SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ----------------------

                                    FORM 10-Q

              [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended August 31, 1996

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                         Commission file number 1-10860

                              THE HE-RO GROUP, LTD.


             (Exact name of registrant as specified in its charter)

              Delaware                                   13-3615898
   (State or other jurisdiction of                    (I.R.S. Employer
   incorporation or organization)                    Identification No.)

       550 Seventh Avenue                                  10018
       New York, NY
       (Address of principal                            (Zip Code)
       executive offices)

                                 (212) 840-6047
              (Registrant's telephone number, including area code)

                                 Not Applicable
              (Former name, former address and former fiscal year,
                          if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. YES X  NO

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

                                                 Outstanding at
       CLASS OF COMMON STOCK                    OCTOBER 11, 1996
       ---------------------                    ----------------
          $.01 par value                            6,717,333



<PAGE>


                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES


Index


PART I.    FINANCIAL INFORMATION                                       Page No.

Item 1.    Financial Statements:

           Consolidated Balance Sheets
           August 31, 1996 and May 31, 1996..........................       3

           Consolidated Statements of Income
           Three Months Ended August 31, 1996 and 1995...............       4

           Consolidated Statements of Changes in Stockholders' Equity
           Three Months Ended August 31, 1996 and 1995...............       5

           Consolidated Statements of Cash Flows
           Three Months Ended August 31, 1996 and 1995...............       6

           Condensed Notes to Consolidated Financial Statements......  7 - 13

Item 2.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations....................... 14 - 17

PART II.   OTHER INFORMATION.........................................      18


<PAGE>



                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                 (In thousands)
                                                       August 31,      May 31,
                                                          1996          1996
                                                       (unaudited)
ASSETS:

CURRENT ASSETS
    Cash...........................................       $   613     $   405
                                                          -------     -------
    Accounts receivable:
      Trade, net of allowances for doubtful
      accounts of $350 (August), $300 (May)........         4,564       1,648
      Suppliers and other..........................         3,059       2,991
                                                          -------     -------
                                                            7,623       4,639
    Inventory......................................        15,281      15,029
    Other current assets...........................           557         493
                                                          -------     -------
           Total current assets....................        24,074      20,566
                                                          -------     -------
FIXED ASSETS - at cost, net of accumulated
    depreciation and amortization..................         2,205       2,424
OTHER ASSETS.......................................         1,567       1,633
                                                          -------     -------
                                                          $27,846     $24,623
                                                          =======     =======

LIABILITIES AND STOCKHOLDERS' EQUITY:

CURRENT LIABILITIES
    Bank loans.....................................       $ 8,971     $ 5,977
    Current maturities of long-term debt...........         2,750       2,600
    Accounts payable...............................         7,064       5,981
    Accrued expenses and other current
        liabilities................................         2,028       1,888
                                                          -------     -------
           Total current liabilities...............        20,813      16,446
                                                          -------     -------

Subordinated Notes Payable -
    stockholder, net of current maturities.........         5,296       5,296
                                                          -------     -------

Long-term debt, net of current maturities..........           -           150
                                                          -------     -------

COMMITMENTS AND CONTINGENCIES:

STOCKHOLDERS' EQUITY
    Preferred stock, $.01 par value; 1,000,000
        authorized shares; no shares outstanding...           -           -
 Common stock, $.01 par value; 25,000,000
        authorized shares; issued and outstanding
        6,717,333 shares...........................            67          67
    Additional paid-in capital.....................        40,166      40,166
    Retained earnings (deficiency).................       (38,496)    (37,502)
                                                          -------     -------
           Total stockholders' equity..............         1,737       2,731
                                                          -------     -------
                                                          $27,846     $24,623
                                                          =======     =======

The  accompanying  condensed  notes are an integral  part of these  consolidated
statements.

                                        3

<PAGE>


                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                      (In thousands, except per share data)

                                   (UNAUDITED)

                                                       THREE MONTHS ENDED
                                                           AUGUST 31,
                                                        1996           1995
                                                        ----           ----

Net sales.......................................      $11,577        $13,704

Cost of sales...................................        6,935          7,932
                                                      -------        -------

    Gross profit................................        4,642          5,772

Selling, general and administrative expenses....        5,075          5,247

Operating income (loss).........................         (433)           525

Interest expense................................          561            614
                                                      -------        -------

    Loss before income taxes....................         (994)           (89)

Provision for income taxes......................           -             -
                                                      -------        -------

    Net loss ...................................     $   (994)      $    (89)
                                                     ========       ========

Net loss per common share.......................     $  (0.15)      $  (0.01)
                                                     ========       ========

Weighted average shares outstanding.............        6,717          6,717
                                                      =======        =======


The  accompanying  condensed  notes are an integral  part of these  consolidated
statements.

                                        4

<PAGE>

                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                                 (In thousands)

                                   (UNAUDITED)



                               COMMON STOCK    Additional  Retained
                              No. of           Paid in     Earnings
                              SHARES  AMOUNT   CAPITAL   (DEFICIENCY)    TOTAL
                              -------------------------------------------------

Balance, May 31, 1995          6,717    $67    $40,166     $(33,574)    $ 6,659

Net loss                                                        (89)        (89)

Balance, August 31, 1995       6,717    $67    $40,166     $(33,663)    $ 6,570
                               =====    ===    =======     ========     =======




Balance, May 31, 1996          6,717    $67    $40,166     $(37,502)    $ 2,731

Net loss                                                       (994)       (994)

Balance, August 31, 1996       6,717    $67    $40,166    $ (38,496)    $ 1,737
                               =====    ===    =======    =========     =======



The  accompanying  condensed  notes are an integral  part of these  consolidated
statements.

                                        5

<PAGE>

                     THE HE-RO GROUP, LTD., AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)
                                   (UNAUDITED)

                                                         THREE MONTHS ENDED
                                                              AUGUST 31,
                                                         1996          1995
                                                         ----          ----
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss.......................................   $  (994)     $    (89)
                                                      -------      --------
    Adjustments to reconcile pro forma net
        income to net cash provided by (used in)
        operating activities:
        Depreciation and amortization..............       246           276
        Amortization of deferred finance costs.....        79            63
        Loss on disposition of fixed assets........         0            70

(Increase) decrease in assets:
    Trade receivables..............................    (2,916)       (4,197)
    Other receivables..............................       (68)          616
    Inventories....................................      (252)       (1,500)
    Other current assets...........................       (64)          110
Increase (decrease) in liabilities:
    Accounts payable...............................     1,083           463
    Accrued expenses and other current liabilities.       140          (363)
                                                      -------       -------
    Total adjustments..............................    (1,752)       (4,462)
                                                      -------       -------
           Net cash used in operating activities...    (2,746)       (4,551)
                                                      -------       -------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Acquisition of fixed assets....................       (27)          (21)
    Decrease in other assets.......................        26            26
                                                      -------       -------
Net cash provided by (used in) investing...........
activities.........................................        (1)            5
                                                      -------       -------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase (decrease) in bank loans................     2,994         4,132
  Deferred finance costs...........................       (39)          (98)
                                                      -------       -------
    Net cash provided by financing activities......     2,955         4,034
                                                      -------       -------

NET INCREASE (DECREASE) IN CASH....................       208          (512)
                                                      -------       -------

CASH, beginning of period..........................       405           809
                                                      -------       -------

CASH, end of period................................   $   613       $   297
                                                      =======       =======


The  accompanying  condensed  notes are an integral  part of these  consolidated
statements.

                                        6

<PAGE>

                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

                                 August 31, 1996



1. BASIS OF PRESENTATION

     The  consolidated  financial  statements  include the accounts of The HE-RO
Group,  Ltd. and its subsidiaries  (the "Company").  The consolidated  financial
statements are presented in accordance  with the  requirements  of the quarterly
report on Form  10-Q and  consequently  do not  include  all of the  disclosures
normally  made  in an  annual  report  on Form  10-K  filing.  Accordingly,  the
consolidated   financial  statements  included  herein  should  be  reviewed  in
conjunction  with the consolidated  financial  statements and the notes included
therein with the Company's Annual Report on Form 10-K.

     The financial  information  as of and for the three months ended August 31,
1996 and 1995 has been  prepared  in  accordance  with the  Company's  customary
accounting practices and has not been audited. In the opinion of management, the
information presented reflects all adjustments necessary for a fair statement of
interim results.  All such adjustments are of a normal and recurring nature. The
foregoing  interim  results  are not  necessarily  indicative  of the results of
operations for the full year ending May 31, 1997 ("Fiscal 1997").



2. RESTRUCTURING

     On  October  14,  1993,  at a Special  Meeting  of the  Company's  Board of
Directors,  the Board adopted a restructuring  plan (effective  August 31, 1993)
pursuant to which during the fiscal year ending May 31, 1994 and thereafter, the
Company would refocus substantially all of its resources on its core evening and
special  occasion  wear  business,  primarily  its Black Tie by Oleg Cassini and
Niteline  product  lines,  and its retail outlet  stores.  At the same time, the
Company  determined  it  should  discontinue   producing  moderate  dresses  and
sportswear and bridge dresses and suits, and close the divisions responsible for
the  discontinued  product lines. In connection with these actions,  the Company
recorded  pre-tax  restructuring  charges  for the years  ended May 31, 1994 and
1995,  respectively.  During the quarter,  the Company made payments relating to
lease  and  other   settlements.   As  of  August  31,  1996,  the  Company  had
substantially completed its restructuring plan.


                                        7

<PAGE>


3. INVENTORY

     Inventory is stated at the lower of cost  (first-in,  first-out) or market,
and at  August  31,  1996 was  calculated  using the gross  profit  method.

                                                      (In Thousands)
                                                  August 31,     May 31,
                                                     1996         1996 
                                                   ---------    --------
                                                  (UNAUDITED)

        Finished goods.........................     $11,485     $10,647
        Raw materials..........................       3,796       4,382
                                                    -------      ------
                                                    $15,281     $15,029

4. FIXED ASSETS

     Fixed assets  consist of the following:

                                                      (In Thousands)
                                                  August 31,     May 31,
                                                     1996         1996 
                                                   ---------    --------
                                                  (UNAUDITED)

        Machinery and equipment.................    $ 3,115     $ 3,115
        Furniture and fixtures..................      2,992       2,979
        Leasehold improvements..................      3,661       3,647
                                                    -------     -------
                                                      9,768       9,741
        Less - Accumulated depreciation and
        amortization............................      7,563       7,317
                                                    -------     -------
                                                    $ 2,205     $ 2,424
                                                    =======     =======

5. RELATED PARTY TRANSACTIONS

     The  Company  has an  investment  of  $798,000  in Great  Projects  Limited
("GPL"), a Hong Kong corporation.  Fifty percent of GPL is owned by a subsidiary
of the  Company,  and 25% is owned by each of two Hong Kong  companies  that are
unaffiliated  with the Company or its officers or  directors.  As of October 31,
1993, the partners agreed to discontinue the operations of GPL. In January 1996,
liquidation  proceedings in Hong Kong were commenced to wind up GPL. Included in
accounts  payable is $2,151,000 due to the foreign  affiliate at August 31, 1996
and May 31, 1995. The Company does not expect any material impact on its results
of operations due to the liquidation of GPL.

     Notes and obligations  payable to the beneficial  principal  stockholder in
the aggregate  principal amount of $5,296,000 are subordinated to bank borrowing
and bear interest  varying from 8% to 12% per annum.  These  obligations are due
upon  demand  but  because  these  obligations  are  subordinated  to  the  bank
borrowing, the liability relating thereto has been classified as long-term.



                                        8

<PAGE>




6. BANK LOANS AND LONG TERM DEBT

     On May 12,  1995,  the Company  signed a credit  agreement  (the  "Foothill
Credit Agreement") with Foothill Capital Corporation ("Foothill") for a two year
term  expiring  June 2, 1997,  to enable the  Company to borrow,  assuming  that
borrowing  base  thresholds  are met (for  direct  loans and letters of credit),
amounts not exceeding  $15,000,000 during the term of the credit agreement.  The
indebtedness  incurred under the Foothill Credit Agreement is secured by a first
lien on the Company's  domestic inventory and accounts  receivable,  among other
collateral.

     Interest  on direct  debt is payable at the prime rate (8.25% at August 31,
1996) plus 2 1/2% per annum.  At August 31,  1996,  the direct debt  outstanding
under  the  Foothill  Credit  Agreement  was  $8,971,000  and  the  Company  was
contingently liable for outstanding letters of credit of approximately $600,000.

     The Company's credit line with Foothill refinanced a substantial portion of
the  indebtedness  previously  outstanding  from the  Company to a group of four
banks (the "Bank Group").  At August 31, 1996, the  outstanding  indebtedness of
the  Company  to the Bank  Group  was  $2,750,000  in the  aggregate  under  the
Company's  fourth  amended and restated  credit  agreement  with its Bank Group,
evidenced by a term note to each bank with  interest at 2% above the prime rate.
The  Company's  indebtedness  to  the  Bank  Group  is (i)  subordinated  to the
Company's indebtedness to Foothill (ii) secured by a second lien on the domestic
inventory and accounts receivable,  among other collateral,  and a first lien on
the inventory  located in Hong Kong and China,  and (iii) subject to a mandatory
prepayment  of $100,000 for any month in which the  Company's  inventory in Hong
Kong and China decrease below certain minimum  thresholds.  This loan is due and
payable in monthly  installments  of principal  ranging from $50,000 to $150,000
beginning  August 1995, plus monthly interest  payments,  with the final payment
due in June  1997.  These  payments  are  permitted  under the  Foothill  Credit
Agreement if certain liquidity  standards are met. For the months ended December
1995 through September 1996, because these liquidity standards were not met, the
Company was not  permitted to pay the monthly  installments  of principal to the
Bank Group, and accordingly was not in compliance with its credit agreement with
the  Bank  Group.  As a  result  of the  foregoing  and in  connection  with the
contemplated transaction with Sun Capital Partners, Inc. as discussed in Note 9,
the Company will be seeking to refinance or revise its credit facilities.

     As partial  consideration for entering into the amended and restated credit
agreement with the Bank Group,  warrants previously granted to the Bank Group to
purchase up to an aggregate of 250,000 shares of the Company's common stock at a
price of $2.00 per share  were  extended  for a one year term to  September  17,
1999.

                                        9

<PAGE>



     The Company's  credit  agreements with Foothill and the Bank Group requires
Della Rounick and the estate of Herbert Rounick, collectively, to own or control
at least 51% of the Company's  outstanding  common stock. In addition,  the more
significant  restrictive  covenants as defined in the Foothill Credit  Agreement
are as follows:

         -  The minimum current ratio must equal:  1.0 to 1

         -  The maximum liabilities to net worth must equal:  38.0 to 1

         -  The minimum net worth required:  $400,000

         -  The minimum working capital required :  $3,500,000

         -  Capital expenditures may not exceed $500,000 in one year.

         -  The Company is prohibited  from paying  dividends  throughout  the
            term of the agreement.

         -  The net income on a  cumulative  basis and  measured at the end of
            each fiscal  quarter may not fall below negative  $4,500,000  from
            June 1, 1995.

     As of August 31,  1996,  the Company  was not in  compliance  with  certain
financial  covenants  under the  Foothill  Credit  Agreement.  The  Company  has
received a waiver from Foothill  relating to the foregoing  non-compliance  (see
Note 9 for further discussion).


7. SUPPLEMENTAL CASH FLOW INFORMATION

     Payments of income taxes were $37,000 and $8,000 for the three months ended
August  31,  1996 and  1995,  respectively.  Payments  of  interest  during  the
corresponding periods were $420,000 and $554,000, respectively.


8. CONTINGENCIES

     Because a substantial  amount of the Company's products are manufactured in
The  People's  Republic of China  ("China"),  the loss of  "most-favored-nation"
("MFN") trading status for China would have, and the conditional granting of MFN
trading  status  for China or the  imposition  of  retaliatory  trade  sanctions
against China  involving the Company's  products  could have a material  adverse
affect on the Company,  resulting  from  significantly  higher rates of duty and
other trade sanctions imposed on goods originating in China.

     In  May  1996,  President  Clinton  issued  a  Presidential   Determination
recommending the renewal of "most-favored-nation" trade status for China for the
twelve  months  ending  July 2, 1997.  Although  resolutions  disapproving  such
renewal were  introduced in June 1996 into both the U.S. Senate and the House of


                                       10

<PAGE>

Representatives,  the House  resolution  was voted on and failed to pass. As has
occurred in the last two years, in a break with previous years, the Presidential
Determination   did   not   recommend   subjecting   any   future   renewal   of
"most-favored-nation"  trade  status  for China to various  conditions,  such as
China's  compliance  with the 1992  bilateral  agreement  with the United States
concerning  prison  labor and overall  progress  with  respect to human  rights,
release and  accounting  of Chinese  citizens  imprisoned  or detained for their
political  and religious  beliefs,  humane  treatment of  prisoners,  protecting
Tibet's religious and cultural heritage and permitting  international  radio and
television  broadcasts into China.  However,  in June 1996 a bill was introduced
into  Congress  which,  if  enacted,   would  provide  that  China's   continued
designation as a "most-favored-nation"  be linked to Taiwan's admission into the
WTO by March 1997.  "Most-favored- nation" trade status was renewed in July 1996
for an additional  year. There is no assurance that the President will recommend
the  renewal  of  "most-favored-nation"  trade  status  for  China  for the year
commencing  July  3,  1997  or  thereafter  or  that  Congress  will  not  enact
legislation  denying or conditioning  the grant of  "most-favored-nation"  trade
status to China in the future.

     In January  1994,  the United  States and China  entered  into a three year
bilateral textile agreement  expiring December 31, 1996. Among other things, the
agreement  reduces by 13%  China's  market  access  for  certain  cotton,  wool,
man-made  fiber,  silk blend and other  vegetable  fiber  textiles  and  textile
products  exported to the United  States and permits the United States to impose
significant penalties for transshipment  violations.  Such penalties include the
assessment of  "transshipment  charges" against the restraint levels of affected
categories  which could  result in such levels  filling more rapidly or becoming
fully  utilized  with little or no advance  notice.  Pursuant  to the  bilateral
textile agreement, such transshipment charges have, on occasion, been applied by
the United States. In addition,  a separate  agreement between the United States
and China was reached which, for the first time,  subjects to quota limitations,
China's  exports  of  apparel  containing  70% or more by weight  of silk.  This
agreement is effective with respect to goods produced or  manufactured  in China
and exported to the United  States  during the period from April 1, 1994 through
December  31,  1996.  Previously,  these  products  were  not  subject  to quota
limitations.  Negotiations with respect to the expiring bilateral agreements are
underway.  The  Company  cannot  predict  the  terms  of  any  renewal  of  such
agreements.

     On July 1,  1997,  the  British  Crown  Colony of Hong Kong  reverts to the
People's Republic of China. Since a new bilateral textile agreement will have to
be  negotiated  by the end of the year,  effective  on January  1,  1997,  it is
uncertain  how Hong Kong  textile  quota will be viewed in  relation  to Chinese
textile quota. If the United States should determine that goods produced in Hong
Kong would be subjected to Chinese quota,  such a determination  would adversely
affect any  contingency  plans of the Company which are premised on the shifting
of production or assembly of the products from China to Hong Kong.

     In addition,  over the past several years  (including  1996), the Office of
the United  States Trade  Representative  has  conducted,  and may in the future


                                       11

<PAGE>


conduct,  investigations relating to China's trade policies and practices. While
previous  investigations  were  resolved  without  resort to  retaliatory  trade
sanctions against China by the United States,  an unfavorable  resolution of any
future  investigation  could  result  in the  imposition  of  retaliatory  trade
sanctions  against  China and on products  imported  from China.  This  includes
punitive  duties,  fees or restrictions on certain Chinese  products,  including
products manufactured by the Company in China.

     Legislation  implementing  the Uruguay  Round of the General  Agreement  on
Tariffs  and Trade was signed by  President  Clinton in late 1994.  Among  other
provisions,  it contained a section which amended the rules of origin applicable
to textile and textile  products,  effective  with  respect to goods  entered or
withdrawn from warehouse for  consumption on or after July 1, 1996.  Regulations
implementing these changes have been finalized.  In general,  and with specified
exceptions,  the statute  and  regulations  provide  that most  textile  apparel
articles will be considered to originate in the country in which they are wholly
assembled.  In many  cases,  this  represents  a change from the manner in which
country of origin has been  determined,  which in many  instances,  was based on
where the components were cut. The Company cannot now predict to what extent the
new rules concerning  country of origin will change import trade patterns or how
it will impact upon quota usage from exporting countries.

     The Company is a party to various  claims,  legal  actions,  and complaints
arising in the  ordinary  course of  business.  In the opinion of the  Company's
management,  all such matters are without merit or involve such amounts in which
an unfavorable  disposition would not have a material effect on the consolidated
financial statements of the Company.

9. SUBSEQUENT EVENT

     Because the Company has been incurring  losses from  operations,  there has
been insufficient liquidity, as required by its credit agreement with its senior
lender, Foothill Capital Corporation  ("Foothill"),  to allow the Company to pay
required monthly  installments of principal to its group of four banks that rank
junior to Foothill.  In addition,  as of August 31, 1996, the Company was not in
compliance with certain financial  covenants under the Foothill Credit Agreement
for which the  Company  has  received  a waiver  from  Foothill  (see Note 6 for
discussion).  The Company is projecting losses from operations for the remainder
of fiscal 1997,  which would  result in its  non-compliance  with the  financial
covenants  under its credit  agreement with Foothill.  The  combination of these
factors raises  substantial  doubt about the Company's  ability to continue as a
going concern.  In the fourth quarter of fiscal 1996, the Company engaged Arthur
Andersen  Worldwide  -  Corporate  Finance as its  financial  advisor to explore
options  including  alliances with other companies,  an infusion of capital into
the  Company,  the sale or  merger of the  Company,  or any  combination  of the
foregoing.


                                       12

<PAGE>



     Effective  September 25, 1996, the Company signed a purchase agreement with
an affiliate of Sun Capital Partners,  Inc. ("Sun Capital"),  a merchant banking
and investment banking firm located in West Palm Beach, Florida. Under the terms
of the purchase agreement, Sun Capital will invest $2,500,000 in the Company for
which Sun Capital  will  receive  common  stock of the  Company.  As part of the
transaction,  Sun  Capital  will  purchase  the  subordinated  debt and  accrued
interest  payable of  approximately  $6,000,000  currently held by the Company's
beneficial principal stockholder, Co-Chairman and Chief Executive Officer, Della
Rounick,  for $2,500,000,  and  approximately  $500,000 of the subordinated debt
will be  converted  into equity of the Company.  In  addition,  Sun Capital will
receive  options to purchase  common stock of the Company at declining  exercise
prices (starting at $.50 per share),  based on a formula linked to the Company's
performance.  The common stock  received upon closing and the options,  if fully
exercised, will represent up to 49.9% of the common stock of the Company.

