the holder of
the Subordinated Convertible Note a certificate, signed by (i) the Chief
Executive Officer of the Payor and (ii) the Chief Financial Officer of the
Payor, setting forth in reasonable detail the event requiring the adjustment and
the method by which such adjustment was calculated and specifying the increased
or decreased Conversion Price then in effect following such adjustment.

         (d) Reorganization, Reclassification. In case of any merger of the
Payor or any capital reorganization, reclassification or other change of
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value) (each, a
"Transaction"), the Payor shall execute and deliver to the holder at least ten
(10) Business Days prior to effecting such Transaction a certificate stating
that the holder of this Subordinated Convertible Note shall have the right to
receive in such Transaction, in exchange for this Subordinated Convertible Note,
a security identical to (and not less favorable than) this Subordinated
Convertible Note, and provision shall be made therefor in the agreement, if any,
relating to such Transaction. Such replacement note shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 5. The

<PAGE>

provisions of this Section 5(d) and any equivalent thereof in any such new note
similarly shall apply to successive transactions.

         6. Events of Default. An "Event of Default" shall occur if:

              (a) the Payor shall default in the payment of the principal of or
interest payable on this Subordinated Convertible Note, when and as the same
shall become due and payable, whether at maturity or at a date fixed for
prepayment or by acceleration or otherwise and such default with respect to the
payment of interest shall continue unremedied for two days;

              (b) the Payor shall fail to observe or perform any covenant or
agreement contained in this Subordinated Convertible Note or the Investment
Agreement and such failure shall continue for five business days after Payor
receives notice of such failure;

              (c) any representation, warranty, certification or statement made
by or on behalf of the Payor in this Subordinated Convertible Note or the
Investment Agreement or in any certificate, writing or other document delivered
pursuant hereto shall prove to have been incorrect in any material respect when
made;

              (d) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (A) relief
in respect of Payor or of a substantial part of Payor's respective property or
assets, under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other Federal or state bankruptcy, insolvency,
receivership or similar law (any such law, a "Bankruptcy Law"), (B) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for a substantial part of the property or assets of any Payor,
(C) the winding up or liquidation of any Payor; and such proceeding or petition
shall continue undismissed for 60 days, or an order or decree approving or
ordering any of the foregoing shall be entered;

              (e) the Payor shall (A) voluntarily commence any proceeding or
file any petition seeking relief under a Bankruptcy Law, (B) consent to the
institution of or the entry of an order for relief against it, or fail to
contest in a timely and appropriate manner, any proceeding or the filing of any
petition described in clause (d), (C) apply for or consent to the appointment of
a receiver, trustee, custodian, sequestrator, conservator or similar official
for a substantial part of the property or assets of the Payor, (D) file an
answer admitting the material allegations of a petition filed against it in any
such proceeding, (E) make a general assignment for the benefit of creditors, (F)
become unable, admit in writing its inability or fail generally to pay its debts
as they become due or (G) take any action for the purpose of effecting any of
the foregoing;

              (f) one or more judgments or orders for the payment of money in
excess of $250,000 in the aggregate shall be rendered against the Payor and such
judgment(s) or order(s) shall continue unsatisfied and unstayed for a period of
30 days;

<PAGE>

              (g) the Payor shall default in the payment of any principal,
interest or premium, or any observance or performance of any covenants or
agreements, with respect to indebtedness (excluding trade payables and other
indebtedness entered into in the ordinary course of business) in excess of
$50,000 in the aggregate for borrowed money or any obligation which is the
substantive equivalent thereof and such default shall continue for more than the
period of grace, if any, or of any such Indebtedness or obligation shall be
declared due and payable prior to the stated maturity thereof;

              (h) the Payor shall incur any indebtedness for borrowed money
other than up to $15,000,000 of secured inventory financing on terms reasonably
acceptable to Payee (the "Inventory Financing"); or

              (i) any material provisions of this Subordinated Convertible Note
or the Investment Agreement shall terminate or become void or unenforceable or
the Payor shall so assert in writing.

         7. Subordination.

              (a) Agreement of Subordination. The Payor covenants and agrees,
and the Payee likewise covenants and agrees, that (i) to the extent and in the
manner hereinafter set forth in this Section 7, the obligations of the Company
to pay the principal of and accrued interest on this Subordinated Convertible
Note (the "Obligations") are hereby expressly made subordinate and junior in
right of payment to the prior payment in full of up to $15,000,000 in principal
amount of and interest on the Inventory Financing whether outstanding at the
date hereof or hereinafter incurred (such Indebtedness not in excess of
$15,000,000 being hereinafter referred to as the "Senior Indebtedness"); (ii)
the subordination is solely for the benefit of any holders of Senior
Indebtedness; and (iii) each holder of Senior Indebtedness whether now
outstanding or hereinafter created, incurred, assumed or guaranteed shall be
deemed to have extended or acquired such Senior Indebtedness in reliance upon
the covenants and provisions contained herein. Notwithstanding the foregoing,
nothing in this Section 7 shall prevent the conversion of this Subordinated
Convertible Note into shares of Series B Stock in accordance with the terms
hereof.

              (b) Subordination Upon Certain Events. Upon the occurrence of any
Event of Default under Sections 6(d) or (e) of this Note:

                   (i) Upon any payment or distribution of assets of the Payor
to creditors of the Company, holders of Senior Indebtedness shall be entitled to
receive indefeasible payment in full of all obligations with respect to the
Senior Indebtedness before the holder of this Note shall be entitled to receive
any payment in respect of the Obligations.

                   (ii) Until all Senior Indebtedness is paid in full, any
distribution to which the Payee would be entitled but for this Section 7 shall
be made to holders of Senior Indebtedness, as their interests may appear, except
that the Payee may receive securities that are subordinate to the Senior
Indebtedness to at least the same extent as this Subordinated Convertible Note.

<PAGE>

                   (iii) For purposes of this Section 7, a distribution may
consist of cash, securities or other property, by set-off or otherwise.

                   (iv) Notwithstanding the foregoing provisions of this Section
7(b), if payment or delivery by the Company of cash, securities or other
property to the Payee is authorized by an order or decree giving effect, and
stating in such order or decree that effect is given, to the subordination of
this Subordinated Convertible Note to the Senior Indebtedness, and made by a
court of competent jurisdiction in a proceeding under any applicable bankruptcy
or reorganization law, payment or delivery by the Company of such cash,
securities or other property shall be made to the Payee in accordance with such
order or decree.

              (c) Limitation on Payment.

                   (i) Upon receipt by the Company and the Payee of a Blockage
Notice (as defined below), then unless and until (A) all defaults in the payment
of any Senior Indebtedness (the "Senior Defaults") that gave rise to the
Blockage Notice shall have been remedied or effectively waived or shall have
ceased to exist or (B) the Senior Indebtedness in respect of which such Senior
Defaults shall have occurred shall have been paid in full or (C) a notice of
acceleration of the maturity of such Senior Indebtedness shall have been
transmitted to the Company in respect of such Senior Defaults, no direct or
indirect payment (in cash, property, securities or by set-off or otherwise) of
or on account of the principal of or interest on this Subordinated Convertible
Note or in respect of any redemption, retirement, purchase or other acquisition
of this Subordinated Convertible Note shall be made during any period prior to
the expiration of the Blockage Period (as defined below).

                   (ii) For purposes of this Section 7, a "Blockage Notice" is a
notice of a Senior Default that in fact has occurred and is continuing, given to
the Company and the Payee by any holders of Senior Indebtedness then outstanding
(or their authorized agent); provided, however, that no such notice shall be
effective as a Blockage Notice if an effective Blockage Notice shall have been
given within 360 days prior thereto.

                   (iii) For purposes of this Section 7, a "Blockage Period"
with respect to a Blockage Notice is the period commencing upon the Company's
receipt of such Blockage Notice and having the duration set forth in the
particular agreement establishing the Senior Indebtedness to which the Company
is a party; provided, that, such Blockage Period is no more than 90 days.

         Notwithstanding the foregoing, the Blockage Period shall be
inapplicable or cease to be effective if an Event of Default pursuant to Section
6(d) or (e) shall have occurred. In addition, any Blockage Period shall cease to
be effective if at any time during such period (i) substantial assets of the
Company are sold or otherwise disposed of outside of the ordinary course of
business for less than fair value or (ii) payment or any distribution of any
character, whether in cash, securities or other property of the Company shall be
made to or received by any creditor on any indebtedness which is on the same
level of priority with or junior and subordinate in right of payment to this
Subordinated Convertible Note.

<PAGE>

         Upon the expiration or termination of any Blockage Period, the Payee
shall be entitled to exercise any of its rights with respect to this
Subordinated Convertible Note other than any right to accelerate the maturity
date of this Subordinated Convertible Note based upon the occurrence of any
Event of Default in respect thereto which has been cured or otherwise remedied
during the Blockage Period.

              (d) Payments and Distributions Received. If the Payee shall have
received any payment from or distribution of assets of the Company in respect of
Obligations in contravention of the terms of this Section 7 before all Senior
Indebtedness is paid in full, then and in such event such payment or
distribution shall be received and held in trust for and shall be paid over or
delivered to the holders of Senior Indebtedness to the extent necessary to pay
all such Senior Indebtedness in full.

