EXHIBIT 10.1

                       NOTE AND WARRANT PURCHASE AGREEMENT

         This NOTE AND WARRANT PURCHASE AGREEMENT (this "AGREEMENT") is made as
of October 1, 1997, by and among THE WILLIS GROUP, LLC, a Texas limited
liability company ("WILLIS" and, together with any transferee of the Note, the
"PURCHASER"), and EQUALNET HOLDING CORP., a Texas corporation (the "COMPANY"),
EQUALNET CORPORATION, a Delaware corporation ("EC"), TELESOURCE, INC., a Texas
corporation ("TI"), and EQUALNET WHOLESALE SERVICES, INC., a Delaware
corporation ("EWS", together with the Company, EC, and TI, the "SELLERS").


                                    RECITALS

         Purchaser desires to purchase from the Sellers, and the Sellers desire
to issue and sell to Purchaser, subject to the terms and conditions set forth
herein, (i) a 12% convertible secured note due April 1, 1998, payable by the
Sellers, as co-obligors, in the original principal amount of $1,000,000 and (ii)
warrants to purchase up to an aggregate of 200,000 shares of Common Stock (as
hereinafter defined) of the Company, subject to adjustment as provided herein
and in the Warrant Agreement (as hereinafter defined).


                                   AGREEMENTS

         In consideration of the recitals and the mutual covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto hereby agree as follows:


                                    ARTICLE I

                                   DEFINITIONS

         In addition to the capitalized terms defined elsewhere in this
Agreement, the following capitalized terms shall have the following respective
meanings when used in this Agreement:

                  "AFFILIATE" as applied to any specified Person means any other
         Person directly or indirectly controlling, controlled by, or under
         direct or indirect common control with, such specified Person. The term
         "control" (including, with correlative meanings, the terms
         "controlling," "controlled by" and "under common control with"), as
         applied to any Person, means the possession, directly or indirectly, of
         20% or more of the voting power (or in the case of a Person which is
         not a corporation, 20% or more of the ownership interest, beneficial or
         otherwise) of such Person or the power otherwise to direct or cause the
         direction of the management and policies of that Person, whether
         through voting, by contract or otherwise. For purposes of this
         paragraph, "voting power" of any Person means the total number of votes
         which may be cast by the holders of the total number of outstanding
         shares of stock of any class or classes of such Person in any election
         of directors (or Persons performing similar functions) of such Person.
         For purposes of this Agreement, all executive officers and directors of
         a Person shall be deemed to be Affiliates of such Person.

                  "ANNUAL PLAN" shall have the meaning assigned to such term in
         Section 4.2.9 hereof.

                  "BUSINESS DAY" means any day other than a Saturday, a Sunday,
         or a day on which commercial banks in New York City, New York or
         Houston, Texas are required or authorized to be closed.

                  "CAPITAL EXPENDITURES" shall mean expenditures in respect of
         fixed or capital assets by a Person, including the capital portion of
         lease payments made in respect of Capitalized Lease Obligations, but
         EXCLUDING expenditures for the restoration, repair or replacement of
         any fixed or capital asset which was destroyed or damaged, in whole or
         in part, to the extent financed by the proceeds of an insurance policy
         maintained by such Person. Expenditures in respect of replacements and
         maintenance consistent with the business practices of such Person in
         respect of plant facilities, machinery, fixtures and other like capital
         assets utilized in the ordinary course of business are not Capital
         Expenditures to the extent such expenditures are not capitalized in
         preparing a balance sheet of such Person in accordance with GAAP.

                  "CAPITALIZED LEASE OBLIGATIONS" means all payment obligations
         arising under any lease of property which, in accordance with GAAP,
         would be capitalized on the Company's or any Subsidiary's balance sheet
         or for which the amount of the asset and liability thereunder as if so
         capitalized should, in accordance with GAAP, be disclosed in a note to
         such balance sheet.

                  "CASH FLOW" means, for any period, the total of:

                           (a) Net Income for each period; PLUS

                           (b) all amounts deducted in computing such Net Income
                  in respect of (i) depreciation and amortization; (ii) interest
                  on Indebtedness (including payments in the nature of interest
                  under Capitalized Lease Obligations and interest costs that
                  were capitalized); and (iii) the provision for taxes for such
                  period based on income or profits to the extent such income or
                  profits were included in calculating Net Income.

                  "CHANGE OF CONTROL" means the occurrence of any of the
         following: (i) the sale, lease, transfer, conveyance or other
         disposition, in one or a series of related transactions, of all or
         substantially all of the assets of the Company and its Subsidiaries
         taken as a whole to any "person" (as such term is used in Section
         13(d)(3) of the Securities Exchange Act); (ii) the Company consolidates
         with or merges into another Person or any Person consolidates with, or
         merges into, the Company, in any such event pursuant to a transaction
         in which the outstanding voting stock of the Company is changed into or
         exchanged for cash, securities, or other property, other than any such
         transaction where the holders of the voting stock of the Company
         immediately prior to such transaction own, directly or indirectly, not
         less than a majority of the voting stock of the surviving or resulting
         Person immediately after such transaction; (iii) the adoption of a plan
         relating to the liquidation or dissolution of the Company, or (iv) the
         consummation of any transaction (including, without limitation, any
         merger or consolidation) the result of which is that any "person" (as
         defined above) becomes the "beneficial owner" (as such term is defined
         in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act),
         directly or indirectly, of more than 30% of the voting stock of the
         Company. For purposes of this definition, any transfer of an equity
         interest of an entity that was formed for the purpose of acquiring
         voting stock of the Company will be deemed to be a transfer of such
         portion of such voting stock as corresponds to the portion of the
         equity of such entity that has been so transferred.

                  "CHARTER" means, for any Person, such Person's certificate or
         articles of incorporation or other organizational documents.

                  "CLAIMS" shall have the meaning assigned to such term in
         Section 6.3 hereof.

                  "CLOSING" means the closing of the sale and purchase of the
         Note and the Warrants pursuant to this Agreement.

                  "CLOSING DATE"shall have the meaning assigned to such term in
         Section 2.2 hereof.

                  "CODE" means the Internal Revenue Code of 1986, as amended
         from time to time, and all rules and regulations promulgated
         thereunder, and any successor statute.

                  "COMERICA LOC" means the $100,000 Letter of Credit issued by
         Comerica Bank-Texas on behalf of EC for the benefit of Caroline
         Partners, Ltd., dated August 5, 1997, and having an expiry of February
         17, 1998, as the same may be amended, supplemented, extended, reissued,
         or otherwise modified from time to time.

                  "COMMISSION" shall have the meaning assigned to such term in
         Section 4.1.11(e) hereof.

                  "COMMON STOCK" means the Company's common stock, par value
         $0.01 per share.

                  "CONSOLIDATED" refers to the consolidation of financial
         statements in accordance with GAAP.

                  "CONVERSION DATE" shall have the meaning assigned to such term
         in Section 5.1.3 hereof.

                  "CONVERSION PRICE" shall have the meaning assigned to such
         term in Section 5.1.2 hereof.

                  "DEFAULT RATE" shall have the meaning assigned to such term in
         Section 6.1 hereof. 

                  "DEMAND SECURITIES" shall have the meaning assigned to such 
         term in Section 4.1.11(a) hereof.

                  "DOLLARS" and "$" shall mean lawful money of the United States
         of America.

                  "ENVIRONMENTAL LAWS" means any and all Federal, state, local,
         and foreign statutes, laws, regulations, ordinances, rules, judgments,
         orders, decrees, permits, concessions, grants franchises, licenses,
         agreements, or governmental restrictions relating to environmental
         matters, including, without limitation, those relating to fines,
         orders, injunctions, penalties, damages, contribution, cost recovery
         compensation, losses or injuries resulting from the release of
         Hazardous Materials and to the generation, use, storage,
         transportation, handling or disposal of Hazardous Materials, in any
         manner applicable to the Company or any of its Subsidiaries or any of
         their respective properties.

                  "ERISA" means the Employee Retirement Income Security Act of
         1974, as amended from time to time.

                  "ERISA AFFILIATE" means each trade or business (whether or not
         incorporated) which together with the Company or a Subsidiary of the
         Company would be deemed to be a "single employer" within the meaning of
         Section 4001 of ERISA.

                  "ERISA TERMINATION EVENT" means (i) a "Reportable Event"
         described in Section 4043 of ERISA and the regulations issued
         thereunder (other than a "Reportable Event" not subject to the
         provision for 30-day notice to the PBGC under such regulations), or
         (ii) the withdrawal of the Company or any of its ERISA Affiliates from
         a Plan during a plan year in which it was a "substantial employer" as
         defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice
         of intent to terminate a Plan or the treatment of a Plan amendment as a
         termination under Section 4041 of ERISA, or (iv) the institution of
         proceedings to terminate a Plan by the PBGC or (v) any other event or
         condition which might constitute grounds under Section 4042 of ERISA
         for the termination of, or the appointment of a trustee to administer,
         any Plan.

                  "EVENT OF DEFAULT" shall have the meaning as set forth in
         Section 6.1 hereof.

                  "EXCLUDED STOCK" shall have the meaning assigned to such term
         in Section 5.1.5(ii) hereof.

                  "FINANCIAL STATEMENTS" shall mean the Consolidated Financial
         Statement or Statements of the Company and its Subsidiaries described
         or referred to in Sections 4.2.1 and 4.2.2 hereof.

                  "FURST AGREEMENT" means that certain Note and Warrant Purchase
         Agreement dated as of February 11, 1997, by and among the Furst Group,
         Inc., the Company, EC, TI, and EWS, and the notes and warrants executed
         and delivered in connection therewith.

                  "GAAP" means generally accepted accounting principles
         (including principles of consolidation) in the United States of
         America, in effect from time to time, consistently applied.

                  "GOVERNMENTAL AUTHORITY" means any foreign or domestic
         federal, state, county, municipal, or other governmental or regulatory
         authority, agency, board, body, commission, instrumentality, court, or
         any political subdivision thereof.

                  "GOVERNMENTAL REQUIREMENT" means any law, statute, code,
         ordinance, order, rule, regulation, judgment, decree, injunction,
         franchise, permit, certificate, license, authorization, or other
         direction or requirement (including but not limited to any of the
         foregoing which relate to Environmental Laws, energy regulations and
         occupational, safety and health standards or controls) of any
         Governmental Authority.

                  "HAZARDOUS MATERIALS" means (a) any chemical, material or
         substance defined as or included in the definition of "hazardous
         substances," "hazardous wastes," "hazardous materials," "extremely
         hazardous waste," "restricted hazardous waste," "toxic pollutants,"
         "contaminants," "pollutants," "toxic substances" or words of similar
         import under any Environmental Laws, (b) any oil, petroleum or
         petroleum derived substance, (c) any flammable substances or
         explosives, (d) any radioactive materials, (e) any other materials or
         pollutants which cause properties to be in violation of any
         Environmental Laws, (f) asbestos in any form which is or could become
         friable, radon gas, urea formaldehyde foam insulation, or transformers
         or other electrical equipment which contain any oil or dielectric fluid
         containing polychlorinated biphenyls, and (g) any other chemical,
         material or substance, exposure to which is prohibited, limited, or
         regulated by any Governmental Authority.

                  "HIGHEST LAWFUL RATE" shall have the meaning assigned to such
         term in Section 8.14 hereof.

                  "INDEBTEDNESS" means, with respect to any Person, the
         principal of, premium, if any, and interest on: (a) indebtedness for
         money borrowed from others whether or not evidenced by notes, bonds,
         debentures or otherwise; (b) indebtedness of another Person guaranteed,
         directly or indirectly, in any manner by such Person, including,
         without limitation, through an agreement, contingent or otherwise, (i)
         to purchase or pay any such indebtedness, (ii) to advance or supply
         funds for the purchase or payment of such indebtedness, (iii) to
         purchase and pay for property if not delivered or pay for services if
         not performed, primarily for the purpose of enabling such other Person
         to make payment of such indebtedness or to assure the owners of the
         indebtedness against loss, or (iv) to maintain working capital, equity
         capital or other financial condition of such other Person so as to
         enable it to pay such indebtedness; (c) all indebtedness secured by any
         Lien upon property owned by such Person, even though such Person has
         not in any manner become liable for the payment of such indebtedness;
         (d) all indebtedness of such Person created or arising under any
         conditional sale, lease (intended primarily as a financing device) or
         other title retention or security agreement with respect to property
         acquired by such Person even though the rights and remedies of the
         seller, lessor or lender under such agreement or lease in the event of
         default may be limited to repossession or sale of such property; (e)
         all obligations of such Person issued or assumed for the deferred
         purchase price of property or services, including all trade credit; (f)
         Capitalized Lease Obligations and the present value of all future lease
         payments under a lease other than Capitalized Lease Obligations; (g)
         all unfunded postretirement and postemployment benefits including,
         without limitation, unfunded pension liabilities; (h) mandatory
         redemption or mandatory dividend rights on common or preferred stock
         (or other equity) (other than rights (if any) of the Furst Group (or
         its assignee) to cause the Company to repurchase Common Stock; (i)
         obligations of discontinued businesses that are subsumed within the
         single-sum amount of the net assets of the discontinued operations
         being held for sale; and (j) all obligations of such Person under or
         with respect to letters of credit if in the aggregate or individually
         such letters of credit equal or exceed $100,000.

                  "INITIAL CONVERSION PRICE" shall have the meaning assigned to
         such term in Section 5.1.2 hereof.

                  "INITIATING HOLDERS" shall have the meaning assigned to such
         term in Section 4.1.11(a) hereof.

                  "INTELLECTUAL PROPERTY" shall have the meaning assigned to
         such term in Section 3.1.21(a) hereof.

                  "INTEREST EXPENSE" shall mean, for any period, the sum of (a)
         the cash interest payments by an obligor made or accrued in accordance
         with GAAP during such period in connection with all of its
         interest-bearing Indebtedness and (b) the interest component of any
         Capitalized Lease Obligations.

                  "INTERMEDIARY" shall have the meaning assigned to such term in
         Section 3.1.17 hereof.

                  "INVESTMENT" means any stock, partnership, or joint venture
         interest or other security, any loan, advance, contribution to capital,
         any acquisitions of real or personal property (other than real and
         personal property acquired in the ordinary course of business), and any
         purchase or commitment or option to purchase stock or other securities
         of or any interest in another Person or any integral part of any
         business or the assets comprising such business or part thereof if the
         aggregate consideration for such purchase, commitment or option was in
         excess of $10,000, and whether existing on the date of this Agreement
         or hereafter made.

                  "LEASE AGREEMENT" means the Lease Agreement dated June 28,
         1994, between Caroline Partners, Ltd. and EC (as successor-in-interest
         to EqualNet Communications, Inc.), as amended by the First Amendment to
         Lease Agreement, dated effective as of August 15, 1994, as amended by
         the Second Amendment to Lease Agreement, dated effective as of
         September 8, 1994, as amended by the Third Amendment to Lease
         Agreement, dated effective as of April 10, 1995, as amended by the
         Fourth Amendment to Lease Agreement, dated effective as of August 14,
         1997, as the same may be further amended, supplemented, or otherwise
         modified from time to time.

                  "LEASEHOLD DEED OF TRUST" means the Leasehold Deed of Trust
         and Security Agreement to be executed by EC, as grantor, to Clifton S.
         Rankin, as trustee, for the benefit of Purchaser, substantially in the
         form of Exhibit E hereto, as the same may be amended, supplemented, or
         otherwise modified from time to time.

                  "LIEN" means, with respect to any Person, any mortgage, deed
         of trust, lien, security interest, pledge, lease, conditional sale
         contract, claim, charge, easement, right of way, assessment,
         restriction and other encumbrance of every kind.

                  "MARGIN STOCK" shall have the meaning assigned to such term in
         Section 3.1.6 hereof.

                  "MATERIAL ADVERSE EFFECT" means any material and adverse
         effect on (i) the assets, liabilities, financial condition, business,
         or operations of the Company and its Subsidiaries on a Consolidated
         basis, or (ii) the ability of the Company and its Subsidiaries on a
         Consolidated basis to carry out their business as at the date of this
         Agreement or meet its obligations under the Operative Documents on a
         timely basis.

                  "MULTIEMPLOYER PLAN" means a Plan defined as such in Section
         3(37) of ERISA to which contributions have been made by the Company or
         any ERISA Affiliate and which is covered by Title IV of ERISA.

                  "NOTE" means the 12% convertible secured note payable by the
         Sellers, as co-obligors, in the original principal amount of
         $1,000,000, substantially in the form of Exhibit A hereto, as the same
         may be amended, supplemented, or otherwise modified from time to time,
         and any notes issued in exchange for such Note.

                  "OPERATIVE DOCUMENTS" means this Agreement, the Leasehold Deed
         of Trust, the Note, the Security Agreement, the Warrant Agreement, and
         the Warrant Certificates.

                  "PERMITS" means all licenses, permits, exceptions, franchises,
         accreditations, privileges, rights, variances, waivers, approvals and
         other authorizations (including, without limitation, those relating to
         environmental matters) of, by or from Governmental Authorities
         necessary for the conduct of the business of the Company and its
         Subsidiaries immediately prior to the Closing and as proposed to be
         conducted by the Company and its Subsidiaries after the Closing.

                  "PERMITTED LIENS" shall have the meaning assigned to such term
         in Section 4.3.2 hereof.