     The transaction is subject to due diligence to be completed by Sun Capital,
obtaining  financing,  third  party  approvals,  other  closing  conditions  and
shareholder approval. There can be no assurance that the Company will consummate
the transaction described above.

     In the absence of the preceding  transaction  or similar  events that would
provide  plans to  restructure  debt,  to  reduce or delay  expenditures,  or to
increase  ownership  equity,  there  could  be a  substantial  doubt  as to  the
Company's  success  of  future  operations.   The  result  includes  a  possible
discontinuance  of operations in which there is a commencement of dissolution or
bankruptcy,  or there  could be an  externally  forced  revision  of its present
operating structure.


                                       13

<PAGE>


                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


GENERAL

     The following discussion provides information and analysis of the Company's
results of operations  for the three month period ended August 31, 1996, and its
liquidity and capital resources. The following discussion and analysis should be
read  in  conjunction  with  the  Unaudited  Consolidated  Financial  Statements
included elsewhere herein.

     Because a substantial  amount of the Company's products are manufactured in
The People's  Republic of China ("China"),  the loss of  "most-favored-  nation"
("MFN") trading status for China would have, and the conditional granting of MFN
trading  status  for China or the  imposition  of  retaliatory  trade  sanctions
against China  involving the Company's  products  could have a material  adverse
affect on the Company,  resulting  from  significantly  higher rates of duty and
other trade sanctions imposed on goods originating in China.

     In  May  1996,  President  Clinton  issued  a  Presidential   Determination
recommending the renewal of "most-favored-nation" trade status for China for the
twelve  months  ending  July 2, 1997.  Although  resolutions  disapproving  such
renewal were  introduced in June 1996 into both the U.S. Senate and the House of
Representatives,  the House  resolution  was voted on and failed to pass. As has
occurred in the last two years, in a break with previous years, the Presidential
Determination   did   not   recommend   subjecting   any   future   renewal   of
"most-favored-nation"  trade  status  for China to various  conditions,  such as
China's  compliance  with the 1992  bilateral  agreement  with the United States
concerning  prison  labor and overall  progress  with  respect to human  rights,
release and  accounting  of Chinese  citizens  imprisoned  or detained for their
political  and religious  beliefs,  humane  treatment of  prisoners,  protecting
Tibet's religious and cultural heritage and permitting  international  radio and
television  broadcasts into China.  However,  in June 1996 a bill was introduced
into  Congress  which,  if  enacted,   would  provide  that  China's   continued
designation as a "most-favored-nation"  be linked to Taiwan's admission into the
WTO by March 1997.  "Most-favored-nation"  trade status was renewed in July 1996
for an additional  year. There is no assurance that the President will recommend
the  renewal  of  "most-favored-  nation"  trade  status  for China for the year
commencing  July  3,  1997  or  thereafter  or  that  Congress  will  not  enact
legislation  denying or conditioning  the grant of  "most-favored-nation"  trade
status to China in the future.

     In January  1994,  the United  States and China  entered  into a three year
bilateral textile agreement  expiring December 31, 1996. Among other things, the
agreement  reduces by 13%  China's  market  access  for  certain  cotton,  wool,
man-made  fiber,  silk blend and other  vegetable  fiber  textiles  and  textile
products  exported to the United  States and permits the United States to impose
significant penalties for transshipment  violations.  Such penalties include the
assessment of  "transshipment  charges" against the restraint levels of affected


                                       14

<PAGE>


                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


categories  which could  result in such levels  filling more rapidly or becoming
fully  utilized  with  little or no  advance  notice.  In  addition,  a separate
agreement  between the United States and China was reached which,  for the first
time,  subjects to quota limitations,  China's exports of apparel containing 70%
or more by weight of silk.  This  agreement is  effective  with respect to goods
produced or  manufactured  in China and exported to the United States during the
period from April 1, 1994 through December 31, 1996. Previously,  these products
were not subject to quota limitations.

     On July 1,  1997,  the  British  Crown  Colony of Hong Kong  reverts to the
People's Republic of China. Since a new bilateral textile agreement will have to
be  negotiated  by the end of the year,  effective  on January  1,  1997,  it is
uncertain  how Hong Kong  textile  quota will be viewed in  relation  to Chinese
textile quota. If the United States should determine that goods produced in Hong
Kong would be subjected to Chinese quota,  such a determination  would adversely
affect any  contingency  plans of the Company which are premised on the shifting
of production or assembly of the products from China to Hong Kong.

     In addition,  over the past several years  (including  1996), the Office of
the United  States Trade  Representative  has  conducted,  and may in the future
conduct,  investigations relating to China's trade policies and practices. While
previous  investigations  were  resolved  without  resort to  retaliatory  trade
sanctions against China by the United States,  an unfavorable  resolution of any
future  investigation  could  result  in the  imposition  of  retaliatory  trade
sanctions  against  China and on products  imported  from China.  This  includes
punitive  duties,  fees or restrictions on certain Chinese  products,  including
products manufactured by the Company in China.

     Legislation  implementing  the Uruguay  Round of the General  Agreement  on
Tariffs  and Trade was signed by  President  Clinton in late 1994.  Among  other
provisions,  it contained a section which amended the rules of origin applicable
to textile and textile  products,  effective  with  respect to goods  entered or
withdrawn from warehouse for  consumption on or after July 1, 1996.  Regulations
implementing  these changes have recently been finalized.  In general,  and with
specified  exceptions,  the statute and  regulations  provide  that most textile
apparel  articles  will be  considered to originate in the country in which they
are wholly assembled. In many cases, this represents a change from the manner in
which country of origin has been determined,  which in many instances, was based
on where the components  were cut. The Company cannot now predict to what extent
the new rules concerning  country of origin will change import trade patterns or
how it will impact upon quota usage from exporting countries.

     The Company is a party to various  claims,  legal  actions,  and complaints
arising in the  ordinary  course of  business.  In the opinion of the  Company's
management,  all such matters are without merit or involve such amounts in which
an unfavorable  disposition would not have a material effect on the consolidated
financial statements of the Company.


                                       15

<PAGE>


                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS



RESULTS OF OPERATIONS
FIRST QUARTER FISCAL 1997 COMPARED TO FIRST QUARTER FISCAL 1996

     Net sales of $11.6  million  for the three  months  ended  August 31,  1996
decreased by $2.1 million, or (15.5%) compared to net sales of $13.7 million for
the three months ended August 31, 1995. This decrease is primarily  attributable
to  reduced  sales for  evening  wear  products  due to the soft  economy in the
apparel industry.

     Cost of sales for the three months ended August 31, 1996 was $6.9  million,
or 59.9% of net sales  compared to $7.9  million,  or 57.9% of net sales for the
three  months  ended  August 31,  1995.  Gross profit for the three months ended
August  31,  1996 was $4.6  million,  or 40.0% of net  sales,  compared  to $5.8
million,  or 42.1% of net sales for three  months  ended  August 31,  1995.  The
decrease  in gross  profit  dollars  and as a  percent  of  sales  is  primarily
attributable to the decrease in sales described above.

     Selling, general and administrative expenses were $5.1 million, or 43.8% of
net sales for the three months ended August 31, 1996,  compared to $5.2 million,
or 38.3% of net sales for the three months ended August 31, 1995.
7.k
     Operating  loss was  $(.4)  million  or  (3.7)%  of net sales for the three
months ended August 31, 1996  compared to an operating  income of $.5 million or
3.8% of net sales for the three months  ended  August 31, 1995.  The increase in
operating  loss was  attributable  to the reduced sales and gross profit dollars
described above.

     Interest  expense  for the  three  months  ended  August  31,  1996 was $.6
million,  or 4.8% of net sales compared to $.6 million, or 4.5% of net sales for
the three months ended August 31, 1995.

     As a  result  of the  factors  described  above,  the  Company's  net  loss
increased  to $(1.0)  million,  or (8.6)% of net sales  during the three  months
ended August 31, 1996,  compared to $(.1) million, or (.7)% of net sales for the
three months ended August 31, 1995.


LIQUIDITY AND CAPITAL RESOURCES

     At August 31, 1996, the Company had a decrease in cash flows from operating
activities of $2.7 million. This decrease resulted primarily from a net increase
in accounts receivable of $2.9 million and a net loss of $1.0 million, offset by
an increase in accounts  payable of $1.1 million.  The  Company's  level of cash
flows from  operating  activities  varies  from  quarter  to quarter  due to the
seasonality of its business.

     In regard to cash flows from investing  activities,  during the first three
months  of  fiscal  1997  and  1996,   capital   improvements   and  replacement
expenditures were not significant. Capital improvements and replacements for the
full fiscal 1997 year are expected to approximate $.2 million.

                                       16

<PAGE>


                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS



     Cash flows from financing  activities  increased by $3.0 million  resulting
primarily  from an increase in bank  borrowings  under the  Company's  revolving
credit facilities.

     Because the Company has been incurring  losses from  operations,  there has
been insufficient liquidity, as required by its credit agreement with its senior
lender, Foothill Capital Corporation  ("Foothill"),  to allow the Company to pay
required monthly  installments of principal to its group of four banks that rank
junior to Foothill.  In addition,  as of August 31, 1996, the Company was not in
compliance with certain financial  covenants under the Foothill Credit Agreement
for which the  Company  has  received  a waiver  from  Foothill  (see Note 6 for
discussion).  The Company is projecting losses from operations for the remainder
of fiscal 1997,  which would  result in its  non-compliance  with the  financial
covenants  under its credit  agreement with Foothill.  The  combination of these
factors raises  substantial doubt about its ability to generate  sufficient cash
to support its operations during the twelve month period following May 31, 1996.
The Company's  ability to continue as a going concern is dependent upon plans to
restructure  debt,  to reduce or delay  expenditures,  or to increase  ownership
equity as discussed in Note 9 of Notes to Consolidated Financial Statements. The
Company believes that the contemplated transaction with Sun Capital as discussed
in Note 9, as well as funds generated by operations (i.e.  management's  ability
to reduce the significant  operating  losses),  the availability of credit under
the  revised  credit  facilities  coupled  with  reduced  inventory  levels will
contribute  to  meeting  the  Company's  working  capital,  letter of credit and
capital  expenditure  requirements for the foreseeable  future.  (See Note 6 for
further discussion of the revised credit  facilities.) There can be no assurance
that the Company will  consummate  the  transaction  with Sun Capital  described
above.














                                       17

<PAGE>


                     THE HE-RO GROUP, LTD. AND SUBSIDIARIES

                           PART II. OTHER INFORMATION



Item 6.         Exhibits and Reports on Form 8-K


(a)             Exhibits:

10.19           Note and Common Stock Purchase Agreement, dated as of
                September 25, 1996, by and among the Registrant,  The
                He-Ro  Group,   Inc.,   Vasiliki  Della   Pasvantidou
                Rounick,  individually  and as the  Executrix  of the
                Estate  of  Herbert   Rounick,   and  Sun  Investment
                Partnership I, Ltd.


(b)             Reports on Form 8-K:

                The  Company  did not  file  any  report  on Form 8-K
                during the three months ended August 31, 1996






                                   SIGNATURES


     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, The
He-Ro  Group,  Ltd.  has duly  caused this  Quarterly  Report on Form 10-Q to be
signed on its behalf by the undersigned thereunto duly authorized.

Date:   October 11, 1996                  THE HE-RO GROUP, LTD.
                                          (Registrant)


                                       By: /S/ DELLA ROUNICK
                                           ------------------------
                                           Della Rounick
                                           Co-Chairman of the Board
                                           of Directors and Chief
                                           Executive Officer


Date:  October 11, 1996


                                           /S/ SAM D. KAPLAN
                                           ------------------------
                                           Sam D. Kaplan
                                           Chief Financial Officer
                                           and Secretary
                                           (Principal Financial and
                                            Accounting Officer)

                                       18

<PAGE>


                                INDEX TO EXHIBITS
                                       TO
                              THE QUARTERLY REPORT
                                  ON FORM 10-Q
                      FOR THE QUARTER ENDED AUGUST 31, 1996
                                       OF
                              THE HE-RO GROUP, LTD.



Exhibit                                                            Sequentially
  No.                  Description                                 Numbered Page

*10.19            Note and Common Stock Purchase Agreement,
                  dated as of September 25, 1996, by and among
                  the Registrant, The He-Ro Group, Inc.,
                  Vasiliki Della Pasvantidou Rounick,
                  individually and as the Executrix of the
                  Estate of Herbert Rounick, and Sun Investment
                  Partnership I, Ltd.




* Filed herewith.

<PAGE>

                               EXHIBIT NO. 10.19
                               -----------------

                              NOTE AND COMMON STOCK


                               PURCHASE AGREEMENT



                         DATED AS OF SEPTEMBER 25, 1996


<PAGE>



                              NOTE AND COMMON STOCK

                               PURCHASE AGREEMENT


                                      INDEX

                                                                         Page 
                                    ARTICLE I
                  PURCHASE AND SALE OF NOTES AND COMMON STOCK;
                               ISSUANCE OF OPTIONS

1.1       Sale and Purchase of Notes and Purchase Rights.................  1
1.2       Exercise of Purchase Rights....................................  2
1.3       Issuance of Option.............................................  2
1.4       Reservation of Shares of Common Stock..........................  2
1.5       Closing .......................................................  2
1.6       Deliveries at Closing..........................................  2
1.7       Use of Proceeds................................................  3

                                   ARTICLE II
                        REPRESENTATIONS AND WARRANTIES OF
                              THE COMPANY AND HE-RO

2.1       Organization and Corporate Power...............................  3
2.2       Authorization..................................................  3
2.3       Government Approvals...........................................  4
2.4       Authorized and Outstanding Stock...............................  4
2.5       Subsidiaries...................................................  4
2.6       Financial Information; NOL; Indebtedness.......................  5
2.7       Events Subsequent to the Date of the Financial Statements......  5
2.8       Litigation.....................................................  6
2.9       Compliance with Laws...........................................  6
2.10      Taxes   .......................................................  7
2.11      Real Property..................................................  7
2.12      Personal Property..............................................  7
2.13      Patents, Trademarks, etc.......................................  7
2.14      Agreements of Directors, Officers and Employees................  8
2.15      Governmental and Industrial Approvals..........................  8
2.16      Federal Reserve Regulations....................................  8
2.17      Contracts and Commitments......................................  8
2.18      Securities Act.................................................  9
2.19      Registration Rights............................................  9
2.20      Insurance Coverage.............................................  9
2.21      Employee Matters...............................................  9
2.22      No Brokers or Finders.......................................... 10
2.23      Transactions with Affiliates................................... 10
2.24      Assumptions, Guarantees, etc. of Indebtedness of Other Persons. 10
2.25      Suppliers and Customers........................................ 10
2.26      Status Under Certain Laws...................................... 10
2.27      No Conflicts or Defaults....................................... 10
2.28      Environmental Compliance....................................... 11
2.29      Disaster....................................................... 11

                                       -i-

<PAGE>



2.30      Inventories; Accounts Receivable............................... 12
2.31      Customs ....................................................... 12
2.32      Information in Proxy Statement................................. 12
2.33      Solvency....................................................... 13
2.34      Disclosures.................................................... 13

                                   ARTICLE III
                        REPRESENTATIONS AND WARRANTIES OF
                             THE ESTATE AND ROUNICK

3.1       Authorization.................................................. 13
3.2       Government Approvals........................................... 13
3.3       No Brokers or Finders.......................................... 13
3.4       Ownership of Old Notes......................................... 13
3.5       No Defaults or Conflicts....................................... 14
3.6       Litigation..................................................... 14
3.7       Disclosures.................................................... 14

                                   ARTICLE IV
                      AFFIRMATIVE COVENANTS OF THE COMPANY

4.1       Accounts and Reports........................................... 14
4.2       Payment of Taxes............................................... 15
4.3       Compliance with Laws, Etc...................................... 16
4.4       Inspection..................................................... 16
4.5       Corporate Existence; Ownership of Subsidiaries................. 16
4.6       Compliance with ERISA.......................................... 16
4.7       Operating Plan and Budget...................................... 16
4.8       Financing...................................................... 16
4.9       Meetings of the Board of Directors............................. 16
4.10      Maintenance of Properties; Insurance........................... 17
4.11      Rule 144 Information........................................... 17
4.12      Regular Course of Business..................................... 17
4.13      Exclusivity.................................................... 17
4.14      Amendment to Bylaws............................................ 18
4.15      Proxy Statement; Shareholder Approvals......................... 18
4.16      Advice of Changes; Government Filings.......................... 18
4.17      General Restrictions........................................... 18
4.18      Listing of Shares.............................................. 19
4.19      Fairness Opinion............................................... 19
4.20      Board Representation........................................... 19

                                    ARTICLE V
                        AFFIRMATIVE COVENANTS OF ROUNICK

5.1       NOL; Grant of Proxy............................................ 20
5.2       Non-Competition................................................ 20
5.3       Nondisclosure.................................................. 20
5.4       Injunction..................................................... 21

                                   ARTICLE VI
                     AFFIRMATIVE COVENANTS OF THE PURCHASER



                                      -ii-

<PAGE>



                                   ARTICLE VII
                        NEGATIVE COVENANTS OF THE COMPANY

7.1       Investments in Other Persons................................... 21
7.2       Distributions.................................................. 22
7.3       Dealings with Affiliates....................................... 22
7.4       Merger; Sale of Assets......................................... 22
7.5       Indebtedness................................................... 22
7.6       Liens   ....................................................... 22
7.7       Limitations on Restrictions on Subsidiary Dividends and Other
           Distributions................................................. 22
7.8       No Conflicting Agreements...................................... 23
7.9       Restrictions on Further Issuances.............................. 23
7.10      Settlement of Claims or Litigation............................. 23
7.11      No Dilution or Impairment...................................... 23
7.12      Maintenance of Public Market................................... 23
7.13      No Restriction or Impairment of NOL............................ 23

                                  ARTICLE VIII
                          REPRESENTATIONS OF PURCHASER

8.1       Investments Representations and Warranties..................... 24
8.2       Permitted Sales; Legends....................................... 24
8.3       Organization and Corporate Power............................... 25
8.4       Authorization.................................................. 25
8.5       No Brokers or Finders.......................................... 25
8.6       No Defaults or Conflicts....................................... 25

                                   ARTICLE IX
                      CONDITIONS OF PURCHASER'S OBLIGATION

9.1       Representations and Warranties................................. 25
9.2       Opinions of Counsel............................................ 25
9.3       Amendments to Charter Documents................................ 26
9.4       Certified Documents, Etc....................................... 26
9.5       No Material Adverse Effect..................................... 26
9.6       Consents and Waivers........................................... 26
9.7       No Restrictions................................................ 26
9.8       Litigation..................................................... 26
9.9       Shareholder Approval........................................... 26
9.10      Rights Offering................................................ 26
9.11      Stock Exchange Listing......................................... 26
9.12      Due Diligence.................................................. 26
9.13      Opinion Regarding NOL.......................................... 27
9.14      Financing...................................................... 27
9.15      Certain Other Agreements....................................... 27
9.16      Other Documents and Opinions................................... 27
9.17      Minimum Stock Price............................................ 27
9.18      Amendment to or Cancellation of Stock Rights................... 27


                                      -iii-

<PAGE>



                                    ARTICLE X
                  CONDITIONS OF THE OBLIGATIONS OF THE COMPANY,
                             ROUNICK AND THE ESTATE

10.1      Representations and Warranties................................. 27
10.2      Shareholder Approval........................................... 27
10.3      Litigation..................................................... 27
10.4      Senior Debt.................................................... 28

                                   ARTICLE XI
                                   TERMINATION

11.1      Termination.................................................... 28
11.2      Effect of Termination.......................................... 28
11.3      Certain Termination Fees....................................... 29

                                   ARTICLE XII
                               CERTAIN DEFINITIONS


                                  ARTICLE XIII
                  SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION

13.1      Survival of Representations and Warranties of Parties other
           than Purchaser................................................ 31
13.2      Indemnification by Rounick and the Estate...................... 31
13.3      Indemnification by the Company and He-Ro....................... 32
13.4      Legal Proceedings.............................................. 32

                                   ARTICLE XIV
                                  MISCELLANEOUS

14.1      Parties in Interest............................................ 32
14.2      Amendments and Waivers......................................... 32
14.3      Notices ....................................................... 32
14.4      Expenses....................................................... 33
14.5      Indemnification for Broker Fees................................ 33
14.6      Counterparts................................................... 33
14.7      Effect of Headings............................................. 33
14.8      Adjustments.................................................... 33
14.9      Governing Law; Arbitration..................................... 34
14.10     Attorneys' Fees................................................ 34
14.11     Further Assurances............................................. 34
14.12     Publicity...................................................... 34
14.13     Entire Agreement............................................... 34
14.14     Severability................................................... 34
14.15     Binding Effect and Assignment.................................. 34


                                      -iv-

<PAGE>



                                LIST OF EXHIBITS

EXHIBIT A             -      Subordinated Note
EXHIBIT B             -      Option
EXHIBIT C             -      Opinion of Counsel for the Company and Rounick
EXHIBIT D             -      Registration Rights Agreement
EXHIBIT E             -      License Agreement
EXHIBIT F             -      Investment Advisory Agreement
EXHIBIT G             -      Certificate of Amendment
EXHIBIT H             -      Voting Trust Agreement
EXHIBIT I             -      Amended and Restated Bylaws
EXHIBIT J             -      Irrevocable Proxy



                                LIST OF SCHEDULES

Schedule              -      Organization and Corporate Power
Schedule              -      Authorized and Outstanding Stock
Schedule 2.5          -      Investments in Other Persons
Schedule 2.6(a)       -      No Change Since May 31, 1996
Schedule 2.6(c)       -      Indebtedness
Schedule              -      Events Subsequent to the Date of the Financial
                               Statements
Schedule              -      Litigation
Schedule              -      Taxes
Schedule              -      Real Property
Schedule              -      Personal Property
Schedule              -      Patents, Trademarks, etc.
Schedule              -      Agreements of Directors, Officers and Employees
Schedule              -      Contracts and Commitments
Schedule              -      Insurance Coverage
Schedule              -      Employee Matters
Schedule              -      Brokers or Finders (Company and He-Ro)
Schedule              -      Location of Inventories
Schedule 2.25         -      Customers
Schedule              -      Customs
Schedule              -      Brokers or Finders (Estate and Rounick)

                                       -v-

<PAGE>



                    NOTE AND COMMON STOCK PURCHASE AGREEMENT


         NOTE AND COMMON STOCK  PURCHASE  AGREEMENT,  dated as of September  25,
1996 ("Agreement"),  by and among The He-Ro Group, Ltd., a Delaware  corporation
(the "Company"), The HeRo Group, Inc., a New York corporation and a wholly owned
subsidiary  of  the  Company  ("He-Ro"),   Vasiliki  Della  Pasvantidou  Rounick
("Rounick"),  individually and as the Executrix of the Estate of Herbert Rounick
(the  "Estate"),  the Estate and Sun  Investment  Partnership I, Ltd., a Florida
limited partnership (the "Purchaser").


