                 PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
                 ----------------------------------------------


     THIS PREFERRED STOCK AND WARRANT PURCHASE  AGREEMENT,  dated as of June 24,
2005 (this  "Agreement"),  is  entered  into by and  between  BLUEFLY,  INC.,  a
Delaware  corporation (the "Company"),  Quantum Industrial Partners LDC ("QIP"),
SFM  Domestic  Investments,  LLC  ("SFM,"  and,  together  with QIP,  the "Soros
Parties") and Investors  listed on the signature page attached  hereto (the "New
Investors").  The New Investors and the Soros Parties are sometimes  referred to
collectively as the "Investors").

                                    RECITALS
                                    --------

     WHEREAS, the Investors desire to purchase from the Company, and the Company
desires to issue and sell to the Investors,  seven thousand  (7,000) shares (the
"Series  F  Shares")  of the  Company's  newly-designated  Series F  Convertible
Preferred Stock, par value $.01 per share (the "Series F Preferred  Stock"),  of
the  Company  and  warrants  in the  form  attached  hereto  as  Exhibit  A (the
"Warrants,"   and,   together  with  the  Series  F  Shares  the  "Newly  Issued
Securities"),  exercisable  to purchase up to an aggregate of 603,448  shares of
the Company's  Common Stock,  $.01 par value (the "Common Stock") at an exercise
price of $2.87 per  share of Common  Stock,  on the  terms  and  subject  to the
conditions contained herein;

     WHEREAS,  simultaneously  with the  purchase  and sale of the Newly  Issued
Securities, the New Investors desire to purchase from the Soros Parties, and the
Soros Parties desire to sell to the New  Investors,  the number of shares of the
Company's  Series D Convertible  Preferred  Stock, par value $.01 per share (the
"Series D Preferred Stock") set forth on Schedules 2A and 2B (collectively,  the
"Existing Preferred Shares").

                                    AGREEMENT
                                    ---------

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

                                   ARTICLE I
   PURCHASE AND SALE OF NEWLY ISSUED SECURITIES AND EXISTING PREFERRED SHARES
   --------------------------------------------------------------------------

     SECTION 1.1 Purchase and Sale of Newly  Issued  Securities.  Subject to the
terms  and  conditions  hereof,  the  Company  hereby  issues  and  sells to the
Investors,  and each Investor hereby purchases from the Company:  (a) the number
of Series F Shares set forth opposite such  Investor's name in Schedule 1, for a
purchase price of $1,000 per share ("Series F Subscription  Amount"),  resulting
in an aggregate  purchase price for all Shares sold pursuant to the terms hereof
of


                                       1
<PAGE>

$7,000,000.00; and (b) the number of Warrants set forth opposite such Investor's
name in Schedule 1, for a purchase price of $0.125 per Warrant (the "Warrant
Subscription Amount," and, together with the Series F Subscription Amount, the
"Subscription Amount"), resulting in an aggregate purchase price for all
Warrants of $75,431.

     SECTION 1.2 Purchase and Sale of Existing Preferred Shares.  Simultaneously
with the  purchase and sale of the Newly Issued  Securities,  the Soros  Parties
hereby  sell,  transfer  and assign  the  Existing  Preferred  Shares to the New
Investors for an aggregate purchase price of $3,000,000.  The number of Existing
Preferred  Shares sold by each Soros Party,  the face value and aggregate amount
of accrued and unpaid  dividends on such shares and the  purchase  price of such
shares is set forth in  Schedule  2A. The number of  Existing  Preferred  Shares
purchased by each New Investor,  the face value and aggregate  amount of accrued
and unpaid dividends on such shares and the purchase price of such shares is set
forth in Schedule 2B.

     SECTION 1.3 Closing. Upon the terms and subject to the conditions set forth
herein, each Investor shall deliver to the Company via wire transfer immediately
available funds equal to their Subscription Amount and the Company shall deliver
to each Investor their respective Newly Issued Securities as determined pursuant
to Section  1.1 and the other  items set forth in Section  1.4  issuable  at the
closing.  Upon  satisfaction  of the  conditions  set forth in Sections 1.4, the
closing shall occur at the offices of the Escrow Agent,  or such other  location
as the parties shall mutually agree.

     SECTION 1.4  Deliveries.

     a)   On the  closing  date,  the  Company  shall  deliver  or  cause  to be
          delivered  to the Escrow  Agent  with  respect  to each  Investor  the
          following:

               (i) this Agreement duly executed by the Company;

               (ii) a legal opinion of Company Counsel, in the form agreed to by
                    the parties;

               (iii) a  certificate  evidencing  a number  of shares of Series F
                    Preferred   Stock   equal  to  such   Investor's   Series  F
                    Subscription Amount divided by 1,000, registered in the name
                    of such Investor;

               (iv) a  Warrant  registered  in the  name  of  such  Investor  to
                    purchase up to a number of shares of Common  Stock set forth
                    on  Schedule  1,  with an  exercise  price  equal to  $2.87,
                    subject to adjustment therein; and

               (v)  the Escrow Agreement duly executed by the
                               Company.

     b)   On the  Closing  Date,  each  Investor  shall  deliver  or cause to be
          delivered to the Escrow Agent the following:

               (i)  this Agreement duly executed by such Investor;


                                       2
<PAGE>

               (ii) such Investor's  Subscription Amount by wire transfer to the
                    account of the Escrow Agent (provided that the Soros Parties
                    Subscription Amount shall be paid as described below);

               (iii) the  purchase  price  for  such  New  Investor's   Existing
                    Preferred  shares by wire  transfer  to the  account  of the
                    Escrow Agent to be disbursed to the Company on behalf of the
                    Soros  Parties  as  payment  in full of  their  Subscription
                    Amount);

               (iv) the Escrow  Agreement duly executed by such Investor  (other
                    than the Soros  Parties,  who are not  parties to the Escrow
                    Agreement).

     c)   On the Closing  Date,  the Soros  Parties shall deliver or cause to be
          delivered to the Escrow Agent the following:

               (i)  a  certificate  evidencing  a number of  shares of  Existing
                    Preferred Shares as set forth on Schedule 2A.



                                   ARTICLE II
            REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY
            ---------------------------------------------------------

     The Company  represents  and warrants to, and agrees with, the Investors as
follows:

     SECTION 2.1  Organization,  etc. The Company and its Subsidiary (as defined
in Section 2.4(b)) have each been duly formed,  and are each validly existing as
a corporation in good standing  under the laws of the State of their  respective
States of  incorporation,  and are each  qualified  to do  business as a foreign
corporation in each  jurisdiction  in which the failure to be so qualified could
reasonably  be  expected  to  have a  material  adverse  effect  on the  assets,
liabilities,  condition (financial or other),  business or results of operations
of the  Company  and its  Subsidiary  taken  as a  whole  (a  "Material  Adverse
Effect"). The Company and its Subsidiary each have the requisite corporate power
and  authority to own,  lease and operate  their  respective  properties  and to
conduct their respective businesses as presently conducted.  The Company has the
requisite  corporate  power and  authority to enter into,  execute,  deliver and
perform all of its duties and obligations under this Agreement and to consummate
the transactions contemplated hereby.

     SECTION 2.2 Authorization.  The execution, delivery and performance of this
Agreement  and the  issuance of the Newly  Issued  Securities  and the shares of
Common Stock (the  "Conversion  Shares")  issuable upon exercise of the Warrants
and/or  conversion  of the Series F Shares and the  Existing  Preferred  Shares,
and/or in lieu of any cash payments of any  dividends on the Existing  Preferred
Shares and the Series F Shares (collectively, the "Convertible Securities") have
been  duly  authorized  by all  necessary  corporate  action  on the part of the
Company.