                  "PERSON" means an individual or individuals, a partnership, a
         corporation, a company, a limited liability company, an association, a
         joint stock company, a trust, a joint venture, an unincorporated
         organization, any other form of legal entity, or a Governmental
         Authority.

                  "PIGGY-BACK SECURITIES" shall have the meaning assigned to
         such term in Section 4.1.11(b) hereof.

                  "PIGGY-BACK TERMINATION DATE " shall have the meaning assigned
         to such term in Section 4.1.11(b) hereof.

                  "PLAN" means any multi-employer plan or single employer plan,
         as defined in Section 4001 and subject to Title IV of ERISA, which is
         maintained, or at any time during the five calendar years preceding the
         date of this Agreement was maintained, for employees of the Company or
         a Subsidiary of the Company or an ERISA Affiliate.

                  "PROPERTY" means any interest in any kind of property or
         asset, whether real, personal or mixed, or tangible or intangible.

                  "PROPRIETARY INFORMATION AGREEMENT" shall have the meaning
         assigned to such term in Section 3.1.21(b) hereof.

                  "PURCHASE PRICE" shall have the meaning set forth in Section
         2.1 hereof.

                  "REGISTRABLE SECURITIES" shall have the meaning assigned to
         such term in Section 4.1.11(b) hereof.

                  "RESPONSIBLE OFFICER" means with respect to any Person (other
         than a Person that is an individual), the chairman of the board, the
         president, any executive or senior vice president, the vice president
         of finance, the chief executive officer, the chief operating officer or
         the treasurer of such Person.

                  "RFC AGREEMENT" means the Receivables Sale Agreement dated as
         of June 18, 1997, by and between EC and Receivables Funding
         Corporation.

                  "SECURITIES ACT" shall have the meaning set forth in Section
         3.2.1 hereof.

                  "SECURITY AGREEMENT" means the Security Agreement to be
         executed by each of the Sellers, as debtor, and Purchaser, as secured
         party, substantially in the form of Exhibit D hereto, as the same may
         be amended, supplemented, or otherwise modified from time to time.

                  "SENIOR OBLIGATIONS" means Indebtedness arising under (a) the
         Furst Agreement in an amount not to exceed $3,000,000 (plus interest),
         (b) the RFC Agreement (and the obligations arising thereunder) in an
         amount not to exceed the Purchase Commitment (as defined in the RFC
         Agreement on the date hereof), and (c) the Comerica LOC in an amount
         not to exceed $100,000 (plus related costs and expenses arising in
         connection therewith).
                  "SUBSIDIARY" means, as to any Person, any corporation,
         company, association, partnership, limited liability company or other
         business entity of which such Person or one or more of its Subsidiaries
         or such Person and one or more of its Subsidiaries owns sufficient
         equity or voting interests to enable it or them (as a group)
         ordinarily, in the absence of contingencies, to elect a majority of the
         directors (or Persons performing similar functions) of such entity, and
         any partnership, limited liability company or joint venture if more
         than a 50% interest in the profits of capital thereof is owned by such
         Person or one or more of its Subsidiaries or such Person and one or
         more of its Subsidiaries.

                  "TECHNICAL EMPLOYEES" shall have the meaning assigned to such
         term in Section 3.1.21(b) hereof.

                  "TERMINATION DATE" shall have the meaning assigned to such
         term in Section 4.1.11(a) hereof.

                  "WARRANT AGREEMENT" means the Warrant Agreement to be executed
         by the Company, substantially in the form of Exhibit B hereto, as the
         same may be amended, supplemented, or otherwise modified from time to
         time.

                  "WARRANT CERTIFICATE" means the certificate evidencing
         Warrants, substantially in the form of Exhibit A to the Warrant
         Agreement, as the same may be amended, supplemented, or otherwise
         modified from time to time.

                  "WARRANT HOLDER" means any holder of the Warrants.

                  "WARRANT SHARES" means the shares of common stock issued or
         issuable upon the exercise of the Warrants.

                  "WARRANTS" means warrants to purchase shares of common stock
         of the Company issued to Purchaser pursuant to this Agreement and the
         Warrant Agreement and evidenced by the Warrant Certificate.

                  "WEB AGREEMENT" means that certain Web Site Services and Long
         Distance Agreement between International Center for Entrepreneurial
         Development, Inc. and EC dated August 1, 1997.

                                   ARTICLE II

                     PURCHASE AND SALE OF THE NOTE; CLOSING

         2.1 SALE AND PURCHASE OF NOTE AND WARRANTS. Subject to the satisfaction
of the terms and conditions herein set forth and in reliance upon the respective
representations and warranties of the parties set forth herein or in any
document delivered pursuant hereto, at the Closing, the Sellers agree to sell to
Purchaser, and Purchaser agrees to purchase from the Sellers, the Note and the
Warrants free and clear of any Liens whatsoever. The aggregate purchase price
for the Note and the Warrants is $1,000,000 (the "PURCHASE Price").

         2.2 CLOSING. The Closing of the purchase and sale of the Note and
Warrants will be held at the offices of Vinson & Elkins L.L.P., 1001 Fannin,
3500 First City Tower, Houston, Texas 77002, on October 1, 1997 (the "CLOSING"),
at 10:00 a.m., Houston time, or at such other time, date and place as the
parties may agree (the "CLOSING DATE"). On the Closing Date, the Sellers will
deliver to Purchaser the Note and the Warrant Certificate, each duly executed
and registered in the name of Purchaser, and Purchaser will pay the Purchase
Price by wire transfer of funds to an account designated by the Sellers, which
account shall be (a) designated by the Sellers not less than three Business Days
prior to the Closing Date and (b) at a commercial bank or other financial
institution located in New York, New York.


                                   ARTICLE III

                         REPRESENTATIONS AND WARRANTIES

         3.1 REPRESENTATIONS AND WARRANTIES OF THE SELLERS. In order to induce
Purchaser to enter into this Agreement, each Seller (on its own behalf and on
behalf of its Subsidiaries) represents and warrants to Purchaser (which
representations and warranties will survive the delivery of the Note) that:

                  3.1.1 CORPORATE EXISTENCE. Each Seller and each of its
         Subsidiaries is duly organized, legally existing, and in good standing
         under the laws of the jurisdictions in which it is incorporated and is
         duly qualified as a foreign corporation (or other legal entity) in all
         jurisdictions in which the nature of its business activities or its
         ownership or leasing of property makes such qualification necessary,
         except where the failure to so qualify will not have a Material Adverse
         Effect.

                  3.1.2 CORPORATE POWER AND AUTHORIZATION. Each Seller has the
         requisite corporate power and authority to create and issue the Note
         and the Warrants (as applicable), to execute, deliver, and perform its
         obligations under this Agreement and the other Operative Documents, and
         to consummate the transactions contemplated hereby and thereby. All
         action on each Seller's part requisite for the due creation and
         issuance of the Note and the Warrants (as applicable) and for the due
         execution, delivery, and performance of this Agreement and the other
         Operative Documents to which it is a party has been duly and
         effectively taken.

                  3.1.3 BINDING OBLIGATIONS. This Agreement is and, upon the
         execution, issuance, and delivery by the Sellers, the Note, the
         Warrants, and each of the other Operative Documents will be,
         enforceable in accordance with its terms (except that enforcement may
         be subject to (i) any applicable bankruptcy, insolvency or similar laws
         generally affecting the enforcement of creditors' rights and (ii)
         general principles in equity regardless of whether such enforcement is
         sought in a proceeding in equity or at law).

                  3.1.4 NO VIOLATION. Neither the execution and delivery of this
         Agreement or any of the other Operative Documents to which it is a
         party, the consummation of the transactions provided for herein and
         therein or contemplated hereby or thereby nor the fulfillment by the
         Sellers of the terms hereof or thereof will (a) violate any provision
         of the Charter or the by-laws of any Seller, (b) result in a default,
         give rise to any right of termination, cancellation, acceleration or
         imposition of any Lien upon the Note, or require any consent or
         approval (other than any consent or approval that has previously been
         obtained) under any of the terms, conditions or provisions of any of
         the Permits or any note, bond, mortgage, indenture, loan, distribution
         agreement, license, agreement, lease, or instrument or obligation to
         which any Seller is a party or by which any Seller may be bound (except
         where the failure to obtain such consent or approval will not have a
         Material Adverse Effect), or (c) violate any law, judgment, order,
         writ, injunction, decree, statute, rule, or regulation of any
         Governmental Authority applicable to any Seller or the Note (except
         where such violation will not have a Material Adverse Effect).

                  3.1.5 CONSENTS. All consents, approvals, qualifications,
         orders, or authorizations of, or filings with, any Governmental
         Authority, and all consents under any material contracts, agreements,
         or instruments by which any Seller is bound or to which it is subject,
         and required in connection with each Seller's valid execution,
         delivery, or performance of this Agreement and the other Operative
         Documents to which it is a party and the offer, sale, and delivery of
         the Note and the consummation of any other transaction contemplated on
         the part of the Sellers have been obtained or made.

                  3.1.6 USE OF PROCEEDS. The proceeds from the sale of the Note
         and the Warrants will be used for working capital and other general
         corporate purposes. No part of the proceeds from the sale of the Note
         will be used, directly or indirectly, for the purpose of buying or
         carrying any margin stock within the meaning of Regulation G of the
         Board of Governors of the Federal Reserve System (12 CFR 207), or for
         the purpose of buying or carrying or trading in any securities under
         such circumstances as to involve any Seller in a violation of
         Regulation X of said Board (12 CFR 224) or to involve any broker or
         dealer in a violation of Regulation T of said Board (12 CFR 220). As
         used herein, the terms "margin stock" and "purpose of buying or
         carrying" shall have the meanings assigned to them in said Regulation
         G.

                  3.1.7 FINANCIAL INFORMATION

                  (a) The Consolidated balance sheet of the Company and its
         Subsidiaries as at June 30, 1996, and the related Consolidated
         statements of operations, shareholders' equity and cash flows for the
         12-month period then ended, including in each case the related
         schedules and notes, reported on by Ernst & Young LLP, are complete and
         correct and fairly present in all material respects the Consolidated
         financial position of the Company and its Subsidiaries as at the date
         thereof and the Consolidated results of operations and changes in cash
         flows for such period, in accordance with GAAP.

                  (b) The unaudited Consolidated balance sheet of the Company
         and its Subsidiaries as at March 31, 1997, and the related unaudited
         Consolidated statements of operations, shareholders' equity and cash
         flows for the nine-month period then ended, as included in the
         Company's Quarterly Report on Form 10-Q for the quarterly period ended
         June 30, 1997, true copies of which have been previously delivered to
         Purchaser, are complete and correct and fairly present in all material
         respects the Consolidated financial position of the Company and its
         Subsidiaries as at the date thereof and the Consolidated results of
         operations and changes in cash flows for such period in conformity with
         GAAP, subject only to normal year-end audit adjustments.

                  (c) Since March 31, 1997, there has been no Material Adverse
         Effect.

                  3.1.8 LIABILITIES. Except for liabilities incurred in the
         ordinary course of business, none of the Sellers has any material
         (individually or in the aggregate) liabilities, direct or contingent
         (including but not limited to liability with respect to any Plan)
         except as disclosed or referred to in SCHEDULE 3.1.8 or in the
         financial statements referred to in Section 3.1.7. The Sellers have no
         Indebtedness other than Indebtedness disclosed in SCHEDULE 3.1.8.

                  3.1.9 LITIGATION. Except as discussed in SCHEDULE 3.1.9 or as
         described in any report filed by the Company with the Commission and
         delivered to Purchaser, there is no action, suit, or proceeding, or any
         governmental investigation or any arbitration, in each case pending or,
         to the knowledge of the Sellers, threatened against any Seller or any
         material property of any thereof before any court or arbitrator or any
         governmental or administrative body, agency or official (i) which
         challenges the validity of this Agreement, the Note, or any of the
         Operative Documents or the attachment, perfection, or priority of any
         Operative Document or the Liens to be created thereunder; or (ii)
         which, if adversely determined, would have a Material Adverse Effect.

                  3.1.10 COMPLIANCE WITH ERISA. Each Plan is in substantial
         compliance with ERISA, no Plan has an accumulated or waived funding
         deficiency within the meaning of Section 412 or Section 418(B) of the
         Code, no proceedings have been instituted to terminate any Plan, and
         except as disclosed in SCHEDULE 3.1.10, none of the Sellers nor any
         ERISA Affiliate has incurred any material liability to or on account of
         a Plan under ERISA, and except as disclosed in SCHEDULE 3.1.10, no
         condition exists which presents a material risk to any Seller of
         incurring such a liability.

                  3.1.11 TAXES; GOVERNMENTAL CHARGES. Each of the Sellers has
         filed all tax returns and reports required to be filed and has paid all
         taxes, assessments, fees, and other governmental charges levied upon
         any of them or upon any of their respective properties or income which
         are due and payable, including interest and penalties, or has provided
         adequate reserves for the payment thereof, except where the failure to
         so file, pay, or reserve would not have a Material Adverse Effect.

                  3.1.12 DEFAULTS. Except as disclosed in SCHEDULE 3.1.12, none
         of the Sellers is in default, nor has any event or circumstance
         occurred which, but for the passage of time or the giving of notice, or
         both, would constitute a default (in any respect which may have a
         Material Adverse Effect) under any loan or credit agreement, indenture,
         mortgage, deed of trust, security agreement, or other instrument or
         agreement evidencing or pertaining to any Indebtedness of any Seller or
         any Subsidiary, or under any material agreement or instrument to which
         any Seller or any Subsidiary is a party or by which any Seller or any
         Subsidiary is bound. No default hereunder has occurred and is
         continuing.

                  3.1.13 COMPLIANCE WITH THE LAW. None of the Sellers (a) is in
         violation of any Governmental Requirement or (b) has failed to obtain
         any license, permit, franchise, or other governmental authorization
         necessary to the ownership of any of their respective properties or the
         conduct of their respective business, which violation or failure would
         have (in the event that such a violation or failure were asserted by
         any Person through appropriate action) a Material Adverse Effect.

                  3.1.14 INTENTIONALLY OMITTED.

                  3.1.15 INVESTMENT COMPANY ACT. None of the Sellers is an
         "investment company" or a company "controlled" by an "investment
         company," within the meaning of the Investment Company Act of 1940, as
         amended.

                  3.1.16 PUBLIC UTILITY HOLDING COMPANY ACT. None of the Sellers
         is a "holding company," or a "subsidiary company" of a "holding
         company," or an "affiliate" of a "holding company" or of a "subsidiary
         company" of a "holding company," or a "public utility" within the
         meaning of the Public Utility Holding Company Act of 1935, as amended.

                  3.1.17 FEES AND COMMISSIONS. None of the Sellers nor, to the
         knowledge of any of the Sellers, their Affiliates has retained a
         finder, broker, agent, financial advisor, or other intermediary
         (collectively, an "INTERMEDIARY") in connection with the transactions
         contemplated by this Agreement and the other Operative Documents, and
         the Sellers agree, jointly and severally, to pay and to indemnify and
         hold harmless Purchaser from and against liability for any compensation
         to any Intermediary and the fees and expenses of defending against such
         liability or alleged liability.

                  3.1.18 DISCLOSURE. The Company's filings made pursuant to the
         Securities Exchange Act of 1934, as amended and listed on SCHEDULE
         3.1.18 hereto as of their respective dates, do not contain any untrue
         statement of a material fact and do not omit to state any material fact
         necessary in order to make the statements contained therein or herein
         not misleading in the light of the circumstances under which they were
         made.

                  3.1.19 STRUCTURE; CAPITALIZATION.

                  (a) SCHEDULE 3.1.19 contains (except has noted therein) a
         complete and correct list of the Company's Subsidiaries, showing, as to
         each Subsidiary, the correct name thereof, the jurisdiction of its
         organization, and the percentage of shares of each class of its capital
         stock or similar equity interests outstanding owned by the Company and
         each other Subsidiary.

                  (b) All of the outstanding shares of capital stock or similar
         equity interests of each Subsidiary shown in SCHEDULE 3.1.19 as being
         owned by the Company and its Subsidiaries have been validly issued, are
         fully paid and nonassessable, and are owned by the Company or such
         other Subsidiaries free and clear of any Lien (except as otherwise
         disclosed in SCHEDULE 3.1.19.

                  (c) No Subsidiary of the Company is a party to, or otherwise
         subject to any legal restriction of any agreement (other than this
         Agreement and customary limitations imposed by corporate law statutes)
         restricting the ability of such Subsidiary to pay dividends out of
         profits or make any other similar distributions of profits to the
         Company or any of its Subsidiaries that owns outstanding shares of
         capital stock or similar equity interests of such Subsidiary.

                  (d) As of the Closing Date and after giving effect to the
         transactions contemplated in this Agreement (i) the Company's
         authorized capital stock will consist of 21,000,000 shares, of which
         20,000,000 are designated Common Stock; (ii) 6,173,750 shares of Common
         Stock, issued and outstanding and 2,317,900 shares are or will be
         reserved for issuance in connection with the Company's outstanding
         warrants and stock options (200,000 of which will be reserved for
         issuance in connection with the Warrants), all of which, when issued in
         accordance with the terms of such warrants and stock options, will be
         validly issued, fully paid, and non-assessable; (iii) no shares of
         Common Stock are owned or held by or for the account of the Company or
         any of its Subsidiaries (except as disclosed in the financial
         statements described in Section 3.1.7); (iv) except as disclosed on
         SCHEDULE 3.1.19, neither the Company nor any of its Subsidiaries has
         outstanding any stock or other securities convertible into or
         exchangeable for any shares of capital stock, any rights to subscribe
         for or to purchase or any options for the purchase of, or any
         agreements providing for the issuance (contingent or otherwise) of, or
         any calls, commitments or claims of any other character relating to the
         issuance of, any capital stock, or any stock or securities convertible
         into or exchangeable for any capital stock which have not been waived
         (other than as contemplated by this Agreement); and (v) except as
         disclosed in SCHEDULE 3.1.19, neither the Company nor any of its
         Subsidiaries is subject to any obligation (contingent or otherwise) to
         repurchase or otherwise acquire or retire any shares of capital stock.