                                R E C I T A L S:

         A. As soon as  practical  after  the date of this  Agreement  and after
Purchaser  has obtained a Financing  Commitment,  the Company  shall  commence a
rights offering ("Rights Offering") whereby each shareholder of the Company will
be offered the right (the "Purchase  Right"),  for a limited period of time (but
in no event after the Closing Date), to purchase two shares of common stock, par
value $.01 per share (the  "Common  Stock"),  of the  Company  for each share of
Common Stock owned by such shareholder, at $.50 per share.

         B. The Purchaser  desires to purchase from the Estate,  pursuant to the
terms of this Agreement, (i) all of the principal amount of He-Ro's indebtedness
to the Estate of  approximately  $6.0 million,  plus accrued  interest  thereon,
evidenced by a number of subordinated  notes in such aggregate  principal amount
(collectively, the "Old Notes") issued by He-Ro as of May 31, 1995, and (ii) the
Purchase Rights granted to the Estate pursuant to the Rights Offering.

         C. The Purchaser desires to exercise the Purchase Rights purchased from
the Estate for 6,000,000 shares of Common Stock.

         D. The Company  desires to issue an option to the Purchaser to purchase
such number of shares of the Company's Common Stock, which, if exercised,  would
result  in the  Purchaser  owning  49.99%  (but in no event  50% or more) of the
Company's Common Stock.

         E. The Company has a net operating loss carryforward (the "NOL"), which
as of May 31, 1995 was $26.6 million, and per the Company's financial statements
for the 12-month period ended May 31, 1996, an additional loss of  approximately
$3.9 million was incurred by the Company.

         F.  Simultaneous  with the  receipt  by the  Purchaser  of a  Financing
Commitment,  the Company and  Purchaser  will  execute and deliver  that certain
Investment Advisory  Agreement,  the form of which is attached hereto as EXHIBIT
F.


                                    ARTICLE I
                  PURCHASE AND SALE OF NOTES AND COMMON STOCK;
                               ISSUANCE OF OPTIONS

         1.1 SALE AND PURCHASE OF NOTES AND PURCHASE  RIGHTS.  The Estate agrees
to sell to the Purchaser and, subject to the terms and conditions  hereof and in
reliance upon the representations and warranties of each of the Company,  He-Ro,
the Estate and Rounick  contained herein or made pursuant hereto,  the Purchaser
agrees to purchase from the Estate on the Closing Date, all of (i) the principal
amount of He-Ro's  indebtedness to the Estate evidenced by the Old Notes and all
unpaid  interest  thereon  accrued  through and  including the Closing Date (the
aggregate amount of such principal and accrued interest is referred to herein as
the  "Purchased  Debt"),  and (ii) the  Purchase  Rights  granted  to the Estate
pursuant to the Rights Offering.  The aggregate purchase price to be paid to the


                                       -1-

<PAGE>


Estate by the Purchaser for the Purchased Debt and the Purchase  Rights shall be
$2.5 million.  The Purchaser's  purchase of the Purchased Debt shall be effected
by the Estate's surrender of the Old Notes to He-Ro and the issuance by He-Ro to
Purchaser of subordinated  note(s), in substantially the form attached hereto as
EXHIBIT (the "Notes"),  in an aggregate  principal amount equal to the Purchased
Debt, less the Cancelled Debt (as hereinafter defined),  which Notes shall be on
substantially the same terms as the Old Notes.

         1.2 EXERCISE OF PURCHASE  RIGHTS.  Subject to the terms and  conditions
hereof and in reliance upon the  representations  and  warranties of each of the
Company, He-Ro, the Estate and Rounick contained herein or made pursuant hereto,
the Purchaser  agrees to exercise the Purchase  Rights for  6,000,000  shares of
Common Stock (the  "Purchased  Shares"),  with at least $2.5 million of the $3.0
million aggregate purchase price to be paid in cash at Closing and the remaining
purchase  price  to be paid  by  cancellation  of an  equivalent  amount  of the
Purchased Debt (the "Cancelled Debt").

         1.3  ISSUANCE  OF OPTION.  The  Company  agrees to issue and deliver to
Purchaser on the Closing Date an option in  substantially  the form  attached as
EXHIBIT hereto (the "Option"), which will entitle the Purchaser to purchase such
number of shares of Common Stock so as to result in the Purchaser  owning 49.99%
(but in no event  50% or more)  of the  outstanding  Common  Stock  (subject  to
anti-dilution adjustments in the event of any future issuances of Common Stock),
at a purchase  price of $0.50 per share,  such price being subject to adjustment
as provided in the Option.  The purchase  price for shares of Common Stock under
the Option  may,  at the option of the  Purchaser,  be payable by  Purchaser  in
exchange  for a  portion  of the  principal  amount  of the  Notes  equal to the
aggregate  purchase  price for the shares of Common Stock to be purchased  under
the  Option.  The shares of Common  Stock  issuable  pursuant  to the Option are
referred to herein as the "Option Shares."

         1.4  RESERVATION  OF SHARES OF COMMON STOCK.  The Company shall reserve
from its authorized  but unissued  shares of Common Stock  sufficient  shares of
Common Stock for issuance of the Option Shares and the Purchased Shares.

         1.5  CLOSING.  The purchase  and sale of the  Purchased  Shares and the
Notes and the issuance of the Option shall be made at a closing (the  "Closing")
to be held at the offices of Lowenthal,  Landau, Fischer & Bring, P.C., at 10:00
A.M.,  within five (5) business days (the "Closing Date") after the later of (a)
the day on which the  shareholders'  meeting referred to in Section hereof shall
have occurred,  resulting in the approval of the  transactions  contemplated  by
this Agreement by the shareholders of the Company ("Shareholder Approval"),  and
(b) the day on which all conditions set forth in Article hereof are satisfied or
waived;  or at such  other  date,  time and place  mutually  agreed  upon by the
Company, Rounick and the Purchaser.

         1.6  DELIVERIES  AT  CLOSING.  At the  Closing,  the parties are hereby
delivering the following:

         (i) legal counsel for the Company and the Shareholders  shall deliver a
legal opinion to Purchaser in substantially the form attached as EXHIBIT ;

         (ii) the  Company's  transfer  agent  shall  issue a stock  certificate
evidencing the Purchased Shares, in such  denominations and such names as may be
requested by the Purchaser, dated the Closing Date;

         (iii)  the  Estate  shall  surrender  each  of  the  Old  Notes  to the
Purchaser;

         (iv) the Company shall deliver to the Purchaser the Notes,  the Option,
the Registration  Rights Agreement in substantially the form attached as EXHIBIT
D, and the License Agreement in substantially the form attached as EXHIBIT E;


                                       -2-

<PAGE>



         (v)  the  Company  shall  deliver  evidence  that  the  Certificate  of
Amendment to the Certificate of Incorporation  (the  "Certificate of Amendment")
in substantially  the form attached as EXHIBIT G shall have been duly filed with
the Secretary of the State of Delaware;

         (vi)  Purchaser  shall  deliver to the  Company the  purchase  price in
immediately available funds for the Purchased Shares;

         (vii)  Purchaser  shall  deliver to the Estate  the  purchase  price in
immediately available funds for the Old Notes;

         (viii) the Estate and the  Purchaser  shall  deliver  the Voting  Trust
Agreement, in substantially the form attached as EXHIBIT H; and

         (ix) the  parties  shall  deliver the other  items  contemplated  under
Articles and hereof.

         1.7 USE OF PROCEEDS.  The Company  shall use the proceeds from the sale
of the Purchased Shares to provide working capital for the Company.


                                   ARTICLE II
                        REPRESENTATIONS AND WARRANTIES OF
                              THE COMPANY AND HE-RO

         In order to induce the Purchaser to consummate the  transactions  under
this  Agreement,  the Company and He-Ro make the following  representations  and
warranties,  which are true,  correct and  complete in all  respects on the date
hereof  and  shall be true,  correct  and  complete  in all  respects  as of the
Closing:

         2.1  ORGANIZATION  AND  CORPORATE  POWER.  The  Company and each of its
Subsidiaries  (i) is (or  will be as of the  Closing  Date) a  corporation  duly
organized,  validly  existing  and  in  good  standing  under  the  laws  of the
jurisdiction of its  incorporation,  and (ii) has all requisite  corporate power
and  authority to own its  properties  and to carry on its business as presently
conducted.  The  Company  and  each  of its  Subsidiaries  is duly  licensed  or
qualified to do business as a foreign  corporation in each jurisdiction  wherein
the  character  of its  property,  or the  nature  of the  activities  presently
conducted by it, makes such qualification necessary, except where the failure to
so qualify  would not have a Material  Adverse  Effect.  Except as  disclosed on
SCHEDULE , no proceeding looking toward or relating to the dissolution or merger
of the Company or any  Subsidiary  or the  amendment of any of their  respective
certificates of  incorporation  or articles of  incorporation  is pending or has
been  commenced  or is  contemplated  (other  than as  contemplated  under  this
Agreement).  Neither the  Company  nor any  Subsidiary  is in  violation  in any
respect of its certificate or articles of  incorporation  or bylaws.  A true and
correct  copy of each of the  certificate  of  incorporation  and  bylaws of the
Company and the  Subsidiaries,  as amended to date,  has been  furnished  to the
Purchaser.

         2.2  AUTHORIZATION.  Each of the  Company  and He-Ro has all  necessary
corporate  power and  authority,  and has taken all necessary  corporate  action
required for the due authorization,  execution,  delivery and performance by the
Company of this  Agreement  and the Related  Agreements  to which the Company or
He-Ro is a party, and the consummation of the transactions  contemplated  herein
or  therein,  and  for the  due  authorization,  issuance  and  delivery  of the
Purchased Shares, the Option and the Notes. Other than Shareholder  Approval and
the filing of the Certificate of Amendment with the Delaware Secretary of State,
the issuance of the Purchased  Shares,  the Option or the Notes does not or will
not require any further  corporate  action and is not subject to any  preemptive
right, right of first refusal or the like. This Agreement is, and upon execution
and  delivery,  the Related  Agreements to which the Company or He-Ro is a party
will be,  valid  and  binding  obligations  of each of the  Company  and  He-Ro,


                                       -3-

<PAGE>


enforceable  in  accordance  with  their  respective   terms,   except  as  such
enforcement may be limited by applicable bankruptcy,  insolvency,  moratorium or
similar  laws which  affect  creditors'  rights  generally.  The adoption by the
Company of the form of the  Certificate  of Amendment  has been  approved by the
Board of Directors of the Company.

         2.3   GOVERNMENT   APPROVALS.   No   consent,   approval,   license  or
authorization  of, or designation,  declaration or filing with, any Governmental
Authority  is or  will be  required  on the  part of the  Company  or  He-Ro  in
connection  with the execution,  delivery and performance by the Company of this
Agreement or any of the Related  Agreements,  or in connection with the issuance
of the  Securities  or the Notes,  except for (i) those which have  already been
made or granted, (ii) the filing of registration statements (with respect to the
registration  rights granted pursuant to the Registration  Rights  Agreement) or
proxy statements,  under the Securities Act of 1933, as amended (the "Securities
Act"),  the Securities  Exchange Act of 1934, as amended (the "Exchange Act") or
any applicable state securities  commission,  (iii) filing of the Certificate of
Amendment  with the  Delaware  Secretary  of  State,  and (iv) the  filing of an
additional  listing  application  with the New York Stock  Exchange  to list the
Securities.

         2.4 AUTHORIZED AND OUTSTANDING  STOCK. The authorized  capital stock of
the  Company  consists  of (i)  25,000,000  shares  of  Common  Stock,  of which
6,717,333  shares are validly issued and  outstanding  (1,343,462  issued to and
held by a  Subsidiary,  Durnard  Limited)  and,  based  solely on the  Company's
transfer agent list, dated as of September 12, 1996, and attached hereto as part
of  SCHEDULE , held of record by the  shareholders  set forth  thereon,  and all
shareholders known to the Company who own beneficially in excess of 5% of Common
Stock are also set forth on SCHEDULE  (setting forth such person's name,  amount
of shares of Common Stock  beneficially  owned by such person and the percentage
of  outstanding  Common Stock owned by such person,  as calculated in accordance
with the  proxy  rules  of the  Exchange  Act),  and (ii)  1,000,000  shares  of
preferred stock, $.01 par value, none of which are currently outstanding.  There
are no treasury shares held by the Company. All issued and outstanding shares of
capital  stock are, and when issued in  accordance  with the terms  hereof,  the
Securities will be, duly and validly  authorized,  validly issued and fully paid
and  non-assessable  and free from any  restrictions  on  transfer,  except  for
restrictions  imposed by  federal or state  securities  or  "blue-sky"  laws and
except for those imposed pursuant to this Agreement or any Related Agreement.  A
sufficient  number of authorized but unissued shares of Common Stock has been or
will be reserved  for  issuance  upon  exercise of the  Purchase  Rights and the
Option.  Except as  otherwise  set forth in SCHEDULE , there are no  outstanding
warrants,  options  (including,  but not limited to,  options  granted under the
Company's stock option plans), commitments, preemptive rights, rights to acquire
or  purchase,  conversion  rights or demands of any  character  relating  to the
capital  stock or other  securities  of the  Company  (collectively  the  "Stock
Rights").  SCHEDULE sets forth a detailed  listing of the  following  items with
respect to the Stock  Rights:  (i) the name of each holder of the Stock  Rights,
(ii) the number of shares subject to such Stock Rights, (iii) the exercise price
for the shares to be issued  pursuant  to such Stock  Rights,  (iv) the  vesting
schedule for such Stock  Rights,  and (v) any other  material  information  with
respect to the Stock Rights.  All issued and outstanding  shares of stock of the
Company were issued (i) in  transactions  duly  registered  under the Securities
Act,  or  in  transactions  exempt  from  the  registration  provisions  of  the
Securities Act, and (ii) in compliance  with or in transactions  exempt from the
registration provisions of applicable state securities or "blue-sky" laws.

         2.5 SUBSIDIARIES.  Except as set forth in SCHEDULE , and other than the
Senior  Debt,  the Old Notes and  intercompany  indebtedness  eliminated  in the
consolidated   financial   statements  of  the  Company,   the  Company  has  no
Subsidiaries nor any investment or other interest in, or any outstanding loan or
advance to or from,  any Person,  including,  without  limitation,  any officer,
director or  shareholder.  Except as set forth on  SCHEDULE , the Company  owns,
directly or indirectly, of record and beneficially, free and clear of all liens,
charges, restrictions,  claims and encumbrances of any nature, all of the issued
and outstanding capital stock of each of its Subsidiaries. Except as provided in
this Agreement or under the Senior Debt,  there are no restrictions  (whether by
agreement,  statute (other than the corporate  laws of the  applicable  state of
incorporation),  rule, regulation,  order or otherwise) that may affect or limit
the liability of (i) any  Subsidiary to pay dividends or make  distributions  to


                                       -4-

<PAGE>


the  Company,  or (ii) the Company to pay  dividends  or make  distributions  to
holders  of its  capital  stock.  There are no  outstanding  options,  warrants,
rights,  convertible  securities  or other  agreements  or plans under which any
Subsidiary may become obligated to issue, sell or transfer shares of its capital
stock or other securities.

         2.6 FINANCIAL INFORMATION; NOL; INDEBTEDNESS.

         (a) The Company  has filed all reports  required to be filed by it with
the  Securities  and  Exchange  Commission  (the  "Commission")  pursuant to the
Exchange  Act since the date of its  initial  public  offering  of Common  Stock
pursuant  to the  Securities  Act  (collectively  the  "SEC  Reports"),  and has
previously furnished or made available to the Purchaser true and complete copies
of all such SEC Reports. None of such SEC Reports, as of their respective dates,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements  therein,
in light of the circumstances  under which they were made, not misleading.  Each
of the balance sheets  (including the related notes) included in the SEC Reports
fairly presents in all material respects the consolidated  financial position of
such Company and its  Subsidiaries as of the respective  dates thereof,  and the
other related  statements  (including the related notes) included therein fairly
present in all material respects the results of operations and cash flows of the
Company and the Subsidiaries for the respective  periods or as of the respective
dates set forth therein,  all in conformity with generally  accepted  accounting
principles consistently applied during the periods involved, except as otherwise
noted  therein  and  subject,  in the case of the  unaudited  interim  financial
statements,  to normal year-end adjustments and any other adjustments  described
therein  and the  absence of any notes  thereto.  Neither  the  Company  nor any
Subsidiary has any liabilities or obligations,  contingent or otherwise,  of the
type required to be disclosed by generally accepted accounting principles, which
are not adequately  reflected in or reserved against in the financial statements
included in the SEC Reports,  except for liabilities  incurred since the date of
the last financial  statement included in the SEC Reports in the ordinary course
of  business  and  consistent  with past  practices.  Other than as set forth on
SCHEDULE 2.6(A), since May 31, 1996 through the Closing Date, (i) there has been
no change in the business, assets, liabilities,  prospects, condition (financial
or  otherwise)  or  operations  of the Company and its  Subsidiaries  except for
changes  in the  ordinary  course  of  business  which,  individually  or in the
aggregate,  would not have a Material Adverse Effect, (ii) none of the business,
prospects, condition (financial or otherwise),  operations,  property or affairs
of the Company and its  Subsidiaries has been materially  adversely  affected by
any occurrence or development,  individually or in the aggregate, whether or not
insured  against,  and (iii) there has been no adverse change in the Republic of
China's continued status as a "most favored nation" and/or tariffs, which could,
individually or in the aggregate, have a Material Adverse Effect.

         (b) As of May 31, 1995,  for Federal  income tax purposes,  the Company
had net operating loss carryovers  incurred in the years 1993, 1994, 1995 of not
less than, $7,281,980,  $15,564,931, and $3,745,827,  respectively (or, not less
than  $26,592,738 in the  aggregate)  and, as of the date hereof prior to giving
effect to the transactions contemplated herein (or the Closing Date after giving
effect to the transactions  contemplated  herein), the use of the full amount of
those net  operating  loss  carryovers,  in each case for 15 years from the year
incurred,  by any  member of the  affiliated  group of which the  Company is the
common  parent,  is not  limited by Sections  269,  381,  382,  384 or any other
provision of the Code, including,  without limitation,  the Treasury regulations
governing  the filing of  consolidated  returns by  affiliated  groups or by any
comparable provision of any state or local income or franchise tax.

         (c)  SCHEDULE  (C)  attached  hereto  sets  forth (i) the amount of all
Indebtedness of the Company and its Subsidiaries outstanding,  on a consolidated
basis, on the date hereof, (ii) any Lien with respect to such Indebtedness,  and
(iii) a list of each instrument or agreement  governing such Indebtedness  (true
and correct copies of which have been provided to the Purchaser).  Except as set
forth on  SCHEDULE  (C),  no default  exists  with  respect to or under any such
Indebtedness or any instrument or agreement relating thereto, which has not been
waived in writing  by the holder  thereof.  The Old Notes  represent  all of the
Indebtedness owed to the Estate by the Company or its Subsidiaries.


                                       -5-

<PAGE>



         2.7 EVENTS SUBSEQUENT TO THE DATE OF THE FINANCIAL  STATEMENTS.  Except
as disclosed in SCHEDULE , or as contemplated  by this Agreement,  since May 31,
1996, neither the Company nor any Subsidiary has (i) declared, set aside or paid
any dividends,  or made any distributions or payments,  in respect of its equity
securities,  or repurchased,  redeemed or otherwise acquired any equity or other
securities or issue any shares or other units of any equity or other securities;
(ii) merged into or with or consolidated with, any other corporation or acquired
the business or assets of any Person;  (iii)  purchased  any  securities  of any
Person;  (iv) amended its articles of  incorporation  or bylaws;  (v) issued any
securities  relating to its shares of Common Stock, or granted,  or entered into
any  agreement  to grant,  any options,  convertability  rights,  other  rights,
warrants,  calls or  agreements  relating  to its  shares  of Common  Stock,  or
redeemed,  repurchased or otherwise  reacquired any of its shares; (vi) created,
incurred,  assumed,  guaranteed  or otherwise  became  liable or obligated  with
respect to any  Indebtedness,  or made any loan or advance to, or any investment
in, any  Person,  except in each case in the  ordinary  course of business or as
reflected in the financial  statements  included in the Form 10-K for the period
ended May 31, 1996; (vii) made any change in any existing election,  or made any
new election,  with respect to any tax law in any  jurisdiction  which  election
could  have an  effect  on the tax  treatment  of the  Company  or its  business
operations  before or after the Closing Date;  (viii)  entered into,  amended or
terminated any material agreement;  (ix) sold, transferred,  leased,  mortgaged,
encumbered  or  otherwise  disposed  of,  or agreed  to sell,  transfer,  lease,
mortgage,  encumber or otherwise dispose of, any properties or assets except (a)
in the ordinary course of business,  or (b) pursuant to any agreement  specified
in  SCHEDULE  ; (x)  settled  any  material  claim or  litigation,  or filed any
material  motions,  orders,  briefs or settlement  agreements in any  proceeding
before any Governmental Authority or any arbitrator;  (xi) incurred or approved,
or entered into any agreement or commitment to make, any  expenditures in excess
of $50,000  (other than those  required  pursuant to any  agreement set forth in
SCHEDULE or in the ordinary course of business  consistent with past practices);
(xii)  maintained  its books of account  other than in the  usual,  regular  and
ordinary manner in accordance with generally accepted accounting  principles and
on a basis  consistent  with  prior  periods  or made any  change  in any of its
accounting methods or practices; (xiii) engaged in any one or more activities or
transactions outside the ordinary course of business; (xiv) made any increase in
(a) the rate of  compensation  payable or to become  payable  to its  directors,
officers,  agents or  employees,  or (b) the  payment of any  bonus,  payment or
arrangement  made to,  for or with any of its  directors,  officers,  agents  or
employees,  except as required in an  agreement  set forth in SCHEDULE or by any
benefit  plans set forth in SCHEDULE ; (xv) made any  material  change,  whether
oral or written,  to any  agreement or  understanding  with any of the Company's
suppliers,  or entered into any new material  agreements or understandings  with
suppliers; (xvi) sold, assigned, transferred or granted any license with respect
to any patent, trademark,  trade name, service mark, copyright,  trade secret or
other intangible asset, except pursuant to license or other agreements set forth
on  SCHEDULE  ; (xvii)  suffered  any loss of  property  or waived  any right of
substantial  value  whether or not in the ordinary  course of business;  (xviii)
made any material  change in the manner of business or operations of the Company
or any Subsidiary;  (xix) taken any action that could impair or restrict the use
or availability of the NOL; or (xx) committed to do any of the foregoing.