              (e) Proofs of Claim. If, while any Senior Indebtedness is
outstanding, any Event of Default under Section 6(d) or (e) of this Subordinated
Convertible Note occurs, the Payee shall duly and promptly take such action as
any holder of Senior Indebtedness may reasonably request to collect any payment
with respect to this Subordinated Convertible Note for the account of the
holders of the Senior Indebtedness and to file appropriate claims or proofs of
claim in respect of this Subordinated Convertible Note. Upon the failure of the
Payee to take any such action, each holder of Senior Indebtedness is hereby
irrevocably authorized and empowered (in its own name or otherwise), but shall
have no obligation, to demand, sue for, collect and receive every payment or
distribution referred to in respect of this Subordinated Convertible Note and to
file claims and proofs of claim and take such other action as it may deem
necessary or advisable for the exercise or enforcement of any of the rights or
interests of the Holder with respect to this Note.

              (f) Subrogation. After all amounts payable under or in respect of
Senior Indebtedness are paid in full in cash, the Payee shall be subrogated to
the rights of holders of Senior Indebtedness to receive payments or
distributions applicable to Senior Indebtedness to the extent that distributions
otherwise payable to the Payee have been applied to the payment of Senior
Indebtedness. A distribution made under this Section 7 to a holder of Senior
Indebtedness which otherwise would have been made to the Payee is not, as
between the Company and the Payee, a payment by the Company on Senior
Indebtedness.

              (g) Relative Rights. This Section 7 defines the relative rights of
the Payee and the holders of Senior Indebtedness. Nothing in this Section 7
shall (i) impair, as between the Company and the Payee, the obligation of the
Company, which is absolute and unconditional, to pay principal of and interest
(including default interest) on this Subordinated Convertible Note in accordance
with its terms; (ii) effect the relative rights of the Payee and creditors of
the Company other than holders of Senior Indebtedness; or (iii) prevent the
Payee from exercising its available remedies upon an Event of Default, subject
to the rights, if any, under this Section 7 of holders of Senior Indebtedness.

              (h) Subordination May Not Be Impaired by the Company. No right of
any holder of any Senior Indebtedness to enforce the subordination of the
Obligations evidenced by this Subordinated Convertible Note shall be impaired by
any failure by the Company or such holder of Senior Indebtedness to act

<PAGE>

or by the failure of the Company or such holder to comply with this Subordinated
Convertible Note. The provisions of this Section 7 shall continue to be
effective or be reinstated, as the case may be, if at any time any payment of
any of the Senior Indebtedness is rescinded or must otherwise be returned by any
holder of Senior Indebtedness as a result of the insolvency, bankruptcy or
reorganization of the Company or otherwise, all as though such payment had not
been made.

              (i) Payments. A payment with respect to principal of or interest
on the Obligations shall include, without limitation, payment of principal of
and interest on this Note, and any payment on account of mandatory prepayment
provisions.

              (j) Section Not to Prevent Events of Default. The failure to make
a payment on account of principal of or interest on or other amounts
constituting the Obligations by reason of any provision of this Section 7 shall
not be construed as preventing the occurrence of an Event of Default under
Section 6.

         8. Suits for Enforcement.

              (a) Upon the occurrence of any one or more Events of Default, the
holder of this Subordinated Convertible Note may proceed to protect and enforce
its rights by suit in equity, action at law or by other appropriate proceeding,
whether for the specific performance of any covenant or agreement contained in
the Investment Agreement or in aid of the exercise of any power granted in this
Subordinated Convertible Note, or may proceed to enforce the payment of this
Subordinated Convertible Note, or to enforce any other legal or equitable right
it may have as a holder of this Subordinated Convertible Note.

              (b) The holder of this Subordinated Convertible Note may direct
the time, method and place of conducting any proceeding for any remedy available
to itself.

              (c) In case of any Event of Default, the Payor will pay to the
holder of this Subordinated Convertible Note such amounts as shall be sufficient
to cover the reasonable costs and expenses of such holder due to such Event of
Default, including without limitation, costs of collection and reasonable fees,
disbursements and other charges of counsel incurred in connection with any
action in which the holder prevails.

         9. Notices. All notices, demands and other communications provided for
or permitted hereunder shall be made in the manner and to the addresses set
forth in Section 11.2 of the Investment Agreement.

         10. Successors and Assigns. This Subordinated Convertible Note shall
inure to the benefit of and be binding upon the successors and permitted assigns
of the parties hereto. The Payor may not assign any of its rights under this
Subordinated Convertible Note without the prior written consent of Payee. The
Payee may assign all or a portion of their rights or obligations under this
Subordinated Convertible Note to an Affiliate without the prior written consent
of the Payor.

<PAGE>

         11. Amendment and Waiver.

              (a) No failure or delay on the part of the Payor or Payee 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. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Payor or
Payee at law, in equity or otherwise.

              (b) Any amendment, supplement or modification of or to any
provision of this Subordinated Convertible Note, any waiver of any provision of
this Subordinated Convertible Note and any consent to any departure by the Payor
from the terms of any provision of this Subordinated Convertible Note, shall be
effective (i) only if it is made or given in writing and signed by the Payor and
the Payee and (ii) only in the specific instance and for the specific purpose
for which made or given.

         12. Headings. The headings in this Subordinated Convertible Note are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof.

         13. GOVERNING LAW. THIS SUBORDINATED CONVERTIBLE NOTE SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.

         14. Costs and Expenses. The Payor hereby agrees to pay on demand all
reasonable out-of-pocket costs, fees, expenses, disbursements and other charges
(including but not limited to the fees, expenses, disbursements and other
charges of Paul, Weiss, Rifkind, Wharton & Garrison, special counsel to the
Payee) of the Payee arising in connection with any consent or waiver granted or
requested hereunder or in connection herewith, and any renegotiation, amendment,
work-out or settlement of this Subordinated Convertible Note or the indebtedness
arising hereunder.

         15. Waiver of Jury Trial and Setoff. The Payor hereby waives trial by
jury in any litigation in any court with respect to, in connection with, or
arising out of this Subordinated Convertible Note or any instrument or document
delivered pursuant to this Subordinated Convertible Note, or the validity,
protection, interpretation, collection or enforcement thereof, or any other
claim or dispute howsoever arising, between any Payor and the Payee; and the
Payor hereby waives the right to interpose any setoff or counterclaim or
cross-claim in connection with any such litigation, irrespective of the nature
of such setoff, counterclaim or cross-claim except to the extent that the
failure so to assert any such setoff, counterclaim or cross-claim would
permanently preclude the prosecution of the same.

         16. Consent to Jurisdiction. The Payor hereby irrevocably consents to
the nonexclusive jurisdiction of the courts of the State of New York and of any
federal court located in such State in connection with any action or proceeding
arising out of or relating to this Subordinated Convertible Note or any document
or instrument delivered pursuant to this Agreement.

<PAGE>

         17. 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 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.

         18. Entire Agreement. This Subordinated Convertible Note and the
Investment Agreement is 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 hereof.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein. This Subordinated Convertible Note
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.

         19. Further Assurances. The Payor 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 Subordinated Convertible Note.

                                       BLUEFLY, INC.



                                       By:
                                          --------------------------------
                                          Name:
                                          Title:

<PAGE>

                                                                    EXHIBIT E TO
                                                            INVESTMENT AGREEMENT

         THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT
BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.

                                  BLUEFLY, INC.

                          SUBORDINATED CONVERTIBLE NOTE

$
 -------------------
New York, New York                                             November 13, 2000

         FOR VALUE RECEIVED, the undersigned, BLUEFLY, INC., a New York
corporation (the "Payor" or the "Company"), promises to pay to the order of
____________ or its registered assign (the "Payee"), the principal sum of
____________ DOLLARS ($________) and interest on the outstanding principal
balance as set forth herein.

         20. Securities Purchase Agreement. This Subordinated Convertible Note
is one of the Subordinated Convertible Notes issued pursuant to the Note and
Warrant Purchase Agreement, dated as of November 13, 2000, among the Payor, the
Payee and ____________ (the "Securities Purchase Agreement") and amended
pursuant to the Investment Agreement, dated as of November 13, 2000 among the
Payor, the Payee, Bluefly Merger Sub, Inc., a Delaware corporation and
______(the "Investment Agreement" and together with the Securities Purchase
Agreement, the "Agreements"). The Payee is entitled to the benefits of (and
subject to the obligations expressly contained in) this Subordinated Convertible
Note and the Securities Purchase Agreement and may enforce the agreements of the
Payor contained herein and therein and exercise the remedies provided for hereby
and thereby or otherwise available in respect hereto and thereto. Capitalized
terms used herein without definition shall have the meaning ascribed to such
terms in the Investment Agreement.

         21. Interest Rate; Payment.

<PAGE>

              (a) The outstanding principal balance of this Subordinated
Convertible Note shall bear interest at an annual rate equal to 8% per annum,
with interest accruing, from and including _________(1), on a cumulative,
compounding basis. Interest shall be computed on the basis of a 365- or 366-day
year, as the case may be, and the actual number of days elapsed, and shall be
payable only (i) upon repayment of the principal on any Repayment Date (as
defined below) in cash or (ii) upon conversion pursuant to Section 4 either in
cash, or at the Company's option, in shares of Series B Stock.