                  3.1.20 ENVIRONMENTAL MATTERS

                  (a) Neither any property of any Seller nor the operations
         conducted thereon violate any order of any court or Governmental
         Authority or Environmental Laws which violations could reasonably be
         expected to result in liability in excess of $250,000 or which could
         reasonably be expected to result in remedial obligations in excess of
         $250,000, assuming disclosure to the applicable Governmental Authority
         of all relevant facts, conditions and circumstances, if any, pertaining
         to the relevant property.

                  (b) Without limitation of clause (a) above, no property of any
         Seller nor the operations currently conducted thereon or by any prior
         owner or operator of such property or operation, are in violation of or
         subject to any existing, pending or, to the knowledge of any Seller,
         threatened action, suit, investigation, inquiry or proceeding by or
         before any court or Governmental Authority or to any remedial
         obligations under Environmental Laws which could reasonably be expected
         to result in liability in excess of $250,000, or which could reasonably
         be expected to result in remedial obligations in excess of $250,000
         assuming disclosure to the applicable Governmental Authority of all
         relevant facts, conditions and circumstances, if any, pertaining to the
         relevant property.

                  (c) All notices, permits, licenses or similar authorizations,
         if any, required to be obtained or filed in connection with the
         operation or use of any and all property of each Seller and its
         Subsidiaries, including but not limited to past or present treatment,
         storage, disposal or release of Hazardous Materials into the
         environment, have been duly obtained or filed, except where the failure
         to so obtain or file would not have a Material Adverse Effect.


                  3.1.21 INTELLECTUAL PROPERTY AND OTHER INTANGIBLE ASSETS.

                  (a) The Sellers (i) own or have the right to use, free and
         clear of all liens, claims, and restrictions, all patents, trademarks,
         service marks, trade names, and copyrights, and all applications,
         licenses, and rights with respect to the foregoing, and all trade
         secrets, including know-how, inventions, designs, processes, works of
         authorship, computer programs, and technical data and information
         (collectively, "INTELLECTUAL PROPERTY") used and sufficient for use in
         the conduct of its business as now conducted and/or as presently
         proposed to be conducted (including, without limitation, the
         development, manufacture, operation, and sale of all products and
         services sold or proposed to be sold by the Sellers during the next 24
         months following the date of this Agreement) without infringing upon or
         violating any right, lien, or claim of others, including, without
         limitation, former employees and former employers of its past and
         present employees, and (ii) except described in SCHEDULE 3.1.21, is not
         obligated or under any liability whatsoever to make any payments by way
         of royalties, fees, or otherwise to any owner or licensee of, or other
         claimant to, any patent, trademark, service mark, trade name,
         copyright, or other intangible asset, with respect to the use thereof
         or in connection with the conduct of its business or otherwise.

                  (b) Any and all Intellectual Property of any kind, relating to
         the business of the Sellers, currently being developed, or developed in
         the future, by any employee of the Sellers while in the employ of the
         Sellers shall be the property solely of the Sellers. The Sellers have
         taken security measures to protect the secrecy, confidentiality, and
         value of all Intellectual Property, which measures are reasonable and
         customary in the industry in which the Sellers operate. The Sellers'
         employees and other persons who, either alone or in concert with
         others, developed, invented, discovered, derived, programmed, or
         designed the Intellectual Property (the "TECHNICAL EMPLOYEES"), or who
         have knowledge of or access to information about the Intellectual
         Property, have entered into a written agreement with the Sellers, in
         form and substance satisfactory to the Company's management (the
         "PROPRIETARY INFORMATION AGREEMENT") regarding ownership and treatment
         of the Intellectual Property.

                  (c) Except as described in SCHEDULE 3.1.21,, none of the
         Sellers has received any communications alleging that such Seller has
         violated, or by conducting its business as proposed would violate, any
         of the patents, trademarks, service marks, trade names, copyrights, or
         trade secrets or other proprietary rights of any other Person or
         entity. None of the Sellers' employees is obligated under any contract
         (including licenses, covenants, or commitments of any nature) or other
         agreement, or subject to any judgment, decree, or order of any court or
         administrative agency, that would interfere with the use of such
         employee's best efforts to promote the interests of the Sellers or that
         would conflict with the Sellers' business as presently conducted and as
         proposed to be conducted. Neither the execution nor delivery of this
         Agreement, nor the carrying on of the Sellers' business by the
         employees of the Sellers, nor the conduct of the Sellers' business as
         proposed to be conducted, will conflict with or result in a breach of
         the terms, conditions, or provisions of, or constitute a default under,
         any contract, covenant, or instrument under which any of such employees
         is now obligated. It is not, and will not become, necessary to utilize
         any inventions of any of the Sellers' employees (or people the Sellers
         currently intends to hire) made prior to their employment by the
         Sellers other than those that have been assigned to the Sellers
         pursuant to the Proprietary Information Agreement signed by such
         employee.

                  3.1.22 INSURANCE COVERAGE. The properties of the Sellers are
         insured for the benefit of such Seller in amounts deemed adequate by
         the Company's management against risks usually insured against by
         Persons operating businesses similar to those of the Sellers in the
         localities where such properties are located.

         3.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. To induce the Sellers
to enter into this Agreement, Purchaser represents and warrants to the Sellers
that:

                  3.2.1 PURCHASE FOR INVESTMENT.

                  (a) Purchaser is acquiring the Note and Warrants for its own
         account and not with a view to the public resale or distribution of all
         or any part thereof in any transaction which would constitute a
         "distribution" within the meaning of the Securities Act of 1933, as
         amended (the "SECURITIES ACT").

                  (b) Purchaser acknowledges that the Note, the shares of Common
         Stock issuable upon conversion of the Note, the Warrants, and the
         Warrant Shares have not been registered under the Securities Act.

                  (c) Purchaser is an "accredited investor" within the meaning
         of Rule 501 under Regulation D promulgated under the Securities Act, is
         experienced in evaluating investments in companies such as the Company,
         has such knowledge and experience in financial and business matters as
         to be capable of evaluating the merits and risks of its investment and
         has the ability to bear the entire economic risk of its investment.
         Purchaser has made its own evaluation of its investment in the Note and
         the Warrants, based upon such information as is available to it and
         without reliance upon the Company or any other person or entity, and
         Purchaser agrees that neither the Company nor any other person or
         entity has any obligation to furnish any additional information to
         Purchaser except as expressly set forth herein.

                  (d) Purchaser acknowledges that the Note, the shares of Common
         Stock issuable upon conversion of the Note, the Warrants, and the
         Warrant Shares may not be sold, transferred, pledged, hypothecated, or
         otherwise disposed of without registration under the Securities Act or
         an exemption therefrom, and that in the absence of an effective
         registration statement covering the Note, the shares of Common Stock
         issuable upon conversion of the Note, the Warrants, or the Warrant
         Shares or an available exemption from registration under the Securities
         Act, the Note, the shares of Common Stock issuable upon conversion of
         the Note, the Warrants, and the Warrant Shares must be held
         indefinitely.

                  (e) Purchaser agrees that the Note, the shares of Common Stock
         issuable upon conversion of the Note, the Warrants, and the Warrant
         Shares shall bear legends in substantially the following form:

                  "THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
                  INVESTMENT AND MAY NOT BE SOLD OR OFFERED FOR SALE OR
                  OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO (i) AN EFFECTIVE
                  REGISTRATION STATEMENT UNDER THE SECURITIES ACT, OR (ii) AN
                  APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
                  ACT. ANY SALE PURSUANT TO CLAUSE (ii) OF THE PRECEDING
                  SENTENCE MUST BE ACCOMPANIED BY AN OPINION OF COUNSEL
                  REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH
                  EXEMPTION FROM REGISTRATION IS AVAILABLE IN CONNECTION WITH
                  SUCH SALE."

                  3.2.2 AUTHORIZATION; NO CONFLICT. Purchaser has all requisite
         power and authority to enter into this Agreement and to carry out and
         perform its obligations under the terms of this Agreement. This
         Agreement is a legal, valid, and binding obligation of Purchaser. The
         execution, delivery, and performance of this Agreement by Purchaser and
         the consummation by Purchaser of the transactions contemplated hereby
         will not conflict with or result in a default under the terms of any
         material contract, agreement, obligation, commitment, or organizational
         document applicable to Purchaser.

                                   ARTICLE IV

                                    COVENANTS

         The Sellers covenant and agree (each on its own behalf and on behalf of
each of its Subsidiaries, as applicable) as set forth below, and acknowledges
that Purchaser is entering into this Agreement on the expectation that the
Sellers and their Subsidiaries honor such covenants and agreements.

         4.1 AFFIRMATIVE COVENANTS. So long as any principal or other amounts
due and owing remain outstanding under the Note, the Sellers will at all times
comply with the following covenants:

                  4.1.1 COMPLIANCE WITH LAWS. Each Seller will, and will cause
         its Subsidiaries to, comply in all material respects with all
         applicable Governmental Requirements.

                  4.1.2 INSURANCE. Each Seller will, and will cause its
         Subsidiaries to, maintain with financially sound and reputable
         insurers, insurance with respect to its properties and business against
         such liabilities, casualties, risks and contingencies and in such types
         and amounts as is customary in the case of Persons engaged in the same
         or similar businesses and similarly situated. Upon request of
         Purchaser, each Seller will furnish or cause to be furnished to
         Purchaser from time to time a summary of the insurance coverage of such
         Seller in form and substance satisfactory to Purchaser and if requested
         will furnish Purchaser copies of the applicable policies.

                  4.1.3 PAYMENT OF TAXES AND CLAIMS. Each Seller agrees to pay
         or cause to be paid all taxes, assessments, and other governmental
         charges levied upon any of its assets or those of its Subsidiaries or
         in respect of its or their respective franchises, businesses, income or
         profits, all trade accounts payable in accordance with the Company's
         usual and customary business terms, and all claims for work, labor, or
         materials, which if unpaid might become a lien or charge upon any asset
         of such Seller or any of its Subsidiaries, before the same become
         delinquent, except that (unless and until foreclosure, sale or other
         similar proceedings shall have been commenced) no such charge need be
         paid if being contested in good faith and by appropriate measures
         promptly initiated and diligently conducted if (a) such reserve or
         other appropriate provision, if any, as shall be required by GAAP shall
         have been made therefor, and (b) such contest does not have a Material
         Adverse Effect on the ability of such Seller or any of its Subsidiaries
         to pay any Indebtedness and no material assets are in imminent danger
         of forfeiture.

                  4.1.4    PERFORMANCE OF OBLIGATIONS.

                  (a) Each Seller will, and will cause its Subsidiaries to, use
         its commercially reasonable efforts to pay, discharge, or otherwise
         satisfy at or before maturity or before they become delinquent, as the
         case may be, all of its obligations of whatever nature, except when the
         amount or validity thereof is currently being contested in good faith
         by appropriate proceedings and reserves, if any, as shall be required
         by GAAP with respect thereto have been provided on the books of such
         Seller or its Subsidiaries, as the case may be, and except where the
         failure to so pay, discharge or satisfy such obligations would not have
         a Material Adverse Effect.

                  (b) The Sellers will pay the Note according to the reading,
         tenor, and effect thereof.

                  4.1.5 CORPORATE EXISTENCE; PROPERTY. Each Seller (i) will do
         or cause to be done all things reasonably necessary to preserve and
         keep in full force and effect the corporate existence and material
         rights of such Seller and all of its Subsidiaries, (ii) will cause its
         properties and the properties of its Subsidiaries used and useful in
         the conduct of their respective businesses to be maintained and kept in
         good condition, repair and working order and will use its commercially
         reasonable efforts to cause to be made all necessary repairs, renewals,
         replacements, betterments and improvements thereto, and (iii) will, and
         will cause each of its Subsidiaries to, qualify and remain qualified to
         conduct business in each jurisdiction where the nature of the business
         or the ownership of property by such Seller or such Subsidiary may
         require such qualification and where the failure to so qualify would
         have a Material Adverse Effect.

                  4.1.6 USE OF PROCEEDS. The Seller shall use the proceeds from
         the sale of the Note and the Warrants for the purposes and in the
         manner described in Section 3.1.6.

                  4.1.7 ENVIRONMENTAL MATTERS. Each Seller and its Subsidiaries
         shall comply with all applicable Environmental Laws the failure to
         comply with which would have a Material Adverse Effect. If any Seller
         or its Subsidiaries shall receive written notice that there exists a
         violation of Environmental Law with respect to its operations or any
         real property owned, formerly owned, used, or leased thereby, which
         violation could have a Material Adverse Effect, such Seller shall
         immediately notify Purchaser in writing. Furthermore, if any Seller or
         its Subsidiaries shall receive written notice that there exists a
         violation of Environmental Law with respect to its operations or any
         real property owned, formerly owned, used or leased thereby, which
         violation could have a Material Adverse Effect, such Seller shall
         within the time period permitted by the applicable Governmental
         Authority (unless otherwise contested by such Seller in good faith)
         remove or remedy such violation in accordance with all applicable
         Environmental Laws unless the Board of Directors of such Seller
         determines that it would be in the best interest of such Seller to
         delay the remedy of such violation, so long as no Material Adverse
         Effect is suffered by such Seller during such delay.

                  4.1.8 FEES AND EXPENSES.

                  (a) The Sellers will bear all of their expenses in connection
         with this Agreement and the other Operative Documents and the
         transactions contemplated hereby and thereby, and will also reimburse
         Purchaser for or pay any expenses Purchaser incurs (including, without
         limitation, the fees incurred by Purchaser in connection with due
         diligence and the reasonable legal fees) in connection with the
         negotiation of and closing under this Agreement and any other Operative
         Documents and the transactions contemplated hereby and thereby (up to a
         maximum of $25,000), including, without limitation, all expenses
         incurred in connection with (i) the preparation of, negotiation of,
         closing under, amendment of, waiver under, or enforcement of, or the
         preservation of any rights under, this Agreement or any other Operative
         Documents, (ii) any stamp and other taxes (other than income taxes)
         payable with respect to this Agreement or the other Operative
         Documents, and (iii) any filing with any Governmental Authority with
         respect to Purchaser's purchase of the Note and the Warrants.

                  (b) The Sellers will also bear the legal fees and
         disbursements of counsel (up to a maximum of $25,000) to Purchaser in
         connection with any mutually agreed upon amendments to this Agreement
         or any of the other Operative Documents, or any amendments proposed by
         the Sellers whether or not effected, or in connection with the
         consummation of any future transaction related thereto.

                  4.1.9 BOOKS AND RECORDS; INSPECTION OF PROPERTY. Each Seller
         will keep, and will cause each of its Subsidiaries to keep, proper
         books of record and accounts in which full, true and correct entries in
         conformity with GAAP shall be made of all dealings and transactions in
         relation to its business and activities. Each Seller covenants that it
         will permit any Person representing Purchaser and designated in writing
         by such Investors, at the Investors' expense, to visit and inspect any
         of the properties of such Seller and its Subsidiaries, to examine the
         corporate, financial, and operating records of such Seller and its
         Subsidiaries and make copies thereof or extracts therefrom and to
         discuss the affairs, finances, and accounts of any of such corporations
         with the directors, officers and independent accountants of such Seller
         and its Subsidiaries, all at such reasonable times and as often as
         Purchaser may reasonably request.

                  4.1.10 STOCK TO BE RESERVED. The Company covenants that all
         shares of Common Stock that may be issued upon the exercise of the
         Warrants will, upon issuance and upon full payment therefor in
         accordance with the terms thereof, be validly issued, fully paid, and
         non-assessable and free from all taxes, liens, and charges with respect
         to the issuance thereof. The Company further covenants that during the
         period within which the Warrants may be exercised, the Company will at
         all times have authorized and reserved a sufficient number of shares of
         Common Stock to permit the exercise of the Warrants.