         2.8  LITIGATION.  Except as  disclosed  in the Form 10-K for the period
ended May 31, 1996, or as set forth on SCHEDULE , there are no claims,  actions,
suits,  investigations  or proceedings  against the Company or any Subsidiary in
any  court or before  any  Governmental  Authority,  or  before  any  arbitrator
(whether  covered by  insurance  or not)  pending  or, to the  knowledge  of the
Company  threatened,  against the Company or any Subsidiary  which (i) questions
the validity of this Agreement,  the Notes, the Purchased Shares,  the Option or
the Securities or any other Related Documents or any action taken or to be taken
pursuant  hereto or thereto,  (ii) could  reasonably  be  expected to  adversely
affect the right,  title or interest of the Purchaser to the Notes,  the Option,
the Purchased  Shares or the Securities,  or (iii) might have a Material Adverse
Effect; nor, to the knowledge of the Company,  except as set forth on SCHEDULE ,
has there  occurred any event or does there exist any  condition on the basis of
which  any such  litigation,  proceeding  or  investigation  might  properly  be
instituted  with any  substantial  chance of recovery  where such recovery would
likely have a Material Adverse Effect. Neither the Company nor any Subsidiary is
in default  with  respect  to any order,  writ,  injunction,  decree,  ruling or
decision of any court, commission, board or other government agency.

                                       -6-

<PAGE>




         2.9 COMPLIANCE  WITH LAWS. The Company is and has been in compliance in
all respects with any and all Legal  Requirements  applicable to the Company and
the  Subsidiaries,  other  than  failures  to so  comply  that  would not have a
Material Adverse Effect.  Neither the Company nor any Subsidiary has received or
entered into any citations, complaints, consent orders, compliance schedules, or
other  similar  enforcement  orders or  received  any  written  notice  from any
Governmental  Authority or any other  written  notice that would  indicate  that
there is not currently  compliance with all such Legal Requirements,  except for
failures to so comply that would not have a Material Adverse Effect. The Company
has not received  notice of, and to the  Knowledge  of the Company,  there is no
basis for, any claim,  action,  suit,  investigation  or  proceeding  that might
result in a finding that the Company or any Subsidiary is not or has not been in
compliance with the Foreign Corrupt  Practices Act of 1977, as amended,  and the
rules and  regulations  promulgated  thereunder.  There are no  adverse  orders,
judgments, writs, injunctions, decrees or demands of any court or administrative
body,   domestic  or   foreign,   or  of  any  other   governmental   agency  or
instrumentality,  domestic  or foreign,  outstanding  against the Company of any
Subsidiary.

         2.10 TAXES.  The Company and each of its Subsidiaries has filed all tax
returns  (including  statements  of estimated  taxes owed)  required to be filed
within the  applicable  periods  for such  filings and has timely paid all taxes
required to be paid, and has established adequate reserves (net of estimated tax
payments  already  made) for the payment of all taxes  payable in respect to the
period  subsequent to the last periods covered by such returns.  No deficiencies
for any tax have been proposed or assessed against the Company or any Subsidiary
and,  except as  disclosed  on  SCHEDULE , no tax  returns of the Company or any
Subsidiary have ever been audited,  and, to the knowledge of the Company,  there
is no such audit pending or contemplated.  There is no tax lien, whether imposed
by any federal,  state, local or foreign taxing authority,  outstanding  against
the assets, properties or business of the Company.

         2.11 REAL PROPERTY.

         (a) SCHEDULE  sets forth the  addresses  and uses of all real  property
that the Company or any Subsidiary  owns,  leases or subleases,  and any Lien on
any such owned real property or the Company's or Subsidiary's leasehold interest
therein,  specifying in the case of each such lease or sublease, the name of the
lessor or sublessor,  as the case may be, the lease term and the  obligations of
the lessee thereunder.

         (b) Except as set forth on SCHEDULE , the Company or its Subsidiary, as
the case may be,  has good and  marketable  title to, and owns free and clear of
all Liens,  all  property  listed as owned by the Company or any  Subsidiary  on
SCHEDULE  , and  there  is no  material  violation  of any  law,  regulation  or
ordinance (including without limitation laws, regulations or ordinances relating
to zoning, environmental, city planning or similar matters) relating to any real
property owned, leased or subleased by the Company or any Subsidiary.

         (c) All the leases listed on SCHEDULE are valid and enforceable and are
in full  force and  effect,  and there are no  defaults  by the  Company  or any
Subsidiary under any of such leases or, to the knowledge of the Company,  by any
other party thereto, which might curtail in any material respect the present use
of the  Company's  and such  Subsidiary's  property  listed  on  SCHEDULE  . The
performance by the Company of this Agreement and the Related Agreements will not
result in the  termination  of, or in any increase of any amounts payable under,
any lease listed on SCHEDULE .

         2.12 PERSONAL PROPERTY.  Except as set forth on SCHEDULE and except for
property sold or otherwise  disposed of in the ordinary course of business since
May 31, 1996, the Company and its Subsidiaries own, free and clear of any Liens,
all  of the  personal  property  reflected  as  owned  by the  Company  and  its
Subsidiaries  in the balance  sheet  contained in Form 10-K for the period ended
May 31, 1996, and all other material items of personal  property acquired by the
Company and its Subsidiaries through the date hereof. All material items of such
personal  property  are in  good  operating  condition,  normal  wear  and  tear
excepted.


                                       -7-

<PAGE>



         2.13  PATENTS,  TRADEMARKS,  ETC.  Set forth on  SCHEDULE is a list and
brief description of all material patents,  patent rights,  patent applications,
trademarks,  trademark  applications,  service marks,  service mark applications
trade  names  and  copyrights,  and all  applications  for such  that are in the
process of being prepared,  owned by or registered in the name of the Company or
any  Subsidiary,  or of which the  Company or any  Subsidiary  is a licensor  or
licensee or in which the Company or any  Subsidiary  has any right,  and in each
case a brief  description  of the  nature of such  right.  The  Company  and its
Subsidiaries  own or  possess  adequate  licenses  or  other  rights  to use all
patents, patent applications, trademarks, trademark applications, service marks,
service mark applications,  trade names,  copyrights,  manufacturing  processes,
formulae,  trade secrets and know how  (collectively,  "Intellectual  Property")
necessary  or desirable  to the conduct of their  business as  conducted  and as
proposed  to be  conducted.  No claim is  pending  or, to the  knowledge  of the
Company,  threatened to the effect that the  operations of the Company  infringe
upon or  conflict  with the  asserted  rights  of any  other  person  under  any
Intellectual  Property,  and there is no known basis for any such claim (whether
or not pending or  threatened).  No claim is pending or, to the knowledge of the
Company,  threatened to the effect that any such Intellectual  Property owned or
licensed by the Company,  or which the Company or any  Subsidiary  otherwise has
the right to use, is invalid or unenforceable by the Company or such Subsidiary,
and there is no known  basis for any such  claim  (whether,  or not  pending  or
threatened).  To  the  knowledge  of  the  Company,  all  technical  information
developed  by and  belonging to the Company and its  Subsidiaries  which has not
been  patented  or copy-  written  has been kept  confidential  by the  Company.
Neither  the  Company  nor any  Subsidiary  has granted or assigned to any other
person or entity any right to provide the  services or proposed  services of the
Company or such Subsidiary.  To the knowledge of the Company,  and other than as
contemplated by this Agreement, no current or former principal shareholder,  key
employee,  officer or  director of the  Company or any of its  Subsidiaries  has
(directly  or  indirectly)  any right,  title or  interest  in any of the rights
described  on  SCHEDULE  other than such right  which such Person may enjoy as a
shareholder of the Company.

         2.14  AGREEMENTS OF DIRECTORS,  OFFICERS AND  EMPLOYEES.  Except as set
forth on SCHEDULE , to the  knowledge  of the Company,  no director,  officer or
employee of or  consultant  to the Company or any  Subsidiary is in violation of
any terms of any employment contract, non-competition agreement,  non-disclosure
agreement,  or other  contract or  agreement  containing  restrictive  covenants
relating to the right of any such director,  officer,  employee or consultant to
be employed or engaged by the Company or such  Subsidiary  because of the nature
of the  business  conducted  or proposed to be  conducted by the Company or such
Subsidiary,  or relating to the use of trade secrets or proprietary  information
of others.

         2.15 GOVERNMENTAL AND INDUSTRIAL APPROVALS. The Company and each of its
Subsidiaries has all the material  permits,  licenses,  orders,  certifications,
franchises  and other  rights and  privileges  of all federal,  state,  local or
foreign governmental or regulatory bodies necessary or desirable for the Company
and such Subsidiaries,  taken as a whole, to conduct their respective businesses
as presently  conducted.  All such permits,  licenses,  orders,  certifications,
franchises  and other rights and privileges are in full force and effect and, to
the knowledge of the Company,  no suspension or  cancellation  of any of them is
threatened,  and  none  of  such  permits,  licenses,  orders,   certifications,
franchises or other rights and privileges  will be affected by the  consummation
of the transactions  contemplated in this Agreement and the Related  Agreements.
Neither  the  Company  nor  any  Subsidiary  is in  default  under  any of  such
franchises, licenses, permits, consents, approvals or other authority.

         2.16 FEDERAL  RESERVE  REGULATIONS.  Neither the Company nor any of its
Subsidiaries  has engaged in the business of extending credit for the purpose of
purchasing  or carrying  margin stock (within the meaning of Regulation G of the
Board of Governors of the Federal Reserve  System),  and no part of the proceeds
of the sale of the  Securities  will be used to  purchase  or carry  any  margin
security or to extend credit to others for the purpose of purchasing or carrying
any margin  security or in any other manner  which would  involve a violation of
any of the regulations of the Board of Governors of the Federal Reserve System.

         2.17 CONTRACTS AND COMMITMENTS. Except as set forth on SCHEDULE 2.11 or
SCHEDULE  attached  hereto or as  disclosed in the  Company's  Form 10-K for the


                                       -8-

<PAGE>


period ended May 31, 1996,  neither the Company nor any Subsidiary is a party to
any oral or written (i)  consulting  agreement not terminable on 60 days or less
notice involving the payment of more than $10,000 per annum,  (ii) joint venture
agreement, (iii) noncompetition or similar agreements that restricts the Company
or its Subsidiaries  from engaging in a line of business either in total or in a
particular  territory  or for a  particular  period,  (iv)  agreement  with  any
executive  officer  or other  employee  of the  Company or any  Subsidiary,  the
benefits of which are contingent,  or the terms of which are materially altered,
upon the  occurrence  of a  transaction  involving  the  Company  of the  nature
contemplated  by this  Agreement and which provides for the payment of in excess
of $10,000,  (v) agreement with respect to any executive  officer of the Company
or  any  Subsidiary  providing  any  term  of  employment  beyond  one  year  or
compensation  guaranty in excess of $10,000 per annum,  (vi)  agreement or plan,
including  any stock option plan,  stock  appreciation  rights plan,  restricted
stock  plan or  stock  purchase  plan,  any of the  benefits  of  which  will be
increased,  or the vesting of the benefits of which will be accelerated,  by the
occurrence  of any of the  transactions  contemplated  by this  Agreement or the
value of any of the benefits of which will be  calculated on the basis of any of
the  transactions  contemplated by this  Agreement,  (vii) contract or agreement
that cannot by its terms be terminated by the Company or any Subsidiary  with 30
days or less notice without  penalty and involves  annual  payments in excess of
$50,000,  (viii)  contract  or  agreement  for  capital  expenditures  involving
payments  in  excess of  $50,000,  (ix)  other  than in the  ordinary  course of
business  consistent with past  practices,  any agreement for the sale of assets
that have a net book value of $50,000 or more, or (x) contract or agreement that
is  material to the Company  and its  Subsidiaries  taken as a whole.  Except as
disclosed in the Form 10-K for the period  ended May 31,  1996,  the Company has
not  received  notice  that any party to any  agreement  or any  customer of the
Company  intends to  terminate,  limit or  restrict  its  relationship  with the
Company, where such termination would have a Material Adverse Effect.

         2.18  SECURITIES ACT. The Company has complied and will comply with all
applicable  federal or state securities laws in connection with the issuance and
sale of the Option, the Securities and the Notes. Neither the Company nor anyone
acting on its behalf has offered any of the Option, the Securities or the Notes,
or  similar  securities,  or  solicited  any  offers  to  purchase  any of  such
securities,  so as to bring the issuance and sale of the Option,  the Securities
or the Notes under the registration provisions of the Securities Act.

         2.19  REGISTRATION  RIGHTS.  The  Company  has not  granted  any rights
relating to  registration of its capital stock under the Securities Act or state
securities laws other than those contained in this Agreement or in the Warrants.

         2.20 INSURANCE  COVERAGE.  SCHEDULE hereto contains an accurate summary
of  the  insurance  policies  currently   maintained  by  the  Company  and  its
Subsidiaries,  copies of which have been furnished to the  Purchaser.  Except as
described  on  SCHEDULE , there are  currently  no claims  pending  against  the
Company or any Subsidiary under any insurance  policies  currently in effect and
covering   the   property,   business  or  employees  of  the  Company  and  its
Subsidiaries.

         2.21  EMPLOYEE  MATTERS.  Except as  disclosed in the Form 10-K for the
period ended May 31, 1996, or as set forth on SCHEDULE , neither the Company nor
any Subsidiary has in effect any employment  agreements,  deferred compensation,
pension  or  retirement   agreements  or  arrangements,   bonus,   incentive  or
profit-sharing  plans  or  arrangements,   or  labor  or  collective  bargaining
agreements,  written or oral.  Other than with  respect to Rounick,  none of the
officers or other key  employees of the Company or any  Subsidiary  has notified
the Company of his or her  intention to  terminate  his or her  employment.  The
Company  and  its  Subsidiaries  are in  compliance  in all  respects  with  all
applicable laws and regulations relating to labor,  employment,  fair employment
practices, terms and conditions of employment, and wages and hours, except where
such failure to comply would not reasonably be likely to have a Material Adverse
Effect. The Company and each Subsidiary is in material compliance with the terms
of all plans,  programs and agreements  listed on SCHEDULE , and each such plan,
program or agreement is in compliance  in all material  respects with all of the
requirements  and provisions of the Employee  Retirement  Income Security Act of
1974,  as  amended  ("ERISA").  No  such  plan or  program  has  engaged  in any
"prohibited transaction" as defined in Section 4975 of the Code, or has incurred


                                       -9-

<PAGE>


any "accumulated funding deficiency" as defined in Section 302 of ERISA, nor has
any  reportable  event as  defined in Section  4043(b)  of ERISA  occurred  with
respect to any such plan or program.  Neither the Company nor any Subsidiary has
or has  maintained any group health plan subject to Section 4980B of the Code or
Section 162(i) or (k) of the Code as amended by the Consolidated  Omnibus Budget
Reconciliation  Act of 1985,  as  amended  by the  Technical  and  Miscellaneous
Revenue Act of 1988. With respect to each plan listed on SCHEDULE , all required
filings,  including  all  filings  required  to be made with the  United  States
Department of Labor and Internal  Revenue  Service,  have been timely filed, and
the present value of all accrued  benefits  under each such plan does not, as of
the date hereof,  and will not, as of the Closing Date,  exceed the value of the
respective net assets of each such plan applicable to such benefits.

         2.22 NO BROKERS OR  FINDERS.  Except as  disclosed  on SCHEDULE , which
SCHEDULE sets forth the financial terms of such  arrangements,  no person has or
will have, as a result of the transactions  contemplated by this Agreement,  any
right,  interest or claim against or upon the Company or any of its Subsidiaries
for any commission,  fee or other  compensation as a finder or broker because of
any act or omission by the Company or any of its Subsidiaries.

         2.23  TRANSACTIONS  WITH  AFFILIATES.  Except as disclosed in the Proxy
Statement for the Annual Meeting of Shareholders  held on May 28, 1996 or in the
Form 10-K for the period ended May 31, 1996, there are no loans, leases or other
continuing  transactions  between the Company or any Subsidiary on the one hand,
and any  officer or  director  of the  Company or any  Subsidiary  or any person
owning  five  percent  (5%) or more of the  Common  Stock of the  Company or any
respective  family member or affiliate of such officer,  director or shareholder
on the other hand.

         2.24  ASSUMPTIONS,  GUARANTEES,  ETC. OF INDEBTEDNESS OF OTHER PERSONS.
Neither the Company nor any  Subsidiary  has  assumed,  guaranteed,  endorsed or
otherwise  become directly or contingently  liable on or for any Indebtedness of
any other Person, except guarantees by endorsement of negotiable instruments for
deposit or  collection  or similar  transactions  or with  respect to the Senior
Debt.

         2.25 SUPPLIERS AND CUSTOMERS.

         (a) Each of the Company and each  Subsidiary  has  adequate  sources of
supply for its business as currently  conducted and as proposed to be conducted.
Each has good  relationships with all of its material sources of supply of goods
and services  and each does not  anticipate  any material  problem with any such
material  sources of supply,  except with  respect to possible  trade and import
restrictions  as  disclosed  in the Form 10-K for the period  ended May 31, 1996
(and to the best  knowledge  of the Company and  Subsidiaries  there has been no
change in such  restrictions  and no change is pending or contemplated as of the
date hereof  except as  specifically  disclosed  in the Form 10-K for the period
ended May 31, 1996,  which is  reasonably  likely to render the  representations
contained in this Section untrue or incorrect).

         (b)  SCHEDULE  sets forth the top 20  customers  of the  Company  (on a
consolidated  basis) during the 12-month period ended August 31, 1996,  together
with the dollar amount of goods  purchased by such customers  during such period
(collectively, the "Top Customers"). Each of the Company and each Subsidiary has
good  relationships  with the Top Customers and does not anticipate any material
problems with any of them.

         (c) Neither the Company nor any  Subsidiary  has any knowledge that the
purchases from the Top Customers might materially decrease.

         2.26  STATUS  UNDER  CERTAIN  LAWS.  Neither the Company nor any of its
Subsidiaries  is  an  "investment  company",  or a  company  "controlled"  by an
"investment company",  within the meaning of the Investment Company Act of 1940,
as  amended.  Neither  the  Company  nor any of its  Subsidiaries  is a "holding
company", or a "subsidiary company" of a "holding company", or an "affiliate" of


                                      -10-

<PAGE>


a "holding company" or of a "subsidiary company" of a "holding company", as such
terms are defined in the Public Utility Holding Company Act of 1935, as amended.

         2.27 NO CONFLICTS  OR  DEFAULTS.  Other than with respect to the Senior
Debt,  the  execution,   delivery  and   performance  by  the  Company  and  the
Subsidiaries of this Agreement and the Related  Documents to which it is or will
be a party and any of the transactions  contemplated  hereby or thereby does not
and will not (i) violate or conflict with,  with or without the giving of notice
or the passage of time or both, any provision of (A) the respective certificates
or articles of incorporation or bylaws of the Company or any of its Subsidiaries
or (B) any law, rule,  regulation,  order, judgment,  writ, injunction,  decree,
agreement, indenture or other instrument applicable to the Company or any of its
Subsidiaries or any of their respective properties,  (ii) result in the creation
of any security interest, Lien or other encumbrance upon any of the Company's or
any  Subsidiary's  properties,  assets or revenues,  (iii)  require the consent,
waiver,  approval,  order or  authorization  of, or  declaration,  registration,
qualification  or filing  with,  any Person  (other than as set forth in SECTION
hereof),  (iv) cause  anti-dilution  clauses of any  outstanding  securities  to
become  operative or give rise to any preemptive  rights (other than pursuant to
the  Stock  Option  Plans  and the  Warrants),  or (v) to the  knowledge  of the
Company, cause the Company or any Subsidiary to lose the benefit of any right or
privilege it presently enjoys or cause any Person who is expected to normally do
business with the Company or any  Subsidiary to discontinue to do so on the same
basis.  Other than with respect to the Senior Debt, for which written waivers of
default  have been  obtained,  or as disclosed on SCHEDULE , neither the Company
nor the Subsidiary is in default under, and no condition exists (whether covered
by insurance or not) that with or without  notice or lapse of time or both would
(i)  constitute  a  default  under,   or  breach  or  violation  of,  any  Legal
Requirement, indenture, agreement or instrument applicable to the Company or the
Subsidiaries,  or (ii) accelerate or permit the  acceleration of the performance
required under,  or give any other party the right to terminate,  any indenture,
agreement or  instrument  applicable to the Company or the  Subsidiaries,  other
than  defaults,  breaches,  violations  or  accelerations  that would not have a
Material Adverse Effect.

         2.28 ENVIRONMENTAL COMPLIANCE.

         (a) There is no  substance  or  material  defined  or  designated  as a
hazardous or toxic waste,  material or substance,  or other similar term, by any
federal, state or local environmental statute, regulation or ordinance on, about
or in, in material  violation of law, any property,  real or personal,  in which
the Company or any Subsidiary has any interest.

         (b)  There is no (and has not been any)  offsite  disposal  or  on-site
disposal at any locations currently or formerly owned or occupied by the Company
or any  Subsidiary as a result of which  disposal  there would exist a risk that
the  Company or any  Subsidiary  would  incur a liability  or  obligation  under
federal, state or local environmental or other laws, regulations or ordinances.

         (c) Neither the Company nor any Subsidiary nor, to the knowledge of the
Company and of its Subsidiaries,  any prior or present owner, operator,  tenant,
subtenant or invitee of any of the real property (including  improvements) owned
by the  Company  or any  Subsidiary,  or  formerly  owned by the  Company or any
Subsidiary,  have (i) used, installed,  stored, spilled, released,  transported,
disposed of or discharged any hazardous substances upon, into, beneath,  from or
affecting  such real  property  (including  improvements),  or (ii) received any
verbal or  written  notice,  citation,  subpoena,  summons,  complaint  or other
correspondence or communication  from any person with respect to the presence of
hazardous  substances  upon, in, beneath,  or emanating from or affecting any of
the real  property  (including  improvements)  currently  or  formerly  owned or
occupied by the Company or any  Subsidiary.  The Company has provided  Purchaser
with  copies of all,  environmental  audits,  reports  and  studies of which the
Company is aware  relating to  conditions  at any property  owned or used by the
Company or any Subsidiary.

         (d) Neither the Company nor any  Subsidiary  has any  knowledge  of any
intentional or unintentional,  gradual or sudden, release, disposal or discharge
upon, into or beneath the real property  (including  improvements)  currently or


                                      -11-

<PAGE>


formerly owned or occupied the Company or any Subsidiary,  that has caused or is
causing soil or groundwater  contamination which under applicable  environmental
laws,  regulations or ordinances  could require  investigation or remediation or
could  otherwise  create a material  liability or  obligation on the part of the
Company or any Subsidiary.

         2.29  DISASTER.  Neither the business nor the properties of the Company
or its  Subsidiaries  is currently  (or has been since May 31, 1996)  damaged or
otherwise adversely affected by any fire, explosion,  accident,  strike, lockout
or other dispute,  drought,  storm, hail, earthquake,  embargo, act of God or of
the public enemy or other casualty (whether or not covered by insurance),  which
materially adversely affects, or if such event or condition were to continue for
more than ten (10)  additional  days  could  materially  adversely  affect,  the
assets,  properties,  liabilities,  business,  affairs,  results of  operations,
condition (financial or otherwise) or prospects of the Company on a consolidated
basis.

