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                              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

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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.

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         "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

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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,

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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)

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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 b