              (b) The outstanding balance of any amount owed under this
Subordinated Convertible Note which is not paid when due shall bear interest at
the rate of 2% per annum (the "Default Interest") above the rate that would
otherwise be in effect under this Subordinated Convertible Note with the Default
Interest accruing, from and including such due date, on a cumulative,
compounding basis.

              (c) The outstanding principal and all accrued and unpaid interest
shall be paid in full no later than May 1, 2001 (the "Maturity Date"), unless
repaid earlier pursuant to the provisions of Section 3 or unless this
Subordinated Convertible Note is earlier converted in accordance with Section 4
(the date of any payment pursuant to Section 3 and the Maturity Date,
collectively referred to as a "Repayment Date"). On a Repayment Date, the Payor
shall pay the applicable amount of principal and interest in lawful money of the
United States of America by wire or bank transfer of immediately available funds
to an account designated by the Payee in writing from time to time.

         22. Prepayment.

              (a) Mandatory Prepayment.

                   (i) Upon the occurrence of an Event of Default (under Section
6(d) or (e)), the outstanding principal of and all accrued interest on this
Subordinated Convertible Note shall be accelerated and shall automatically
become immediately due and payable, without presentment, demand, protest or
notice of any kind, all of which are expressly waived by the Payor,
notwithstanding anything contained herein to the contrary.

                   (ii) The Payee shall, at its sole option, have the right to
require the Payor to pay the outstanding principal of and all accrued interest
on this Subordinated Convertible Note upon the occurrence of any of the
following events: (1) an Event of Default under Section 6(a), (b), (c), (f), (g)
or (h), (2) the Company entering into an agreement to effectuate any sale or
other disposition of all or substantially all of its assets, in one transaction
or in a series of transactions, (3) the Company entering into an agreement
(other than the Investment Agreement) to effectuate any consolidation or merger
into another entity, or (4) any sale (other than a sale contemplated by the
Investment Agreement) of a majority of the outstanding equity of the Company (or
any other event that constitutes a Change of Control (as defined below) of the
Company), in one

--------------
(1) To be filled in with respective date of issue.

<PAGE>

transaction or in a series of transactions. Immediately upon the occurrence of
either of the events set forth in clauses (1), (2) or (3) above, or immediately
upon obtaining knowledge that any person has entered into an agreement to
effectuate, the event set forth in clause (4) above, the Company shall give
written notice of such event to the Payee. Change of Control means any Person or
"group" (within the meaning of Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") other than Payee and its Affiliates or
any group that includes Payee and/or its Affiliates, becoming the beneficial
owner, directly or indirectly, of outstanding shares of stock of the Company
entitling such Person or Persons to exercise 50% or more of the total votes
entitled to be cast at a regular or special meeting, or by action by written
consent, of the stockholders of the Company in the election of directors (the
term "beneficial owner" shall be determined in accordance with Rule 13d-3 of the
Exchange Act).

                   (iii) Any mandatory prepayment under this Section 3(a) shall
include payment of reasonable costs and expenses, if any, associated with such
prepayment.

              (b) No Optional Prepayment. The Payor may not prepay this
Subordinated Convertible Note.

         23. Mandatory Conversion.

              (a) This Subordinated Convertible Note (plus interest accrued and
unpaid thereon) shall be automatically converted on the Second Closing Date (as
defined in the Investment Agreement) into that number of fully paid and
non-assessable shares of Series B Stock which is equal to the quotient obtained
by dividing the then outstanding principal amount of this Subordinated
Convertible Note (plus interest accrued and unpaid thereon) to the date of
conversion by the Conversion Price (as defined below).

              (b) At the Second Closing (as defined in the Investment
Agreement), the Company shall deliver or cause to be delivered to the holder of
this Subordinated Convertible Note a certificate or certificates representing
the number of fully paid and non-assessable shares of Series B Stock into which
this Subordinated Convertible Note may be converted. Such conversion shall be
deemed to have been made simultaneously with the Second Closing, so that the
rights of the holder as a holder of this Subordinated Convertible Note shall
cease with respect to this Subordinated Convertible Note at such time
(including, without limitation, the right to receive the principal of this
Subordinated Convertible Note other than in the form of shares of Series B
Stock), interest shall cease to accrue hereon and the person or persons entitled
to receive the shares of Series B Stock deliverable upon conversion of this
Subordinated Convertible Note shall be treated for all purposes as having become
the record holders of such shares of Series B Stock at such time, and such
conversion shall be at the conversion rate in effect at such time.

              (c) The Company covenants that it will at all times reserve and
keep available out of its authorized Series B Stock (at such time as such Series
B Stock is authorized) solely for the purpose of issue or delivery upon
conversion of this Subordinated Convertible Note as herein provided, such number
of shares of Series B Stock as shall then be issuable or deliverable upon the
conversion of this Subordinated Convertible

<PAGE>

Note. The Company covenants that all shares of Series B Stock which shall be so
issuable or deliverable shall, when issued or delivered, be duly and validly
issued and fully paid and non-assessable.

              (d) No fractional shares of Series B Stock shall be issued upon
conversion of this Note and the Corporation shall, in lieu of issuing any
fractional share, pay cash equal to the product of such fraction multiplied by
the Current Market Price (as defined in the Certificate of Incorporation of
Bluefly, Inc., a Delaware corporation, attached as Exhibit C to the Investment
Agreement) of the number of shares of Common Stock into which one share of
Series B Stock is converted on the applicable date of conversion of this
Subordinated Convertible Note.

         24. Conversion Price; Antidilution Adjustments.

              (a) Conversion Price. The initial Conversion Price shall be $2.34
("Conversion Price"), subject to adjustment as set forth in subsection (b)
below.

              (b) Antidilution Adjustments. In case the Company shall (x) pay a
dividend or make a distribution on any of its securities in shares of Series B
Stock, (y) subdivide or reclassify its outstanding Series B Stock into a greater
number of shares, or (z) combine or reclassify its outstanding Series B Stock
into a smaller number of shares, the applicable Conversion Price in effect
immediately prior to such event shall be adjusted so that the Payee shall be
entitled to receive the number of shares of Series B Stock which it would have
owned or have been entitled to receive after the happening of such event had
this Subordinated Convertible Note been converted immediately prior to the
happening of such event. An adjustment made pursuant to this paragraph shall
become effective immediately after the record date in the case of a dividend or
distribution and shall become effective on the effective date in the case of
subdivision, combination or reclassification. If any dividend or distribution is
not paid or made, the applicable Conversion Price then in effect shall be
appropriately readjusted.

              (c) Certificate as to Adjustments. Upon any increase or decrease
in the Conversion Price, the Payor shall within a reasonable period (not to
exceed ten (10) days) following any of the foregoing transactions deliver to the
holder of the Subordinated Convertible Note a certificate, signed by (i) the
Chief Executive Officer of the Payor and (ii) the Chief Financial Officer of the
Payor, setting forth in reasonable detail the event requiring the adjustment and
the method by which such adjustment was calculated and specifying the increased
or decreased Conversion Price then in effect following such adjustment.

              (d) Reorganization, Reclassification. In case of any merger of the
Payor or any capital reorganization, reclassification or other change of
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value) (each, a
"Transaction"), the Payor shall execute and deliver to the holder at least ten
(10) Business Days prior to effecting such Transaction a certificate stating
that the holder of this Subordinated Convertible Note shall have the right to
receive in such Transaction, in exchange for this Subordinated Convertible Note,
a security identical to (and not less favorable than) this Subordinated
Convertible Note, and provision shall be made therefor in the

<PAGE>

agreement, if any, relating to such Transaction. Such replacement note shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 5. The provisions of
this Section 5(d) and any equivalent thereof in any such new note similarly
shall apply to successive transactions.

         25. Events of Default. An "Event of Default" shall occur if:

              (a) the Payor shall default in the payment of the principal of or
interest payable on this Subordinated Convertible Note, when and as the same
shall become due and payable, whether at maturity or at a date fixed for
prepayment or by acceleration or otherwise and such default with respect to the
payment of interest shall continue unremedied for two days;

              (b) the Payor shall fail to observe or perform any covenant or
agreement contained in this Subordinated Convertible Note, Agreements or the
Warrants and such failure shall continue for five business days after Payor
receives notice of such failure;

              (c) any representation, warranty, certification or statement made
by or on behalf of the Payor in this Subordinated Convertible Note or the
Securities Purchase Agreement or in any certificate, writing or other document
delivered pursuant hereto shall prove to have been incorrect in any material
respect when made;

              (d) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (A) relief
in respect of Payor or of a substantial part of Payor's respective property or
assets, under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other Federal or state bankruptcy, insolvency,
receivership or similar law (any such law, a "Bankruptcy Law"), (B) the
appointment of a receiver, trustee, custodian, sequestrator, conservator or
similar official for a substantial part of the property or assets of any Payor,
(C) the winding up or liquidation of any Payor; and such proceeding or petition
shall continue undismissed for 60 days, or an order or decree approving or
ordering any of the foregoing shall be entered;