         2.30 INVENTORIES;  ACCOUNTS  RECEIVABLE.  Subject to the disclosure set
forth in footnote 3 to the audited  financial  statements  contained in the Form
10-K for the period ended May 31, 1996 with respect to a write-down of Hong Kong
inventory  (the "Hong Kong  Inventory"),  the  inventory  of the Company and the
Subsidiaries consist of, and as of the Closing Date shall consist of, items that
are usable and  saleable in the  ordinary  and usual  course of business for the
purposes of which intended.  Such inventory is carried on the Company's books of
account in accordance with generally accepted accounting principles consistently
applied at the lower of cost or  market,  and the value of  obsolete  materials,
materials  below standard  quality and  slow-moving  materials have been written
down in accordance with generally accepted accounting principles.  The Hong Kong
Inventory has been written down to its net realizable  value in accordance  with
generally accepted accounting  principles  consistently  applied at the lower of
cost or market, based on the Company continuing as a going concern.  Neither the
Company nor the  Subsidiaries  is under any liability or obligation with respect
to the return of its inventory or merchandise in the possession of  wholesalers,
distributors,  retailers  or  other  customers,  except  for  goods  sold  under
consignment  at retail  stores.  All  inventory is located at the  locations set
forth on SCHEDULE . The accounts  receivable of the Company and the Subsidiaries
reflected on the most recent balance sheet delivered to the Purchaser arose from
bona fide  transactions  in the ordinary  course of business,  and the goods and
services  involved  have been  sold,  delivered  and  performed  to the  account
obligors,  and no further  filings  (with  governmental  agencies,  insurers  or
others) are  required to be made,  no further  goods are required to be provided
and no further  services  are  required to be rendered in order to complete  the
sales  and  fully  render  the  services  and  to  entitle  the  Company  or the
Subsidiaries to collect the accounts  receivable in full.  Except as provided in
the Senior  Debt,  no such  account  has been  assigned  or pledged to any other
person,  firm or  corporation  and no defense or set-off to any such account has
been asserted by the account obligor or exists. No agreement for deduction, free
services, discount or other deferred price adjustment has been made with respect
to such accounts  receivable.  The allowance for doubtful  accounts set forth in
the balance sheet as of the most recent balance sheet delivered to the Purchaser
is  adequate  from  a  historical  perspective  for  the  nonpayment  of  claims
previously submitted and for which revenues have been accrued.

         2.31 CUSTOMS. SCHEDULE sets forth (i) all names of importers of record,
including  importer  identification  numbers,  with  respect to all  textile and
apparel  products  imported by the Company into the United States,  and (ii) all
names of foreign  manufacturers.  Neither the Company nor its Subsidiaries  have
done business with any exporter or manufacturer on the "List of Foreign Entities
Violating Textile  Transshipments  and Country of Origin Rules." The Company has
implemented an "Informed  Compliance  Program" with respect to the import of its
goods into the United States, a true and correct copy of which has been provided
to the Purchaser. The Textile Rules of Origin, promulgated under the laws of the
United States Custom Service ("Customs"), effective as of July 1, 1996, have not
and will not have a Material Adverse Effect. There are no outstanding penalties,
investigations,  advances,  seizures or increases in duties imposed  against the
Company by Customs,  nor has the  Company  received  notice of any such  claims.
Customs  has not  demanded,  nor is there any  reasonable  basis for  Customs to
demand,  redelivery of any goods  imported by the Company into the United States
within 180 days prior to the date hereof (or 180 days prior to Closing).


                                      -12-

<PAGE>



         2.32  INFORMATION  IN PROXY  STATEMENT.  None of the  information to be
supplied  by  the  Company  or  any  Subsidiary  in the  proxy  statement  to be
distributed  in connection  with the meeting of  shareholders  of the Company to
vote upon this Agreement and the  transactions  contemplated  hereby (the "Proxy
Statement")  will,  at the time of the  mailing of the Proxy  Statement  and any
amendments  or  supplements   thereto,  and  at  the  time  of  the  meeting  of
shareholders  to be held in connection  with the approval of this  Agreement and
the  transactions  contemplated  hereby,  will contain any untrue statement of a
material fact or omit to state any material  fact required to be stated  therein
or  necessary  in  order  to  make  the  statements  therein,  in  light  of the
circumstances  under which they are made, not  misleading.  The Proxy  Statement
insofar as it  pertains to the  Company  will comply as to form in all  material
respects with the  provisions of the Exchange Act and the rules and  regulations
promulgated thereunder.

         2.33 SOLVENCY. The Company is solvent.

         2.34  DISCLOSURES.  Neither this Agreement,  any schedule or exhibit to
this  Agreement,  the  Related  Agreements,  the  SEC  Reports,  nor  any  other
agreement,  document  or  written  statement  made by the  Company  or He-Ro and
furnished by the Company or He-Ro to the Purchaser or the Purchaser's counsel in
connection  with the  transactions  contemplated  hereby,  contains  any  untrue
statement of material fact or omits to state any material fact necessary to make
the  statements  contained  herein or therein not  misleading.  There is no fact
known to the Company or He-Ro that has not been disclosed herein or in any other
agreement,  document or written statement furnished by the Company or any of its
Subsidiaries   to  the  Purchaser  or  their  counsel  in  connection  with  the
transactions  contemplated  hereby which materially  adversely  affects or could
materially and adversely  affect the business,  properties,  assets or financial
condition of the Company or any of its Subsidiaries.


                                   ARTICLE III
                        REPRESENTATIONS AND WARRANTIES OF
                             THE ESTATE AND ROUNICK

         In order to induce the Purchaser to consummate the  transactions  under
this  Agreement,  each of the Estate and  Rounick  jointly  makes the  following
representations  and  warranties,  which are true,  correct and  complete in all
respects  on the date  hereof and shall be true,  correct  and  complete  in all
respects as of the Closing:

         3.1  AUTHORIZATION.  Each of Rounick  and the Estate has all  necessary
power and  authority,  and has taken all necessary  action  required for the due
authorization,  execution, delivery and performance by Rounick and the Estate of
this  Agreement the Related  Agreements  to which it or she is a party,  and the
consummation of the  transactions  contemplated  herein or therein,  and for the
sale of the Old Notes. Except as required under the Senior Debt, the sale of the
Old Notes does not or will not require any further  action and is not subject to
any preemptive right, right of first refusal or the like. This Agreement is, and
upon  execution  and  delivery,  the Related  Agreements  to which the Estate or
Rounick is a party,  will be, valid and binding  obligations  of Rounick and the
Estate  (including the  beneficiaries  thereto),  enforceable in accordance with
their respective terms,  except as such enforcement may be limited by applicable
bankruptcy,  insolvency,  moratorium  or similar  laws which  affect  creditors'
rights generally.

         3.2   GOVERNMENT   APPROVALS.   No   consent,   approval,   license  or
authorization  of, or  designation,  declaration  or filing  with,  any court or
governmental  authority  is or will be  required  on the part of  Rounick or the
Estate in connection with the execution,  delivery and performance by Rounick or
the Estate of this Agreement or any of the Related Agreements,  or in connection
with the sale of the Old Notes.

         3.3 NO BROKERS OR  FINDERS.  Except as  disclosed  on  SCHEDULE , which
SCHEDULE sets forth the financial terms of such  arrangements,  no person has or
will have, as a result of the transactions  contemplated by this Agreement,  any
right,  interest  or  claim  against  or upon  the  Estate  or  Rounick  for any
commission,  fee or other  compensation as a finder or broker because of any act
or omission by the Estate or Rounick.

                                      -13-

<PAGE>



         3.4 OWNERSHIP OF OLD NOTES. The Estate owns  beneficially and of record
the Old Notes, free and clear of any and all liens,  mortgages,  adverse claims,
charges,  security interests,  encumbrances or other restrictions or limitations
whatsoever  (other than pursuant to the Senior Debt),  and the Old Notes are not
subject to any options,  rights,  rights of first refusal,  calls or agreements.
The Old Notes  represent all  Indebtedness  owed to the Estate by the Company or
its Subsidiaries.

         3.5 NO DEFAULTS  OR  CONFLICTS.  Other than with  respect to the Senior
Debt, the execution,  delivery and performance by the Estate and Rounick of this
Agreement and the Related Documents to which it is or will be a party and any of
the  transactions  contemplated  hereby  or  thereby  does  not and will not (i)
violate or conflict with, with or without the giving of notice or the passage of
time or both, any provision of any law, rule, regulation, order, judgment, writ,
injunction,  decree, agreement,  indenture or other instrument applicable to the
Estate and  Rounick or any of their  respective  properties,  (ii) result in the
creation of any security  interest,  Lien or other  encumbrance  upon any of the
properties  or assets of the Estate or Rounick,  or (iii)  require the  consent,
waiver,  approval,  order or  authorization  of, or  declaration,  registration,
qualification or filing with, any Person (other than a governmental authority as
referenced in SECTION ).

         3.6 LITIGATION.  There is no litigation or  governmental  proceeding or
investigation  pending or, to the knowledge of Rounick or the Estate threatened,
against Rounick or the Estate which (i) questions the validity of this Agreement
or any  Related  Documents  to which  Rounick or the Estate are a party,  or any
action taken or to be taken pursuant hereto or thereto,  or (ii) might adversely
affect the right,  title or  interest  of the  Purchaser  to the Notes.  Neither
Rounick  nor  the  Estate  is in  default  with  respect  to  any  order,  writ,
injunction,  decree, ruling or decision of any court, commission, board or other
government agency.

         3.7 DISCLOSURES.  No agreement,  document or written  statement made by
Rounick or the Estate and furnished by Rounick or the Estate to the Purchaser or
the Purchaser's counsel in connection with the transactions contemplated hereby,
contains any untrue  statement of a material fact or omits to state any material
fact  necessary  to  make  the  statements   contained  herein  or  therein  not
misleading.  There is no fact known to  Rounick or the Estate  that has not been
disclosed  herein or in any  other  agreement,  document  or  written  statement
furnished  by  Rounick  or the  Estate  to the  Purchaser  or their  counsel  in
connection with the sale of the Old Notes which materially  adversely affects or
could materially and adversely affect the Purchaser's  right, title and interest
in the Notes. To the knowledge of Rounick,  the SEC Reports did not, as of their
respective  dates,  contain any untrue  statement of a material  fact or omit to
state a material  fact  required to be stated  therein or  necessary to make the
statements  therein,  in light of the circumstances  under which they were made,
not misleading.


                                   ARTICLE IV
                      AFFIRMATIVE COVENANTS OF THE COMPANY

         Without limiting any other covenants and provisions hereof, the Company
covenants  and agrees that it will  observe (and will cause each  Subsidiary  to
observe)  the  following  covenants.   These  covenants,   unless  as  otherwise
specifically provided herein, shall exist for the benefit of, and be enforceable
by (i) the Purchaser (a) from the date of this  Agreement  until the Closing (or
until this Agreement is terminated pursuant to Article hereof) and (b) after the
Closing,  at any time the Purchaser  owns all or a portion of the Notes but does
not  beneficially  own or have  the  power to vote at  least  two-thirds  of the
outstanding  shares  of  Common  Stock,  and  (ii) at  Purchaser's  option,  the
transferee of the Notes if, after the Closing,  the Purchaser transfers all or a
portion of the Notes to any third party, notwithstanding the number of shares of
Common Stock that the  Purchaser  beneficially  owns or has the power to vote at
the time of such transfer.

                                      -14-

<PAGE>




         4.1 ACCOUNTS AND REPORTS.  The Company will, and will cause each of its
Subsidiaries  to,  maintain a system of accounts in  accordance  with  generally
accepted accounting  principles  consistently  applied and the Company will, and
will  cause  each of its  Subsidiaries  to,  keep  full and  complete  financial
records.  Prior to Closing, the Company shall cause to be prepared and delivered
to the  Purchaser the  financial  statements,  each to be prepared in accordance
with generally  accepted  accounting  principles and on a basis  consistent with
prior periods, as described below.

         (a) As soon as  available,  and in any event  within  ninety  (90) days
after the end of each fiscal year, a copy of the consolidated and  consolidating
balance  sheet of the Company and its  Subsidiaries  as at the end of such year,
together with consolidated and consolidating statements of income, shareholders'
equity and cash flow of the Company and its Subsidiaries for such year,  setting
forth  in each  case in  comparative  form  the  corresponding  figures  for the
preceding  fiscal  year,  all  in  reasonable  detail  and  duly  audited  by an
independent public accountant of national  recognition  selected by the Board of
Directors of the Company and reasonably acceptable to Purchaser.

         (b) As soon as available,  and in any event within forty-five (45) days
after the end of each fiscal quarter,  a consolidated and consolidating  balance
sheet of the Company and its  Subsidiaries  as of the end of such fiscal quarter
and consolidated and consolidating  statements of income,  shareholders'  equity
and cash flow for such  quarter  and for the period from  beginning  of the then
current  fiscal year to the end of such  quarter,  setting forth in each case in
comparative form the corresponding  figures for the corresponding  period of the
preceding  fiscal year,  all in  reasonable  detail.  The  financial  statements
delivered  pursuant  to this  paragraph  (b) need not be  audited,  but shall be
certified by the chief financial officer of the Company as presenting fairly the
financial  condition  of the Company and its  Subsidiaries  in  conformity  with
generally accepted accounting  principles applied on a consistent basis, subject
to changes resulting from normal and recurring year-end adjustments.

         (c) As soon as available,  and in any event within forty-five (45) days
after the end of each calendar month, an unaudited consolidated balance sheet of
the  Company  and its  Subsidiaries  as of the end of such  month and  unaudited
consolidated  statements of income and  shareholders'  equity for such month and
for the period commencing at the end of the previous fiscal year and ending with
the end of such  month,  setting  forth  in each  case in  comparative  form the
corresponding figures for the corresponding period of the preceding fiscal year,
all in reasonable detail.

         (d) At the time of  delivery  of each  monthly,  quarterly  and  annual
statement, a certificate, executed by the chief financial officer of the Company
stating that such officer has caused this  Agreement  and the terms of the Notes
and Option to be reviewed  and has no knowledge of any default by the Company or
any Subsidiary in the performance or observance of any of the provisions of this
Agreement  and the terms of the Notes and Opinion,  or, if such officer has such
knowledge, specifying such default.

         (e) Prior to the end of each fiscal year, a copy of the operating  plan
and budget for the next fiscal year required under Section , in form  consistent
with past practice.

         (f)  Promptly  upon  receipt  thereof,  any written  report,  so called
"management letter," and any other communication submitted to the Company or any
Subsidiary  by its  independent  public  accountants  relating to the  business,
prospects or financial condition of the Company and its Subsidiaries;

         (g) Promptly after the commencement thereof, notice of (i) all actions,
suits and proceedings before any court or governmental  department,  commission,
board,  bureau,  agency or instrumentality,  domestic or foreign,  affecting the
Company (or any Subsidiary) which, if successful,  could have a Material Adverse
Effect; and (ii) all material defaults by the Company or any Subsidiary (whether
or not declared) under any agreement for money borrowed  (unless waived or cured
within applicable grace periods);

                                      -15-

<PAGE>




         (h) Promptly upon sending,  making  available,  or filing the same, all
reports and financial  statements as the Company (or any Subsidiary)  shall send
or make available generally to the shareholders of the Company as such or to the
Commission; and

         (i) Such other  information with regard to the business,  properties or
the  condition  or  operations,  financial or  otherwise,  of the Company or its
Subsidiaries as the Purchaser or its transferee may from time to time reasonably
request.

         4.2 PAYMENT OF TAXES. The Company will pay and discharge (and cause any
Subsidiary to pay and discharge) all taxes, assessments and governmental charges
or levies imposed upon it or upon its income or profits,  or upon any properties
belonging  to it,  prior to the  date on  which  interest  or  penalties  attach
thereto,  and all lawful claims which, if unpaid,  might become a Lien or charge
upon any  properties of the Company (or any  Subsidiary),  provided that neither
the  Company  nor  any  Subsidiary  shall  be  required  to pay  any  such  tax,
assessment,  charge, levy or claim which is being contested in good faith and by
proper proceedings if the Company or such Subsidiary shall have set aside on its
books adequate reserves with respect thereto.

         4.3 COMPLIANCE  WITH LAWS, ETC. The Company will comply (and cause each
of its Subsidiaries to comply) with all applicable laws, rules,  regulations and
orders of any governmental authority,  the noncompliance with which could likely
have a Material Adverse Effect.

         4.4  INSPECTION.  The  Company  shall  (i)  permit  Purchaser  and  its
authorized   employees,   agents,   accountants,   legal   counsel   and   other
representatives  to have  access  to the  books,  records,  employees,  counsel,
accountants,  engineers  and  other  representatives  of  the  Company  and  its
Subsidiaries at all times  reasonably  requested by Purchaser for the purpose of
conducting  an  investigation  of the Company's  and the  Subsidiaries'  assets,
liabilities,  financial condition,  corporate status,  operations,  business and
properties  (collectively,  "Operations");  (ii) make available to Purchaser for
examination and  reproduction all documents and data of every kind and character
relating to the Company and its  Subsidiaries  in  possession  or control of, or
subject to  reasonable  access by, the Company or its  Subsidiaries,  including,
without limitation,  all files,  records,  data and information  relating to the
Company's Operations (whether stored in paper,  magnetic or other storage media)
and all agreements, instruments,  contracts, assignments,  certificates, orders,
and amendments  thereto;  and (iii) allow Purchaser  access to, and the right to
inspect, the Company's  Operations that are operated by a third-party  operator,
in which case the Company  shall use its best  efforts to cause the  operator of
such  Operations to allow  Purchaser  access to, and the right to inspect,  such
Operations.

         4.5 CORPORATE EXISTENCE;  OWNERSHIP OF SUBSIDIARIES.  The Company will,
and will cause its Subsidiaries to, at all times preserve and keep in full force
and effect their corporate existence,  and rights and franchises material to the
business  of the  Company  and its  Subsidiaries,  taken  as a  whole,  and will
qualify, and will cause each of its Subsidiaries to qualify, to do business as a
foreign  corporation in any jurisdiction where the failure to do so would have a
Material  Adverse  Effect.  The  Company  shall at all times  own of record  and
beneficially,  free and clear of all liens,  charges,  restrictions,  claims and
encumbrances of any nature,  all of the issued and outstanding  capital stock of
each of its Subsidiaries.

         4.6 COMPLIANCE  WITH ERISA.  The Company will comply (and cause each of
its  Subsidiaries  to comply) in all material  respects with all minimum funding
requirements applicable to any pension or other employee benefit plans which are
subject to ERISA or to the Code, and comply in all other material  respects with
the provisions of ERISA and the Code, and the rules and regulations  thereunder,
which are  applicable  to any such  plan.  Neither  the  Company  nor any of its
Subsidiaries  will permit any event or condition to exist which could permit any
such plan to be terminated under circumstances which cause the lien provided for
in Section  3068 of ERISA to attach to the  assets of the  Company or any of its
Subsidiaries.


                                      -16-

<PAGE>



         4.7  OPERATING  PLAN AND BUDGET.  Prior to the end of each fiscal year,
the Company will  prepare and submit to its Board of Directors  for its approval
prior to such year end an operating plan and budget,  cash flow  projections and
profit  and  loss  projections,  all  itemized  in  reasonable  detail  for  the
immediately following year.

         4.8  FINANCING.  The  Company  will  promptly  provide  to the Board of
Directors  and the  Purchaser  the  details and terms of, and any  brochures  or
investment  memoranda prepared by the Company related to, any possible financing
of any nature for the Company (or any of its Subsidiaries), whether initiated by
the Company or any other  Person;  and provided  further,  that such  financings
shall be subject to the provisions of Section hereof.

         4.9 MEETINGS OF THE BOARD OF  DIRECTORS.  The Board of Directors  shall
schedule  regular  meetings  not less  frequently  than once every 90 days.  The
Purchaser  shall be notified of such  meetings and have the right to attend such
meetings. The Company shall reimburse the Purchaser for all direct out-of-pocket
expenses incurred by the Purchaser or its designee in attending such meetings.

         4.10 MAINTENANCE OF PROPERTIES; INSURANCE. The Company will maintain or
cause  to be  maintained  in  good  repair,  working  order  and  condition  all
properties  used or useful in the  business of the Company and its  Subsidiaries
and from  time to time will  make or cause to be made all  appropriate  repairs,
renewals and replacements  thereof.  The Company shall maintain with financially
sound and reputable insurance companies insurance with respect to its properties
and business and the properties and business of its Subsidiaries against loss or
damage of the kinds  customarily  insured against by corporations of established
reputation  engaged in the same or similar business and similarly  situated,  of
such  type  and  in  such  amounts  as are  customarily  carried  under  similar
circumstances by such other corporations.

         4.11 RULE 144 INFORMATION.  After the Closing,  the Company shall, upon
the request of the Purchaser or its transferee, make whatever other filings with
the  Commission,  or  otherwise  make  generally  available  to the public  such
financial  and  other  information,  as any  such  holder  may  deem  reasonably
necessary  or  desirable  in order to enable such holder to be permitted to sell
Securities pursuant to the provisions of Rule 144.

         4.12 REGULAR  COURSE OF BUSINESS.  The Company agrees that on and after
the date  hereof  and  until  the  Closing  that it will  carry on its  business
diligently and in the ordinary  course and  substantially  in the same manner as
heretofore  carried on and will use its best efforts to (i) preserve its present
business  organization  intact,  (ii)  preserve its present  relationships  with
suppliers,  customers and other persons having business  dealings with it, (iii)
use its best efforts to keep all agreements and arrangements  listed or required
to be listed on SCHEDULE in full force and effect, and to comply with all of the
covenants  contained in all such items, and (iv) comply in all material respects
with all applicable  Legal  Requirements.  The Company shall promptly notify the
Purchaser  if it (i)  engages  in any  transaction  which  could have a Material
Adverse  Effect on the Company,  (ii) incurs any debt for borrowed  money (other
than draw downs under the Senior Debt (or any  refinancings  thereof)  and trade
debt in the ordinary  course),  or (iii) enters into any material  agreements or
transactions not in the ordinary course of business.