                  4.1.11 REGISTRATION RIGHTS.

                  (A) DEMAND REGISTRATION RIGHTS. The Company covenants and
         agrees with the Purchaser and any subsequent holders of the Note, the
         Warrants and/or Warrant Shares that, at any time after the earliest of
         (i) the Conversion Date, (ii) the date on which the Warrants (or any
         portion thereof) are exercised, or (iii) the maturity date of the Note,
         within 60 days after receipt of a written request from the Purchaser
         (the "INITIATING HOLDERS"), the Company shall file a registration
         statement (and use its commercially reasonable efforts to cause such
         registration statement to become effective under the Securities Act)
         with respect to the offering and sale or other disposition of any
         number of shares of Common Stock issued upon conversion of the Note or
         Warrant Shares or both (all such securities, the "DEMAND SECURITIES");
         PROVIDED that the Company may defer its obligations under this Section
         4.1.11(a) for a period of no more than 90 days if the Company's Board
         of Directors adopts a resolution that filing such a registration
         statement would require a public disclosure by the Company which
         disclosure would have material adverse consequences for the Company,
         such as a disclosure regarding a pending material acquisition by the
         Company; PROVIDED FURTHER that once such information has been publicly
         disclosed, then the Company shall promptly proceed to fulfill its
         obligations under this Section 4.1.11(a). The Company shall
         continuously maintain the effectiveness of such registration statement
         for the lesser of (i) 180 days after the effective date of the
         registration statement or (ii) the consummation of the distribution by
         the holders of the Demand Securities covered by such registration
         statement (the "TERMINATION DATE"); PROVIDED, HOWEVER, that if at the
         Termination Date, the Demand Securities are covered by a registration
         statement which also covers other securities and which is required to
         remain in effect beyond the Termination Date, the Company shall
         maintain in effect such registration statement as it relates to the
         Demand Securities for so long as such registration statement (or any
         subsequent registration statement) remains or is required to remain in
         effect for any of such other securities. The Company shall not be
         required to comply with more than two requests for registration
         pursuant to this Section 4.1.11(a). In addition, the Company shall be
         required to effect up to three Short-form Registrations at the request
         of Purchaser. All expenses of such registration shall be borne by the
         Company, except that underwriting commissions and expenses attributable
         to the Demand Securities and fees and disbursements of counsel and
         other advisors (if any) to the Initiating Holders will be borne by such
         holders requesting that such securities be offered.

                  If the Initiating Holders intend to distribute the Demand
         Securities covered by their request by means of an underwriting, they
         shall so advise the Company as a part of their request made pursuant to
         this Section 4.1.11(a). The right of any other holder to registration
         pursuant to this Section 4.1.11(a) shall be conditioned upon such
         holder's participation in such underwriting and the inclusion of such
         holder's Demand Securities in the underwriting (unless otherwise
         mutually agreed by a majority in interest of the Initiating Holders and
         such holder with respect to such participation and inclusion) to the
         extent provided herein. A holder may elect to include in such
         underwriting all or a part of the Demand Securities he holds. If other
         holders of registration rights request inclusion in any registration
         statement pursuant to this Section 4.1.11(a), such holders may be
         included in the underwriting conditioned on their acceptance of the
         further applicable provisions of this Section 4.1.11(a). The Company
         shall (together with other holders proposed to distribute their
         securities through such underwriting) enter into an underwriting
         agreement in customary form with a representative of the underwriter or
         underwriters selected for such underwriting by a majority in interest
         of the Initiating Holders. If the representative advises the Initiating
         Holders in writing that marketing factors require a limitation on the
         number of shares to be underwritten, then securities held by holders
         other than the Initiating Holders shall be excluded from such
         registration to the extent so required by such limitation.

                  (B) PIGGY-BACK REGISTRATION RIGHTS. The Company covenants and
         agrees with the Purchaser and any subsequent holders of the Note, the
         Warrants and/or Warrant Shares that, in the event the Company proposes
         to file a registration statement under the Securities Act with respect
         to a firm commitment offering of Common Stock (other than in connection
         with an exchange offer or a registration statement on Form S-4 or S-8
         or other similar registration statements not available to register
         securities so requested to be included), the Company shall in each case
         give written notice of such proposed filing to the Purchaser at least
         30 days before the earlier of the anticipated or the actual effective
         date of the registration statement and at least ten days before the
         initial filing of such registration statement and such notice shall
         offer to such holders the opportunity to include in such registration
         statement such number of shares of Common Stock issued upon conversion
         of the Note or Warrant Shares or both (the "PIGGY-BACK SECURITIES", and
         together with the securities referred to in Section 4.1.11(a) above,
         the "REGISTRABLE SECURITIES") as they may request. Holders desiring
         inclusion of Piggy-back Securities in such registration statement shall
         so inform the Company by written notice, given within ten days of the
         giving of such notice by the Company in accordance with the provisions
         of Section 8.11 hereof. The Company shall permit, or shall cause the
         managing underwriter of a proposed offering to permit, the holders of
         Piggy-back Securities requested to be included in the registration to
         include such securities in the proposed offering on the same terms and
         conditions as applicable to securities of the Company, if any, included
         therein for the account of any person other than the Company and the
         holders. Notwithstanding the foregoing, if any such managing
         underwriter shall advise the Company in writing that, in its opinion,
         the distribution of securities by holders thereof, including all or a
         portion of the Piggy-back Securities, requested to be included in the
         registration concurrently with the securities being registered by the
         Company, would materially adversely affect the distribution of such
         securities by the Company for its own account, then the holders of the
         Registrable Securities shall delay their offering and sale of the
         Registrable Securities (or the portions thereof so designated by such
         managing underwriter) for such period, not to exceed 120 days, as the
         managing underwriter shall request, provided that if any other
         securities are included in such registration statement for the account
         of any person other than the Company and the holders of Piggy-back
         Securities, then such securities, including the Piggy-back Securities,
         so included shall be apportioned among holders who wish to be included
         therein pro rata according to amounts so requested to be included by
         each such person. No such delay shall in any event impair any right
         granted hereunder to make subsequent requests for inclusion pursuant to
         the terms of this Section 4.1.11(b). The Company shall continuously
         maintain in effect any registration statement with respect to which the
         Piggy-back Securities have been requested to be included (and so
         included) for a period of not less than 180 days after the
         effectiveness of such registration statement ("PIGGY-BACK TERMINATION
         DATE"); PROVIDED, HOWEVER, that if at the Piggy-back Termination Date
         the Piggy-back Securities are covered by a registration statement which
         is, or is required to remain, in effect beyond the Piggy-back
         Termination Date, the Company shall maintain in effect the registration
         statement as it relates to the Piggy-back Securities for so long as
         such registration statement remains or is required to remain in effect
         for any of such other securities. All expenses of such registration
         shall be borne by the Company, except that underwriting commissions and
         expenses attributable to the Piggy-back Securities and fees and
         distributions of counsel and other advisors (if any) to the holders
         requesting that the Piggy-back Securities be offered will be borne by
         such holders.

                  (C) OTHER MATTERS. In connection with the registration of
         Registrable Securities in accordance with Sections 4.1.11(a) or (b)
         above, the Company agrees to:

                           (i) Use its commercially reasonable efforts to
                  register or qualify the Registrable Securities for offer or
                  sale under state securities or Blue Sky laws of such
                  jurisdictions in which the holders of such Registrable
                  Securities shall designate; PROVIDED that in no event shall
                  the Company be obligated to qualify to do business in any
                  jurisdiction where it is not now so qualified or to take any
                  action which would subject it to general service of process in
                  any jurisdiction where it is not now so subject, and use its
                  commercially reasonable efforts to do any and all other acts
                  and things which may be necessary or advisable to enable the
                  holders of Registrable Securities to consummate the sale,
                  transfer, or other disposition of such securities in any
                  jurisdiction;

                           (ii) Enter into indemnity and contribution
                  agreements, each in customary form, with each underwriter, if
                  any, and each holder of Registrable Securities included in
                  such registration statement; and, if requested, enter into an
                  underwriting agreement containing customary representations,
                  warranties, covenants, allocation of expenses, and customary
                  closing conditions including, but not limited to, opinions of
                  counsel and accountants' cold comfort letters with any
                  underwriter who participates in the offering of Registrable
                  Securities;

                           (iii) Pay all expenses in connection with the
                  registration of the Registrable Securities under the
                  Securities Act and compliance with the provisions of clause
                  (i) above, except to the extent otherwise provided in Sections
                  4.1.11(a) and (b); and

                           (iv) List the Registrable Securities on each
                  securities exchange, if any, on which the Common Stock is
                  listed.

                  In connection with the registration of Registrable Securities
         in accordance with Paragraph (b) above, the holders agree to enter into
         an underwriting agreement containing customary representations,
         warranties, covenants, allocation of expenses (not otherwise
         inconsistent with this Agreement), and customary closing conditions,
         with any underwriter who participates in the offering of Registrable
         Securities.

                  (D) RESTRICTIONS ON PUBLIC SALE BY THE COMPANY. The Company
         agrees not to effect any public sale or distribution of any shares of
         Common Stock or any securities convertible into or exchangeable or
         exercisable for such shares of Common Stock (or any option or other
         right for such securities), except for any securities that may be
         issued to the holders pursuant to the Note or the Warrants during the
         15-day period prior to, and during the 60-day period beginning on the
         effective date of any registration statement under which the
         Registrable Securities are registered in accordance with Section
         4.1.11(a) (other than as part of such registration).

                  (E) RULE 144. With a view to making available to Purchaser the
         benefits of certain rules of the Securities and Exchange Commission
         (the "COMMISSION") that may permit the sale of Registrable Securities
         to the public without registration, the Company hereby covenants and
         agrees to use its commercially reasonable best efforts to: (i) file in
         a timely manner all reports and other documents required to be filed by
         it under the Securities Act and the Securities Exchange Act of 1934, as
         amended, and the rules and regulations adopted by the Commission
         thereunder necessary to permit sales under Rule 144 under the
         Securities Act, and the Company will take such further action to the
         extent reasonably required from time to time to permit the Purchaser to
         sell Registrable Securities (whether or not any such securities have
         been the subject of a demand or piggy-back request under Section
         4.1.11(a) and (b) hereof) without registration under the Securities Act
         within the limitation of the exemptions provided by (A) Rule 144 under
         the Securities Act, as such Rule may be amended from time to time, or
         (B) any similar rule or regulation hereafter adopted by the Commission
         and (ii) promptly furnish Purchaser a copy of all such reports and
         documents upon request. Upon the request of Purchaser, the Company will
         deliver to Purchaser a written statement as to whether it has complied
         with such requirements.

                  (F) OTHER REGISTRATION RIGHTS. The Company hereby agrees that
         it shall not grant any additional registration rights with respect to
         shares of its Common Stock, warrants to purchase its Common Stock or
         securities convertible into its Common Stock, which are inconsistent
         with the provisions of this Agreement.

                  4.1.12 FURTHER ASSURANCES. Each Seller covenants that it shall
         cooperate with Purchaser and execute such further instruments and
         documents as Purchaser shall reasonably request to carry out to the
         satisfaction of Purchaser the transactions contemplated by this
         Agreement.

         4.2 REPORTING COVENANTS. So long as any principal or other amounts due
and owing under the Note remain outstanding, the Sellers will furnish to
Purchaser:

                  4.2.1 ANNUAL FINANCIAL STATEMENTS. As soon as available and in
         any event within 120 days after the end of each fiscal year of the
         Company occurring after the date hereof, a Consolidated and
         consolidating balance sheet of the Company and its Subsidiaries as at
         the end of such year and the related Consolidated and consolidating
         statements of operations, shareholders' equity and cash flows of the
         Company and its Subsidiaries for such fiscal year, setting forth in
         each case in comparative form the figures for the previous fiscal year,
         all in reasonable detail and accompanied by a report thereon of Ernst &
         Young LLP or other independent public accountants of comparable
         recognized national standing, which such report shall state that such
         Consolidated Financial Statements present fairly the Consolidated
         financial position as at the end of such fiscal year, and the
         Consolidated results of operations and cash flows for such fiscal year,
         in accordance with GAAP, of the Company and its Subsidiaries.

                  4.2.2 QUARTERLY FINANCIAL STATEMENTS. As soon as available and
         in any event within 50 days after the end of each fiscal quarter of the
         Company occurring after the date hereof (other than the fourth quarter
         of each fiscal year of the Company), an unaudited Consolidated and
         consolidating balance sheet of the Company and its Subsidiaries as at
         the end of such quarter and the related Consolidated and consolidating
         statements of operations, shareholders' equity and cash flows of the
         Company and its Subsidiaries for such fiscal quarter and for the
         portion of the Company's fiscal year ended at the end of such quarter,
         setting forth in each case in comparative form the figures for the
         corresponding quarter and the corresponding portion of the Company's
         previous fiscal year, all in reasonable detail and certified by a
         Responsible Officer of the Company that they are complete and correct
         and that they fairly present in all material respects the Consolidated
         financial position as at the end of such fiscal quarter, and the
         Consolidated results of operations and cash flows for such fiscal
         quarter and such portion of the Company's fiscal year, in accordance
         with GAAP, of the Company and its Subsidiaries (subject to normal,
         year-end audit adjustments).

                  4.2.3 COMPLIANCE CERTIFICATE. Together with the Financial
         Statements required pursuant to Sections 4.2.1 and 4.2.2 above, a
         certificate of a Responsible Officer of the Company, substantially in
         the form of Exhibit F, together with or accompanied by such financial
         or other details, information, and material as Purchaser may reasonably
         request to evidence such compliance.

                  4.2.4 AUDITORS' NO DEFAULT CERTIFICATE; MANAGEMENT LETTERS.
         Together with the Financial Statements required pursuant to Section
         4.2.1 above, a certificate of the accountants who prepared the annual
         report referred to therein, to the effect that, in making the review
         necessary for their certification of such Financial Statements, they
         have obtained no knowledge of any Default or Event of Default, or if
         they have obtained knowledge of any Default or Event of Default,
         specifying the nature and period of existence thereof. Promptly
         following the preparation thereof, copies of each management letter
         formally issued to the Company by such accountants (together with any
         response thereto prepared by the Company).

                  4.2.5 NOTICE OF CERTAIN EVENTS. Promptly after a Responsible
         Officer obtains knowledge of the receipt or occurrence of any of the
         following, a certificate of a Responsible Officer of any Seller
         specifying (i) any official notice of any violation, non-compliance, or
         claim made by any Governmental Authority pertaining to all or any part
         of the properties of such Seller or any of its Subsidiaries (which
         violation, non-compliance, or claim could have a Material Adverse
         Effect); (ii) any event which constitutes a default or an Event of
         Default, together with a detailed statement specifying the nature
         thereof and the steps being taken to cure such default or Event of
         Default; (iii) the receipt of any notice from, or the taking of any
         other action by, the holder of any promissory note, debenture or other
         evidence of indebtedness of such Seller or any of its Subsidiaries or
         of any security (as defined in the Securities Act) of such Seller or
         any of its Subsidiaries with respect to a claimed default, together
         with a detailed statement specifying the notice given or other action
         taken by such holder and the nature of the claimed default and what
         action such Seller or its Subsidiary is taking or proposes to take with
         respect thereto; (iv) any dispute between such Seller or any of its
         Subsidiaries and any Governmental Authority, which, if adversely
         determined, would have a Material Adverse Effect; (v) any default or
         noncompliance of any party to any of the Operative Documents with any
         of the terms and conditions thereof or any notice of termination or
         other proceedings or actions which might adversely affect any of the
         Operative Documents; (vi) any event or condition which violates any
         Environmental Law which could potentially result in liability in excess
         of $250,000, or which could potentially result in remedial obligations
         in excess of $250,000, assuming disclosure to the applicable
         Governmental Authority of all relevant facts, conditions and
         circumstances, if any, pertaining to such event or condition; or (vii)
         any event or condition which may reasonably be expected to have a
         Material Adverse Effect.

                  4.2.6 SHAREHOLDER COMMUNICATIONS, FILINGS, ETC. Promptly upon
         the mailing or filing thereof, copies of all Financial Statements,
         reports and proxy statements mailed to the Company's shareholders, and
         copies of all effective registration statements or periodic reports
         filed with the Commission.

                  4.2.7 INTENTIONALLY OMITTED.

                  4.2.8 ERISA. Promptly (and in any event within 30 days) after
         the Company or any of its Subsidiaries knows or has reason to know that
         a Reportable Event with respect to any Plan has occurred, that any Plan
         is or may be terminated, reorganized, partitioned or declared insolvent
         under Title IV of ERISA or that any Seller or any of its Subsidiaries
         will or may incur any liability to or on account of a Plan under
         Sections 4062, 4063, 4064, 4201, or 4204 of ERISA, such Seller will
         deliver to Purchaser a certificate of the Chief Financial Officer of
         such Seller setting forth information as to such occurrence and what
         action, if any, such Seller is required or proposes to take with
         respect thereto, together with any notices concerning such occurrences
         which are (a) required to be filed by such Seller or the plan
         administrator of any such Plan controlled by such Seller or its
         Subsidiaries, with the PBGC or (b) received by such Seller or its
         Subsidiaries from any plan administrator of a multiemployer or other
         Plan not under their control. Each Seller shall furnish to Purchaser
         and each other holder of securities a copy of each annual report (Form
         5500 Series) of any Plan received or prepared by such Seller or any of
         its Subsidiaries. Each annual report and any notice required to be
         delivered hereunder shall be delivered no later than 10 days after the
         later of the date such report or notice is filed with the Internal
         Revenue Service or the PBGC or the date such report or notice is
         received by any Seller or any of its Subsidiaries, as the case may be.

         4.3 NEGATIVE COVENANTS. So long as any principal or other amounts due
and owing under the Note remain outstanding, without the prior written consent
of the holders of a majority of the principal outstanding under the Note, the
Sellers:

                  4.3.1 INDEBTEDNESS INCURRED. Shall not, and shall not permit
         any of their Subsidiaries to, issue, incur, assume or permit to exist
         any Indebtedness, except (a) the Note, (b) Indebtedness not in excess
         of $50,000 at any one time and secured by Permitted Liens described in
         Section 4.3.2 of this Agreement, (c) Indebtedness for unsecured trade
         payables and lease payables incurred in the ordinary course, (d) the
         Senior Obligations, (e) Indebtedness existing on the date of this
         Agreement and described on SCHEDULE 4.3.1 hereto, and (f) preferred
         stock issued pursuant to that certain letter of intent attached hereto
         as Exhibit H hereto.