              (e) the Payor shall (A) voluntarily commence any proceeding or
file any petition seeking relief under a Bankruptcy Law, (B) consent to the
institution of or the entry of an order for relief against it, or fail to
contest in a timely and appropriate manner, any proceeding or the filing of any
petition described in clause (d), (C) apply for or consent to the appointment of
a receiver, trustee, custodian, sequestrator, conservator or similar official
for a substantial part of the property or assets of the Payor, (D) file an
answer admitting the material allegations of a petition filed against it in any
such proceeding, (E) make a general assignment for the benefit of creditors, (F)
become unable, admit in writing its inability or fail generally to pay its debts
as they become due or (G) take any action for the purpose of effecting any of
the foregoing;

<PAGE>

              (f) one or more judgments or orders for the payment of money in
excess of $250,000 in the aggregate shall be rendered against the Payor and such
judgment(s) or order(s) shall continue unsatisfied and unstayed for a period of
30 days;

              (g) the Payor shall default in the payment of any principal,
interest or premium, or any observance or performance of any covenants or
agreements, with respect to indebtedness (excluding trade payables and other
indebtedness entered into in the ordinary course of business) in excess of
$50,000 in the aggregate for borrowed money or any obligation which is the
substantive equivalent thereof and such default shall continue for more than the
period of grace, if any, or of any such Indebtedness or obligation shall be
declared due and payable prior to the stated maturity thereof;

              (h) the Payor shall incur any indebtedness for borrowed money
other than up to $15 million of secured inventory financing on terms reasonably
acceptable to Payee (the "Inventory Financing"); or

              (i) any material provisions of this Subordinated Convertible Note,
the Agreements or the Warrants shall terminate or become void or unenforceable
or the Payor shall so assert in writing.

         26. Subordination.

              (a) Agreement of Subordination. The Payor covenants and agrees,
and the Payee likewise covenants and agrees, that (i) to the extent and in the
manner hereinafter set forth in this Section 7, the obligations of the Company
to pay the principal of and accrued interest on this Subordinated Convertible
Note (the "Obligations") are hereby expressly made subordinate and junior in
right of payment to the prior payment in full of up to $15,000,000 in principal
amount of and interest on the Inventory Financing whether outstanding at the
date hereof or hereinafter incurred (such Indebtedness not in excess of
$15,000,000 being hereinafter referred to as the "Senior Indebtedness"); (ii)
the subordination is solely for the benefit of any holders of Senior
Indebtedness; and (iii) each holder of Senior Indebtedness whether now
outstanding or hereinafter created, incurred, assumed or guaranteed shall be
deemed to have extended or acquired such Senior Indebtedness in reliance upon
the covenants and provisions contained herein. Notwithstanding the foregoing,
nothing in this Section 7 shall prevent the conversion of this Subordinated
Convertible Note into shares of Series B Stock in accordance with the terms
hereof.

              (b) Subordination Upon Certain Events. Upon the occurrence of any
Event of Default under Sections 6(d) or (e) of this Note:

                   (i) Upon any payment or distribution of assets of the Payor
to creditors of the Company, holders of Senior Indebtedness shall be entitled to
receive indefeasible payment in full of all obligations with respect to the
Senior Indebtedness before the holder of this Note shall be entitled to receive
any payment in respect of the Obligations.

<PAGE>

                   (ii) Until all Senior Indebtedness is paid in full, any
distribution to which the Payee would be entitled but for this Section 7 shall
be made to holders of Senior Indebtedness, as their interests may appear, except
that the Payee may receive securities that are subordinate to the Senior
Indebtedness to at least the same extent as this Subordinated Convertible Note.

                   (iii) For purposes of this Section 7, a distribution may
consist of cash, securities or other property, by set-off or otherwise.

                   (iv) Notwithstanding the foregoing provisions of this Section
7(b), if payment or delivery by the Company of cash, securities or other
property to the Payee is authorized by an order or decree giving effect, and
stating in such order or decree that effect is given, to the subordination of
this Subordinated Convertible Note to the Senior Indebtedness, and made by a
court of competent jurisdiction in a proceeding under any applicable bankruptcy
or reorganization law, payment or delivery by the Company of such cash,
securities or other property shall be made to the Payee in accordance with such
order or decree.

              (c) Limitation on Payment.

                   (i) Upon receipt by the Company and the Payee of a Blockage
Notice (as defined below), then unless and until (A) all defaults in the payment
of any Senior Indebtedness (the "Senior Defaults") that gave rise to the
Blockage Notice shall have been remedied or effectively waived or shall have
ceased to exist or (B) the Senior Indebtedness in respect of which such Senior
Defaults shall have occurred shall have been paid in full or (C) a notice of
acceleration of the maturity of such Senior Indebtedness shall have been
transmitted to the Company in respect of such Senior Defaults, no direct or
indirect payment (in cash, property, securities or by set-off or otherwise) of
or on account of the principal of or interest on this Subordinated Convertible
Note or in respect of any redemption, retirement, purchase or other acquisition
of this Subordinated Convertible Note shall be made during any period prior to
the expiration of the Blockage Period (as defined below).

                   (ii) For purposes of this Section 7, a "Blockage Notice" is a
notice of a Senior Default that in fact has occurred and is continuing, given to
the Company and the Payee by any holders of Senior Indebtedness then outstanding
(or their authorized agent); provided, however, that no such notice shall be
effective as a Blockage Notice if an effective Blockage Notice shall have been
given within 360 days prior thereto.

                   (iii) For purposes of this Section 7, a "Blockage Period"
with respect to a Blockage Notice is the period commencing upon the Company's
receipt of such Blockage Notice and having the duration set forth in the
particular agreement establishing the Senior Indebtedness to which the Company
is a party; provided, that, such Blockage Period is no more than 90 days.

         Notwithstanding the foregoing, the Blockage Period shall be
inapplicable or cease to be effective if an Event of Default pursuant to Section
6(d) or (e) shall have occurred. In addition, any Blockage Period

<PAGE>

shall cease to be effective if at any time during such period (i) substantial
assets of the Company are sold or otherwise disposed of outside of the ordinary
course of business for less than fair value or (ii) payment or any distribution
of any character, whether in cash, securities or other property of the Company
shall be made to or received by any creditor on any indebtedness which is on the
same level of priority with or junior and subordinate in right of payment to
this Subordinated Convertible Note.

         Upon the expiration or termination of any Blockage Period, the Payee
shall be entitled to exercise any of its rights with respect to this
Subordinated Convertible Note other than any right to accelerate the maturity
date of this Subordinated Convertible Note based upon the occurrence of any
Event of Default in respect thereto which has been cured or otherwise remedied
during the Blockage Period.

              (d) Payments and Distributions Received. If the Payee shall have
received any payment from or distribution of assets of the Company in respect of
Obligations in contravention of the terms of this Section 7 before all Senior
Indebtedness is paid in full, then and in such event such payment or
distribution shall be received and held in trust for and shall be paid over or
delivered to the holders of Senior Indebtedness to the extent necessary to pay
all such Senior Indebtedness in full.

              (e) Proofs of Claim. If, while any Senior Indebtedness is
outstanding, any Event of Default under Section 6(d) or (e) of this Subordinated
Convertible Note occurs, the Payee shall duly and promptly take such action as
any holder of Senior Indebtedness may reasonably request to collect any payment
with respect to this Subordinated Convertible Note for the account of the
holders of the Senior Indebtedness and to file appropriate claims or proofs of
claim in respect of this Subordinated Convertible Note. Upon the failure of the
Payee to take any such action, each holder of Senior Indebtedness is hereby
irrevocably authorized and empowered (in its own name or otherwise), but shall
have no obligation, to demand, sue for, collect and receive every payment or
distribution referred to in respect of this Subordinated Convertible Note and to
file claims and proofs of claim and take such other action as it may deem
necessary or advisable for the exercise or enforcement of any of the rights or
interests of the Holder with respect to this Note.

              (f) Subrogation. After all amounts payable under or in respect of
Senior Indebtedness are paid in full in cash, the Payee shall be subrogated to
the rights of holders of Senior Indebtedness to receive payments or
distributions applicable to Senior Indebtedness to the extent that distributions
otherwise payable to the Payee have been applied to the payment of Senior
Indebtedness. A distribution made under this Section 7 to a holder of Senior
Indebtedness which otherwise would have been made to the Payee is not, as
between the Company and the Payee, a payment by the Company on Senior
Indebtedness.

              (g) Relative Rights. This Section 7 defines the relative rights of
the Payee and the holders of Senior Indebtedness. Nothing in this Section 7
shall (i) impair, as between the Company and the Payee, the obligation of the
Company, which is absolute and unconditional, to pay principal of and interest
(including default interest) on this Subordinated Convertible Note in accordance
with its terms; (ii) effect the relative rights of the Payee and creditors of
the Company other than holders of Senior Indebtedness; or (iii)

<PAGE>

prevent the Payee from exercising its available remedies upon an Event of
Default, subject to the rights, if any, under this Section 7 of holders of
Senior Indebtedness.

              (h) Subordination May Not Be Impaired by the Company. No right of
any holder of any Senior Indebtedness to enforce the subordination of the
Obligations evidenced by this Subordinated Convertible Note shall be impaired by
any failure by the Company or such holder of Senior Indebtedness to act or by
the failure of the Company or such holder to comply with this Subordinated
Convertible Note. The provisions of this Section 7 shall continue to be
effective or be reinstated, as the case may be, if at any time any payment of
any of the Senior Indebtedness is rescinded or must otherwise be returned by any
holder of Senior Indebtedness as a result of the insolvency, bankruptcy or
reorganization of the Company or otherwise, all as though such payment had not
been made.