         4.13  EXCLUSIVITY.  Each of the Company,  its  Subsidiaries and Rounick
will not, and will use their best efforts to cause their  respective  directors,
officers,  employees,  financial advisors, legal counsel,  accountants and other
agents and representatives (for purposes of this Section only, being referred to
as "affiliates") not to, initiate, solicit or encourage, directly or indirectly,
or take any other  action  to  facilitate  any  inquiries  or the  making of any
proposal  with respect to, engage or  participate  in  negotiations  concerning,
provide any nonpublic  information or data to or have any  discussions  with any
person  other  than  Purchaser  relating  to,  any  acquisition,   tender  offer
(including  a  self-tender  offer),   exchange  offer,  merger,   consolidation,
acquisition  of beneficial  ownership of or the right to vote  securities of the
Company,  dissolution (unless such dissolution is not followed by or part of any
other  Acquisition  Proposal),  business  combination,  purchase  of  all or any


                                      -17-

<PAGE>


significant  portion of the Old Notes,  the  assets or any  division  of, or any
equity interest in, the Company or any Subsidiary, or similar transaction, other
than  the  transactions  contemplated  under  this  Agreement  (such  proposals,
disclosures,  negotiations,  or  transactions  being referred to as "Acquisition
Proposals").  Notwithstanding  the foregoing,  the Company's  Board of Directors
may, subject to the provisions of Section 11.3 hereof, to the extent required in
the exercise of the fiduciary  duties of its Board of Directors under applicable
law as advised by  independent  counsel  (which  shall  include  the law firm of
Lowenthal,  Landau,  Fischer  &  Bring,  P.C.),  engage  in  or  participate  in
negotiations   concerning  and,  in  connection  therewith,   provide  nonpublic
information  or data to and have any  discussions  relating  to, an  Acquisition
Proposal.  The Company  will  notify the  Purchaser  within 24 hours  orally and
within 48 hours in writing if any such Acquisition Proposal (including the terms
thereof and  identity of the persons  making  such  proposals)  is received  and
furnish to the  Purchaser a copy of any written  proposal.  Notwithstanding  the
lead-in  paragraph to this  Article IV, the  provisions  of this  Section  shall
remain in effect until the earlier of (x) the date this  Agreement is terminated
pursuant to Article , and (y) the Closing Date;  provided that, if prior to such
date  specified  in  subclauses  (x) or (y),  Purchaser  notifies the Company in
writing that it either is no longer  interested in pursuing this  transaction or
intends  to cease to  pursue  negotiations,  due  diligence  and  other  actions
necessary to close under this  Agreement,  then,  the provisions of this Section
shall terminate upon receipt by the Company of such written notice.

         4.14 AMENDMENT TO BYLAWS.  The Company shall take all action  necessary
to amend and  restate its bylaws in the form  attached  hereto as EXHIBIT I (the
"Bylaws") within 15 days of the execution of this Agreement.

         4.15 PROXY  STATEMENT;  SHAREHOLDER  APPROVALS.  The  Company  shall in
accordance with applicable law and its certificate of incorporation  and bylaws:
(a)  promptly  and  duly  call,  give  notice  of,  convene  and hold as soon as
practicable  following  the execution  and delivery of this  Agreement  (but not
prior to the date on which the  Purchaser  obtains the  Financing  Commitment) a
meeting of its  shareholders for the purpose of voting to approve and adopt this
Agreement  and  the  transactions  contemplated  hereby,  including  the  Rights
Offering,  and shall use its best  efforts,  except to the  extent  the Board of
Directors is otherwise  required by its fiduciary  duty under  applicable law as
advised by independent  counsel, to obtain Shareholder  Approval;  (b) except to
the extent the Board of Directors is otherwise required by its fiduciary duty as
advised  by  independent  counsel,  upon  receipt  by the  Company of a fairness
opinion that the  transactions  contemplated  by this Agreement are fair, from a
financial point of view, to the Company's shareholders (the "Fairness Opinion"),
recommend  approval and adoption of this  Agreement by the  shareholders  of the
Company,  and include in the Proxy Statement such  recommendation,  and take all
lawful  action to solicit such  approvals;  and (c) as promptly as  practicable,
prepare and file with the  Commission a preliminary  Proxy  Statement and, after
consultation with the Purchaser and its counsel,  respond to any comments of the
Commission  with  respect  to the  preliminary  Proxy  Statement  and  cause the
definitive Proxy Statement to be mailed to the Company's shareholders.  Whenever
any event occurs  which  should be set forth in an amendment or a supplement  to
the Proxy Statement or any filing  required to be made with the Commission,  the
Company will promptly  inform the Purchaser and its counsel,  and will cooperate
in filing with the Commission  and/or mailing to shareholders  such amendment or
supplement.  The Proxy  Statement,  and all amendments and supplements  thereto,
shall  comply  with  applicable  law and be in  form  and  substance  reasonably
satisfactory  to the Purchaser.  Notwithstanding  the lead-in  paragraph to this
Article , the  provisions  of this  Section  shall  remain  in effect  until the
earlier to occur of the date on which (i) this Agreement is terminated  pursuant
to Article hereof, and (ii) Shareholder Approval is obtained.

         4.16 ADVICE OF CHANGES;  GOVERNMENT  FILINGS.  The Company shall advise
the Purchaser of any change or event having, or which, insofar as can reasonably
be  foreseen,  could  have,  a Material  Adverse  Effect or which would cause or
constitute  a  material  breach  of any of the  representations,  warranties  or
covenants of the Company  contained  herein.  The Company shall file all reports
required by regulation to be filed by it with the Commission between the date of
this Agreement and the Closing Date and shall deliver to the Purchaser copies of
all such reports  promptly  after the same are filed.  Each such report filed by
the Company (i) will comply in all material respects with applicable  Commission


                                      -18-

<PAGE>


rules regarding the form,  content and time of filing, and (ii) will not contain
any untrue  statement  of any  material  fact or omit to state a  material  fact
required  to be stated  therein  or  necessary  in order to make the  statements
therein,  in  light  of the  circumstances  under  which  they  were  made,  not
misleading.  Except where prohibited by applicable statutes and regulations, the
Company shall promptly provide the Purchaser (or its counsel) with copies of all
other filings made by the Company with any state or federal government entity in
connection with this Agreement or the transactions contemplated hereby.

         4.17 GENERAL  RESTRICTIONS.  Except as otherwise expressly permitted in
or  contemplated  by this  Agreement,  without  the  prior  written  consent  of
Purchaser,  which consent shall not be unreasonably  withheld,  the Company will
not permit the Company or any  Subsidiary to take any of the  following  actions
from the date hereof and prior to the Closing: (i) declare, set aside or pay any
dividends,  or make any  distributions  or  payments,  in  respect of its equity
securities,  or  repurchase,  redeem or  otherwise  acquire  any equity or other
securities or issue any shares or other units of any equity or other securities;
(ii) merge into or with or consolidate  with,  any other  corporation or acquire
the  business or assets of any Person;  (iii)  purchase  any  securities  of any
Person;  (iv) amend its  articles  of  incorporation  or  bylaws;  (v) issue any
securities  relating to its shares,  or grant,  or enter into any  agreement  to
grant, any options,  convertability  rights,  other rights,  warrants,  calls or
agreements  relating to its shares of Common  Stock,  or redeem,  repurchase  or
otherwise  reacquire  any of its shares of Common  Stock;  (vi)  create,  incur,
assume,  guarantee or otherwise  become liable or obligated  with respect to any
Indebtedness,  or make any loan or advance to, or any investment in, any Person;
(vii) make any change in any existing election,  or make any new election,  with
respect to any tax law in any  jurisdiction  which election could have an effect
on the tax treatment of the Company or its business  operations  before or after
the Closing Date; (viii) enter into, amend or terminate any material  agreement,
other than an amendment to the agreement relating to the Foothill Debt, provided
Purchaser  receives prior written notice of such amendment and such amendment is
beneficial to the Company;  (ix) sell, transfer,  lease,  mortgage,  encumber or
otherwise dispose of, or agree to sell, transfer,  lease, mortgage,  encumber or
otherwise  dispose of, any properties or assets except pursuant to any agreement
specified in SCHEDULE ; (x) settle any claim or  litigation  which would require
the payment of $15,000  individually  or $50,000 in the  aggregate  for all such
claims,  or file any motions,  orders,  briefs or  settlement  agreements in any
proceeding before any Governmental  Authority or any arbitrator,  provided that,
if such failure to file would materially prejudice the Company and the Purchaser
does not give its consent within sufficient time to avoid such prejudice,  then,
prior notice of such filing shall be made to Purchaser, without the necessity of
obtaining prior consent of the Purchaser;  (xi) incur or approve,  or enter into
any  agreement or  commitment  to make,  any  expenditures  in excess of $50,000
(other than those  required  pursuant to any  agreement set forth in SCHEDULE );
(xii)  maintain  its books of  account  other  than in the  usual,  regular  and
ordinary manner in accordance with generally accepted accounting  principles and
on a basis  consistent  with  prior  periods  or make any  change  in any of its
accounting methods or practices;  (xiii) engage in any one or more activities or
transactions outside the ordinary course of business; (xiv) make any increase in
(a) the rate of  compensation  payable or to become  payable  to its  directors,
officers,  agents or  employees,  or (b) the  payment of any  bonus,  payment or
arrangement  made to,  for or with any of its  directors,  officers,  agents  or
employees,  except as required in an  agreement  set forth in SCHEDULE or by any
benefit  plans set forth in SCHEDULE ; (xv) make any  material  change,  whether
oral or written,  to any  agreement or  understanding  with any of the Company's
suppliers,  or enter into any new material  agreements  or  understandings  with
suppliers;  (xvi) enter into any transaction or make any commitment  which could
result in any of the  representations,  warranties  or  covenants of the Company
contained in this  Agreement not being true and correct after the  occurrence of
such transaction or event;  (xvii) take any action that could impair or restrict
the use or availability of the NOL; (xviii) sell, assign,  transfer or grant any
license  with  respect to any  patent,  trademark,  trade  name,  service  mark,
copyright, trade secret or other intangible asset, except pursuant to license or
other  agreements  entered into in the ordinary course of business,  (xix) waive
any  right  of  substantial  value  whether  or not in the  ordinary  course  of
business;  (xx) make any material change in the manner of business or operations
of the Company or by Subsidiary, or (xxi) commit to do any of the foregoing.


                                      -19-

<PAGE>



         4.18  LISTING OF SHARES.  The  Company  will take such action as may be
necessary,  from time to time,  to list on the New York Stock  Exchange (or such
exchange where the Common Stock is then issued) the Securities.

         4.19 FAIRNESS OPINION. The Company shall use its best efforts to obtain
the Fairness Opinion within 45 days of the date of this Agreement.

         4.20 BOARD  REPRESENTATION.  At or prior to the meeting of shareholders
referred to in Section hereof,  the Company shall take all such action as may be
necessary with respect to its Board of Directors (including, but not limited to,
the filing of necessary  amendments to its articles of  incorporation or bylaws)
such that (i) the number of  members of the Board  shall be set at not more than
seven,  which  provision  shall  not  be  increased  or  decreased  without  the
affirmative  vote  of  all  the  Purchaser's  Board  Designees  (as  hereinafter
defined),  and (ii) the Purchaser  shall be allowed to appoint four designees of
their  choice  as  members  of  the  Board  of  Directors   (collectively,   the
"Purchaser's Board  Designees").  At all times that one or more designees of the
Purchaser  is serving on the Board,  the Company  shall  cause such  Purchaser's
Board  Designees to be added to any current  directors' and officers'  liability
policy.  The Company agrees to indemnify and advance expenses to the Purchaser's
Board  Designees  to the fullest  extent  required or permitted by law and shall
enter  into  indemnification  agreements  with  each  of the  Purchaser's  Board
Designees.


                                    ARTICLE V
                        AFFIRMATIVE COVENANTS OF ROUNICK

         5.1 NOL;  GRANT OF PROXY.  Without  limiting  any other  covenants  and
provisions  hereof,  Rounick  covenants and agrees that (i) until the earlier of
(x) the tenth  day  following  the third  anniversary  of the  Closing,  (y) the
utilization  of the entire  amount of the NOL,  or (z) the  termination  of this
Agreement pursuant to Article hereof;  neither she nor her affiliates (including
but not limited to the Estate) will  acquire,  dispose of or transfer any shares
of Common Stock (or any rights (in any form, including conversion rights, rights
to acquire  rights or exchange  rights) to acquire,  dispose of or transfer  any
shares of Common  Stock) that would result in any  restriction  or impairment of
the  use  or  availability  of  the  NOL,  including,  but  not  limited  to,  a
distribution by the Estate to its beneficiaries, unless such beneficiaries agree
in  writing  to be  bound  by the  provisions  of  this  Section  5.1  and  such
distribution  does not  restrict or impair the use or  availability  of the NOL,
(ii) at the time the Purchaser has obtained the Financing  Commitment,  she will
agree to vote her shares in favor of the Agreement,  the Related  Agreements and
the other transactions contemplated hereby, and shall grant an irrevocable proxy
(the  "Irrevocable  Proxy"),  in substantially the form attached as EXHIBIT , to
the  Purchaser,  or its  designee,  to vote shares of Common Stock  beneficially
owned by Rounick (as defined in Rule 13d-3  promulgated  under the Exchange Act)
in favor of the transactions  contemplated by this Agreement, and (iii) prior to
the  Closing,  neither she nor her  affiliates  will sell,  pledge or  otherwise
dispose of shares of Common Stock  beneficially  owned by Rounick (as defined in
Rule 13d-3 promulgated  under the Exchange Act) to any third person,  enter into
any proxy or voting  arrangement with respect to any of such shares or vote such
shares  in any  manner  inconsistent  with  this  Agreement  or  enter  into any
agreement  with  respect to any of the  foregoing.  The  shares of Common  Stock
beneficially  owned by Rounick (as defined in Rule 13d-3  promulgated  under the
Exchange Act) shall,  simultaneous with the Closing, be contributed to and voted
in accordance with the terms of the Voting Trust Agreement, the trustee of which
shall be the Purchaser or its designee (the "Trustee").

         5.2  NON-COMPETITION.  In  consideration of the payment of the purchase
price for the  Purchased  Debt and the Purchase  Rights,  and in order to induce
Purchaser  to enter  into this  Agreement  and to  consummate  the  transactions
contemplated hereby, Rounick hereby covenants and agrees as follows:

         (a) Rounick will not,  without the prior written  consent of Purchaser,
for a period of three (3) years from and after the  Closing  Date,  directly  or
indirectly,   for  herself,  or  for  any  other  Person,   firm,   corporation,
partnership,  association  or other  entity,  employ or  attempt  to employ  any


                                      -20-

<PAGE>


employee of the Company or its Subsidiaries  until at least six months after the
date such employee was not employed by the Company or its Subsidiaries.

         (b)  Rounick  shall  not,  without  the prior  written  consent  of the
Purchaser  and for a period of three (3) years from and after the Closing  Date,
other than with respect to the Company,  (A) directly or  indirectly  acquire or
own in any manner any interest in any Person,  firm,  partnership,  corporation,
association  or other  entity  which is engaged in any facet of the  Business or
which  competes  in the  Business in any way,  anywhere in the world,  or (B) be
employed  by or serve as an  employee,  agent,  officer,  director  of,  or as a
consultant to, any Person, firm, partnership,  corporation, association or other
entity  which is engaged in any facet of the  Business or which  competes in the
Business in any way in the world.

         5.3  NONDISCLOSURE.  Rounick  hereby  agrees that she shall not,  for a
period of five (5) years from and after the Closing Date, disclose,  directly or
indirectly, to any Person, firm, corporation,  partnership, association or other
entity, any confidential  information  relating to the Business,  the Company or
its  Subsidiaries,  or any information  concerning  their  respective  financial
condition,  customers, sources of leads and methods of obtaining new business or
the methods generally of doing and operating their respective businesses, except
to the  extent  that such  information  is a matter of  public  knowledge  or is
required to be disclosed by law of judicial or administrative process.

         5.4 INJUNCTION. It is recognized and hereby acknowledged by the parties
hereto that a breach or violation by Rounick or any of her  affiliates of any or
all of the  covenants  and  agreements  contained  in this  Article  V may cause
irreparable  harm and  damage to  Purchaser  in a monetary  amount  which may be
virtually  impossible to ascertain.  As a result,  Rounick recognizes and hereby
acknowledges that Purchaser shall be entitled to an injunction from any court of
competent  jurisdiction enjoining and restraining any breach or violation of any
or all of the  covenants and  agreements  contained in this Article V by Rounick
and/or her  associates,  affiliates,  partners  or agents,  either  directly  or
indirectly,  and that  such  right to  injunction  shall  be  cumulative  and in
addition  to  whatever  other  rights or  remedies  the  Purchaser  may  possess
hereunder,  at law or in equity.  Nothing  contained  in this  Section  shall be
construed to prevent  Purchaser from seeking and recovering  from Rounick or any
of her  affiliates  damages  sustained by Purchaser as a result of any breach or
violation by any of them of any of the covenants or agreements contained herein.


                                   ARTICLE VI
                     AFFIRMATIVE COVENANTS OF THE PURCHASER

         Without  limiting  any  other  covenants  and  provisions  hereof,  the
Purchaser  covenants and agrees that, after the Closing,  the Purchaser will, to
the extent allowed by law, use its reasonable efforts to cause the Trustee under
the Voting Trust  Agreement to vote all  securities  covered by the Voting Trust
Agreement so that, at all times while Rounick,  individually  or as executrix of
the Estate,  beneficially  owns (as defined in Rule 13d-3  promulgated under the
Exchange Act) at least 15% of the Common Stock,  Rounick shall have the right to
appoint a member to the Board of Directors, which may be Rounick, at her option.


                                   ARTICLE VII
                        NEGATIVE COVENANTS OF THE COMPANY

         Without  limiting any other  covenants and  provisions  hereof,  and in
addition  to any  provisions  set forth in the  Certificate  of  Amendment,  the
Company covenants and agrees that it will comply (and will cause each Subsidiary
to  comply),  unless  waived  in  writing  by the  Purchaser,  with  each of the
following covenants.  These covenants,  unless otherwise  specifically  provided
herein,  shall exist for the benefit of, and be enforceable by (i) the Purchaser
(a) from the date of this  Agreement  until the Closing (or until this Agreement
is terminated pursuant to Article hereof) and (b) after the Closing, at any time


                                      -21-

<PAGE>


the Purchaser owns all or a portion of the Notes but does not  beneficially  own
or have the  power to vote at least  two-thirds  of the  outstanding  shares  of
Common Stock,  and (ii) at Purchaser's  option,  the transferee of the Notes if,
after the Closing,  the Purchaser transfers all or a portion of the Notes to any
third  party,  notwithstanding  the  number of shares of Common  Stock  that the
Purchaser  beneficially  owns or has  the  power  to  vote  at the  time of such
transfer.

         7.1  INVESTMENTS IN OTHER PERSONS.  The Company will not make or permit
any Subsidiary to make any loan or advance to any Person, or purchase, otherwise
acquire, or permit any Subsidiary to purchase or otherwise acquire,  the capital
stock,  assets  comprising the business of,  obligations of, or any interest in,
any Person, EXCEPT:

         (i)  investments  by  the  Company  or a  Subsidiary  in  evidences  of
indebtedness  issued or fully  guaranteed  by the United  States of America  and
having a maturity of not more than one year from the date of acquisition;

         (ii)  investments  by the Company or a Subsidiary  in  certificates  of
deposit,  notes,  acceptances and repurchase agreements having a maturity of not
more than one year from the date of  acquisition  issued by a bank  organized in
the United States  having  capital,  surplus and  undivided  profits of at least
$50,000,000;

         (iii) loans or advances  from a wholly owned  Subsidiary to the Company
or from a wholly owned Subsidiary to another wholly owned Subsidiary;

         (iv)  investments  by the Company or a Subsidiary  in A-rated or better
commercial  paper  having a maturity  of not more than one year from the date of
acquisition; and

         (v)  investments  by the Company or a Subsidiary in "money market" fund
shares,  or in "money  market"  accounts  fully  insured by the Federal  Deposit
Insurance  Corporation and sponsored by banks and other financial  institutions,
provided  that such  "money  market"  fund or  "money  market"  accounts  invest
principally in  investments of the types  described in clauses (i), (ii) or (iv)
of this subsection .

         7.2  DISTRIBUTIONS.  The Company will not declare or pay any dividends,
purchase,  redeem,  retire,  or  otherwise  acquire for value any of its capital
stock (or rights,  options or warrants to purchase such shares) now or hereafter
outstanding,  return  any  capital  to its  shareholders  as  such,  or make any
distribution of assets to its  shareholders as such, or permit any Subsidiary to
do any of the  foregoing,  except  that the  Subsidiaries  may  declare and make
payment of cash and stock  dividends,  return capital and make  distributions of
assets to the Company and except that nothing herein contained shall prevent the
Company  from  effecting  a stock  split or  declaring  or paying  any  dividend
consisting  of shares of any class of capital  stock to the holders of shares of
such class of capital stock.

         7.3  DEALINGS  WITH  AFFILIATES.  The  Company  will not enter into any
transaction including,  without limitation, any loans or extensions of credit or
royalty  agreements,  with  any  officer  or  director  of  the  Company  or any
Subsidiary or holder of any class of capital stock of the Company, or any member
of their  respective  immediate  families  or any  corporation  or other  entity
directly or indirectly controlled by one or more of such officers,  directors or
shareholders  or members of their  immediate  families,  except for  advances in
reasonable  amounts made to employees of the Company or any Subsidiary for valid
business purposes,  provided that such advances are repaid to the Company within
90 days.

         7.4 MERGER; SALE OF ASSETS. The Company shall not, and shall not permit
any Subsidiary to, merge or consolidate with or into any other  corporation,  or
sell, assign, lease or otherwise dispose of or voluntarily part with the control
(whether in one transaction or in a series of related  transactions)  of all, or
substantially all, of its assets (whether now owned or hereinafter acquired), or
any  portion  of its  assets  which  have  accounted  for more than 10% of total


                                      -22-

<PAGE>


revenues  of the Company  and its  Subsidiaries  taken as a whole for any of the
three most recent  fiscal  years of the  Company,  or sell,  assign or otherwise
dispose of (whether in one  transaction or in a series of  transactions)  any of
its accounts  receivable  (whether  now in existence or hereafter  created) at a
discount  or with  recourse,  to any  Person,  (i)  except  for  sales  or other
dispositions of assets in the ordinary course of business,  and (ii) except that
(a) any  wholly  owned  Subsidiary  may  merge  into or  transfer  assets to the
Company,  and (b) any wholly owned Subsidiary may merge into or consolidate with
or transfer assets to any other wholly owned Subsidiary.

         7.5 INDEBTEDNESS.  Neither the Company nor any of its Subsidiaries will
create,  incur,  guarantee,  assume or otherwise  become  directly or indirectly
liable for any Indebtedness  except Indebtedness in an amount that individually,
or in the aggregate,  does not exceed $50,000  (excluding the Senior Debt or the
debt that replaces the Senior Debt).

         7.6 LIENS.  Neither the Company nor any of its Subsidiaries will create
or  suffer  to exist any Lien  upon any of its  assets,  now owned or  hereafter
acquired, securing any Indebtedness or other obligation except Permitted Liens.

         7.7  LIMITATIONS  ON  RESTRICTIONS  ON  SUBSIDIARY  DIVIDENDS AND OTHER
DISTRIBUTIONS. The Company shall not permit any of its Subsidiaries, directly or
indirectly, to create or suffer to exist or become effective any encumbrances or
restrictions  on the ability of any of its  Subsidiaries to (i) pay dividends or
make any other  distributions  on its  capital  stock or any other  interest  or
participation  in  its  profit  owned  by  any  of  the  Company  or  any of its
Subsidiaries, or pay any Indebtedness owed by any of the Subsidiaries, (ii) make
loans or advances to the Company,  or (iii)  transfer any of its  properties  or
assets to the Company.