                  4.3.2 LIENS. Shall not, and shall not permit any of its
         Subsidiaries to, create or permit to exist any Lien with respect to any
         assets now or hereafter existing or acquired, except the following
         (herein collectively called the "PERMITTED LIENS"): (a) Liens for
         current taxes or special assessments not delinquent or for taxes or
         special assessments being contested in good faith and by appropriate
         proceedings that do not subject any Seller or any of its Subsidiaries
         to penalties under the Code or other applicable tax laws and for which
         adequate reserves shall have been established and are then being
         maintained in accordance with GAAP; (b) Liens in connection with the
         acquisition of tangible property after the date hereof and attaching
         only to the property acquired; (c) Liens incurred in the ordinary
         course of business in connection with worker's compensation,
         unemployment insurance or other forms of governmental insurance or
         benefits; (d) mechanics', workers', materialmen's, and other like Liens
         arising in the ordinary course of business in respect of obligations
         which are not delinquent or which are being contested in good faith and
         by appropriate proceedings and for which adequate reserves shall have
         been established and are then maintained in accordance with GAAP; (e)
         easements, municipal and zoning ordinances, and rights of way
         restrictions not interfering with the ordinary conduct of the business
         of any Seller as conducted on the date of execution hereof; (f) Liens
         or deposits required by law as a condition to the transaction of
         business in the ordinary course; (g) intentionally omitted; (h) Liens
         incurred to secure the obligations incurred or undertaken in connection
         with this Agreement and the other Operative Documents; (i) Liens
         subject to a subordination agreement pursuant to which the Indebtedness
         evidenced thereby is subordinated to the Indebtedness evidenced by this
         Agreement and the other Operative Documents; and (j) Liens existing on
         the date of this Agreement and described on SCHEDULE 4.3.2 hereto.

                  4.3.3 MERGERS. Shall not, and shall not permit any of their
         Subsidiaries to, enter into any transaction of merger or consolidation
         or liquidate, wind up, or dissolve itself (or suffer any liquidation or
         dissolution), or convey, sell, lease, transfer, or otherwise dispose
         of, in one transaction or a series of transactions, all or
         substantially all of its business, property, or assets, whether now
         owned or hereafter acquired, or acquire by purchase or otherwise all or
         substantially all the business, property or assets of, or stock or
         other evidence of beneficial ownership of, any Person (other than any
         sales or transfers by a Subsidiary to any Seller or to another
         Subsidiary), except that the Company may enter into or permit a
         transaction of purchase, merger or consolidation if (i) (A) the Company
         is the surviving entity, (B) immediately after such purchase, merger or
         consolidation (and giving effect thereto) no default under any
         Indebtedness shall have occurred and be continuing, and (C) the
         consolidated net worth of the surviving entity shall be equal to or
         greater than the consolidated net worth of the Company and its
         Subsidiaries immediately preceding such purchase, merger or
         consolidation, in each case as determined in accordance with GAAP, or
         (ii) the merger or consolidation is (X) between two or more wholly
         owned Subsidiaries of the Company or (Y) of one or more of the
         Subsidiaries with and into the Company.

                  4.3.4 DISPOSITION OF SUBSTANTIAL ASSETS. Shall not, and shall
         not permit any of their Subsidiaries to, sell, dispose of, or otherwise
         convey (by merger, consolidation, sale of stock or otherwise), in any
         single or related series of sales, dispositions, or conveyances, any
         assets of the Sellers or any Subsidiary if the aggregate fair market
         value (determined in good faith by the Board of Directors or management
         of the Sellers, as appropriate) of all assets (taking into account all
         liabilities related to such assets) so sold, disposed of or conveyed by
         the Company and its Subsidiaries after the date hereof would exceed the
         lesser of (a) $1,000,000 or (b) 25% of the aggregate fair market value
         of total assets of the Company and its Subsidiaries taken as a whole
         (taking into account all liabilities related to such assets) as of the
         end of the most recently ended fiscal year of the Company (other than
         any sales or transfers by a Subsidiary to any Seller or to another
         Subsidiary); PROVIDED that the Sellers may dispose of assets that are
         no longer used in or useful to the operations or business of the
         Sellers. Notwithstanding this Section 4.3.4, no assets of any Seller or
         its Subsidiaries shall be sold, disposed or otherwise conveyed at less
         than fair market value as determined in good faith by the Board of
         Directors or management of the Company, as appropriate, except (i) in
         accordance with the terms of the RFC Agreement and (ii) for compromises
         of accounts in the ordinary course of business.

                  4.3.5 CHARTER. Other than the Company, shall not, and shall
         not permit any of its Subsidiaries to, amend its Charter or its by-laws
         or create additional series or classes of shares.

                  4.3.6 SUBSIDIARY PAYMENTS AND ISSUANCES.

                  (a) Shall not, and shall not permit any of its Subsidiaries
         to, enter into or permit to exist any agreement or undertaking which
         prohibits, restricts, or limits the ability of any of the Company's
         Subsidiaries to pay dividends or distributions to the Company; or

                  (b) Other than the Company, shall not, and shall not permit
         any of its Subsidiaries to, issue any securities.

                  4.3.7 TRANSACTIONS WITH AFFILIATES. Shall not enter into or
         maintain, and shall not permit any Subsidiary to enter into or
         maintain, any transaction or agreement with any of its or any
         Subsidiary's Affiliates other than any other Seller, except in the
         ordinary course of business and upon fair and reasonable terms no less
         favorable to the Seller or any of its Subsidiaries than would be
         obtained by such Seller or any such Subsidiary in a comparable arm's
         length transaction with a Person who is not an Affiliate of such Seller
         or any of its Subsidiaries.

                  4.3.8 LOAN, ADVANCES, AND INVESTMENTS. Shall not, and shall
         not permit any Subsidiary to, make or permit to remain outstanding any
         loan or advance to, or guarantee, endorse, or otherwise be or become
         contingently liable, directly or indirectly, in connection with the
         obligations, stock, or dividends of, or own, purchase, or acquire any
         stock, obligations, or securities of, or, except in the ordinary course
         of business as reasonably deemed appropriate by the management of the
         Company, make any Investment in any Person other than (a) the Sellers
         or any of their Subsidiaries or (b) United Network Services, L.L.C., a
         Delaware limited liability company (to the extent such loan, advance,
         guarantee, or Investment exists on the date of this Agreement), except
         that the Sellers or any of their Subsidiaries may:

                           (i) own, purchase or acquire (a) commercial paper
                  rated A-1 by Standard & Poor's Corporation or P-1 by Moody's
                  Investors Service, Inc. on the date of acquisition; (b)
                  certificates of deposit of United States commercial banks
                  (having a combined capital and surplus in excess of
                  $100,000,000), (c) obligations of or guaranteed by the United
                  States government or any agency thereof; and (d) money market
                  funds organized under the laws of the United States or any
                  state thereof that invest substantially all of their assets in
                  any of the types of investments described in clauses (a), (b)
                  or (c) of this clause (i);

                           (ii) endorse negotiable instruments for collection in
                  the ordinary course of business, make or permit to remain
                  outstanding travel, moving and other like advances to
                  officers, employees and consultants in the ordinary course of
                  business or make or permit to remain outstanding lease,
                  utility and other similar deposits in the ordinary course of
                  business;

                           (iii) make loans or advances to or Investments in a
                  Person, in an aggregate amount of up to $100,000 at any one
                  time outstanding; and

                           (iv) normal and prudent extensions of credit to
                  customers buying goods and services in the ordinary course of
                  business, which extensions shall not be for longer periods
                  that those extended by similar businesses operated in a normal
                  and prudent manner.

                  4.3.9 ENVIRONMENTAL MATTERS. Shall not cause or permit, and
         shall not allow any of its Subsidiaries to cause or permit, any of
         their respective properties to be in violation of, or do anything to
         permit anything to be done which will subject such property to any
         remedial obligations under any Environmental Laws, that could
         reasonably be expected to result in liability in excess of $250,000 or
         which could reasonably be expected to result in remedial obligations in
         excess of $250,000 assuming disclosure to the applicable Governmental
         Authority of all relevant facts, conditions and circumstances, if any,
         pertaining to the relevant property.

                  4.3.10 ERISA COMPLIANCE. Shall not permit any Plan maintained
         by it or any Subsidiary to:

                           (a) engage in any "prohibited transaction" as such
                  term is defined in Section 4975 of the Code:

                           (b) incur any "accumulated funding deficiency" as
                  such term is defined in Section 302 of ERISA; or

                           (c) terminate any such Plan in a manner which could
                  result in the imposition of a Lien on the property of the
                  Sellers or their Subsidiaries pursuant to Section 4068 of
                  ERISA.

                  4.3.11 SALE AND LEASEBACK. Shall not, and shall not permit any
         of its Subsidiaries to, enter into any arrangements with any lender or
         investor or to which such lender or investor is a party providing for
         the leasing by the Sellers or any Subsidiary of real or personal
         property which has been or is to be sold or transferred by the Sellers
         or any Subsidiary to such lender or investor or any Person to whom
         funds have been or are to be advanced by such lender or investor on the
         security of such property or rental obligations of the Sellers or any
         Subsidiary.

                  4.3.12 SALE OF STOCK AND DEBT OF SUBSIDIARIES. Shall not, and
         shall not permit any of its Subsidiaries to, sell or otherwise dispose
         of, or part with control of, any shares of stock or Indebtedness of any
         Subsidiary, except to the Company or another Subsidiary and except that
         all shares of stock and Indebtedness of any Subsidiary at the time
         owned by or owed to the Company and all Subsidiaries may be sold as an
         entirety for a cash consideration which represents the fair value (as
         determined in good faith by the Board of Directors of the Company) at
         the time of sale of the shares of stock and Indebtedness so sold;
         PROVIDED that such sale or disposition does not violate Section 4.3.4
         hereof; PROVIDED FURTHER that, at the time of such sale, such
         Subsidiary shall not own, directly or indirectly, any shares of stock
         or Indebtedness of any other Subsidiary (unless all of the shares of
         stock and Indebtedness of such other Subsidiary owned, directly or
         indirectly, by the Company, and all its Subsidiaries are simultaneously
         being sold as permitted by this Section 4.3.12).

                  4.3.13 CERTAIN CONTRACTS. Except as otherwise specifically
         permitted by any other provision of Section 4.3, shall not, and shall
         not permit any of its Subsidiaries to, enter into or be a party to (i)
         any contract to rent or lease (as lessee) any real or personal property
         if such contract (or any related document) provides an obligation to
         make payments under conditions not customarily found in commercial
         leases then in general use or requires that the lessee purchase or
         otherwise acquire securities or obligations of the lessor (unrelated to
         the lease in question), (ii) any contract for the sale or use of
         materials, supplies, or other property, or the rendering of services,
         if such contract (or any related document) provides that payment for
         such materials, supplies or other property, or the use thereof or
         payment for such services, shall be subordinated to any indebtedness
         (of the purchaser or user of such materials, supplies or other property
         or the Person entitled to the benefit of such services) owed or to be
         owed to any Person, or (iii) any other contract which is, or, in the
         economic effect, is substantially equivalent to, a guarantee, except,
         with respect to (iii) hereof, as permitted under Section 4.3.1 hereof.

                                    ARTICLE V

                                CONVERSION RIGHTS

         5.1 CONVERSION RIGHTS. The Note shall be convertible into Common Stock
as follows:

                  5.1.1 CONVERSION AT HOLDER'S OPTION. Subject to the provisions
         of Section 5.2 hereof, the holder of the Note shall have the right at
         such holder's option, at any time and from time to time after the date
         of issuance of the Note and without the payment of any additional
         consideration, to convert the Note, in whole or in part, into fully
         paid and nonassessable shares of Common Stock at the Conversion Price
         (as defined in Section 5.1.2 below) in effect on the Conversion Date
         (as defined in Section 5.1.3 below) upon the terms hereinafter set
         forth.

                  5.1.2 NUMBER OF SHARES. In the event of a conversion pursuant
         to Sections 5.1.1 and 5.2, the Note shall be converted into such number
         of shares of Common Stock as is determined by dividing (x) $1,000,000
         (plus accrued and unpaid interest on the portion of the Note so
         converted through the Conversion Date) by (y) the Conversion Price in
         effect on the Conversion Date. If less than the full principal amount
         of the Note is converted, the accrued and unpaid interest shall be
         calculated on a PRO RATA basis. The "CONVERSION PRICE" shall be the
         lesser of (i) $1.00 per share of Common Stock (the "INITIAL CONVERSION
         PRICE") and (ii) 85% of the Current Market Price, as defined in Section
         5.1.6 below, on the Conversion Date. Such Initial Conversion Price
         shall be subject to adjustment in order to adjust the number of shares
         of Common Stock into which the Note is convertible, as hereinafter
         provided.

                  5.1.3 MECHANICS OF CONVERSION. The holder of the Note may
         exercise the conversion right specified in Section 5.1.1 by
         surrendering to the Company or any transfer agent of the Company the
         Note to be converted. If the certificate representing shares of Common
         Stock issuable upon conversion of the Note is to be issued in a name
         other than the name on the face of the Note, such Note shall be
         accompanied by such evidence of the assignment and such evidence of the
         signatory's authority with respect thereto as deemed appropriate by the
         Company or its transfer agent. Conversion shall be deemed to have been
         effected with respect to conversions pursuant to Section 5.1.1, on the
         date when delivery of notice of an election to convert pursuant to
         Section 5.1.1 is made, and such applicable date is referred to herein
         as the "CONVERSION DATE." Subject to the provisions of Section
         5.1.5(f), as promptly as practicable after the Conversion Date (and
         after surrender of the Note to the Company), the Company shall issue
         and deliver to or upon the written order of such holder a certificate
         or certificates for the number of full shares of Common Stock to which
         such holder is entitled upon such conversion, and a check or cash with
         respect to any fractional interest in a share of Common Stock, as
         provided in Section 5.1.4. Subject to the provisions of Section
         5.1.5(f), the person in whose name the certificate or certificates for
         Common Stock are to be issued shall be deemed to have become a holder
         of record of such Common Stock on the applicable Conversion Date. Upon
         conversion of only a portion of the Note the Company shall issue and
         deliver to or upon the written order of the holder of the certificate
         so surrendered for conversion, at the expense of the Company, a new
         Note representing the remaining unconverted principal amount of the
         Note so surrendered.

                  5.1.4 FRACTIONAL SHARES. No fractional shares of Common Stock
         or scrip shall be issued upon conversion of the Note. The number of
         full shares of Common Stock issuable upon conversion thereof shall be
         computed on the basis of the aggregate principal amount of the Note to
         be converted. Instead of any fractional shares of Common Stock which
         would otherwise be issuable upon conversion of the Note, the Company
         shall pay a cash adjustment in respect of such fractional interest in
         an amount equal to that fractional interest of the then Current Market
         Price, as defined in Section 5.1.6 below.

                  5.1.5 CONVERSION PRICE AND NUMBER OF SHARES ADJUSTMENTS. The
         Initial Conversion Price shall be subject to adjustment from time to
         time as follows:

                           (a) COMMON STOCK ISSUED AT LESS THAN THE CONVERSION
                  PRICE. If the Company shall issue any Common Stock, other than
                  Excluded Stock, without consideration or for consideration per
                  share less than the lower of (1) the Initial Conversion Price
                  in effect immediately prior to such issuance and (2) the
                  Current Market Price, the Initial Conversion Price in effect
                  immediately prior to each such issuance shall immediately
                  (except as otherwise expressly provided below) be reduced to
                  the price that is equivalent to such consideration received by
                  the Company upon such issuance; PROVIDED that this Section
                  5.1.5(a) shall expire and be of no force and effect after
                  April 1, 1998.

                                    (i) ISSUANCE FOR CASH. In the case of the
                           issuance of Common Stock for cash, the amount of the
                           consideration received by the Company shall be deemed
                           to be the amount of the cash proceeds received by the
                           Company for such Common Stock before deducting
                           therefrom any discounts, commissions, taxes or other
                           expenses allowed, paid or incurred by the Company for
                           any underwriting or otherwise in connection with the
                           issuance and sale thereof.

                                    (ii) CONSIDERATION OTHER THAN CASH. In the
                           case of the issuance of Common Stock (otherwise than
                           upon the conversion of shares of capital stock or
                           other securities of the Company) for a consideration
                           in whole or in part other than cash, including
                           securities acquired in exchange therefor (other than
                           securities that by their terms are exchangeable for
                           such Common Stock), the consideration other than cash
                           shall be deemed to be the fair value thereof as
                           determined in good faith by the Board of Directors,
                           irrespective of any accounting treatment; PROVIDED
                           that such fair value as determined by the Board of
                           Directors shall not exceed the aggregate Current
                           Market Price of the shares of Common Stock being
                           issued as of the date the Board of Directors
                           authorizes the issuance of such shares.