              (i) Payments. A payment with respect to principal of or interest
on the Obligations shall include, without limitation, payment of principal of
and interest on this Note, and any payment on account of mandatory prepayment
provisions.

              (j) Section Not to Prevent Events of Default. The failure to make
a payment on account of principal of or interest on or other amounts
constituting the Obligations by reason of any provision of this Section 7 shall
not be construed as preventing the occurrence of an Event of Default under
Section 6.

         27. Suits for Enforcement.

              (a) Upon the occurrence of any one or more Events of Default, the
holder of this Subordinated Convertible Note may proceed to protect and enforce
its rights by suit in equity, action at law or by other appropriate proceeding,
whether for the specific performance of any covenant or agreement contained in
the Securities Purchase Agreement or in aid of the exercise of any power granted
in this Subordinated Convertible Note, or may proceed to enforce the payment of
this Subordinated Convertible Note, or to enforce any other legal or equitable
right it may have as a holder of this Subordinated Convertible Note.

              (b) The holder of this Subordinated Convertible Note may direct
the time, method and place of conducting any proceeding for any remedy available
to itself.

              (c) In case of any Event of Default, the Payor will pay to the
holder of this Subordinated Convertible Note such amounts as shall be sufficient
to cover the reasonable costs and expenses of such holder due to such Event of
Default, including without limitation, costs of collection and reasonable fees,
disbursements and other charges of counsel incurred in connection with any
action in which the holder prevails.

         28. Notices. All notices, demands and other communications provided for
or permitted hereunder shall be made in the manner and to the addresses set
forth in Section 11.2 of the Securities Purchase Agreement.

<PAGE>

         29. Successors and Assigns. This Subordinated Convertible Note shall
inure to the benefit of and be binding upon the successors and permitted assigns
of the parties hereto. The Payor may not assign any of its rights under this
Subordinated Convertible Note without the prior written consent of Payee. The
Payee may assign all or a portion of their rights or obligations under this
Subordinated Convertible Note to an Affiliate without the prior written consent
of the Payor.

         30. Amendment and Waiver.

              (a) No failure or delay on the part of the Payor or Payee 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. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Payor or
Payee at law, in equity or otherwise.

              (b) Any amendment, supplement or modification of or to any
provision of this Subordinated Convertible Note, any waiver of any provision of
this Subordinated Convertible Note and any consent to any departure by the Payor
from the terms of any provision of this Subordinated Convertible Note, shall be
effective (i) only if it is made or given in writing and signed by the Payor and
the Payee and (ii) only in the specific instance and for the specific purpose
for which made or given.

         31. Headings. The headings in this Subordinated Convertible Note are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof.

         32. GOVERNING LAW. THIS SUBORDINATED CONVERTIBLE NOTE SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.

         33. Costs and Expenses. The Payor hereby agrees to pay on demand all
reasonable out-of-pocket costs, fees, expenses, disbursements and other charges
(including but not limited to the fees, expenses, disbursements and other
charges of Paul, Weiss, Rifkind, Wharton & Garrison, special counsel to the
Payee) of the Payee arising in connection with any consent or waiver granted or
requested hereunder or in connection herewith, and any renegotiation, amendment,
work-out or settlement of this Subordinated Convertible Note or the indebtedness
arising hereunder.

         34. Waiver of Jury Trial and Setoff. The Payor hereby waives trial by
jury in any litigation in any court with respect to, in connection with, or
arising out of this Subordinated Convertible Note or any instrument or document
delivered pursuant to this Subordinated Convertible Note, or the validity,
protection, interpretation, collection or enforcement thereof, or any other
claim or dispute howsoever arising, between any Payor and the Payee; and the
Payor hereby waives the right to interpose any setoff or counterclaim or
cross-claim in connection with any such litigation, irrespective of the nature
of such setoff, counterclaim or cross-

<PAGE>

claim except to the extent that the failure so to assert any such setoff,
counterclaim or cross-claim would permanently preclude the prosecution of the
same.

         35. Consent to Jurisdiction. The Payor hereby irrevocably consents to
the nonexclusive jurisdiction of the courts of the State of New York and of any
federal court located in such State in connection with any action or proceeding
arising out of or relating to this Subordinated Convertible Note or any document
or instrument delivered pursuant to this Agreement.

         36. 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 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.

         37. Entire Agreement. This Subordinated Convertible Note, the
Agreements and the Warrants 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 hereof. There are no restrictions, promises, warranties or undertakings,
other than those set forth or referred to herein. This Subordinated Convertible
Note supersedes all prior agreements and understandings between the parties with
respect to such subject matter.

<PAGE>


         38. Further Assurances. The Payor 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 Subordinated Convertible Note.

                                       BLUEFLY, INC.



                                       By:
                                          -----------------------------
                                          Name:
                                          Title:

<PAGE>

                                                                     Exhibit F-1

                      SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
                              THE CHRYSLER BUILDING
                              405 LEXINGTON AVENUE
                               NEW YORK, NY 10174
                            TELEPHONE (212) 973-0111
                    FACSIMILE (212) 891-9598 WWW.SWIDLAW.COM

                                                           THE WASHINGTON OFFICE
                                                          THE WASHINGTON HARBOUR
                                                    3000 K STREET, NW, SUITE 300
                                                       WASHINGTON, DC 20007-5116
                                              (202) 424-7500  FAX (202) 424-7647

                                            November 2, 2000

The several Purchasers listed on
Schedule 1 to the Investment
Agreement (as hereafter defined)

Gentlemen:

         We have acted as counsel to Bluefly, Inc., a New York corporation (the
"Company"), and Bluefly Merger Sub, Inc., a Delaware corporation ("NewCo"), in
connection with the execution and delivery of the Investment Agreement of even
date herewith among the Company, NewCo and you, as Purchasers (the "Investment
Agreement"), pursuant to which the Company will sell to you, as Purchasers,
subordinated convertible notes in the aggregate principal amount of $5,000,000
(the "New Notes") and issue to you amended subordinated convertible notes in the
aggregate principal amount of $[_________](2) (the "Amended Notes" and, together
with the New Notes, the "Notes"). This opinion is being delivered to you
pursuant to Section 5.6 of the Investment Agreement. Capitalized terms used but
not otherwise defined herein shall have the meanings set forth in the Investment
Agreement.

         We note that we are not general counsel to the Company and would not
ordinarily be familiar with or aware of matters relating to the Company unless
they are brought to our attention by representatives of the Company with respect
to matters upon which we have been specifically requested to function by the
Company. Accordingly, our examination in connection herewith has

--------------
(2) Amount equal to First Round Notes and Additional Notes, together with
    accrued and unpaid interest.

<PAGE>

been limited to the documents identified to us by the Company as relevant to the
transactions contemplated by the Investment Agreement.

         In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction to be genuine, of the
Investment Agreement, the New Notes and the Amended Notes (collectively, the
"Transaction Documents"), and we have examined originals or copies, certified or
otherwise identified to our satisfaction, of such corporate records and other
documents and instruments of the Company and NewCo, certificates or comparable
documents of public officials and of officers and representatives of the Company
and NewCo and have made such inquiries of such officers and representatives, and
considered such questions of law, as we deemed relevant and necessary as the
basis for the opinions hereinafter set forth.

         In making such examinations, we have assumed the legal capacity of each
natural person signing the Transaction Documents, the genuineness of signatures,
the authenticity of documents submitted to us as originals, the conformity to
authentic original documents of documents submitted to us as certified,
photostatic or telecopied copies and the accuracy and completeness of all
corporate records and other information made available to us by the Company and
NewCo. We have further assumed that the Investment Agreement has been duly
authorized, executed and delivered by, and is the legal, valid and binding
obligation of, the Purchasers.

         As to questions of fact material to this opinion, we have relied solely
upon the accuracy of the representations and warranties of the parties in the
Investment Agreement and of the certificates and other comparable documents of
officers and representatives of the Company and NewCo, upon statements made to
us in discussions with the management of the Company and NewCo and upon
certificates of public officials. The phrase "to our knowledge" as used in this
opinion means actual knowledge of attorneys currently within this firm based
upon work performed on substantive aspects of the transactions that are the
subject of the Transaction Documents or other matters with respect to which such
attorneys have performed substantive work in the course of their representation
of the Company and NewCo, certificates of certain representatives of the
Company, and our examination of documents in connection with the issuance of
this opinion, and does not include matters as to which such attorneys could be
deemed to have constructive knowledge. Except as expressly set forth herein, we
have not undertaken any independent investigation, examination or inquiry to
determine the existence or absence of any facts (and have not caused the review
of any court file, dockets or indices) and no inference as to our knowledge
concerning any facts should be drawn as a result of the limited representation
undertaken by us.

         Based upon the foregoing, and subject to the qualifications,
limitations and

<PAGE>

November 10, 2000

    assumptions stated herein, we are of the opinion that:

The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of New York.

NewCo is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware.

NewCo was incorporated on October 31, 2000.