         7.8 NO CONFLICTING  AGREEMENTS.  The Company agrees that neither it nor
any Subsidiary will, without the consent of the Purchasers,  enter into or amend
any agreement, contract, commitment or understanding which would limit, restrict
or  prohibit  the  exercise  by the  Purchaser  of any of its rights  under this
Agreement or any of the Related Agreements.

         7.9  RESTRICTIONS  ON FURTHER  ISSUANCES.  Except for  issuances of the
Securities, the Company will not:

         (i)  issue or sell any  shares of  capital  stock to any  Person  for a
purchase price per share which is less than the Fair Market Value of such shares
(except for shares issued or issuable upon exercise of the options, warrants and
rights  listed on SCHEDULE , and then only to the extent  consistent  with prior
practices of the Company);

         (ii)  issue or sell any shares of  preferred  stock  ranking  senior in
rights of payment or priority to the Common Stock; or

         (iii) except as contemplated  under this  Agreement,  grant any "puts",
contingent  value options or similar  rights with respect to its capital  stock,
other than pursuant to the Company's stock option plans in effect as of the date
hereof  and then only to the  extent  consistent  with  prior  practices  of the
Company.

         7.10 SETTLEMENT OF CLAIMS OR LITIGATION.  Except as otherwise expressly
permitted in this Agreement,  the Company shall not settle any material claim or
litigation,   or  file  any  material  motions,  orders,  briefs  or  settlement
agreements  in  any  proceeding   before  any  governmental   authority  or  any
arbitrator.

         7.11 NO DILUTION OR  IMPAIRMENT.  The Company will not, by amendment of
its  certificate  of  incorporation  or  through  any   consolidation,   merger,
reorganization,  transfer of assets, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this  Agreement  or the Related  Agreements.  The Company
will at all times in good faith  assist in the  carrying  out of all such terms,


                                      -23-

<PAGE>


and in the taking of all such  action,  as may be necessary  or  appropriate  in
order to protect the rights of the Purchaser or its transferees against dilution
or other  impairment.  Without  limiting the  generality of the  foregoing,  the
Company (a) will not permit the par value or the determined or stated capital of
any shares of Common Stock  receivable  upon the exercise of the Options and the
Purchase  Rights to exceed the amount payable  therefor upon such exercise,  (b)
will take all such action as may be necessary or  appropriate  in order that the
Company may validly and legally issue fully paid and nonassessable shares of the
Company's Common Stock,  free from all taxes,  liens and charges with respect to
the issue thereof, upon the exercise of the Options and the Purchase Rights from
time to time outstanding,  and (c) will not issue any capital stock of any class
which  is  preferred  as to  dividends  or as to  distribution  of  assets  upon
voluntary or involuntary dissolution, liquidation or winding-up.

         7.12  MAINTENANCE OF PUBLIC MARKET.  The Company shall not proceed with
or  commence  any program of  acquisition  of its own Common  Stock,  initiate a
corporate  reorganization  or  recapitalization  or  authorize or consent to any
action   which  would  have  the  effect  of:  (a)  removing  the  Company  from
registration  with the  Commission  under the  Securities  Exchange  Act, or (b)
reducing  substantially  or  eliminating  the public market for shares of Common
Stock of the Company.

         7.13 NO  RESTRICTION  OR IMPAIRMENT  OF NOL. The Company  covenants and
agrees  that (i) until the  earlier  of (x) the  tenth day  following  the third
anniversary of the Closing, (y) the utilization of the entire amount of the NOL,
or (z) the termination of this Agreement  pursuant to Article XI hereof, it will
not take, and it will cause its  Subsidiaries not to take, any action that might
restrict or impair the use or  availability of the NOL, which  obligation  shall
include,  but not be limited to, a covenant by the Company not to issue, for the
period specified  herein,  any additional shares of Common Stock (other than the
Securities) during such period, or any rights (in any form, including conversion
rights,  rights to acquire rights or exchange  rights) to purchase  Common Stock
which would become exercisable  during such period,  unless such issuance is pro
rata to all existing shareholders of the Company.


                                  ARTICLE VIII
                          REPRESENTATIONS OF PURCHASER

         The Purchaser hereby represents and warrants to the Company as follows:

         8.1 INVESTMENTS REPRESENTATIONS AND WARRANTIES.

         (a) The Purchaser is purchasing  the Notes,  Options and Securities for
investment purposes,  for its own account and not with a view to, or for sale in
connection  with,  any  distribution  thereof in  violation  of Federal or state
securities laws and the Purchaser agrees that it will not divide its interest in
the Notes, Options, or Securities with others,  re-sell, or otherwise distribute
the Securities in violation of Federal or state securities laws;

         (b) By reason of its business or financial  experience,  the  Purchaser
has the capacity to protect its  interest in  connection  with the  transactions
contemplated hereunder;

         (c) The  Purchaser  has  been  afforded  the  opportunity  to ask  such
questions as it deems necessary of, and to receive answers from, the Company and
to obtain such additional information which the Company possesses or can acquire
without  unreasonable effort or expense, to make an informed decision to acquire
the  Options,  Notes and  Securities;  provided,  however,  that nothing in this
Section shall be deemed to vitiate or limit the representations,  warranties and
covenants of the Company, Rounick or the Estate contained in this Agreement; and

         (d) The Purchaser is an  "accredited  investor" as that term is defined
in Rule 501(a) of Regulation D under the Securities Act.


                                      -24-

<PAGE>



         8.2   PERMITTED   SALES;   LEGENDS.   Notwithstanding   the   foregoing
representations,  the Company agrees that it will permit (i) a  distribution  of
the  Securities  by a  partnership  to one or more  of its  partners,  where  no
consideration  is  exchanged  therefor  by such  partners,  or to a  retired  or
withdrawn  partner  who  retires or  withdraws  after the date hereof in full or
partial  distribution of his interest in such  partnership,  or to the estate of
any such partner or the transfer by gift,  will or intestate  succession  of any
partner to his spouse or to the  siblings,  lineal  descendants  or ancestors of
such partner or his spouse, or to a trust created for the benefit of one or more
of the foregoing, if the transferee agrees in writing to be subject to the terms
hereof to the same extent as if it were an original Purchaser hereunder and (ii)
a sale or other  transfer  of any of the  Securities  upon  obtaining  assurance
satisfactory   to  the  Company  that  such   transaction  is  exempt  from  the
registration  requirements  of,  or  is  covered  by an  effective  registration
statement   under,  the  Securities  Act  and  applicable  state  securities  or
"blue-sky"  laws,  including,  without  limitation,  receipt  of an  unqualified
opinion to such  effect of counsel  reasonably  satisfactory  to the  Company or
receipt  of  a  no-action  letter  to  such  effect  from  the  Commission.  The
certificates  representing  the Securities  shall bear a legend  evidencing such
restriction on transfer substantially in the following form:

               "The shares  represented by this  certificate  have been acquired
          for investment and have not been  registered  under the Securities Act
          of 1933 (the "Act") or the  securities  laws of any state.  The shares
          may not be transferred by sale, assignment, pledge or otherwise unless
          (i) a registration statement for the shares under the Act is in effect
          or (ii) the  corporation  has  received an opinion of  counsel,  which
          opinion is reasonably  satisfactory to the corporation,  to the effect
          that such  registration  is not  required  under the Act.  The  shares
          represented  by  this  certificate  are  subject  to  a  Voting  Trust
          Agreement,  a  copy  of  which  is on  file  at  the  offices  of  the
          corporation."

         8.3  ORGANIZATION  AND  CORPORATE  POWER.  The  Purchaser  is a limited
partnership,  duly  organized,  validly  existing and in good standing under the
laws of the  State of  Florida,  and has all  requisite  partnership  power  and
authority  to own its  properties  and to carry  on its  business  as  presently
conducted.  The  Purchaser  is duly  licensed or  qualified  to do business as a
foreign limited  partnership in each  jurisdiction  wherein the character of its
property,  or the nature of the activities presently conducted by it, makes such
qualification necessary, except where the failure to so qualify would not have a
material  adverse effect on the Purchaser.  The Purchaser is not in violation in
any respect of its certificate of limited partnership.

         8.4  AUTHORIZATION.  The Purchaser has all necessary  partnership power
and authority,  and has taken all necessary  partnership action required for the
due authorization,  execution, delivery and performance by the Purchaser of this
Agreement and the Related  Agreements to which the Purchaser is a party, and the
consummation of the transactions  contemplated herein or therein. This Agreement
is,  and upon  execution  and  delivery,  the  Related  Agreements  to which the
Purchaser is a party will be, valid and binding  obligations  of the  Purchaser,
enforceable  in  accordance  with  their  respective   terms,   except  as  such
enforcement may be limited by applicable bankruptcy,  insolvency,  moratorium or
similar laws which affect creditors' rights generally.

         8.5 NO BROKERS OR FINDERS.  No person has or will have,  as a result of
the transactions  contemplated by this Agreement,  any right,  interest or claim
against or upon the Purchaser for any commission, fee or other compensation as a
finder or broker because of any act or omission by the Purchaser.

         8.6 NO DEFAULTS OR CONFLICTS.  The execution,  delivery and performance
by the Purchaser of this  Agreement and the Related  Documents to which it is or
will be a party and any of the transactions  contemplated hereby or thereby does
not and will not (i)  violate or  conflict  with,  with or without the giving of
notice  or the  passage  of  time or  both,  any  provision  of any  law,  rule,
regulation, order, judgment, writ, injunction,  decree, agreement,  indenture or
other  instrument   applicable  to  the  Purchaser  or  any  of  its  respective
properties,  (ii) result in the creation of any security interest, Lien or other


                                      -25-

<PAGE>


encumbrance  upon any of the  properties  or assets of the  Purchaser,  or (iii)
require  the  consent,   waiver,   approval,   order  or  authorization  of,  or
declaration, registration qualification or filing with, any Person (other than a
governmental authority).


                                   ARTICLE IX
                      CONDITIONS OF PURCHASER'S OBLIGATION

         The obligation of the Purchaser to purchase the Notes and the Purchased
Stock and deliver the purchase price therefor at the Closing shall be subject at
its  election  to the  satisfaction  of each of the  conditions  stated  in this
Article .

         9.1 REPRESENTATIONS AND WARRANTIES.  The representations and warranties
of the Company,  He-Ro, Rounick and the Estate contained in this Agreement shall
be true and correct on the date of such  Closing  with the same effect as though
made on and as of that date, and the Purchaser  shall have received an Officer's
Certificate  dated  as of such  Closing  to that  effect,  with  respect  to the
representations of the Company and He-Ro.

         9.2 OPINIONS OF COUNSEL.  The Purchaser shall have received an opinion,
dated the date of  Closing,  from  Lowenthal,  Landau,  Fischer  & Bring,  P.C.,
counsel to the Company, Rounick and the Estate.

         9.3  AMENDMENTS  TO CHARTER  DOCUMENTS.  Purchaser  shall have received
evidence  that the  Certificate  of  Amendment  has  been  duly  filed  with the
Secretary of State of Delaware and that the  Certificate of Amendment and Bylaws
are in full force and effect.

         9.4  CERTIFIED  DOCUMENTS,  ETC.  The  Purchaser  shall  have  received
certificates as to the incumbency of officers and certificates  from appropriate
authorities  as to the legal  existence and tax good standing of the Company and
its Subsidiaries, which the Purchaser or their counsel may reasonably request.

         9.5 NO  MATERIAL  ADVERSE  EFFECT.  There  shall  not have  occurred  a
Material Adverse Effect since July 31, 1996.

         9.6 CONSENTS AND WAIVERS.  No  preliminary  or permanent  injunction or
other order by any  Governmental  Authority which prohibits the  consummation of
the  Agreement  shall have been issued and remain in effect.  No statute,  rule,
regulation,  executive order, stay, decree, or judgment shall have been enacted,
entered, issued,  promulgated or enforced by any court or governmental authority
which   prohibits  or  restricts  the   consummation   of  the  Agreement.   All
authorizations,  consents,  orders or approvals of, or  declarations  or filings
with,  and all  expirations  of waiting  periods  imposed  by, any  Governmental
Authority  (all  of the  foregoing,  "Consents")  which  are  necessary  for the
consummation of the Agreement,  shall have been filed, occurred or been obtained
(all such  permits,  approvals,  filings and  consents and the lapse of all such
waiting periods being referred to as the "Requisite  Regulatory  Approvals") and
all such Requisite  Regulatory  Approvals shall be in full force and effect. All
state securities or blue sky permits and other authorizations necessary to issue
the Notes,  the Options and the Securities and to consummate the Agreement shall
have been received.

         9.7 NO  RESTRICTIONS.  There  shall  not be any  action  taken,  or any
statute,  rule,  regulation  or  order  enacted,  entered,  enforced  or  deemed
applicable to the Agreement,  by any Governmental Authority which, in connection
with the grant of a  Requisite  Regulatory  Approval  imposes any  condition  or
restriction  upon the Company or the Purchaser,  which in any such case would so
materially   adversely   impact  the  economic  or  business   benefits  of  the
transactions  contemplated  by  this  Agreement  as to  render  inadvisable  the
consummation of the Agreement.


                                      -26-

<PAGE>



         9.8 LITIGATION. No suit, action or other proceeding (excluding any such
matter  initiated  by or on  behalf  of  the  Purchaser)  shall  be  pending  or
threatened  before any Governmental  Authority seeking to restrain the Purchaser
or the Company or prohibit the Closing or seeking  damages against the Purchaser
or the  Company  or  their  assets  as a  result  of the  consummation  of  this
Agreement;  provided,  that, the Purchaser will take reasonable actions (as long
as such actions do not result in any expense to the  Purchaser) for a reasonable
period of time (not to exceed 10 days,  during  which time the Closing  shall be
tolled to permit such  actions) to  contest,  dismiss or obtain  relief from any
such suit,  action,  proceeding  or injunction in order to permit the Closing to
occur.

         9.9 SHAREHOLDER  APPROVAL.  The  shareholders of the Company shall have
approved and adopted,  by the requisite vote and in accordance  with  applicable
law, this Agreement and the transactions contemplated hereby.

         9.10  RIGHTS  OFFERING.  All  Purchase  Rights  pursuant  to the Rights
Offering shall have expired.

         9.11 STOCK EXCHANGE LISTING. The Securities shall have been listed with
the New York Stock Exchange,  and all expenses  associated  therewith shall have
been paid by the Company.

         9.12  DUE  DILIGENCE.  The  Purchaser  shall  have  completed  its  due
diligence  investigation,  and the results  thereof shall be satisfactory to the
Purchaser,  in its  sole  discretion,  and  such  investigation  shall  not have
revealed that any of the  representations of the Company,  Rounick or the Estate
set  forth   herein  are  untrue  or  incorrect  in  any  respect  or  otherwise
unsatisfactory to the Purchaser;  provided, that, this condition shall be deemed
waived  by the  Purchaser  if  Purchaser  does not  notify  the  Company  of its
intention  to  exercise  this  due  diligence  out by the  later to occur of (x)
receipt by the Company of the Fairness Opinion,  or (y) receipt by the Purchaser
of the Financing Commitment.

         9.13  OPINION  REGARDING  NOL.  The  Purchaser  shall  have  received a
"bringdown"  opinion  of its  independent  counsel or  accountants,  in form and
substance  satisfactory  to  Purchaser,  to the  effect  that  the  transactions
contemplated  by this Agreement and the other Related  Documents will not impair
or restrict the use or availability of the NOL after the Closing.

         9.14  FINANCING.  The  Purchaser  shall  have  received  the  financing
contemplated by the Financing Commitment.

         9.15 CERTAIN OTHER AGREEMENTS.  The Company or Rounick, as the case may
be, shall have executed and delivered the Registration  Rights Agreement and the
License Agreement,  and the Investment  Advisory Agreement shall be in force and
effect.

         9.16 OTHER  DOCUMENTS AND OPINIONS.  The Purchaser  shall have received
such other documents and opinions, in form and substance reasonably satisfactory
to  the  Purchaser  and  its  counsel,  relating  to  matters  incident  to  the
transactions contemplated hereby as the Purchaser may reasonably request.

         9.17 MINIMUM STOCK PRICE.  The closing  price of the  Company's  Common
Stock on the New York Stock Exchange shall be at least $.45.

         9.18 AMENDMENT TO OR CANCELLATION OF STOCK RIGHTS.  The Purchaser shall
have received evidence that the Stock Rights shall either have been cancelled or
amended such that no additional  shares of Common Stock will be issued  pursuant
to such Stock  Rights  during  the  period of three  years and ten days from the
Closing Date.


                                      -27-

<PAGE>

                                    ARTICLE X
                  CONDITIONS OF THE OBLIGATIONS OF THE COMPANY,
                             ROUNICK AND THE ESTATE

         The  obligation  of the Company to sell the  Purchased  Securities  and
issue the Option,  and of Rounick and the Estate to sell the Old Notes, shall be
subject at their election to the  satisfaction of each of the conditions  stated
in this Article .

         10.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Purchaser  contained in this  Agreement  shall be true and correct on the
date of Closing with the same effect as though made on and as of that date,  and
the  Company  shall have  received a  certificate  dated as of such  Closing and
signed on behalf of a designee of the Purchaser to that effect.

         10.2 SHAREHOLDER  APPROVAL.  The shareholders of the Company shall have
approved and adopted,  by the requisite vote and in accordance  with  applicable
law, this Agreement and the transactions contemplated hereby.

         10.3 LITIGATION.  No suit,  action or other  proceeding  (excluding any
such matter  initiated  by or on behalf of the  Company,  Rounick or the Estate)
shall be pending or  threatened  before any  Governmental  Authority  seeking to
restrain the  Company,  Rounick or the Estate or prohibit the Closing or seeking
damages  against the Company,  Rounick or the Estate or their assets as a result
of the consummation of this Agreement;  provided,  that, the Company, Rounick or
the Estate,  as the case may be, will take  reasonable  actions for a reasonable
period of time (not to exceed 10 days,  during  which time the Closing  shall be
tolled to permit such  actions) to  contest,  dismiss or obtain  relief from any
such suit,  action,  proceeding  or injunction in order to permit the Closing to
occur.

         10.4 SENIOR  DEBT.  The Senior Debt shall have been  refinanced  or the
consent of the lenders under the Senior Debt to the transactions contemplated by
this Agreement shall have been obtained.


                                   ARTICLE XI
                                   TERMINATION

         11.1 TERMINATION. This Agreement may be terminated:

         (a)  By  mutual  written  consent  of  the  Company,  Rounick  and  the
Purchaser.

         (b) By the Company,  Rounick or the  Purchaser if (i) the Closing shall
not have been consummated  before February 28, 1997, (ii)  Shareholder  Approval
shall not have been  obtained  by reason of the  failure to obtain the  required
vote at a duly held meeting of shareholders or at any  adjournment  thereof,  or
(iii) the Company has not  received a Fairness  Opinion  within 45 days from the
date hereof;  provided that, the party  terminating  this Agreement  pursuant to
this clause (b) must have in good faith fully  satisfied  its  undertakings  and
agreements  set forth in this  Agreement  (including  but not  limited  to,  the
recommendation  by the Board of Directors of the Company to its shareholders for
the approval and adoption of this  Agreement and the  transactions  contemplated
hereby  and the use by the  Company  of its best  efforts  to obtain a  Fairness
Opinion);  and provided further that, the termination of this Agreement pursuant
to this clause (b) will obligate the Company to pay the termination fee provided
for in Section 11.3 hereof.

         (c) By the Company or the  Purchaser if the Company  shall  receive any
Acquisition Proposal after the date hereof from a third party or parties and the
Board of Directors of the Company shall have been advised by independent counsel
that the  Company is  required,  under  applicable  law in the  exercise  of the
Board's  fiduciary  duties,  to  pursue  such  Acquisition  Proposal;  provided,
however, that the termination of this Agreement pursuant to this clause (c) will
obligate the Company to pay the termination fee provided for in Section hereof.


                                      -28-

<PAGE>



         (d)  By the  Purchaser  if any  party  to  this  Agreement  other  than
Purchaser breaches any material representation  (excluding the representation in
Section 2.33), warranty,  covenant or agreement in this Agreement that is in the
control of such  party and can be cured by such  party,  and such  breach is not
cured within 10 days of written notice by the Purchaser to such breaching party.

         (e) By the  Company  or  Rounick  if the  Purchaser  (i)  breaches  any
material representation,  warranty, covenant or agreement of this Agreement that
is in the control of the Purchaser and can be cured by the  Purchaser,  and such
breach is not cured  within 10 days of written  notice by the Company or Rounick
to the Purchaser,  or (ii) fails to obtain a Financing Commitment within 45 days
from the date hereof,  such 45-day  period to be  automatically  extended for an
additional  15-day period unless Purchaser  notifies the Company in writing that
it does not  intend to  continue  to pursue  the  procurement  of the  Financing
Commitment.

         11.2  EFFECT  OF  TERMINATION.  In the  event  of  termination  of this
Agreement as provided above, this Agreement shall forthwith become of no further
effect and,  except for a termination  resulting from a breach by a party of any
of its material obligations under this Agreement, there shall be no liability or
obligation on the part of the Company,  Rounick,  the Estate or the Purchaser or
their respective  officers or directors (except as set forth in Sections , , and
hereof, which shall survive the termination).  Nothing contained in this Section
shall relieve any party from liability for willful breach of this Agreement that
results in  termination of this  Agreement.  Upon request  therefor,  each party
shall redeliver all documents, work papers and other material of any other party
relating to the  transactions  contemplated  hereby,  whether obtained before or
after the execution hereof, to the party furnishing same.