                                    (iii) OPTIONS AND CONVERTIBLE SECURITIES. In
                           the case of the issuance of (x) options, warrants or
                           other rights to purchase or acquire Common Stock
                           (whether or not at the time exercisable), (y)
                           securities by their terms convertible into or
                           exchangeable for Common Stock (whether or not at the
                           time so convertible or exchangeable, or (z) options,
                           warrants or rights to purchase such convertible or
                           exchangeable securities (whether or not at the time
                           exercisable), other than in each case Excluded Stock
                           as defined in Section 5.1.5(b) below:

                                            (A) the aggregate maximum number of
                                    shares of Common Stock deliverable upon
                                    exercise of such options, warrants or other
                                    rights to purchase or acquire Common Stock
                                    shall be deemed to have been issued at the
                                    time such options, warrants or rights were
                                    issued and for a consideration equal to the
                                    consideration (determined in the manner
                                    provided in Sections 5.1.5(a)(i) and (ii)
                                    above), if any, received by the Company upon
                                    the issuance of such options, warrants or
                                    rights plus the minimum purchase price
                                    provided in such options, warrants or rights
                                    for the Common Stock covered thereby;

                                            (B) the aggregate maximum number of
                                    shares of Common Stock deliverable upon
                                    conversion of or in exchange for any such
                                    convertible or exchangeable securities, or
                                    upon the exercise of options, warrants or
                                    other rights to purchase or acquire such
                                    convertible or exchangeable securities and
                                    the subsequent conversion or exchange
                                    thereof, shall be deemed to have been issued
                                    at the time such securities were issued or
                                    such options, warrants or rights were issued
                                    and for a consideration equal to the
                                    consideration if any, received by the
                                    Company for any such securities and related
                                    options, warrants or rights (excluding any
                                    cash received on account of accrued interest
                                    or accrued dividends), plus the additional
                                    consideration (determined in the manner
                                    provided in Sections 5.1.5(a)(i) and (ii)
                                    above), if any, to be received by the
                                    Company upon the conversion or exchange of
                                    such securities, or upon the exercise of any
                                    related options, warrants or rights to
                                    purchase or acquire such convertible or
                                    exchangeable securities and the subsequent
                                    conversion or exchange thereof;

                                            (C) on any change in the number of
                                    shares of Common Stock deliverable upon
                                    exercise of any such options, warrants or
                                    rights or conversion or exchange of such
                                    convertible or exchangeable securities or
                                    any change in the consideration to be
                                    received by the Company upon such exercise,
                                    conversion or exchange, including, but not
                                    limited to, a change resulting from the
                                    anti-dilution provisions thereof, the
                                    Conversion Price as then in effect shall
                                    forthwith be readjusted to such Conversion
                                    Price as would have been obtained had an
                                    adjustment been made upon the issuance of
                                    such options, warrants or rights not
                                    exercised prior to such change, or of such
                                    convertible or exchangeable securities not
                                    converted or exchanged prior to such change,
                                    upon the basis of such change;

                                            (D) on the expiration or
                                    cancellation of any such options, warrants
                                    or rights, or the termination of the right
                                    to convert or exchange such convertible or
                                    exchangeable securities, if the Initial
                                    Conversion Price shall have been adjusted
                                    upon the issuance thereof, the Initial
                                    Conversion Price shall forthwith be
                                    readjusted to such Initial Conversion Price
                                    as would have been obtained had an
                                    adjustment been made upon the issuance of
                                    such options, warrants, rights or such
                                    convertible or exchangeable securities on
                                    the basis of the issuance of only the number
                                    of shares of Common Stock actually issued
                                    upon the exercise of such options, warrants
                                    or rights, or upon the conversion or
                                    exchange of such convertible or exchangeable
                                    securities; and

                                            (E) if the Initial Conversion Price
                                    shall have been adjusted upon the issuance
                                    of any such options, warrants, rights or
                                    convertible or exchangeable securities, no
                                    further adjustment of the Conversion Price
                                    shall be made for the actual issuance of
                                    Common Stock upon the exercise, conversion
                                    or exchange thereof.

                  In addition to the adjustments set forth above, the Initial
                  Conversion Price shall be immediately reduced on a PARI PASSU
                  basis with the conversion, exercise, or strike price of any
                  other derivative securities of the Company whether now
                  outstanding or hereafter issued.

                           (b) EXCLUDED STOCK. "Excluded Stock" shall mean (i)
                  shares of Common Stock issued or reserved for issuance by the
                  Company upon exercise of warrants outstanding on the date
                  hereof, other than warrants described in SCHEDULE 5.1.5
                  hereto, (ii) shares of Common Stock issued or reserved for
                  issuance by the Company as a stock dividend payable in shares
                  of Common Stock, or upon any subdivision or split-up of the
                  outstanding shares of Common Stock, each of which is subject
                  to the provisions of Section 5.1.5(c) below, (iii) shares of
                  Common Stock issued to Purchaser or any holder of the Note or
                  the Warrants, or (iv) grants of options and shares of Common
                  Stock issuable or issued thereunder pursuant to the Company's
                  stock option plans existing on the date hereof. All shares of
                  Excluded Stock which the Company has reserved for issuance
                  shall be deemed to be outstanding for all purposes of
                  computations under Section 5.1.5(a).

                           (c) STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS
                  OR COMBINATIONS. If the Company shall (i) declare a dividend
                  or make a distribution on its Common Stock in shares of its
                  Common Stock, (ii) subdivide or reclassify the outstanding
                  shares of Common Stock into a greater number of shares, or
                  (iii) combine or reclassify the outstanding Common Stock into
                  a smaller number of shares, the Initial Conversion Price in
                  effect at the time of the record date for such dividend or
                  distribution or the effective date of such subdivision,
                  combination or reclassification shall be proportionately
                  adjusted so that the holder of the Note surrendered for
                  conversion after such date shall be entitled to receive the
                  number of shares of Common Stock which he would have owned or
                  been entitled to receive had the Note been converted
                  immediately prior to such date. Successive adjustments in the
                  Initial Conversion Price shall be made whenever any event
                  specified above shall occur.

                           (d) OTHER DISTRIBUTIONS. In case the Company shall
                  fix a record date for the making of a distribution to all
                  holders of shares of its Common Stock (i) of shares of any
                  class other than its Common Stock or (ii) of evidences of
                  Indebtedness of the Company or any Subsidiary or (iii) of
                  assets (excluding cash dividends or distributions, and
                  dividends or distributions referred to in 5.1.5(c) above), or
                  (iv) of rights or warrants (excluding those referred to in
                  Section 5.1.5(a) above), in each case the Initial Conversion
                  Price in effect immediately prior thereto shall be reduced
                  immediately thereafter to the price determined by dividing (A)
                  an amount equal to the difference resulting from (1) the
                  number of shares of Common Stock outstanding on such record
                  date multiplied by the Initial Conversion Price per share on
                  such record date, less (2) the fair market value (as
                  determined by the Board of Directors, whose determination
                  shall be conclusive) of said shares or evidences of
                  indebtedness or assets or rights or warrants to be so
                  distributed, by (B) the number of shares of Common Stock
                  outstanding on such record date. Such adjustment shall be made
                  successively whenever such a record date is fixed. In the
                  event that such distribution is not so made, the Initial
                  Conversion Price then in effect shall be readjusted, effective
                  as of the date when the Board of Directors determines not to
                  distribute such shares, evidences of indebtedness, assets,
                  rights or warrants, as the case may be, to the Initial
                  Conversion Price which would then be in effect if such record
                  date had not been fixed.

                           (e) ROUNDING OF CALCULATIONS; MINIMUM ADJUSTMENT. All
                  calculations under this Section 5.1.5 shall be made to the
                  nearest cent or to the nearest one thousandth (1/1000th) of a
                  share, as the case may be. Any provision of this Section 5.1.5
                  to the contrary notwithstanding, no adjustment in the Initial
                  Conversion Price shall be made if the amount of such
                  adjustment would be less than $0.05, but any such amount shall
                  be carried forward and an adjustment with respect thereto
                  shall be made at the time of and together with any subsequent
                  adjustment which, together with such amount and any other
                  amount or amounts so carried forward, shall aggregate $0.05 of
                  more; PROVIDED that if the events giving rise to such
                  adjustments occur within three months of each other, then such
                  adjustments shall be calculated as if the events giving rise
                  to them had occurred simultaneously on the date of the first
                  such event.

                           (f) TIMING OF ISSUANCE OF ADDITIONAL COMMON STOCK
                  UPON CERTAIN ADJUSTMENTS. In any case in which the provisions
                  of this Section 5.1.5 shall require that an adjustment shall
                  become effective immediately after a record date for an event,
                  the Company may defer until the occurrence of such event (i)
                  issuing to the holder of the Note converted after such record
                  date and before the occurrence of such event the additional
                  shares of Common Stock issuable upon such conversion by reason
                  of the adjustment required by such event over and above the
                  shares of Common Stock issuable upon such conversion before
                  giving effect to such adjustment and (ii) paying to such
                  holder any amount of cash in lieu of a fractional share of
                  Common Stock pursuant to Section 5.1.4; PROVIDED that the
                  Company upon request shall deliver to such holder a due bill
                  or other appropriate instrument evidencing such holder's right
                  to receive such additional shares, and such cash, upon the
                  occurrence of the event requiring such adjustment.

                  5.1.6 CURRENT MARKET PRICE. The Current Market Price at any
         date shall mean, in the event the Common Stock is publicly traded, the
         average of the daily closing prices per share of Common Stock for five
         consecutive trading days ending one trading day before such date (as
         adjusted for any stock dividend, split, combination or reclassification
         that took effect during such five trading day period). The closing
         price for each day shall be the last reported sale price regular way
         or, in case no such reported sale takes place on such day, the average
         of the last closing bid and asked prices regular way, in either case on
         the principal national securities exchange on which the Common Stock is
         listed or admitted to trading, or if not listed or admitted to trading
         on any national securities exchange, the closing sale price for such
         day reported by The Nasdaq Stock Market, if the Common Stock is traded
         over-the-counter and quoted in the National Market System, or if the
         Common Stock is so traded, but not so quoted, the average of the
         closing reported bid and asked prices of the Common Stock as reported
         by The Nasdaq Stock Market or any comparable system, or, if the common
         stock is not listed on The Nasdaq Stock Market or any comparable
         system, the average of the closing bid and asked prices as furnished by
         two members of the National Association of Securities Dealers, Inc.
         selected from time to time by the Company for that purpose. If the
         Common Stock is not traded in such manner that the quotations referred
         to above are available for the period required hereunder, Current
         Market Price per share of Common Stock shall be deemed to be the fair
         value per share of Common Stock as determined in good faith by the
         Board of Directors, irrespective of any accounting treatment.

                  5.1.7 STATEMENT REGARDING ADJUSTMENTS. Whenever the Initial
         Conversion Price shall be adjusted as provided in Section 5.1.5, the
         Company shall forthwith file, at the office of any transfer agent for
         the Note and Common Stock and at the principal office of the Company, a
         statement showing in detail the facts requiring such adjustment and the
         Initial Conversion Price that shall be in effect after such adjustment,
         and the Company shall also cause a copy of such statement to be sent by
         mail, first class postage prepaid, to the holder the Note at its
         address appearing on the Company's records. Each such statement shall
         be signed by the Company's chief financial officer. Where appropriate,
         such copy may be given in advance and may be included as part of a
         notice required to be mailed under the provisions of Section 5.1.8.

                  5.1.8 NOTICE TO HOLDERS. In the event the Company shall
         propose to take any action of the type described in clause (i) (but
         only if the action of the type described in clause (i) would result in
         an adjustment in the Initial Conversion Price), (iii) or (iv) of
         Section 5.1.5, or described in Section 5.1.11, the Company shall give
         notice to each holder of the Notes, in the manner set forth in Section
         5.1.7, which notice shall specify the record date, if any, with respect
         to any such action and the approximate date on which such action is to
         take place. Such notice shall also set forth such facts with respect
         thereto as shall be reasonably necessary to indicate the effect on the
         Initial Conversion Price and the number, kind or class of shares or
         other securities or property which shall be deliverable upon conversion
         of the Note. In the case of any action which would require the fixing
         of a record date, such notice shall be given at least ten days prior to
         the date so fixed, and in case of all other action, such notice shall
         be given at least 15 days prior to the taking of such proposed action.
         Failure to give such notice, or any defect therein, shall not affect
         the legality or validity of any such action.

                  5.1.9 TREASURY STOCK. For the purposes of this Section 5.1,
         the sale or other disposition of any Common Stock theretofore held in
         the Company's treasury shall be deemed to be an issuance thereof.

                  5.1.10 COSTS. The Company shall pay all documentary, stamp,
         transfer or other transactional taxes attributable to the issuance or
         delivery of shares of Common Stock upon conversion of the Note;
         PROVIDED that the Company shall not be required to pay any federal or
         state income taxes or other taxes which may be payable in respect of
         any transfer involved in the issuance or delivery of any certificate
         for such shares in a name other than that of the holder of the Notes in
         respect of which such shares are being issued.

                  5.1.11 CONSOLIDATION, MERGER, SALE, LEASE OR CONVEYANCE. In
         case of any consolidation with or merger of the Company with or into
         another corporation or other entity, or in case of any sale, lease or
         conveyance to another corporation or other entity of the assets of the
         Company as an entirety or substantially as an entirety, the Note shall
         after the date of such consolidation, merger, sale, lease or conveyance
         be convertible into the number of shares of stock or other securities
         or property (including cash) to which the Common Stock issuable (at the
         time of such consolidation, merger, sale, lease or conveyance, as if
         the Note was then optionally convertible or mandatorily convertible, as
         the case may be) upon conversion of the Note would have been entitled
         upon such consolidation, merger, sale, lease or conveyance; and in any
         such case, if necessary, the provisions set forth herein with respect
         to the rights and interests thereafter of the holders of the Note
         (including without limitation the definition of Current Market Price)
         shall be appropriately adjusted so as to be applicable, as nearly as
         may reasonably be, to any shares of stock or other securities or
         property thereafter deliverable on the conversion of the Note.

         5.2 LIMITATION ON CONVERSION. So long as the Company satisfies the
continued listing requirements of the Nasdaq National Market, the conversion
rights set forth above in Section 5.1 and the right to exercise the Warrants as
set forth in the Warrant Agreement shall be limited so that, upon conversion of
the Note or exercise of the Warrants or both, the Purchaser's aggregate
ownership of the Company will be less than 20% of the shares of Common Stock
outstanding on the date of issuance of the Note and the Warrants; PROVIDED that
such limitation shall cease and this Section 5.2 shall become null and void upon
the approval of the issuance of the Note and the Warrants by the shareholders of
the Company or the National Association of Securities Dealers, Inc. or upon such
other event as shall allow the conversion or exercise or both, as appropriate,
without violating the applicable requirements of the Nasdaq National Market.


                                   ARTICLE VI

                                EVENTS OF DEFAULT

         6.1 EVENTS OF DEFAULT DEFINED; ACCELERATION OF MATURITY. If any one or
more of the following events (herein called "EVENTS OF DEFAULT") shall have
occurred:

                  (a) all or any part of the principal of the Note is not paid
         when and as the same shall become due and payable, whether at the
         maturity thereof, by acceleration, or otherwise;

                  (b) all or any part of the interest on the Note is not paid
         within three days of the date when the same shall become due and
         payable;

                  (c) all or any part of any other amount owing to Purchaser
         pursuant to the terms of this Agreement or the Note is not paid within
         three days of the date when such other amount is due and payable;

                  (d) default shall occur in the observance or performance of
         any covenant contained in Article IV of this Agreement;

                  (e) default shall occur in the observance or performance of
         any of the other covenants or agreements of the Sellers contained in
         this Agreement, any other Operative Document or any other agreement
         evidencing Indebtedness by the Sellers or any of their Subsidiaries,
         which is not remedied within ten days after notice thereof to the
         Company;

                  (f) a receiver, conservator, custodian, liquidator or trustee
         of any Seller or any of its Subsidiaries or of all or any of the assets
         of any of them, is appointed by court order and such order remains in
         effect for more than 30 days; or an order for relief is entered under
         the federal or any foreign bankruptcy laws with respect to any Seller
         or any of its Subsidiaries; or any of the material assets of any of
         them is sequestered by court order and such order remains in effect for
         more than 30 days; or a petition is filed against any Seller or any of
         its Subsidiaries under the bankruptcy, reorganization, moratorium,
         arrangement, insolvency, readjustment of debt, dissolution,
         liquidation, or other similar law of any applicable Governmental
         Authority, whether now or hereafter in effect, and is not dismissed
         within 60 days after such filing;

                  (g) any Seller or any of its Subsidiaries files a petition in
         voluntary bankruptcy or seeking relief under any provision of any
         bankruptcy, reorganization, moratorium, arrangement, insolvency,
         readjustment of debt, dissolution, liquidation, or other similar law of
         any applicable Governmental Authority, whether now or hereafter in
         effect, or consents to the filing of any petition against it under any
         such law;

                  (h) any Seller or any of its Subsidiaries makes a general
         assignment for the benefit of its creditors, or admits in writing its
         inability to pay its debts generally as they become due, or consents to
         the appointment of a receiver, conservator, custodian, liquidator or
         trustee of any Seller or any of its Subsidiaries, or of all or any part
         of the assets of any of them;

                  (i) final judgment for the payment of money in excess of
         $100,000 shall be rendered by a court of record against any Seller or
         any of its Subsidiaries or such Seller or such Subsidiary shall not (i)
         discharge the same or provide for its discharge in accordance with its
         terms or (ii) procure a stay of execution thereof within 15 days from
         the date of entry thereof and within said period of 15 days, or such
         longer period during which execution of such judgment shall have been
         stayed, appeal therefrom and cause the execution thereof to be stayed
         during such appeal including, without limitation, by providing adequate
         bond for such judgment;