                                       3
<PAGE>

     SECTION 2.3 Validity; Enforceability. This Agreement 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,  except as such  enforceability may be limited by, or subject to, any
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and subject to general  principles of
equity.

     SECTION 2.4  Capitalization.

          (a) As of the date hereof, the authorized capital stock of the Company
     consists of  92,000,000  shares of Common  Stock and  25,000,000  shares of
     preferred  stock,  $0.01 par value per share,  of which 500,000 shares have
     been designated Series A Convertible Preferred Stock, 9,000,000 shares have
     been designated  Series B Convertible  Preferred  Stock,  3,500 shares have
     been designated  Series C Convertible  Preferred  Stock,  7,150 shares have
     been designated  Series D Convertible  Preferred  Stock,  1,000 shares have
     been designated Series E Convertible  Preferred Stock and 7,000 shares have
     been designated Series F Convertible Preferred Stock. Without giving effect
     to the  transactions  contemplated by this Agreement,  as of June 23, 2005,
     the issued and  outstanding  capital stock of the Company  consisted of (i)
     approximately  15,667,740  shares of Common Stock,  (ii) 460,000  shares of
     Series A Convertible  Preferred  Stock,  (iii) 8,889,414 shares of Series B
     Convertible  Preferred  Stock,  (iv) 1,000  shares of Series C  Convertible
     Preferred  Stock,  (v) 7,136.548  shares of Series D Convertible  Preferred
     Stock and (vi) 1,000 shares of Series E Convertible  Preferred  Stock.  All
     such shares of the Company have been duly authorized and are fully paid and
     non-assessable.  Except as set forth on Schedule 2.4 hereto or as otherwise
     contemplated by this Agreement,  there are no outstanding options, warrants
     or other equity  securities that are convertible  into, or exercisable for,
     shares of the  Company's  capital  stock.  The face value and  accrued  and
     unpaid  dividends  on the  Existing  Preferred  Stock  are as set  forth on
     Schedule  2. The face value of each share of  Existing  Preferred  Stock is
     currently  convertible  into Common Stock at the rate of $0.76 per share of
     Common Stock.

          (b) The only Subsidiary of the Company is Clothesline Corporation. The
     Subsidiary has no operations or assets.  The Company owns all of the issued
     and  outstanding  capital  stock of its  Subsidiary,  free and clear of all
     liens  and  encumbrances.  All of such  shares  of  capital  stock are duly
     authorized, validly issued, fully paid and non-assessable,  and were issued
     in compliance with the registration and  qualification  requirements of all
     applicable  federal,  state  and  foreign  securities  laws.  There  are no
     options, warrants,  conversion privileges,  subscription or purchase rights
     or other rights presently  outstanding to purchase or otherwise acquire any
     authorized but unissued,  unauthorized  or treasury shares of capital stock
     or other  securities  of, or any  proprietary  interest  in, the  Company's
     Subsidiary,  and there is no outstanding  security of any kind  convertible
     into or exchangeable for such shares or proprietary interest.  "Subsidiary"
     means, with respect to the Company,  a corporation or other entity of which
     more  than  50% of  the  voting  power  of the  outstanding  voting  equity
     securities or more than 50% of the outstanding economic equity interest are
     held, directly or indirectly, by the Company.

     SECTION 2.5 [INTENTIONALLY OMITTED]


                                       4
<PAGE>

     SECTION 2.6  No Violation. The execution and delivery of this Agreement and
the performance by the Company of the transactions  contemplated hereby will not
(i)  conflict  with or result in a breach of any  provision  of the  articles of
incorporation  or by-laws of the  Company or its  Subsidiary,  (ii)  result in a
default  or breach  of,  or,  except  for the  approval  of the  holders  of the
Company's Series A Convertible  Preferred Stock, Series B Convertible  Preferred
Stock.  Series C Convertible  Preferred  Stock,  Series D Convertible  Preferred
Stock and Series E Convertible Preferred Stock, and the waiver by the holders of
the Company's  convertible  notes of their conversion rights with respect to the
transactions contemplated hereby (all of which have been obtained),  require any
consent, approval, authorization or permit of, or filing or notification to, any
person,  company or entity (including,  without  limitation,  any stockholder or
holder of the Company's equity securities) under any of the terms, conditions or
provisions of any note, bond, mortgage,  indenture, loan, factoring arrangement,
license, agreement, lease or other instrument or obligation to which the Company
or its Subsidiary is a party or by which the Company or its Subsidiary or any of
their  respective  assets  may be bound  (collectively,  "Agreements")  or (iii)
violate any law, judgment,  order, writ,  injunction,  decree,  statute, rule or
regulation  of any court,  administrative  agency,  bureau,  board,  commission,
office,  authority,  department or other  governmental  entity applicable to the
Company or its  Subsidiary,  except,  in the case of clause (ii) or (iii) above,
any such event that could not reasonably be expected to have a Material  Adverse
Effect or materially impair the transactions contemplated hereby. The Company is
in compliance,  in all material respects,  with the listing  requirements of the
Nasdaq  SmallCap  Market.  No  material  default or breach by the Company or its
Subsidiary exists under any material  Agreement,  other than any such default or
breach that could not reasonably be expected to have a Material Adverse Effect.

     SECTION 2.7  Issuances  of  Securities.  The Series F Shares,  the Existing
Preferred  Shares and the Warrants have been validly  issued,  and, upon payment
therefor, will be fully paid and non-assessable. Upon the exercise or conversion
of the  Convertible  Securities  in  accordance  with  the  terms  thereof,  the
Conversion  Shares will be validly issued,  fully paid and  non-assessable.  The
offering,  issuance,  sale and delivery of the Newly Issued  Securities  and the
Existing  Preferred Shares as contemplated by this Agreement are exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933,
as  amended  (the  "Securities  Act"),  are being  made in  compliance  with all
applicable  federal and (except for any violation or  non-compliance  that could
not  reasonably  be expected to have a Material  Adverse  Effect) state laws and
regulations  concerning the offer, issuance and sale of securities,  and are not
being issued in violation of any  preemptive or other rights of any  stockholder
of the Company.  The parties  hereto agree and  acknowledge  that, in making the
representations  and  warranties in the foregoing  sentence of this Section 2.7,
the  Company  is  relying  on the  representations  and  warranties  made by the
Investors in Section 3.4.

     SECTION 2.8 Absence of Certain  Developments.  Since March 31, 2005,  there
has not been any: (i) material  adverse  change in the  condition,  financial or
otherwise,  of the  Company  and its  Subsidiary  (taken  as a whole)  or in the
assets,  liabilities,  properties or business of the Company and its  Subsidiary
(taken as a whole);  (ii) declaration,  setting aside or payment of any dividend
or


                                       5
<PAGE>

other  distribution  with  respect to, or any direct or indirect  redemption  or
acquisition  of, any capital stock of the Company;  (iii) waiver of any valuable
right of the Company or its Subsidiary or  cancellation  of any material debt or
claim held by the Company or its Subsidiary;  (iv) material loss, destruction or
damage to any property of the Company or its Subsidiary, whether or not insured;
(v)  acquisition  or  disposition  of any  material  assets (or any  contract or
arrangement  therefor) or any other  material  transaction by the Company or its
Subsidiary  otherwise  than for fair value in the  ordinary  course of  business
consistent with past practice; or (vi) other agreement or understanding, whether
in writing or otherwise, for the Company or its Subsidiary to take any action of
the type specified in clauses (i) through (v).