Each of the Company and NewCo has all requisite corporate power to own and hold
its properties, to carry on its business as, to our knowledge, it is currently
conducted and to execute, deliver and perform its obligations under the
Transaction Documents.

The execution, delivery and performance by the Company of the Transaction
Documents have been duly authorized by all requisite corporate action on the
part of the Company.

The execution, delivery and performance by NewCo of the Investment Agreement
have been duly authorized by all requisite corporate action on the part of
NewCo.

Each of the Transaction Documents has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.

The Investment Agreement has been duly executed and delivered by NewCo and
constitutes the legal, valid and binding obligation of NewCo, enforceable
against NewCo in accordance with its terms.

The execution and delivery by the Company and NewCo of the Transaction Documents
to which it is a party, the performance by the Company and NewCo of its
obligations thereunder and the issuance, sale and delivery of the Notes do not:
(a) contravene the terms of the New York Certificate or by-laws of the Company
or the Delaware Certificate or by-laws of NewCo or any organizational documents,
or any amendment thereof, of any Subsidiary of the Company; (b) violate,
conflict with or result in a breach or contravention of, or the creation of any
Lien under, any material contract or any New York or federal law or regulation
which, in our experience, is normally applicable to transactions of the type
contemplated by the Investment Agreement, except for those which would not have
a material adverse effect on the Company and its Subsidiaries, taken as a whole
(a "Material Adverse Effect"); and (c) violate any Orders known to us of any
Governmental Authority against, or binding upon, the Company, NewCo or any
Subsidiary of the Company except for those Orders the violation of which would
not have a Material Adverse Effect. In rendering the opinion expressed in this
paragraph with respect to subparagraph (b) above, we have been advised by the
Company and have

<PAGE>

November 10, 2000

assumed, for purposes of our opinion, that the only material contracts are those
that are filed as exhibits or described in the Company's SEC Documents. In
rendering the opinion expressed in this paragraph with respect to performance by
the Company of its obligations under the Investment Agreement, we have assumed
compliance by the Company with the Securities Act and the Exchange Act, and the
applicable rules and regulations thereunder and with applicable state securities
laws and the applicable regulations thereunder.

Except as set forth on Schedule 3.4 to the Investment Agreement, 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), to our knowledge, any 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 or NewCo for the execution,
delivery and performance by the Company or NewCo of the Investment Agreement and
each Transaction Document to which it is a party and the consummation of the
transactions contemplated thereby, except consents, approvals, authorizations,
orders, registrations, filings or qualifications that have already been obtained
or are not material to the business or operations of the Company and its
Subsidiaries, taken as a whole. In rendering the opinion expressed in this
paragraph, we have assumed the accuracy of the representations and warranties of
the Purchasers set forth in Section 4 of the Investment Agreement. In rendering
the opinion expressed in this paragraph with respect to the performance by the
Company and NewCo of their respective obligations under the Investment
Agreement, we have also assumed compliance by the Company and NewCo at such time
with the Securities Act, the Exchange Act and the applicable rules and
regulations thereunder and with applicable state securities laws and the
applicable regulations thereunder.

As of the date hereof, the authorized capital stock of the Company consists 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 as Series A Stock.

To our knowledge, there is no action, suit, investigation or proceeding pending
or threatened against the Company or any of its properties or assets by or
before any court, arbitrator or governmental body, department, commission,
board, bureau, agency or instrumentality, which questions the validity of the
Investment Agreement or any action taken or to be taken pursuant thereto.

The opinions set forth above are subject to the following qualifications and
limitations:

Our opinions in paragraphs 1 and 11 as to the due incorporation, valid existence
and good standing and authorized capital stock of the Company are based solely
on our review of

<PAGE>

November 10, 2000

recently issued certified copy of the New York Certificate and a recently issued
certificate of good standing obtained from the Secretary of State of the State
of New York;

Our opinion in paragraph 2 and 3 as to the due incorporation, valid existence
and good standing of NewCo is based solely on our review of a recently issued
certified copy of the certificate of incorporation of NewCo and a recently
issued certificate of good standing obtained from the Secretary of State of the
State of Delaware.

We express no opinion as to the effect of the application of equitable
principles (whether considered in a proceeding at law or in equity) or of
bankruptcy, insolvency, reorganization, moratorium and other laws now or
hereafter in effect affecting the enforcement of creditors' rights and remedies
(including those relating to fraudulent conveyances and transfers);

We express no opinion as to the enforceability of any choice of law provision in
any Transaction Document;

We express no opinion as to the enforceability under certain circumstances,
under state or federal law or court decisions, of provisions that purport to
establish (or many be construed to establish) evidentiary standards;

We express no opinion as to the enforceability under certain circumstances,
under state or federal law or court decisions, of provisions expressly or by
implication waiving broadly or vaguely stated rights, unknown future rights,
defenses to obligations or rights granted by law or statute, where such waivers
are against public policy or prohibited by law;

We express no opinion as to the enforceability under certain circumstances,
under state or federal law or court decisions, of provisions to the effect that
rights or remedies are not exclusive, that every right or remedy is cumulative
and may be exercised in addition to or with any other right or remedy, that
election of a particular remedy or remedies does not preclude recourse to one or
more other remedies, that election of a particular remedy or remedies may be
exercised without notice or upon a stated period of notice, or that failure to
exercise or delay in exercising rights or remedies will not operate as a waiver
of any such right or remedy;

We express no opinion as to limitations on the right to exercise rights and
remedies under the Transaction Documents or to impose penalties for any default
thereunder if it is determined in substance by a court of competent jurisdiction
that the default is not material, the penalties bear no reasonable relation to
the damage suffered as a result of the defaults, or it cannot be demonstrated
that enforcement of the restrictions or burdens is reasonably necessary for the
protection of the party purporting to exercise such rights;

We express no opinion as to the validity or enforceability of the
indemnification and contribution provisions of the Investment Agreement;

<PAGE>

November 10, 2000

We express no opinion as to the tax consequences of the transactions
contemplated by the Investment Agreement; and

We express no opinion concerning the laws of any jurisdiction other than the law
of the State of New York (including but not limited to the Business Corporation
Law of the State of New York), the federal law of the United States of America,
and, to the extent provided in the succeeding sentence, the Delaware General
Corporation Law. With respect to any matters concerning Delaware corporate law
involved in the opinions set forth below, any such opinions are based upon our
reasonable familiarity with the Delaware General Corporation Law as a result of
our reading of standard published compilations of such laws. We express no
opinion concerning any state securities or "blue sky" laws. We also express no
opinion on the effect of the consummation of the transactions contemplated by
the Transaction Documents on the Company's compliance with the rules of any
stock exchange.

         The opinions rendered herein are as of the date hereof. We assume no
obligation to update or supplement those opinions to reflect any fact which may
hereafter come to our attention or any changes in law which may hereafter occur.

         This letter is furnished by us, as counsel to the Company and NewCo, in
connection with the consummation of the transactions contemplated by the
Investment Agreement and is solely for your benefit. This opinion may not be
relied upon by you for any other purposes, or relied upon by any other person,
firm, corporation or other entity for any purpose, or quoted in whole or in part
or otherwise referred to, without our prior written consent.

                                            Very truly yours,


                                            SWIDLER BERLIN SHEREFF FRIEDMAN, LLP


SBSF:RAG:JSH:AMF

<PAGE>

November 10, 2000

                                                                     EXHIBIT F-2

                               [              ]



The several Purchasers listed on
Schedule 1 to the Investment
Agreement (as hereafter defined)

Gentlemen:

         We have acted as counsel to Bluefly, Inc., a Delaware corporation
formerly known as Bluefly Merger Sub, Inc. (the "Company"), and Bluefly, Inc., a
New York corporation (the "Merging Company"), in connection with the execution
and delivery of the Investment Agreement, dated as of November __, 2000, among
the Company, the Merging Company and you, as Purchasers (the "Investment
Agreement"), pursuant to which the Company will issue to you shares of the
Company's Series B Convertible Preferred Stock (the "Series B Shares") upon the
conversion of the New Notes and the Amended Notes and amend the terms of the
Company's Series A Convertible Preferred Stock (the "Series A Shares"). This
opinion is being delivered to you pursuant to Section 5.6 of the Investment
Agreement. Capitalized terms used but not otherwise defined herein shall have
the meanings set forth in the Investment Agreement.

         We note that we are not general counsel to the Company or the Merging
Company and would not ordinarily be familiar with or aware of matters relating
to the Company or the Merging Company unless they are brought to our attention
by representatives of the Company or the Merging Company with respect to matters
upon which we have been specifically requested to function by the Company.
Accordingly, our examination in connection herewith has been limited to the
documents identified to us by the Company or the Merging Company as relevant to
the transactions contemplated by the Investment Agreement.

         In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction to be genuine, of the
Investment Agreement, the Delaware Certificate, the Certificate of Merger (New
York) and the Certificate of Merger (Delaware) (collectively, the "Transaction
Documents"), and we have examined originals or copies, certified or otherwise
identified to our satisfaction, of such corporate records and other documents
and instruments of the Company and the Merging Company, certificates or
comparable documents of public officials and of officers and representatives of
the Company and the Merging Company and have made such inquiries of such
officers and representatives, and considered such questions of law, as we deemed
relevant and necessary as the basis for the opinions hereinafter set forth.