         11.3 CERTAIN  TERMINATION FEES. If this Agreement is terminated for any
reason,  then the Company shall  reimburse the  Purchaser,  within five business
days of  demand  by the  Purchaser,  and hold  the  Purchaser  harmless  against
liability for the payment for (I) all out-of-pocket expenses, up to a maximum of
$225,000,  incurred by the Purchaser or its affiliates,  in connection with this
Agreement and the Related Agreements,  including,  without  limitation,  (a) all
costs and expenses  (including  travel  expenses) of the  Purchaser  incurred in
connection with the investigation,  preparation,  execution and delivery of such
agreements or instruments,  or the transactions  contemplated  hereby or thereby
(and due diligence related thereto), (b) all document production and duplication
charges, (c) all fees and expenses of any professionals engaged by the Purchaser
in  connection  with  such  agreements  or  instruments,   or  the  transactions
contemplated hereby or thereby, and any subsequent proposed  modification of, or
proposed  consent under,  such  agreements or  instruments,  whether or not such
proposed modification shall be effected or proposed consent granted, and (d) all
such expenses,  including reasonable  attorney's fees and expenses,  incurred by
the Purchaser with respect to the enforcement of any rights or provisions of any
such agreement or instrument (collectively,  the "Out-of-Pocket  Expenses"), and
(II) all fees  incurred by the Purchaser or its  affiliates to obtain  financing
for the transactions contemplated by this Agreement (the "Fees" and collectively
with the Out-of-Pocket Expenses, the "Reimbursed Expenses").  In addition to the
Reimbursed  Expenses,  the Company  shall pay to the Purchaser a fee of $500,000
(the "Termination Fee"),  $300,000 of which shall be payable to Purchaser within
one business day of the  occurrence of an event in clauses (i),  (ii),  (iii) or
(iv) in this sentence and the remaining $200,000 payable to the Purchaser on the
earlier  to  occur  of (A) 60 days  from  the  occurrence  of such  event or (B)
consummation of the competing  offer,  which fee represents  liquidated  damages
(and not a penalty),  intended to  compensate  the  Purchaser  for various fees,
costs,  losses and expenses  (including,  without  limitation,  the foregoing of
other possible opportunities and expenditures of valuable time and efforts): (i)
if this  Agreement  is  terminated  pursuant  to  Sections , or 11.1(d)  hereof;
provided, that, if the Agreement is terminated pursuant to Section 11(b)(i) as a
result of any Termination Exception (as defined below), no Termination Fee shall
be due, (ii) the Company's Board of Directors recommends or accepts (or fails to
reject,  within one week of receipt  thereof) any Acquisition  Proposal prior to
the  termination of this  Agreement or within three months after  termination of
this  Agreement  (unless such  termination  is (x)  pursuant to Section  11.1(e)
hereof,  (y) as a result of  termination  by  Purchaser  because of a failure to
satisfy the conditions set forth in Sections 9.8, 9.10,  9.11,  9.12, 9.13, 9.14
or 9.17, or (z) as a result of a termination  by the Company or Rounick  because
of a failure to satisfy the  condition  set forth in Section 10.4 (the items set


                                      -29-

<PAGE>


forth  in  (x),  (y)  and  (z)  collectively  referred  to as  the  "Termination
Exceptions")),  (iii) the Company's Board of Directors resumes negotiations with
any party contemplated under subclause (ii) of this sentence,  after a rejection
of an offer from such party,  or (iv) if this  Agreement  is  terminated  by the
Purchaser as a result of the conditions set forth in Article not being satisfied
prior to the Closing other than the  conditions set forth in Sections 9.8, 9.10,
9.11,  9.12,  9.13,  9.14 or 9.17. If this  Agreement is  consummated,  then all
expenses incurred by the Purchaser shall be paid as set forth in Section hereof.
The provisions of this Section shall survive the termination of the Agreement.


                                   ARTICLE XII
                               CERTAIN DEFINITIONS

         As used in this Agreement, the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined):

         "Business"  shall mean the design,  manufacture or marketing of women's
evening wear, special occasion wear and day dresses anywhere in the world.

         "Code" shall mean the Internal  Revenue Code of 1986,  as amended,  and
the regulations and interpretations thereunder.

         "Common  Stock"  will  include  (a)  the  Company's   Common  Stock  as
authorized  on the date of this  Agreement,  (b) any other  capital stock of any
class or classes of the  Company  authorized  on or after the date  hereof,  the
holders of which shall have the right,  without limitation as to amount,  either
to all or to a  share  of the  balance  of  current  dividends  and  liquidating
dividends  after the  payment  of  dividends  and  distributions  on any  shares
entitled to preference,  and (c) any other  securities of the Company into which
or for which any of the  securities  described in (a) or (b) may be converted or
exchanged pursuant to a plan of recapitalization,  reorganization,  merger, sale
of assets or otherwise.

         "Fair Market Value" shall be the "Closing  Price" (as defined below) of
the Common Stock on the business day  immediately  preceding  such date. For the
purpose of  determining  Fair Market  Value,  the "Closing  Price" of the Common
Stock on any business day shall be (i) if the Common Stock is listed or admitted
for trading on any United  States  national  securities  exchange,  or if actual
transactions  are otherwise  reported on a  consolidated  transaction  reporting
system,  the last  reported  sale  price of  Common  Stock on such  exchange  or
reporting system, as reported in any newspaper of general  circulation,  (ii) if
the Common Stock is quoted on the National  Association  of  Securities  Dealers
Automated  Quotations  System  ("NASDAQ"),  or any similar  system of  automated
dissemination of quotations of securities prices in common use, the mean between
the closing  high bid and low asked  quotations  for such day of Common Stock on
such  system,  or (iii) if neither  clause (i) or (ii) is  applicable,  the mean
between the high bid and low asked  quotations  for the Common Stock as reported
by the  National  Quotation  Bureau,  Incorporated  if at least  two  securities
dealers have inserted both bid and asked quotations for Common Stock on at least
five of the ten preceding days.

         "Financing   Commitment"  means  a  financing  commitment  received  by
Purchaser  from a financial  institution,  satisfactory  to the Purchaser in its
sole  discretion,  which provides the Purchaser with the necessary  financing on
terms  satisfactory  to Purchaser,  in its sole  discretion,  to consummate  the
transactions  contemplated  by this  Agreement  and  provide  the  Company  with
adequate working capital after the Closing.

         "Governmental Authority" means any nation or country (including but not
limited to the United  States) and any  commonwealth,  territory  or  possession
thereof and any political subdivision of any of the foregoing, including but not
limited to United States  Customs  Service,  courts,  departments,  commissions,
boards, bureaus, agencies, ministries or other instrumentalities.


                                      -30-

<PAGE>



         "Indebtedness" means all obligations,  contingent or otherwise, whether
current or long-term,  which in accordance  with generally  accepted  accounting
principles  would be classified upon the obligor's  balance sheet as liabilities
(other  than  deferred  taxes)  and  shall  also  include   capitalized  leases,
guarantees,  endorsements  (other than for collection in the ordinary  course of
business)  or other  arrangements  whereby  responsibility  is  assumed  for the
obligations of others,  including any agreement to purchase or otherwise acquire
the obligations of others or any agreement,  contingent or otherwise, to furnish
funds for the purchase of goods, supplies or services for the purpose of payment
of the  obligations  of others,  other than  accounts  or trade  payables in the
ordinary course of business.

         "Legal  Requirements"  means, when described as being applicable to any
Person,  any  and all  laws  (statutory,  judicial  or  otherwise),  ordinances,
regulations,  judgments,  orders,  directives,  injunctions,  writs,  decrees or
awards of, and any contracts,  agreements or undertakings with, any Governmental
Authority,  in each case as and to the extent  applicable to such Person or such
Person's business, operations or properties.

         "Lien"  shall  mean  any  mortgage,  deed of  trust,  pledge,  security
interest,  encumbrance,  lien or charge of any kind  (including any agreement to
give  any of the  foregoing,  any  conditional  sale or  other  title  retention
agreement,  any lease in the nature  thereof,  and the filing of or agreement to
give  any  financing   statement  under  the  Uniform  Commercial  Code  of  any
jurisdiction).

         "Material  Adverse  Effect" means a material  adverse change in, or the
occurrence  of any event  which  could  have a material  adverse  change in, the
assets,  properties,  liabilities,  business,  affairs,  results of  operations,
condition (financial or otherwise) or prospects of the Company on a consolidated
basis.

         "Permitted Liens" shall have the meaning attributed thereto in the Loan
and  Security  Agreement,  dated  as of May  12,  1995,  with  Foothill  Capital
Corporation.

         "Person" means an individual, corporation,  partnership, joint venture,
trust or  unincorporated  organization  or a  government  or agency or political
subdivision thereof.

         "Related  Agreements"  mean the Notes,  the  Option,  the  Registration
Rights  Agreement,  the Non-  Compete  and  License  Agreement,  the  Investment
Advisory  Agreement,  the Voting Trust Agreement,  the Irrevocable Proxy and any
other  agreements  or  instruments  to be  executed  in  connection  herewith or
therewith.

         "Securities"  means  collectively  the Purchased  Shares and the Option
Shares.

         "Senior Debt" means the debt of the Company the  Subsidiaries  pursuant
to (i) Fourth Amended and Restated  Revolving Credit Agreement,  dated as of May
15, 1995, by and among The He-Ro Group,  Inc. and Marine Midland Bank, N.A., The
Chase  Manhattan  Bank,  N.A.,  The Hong Kong and Shanghai  Banking  Corporation
Limited, ABN AMRO Bank N.V.  (collectively the "Bank Group Debt"), and (ii) Loan
and  Security  Agreement,  dated as of May 12,  1995,  by and  between The He-Ro
Group,  Ltd. and certain of its subsidiaries  and Foothill  Capital  Corporation
(the "Foothill Debt").

         "Stock Option Plans" mean  collectively the 1991 Stock Option Plan, the
1993  Outside  Director  Stock  Option Plan and the Amended  and  Restated  1994
Outside Director Stock Option Plan.

         "Subsidiary"  or  "Subsidiaries"   means  any  corporation,   or  other
organization, whether incorporated or unincorporated, of which such party or any
other  Subsidiary  of such  party is a  general  partner  or of which at least a
majority of the  securities or other  interests  having by their terms  ordinary
voting power to elect a majority of the Board of Directors or others  performing
similar  functions with respect to such  corporations or other  organizations is
directly or  indirectly  owned or  controlled by such party and/or by any one or
more of the Subsidiaries.


                                      -31-

<PAGE>



         "Warrants"  means  Warrant  No. 1 to purchase  93,750  shares of Common
Stock, Warrant No. 2 to purchase 62,500 shares of Common Stock, Warrant No. 3 to
purchase  50,000  shares of Common  Stock and Warrant  No. 4 to purchase  43,750
shares of Common Stock.


                                  ARTICLE XIII
                  SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION

         13.1 SURVIVAL OF  REPRESENTATIONS  AND WARRANTIES OF PARTIES OTHER THAN
PURCHASER. The covenants,  representations and warranties of the parties to this
Agreement  other than Purchaser  contained in this  Agreement  shall survive the
closing,  regardless  of any  investigation  made by or on  behalf  of any party
hereto, for a period of two years;  provided,  that (i) the  representations and
warranties set forth in Sections 2.1, 2.2, 2.4, 2.5, 2.6, 3.1, 3.4,  14.5,  14.9
and 14.10 shall survive  indefinitely,  (ii) the  representations and warranties
set forth in Article II (other than  Sections  2.1, 2.2, 2.4, 2.5, 2.6 and 2.10)
shall  survive  for a  period  of  three  years  from  the  Closing,  (iii)  the
representations  and  warranties set forth in Section 2.10 shall survive for the
relevant  statute of limitations,  (iv) the covenants in Articles IV, V, VI, VII
and  XIII  shall  survive  as  provided  therein,  and (v)  the  indemnification
provisions in Section 14.5 shall survive indefinitely.

         13.2 INDEMNIFICATION BY ROUNICK AND THE ESTATE. Rounick and the Estate,
jointly and  severally,  agree to indemnify  Purchaser with respect to, and hold
Purchaser and its respective partners, officers, directors, employees and agents
harmless from, any loss,  liability or expense  (including,  but not limited to,
reasonable  attorney's fees and  disbursements  in connection  therewith)  which
Purchaser  may  directly  or  indirectly  incur or suffer by reason of, or which
results, arises out of or is based upon (a) the inaccuracy of any representation
or  warranty  made by  Rounick or the Estate in this  Agreement  or any  Related
Agreement,  or (b) the  failure  of  Rounick  or the  Estate to comply  with any
covenants  or other  commitments  made by them in this  Agreement or any Related
Agreement;  provided,  however,  other  than  with  respect  to a breach  of the
representation  set  forth in  Section  3.4,  in no event  shall  the  aggregate
obligations of Rounick and the Estate  pursuant to this Article XIII exceed $2.5
million.

         13.3  INDEMNIFICATION  BY THE COMPANY AND HE-RO. The Company and He-Ro,
jointly and  severally,  agree to indemnify the  Purchaser  with respect to, and
hold Purchaser and its respective partners, officers,  directors,  employees and
agents harmless from, any loss, liability or expense (including, but not limited
to, reasonable  attorney's fees and disbursements in connection therewith) which
Purchaser  may  directly  or  indirectly  incur or suffer by reason of, or which
results, arises out of or is based upon (a) the inaccuracy of any representation
or  warranty  made by the  Company  or He-Ro in this  Agreement  or any  Related
Agreement,  (b) the failure of the Company or He-Ro to comply with any covenants
or other  commitments  made by them in this Agreement or any Related  Agreement,
(c) the matters set forth as items 2, 3, 8, 9 and 10 on Schedule 2.8.

         13.4 LEGAL PROCEEDINGS.  In the event Purchaser becomes involved in any
legal,   governmental  or   administrative   proceeding   which  may  result  in
indemnification claims hereunder, Purchaser shall promptly notify the Company or
Rounick, as the case may be, in writing and in full detail of the filing, and of
the nature of such proceeding;  provided,  that, any failure to give such notice
will not waive any  rights of  Purchaser  except to the extent the rights of the
indemnifying  party are actually  prejudiced.  After receipt by the indemnifying
party of such notice, then upon reasonable notice from the indemnifying party to
the Purchaser,  or upon the request of the  Purchaser,  the  indemnifying  party
shall,  at its cost and  expense,  defend,  manage and conduct any  proceedings,
negotiations or communications involving any claimant whose claim is the subject
of the  Purchaser's  notice to the  indemnifying  party as set forth above,  and
shall take all actions necessary, including but not limited to, the retention of
counsel reasonably  satisfactory to the Purchaser,  and the posting of such bond
or other  security as may be required by any  Governmental  Authority,  so as to
enable the claim to be  defended  against or resolved  without  expense or other
action by the Purchaser.  In the event that the indemnifying party shall fail to
initiate a defense  of such  claim  within ten days of the date of the notice to


                                      -32-

<PAGE>


the indemnifying  party, or in the event that in the reasonable  judgment of the
Purchaser,  the indemnifying party is not adequately  defending such claim, then
the Purchaser  shall retain  counsel and conduct the defense of such claim as it
may in its discretion deem proper,  at the cost and expense of the  indemnifying
party. Subject to the foregoing sentence,  if the indemnifying party defends any
proceeding,  the indemnifying  party shall have full control over the conduct of
such  proceeding,  although the  Purchaser  shall have the right to retain legal
counsel at its own expense and shall have the right to approve any settlement of
any dispute  giving rise to such  proceeding,  such  approval not to be withheld
unreasonably by the Purchaser. The Purchaser shall reasonably cooperate with the
indemnifying party in such proceeding.


                                   ARTICLE XIV
                                  MISCELLANEOUS

         14.1 PARTIES IN INTEREST.  Except as otherwise  set forth  herein,  all
covenants, agreements, representations, warranties and undertakings contained in
this Agreement and the Related Agreements shall be binding on and shall inure to
the benefit of the  respective  successors  and  assigns of the  parties  hereto
(including transferees of any of the Securities).

         14.2 AMENDMENTS AND WAIVERS. This Agreement may not be amended, nor any
provision hereof waived,  unless such amendment or waiver is approved in writing
by the parties hereto.  No course of dealing between the Company,  Rounick,  the
Estate and the  Purchaser  (or its  transferee)  nor any delay in  exercise  any
rights  hereunder  shall  operate as a waiver of any rights of the Purchaser (or
its transferee).

         14.3  NOTICES.  All notices,  requests,  consents,  reports and demands
shall be in writing  and shall be hand  delivered,  sent by  facsimile  or other
electronic  medium,  or  mailed,  postage  prepaid,  to  the  Company  or to the
Purchasers  at the address  set forth  below or to such other  address as may be
furnished in writing to the other parties hereto:


The Company, the Estate or              The He-Ro Group, Ltd.
Rounick:                                550 Seventh Avenue
                                        New York, New York 10018
                                        Attention: Della Rounick

with copy to:                           Lowenthal, Landau Fischer & Bring, P.C.
                                        250 Park Avenue
                                        New York, New York 10177
                                        Attention: Martin R. Bring

The Purchaser:                          Sun Investment Partnership I, Ltd.
                                        777 South Flagler Drive
                                        West Tower, Eighth Floor
                                        West Palm Beach, Florida 33407
                                        Attention: General Partner

with copy to:                           Greenberg, Traurig, Hoffman, Lipoff,
                                         Rosen & Quentel, P.A.
                                        1221 Brickell Avenue
                                        Miami, Florida 33131
                                        Attention: Rebecca R. Orand


         14.4 EXPENSES.  If the transactions  contemplated  under this Agreement
are consummated,  the Company shall pay and hold the Purchaser  harmless against
liability for the payment of, all  out-of-pocket  expenses arising in connection


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<PAGE>


with this Agreement and the Related  Agreements and the transactions  hereby and
thereby contemplated, including, without limitation, the Out-of-Pocket Expenses,
broker's or finder's  fees or expenses and all expenses  incurred in  connection
with the printing of such  agreements and instruments and all taxes which may be
payable  in  respect  of the  execution  and  delivery  of  such  agreements  or
instruments,  or the  issuance,  delivery or purchase  by the  Purchaser  of the
Notes, the Options or any of the Securities (collectively the "Total Expenses").

         14.5  INDEMNIFICATION  FOR BROKER FEES.  Subject to the  provisions  of
hereof, the Company further agrees to indemnify and save harmless the Purchaser,
and the Purchaser agrees to indemnify and save harmless the Company, and each of
their respective partners, officers,  directors,  employees and agents, from and
against any and all actions,  causes of action,  suits, losses,  liabilities and
damages, and expenses (including, without limitation, reasonable attorney's fees
and  disbursements  in  connection  therewith)  for any brokers or finders  fees
arising  with  respect to brokers  or finders  engaged by the non-  indemnifying
party.

         14.6  COUNTERPARTS.  This  Agreement  and  any  exhibit  hereto  may be
executed in multiple  counterparts,  each of which shall  constitute an original
but all of which shall constitute but one and the same  instrument.  One or more
counterparts  of this  Agreement  or any  exhibit  hereto may be  delivered  via
telecopier,  with the  intention  that  they  shall  have the same  effect as an
original counterpart hereof.

         14.7 EFFECT OF HEADINGS.  The article and section  headings  herein are
for convenience only and shall not affect the construction hereof.

         14.8   ADJUSTMENTS.   All  provisions  of  this   Agreement   shall  be
automatically adjusted to reflect any stock dividend,  stock split or other such
form of recapitalization.

         14.9  GOVERNING  LAW;  ARBITRATION.  This  Agreement  shall be deemed a
contract  made  under the laws of the State of  Florida  and  together  with the
rights and  obligations of the parties  hereunder,  shall be construed under and
governed by the laws of such State. All disputes arising in connection with this
Agreement shall be finally  settled under the Rules of the American  Arbitration
Association (the "Rules") by three (3) arbitrators  appointed in accordance with
said Rules. Any such arbitration shall be held pursuant to the Laws of the State
of New York unless the parties hereto  mutually agree in writing upon some other
location  for  arbitration.  The  arbitrators  shall not be  empowered  to award
punitive, exemplary and/or consequential damages to any party. There shall be no
consolidation of this arbitration with any other dispute or proceeding involving
third  parties.  The  provisions  of this  Agreement  shall  prevail  in case of
inconsistency between the Rules and this Agreement.

         14.10  ATTORNEYS'  FEES. In the event that a suit for the collection of
any damages resulting from, or for the injunction of any action constituting,  a
breach of any of the terms or provisions of this Agreement,  then the prevailing
party shall pay all reasonable  costs,  fees  (including  reasonable  attorneys'
fees) and expenses of the  non-prevailing  party. The provisions of this Section
shall survive the termination of this Agreement

         14.11  FURTHER  ASSURANCES.  The Company,  the Estate,  Rounick and the
Purchaser shall execute and deliver such documents,  and take such other action,
as shall be  reasonably  requested  by any other  party  hereto to carry out the
transactions contemplated by this Agreement.

         14.12 PUBLICITY.  The Company shall not issue or make, or cause to have
issued or made, any public release or announcement  concerning this Agreement or
the transactions contemplated hereby, without the advance approval in writing of
the form and substance  thereof by the Purchaser,  except as required by law (in
which case, so far as possible,  there shall be consultation between the parties
prior to such announcement).

         14.13  ENTIRE  AGREEMENT.   This  Agreement   (including  exhibits  and
schedules)  and that certain  Confidentiality  Agreement,  dated April 17, 1996,


                                      -34-

<PAGE>


which  shall  remain in full force and  effect,  subject  to the terms  thereof,
constitutes  the entire  agreement  among the parties hereto with respect to the
subject   matter   hereof   and  shall   supersede   all   prior   negotiations,
understandings,  agreements,  arrangements  and  understandings,  both  oral and
written, among the parties hereto with respect to such subject matter.

         14.14  SEVERABILITY.  The  invalidity  of any one or more of the words,
phrases, sentences, clauses, sections or subsections contained in this Agreement
shall not affect the  enforceability of the remaining portions of this Agreement
or any part hereof, all of which are inserted conditionally on their being valid
in law and, in the event that any one or more of the words, phrases,  sentences,
clauses,  sections or subsections  contained in this Agreement shall be declared
invalid by a court of competent jurisdiction,  this Agreement shall be construed
as if such  invalid  word or words,  phrase or phrases,  sentence or  sentences,
clause or clauses,  section or sections,  or subsection or  subsections  had not
been inserted.

         14.15 BINDING EFFECT AND  ASSIGNMENT.  This Agreement  shall be binding
upon and  inure to the  benefit  of the  parties  hereto  and  their  respective
permitted  successors  and assigns;  but neither this  Agreement  nor any of the
rights, benefits or obligations hereunder shall be assigned, by operation of law
or otherwise, by any party hereto without the prior written consent of the other
party; provided, however, that nothing herein shall prohibit the assignment to a
third party of the  Purchaser's  rights under the Notes, or an assignment of the
Purchaser's rights to an affiliate of the Purchaser.

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<PAGE>


         IN WITNESS  WHEREOF,  the parties have executed this Agreement by their
duly authorized representatives as of the date set forth in the first paragraph.



     THE HE-RO GROUP, LTD.


     By:       /S/ DELLA ROUNICK
     Name:     Della Rounick
     Title:    Chief Executive Officer & Co-Chairman of the Board


     THE HE-RO GROUP, INC.


     By:       /S/ DELLA ROUNICK
     Name:     Della Rounick
     Title:    Chief Executive Officer & Co-Chairman of the Board


     ESTATE OF HERBERT ROUNICK


     By:    
     Name:   Vasiliki Della Pasvantidou Rounick
     Title:  Executrix

     /S/ VASILIKI DELLA PASVANTIDOU ROUNICK
     ------------------------------------------------
     Vasiliki Della Pasvantidou Rounick, individually


     
     SUN INVESTMENT PARTNERSHIP I, LTD.


     By:   Sun Capital Advisors, Inc., its general partner

           By:      /S/ MARC J. LEDER
           Name:    Marc J. Leder
           Title:   Managing Director

                                      -36-