                  (j) any representation, warranty, or certification made by any
         Seller or any of its Subsidiaries, or any of their officers in this
         Agreement or any other Operative Document or in any certificate,
         report, Financial Statement, or other instrument delivered under or
         pursuant to any provision hereof or thereof shall prove to have been
         false or incorrect in any material respect on the date or dates as of
         which they were made;

                  (k) if (i) any Plan shall fail to satisfy the minimum funding
         standards of ERISA or the Code for any Plan year or part thereof or a
         waiver of such standards or extension of any amortization period is
         sought or granted under Section 4.12 of the Code, (ii) a notice of
         intent to terminate any Plan shall have been or is reasonably expected
         to be filed with the PBGC or the PBGC shall have instituted proceedings
         under ERISA Section 4042 to terminate or appoint a trustee to
         administer any Plan or the PBGC shall have notified the Company or any
         ERISA Affiliate that a Plan may become a subject of any such
         proceedings, (iii) the aggregate "amount of unfunded benefit
         liabilities" (within the meaning of Section 4001(a)(18) of ERISA) under
         all Plans determined in accordance with Title IV of ERISA, shall exceed
         $500,000, (iv) the Company or any ERISA Affiliate shall have incurred
         or is reasonably expected to incur any liability to Title I or IV of
         ERISA or the penalty or excise tax provisions of the Code relating to
         employee benefit plans, (v) the Company or any ERISA Affiliate
         withdraws from any Multiemployer Plan, or (vi) the Company or any
         Subsidiary establishes or amends any employee welfare benefit plan that
         provides post-employment welfare benefits in a manner that would
         increase the liability of the Company or any subsidiary thereunder; and
         any such event or events described in clauses (i) through (vi) above
         either individually or in the aggregate, could reasonably be expected
         to have a Material Adverse Effect; or

                  (l) the occurrence of an "Event of Default" as defined in the
         Furst Agreement;

then, when any Event of Default described in clause (a), (b), (c), (d), (e),
(i), (j), (k), or (l) above has occurred and shall be continuing, the principal
of the Note and the interest accrued thereon and all other amounts due hereunder
(the "other payments") shall, upon written notice from Purchaser, forthwith
become and be due and payable, if not already due and payable, without
presentment, further demand or other notice of any kind. When any Event of
Default described in clause (f), (g) or (h) above has occurred, then the
principal of the Note, the interest accrued thereon, and the other payments
shall immediately become due and payable, upon the occurrence thereof, without
presentment, demand, or notice of any kind. If any principal, installment of
interest, or other payment is not paid in full on the due date thereof whether
by maturity, or acceleration or any Event of Default has occurred and is
continuing, then the outstanding principal balance of the Note, any overdue
installment of interest (to the extent permitted by applicable law), including
interest accruing after the commencement of any proceeding under any bankruptcy
or insolvency law, and all other payments will bear additional interest from the
due date of such payment, or from and after an Event of Default, at a rate equal
to the lesser of (i) the Highest Lawful Rate or (ii) an amount equal to the then
applicable interest rate on the Note plus 2% per annum (such applicable rate
being referred to as the "DEFAULT RATE"), compounded monthly, until the payment
is received or the Event of Default is cured, if permitted, or waived. If
payment of the Note is accelerated, then the outstanding principal balance
thereof shall bear interest at the Default Rate from and after the Event of
Default. The Sellers shall pay to the holder of the Note all reasonable
out-of-pocket costs and expenses, incurred by such holder in any effort to
collect the Note and other payments, including the reasonable attorneys fees and
expenses for services rendered in connection therewith, and pay interest on such
costs and expenses to the extent not paid when demanded at the Default Rate.

         6.2 SUITS FOR ENFORCEMENT. If any Event of Default specified in Section
6.1 above has occurred and is continuing, the holder of the Note may pursue any
available remedy to protect and enforce such holder's rights, including without
limitation, instituting a suit in equity or by action at law, or both, whether
for the specific performance of any covenant or agreement contained in this
Agreement or any other Operative Document, or in aid of the exercise of any
power granted in this Agreement or any other Operative Document, or to enforce
any other legal or equitable right or remedy of such holder.

         6.3 INDEMNIFICATION. The Sellers agree, jointly and severally, to
indemnify, defend, and hold Purchaser harmless from, against, and in respect of
any and all claims, demands, losses, costs, expenses, obligations, liabilities,
damages, recoveries, and deficiencies, including interest, penalties and
reasonable attorneys' fees (collectively, "CLAIMS"), that Purchaser shall incur
or suffer, which arise, result from, or relate to (a) any breach of, or failure
by any Seller or any of its Subsidiaries to perform, any of its representations,
warranties, covenants, or agreements in this Agreement or any other Operative
Document or in any schedule, certificate, exhibit, or other instrument furnished
or to be furnished by any Seller or any of its Subsidiaries hereunder or
thereunder, or in the Charter of any Seller or any of its Subsidiaries or (b)
any claims of any applicable Governmental Authority or other Person arising
under any Environmental Law.

         6.4 DELAYS OR OMISSIONS. No failure to exercise or delay in the
exercise of any right, power or remedy accruing to any holder of the Note upon
any breach or default of any Seller or any of its Subsidiaries under this
Agreement or any other Operative Document shall impair any such right, power, or
remedy of such holder nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach or
default hereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring.

         6.5 REMEDIES CUMULATIVE. All remedies, under either this Agreement or
any other Operative Document, by law or otherwise afforded to any holder of the
Note, shall be cumulative and not alternative.

                                   ARTICLE VII

                              CONDITIONS PRECEDENT

         7.1 CONDITIONS TO CLOSING BY PURCHASER. The obligation of Purchaser to
purchase the Note and the Warrants, as the case may be, on the Closing Date is
subject to the fulfillment to its satisfaction at or prior to the Closing Date
of each of the following conditions:

                  7.1.1 REPRESENTATIONS AND WARRANTIES. The representations and
         warranties contained in Section 3.1 shall be true and correct when made
         and shall be true and correct as of the Closing Date as if made on the
         Closing Date.

                  7.1.2 PERFORMANCE; DEFAULTS. The Sellers shall have performed
         and complied with all agreements and conditions contained in this
         Agreement required to be performed or complied with by it prior to or
         on the Closing Date and, after giving effect to the issue and sale of
         the Note and the Warrants, no default or Event of Default shall have
         occurred and be continuing.

                  7.1.3 LEGAL INVESTMENT. As of the Closing Date, the purchase
         of the Note and the Warrants by Purchaser shall (a) be legally
         permitted by all laws and regulations to which regulations of each
         jurisdiction to which each Seller and Purchaser are subject, (b) not
         violate any applicable Governmental Requirement, and (c) not subject to
         any tax, penalty, or liability under or pursuant to any applicable
         Governmental Requirement.

                  7.1.4 PROCEEDINGS AND DOCUMENTS. As of the Closing Date, all
         corporate, if applicable, and other proceedings in connection with the
         transactions contemplated hereby shall be reasonably satisfactory in
         form and substance to Purchaser, and Purchaser shall have received on
         or prior to the Closing Date copies of all such legal documents or
         proceedings taken in connection with the consummation of the
         transactions as it shall have reasonably requested.

                  7.1.5 QUALIFICATIONS. As of the Closing Date, all
         authorizations, approvals, or permits of or filings with any
         Governmental Authority that are required by law in connection with the
         lawful issuance, sale, and delivery of the Note and the Warrants (as
         applicable) shall have been duly obtained by each Seller and shall be
         effective on and as of the Closing Date.

                  7.1.6 CONSENTS. On or prior to the Closing Date, each Seller
         shall have received in writing consents required of third parties for
         the consummation of the transactions contemplated hereby, pursuant to
         any law, contract, agreement, or instrument by which such Seller is
         bound or to which it is subject.

                  7.1.7    CERTIFICATES.

                  (a) Each Seller shall have delivered to Purchaser certificates
         executed by their respective Chief Executive Officer, dated as of the
         Closing Date, certifying that all representations and warranties of
         such Seller in this Agreement are true and correct, and such other
         matters as Purchaser shall have reasonably requested.

                  (b) Each Seller shall have delivered to Purchaser copies of
         each of the following, in each case certified to be in full force and
         effect on the Closing Date by the Secretary of such Seller:

                           (i) the certificate and articles of association of
                  such Seller (certified by the appropriate Governmental
                  Authority) and all amendments thereof, certified as true and
                  correct as of the Closing Date;

                           (ii) the by-laws of such Seller as of the Closing
                  Date; and

                           (iii) resolutions of the Board of Directors of such
                  Seller, the form and substance of which are satisfactory to
                  Purchaser, authorizing (A) the execution, delivery, and
                  performance of this Agreement and the other Operative
                  Documents and the transactions contemplated hereby and
                  thereby, (B) the execution, issuance, sale, delivery, and
                  performance of the Note, and (C) the reservation of the
                  Warrant Shares (as applicable).

                  7.1.8 GOOD STANDING CERTIFICATES. The Company shall have
         delivered a certificate of status relating to each Seller from the
         Secretary of State of the respective jurisdiction of incorporation
         dated not more than ten days prior to the Closing Date.

                  7.1.9 LEGAL OPINION. The Sellers shall have delivered to
         Purchaser the legal opinion of Fulbright & Jaworski L.L.P., counsel to
         the Sellers, dated as of the Closing Date and substantially in the form
         of Exhibit G attached hereto.

                  7.1.10 FEES AND EXPENSES. The Sellers shall have paid to
         Purchaser the fees, costs, and expenses that the Sellers are obligated
         to pay pursuant to Section 4.1.8 hereof.

                  7.1.11 OPERATIVE DOCUMENTS. Each Seller shall have executed
         and delivered to Purchaser each of the Operative Documents to which
         such Person is a party.

         7.2 CONDITIONS TO CLOSING BY THE COMPANY. The obligations of the
Sellers to sell the Note and the Warrants to Purchaser are subject to the
fulfillment to its satisfaction on or prior to the Closing Date of each of the
following conditions:

                  7.2.1 REPRESENTATIONS AND WARRANTIES. The representations and
         warranties of Purchaser contained in Section 3.2 shall be true and
         correct when made, and shall be true and correct as of the Closing Date
         as if made on the Closing Date.

                  7.2.2 PERFORMANCE; PAYMENT. All covenants, agreements, and
         conditions contained in this Agreement to be performed or complied with
         by Purchaser on or prior to the Closing Date, including the payment of
         the Purchase Price as consideration for the Note and Warrants shall
         have been performed or complied with.

                                  ARTICLE VIII

                                  MISCELLANEOUS

         8.1 CONSENT TO AMENDMENTS; WAIVERS. Except as otherwise expressly
provided herein, the provisions of this Agreement may be amended or waived only
by the written agreement of the Sellers and Purchaser. Any waiver, permit,
consent, or approval of any kind or character on the part of such holder of any
provisions or conditions of this Agreement must be made in writing and shall be
effective only to the extent specifically set forth in such writing.

         8.2 SURVIVAL OF TERMS; FAILURE TO CLOSE. All representations,
warranties, and covenants contained herein or made in writing by any party in
connection herewith will survive the execution and delivery of this Agreement
and any investigation made at any time by or on behalf of Purchaser.
Notwithstanding anything herein to the contrary, in the event the Closing Date
has not occurred on or before October 15, 1997 because one or more conditions
set forth in Article VII has not been satisfied, Purchaser may terminate its
obligations under this Agreement by written notice to the Sellers.

         8.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto will bind and inure to the benefit of the
respective successors of the parties hereto, whether so expressed or not and the
permitted assigns of the parties hereto including, without limitation and
without need of any express assignment. This Agreement and the rights and
obligations of the Sellers shall not be assigned without the prior written
consent of Purchaser.

         8.4 SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
this Agreement unless the consummation of the transaction contemplated hereby is
materially and adversely affected thereby.

         8.5 DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement
are inserted for convenience of reference only and do not constitute a part of
and shall not be utilized in interpreting this Agreement.

         8.6 GOVERNING LAW. Each Seller hereby consents and agrees that this
Agreement shall be deemed a contract and instrument made under the laws of the
State of New York and shall be construed and enforced in accordance with and
governed by the laws of the State of New York without regard to principles of
conflicts of law.

         8.7      DISPUTES; EXCLUSIVE METHOD; JURISDICTION.

         (A) ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO
INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THE NOTE OR THE
OTHER OPERATIVE DOCUMENTS, INCLUDING ANY CLAIM OR CONTROVERSY OF ANY KIND BASED
ON OR ARISING IN TORT, SHALL BE DETERMINED EXCLUSIVELY BY BINDING ARBITRATION IN
ACCORDANCE WITH THE U.S. FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE,
APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION
OF COMMERCIAL DISPUTES AND THE RULES SET FORTH BELOW. IN THE EVENT OF ANY
INCONSISTENCY, THE RULES SET FORTH IN SECTION 8.7(B) BELOW SHALL CONTROL.
JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING
JURISDICTION. ANY PARTY TO THE NOTE OR THE OTHER OPERATIVE DOCUMENTS MAY BRING
AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF
ANY CONTROVERSY OR CLAIM TO WHICH EITHER THE NOTE OR ANY OPERATIVE DOCUMENT
APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.

         (B) THE ARBITRATION SHALL BE CONDUCTED IN HOUSTON, TEXAS AND
ADMINISTERED BY THE AMERICAN ARBITRATION ASSOCIATION. ALL ARBITRATION HEARINGS
WILL BE COMMENCE WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION. THE ARBITRATOR
SHALL, ONLY UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF
SUCH HEARING FOR AN ADDITIONAL 60 DAYS. THE ARBITRATOR SHALL NOT HAVE AUTHORITY
TO AWARD PUNITIVE, CONSEQUENTIAL, OR INCIDENTAL DAMAGES.

         (C) THE PROVISIONS OF THIS SECTION 8.7 SHALL SURVIVE ANY TERMINATION,
AMENDMENT, OR EXPIRATION OF THE DOCUMENTS EVIDENCING THE TRANSACTIONS. EACH
PARTY AGREES TO KEEP ALL DISPUTES AND ARBITRATION PROCEEDINGS STRICTLY
CONFIDENTIAL, EXCEPT FOR DISCLOSURES OF INFORMATION REQUIRED IN THE ORDINARY
COURSE OF BUSINESS OF THE PARTIES OR BY APPLICABLE LAW OR REGULATION.

         (d) Each of the parties hereto submits itself and its property to the
personal jurisdiction of the United States District Court for the Southern
District of Texas and the courts of the State of Texas sitting in and for Harris
County in any such action or proceeding.

         8.8 FINAL AGREEMENT. THIS AGREEMENT, THE NOTE, AND THE OTHER OPERATIVE
DOCUMENTS CONSTITUTE THE ENTIRE AGREEMENT BETWEEN THE SELLERS AND PURCHASER
CONCERNING THE MATTERS REFERRED TO HEREIN AND THEREIN, AND SUPERSEDE ALL PRIOR
AGREEMENTS AND UNDERSTANDINGS AMONG THE SELLERS AND PURCHASER RELATING TO THE
SUBJECT MATTER HEREOF AND THEREOF. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN OR AMONG THE PARTIES. Any conflict or ambiguity between the terms and
provisions of this Agreement and the terms and provisions of any other Operative
Document shall be controlled by the terms and provisions hereof.

         8.9 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when so executed and delivered shall be
deemed an original, and such counterparts together shall constitute one
instrument.

         8.10 FURTHER COOPERATION. At any time and from time to time, and at its
own expense, the Sellers shall promptly execute and deliver all such documents
and instruments, and do all such acts and things, as Purchaser may reasonably
request in order to further effect the purposes of this Agreement and the other
Operative Documents.

         8.11 NOTICES. All notices, requests, and other communications to any
party hereunder shall be in writing (including bank wire, telecopy, or similar
teletransmission or writing) and shall be given to such party at its address or
telecopy number set forth on the signature pages hereof or such other address or
telecopy number as such party may hereafter specify by notice to the other
parties.

         8.12 NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of
Purchaser in exercising any right or remedy under this Agreement, the Note, or
any other Operative Document and no course of dealing between the Sellers and
Purchaser shall operate as a waiver thereof, nor shall any single or partial
exercise of any right or remedy under this Agreement, the Note, or any other
Operative Document preclude any other or further exercise thereof or the
exercise of any other right or remedy under this Agreement, the Note, or any
other Operative Document. The rights and remedies expressly provided are
cumulative and not exclusive and any rights or remedies that Purchaser would
otherwise have. No notice to or demand on the Sellers not otherwise required by
this Agreement, the Note, or any other Operative Document in any case shall
entitle the Sellers to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of Purchaser to any other or
further action in any circumstances without notice or demand.

         8.13 EXHIBITS; SCHEDULES. The exhibits and schedules attached to this
Agreement are incorporated herein and shall be considered to be a part of this
Agreement for the purposes stated herein, except that in the event of any
conflict between any of the provisions of such exhibits or schedules and the
provisions of this Agreement, the provisions of this Agreement shall prevail.