     SECTION 2.9  Commission Filings.  The Company has filed all required forms,
reports and other  documents with the Securities  and Exchange  Commission  (the
"Commission")  for periods  from and after  January 1, 2003  (collectively,  the
"Commission Filings"),  each of which has complied in all material respects with
all  applicable  requirements  of the Securities Act and/or the Exchange Act (as
applicable).  All of the  Commission  Filings,  including the  Company's  Annual
Report on Form  10-K for the year  ended  December  31,  2004 and the  Company's
Quarterly  Report on Form 10-Q for the quarterly period ended March 31, 2005 are
available  through the Commission's Web site. As of their respective  dates, the
Commission  Filings did not contain any untrue  statement of a material  fact or
omit to state a material fact necessary in order to make the statements made, in
light of the  circumstances  under  which they were made,  not  misleading.  The
audited financial  statements and unaudited interim financial  statements of the
Company  included or incorporated  by reference in such Commission  Filings have
been prepared in  accordance  with GAAP (except as may be indicated in the notes
thereto or, in the case of the unaudited statements, as permitted by Form 10-Q),
complied as of their respective  dates in all material  respects with applicable
accounting   requirements  and  the  published  rules  and  regulations  of  the
Commission with respect thereto,  and fairly present,  in all material respects,
the financial position of the Company as of the dates thereof and the results of
operations  for the periods then ended  (subject,  in the case of any  unaudited
interim financial  statements,  to the absence of footnotes required by GAAP and
normal  year-end  adjustments).  The  Company  has  complied,  in  all  material
respects, with the provisions of the Sarbanes-Oxley act of 2002.

     SECTION 2.10  Brokers.  Except for HPC Capital  Management,  Inc.  ("HPC"),
neither the  Company,  nor any of its  officers,  directors  or  employees,  has
employed  any broker or finder,  or (except  for the finders fee due to HPC from
the  Company,  for which the Company  will be solely  responsible)  incurred any
liability for any brokerage fees, commissions, finder's or other similar fees or
expenses in connection with the transactions contemplated hereby.

     SECTION 2.11  Filings, Consents and Approvals.  The Company is not required
to obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration  with, any court or other federal,  state, local
or  other  governmental  authority  or  other  Person  in  connection  with  the
execution, delivery and performance by the Company of the Transaction Documents,
other than (i) filings  required  pursuant to Section 6.3,  (ii) the filing with
the Commission of the Registration  Statement and a proxy statement with respect
to the  Shareholders

                                       6
<PAGE>

Meeting,  (iii) the filing of the Series F Certificate of Designations  with the
Secretary  of  State of the  State  of  Delaware  and  (iv)  the  notice  and/or
application(s)  to the Nasdaq Stock Market and the Boston Stock Exchange for the
issuance  and  sale  of the  Newly  Issued  Securities  and the  listing  of the
Conversion  Shares for trading thereon in the time and manner  required  thereby
(collectively, the "Required Approvals").

     SECTION  2.12  Litigation.  There is no action,  suit,  inquiry,  notice of
violation,  proceeding  or  investigation  pending or, to the  knowledge  of the
Company,  threatened against or affecting the Company,  any Subsidiary or any of
their respective properties before or by any court, arbitrator,  governmental or
administrative agency or regulatory authority (federal,  state, county, local or
foreign)  (collectively,  an "Action") which (i) adversely affects or challenges
the legality,  validity or enforceability  of any of this Agreement,  the Escrow
Agreement,  the Series F Certificate  of  Designations  and the other  documents
delivered in connection herewith (collectively,  the "Transaction Documents") or
the  Securities or (ii) could,  if there were an unfavorable  decision,  have or
reasonably  be  expected  to result in a Material  Adverse  Effect.  Neither the
Company nor any  Subsidiary,  nor, to the Company's  knowledge,  any director or
officer  thereof,  is or has been the subject of any Action involving a claim of
violation of or liability  under federal or state  securities laws or a claim of
breach of fiduciary  duty that could  reasonably  be expected to have a Material
Adverse Effect.  There has not been, and to the knowledge of the Company,  there
is not pending or contemplated,  any  investigation by the Commission  involving
the Company or any current or former  director  or officer of the  Company.  The
Commission  has not  issued  any  stop  order  or  other  order  suspending  the
effectiveness  of  any  registration  statement  filed  by  the  Company  or any
Subsidiary under the Exchange Act or the Securities Act.

     SECTION 2.13  Compliance.  Neither the Company nor any Subsidiary (i) is in
default  under or in violation  of (and no event has occurred  that has not been
waived that, with notice or lapse of time or both,  would result in a default by
the Company or any  Subsidiary  under),  nor has the  Company or any  Subsidiary
received  notice  of a  claim  that  it is in  default  under  or  that it is in
violation of, any indenture,  loan or credit agreement or any other agreement or
instrument  to which it is a party  or by which it or any of its  properties  is
bound  (whether or not such default or violation  has been  waived),  (ii) is in
violation of any order of any court,  arbitrator or governmental  body, or (iii)
is or  has  been  in  violation  of  any  statute,  rule  or  regulation  of any
governmental authority, including without limitation all foreign, federal, state
and local laws  applicable to its business except in each case as could not have
a Material Adverse Effect.

     SECTION 2.14  Registration  Rights.  Other than each of the  Investors,  no
Person has any right to cause the Company to effect the  registration  under the
Securities Act of any securities of the Company.

     SECTION 2.15  Listing and  Maintenance  Requirements. The Company's  Common
Stock is  registered  pursuant to Section  12(g) of the  Exchange  Act,  and the
Company has taken no action  designed to, or which to its knowledge is likely to
have the effect of,  terminating the  registration of the Common Stock under the
Exchange Act nor has the Company received any  notification  that the


                                       7
<PAGE>

Commission is contemplating terminating such registration.  The Company has not,
in the 12 months  preceding  the date hereof,  received  notice from any Trading
Market on which the Common  Stock is or has been  listed or quoted to the effect
that  the  Company  is  not  in  compliance  with  the  listing  or  maintenance
requirements  of such  Trading  Market.  The  Company  is,  and has no reason to
believe that it will not in the foreseeable future continue to be, in compliance
with all such listing and maintenance requirements in all material respects.

     SECTION 2.16  Acknowledgment  Regarding  Investors' Purchase of Securities.
The Company  acknowledges and agrees that each of the Investors is acting solely
in the capacity of an arm's  length  Investor  with  respect to the  Transaction
Documents  and  the  transactions   contemplated  hereby.  The  Company  further
acknowledges  that no Investor is acting as a financial  advisor or fiduciary of
the Company (or in any similar  capacity) with respect to this Agreement and the
transactions  contemplated hereby and any advice given by any Investor or any of
their respective representatives or agents in connection with this Agreement and
the  transactions  contemplated  hereby is merely  incidental to the  Investors'
purchase of the Securities. The Company further represents to each Investor that
the Company's decision to enter into this Agreement has been based solely on the
independent  evaluation of the transactions  contemplated  hereby by the Company
and its representatives.

                                  ARTICLE III
           REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE INVESTORS
           -----------------------------------------------------------

     Each Investor  represents and warrants to, and agrees with, the Company and
to each other, severally but not jointly, as follows:

     SECTION 3.1  Organization,  etc.  Such Investor has been duly formed and is
validly  existing and in good  standing  under the laws of its  jurisdiction  of
organization. Such Investor has the requisite organizational power and authority
to enter into,  execute,  deliver and perform all of its duties and  obligations
under this Agreement and to consummate the transactions contemplated hereby.

     SECTION 3.2  Authority.  The  execution,  delivery and  performance of this
Agreement  have been duly  authorized by all necessary  organizational  or other
action on the part of such Investor.