<PAGE>

November 10, 2000

         In making such examinations, we have assumed the legal capacity of each
natural person signing the Transaction Documents, the genuineness of signatures,
the authenticity of documents submitted to us as originals, the conformity to
authentic original documents of documents submitted to us as certified,
photostatic or telecopied copies and the accuracy and completeness of all
corporate records and other information made available to us by the Company and
the Merging Company. We have further assumed that the Investment Agreement has
been duly authorized, executed and delivered by, and is the legal, valid and
binding obligation of, the Purchasers.

         As to questions of fact material to this opinion, we have relied solely
upon the accuracy of the representations and warranties of the parties in the
Investment Agreement and of the certificates and other comparable documents of
officers and representatives of the Company and the Merging Company, upon
statements made to us in discussions with the management of the Company and the
Merging Company and upon certificates of public officials. The phrase "to our
knowledge" as used in this opinion means actual knowledge of attorneys currently
within this firm based upon work performed on substantive aspects of the
transactions that are the subject of the Transaction Documents or other matters
with respect to which such attorneys have performed substantive work in the
course of their representation of the Company, certificates of certain
representatives of the Company and the Merging Company, and our examination of
documents in connection with the issuance of this opinion, and does not include
matters as to which such attorneys could be deemed to have constructive
knowledge. Except as expressly set forth herein, we have not undertaken any
independent investigation, examination or inquiry to determine the existence or
absence of any facts (and have not caused the review of any court file, dockets
or indices) and no inference as to our knowledge concerning any facts should be
drawn as a result of the limited representation undertaken by us.

         Based upon the foregoing, and subject to the qualifications,
limitations and assumptions stated herein, we are of the opinion that:

         The Merger has been duly effected in accordance with the provisions of
Section 252 of the General Corporation Law of the State of Delaware and Section
907 of the Business Corporation Law of the State of New York.

         The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and is duly qualified to
transact business as a foreign corporation and is in good standing in the State
of New York.

         The execution and delivery by the Company of the Certificate of Merger
(New York) and Certificate of Merger (Delaware) (together, the "Merger
Documents"), the performance by the Company of its obligations thereunder, the
issuance and delivery of the Series B Shares upon the conversion of the New
Notes and the Amended Notes and the

<PAGE>

amendment of the terms of the Series A Shares do not: (a) contravene the terms
of the Delaware Certificate or by-laws of the Company or any organizational
documents, or any amendment thereof, of any Subsidiary of the Company; (b)
violate, conflict with or result in a breach or contravention of, or the
creation of any Lien under, any material contract or any New York or federal law
or regulation which, in our experience, is normally applicable to transactions
of the type contemplated by the Investment Agreement, except for those contracts
or laws, the violation of which would not have a material adverse effect on the
Company and its Subsidiaries, taken as a whole (a "Material Adverse Effect");
and (c) violate any Orders known to us of any Governmental Authority against, or
binding upon, the Company or any Subsidiary of the Company, except for those
Orders, the violation of which would not have a Material Adverse Effect. In
rendering the opinion expressed in this paragraph with respect to subparagraph
(b) above, we have been advised by the Company and, for purposes of our opinion,
have assumed that the only material contracts are those that are filed as
exhibits or described in the Company's SEC Documents. In rendering the opinion
expressed in this paragraph with respect to the issuance by the Company of the
Series A Shares and the Series B Shares, we have assumed compliance by the
Company with the Securities Act, the Exchange Act and the applicable rules and
regulations thereunder and with applicable state securities laws and the
applicable regulations thereunder.

         Except as set forth on Schedule 3.4 to the Investment Agreement, 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) to our knowledge, any other Person
(whether acting in an individual, fiduciary or other capacity) is required to be
made or obtained by the Company or the Merging Company for (A) the execution,
delivery and performance by the Company of the Merger Documents and the
consummation of the transactions contemplated thereby, (B) the amendment of the
terms of the Series A Shares, and (C) the issuance and delivery of the Series B
Shares, except consents, approvals, authorizations, orders, registrations,
filings or qualifications that have already been obtained or are not material to
the business or operations of the Company and its Subsidiaries, taken as a
whole. In rendering the opinion expressed in this paragraph, we have assumed the
accuracy of the representations and warranties of the Purchasers set forth in
Section 4 of the Investment Agreement. In rendering the opinion expressed in
this paragraph with respect to the performance by the Company of its obligations
under the Investment Agreement, we have also assumed compliance by the Company
at such time with the Securities Act, the Exchange Act and the applicable rules
and regulations thereunder and with applicable state securities laws and the
applicable regulations thereunder.

         As of the date hereof, the authorized capital stock of the Company
consists of [40,000,000] shares of Common Stock and [25,000,000] shares of
Preferred Stock, $.01 par value, of which 500,000 shares have been designated as
Series A Stock and [9,000,000] shares

<PAGE>

have been designated as Series B Stock. To our knowledge, as of the date hereof
the issued and outstanding stock of the Company consists of _______ shares of
Common Stock, 500,000 shares of Series A Stock and ________ shares of Series B
Stock. All such shares of Capital Stock of the Company have been duly authorized
and are fully paid and non-assessable.

         To our knowledge, there is no action, suit, investigation or proceeding
pending or threatened against the Company or any of its properties or assets by
or before any court, arbitrator or governmental body, department, commission,
board, bureau, agency or instrumentality, which questions the validity of the
Investment Agreement or the Merger Documents or any action taken or to be taken
pursuant thereto.

         The Series B Shares have been duly authorized by all requisite
corporate action on the part of the Company. The shares of Common Stock issuable
upon conversion of the Series B Shares have been duly reserved for issuance upon
conversion of the Series B Shares and, when so issued in accordance with the
terms of the Series B Shares, such shares of Common Stock will be validly
issued, fully paid and nonassessable by the Company and the issuance thereof
will not trigger any statutory preemptive rights of any Person.

         The Proxy Statement sent to the Company shareholders in connection with
the Company Shareholders Meeting complied in form in all material respects with
the requirements of the Exchange Act and the rules and regulations thereunder.

         The opinions set forth above are subject to the following
qualifications and limitations:

         Our opinion in paragraph 1 is based solely on our review of a certified
         copy of the Certificate of Merger (New York) and a certified copy of
         the Certificate of Merger (Delaware);

         Our opinions in paragraphs 2 and 5 as to the due incorporation, valid
         existence and good standing and authorized capital stock of the Company
         are based solely on our review of a recently issued certified copy of
         the Delaware Certificate, a recently issued certificate of good
         standing obtained from the Secretary of State of the State of Delaware
         and on a recently issued certificate of existence obtained from the
         Secretary of State of the State of New York;

         Our opinion in paragraph 5 as to the issued and outstanding Capital
         Stock of the Company is based solely on our review of the minutes of
         the Company and on a certificate of an officer of the Company; and

<PAGE>

         We express no opinion concerning the laws of any jurisdiction other
         than the law of the State of New York (including but not limited to the
         Business Corporation Law of the State of New York), the law of the
         State of Delaware relating to corporations and the federal law of the
         United States of America and, to the extent provided in the succeeding
         sentence, the Delaware General Corporation Law. With respect to any
         matters concerning Delaware corporate law involved in the opinions set
         forth below, any such opinions are based upon our reasonable
         familiarity with the Delaware General Corporation Law as a result of
         our reading of standard published compilations of such laws. We express
         no opinion concerning any state securities or "blue sky" laws. We also
         express no opinion on the effect of the consummation of the
         transactions contemplated by the Transaction Documents on the Company's
         compliance with the rules of any stock exchange.

         The opinions rendered herein are as of the date hereof. We assume no
obligation to update or supplement those opinions to reflect any fact which may
hereafter come to our attention or any changes in law which may hereafter occur.

         This letter is furnished by us, as counsel to the Company, in
connection with the consummation of those transactions contemplated by the
Investment Agreement to occur at the Second Closing and is solely for your
benefit. This opinion may not be relied upon by you for any other purposes, or
relied upon by any other person, firm, corporation or other entity for any
purpose, or quoted in whole or in part or otherwise referred to, without our
prior written consent.

                                       Very truly yours,



                                       SWIDLER BERLIN SHEREFF FRIEDMAN,  LLP

SBSF:

<PAGE>

                                                                     EXHIBIT F-3

                         [                   ]

The several Purchasers listed on
Schedule 1 to the Investment
Agreement (as hereafter defined)

Gentlemen:

         We have acted as counsel to Bluefly, Inc., a Delaware corporation
formerly known as Bluefly Merger Sub, Inc. (the "Company"), in connection with
the execution and delivery of the Investment Agreement dated as of November __,
2000 among the Company, Bluefly, Inc., a New York corporation, and you, as
Purchasers (the "Investment Agreement"), pursuant to which the Company will sell
to you shares of the Company's Common Stock (the "Shares"). This opinion is
being delivered to you pursuant to Section 5.6 of the Investment Agreement.
Capitalized terms used but not otherwise defined herein shall have the meanings
set forth in the Investment Agreement.