         8.14 MAXIMUM INTEREST. It is the intention of the parties hereto to
conform strictly to applicable usury laws and, anything herein to the contrary
notwithstanding, the obligations of the Sellers to Purchaser under this
Agreement and the other Operative Documents shall be subject to the limitation
that payments of interest shall not be required to the extent that receipt
thereof would be contrary to provisions of law applicable to Purchaser limiting
rates of interest which may be contracted for, charged, reserved, received, or
taken by Purchaser. Accordingly, if the transactions contemplated hereby would
be usurious under applicable law (including the Federal and state Laws of the
United States of America, or of any other jurisdiction whose laws may be
mandatorily applicable) with respect to Purchaser then, in that event,
notwithstanding anything to the contrary in this Agreement or any other
Operative Document, it is agreed as follows: (a) the provisions of this Section
8.14 shall govern and control; (b) the aggregate of all consideration which
constitutes interest under applicable law that is contracted for, charged,
received, reserved, or taken under this Agreement or any other Operative
Document, or otherwise in connection with this Agreement or the transactions
contemplated by the Operative Documents by Purchaser shall under no
circumstances exceed the maximum amount of interest allowed by applicable law
(such maximum lawful interest rate, if any, with respect to Purchaser herein
called the "HIGHEST LAWFUL RATE"), and any excess shall be credited to the
Sellers by Purchaser (or, if such consideration shall have been paid in full,
such excess refunded to the Sellers); (c) all sums paid, or agreed to be paid,
to Purchaser for the use, forbearance, and detention of any indebtedness of the
Sellers to Purchaser hereunder or under any other Operative Document shall, to
the extent permitted by applicable law, be amortized, prorated, allocated, and
spread throughout the full term of any such indebtedness until payment in full
so that the actual rate of interest does not exceed the Highest Lawful Rate; and
(d) if at any time the sum of the interest and all other amounts payable
pursuant to this Agreement and the other Operative Documents that are deemed to
be interest under applicable law exceeds that amount which would have accrued at
the Highest Lawful Rate, the interest and other amounts to accrue to Purchaser
pursuant to this Agreement and the other Operative Documents shall be limited,
notwithstanding anything to the contrary in this Agreement or any other
Operative Document, to that amount which would have accrued at the Highest
Lawful Rate, but any subsequent reductions, as applicable, shall not reduce the
interest or other amounts payable to Purchaser pursuant to this Agreement and
the other Operative Documents below the Highest Lawful Rate until the total
amount of interest accrued pursuant to this Agreement and the other Operative
Documents and such other amounts deemed to be interest equals the amount that
would have accrued to Purchaser if the rate per annum set forth in the Note had
at all times been in effect, PLUS all other amounts that which would have been
received but for the effect of this Section 8.14. For purposes of Article
5069-1.04, Vernon's Texas Civil Statutes, as amended, to the extent, if any,
applicable to Purchaser, the Sellers agree that the Highest Lawful Rate shall be
the "indicated (weekly) rate ceiling" as defined in said Article; PROVIDED that
Purchaser may also rely, to the extent permitted by applicable laws, on
alternative maximum rates of interest under other laws applicable to Purchaser
if greater. Tex. Rev. Civ. Stat. Ann. Art. 5069, Ch. 15 (which regulates certain
revolving credit loan accounts and revolving tri-party accounts) shall not apply
to this Agreement or any other Operative Document.
<PAGE>
         IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first set forth above.

                                        THE WILLIS GROUP LLC

                                        By:
                                        Name:
                                        Title:

                                        Address for Notice:

                                        10235 W. Little York
                                        Suite 417
                                        Houston, Texas 77040
                                        Attention:
                                        Telecopy:


                                        EQUALNET HOLDING CORP.

                                        By:
                                        Name:
                                        Title:

                                        Address for Notice:

                                        EqualNet Holding Corp.
                                        1250 Wood Branch Park Drive
                                        Houston, Texas 77079-1212
                                        Attention:  General Counsel
                                        Telecopy:  (281)529-4686

                                        with a copy to:

                                        Fulbright & Jaworski L.L.P.
                                        1301 McKinney
                                        Suite 5100
                                        Houston, Texas 77010
                                        Attention:  Robert F. Gray, Jr.
                                        Telecopy:  (713)651-5246


                                        EQUALNET CORPORATION

                                        By:
                                        Name:
                                        Title:

                                        Address for Notice:

                                        EqualNet Holding Corp.
                                        1250 Wood Branch Park Drive
                                        Houston, Texas 77079-1212
                                        Attention:  General Counsel
                                        Telecopy:  (281)529-4686

                                        with a copy to:

                                        Fulbright & Jaworski L.L.P.
                                        1301 McKinney
                                        Suite 5100
                                        Houston, Texas 77010
                                        Attention:  Robert F. Gray, Jr.
                                        Telecopy:  (713)651-5246


                                        TELESOURCE, INC.

                                        By:
                                        Name:
                                        Title:

                                        Address for Notice:

                                        EqualNet Holding Corp.
                                        1250 Wood Branch Park Drive
                                        Houston, Texas 77079-1212
                                        Attention:  General Counsel
                                        Telecopy:  (281)529-4686

                                        with a copy to:

                                        Fulbright & Jaworski L.L.P.
                                        1301 McKinney
                                        Suite 5100
                                        Houston, Texas 77010
                                        Attention:  Robert F. Gray, Jr.
                                        Telecopy:  (713)651-5246


                                        EQUALNET WHOLESALE SERVICES, INC.

                                        By:
                                        Name:
                                        Title:

                                        Address for Notice:

                                        EqualNet Holding Corp.
                                        1250 Wood Branch Park Drive
                                        Houston, Texas 77079-1212
                                        Attention:  General Counsel
                                        Telecopy:  (281)529-4686

                                        with a copy to:

                                        Fulbright & Jaworski L.L.P.
                                        1301 McKinney
                                        Suite 5100
                                        Houston, Texas 77010
                                        Attention:  Robert F. Gray, Jr.
                                        Telecopy:  (713)651-5246
<PAGE>
                                 SCHEDULE 3.1.8
                                       TO
                       NOTE AND WARRANT PURCHASE AGREEMENT

                                   LIABILITIES

Assessed Federal Excise Tax Penalties for 1997                 $21,406.14*

*All other assessments due the Internal Revenue Service are referred to in the
financial statement.
<PAGE>
                                 SCHEDULE 3.1.9
                                       TO
                       NOTE AND WARRANT PURCHASE AGREEMENT

                               PENDING LITIGATION
                      AND MATTERS FOR WHICH FORMAL WRITTEN
                             DEMANDS HAVE BEEN MADE

1.Civil Action No. 95-CH-0142 filed int he Circuit Court of the Seventh Judicial
Circuit of Sangamon County, Illinois filed against EqualNet Corporation and
EqualNet Holding Corp., filed by the office of the Illinois Attorney General and
based upon an allegedly excessive number of customer complaints that long
distance service was switched to EqualNet without the customer's knowledge or
informed consent, with remedies sought under the deceptive trade
practices-consumer protection statutes of that state. EqualNet has filed an
answer denying each of the material allegations of this complaint.

2.Case Number IJ96-1153 filed in the Chancery Court of Pulansky County,
Arkansas, 1st Division, by the office of the Arkansas Attorney General and based
upon an allegedly excessive number of customer complaints that long distance
service was switched to EqualNet without the customer's knowledge or informed
consent, with remedies sought under the Arkansas Deceptive Trade Practices Act.
EqualNet has filed an answer denying each of the material allegations of this
complaint.

3.The assistant attorneys general for each of the foregoing matters have
indicated that any settlement of their cases must be done jointly, and that
other states (Arizona, Idaho, Wisconsin, Texas, Michigan, Tennessee, Kansas,
Nevada and New Jersey) have indicated that they intend to be included in any
such settlement. Fines, penalties, costs of investigations, restitution of all
or portions of customer charges, or some combination of the foregoing or other
assessments may be required of EqualNet to resolve each of the matters described
n paragraph 1 through 3, or that EqualNet will choose to enter into consent
decrees or orders without any admission of fault, as a means to resolve these
matters, rather than pursue a judicial determination as to the truth or falsity
of the allegations made against the Company. It is impossible to forecast with
any accuracy the potential exposure in these matters, but such exposure could be
a material amount. Subject to approval of its board of directors, EqualNet has
offered to resolve these matters cumulatively for the amount of $500,000 plus
certain refunds in an amount to e determined, provided such amounts could be
paid over time. The refunds are not anticipated to be a significant monetary
sanction. The potential cost of protracted litigation simultaneously in several
states was a significant factor in the Company's decision to respond with this
settlement offer. Such offer is not an admission of wrongdoing by the Company in
any manner.

4.Civil Action No. 97-C-2842 filed in the federal District Court for the
Northern District of Illinois, with process served on July 21, 1997 on EqualNet
Corporation and EqualNet Wholesale Services, Inc. (its wholly-owned subsidiary).
This action was filed by American Teletronics Long Distance, Inc. ("ATLD) and
MetroLink Communications, Inc. ("MetroLink") alleging breach of contract, fraud
and negligent misrepresentation arising out of a letter of intent EqualNet
Corporation signed with MetroLink in November, 1995 to create a joint venture
eventually known as Unified Network Services LLC, a Delaware limited liability
company ("UNS") with EqualNet Corporation, MetroLink, MediaNet, Inc. (a
MetroLink affiliate) and EqualNet Wholesale Services, Inc., as
shareholder/members. EqualNet Wholesale Services has not conducted any business
other than the purchase of a 49% ownership interest in UNS. EqualNet Corporation
owns a 1% interest in the limited liability company. MetroLink and MediaNet each
own 25% ownership interests in UNS. The suit alleges that EqualNet did not
provide "back office" support for UNS, and failed to complete the purchase of
ATLD's customer base. EqualNet has filed an answer denying the allegations made
against it, has filed a motion seeking to have EqualNet Wholesale Services, Inc.
dismissed as a defendant, and has filed a counterclaim for damages, based upon
MetroLink's failure or refusal to provide a fully functional, industry standard
network for wholesale by UNS. EqualNet further denies that any contractual
obligation ever existed for EqualNet to acquire ATLD's customer base. EqualNet
conducted its due diligence, and decided upon the conclusion of such due
diligence, that it did not want to acquire the ATLD customer base.
<PAGE>
                                 SCHEDULE 3.1.10

                           EMPLOYEE RETIREMENT INCOME
                              SECURITY ACT OF 1974
                                     (ERISA)

                                      None

<PAGE>

                                 SCHEDULE 3.1.12

                                    DEFAULTS

1.       EqualNet has defaulted in the timely payments of obligations under its
         promissory notes payable to Sprint Communications LP dated November 18,
         1996 and March 11, 1997.

2.       EqualNet has defaulted in the timely payments of obligations to AT&T
         Corp. under both its Carrier Agreement and agreement for payment of
         obligations incurred prior to the effective date of the current Carrier
         Agreement.

3.       EqualNet has defaulted under certain provisions of its agreements with 
         The Furst Group, Inc.
<PAGE>
                                 SCHEDULE 3.1.18

                      UNITED STATES SECURITIES AND EXCHANGE
                               COMMISSION FILINGS

         1.       Prospectus March 9, 1995

         2.       Form 10-K Report Fiscal Year Ended June 30, 1995

         3.       Form 10-Q Quarterly Report Period Ended March 31, 1995

         4.       Form 10-Q Quarterly Report Period Ended September 30, 1995

         5.       Form 8-K Report, June 6, 1995

         6.       Form 10-Q Quarterly Report Period Ended December 31, 1995

         7.       Form 10-Q Quarterly Report Period Ended March 31, 1996

         8.       Amendment No. 1 To Form 8-K, May 10, 1996

         9.       Form 10-K Report Fiscal Year Ended June 30, 1996

         10.      Form 10-Q Quarterly Report Period Ended September 30, 1996

         11.      Form 8-K Report, September 30, 1996

         12.      Form 10-Q Quarterly Report Period Ended December 31, 1996

         13.      Form 10-Q Quarterly Report Period Ended March 31, 1997

         14.      Form 8-K Report, July 1, 1997

         15.      Form 8-K Report, July 7, 1997

<PAGE>
                                 SCHEDULE 3.1.19
                                       TO
                        OUTSTANDING WARRANTS AND OPTIONS


  1.       Key Employee Stock Grants                                    36,435 
                                                                 
  2.       Director Options                                             13,000
                                                                 
  3.       Employee Options Grant 1 (vesting July 11, 1997)            230,000
                                                                 
  4.       "Creative Employee Options                                   40,000*
                                                                 
  5.       Creative Communications, International Warrants             100,000
                                                                 
  6.       Furst Group Warrants                                      1,500,000
                                                                 
  7.       Employee Options Grant 2 (vesting July 11, 1998)            231,000
                                                                 
  8.       Lexus                                                       167,465
<PAGE>
                                 SCHEDULE 3.1.21

                              INTELLECTUAL PROPERTY


                                      None

<PAGE>
                                 SCHEDULE 4.3.1

                            SCHEDULE OF INDEBTEDNESS


         1.       Sprint Note dated November 18, 1996

         2.       Sprint Note dated March 11, 1997

         3.       Capital Lease (Global Services) from 1995 for equipment and
                  furniture

         4.       Miscellaneous leases (Comerica, Global Services) secured with
                  UCC filings

         5.       Letter of Credit (Comerica Bank) in lieu of premises lease
                  deposit

         6.       Obligations arising under the RFC Agreement if and to the
                  extent such agreement were to be construed as a secured loan
                  transaction rather than a factoring agreement

         7.       Obligations to repurchase from The Furst Group certain Common
                  Stock or other equity instruments of the Company in accordance
                  with the Letter Agreement dated October 1, 1997, between The
                  Furst Group and the Company.


<PAGE>
                                 SCHEDULE 4.3.2

                                      LIENS


         1.       Those liens created in the documents of Receivables Funding
                  Corporation signed on or about June 18, 1997.

         2.       Those liens created in the document of The Furst Group, Inc.
                  signed on or about February 3, 1997.

         3.       Those liens securing the obligations under the Comerica LOC.


<PAGE>
                                 SCHEDULE 5.1.5
                                       TO
                       NOTE AND WARRANT PURCHASE AGREEMENT

                                 EXCLUSIONS FROM
                            DEFINITION EXCLUDED STOCK

         1.       Subscription for 167,465 shares of Common Stock by Lexus
                  Commercial Enterprises, Ltd.

         2.       Warrant for 100,000 shares of Common Stock to be issued to
                  Receivables Funding Corporation.

<PAGE>
               AMENDMENT TO NOTE AND WARRANT PURCHASE AGREEMENT
                              AND WARRANT AGREEMENT


        This Amendment to Note and Warrant Purchase Agreement and Warrant
Agreement ("Amendment") is entered into between EqualNet Holding Corp.
("EqualNet"), EqualNet Corporation, Telesource, Inc., EqualNet Wholesale
Services, Inc. and Willis Group, LLC ("TWG") effective as of February 12, 1998.

                                   RECITALS

      Each of the entities listed in the preamble is a party to a Note and
Warrant Purchase Agreement ("Note Agreement") dated October 1, 1997. In
addition, EqualNet and TWG are parties to a Warrant Agreement dated October 1,
1997, pursuant to which EqualNet issued to TWG a warrant for 200,000 shares of
EqualNet's Common Stock (the "Warrant Agreement"). Any capitalized term used but
not defined herein shall have the meaning ascribed to such term in the Note
Agreement or Warrant Agreement, as applicable.

      The parties desire to amend the Warrant Agreement and Warrant issued
pursuant thereto, and the Note Agreement, in accordance with the terms of this
Amendment.

      NOW, THEREFORE, in and for the mutual covenants and promises set forth
herein, EqualNet and TWG agree as follows:

      1. Each of the Warrant Agreement and Warrant is generally amended to
include a covenant on the part of EqualNet that it will use its best efforts to
cause the number of shares of EqualNet Common Stock authorized under EqualNet's
Articles of Incorporation to be increased to permit the full exercise of the
Warrant and a limitation on the holder of the Warrant to the effect that the
obligation of EqualNet to issue shares upon the exercise of the Warrant in whole
or in part shall be conditioned upon EqualNet having a number of UNRESERVED
authorized shares of EqualNet Common Stock at such time sufficient to cover the
number of shares relating to the exercise.

      2. The Note Agreement is generally amended to include a covenant on the
part of EqualNet that it will use its best efforts to cause the number of shares
of EqualNet Common Stock authorized under EqualNet's Articles of Incorporation
to be increased to permit the full conversion of the Note and a limitation on
the holder of the Note to the effect that the obligation of EqualNet to issue
shares upon the conversion of the Note in whole or in part shall be conditioned
upon EqualNet having a number of unreserved authorized shares of EqualNet Common
Stock at such time sufficient to cover the number of shares relating to the
conversion.
<PAGE>
      By entering into this Amendment, TWG does not waive by implication or
otherwise any of the conditions to the consummation of any transaction between
EqualNet and any of its affiliates and TWG pursuant to any separate agreement
between such parties. This Amendment contains the entire understanding and
agreement between the parties with respect to the subject matter of this
Amendment and supersedes any prior or contemporaneous statements, understandings
or agreements with respect to such subject matter.

                                    EQUALNET HOLDING CORP.

                                    By:
                                    Name: Michael L. Hlinak
                                    Title:      Senior Vice President

                                    EQUALNET CORPORATION

                                    By:
                                    Name: Michael L. Hlinak
                                    Title:      Chief Operating Officer

                                    TELESOURCE, INC.

                                    By:
                                    Name: Tom Humble
                                    Title:      Secretary and Authorized Agent

                                    EQUALNET WHOLESALE SERVICES, INC.

                                    By:
                                    Name: Dean H. Fisher
                                    Title:      Secretary and Authorized Agent

                                    WILLIS GROUP, LLC

                                    By:
                                    Name: Mark A. Willis
                                    Title:      President

                                       -2-