     SECTION 3.3 Validity; Enforceability. This Agreement has been duly executed
and delivered by such Investor,  and  constitutes  the legal,  valid and binding
obligation  of such  Investor,  enforceable  against such Investor in accordance
with its terms,  except as such enforceability may be limited by, or subject to,
any bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditors' rights generally and subject to general principles
of equity.

     SECTION 3.4  Soros Ownership. Each of the Soros Parties,  severally but not
jointly,  represents  and warrants to the New Investors  that it owns all of the
Existing  Preferred Stock to be sold by it to the New Investors pursuant to this
Agreement free and clear of all liens and

                                       8
<PAGE>

encumbrances,  and that the face value and accrued and unpaid  dividends  of its
Existing Preferred Stock are as set forth on Schedule 2.

     SECTION 3.5  Investment Representations.

          (a) Such  Investor  acknowledges  that the offer and sale of the Newly
     Issued  Securities,  the Existing Preferred Shares or the Conversion Shares
     (collectively,  the "Securities") to such Investor have not been registered
     under the Securities Act, or the securities laws of any state or regulatory
     body and are being  offered and sold in reliance upon  exemptions  from the
     registration  requirements  of the Securities Act and such laws and may not
     be  transferred or resold  without  registration  under such laws unless an
     exemption  is  available.  The  Securities,  and  any  certificate  for the
     Conversion  Shares will be  imprinted  with a legend in  substantially  the
     following form:

          "THE OFFER AND SALE OF THE SECURITIES  REPRESENTED BY THIS CERTIFICATE
          HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
          OR THE  SECURITIES  LAWS OF ANY STATE AND SUCH  SECURITIES  MAY NOT BE
          SOLD,  TRANSFERRED,  ASSIGNED,  PLEDGED,  HYPOTHECATED,  OR  OTHERWISE
          DISPOSED OF EXCEPT  PURSUANT TO A REGISTRATION  STATEMENT WITH RESPECT
          TO SUCH  SECURITIES  WHICH IS  EFFECTIVE  UNDER SUCH ACT AND UNDER ANY
          APPLICABLE  STATE  SECURITIES  LAWS UNLESS,  IN THE OPINION OF COUNSEL
          REASONABLY   SATISFACTORY  TO  THE  COMPANY,  AN  EXEMPTION  FROM  THE
          REGISTRATION  REQUIREMENTS  OF SUCH ACT AND STATE  SECURITIES  LAWS IS
          AVAILABLE."

          (b) Such Investor is acquiring the  Securities  for investment and not
     with a view to the resale or  distribution  thereof and is  acquiring  such
     securities for its own account.  Such Investor is purchasing the Securities
     in the  ordinary  course of  business  and, as of the date  hereof,  has no
     agreements or  understandings,  directly or indirectly,  with any person to
     distribute the Securities.

          (c) Such Investor is an "accredited investor" (as that term is defined
     in Rule 501 of  Regulation D  promulgated  under the  Securities  Act),  is
     sophisticated in financial matters and is familiar with the business of the
     Company  so that it is capable  of  evaluating  the merits and risks of its
     investment  in the  Company  and  has  the  capacity  to  protect  its  own
     interests. Such Investor has had the opportunity to investigate on its own,
     or together  with its  advisors,  the Company's  business,  management  and
     financial  affairs  and has had the  opportunity  to review  the  Company's
     operations and  facilities  and to ask questions and obtain  whatever other
     information  concerning the Company as such Investor has deemed relevant in
     making its investment decision.

          (d) Such Investor is in compliance with the Uniting and  Strengthening
     America by Providing  Appropriate  Tools Required to Intercept and Obstruct
     Terrorism Act of 2001. To such Investor's knowledge, neither it, nor any of
     its principal owners, partners, members, directors


                                       9
<PAGE>

     or officers is included on: (i) the Office of Foreign  Assets  Control list
     of foreign nations,  organizations and individuals  subject to economic and
     trade sanctions,  based on U.S. foreign policy and national security goals;
     (ii)  Executive  Order 13224,  which sets forth a list of  individuals  and
     groups with whom U.S.  persons are prohibited  from doing business  because
     such  persons have been  identified  as  terrorists  or persons who support
     terrorism  or  (iii)  any  other  watch  list  issued  by any  governmental
     authority, including the Commission.

          (e) Such Investor has adequate funds immediately  available to satisfy
     all of its obligations  hereunder and shall  immediately upon its execution
     of this  Agreement  wire in full the aggregate  purchase price set forth on
     Schedule I opposite its name.

          (f) No  representations  or warranties have been made to such Investor
     by the Company or any director,  officer,  employee,  agent or affiliate of
     the Company,  other than the  representations and warranties of the Company
     set forth herein,  and the decision of such Investor to purchase the Shares
     and  the  Warrant  is  based  on  the  information  contained  herein,  the
     Commission Filings and such Investor's own independent investigation of the
     Company.

     SECTION 3.6  Governmental  Consents.  The  execution  and  delivery by such
Investor  of  this  Agreement  and  the  performance  by  such  Investor  of the
transactions  contemplated  hereby, do not and will not require such Investor to
effectuate or obtain any registration with, consent or approval of, or notice to
any federal state or other governmental authority or regulatory body, except for
(to the extent  applicable)  the filing with the  Commission  of a Schedule 13D,
Form 3 and/or  Form 4 under the  Exchange  Act with  respect to the  acquisition
and/or sale by such Investor of the Securities.

     SECTION 3.7  No Violation. The execution and delivery of this Agreement and
the performance by such Investor of the transactions  contemplated  hereby, will
not (i) conflict  with or result in a breach of any provision of the articles of
incorporation,  by-laws or similar organizational  documents of such Investor or
(ii) violate any law, judgment,  order, writ, injunction,  decree, statute, rule
or regulation of any court,  administrative agency,  bureau, board,  commission,
office,  authority,  department or other governmental  entity applicable to such
Investor,  except any such  violation  that could not  reasonably be expected to
materially  impair  the  transactions  contemplated  hereby  or have a  Material
Adverse Effect.

     SECTION  3.8  Brokers.  Neither  such  Investor,  nor any of its  officers,
directors  or  employees,  has  employed  any broker or finder,  or incurred any
liability for any brokerage fees, commissions, finder's or other similar fees or
expenses in connection with the transactions contemplated hereby.

     SECTION 3.9 Short Sales and Confidentiality Prior To The Date Hereof. Other
than the transaction  contemplated hereunder,  such Investor has not directly or
indirectly,  nor  has  any  Person  acting  on  behalf  of or  pursuant  to  any
understanding  with such Investor,  executed any  disposition,  including  Short
Sales (but not including the location and/or reservation of borrowable shares of


                                       10
<PAGE>

Common Stock),  in the  securities of the Company  during the period  commencing
from the time that such Investor first received a term sheet from the Company or
any  other  Person  setting  forth  the  material  terms  of  the   transactions
contemplated    hereunder   until   the   date   hereof   ("Discussion   Time").
Notwithstanding the foregoing, in the case of a Investor that is a multi-managed
investment  vehicle whereby separate portfolio managers manage separate portions
of such Investor's assets and the portfolio managers have no direct knowledge of
the investment  decisions made by the portfolio managers managing other portions
of such Investor's  assets,  the representation set forth above shall only apply
with respect to the portion of assets managed by the portfolio manager that made
the investment  decision to purchase the Securities  covered by this  Agreement.
Other  than  to  other  Persons  party  to this  Agreement,  such  Investor  has
maintained the  confidentiality of all disclosures made to it in connection with
this transaction (including the existence and terms of this transaction).



                                   ARTICLE IV
                                    COVENANTS
                                    ---------

     SECTION 4.1  Registration Rights.