         We note that we are not general counsel to the Company and would not
ordinarily be familiar with or aware of matters relating to the Company unless
they are brought to our attention by representatives of the Company with respect
to matters upon which we have been specifically requested to function by the
Company. Accordingly, our examination in connection herewith has been limited to
the documents identified to us by the Company as relevant to the transactions
contemplated by the Investment Agreement.

         In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction to be genuine, of the
Investment Agreement, and we have examined originals or copies, certified or
otherwise identified to our satisfaction, of such corporate records and other
documents and instruments of the Company, certificates or comparable documents
of public officials and of officers and representatives of the Company and have
made such inquiries of such officers and representatives, and considered such
questions of law, as we deemed relevant and necessary as the basis for the
opinions hereinafter set forth.

         In making such examinations, we have assumed the legal capacity of each
natural person signing the Investment Agreement, the genuineness of signatures,
the authenticity of documents submitted to us as originals, the conformity to
authentic original documents of documents submitted to us as certified,
photostatic or telecopied copies and the accuracy and completeness of all
corporate records and other information made available to us by the

<PAGE>

Company. We have further assumed that the Investment Agreement has been duly
authorized, executed and delivered by, and is the legal, valid and binding
obligation of, the Purchasers.

         As to questions of fact material to this opinion, we have relied solely
upon the accuracy of the representations and warranties of the parties in the
Investment Agreement and of the certificates and other comparable documents of
officers and representatives of the Company, upon statements made to us in
discussions with the management of the Company and upon certificates of public
officials. The phrase "to our knowledge" as used in this opinion means actual
knowledge of attorneys currently within this firm based upon work performed on
substantive aspects of the transactions that are the subject of the Investment
Agreement or other matters with respect to which such attorneys have performed
substantive work in the course of their representation of the Company,
certificates of certain representatives of the Company, and our examination of
documents in connection with the issuance of this opinion, and does not include
matters as to which such attorneys could be deemed to have constructive
knowledge. Except as expressly set forth herein, we have not undertaken any
independent investigation, examination or inquiry to determine the existence or
absence of any facts (and have not caused the review of any court file, dockets
or indices) and no inference as to our knowledge concerning any facts should be
drawn as a result of the limited representation undertaken by us.

         Based upon the foregoing, and subject to the qualifications,
limitations and assumptions stated herein, we are of the opinion that:

         The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and is duly qualified to
transact business as a foreign corporation and is in good standing in the State
of New York.

         The issuance and delivery of the Shares do not: (a) contravene the
terms of the Delaware Certificate or by-laws of the Company; (b) violate,
conflict with or result in a breach or contravention of, or the creation of any
Lien under, any material contract or any New York or federal law or regulation
which, in our experience, is normally applicable to transactions of the type
contemplated by the Investment Agreement, except for those which would not have
a material adverse effect on the Company and its Subsidiaries, taken as a whole
(a "Material Adverse Effect"); and (c) violate any Orders known to us of any
Governmental Authority against, or binding upon, the Company, except for those
Orders the violation of which would not have a Material Adverse Effect. In
rendering the opinion expressed in this paragraph with respect to subparagraph
(b) above, we have been advised by the Company and have assumed, for the
purposes of our opinion that the only material contracts are those that are
filed as exhibits or described in the Company's SEC Documents. In rendering the
opinion expressed in this paragraph with respect to the issuance by the Company
of its obligations under the Investment Agreement, we have assumed compliance by
the Company with the Securities Act, the Exchange Act and the applicable rules
and regulations thereunder and with applicable state securities laws and

<PAGE>

the applicable regulations thereunder.

         Except as set forth on Schedule 3.4 to the Investment Agreement, 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) to our knowledge, any other Person
(whether acting in an individual, fiduciary or other capacity) is required to be
made or obtained by the Company for the issuance and delivery of the Shares,
except consents, approvals, authorizations, orders, registrations, filings or
qualifications that have already been obtained or are not material to the
business or operations of the Company and its Subsidiaries, taken as a whole. In
rendering the opinion expressed in this paragraph, we have assumed the accuracy
of the representations and warranties of the Purchasers set forth in Section 4
of the Investment Agreement. In rendering the opinion expressed in this
paragraph with respect to the performance by the Company of its obligations
under the Investment Agreement, we have also assumed compliance by the Company
at such time with the Securities Act, the Exchange Act and the applicable rules
and regulations thereunder and with applicable state securities laws and the
applicable regulations thereunder.

         To our knowledge, there is no action, suit, investigation or proceeding
pending or threatened against the Company or any of its properties or assets by
or before any court, arbitrator or governmental body, department, commission,
board, bureau, agency or instrumentality, which questions the validity of the
Investment Agreement or any action taken or to be taken pursuant thereto.

         As of the date hereof, the authorized capital stock of the Company
consists of 40,000,000 shares of Common Stock and 25,000,000 shares of Preferred
Stock, $.01 par value, of which 500,000 shares have been designated as Series A
Stock and [9,000,000] shares have been designated as Series B Stock. To our
knowledge, as of the date hereof the issued and outstanding stock of the Company
consists of _______ shares of Common Stock, 500,000 shares of Series A Stock and
________ shares of Series B Stock. All such shares of Capital Stock of the
Company have been duly authorized and are fully paid and non-assessable.

         The Shares have been duly authorized by all requisite corporate action
on the part of the Company and, upon issuance, such shares of Common Stock will
be validly issued, fully paid and nonassessable by the Company and the issuance
thereof will not trigger any statutory preemptive rights of any Person.

         The Registration Statement filed with the SEC in connection with the
Rights Offering and the Prospectus contained therein complied in form in all
material respects with the requirements of the Securities Act and with the rules
and regulations thereunder. The Registration Statement was declared effective on
______________ and, to our

<PAGE>

knowledge, no stop order suspending the effectiveness of the Registration
Statement has been issued and the Company has not been notified that any
procedures for that purpose have been instituted or were pending under the
Securities Act at the time of the completion of the Rights Offering.

         The opinions set forth above are subject to the following
qualifications and limitations:

         Our opinions in paragraphs 1 and 5 as to the due incorporation, valid
existence, good standing and qualification to do transact business as a foreign
corporation and as to the authorized capital stock of the Company are based
solely on our review of a recently issued certified copy of the Delaware
Certificate, a recently issued certificate of good standing obtained from the
Secretary of State of the State of Delaware and a recently issued certificate of
existence obtained from the Secretary of State of the State of New York;

         Our opinion in paragraph 5 as to the issued and outstanding Capital
Stock of the Company is based solely on our review of the minutes of the Company
and on a certificate of an officer of the Company;

         Our opinion in paragraph 7 as to the effectiveness of the Registration
Statement is based solely on oral advice received from the Staff of the SEC on
__________; and

         We express no opinion concerning the laws of any jurisdiction other
than the law of the State of New York (including but not limited to the Business
Corporation Law of the State of New York), the federal law of the United States
of America, and, to the extent provided in the succeeding sentence, the Delaware
General Corporation Law. With respect to any matters concerning Delaware
corporate law involved in the opinions set forth below, any such opinions are
based upon our reasonable familiarity with the Delaware General Corporation Law
as a result of our reading of standard published compilations of such laws. We
express no opinion concerning any state securities or "blue sky" laws. We also
express no opinion on the effect of the consummation of the transactions
contemplated by the Transaction Documents on the Company's compliance with the
rules of any stock exchange.

<PAGE>

         The opinions rendered herein are as of the date hereof. We assume no
obligation to update or supplement those opinions to reflect any fact which may
hereafter come to our attention or any changes in law which may hereafter occur.

         This letter is furnished by us, as counsel to the Company, in
connection with the consummation of the transactions contemplated by the
Investment Agreement and is solely for your benefit. This opinion may not be
relied upon by you for any other purposes, or relied upon by any other person,
firm, corporation or other entity for any purpose, or quoted in whole or in part
or otherwise referred to, without our prior written consent.

                                       Very truly yours,



                                       SWIDLER BERLIN SHEREFF FRIEDMAN, LLP

SBSF:

</TEXT>
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<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>ARTICLE 5 FINANCIAL DATA SCHEDULE
<TEXT>

<TABLE> <S> <C>

<PAGE>

<ARTICLE> 5

<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-2000
<PERIOD-END>                               SEP-30-2000
<CASH>                                         906,000
<SECURITIES>                                         0
<RECEIVABLES>                                  886,000
<ALLOWANCES>                                         0
<INVENTORY>                                  7,934,000
<CURRENT-ASSETS>                            10,625,000
<PP&E>                                       1,987,000
<DEPRECIATION>                                 693,000
<TOTAL-ASSETS>                              12,069,000
<CURRENT-LIABILITIES>                        5,048,000
<BONDS>                                              0
<PREFERRED-MANDATORY>                       10,886,000
<PREFERRED>                                          0
<COMMON>                                        49,000
<OTHER-SE>                                (15,593,000)
<TOTAL-LIABILITY-AND-EQUITY>                12,069,000
<SALES>                                     11,100,000
<TOTAL-REVENUES>                            11,100,000
<CGS>                                        8,603,000
<TOTAL-COSTS>                               18,075,000
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                           (171,000)
<INCOME-PRETAX>                           (15,749,000)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                       (15,749,000)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                              (15,749,000)
<EPS-BASIC>                                     (3.32)
<EPS-DILUTED>                                   (3.32)



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