          (a) The Company shall use its commercially reasonable best efforts to:
     (i) prepare and file with the Commission a registration statement under the
     Securities  Act (as the same may be  amended or  supplemented  from time to
     time, the  "Registration  Statement") with respect to the offer and sale of
     the Conversion Shares (collectively,  the "Registrable  Securities") within
     forty-five (45) days of the date of hereof; and (ii) cause the Registration
     Statement to be declared  effective by the  Commission  within  ninety (90)
     days of the date hereof.  Provided that no undisclosed  Potential  Material
     Event then exists, the Company shall cause the Registration Statement to be
     declared  effective  by  the  Commission  within  three  business  days  of
     receiving  notification  from the Commission  that it is willing to issue a
     declaration of  effectiveness.  The Company shall not file any registration
     statement under the Securities Act (other than a registration  statement on
     Form  S-8  relating  to  Common  Stock   underlying   stock  options  or  a
     registration  statement  on Form  S-4  relating  to  securities  issued  in
     connection  with a  merger  or  acquisition)  prior  to the  filing  of the
     Registration  Statement.  The  Company  shall use  commercially  reasonable
     efforts to maintain the effectiveness of such Registration  Statement until
     the  earliest  to occur of the  following  (the  "Registration  Termination
     Date"): (i) all of the Registrable  Securities have been disposed of by the
     Investors  pursuant  to  the  Registration   Statement;  or  (ii)  (A)  the
     Conversion  Shares  issuable  upon  conversion  of the  Series F Shares and
     Existing Preferred Shares can be resold pursuant to clause (k) of Rule 144,
     promulgated  under the Securities  Act, or any similar  provisions  then in
     effect ("Rule 144"), or can otherwise be resold pursuant to Rule 144 at any
     time  regardless of the volume  restrictions  of clause (e) of Rule 144 and
     (B) the Conversion Shares issuable upon exercise of the Warrants (including
     pursuant to any cashless exercise provision included therein) can be resold
     pursuant to Rule 144 or are otherwise freely-tradable without registration.


                                       11
<PAGE>

          (b) Each Investor will promptly  furnish to the Company in writing all
     information  reasonably requested by the Company for use in connection with
     the   preparation   of  the   Registration   Statement  and  obtaining  the
     effectiveness  thereof.  Each Investor,  severally but not jointly,  hereby
     represents and warrants that all such information  furnished by it shall be
     true,  accurate and  complete.  In addition,  each  Investor  covenants and
     agrees that it will comply with all applicable securities laws when trading
     the Company's  Common Stock.  To the extent that any Investor  breaches its
     representations,  warranties or covenants  under this Section  4.1(b),  and
     such breach could  reasonably be expected to cause a delay in, or adversely
     impact, the effectiveness of the Registration Statement, the Company shall,
     without  penalty,  be  authorized  to remove  such  Investor's  Registrable
     Securities from inclusion in the Registration Statement.

          (c)  If  at  any  time  or  from  time  to  time  after  the  date  of
     effectiveness  of the  Registration  Statement,  the Company  notifies  the
     Investors  in writing of the  existence of a Potential  Material  Event (as
     defined  below),  the  Investors  shall  not  offer  or  sell  any  of  the
     Registrable  Securities,  or engage in any other  transaction  involving or
     relating  to the  Registrable  Securities,  from the time of the  giving of
     notice with  respect to a  Potential  Material  Event  until such  Investor
     receives written notice from the Company that such Potential Material Event
     either  has  been  disclosed  to the  public  or no  longer  constitutes  a
     Potential Material Event (such period of time hereinafter  referred to as a
     "Blackout Period"). As used herein, "Potential Material Event" means any of
     the following:  (i) the  possession by the Company of material  information
     not  ripe  for  disclosure  in a  registration  statement,  which  shall be
     evidenced by  determinations in good faith by the Board of Directors of the
     Company that disclosure of such information in the  registration  statement
     would be  detrimental  to the business and affairs of the Company;  or (ii)
     any material engagement or activity by the Company which would, in the good
     faith  determination of the Board of Directors of the Company, be adversely
     affected by  disclosure  in a  registration  statement at such time,  which
     determination  shall be  accompanied by a good faith  determination  by the
     Board of Directors of the Company that the registration  statement would be
     materially misleading absent the inclusion of such information. No Blackout
     Period shall exceed  ninety  consecutive  days,  and there shall be no more
     than 120 days  during any  calendar  year in which a Blackout  Period is in
     effect.

          (d) All  registration and filing fees, fees and expenses of compliance
     with  securities  laws,  printing  expenses and all  independent  certified
     public  accountants  fees and  expenses of counsel to the Company and other
     persons  retained by the Company will be borne by the Company.  The Company
     shall  have  no  obligation  to  pay  any  fees  or  expenses  of  brokers,
     underwriters,  or (except as set forth in  Section  6.2)  counsel or others
     retained by any Investor in connection with the sale, or potential sale, of
     the Registrable Securities.

          (e) The Company agrees to indemnify,  to the fullest extent  permitted
     by law,  each Investor and its officers,  directors,  partners,  employees,
     advisors  and  agents  against  any and all Loss (as  hereinafter  defined)
     arising out of or based upon any untrue, or alleged untrue,  statement of a
     material fact contained in the Registration  Statement 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


                                       12
<PAGE>
     the statements  therein not misleading,  except (i) insofar as the same are
     caused  by or  contained  in any  information  furnished  by such  Investor
     pursuant  to  Section  4.1(b) or (ii)  insofar  as the same are caused by a
     failure by such  Investor  to deliver an updated  prospectus  that has been
     filed  with the  Commission  and made  available  to such  Investor  or its
     representatives for delivery to a purchaser. Each Investor,  severally, but
     not jointly,  agrees to indemnify,  to the fullest extent permitted by law,
     the Company and its officers, directors,  partners, employees, advisors and
     agents against any and all Loss arising out of or based upon any untrue, or
     alleged untrue  statement of a material fact contained in the  Registration
     Statement 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 (i) insofar as the same are
     caused  by or  contained  in any  information  furnished  by such  Investor
     pursuant  to  Section  4.1(b) or (ii)  insofar  as the same are caused by a
     failure by such  Investor  to deliver an updated  prospectus  that has been
     filed  with the  Commission  and made  available  to such  Investor  or its
     representatives  for  delivery to a  purchaser.  Any  indemnity  obligation
     arising  under this  Section  4.1 shall be governed  by the  provisions  of
     Section 5.2.  Notwithstanding the foregoing, the liability of each Investor
     under this Section 4.1(e) shall not exceed the net proceeds  received by it
     in connection with any sale of the Registrable Securities.

          (f)  The  Company  shall  furnish  to each  Investor  such  number  of
     conformed copies of the Registration  Statement and the prospectus included
     therein,  in conformity  with the  requirements of the Securities Act, that
     such  Investor  may  reasonably  request  from  time to time  in  order  to
     facilitate the disposition of the Registrable Securities.

     In  connection  with any sale of  Registrable  Securities  pursuant  to the
     Registration   Statement,  in  lieu  of  delivering  physical  certificates
     representing the Registrable Securities, if the Company's transfer agent is
     participating  in the  Depositary  Trust  Company  ("DTC")  Fast  Automated
     Securities Transfer program,  upon request of the applicable  Investor,  so
     long as the certificates  therefore are not required to bear a legend,  the
     Company  shall cause its  transfer  agent to  electronically  transmit  the
     Registrable  Securities by crediting the account of such  Investor's  prime
     broker  with DTC through its Deposit  Withdrawal  Agent  Commission  system
     within three (3) business days of such request.

     SECTION 4.2  Conversion  of Existing  Preferred  Shares.  The New Investors
hereby covenant and agree that the Existing  Preferred  Shares purchased by them
pursuant to this Agreement shall automatically be converted into Common Stock in
accordance with their terms upon the occurrence of an Automatic Conversion Event
(as such term is defined in the Company's  Certificate of Powers,  Designations,
Preferences  and Rights of Series F Convertible  Preferred  Stock (the "Series F
Certificate  of  Designations")).  The  provisions  of this Section 4.2 shall be
deemed the New Investors' and their assigns'  irrevocable notice of its election
to  convert  the  Existing  Preferred  Shares,  effective  immediately  upon the
occurrence of an Automatic Conversion Event, in accordance with Section 6 of the
Series F  Certificate  of  Designations.  For  purposes  of  clarification,  the
provisions of this Section 4.2 shall require the automatic conversion by the New
Investors  and their  assigns'  Existing  Preferred  Shares even if the Series F
Convertible  Preferred  Stock is not

                                       13
<PAGE>

automatically  converted  into Common Stock upon the  occurrence of an Automatic
Conversion  Event as a result of the provisions of Section 6.2(ii) of the Series
F Certificate of Designations.

     SECTION  4.3  Stockholder  Approval  of Series F  Anti-Dilution  Adjustment
Provisions.  The Company hereby  covenants and agrees to include the approval of
the Series F  Anti-Dilution  Adjustment  Provisions  (as defined in the Series F
Certificate  of  Designations)  as an item to be voted  upon at the next  annual
meeting (the "Shareholders Meeting") of its shareholders (provided that Series F
Shares remain  outstanding at such time), and to recommend that the shareholders
of the  Company  vote in favor of the  approval  of such  provisions.  The Soros
Parties hereby covenant and agree to vote all shares of the Company held by them
in  favor  of the  approval  of the  Series F  Anti-Dilution  Provisions  at the
Shareholders  Meeting.  In accordance with the terms of the Series F Certificate
of Designations,  the Series F Anti-dilution  Adjustment  Provisions will not be
operative until such shareholder approval is obtained.

     SECTION 4.4 Payment of Dividends on Existing  Preferred  Stock. The Company
hereby  covenants and agrees with the New Investors  that all currently  accrued
and unpaid  dividends on the Existing  Preferred Stock will be paid in shares of
Common  Stock  in  accordance  with  the  terms of the  Certificate  of  Powers,
Designations,  Preferences and Rights of Series D Convertible Preferred Stock of
the Company so long as at the time of issuance  such shares of Common  Stock may
be  resold  pursuant  to  an  effective  registration   statement.  If  no  such
registration statement is effective then all accrued and unpaid dividends on the
Existing  Preferred shall be paid in cash, or restricted  stock at the option of
the holder,  if noted in the conversion  notice.  The provisions of this Section
4.4 shall be deemed the Company's  irrevocable election to pay such dividends in
shares of Common Stock, rather than cash, subject to the foregoing.

                                   ARTICLE V
                            SURVIVAL; INDEMNIFICATION
                            -------------------------

     SECTION 5.1  Survival.  The  representations  and  warranties  contained in
Articles II and III hereof shall survive until the first anniversary of the date
hereof.

          (a)  Indemnification.  Each party (including its officers,  directors,
     employees, affiliates, agents, successors and assigns (each an "Indemnified
     Party")) shall be indemnified and held harmless by the other parties hereto
     (each  an  "Indemnifying  Party")  for  any and  all  liabilities,  losses,
     damages,  claims,  costs and  expenses,  interest,  awards,  judgments  and
     penalties  (including,  without limitation,  reasonable attorneys' fees and
     expenses)  actually  suffered or incurred by them  (hereinafter  a "Loss"),
     arising  out of or  resulting  from the  breach  of any  representation  or
     warranty  made  by an  Indemnifying  Party  contained  in  this  Agreement.
     Notwithstanding anything to the contrary otherwise contained herein: (i) no
     party's  obligations  under this Article V shall include any  obligation to
     compensate for punitive  damages;  (ii) the liability of any Investor under
     this Section 5.1 shall not exceed the proceeds received by such Investor in
     connection with any sale of the Securities;  and (iii) the liability of the
     Company  to any  Investor  under  this  Section  5.1 shall not  exceed  the
     purchase price of the Newly Issued Securities paid by such Investor.


                                       14
<PAGE>

     SECTION 5.2 Indemnification  Procedure.  The obligations and liabilities of
the Indemnifying  Party under this Article V with respect to Losses arising from
claims of any third party which are subject to the indemnification  provided for
in this Article V ("Third  Party  Claims")  shall be governed by and  contingent
upon the following  additional  terms and  conditions:  if an Indemnified  Party
shall receive notice of any Third Party Claim, the Indemnified  Party shall give
the  Indemnifying  Party  notice of such Third  Party Claim  promptly  after the
receipt by the Indemnified  Party of such notice (which notice shall include the
amount of the Loss, if known, and method of computation  thereof, and containing
a reference to the  provisions of this  Agreement in respect of which such right
of indemnification is claimed or arises); provided, however, that the failure to
provide  such notice  shall not release the  Indemnifying  Party from any of its
obligations under this Article V except to the extent the Indemnifying  Party is
materially  prejudiced  by such  failure and shall not relieve the  Indemnifying
Party from any other obligation or Liability that it may have to any Indemnified
Party  otherwise  than  under  this  Article  V.  Upon  written  notice  to  the
Indemnified  Party  within  five (5) days of the  receipt  of such  notice,  the
Indemnifying  Party  shall be entitled to assume and control the defense of such
Third Party Claim at its or his expense and through counsel of its or his choice
(which  counsel  shall be reasonably  satisfactory  to the  Indemnified  Party);
provided,  however,  that, if there exists or is reasonably  likely to exist, in
the  reasonable  opinion  of  counsel to the  Indemnified  Party a  conflict  of
interest  that would make it  inappropriate  in the  reasonable  judgment of the
Indemnified  Party for the same counsel to represent both the Indemnified  Party
and the  Indemnifying  Party,  then the  Indemnified  Party shall be entitled to
retain its or his own  counsel in each  jurisdiction  for which the  Indemnified
Party  reasonably  determines  counsel  is  required,  at  the  expense  of  the
Indemnifying  Party. In the event the Indemnifying  Party exercises the right to
undertake any such defense against any such Third Party Claim as provided above,
the  Indemnified  Party  shall  cooperate  with the  Indemnifying  Party in such
defense and make  available  to such  Indemnifying  Party,  at the  Indemnifying
Party's expense, all witnesses,  pertinent records, materials and information in
the  Indemnified  Party's  possession or under the  Indemnified  Party's control
relating thereto as is reasonably required by the Indemnifying Party. Similarly,
in the event the Indemnified  Party is,  directly or indirectly,  conducting the
defense  against  any such Third  Party  Claim,  the  Indemnifying  Party  shall
cooperate with the  Indemnified  Party in such defense and make available to the
Indemnified  Party,  at the  Indemnifying  Party's  expense,  all such witnesses
(including  himself),  records,  materials and  information in the  Indemnifying
Party's possession or under the Indemnifying Party's control relating thereto as
is reasonably  required by the Indemnified  Party. No such Third Party Claim may
be settled by the Indemnifying  Party or the Indemnified  Party on behalf of the
other without the prior written consent of the other (which consent shall not be
unreasonably  withheld);  provided,  however,  in the event that the Indemnified
Party does not consent to any such  settlement that would provide it with a full
release from  indemnified Loss and would not require it to take, or refrain from
taking, any action, the Indemnifying Party's liability for indemnification shall
not exceed the amount of such proposed  settlement.  The Indemnified  Party will
refrain from any act or omission that is inconsistent with the position taken by
the  Indemnifying  Party  in the  defense  of a Third  Party  Claim  unless  the
Indemnified  Party determines that such act or omission is reasonably  necessary
to protect its own interest.


                                       15
<PAGE>

                                   ARTICLE VI
                                  MISCELLANEOUS
                                  -------------

     SECTION 6.1 Simultaneous  Closing of Transactions.  The consummation of the
purchase and sale of the Newly  Issued  Securities  and the  Existing  Preferred
Shares shall be deemed to have occurred  simultaneously,  and no portion of such
transactions  shall be deemed  completed until all such  transactions  have been
consummated.

     SECTION 6.2  Expenses.  The Company  shall  reimburse  Palisades  for up to
$25,000 of reasonable legal expenses incurred in connection with the negotiation
of this Agreement and the review of the Registration  Statement,  subject to the
receipt of appropriate  supporting  documentation and the receipt of all amounts
owed by the  Investors  hereunder.  Except  as  provided  above,  all  costs and
expenses,  including,  without  limitation,  fees and  disbursements of counsel,
incurred in  connection  with the  negotiation,  execution  and delivery of this
Agreement and its related  documents  shall be paid by the party  incurring such
costs and expenses, whether or not the Closing shall have occurred.

     SECTION 6.3 Publicity.  The Company shall,  prior to 9:00 a.m., EST, on the
first Business Day following the Closing,  issue a press release  announcing the
consummation of the transactions  contemplated hereby (which press release shall
be subject to the  reasonable  approval of HPC and the Soros Parties) and shall,
within four  Business  Days of the closing,  file with the  Commission a Current
Report on Form 8-K  regarding  the same.  Except as set forth above or as may be
required by applicable law or the rules of any securities  exchange or market on
which securities of the Company are traded,  no party hereto shall issue a press
release or public announcement or otherwise make any disclosure  concerning this
Agreement and the transactions  contemplated  hereby,  without prior approval of
the others; provided, however, that nothing in this Agreement shall restrict the
Company or any Investor from  disclosing  such  information  (a) that is already
publicly  available,  (b) that may be required or appropriate in response to any
summons or subpoena  (provided that the disclosing  party will use  commercially
reasonable  efforts  to notify the other  parties in advance of such  disclosure
under  this  clause  (b) so as to permit  the  non-disclosing  parties to seek a
protective order or otherwise contest such disclosure,  and the disclosing party
will use  commercially  reasonable  efforts to cooperate,  at the expense of the
non-disclosing  parties,  in  pursuing  any  such  protective  order)  or (c) in
connection with any litigation  involving disputes as to the parties' respective
rights and obligations hereunder.

     SECTION 6.4 Non-Public Information.  The Company covenants and agrees that,
except as otherwise  contemplated by the Transaction  Documents,  neither it nor
any other  Person  acting on its behalf  will  provide  any New  Investor or its
agents or counsel with any  information  that the Company  believes  constitutes
material non-public  information,  unless such New Investor shall have indicated
that it desires to receive material non-public information and written agreement
regarding  the  confidentiality  and use of such  information  shall  then be in
effect.  The Company  understands  and confirms that each New Investor  shall be
relying on the foregoing representations in effecting transactions in securities
of the Company.


                                       16
<PAGE>

     SECTION 6.5  Reservation and Listing of Securities.

          (a) The  Company  shall  maintain a reserve  from its duly  authorized
     shares of Common Stock for issuance  pursuant to the Transaction  Documents
     in such amount as may be required to fulfill its  obligations in full under
     the Transaction Documents (the "Required Minimum").

          (b) If, on any  date,  the  number of  authorized  but  unissued  (and
     otherwise  unreserved)  shares  of Common  Stock is less than the  Required
     Minimum on such date,  then the Board of Directors of the Company shall use
     commercially  reasonable  efforts  to amend the  Company's  certificate  or
     articles of incorporation to increase the number of authorized but unissued
     shares of Common  Stock to at least the Required  Minimum at such time,  as
     soon as  possible  and in any event not later  than the 90th day after such
     date.

          (c) The  Company  shall,  if  applicable:  (i) in the time and  manner
     required by the Trading  Market,  prepare and file with such Trading Market
     an additional  shares  listing  application  covering a number of shares of
     Common  Stock at least  equal to the  Required  Minimum on the date of such
     application,  (ii) take all steps  necessary to cause such shares of Common
     Stock to be approved for listing on the Trading  Market as soon as possible
     thereafter,  (iii) provide to the Investors  evidence of such listing,  and
     (iv)  maintain  the listing of such Common Stock on any date at least equal
     to the  Required  Minimum  on such date on such  Trading  Market or another
     Trading Market.

     SECTION 6.6  Short Sales and Confidentiality  After The Date  Hereof.  Each
Investor  severally  and not jointly  with the other  Investors  covenants  that
neither  it  nor  any  affiliates  acting  on  its  behalf  or  pursuant  to any
understanding  with it will  execute  any short sales as defined in Rule 3b-3 of
the Exchange Act ("Short  Sales") during the period after such calendar day when
the  Investor  was first  contacted by anyone  regarding  an  investment  in the
Company  ("Discussion  Time")  and  ending  at the time  that  the  transactions
contemplated  by this  Agreement  are first  publicly  announced as described in
Section 6.3. Each Investor,  severally and not jointly with the other Investors,
covenants  that  until  such  time  as the  transactions  contemplated  by  this
Agreement  are  publicly  disclosed  by the Company as described in Section 6.3,
such Investor will maintain,  the  confidentiality of all disclosures made to it
in connection with this  transaction  (including the existence and terms of this
transaction).  Each Investor  understands  and  acknowledges,  severally and not
jointly  with any  other  Investor,  that the  Commission  currently  takes  the
position that coverage of short sales of shares of the Common Stock "against the
box"  prior  to the  Effective  Date  of the  Registration  Statement  with  the
Securities  is a violation of Section 5 of the  Securities  Act, as set forth in
Item  65,  Section  5 under  Section  A, of the  Manual  of  Publicly  Available
Telephone  Interpretations,  dated  July 1997,  compiled  by the Office of Chief
Counsel,  Division of Corporation  Finance.  Notwithstanding  the foregoing,  no
Investor makes any representation,  warranty or covenant hereby that it will not
engage in Short Sales in the  securities  of the Company after the time that the
transactions  contemplated  by this  Agreement are first  publicly  announced as
described in Section 6.3,  provided that all such  transactions will comply with
all applicable securities laws.


                                       17
<PAGE>

Notwithstanding the foregoing, in the case of a Investor that is a multi-managed
investment  vehicle whereby separate portfolio managers manage separate portions
of such Investor's assets and the portfolio managers have no direct knowledge of
the investment  decisions made by the portfolio managers managing other portions
of such  Investor's  assets,  the covenant set forth above shall only apply with
respect to the portion of assets managed by the portfolio  manager that made the
investment decision to purchase the Securities covered by this Agreement.

     SECTION 6.7  Entire  Agreement. This  Agreement and any other  agreement or
instrument to be delivered expressly pursuant to the terms hereof constitute the
entire  Agreement  between the parties hereto with respect to the subject matter
hereof and supersede all previous  negotiations,  commitments  and writings with
respect to such subject matter.

     SECTION 6.8  Assignments;  Parties in Interest.  Neither this Agreement nor
any of the rights,  interests or obligations hereunder may be assigned by any of
the parties  hereto  without  the prior  written  consent of the other  parties;
provided,  that:  (a) the  Securities  may be  transferred  (i)  pursuant to the
Registration  Statement  or (ii) in  accordance  with the  legend  set  forth in
Section  3.4(a);  and (b) in  connection  with any transfer of  Securities  (the
"Transferred   Securities")  by  Palisades  permitted  by  clause  (a)(ii),  the
Registration  Rights contained in Section 4.1, and the obligation to convert the
Existing  Preferred  Shares  contained in Section  4.2,  shall be deemed to have
automatically  been  transferred to, and assumed by, the transferee with respect
to the Transferred  Securities,  and the transferee shall be required to execute
documentation  agreeing  to the  transfer  and  assumption  of such  rights  and
obligations.  This  Agreement  shall be  binding  upon and  inure  solely to the
benefit of each party  hereto,  and  nothing  herein,  express  or  implied,  is
intended  to or shall  confer  upon any  person  not a party  hereto  any right,
benefit or remedy of any nature whatsoever under or by reason hereof,  except as
otherwise provided herein.

     SECTION  6.9  Amendments.  This  Agreement  may not be amended or  modified
except by an  instrument  in writing  signed  by, or on behalf  of, the  parties
against whom such amendment or modification is sought to be enforced.

     SECTION  6.10  Descriptive  Headings.  The  descriptive  headings  of  this
Agreement are inserted for convenience of reference only and do not constitute a
part of and shall not be utilized in interpreting this Agreement.

     SECTION 6.11 Notices and Addresses. Any notice, demand, request, waiver, or
other communication under this Agreement shall be in writing and shall be deemed
to have been duly given on the date of service,  if personally served or sent by
facsimile;  on the business day after notice is delivered to a courier or mailed
by express  mail, if sent by courier  delivery  service or express mail for next
day  delivery;  and on the fifth  business day after  mailing,  if mailed to the
party to whom notice is to be given,  by first class  mail,  registered,  return
receipt requested, postage prepaid and addressed as follows:

To Company:                Bluefly, Inc.


                                       18
<PAGE>

                           42 West 39th Street, 9th Floor
                           New York, New York 10018
                           Fax:     (212) 354-3400
                           Attn:    Chief Financial Officer and General Counsel

                           With a copy to:

                           Dechert LLP
                           30 Rockefeller Plaza
                           New York, New York 10112
                           Fax:     (212) 698-3599
                           Attn:    Richard A. Goldberg, Esq.


To the Investors: To the addresses set forth on Schedule 1.

     SECTION  6.12  Severability.  In the  event  that  any  provision  of  this
Agreement  becomes or is declared  by a court of  competent  jurisdiction  to be
illegal, void or unenforceable, the remainder of this Agreement will continue in
full force and effect and the  application of such provision to other persons or
circumstances  will be  interpreted so as reasonably to effect the intent of the
parties hereto.  The parties further agree to replace such void or unenforceable
provision of this  Agreement  with a valid and  enforceable  provision that will
achieve,  to the extent possible,  the economic,  business and other purposes of
such void or unenforceable provision.

     SECTION  6.13  Governing  Law;  Choice of Forum.  This  Agreement  shall be
governed by and construed in  accordance  with the internal laws of the State of
New York,  without  regard to conflicts of law  principles.  Each of the parties
hereto  hereby  irrevocably  and   unconditionally   submits  to  the  exclusive
jurisdiction  of any court of the State of New York or any federal court sitting
in the City of New York for  purposes  of any suit,  action or other  proceeding
arising out of this  Agreement  (and agrees not to commence any action,  suit or
proceedings  relating hereto except in such courts).  Each of the parties hereto
agrees  that  service  of any  process,  summons,  notice  or  document  by U.S.
registered  mail at its address set forth herein  shall be effective  service of
process for any action, suit or proceeding brought against it in any such court.
Each of the parties hereto hereby  irrevocably  and  unconditionally  waives any
objection to the laying of venue of any action,  suit or proceeding  arising out
of this Agreement, which is brought by or against it, in the courts of the State
of New York or any  federal  court  sitting  in the State of New York and hereby
further irrevocably and unconditionally  waives and agrees not to plead or claim
in any such court that any such action,  suit or proceeding  brought in any such
court has been brought in an inconvenient forum.

     SECTION 6.14  Counterparts;  Facsimile  Signatures.  This  Agreement may be
executed in one or more  counterparts,  all of which shall be considered one and
the same agreement and shall become effective when one or more counterparts have
been signed by each of the parties and


                                       19
<PAGE>

delivered to the other party, it being understood that all parties need not sign
the same  counterpart.  This  Agreement  may be  executed  by  facsimile,  and a
facsimile  signature  shall  have the  same  force  and  effect  as an  original
signature on this Agreement.

     SECTION 6.15 Independent  Nature of Investors'  Obligations and Rights. The
obligations of each Investor under any Transaction  Document are several and not
joint with the  obligations  of any other  Investor,  and no  Investor  shall be
responsible  in any way for the  performance  of the  obligations  of any  other
Investor under any  Transaction  Document.  Nothing  contained  herein or in any
Transaction  Document,  and no action  taken by any Investor  pursuant  thereto,
shall be deemed to constitute the Investors as a partnership,  an association, a
joint  venture  or any other kind of entity,  or create a  presumption  that the
Investors  are in any way acting in  concert or as a group with  respect to such
obligations or the transactions  contemplated by the Transaction Documents. Each
Investor  shall be  entitled  to  independently  protect and enforce its rights,
including without  limitation the rights arising out of this Agreement or out of
the other  Transaction  Documents,  and it shall not be necessary  for any other
Investor to be joined as an additional party in any proceeding for such purpose.
Each Investor has been  represented  by its own separate  legal counsel in their
review and negotiation of the Transaction Documents.  The Company has elected to
provide all  Investors  with the same terms and  Transaction  Documents  for the
convenience of the Company and not because it was required or requested to do so
by the Investors.

     SECTION 6.16 Specific Performance.  Each of the parties hereto, in addition
to being entitled to exercise all of its rights hereunder, including recovery of
damages,  shall be  entitled to specific  performance  of its rights  under this
Agreement.  Each  party  agrees  that  monetary  damages  would not be  adequate
compensation for any loss incurred by reason of a breach by it of the provisions
of this  Agreement  and  hereby  agrees to waive the  defense  in any action for
specific performance that a remedy at law would be adequate.

                            [Signature page follows]








                                       20
<PAGE>

         IN WITNESS WHEREOF, this Agreement has been duly executed on the date
first set forth above.

                                        BLUEFLY, INC.

                                        By: ____________________________________
                                            Name:   Jonathan P. Freedman
                                            Title:  Vice President and General
                                                    Counsel



                                        QUANTUM INDUSTRIAL PARTNERS LDC

                                        By: ____________________________________
                                            Name:
                                            Title:



                                        SFM DOMESTIC INVESTMENTS LLC

                                        By: ____________________________________
                                            Name:
                                            Title:



                                        PEF ADVISORS LTD

                                        By: ____________________________________
                                            Name:
                                            Title:



                                        PALISADES MASTER FUND LP

                                        By: Discovery Management Ltd.

                                        By: ____________________________________
                                            Name:
                                            Title:




                                       21
<PAGE>

                                        JGB CAPITAL L.P.

                                        By: ____________________________________
                                            Name:
                                            Title:



                                        CRESCENT INTERNATIONAL, LTD.

                                        By: ____________________________________
                                            Name:
                                            Title:



                                        SRG CAPITAL, LLC

                                        By: ____________________________________
                                            Name:
                                            Title:



                                        BRISTOL INVESTMENT FUND, LTD.

                                        By: ____________________________________
                                            Name:
                                            Title:



                                        PORTSIDE GROWTH AND OPPORTUNITY FUND

                                        By: ____________________________________

                                            Name:
                                            Title:



                                       22

