Document:

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                                                                     EXHIBIT 4.2

                               THE SHAW GROUP INC.
                    2001 EMPLOYEE INCENTIVE COMPENSATION PLAN
               (AS AMENDED AND RESTATED THROUGH JANUARY 24, 2003)

1.       PURPOSE OF PLAN.

         The Shaw Group Inc. 2001 Employee Incentive Compensation Plan has been
established by the Company to (i) attract and retain persons eligible to
participate in the Plan; (ii) motivate participants, by means of appropriate
incentives, to achieve long-range goals; (iii) provide incentive compensation
opportunities that are competitive with those of other similar companies; and
(iv) further identify participants' interests with those of the Company's other
shareholders through compensation that is based on the Common Stock thereby
promoting the long-term financial interest of the Company and its Subsidiaries,
including the growth in value of the Company's equity and enhancement of
long-term shareholder return.

2.       DEFINITIONS.

         Unless otherwise required by the context, the following terms when used
in the Plan shall have the meanings set forth in this Section 2:

                  (a) "Agreement": An agreement evidencing an Award in such form
         as adopted from time to time by the Committee pursuant to the Plan.

                  (b) "Award": Any award or benefit granted under the Plan,
         including without limitation, the grant of Options, SARs, Restricted
         Stock, Performance Shares or Incentive Bonuses, or any combination
         thereof, under the Plan.

                  (c) "Board of Directors": The Board of Directors of the
         Company.

                  (d) "Cause": For purposes of the Plan, whether the termination
         of a Participant's employment shall have been for Cause shall be
         determined by the Committee in its sole discretion, if said Participant
         has: (i) been convicted of, or has pleaded guilty or nolo contendere to
         a charge that he committed a felony under the laws of the United States
         or any state or a crime involving moral turpitude, including but not
         limited to fraud, theft, embezzlement or any crime that results in or
         is intended to result in personal enrichment at the expense of the
         Company or its Subsidiaries; (ii) perpetrated a fraud against, or theft
         of property of the Company or any of its Subsidiaries; (iii) committed
         acts amounting to gross negligence, intentional neglect or willful
         misconduct in carrying out his duties and responsibilities as an
         employee of the Company or one or more of its Subsidiaries; (iv)
         willfully or persistently failed to attend to his duties as an employee
         of the Company or one or more of its Subsidiaries; or (v) as a result
         of his gross negligence or willful misconduct, committed any act that
         causes, or has knowingly failed to take reasonable and appropriate
         action to prevent, any material injury to the financial condition or
         business reputation of the Company or any of its Subsidiaries.

                  (e) "Change of Control": For the purposes of the Plan, the
         term Change in Control shall mean the happening of any of the
         following:

                           (i) any "person" as defined in Section 3(a)(9) of the
                  Exchange Act, and as used in Section 13(d) and 14(d) thereof,
                  including a "group" as defined in Section 13(d) of the

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                  Exchange Act (but excluding any shareholder of record of the
                  Company as of January 1, 2000, owning 10% or more of the
                  combined voting power of the Company's securities which are
                  entitled to vote in the election of directors of the Company)
                  directly or indirectly becomes the "beneficial owner" (as
                  defined in Rule 13d-3 under the Exchange Act), of securities
                  of the Company representing 20% or more of the combined voting
                  power of the Company's then outstanding securities which are
                  entitled to vote with respect to the election of directors;

                           (ii) When, during any period of 24 consecutive
                  months, the individuals who, at the beginning of such period,
                  constitute the Board of Directors of the Company (the
                  "Incumbent Directors") cease for any reason other than death
                  or disability to constitute at least a majority thereof;
                  provided, however, that a director who was not a director at
                  the beginning of such 24-month period shall be deemed to have
                  satisfied such 24-month requirement (and be an Incumbent
                  Director) if such director was elected by, or on the
                  recommendation of or with approval of, at least two-thirds of
                  the directors who then qualified as Incumbent Directors either
                  actually (because they were directors at the beginning of such
                  24-month period) or by operation of this provision;

                           (iii) The acquisition of the Company or all or
                  substantially all of the Company's assets by an entity other
                  than the Company (or a Subsidiary) through purchase of assets,
                  or by merger, or otherwise, except in the case of a
                  transaction pursuant to which, immediately after the
                  transaction, the Company's shareholders immediately prior to
                  the transaction own immediately after the transaction at least
                  a majority of the combined voting power of the surviving
                  entity's then outstanding securities which are entitled to
                  vote with respect to the election of directors of such entity;
                  or

                           (iv) The Company files a report or proxy statement
                  with the Commission pursuant to the Exchange Act disclosing in
                  response to Form 8-K, Form 10-K or Schedule 14A (or any
                  successor schedule, form or report or item therein) that a
                  change in control of the Company has or may have occurred or
                  will or may occur in the future pursuant to any then-existing
                  contract or transaction.

                  (f) "Code": The Internal Revenue Code of 1986, as amended from
         time to time.

                  (g) "Commission": The Securities and Exchange Commission.

                  (h) "Committee": The Compensation Committee of the Board of
         Directors or such other committee appointed by the Board of Directors
         which meets the requirements set forth in Section 14.1 hereof.

                  (i) "Company": The Shaw Group Inc., a Louisiana corporation.

                  (j) "Consultant": Any professional advisor to the Company or
         its Subsidiaries as well as any employee, officer or director of a
         corporation that serves as an advisor, consultant or independent
         contractor to the Company or its Subsidiaries. The term "Consultant"
         shall not, however, include any director, officer or employee of the
         Company or its Subsidiaries.

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                  (k) "Effective Date": The date on which the Plan shall become
         effective as set forth in Section 16 hereof.

                  (l) "Exchange Act": The Securities Exchange Act of 1934, as
         amended, together with all regulations and rules issued thereunder.

                  (m) "Exercise Price": (i) In the case of an Option, the price
         per Share at which the Shares subject to such Option may be purchased
         upon exercise of such Option and (ii) in the case of an SAR, the price
         per Share which upon grant, the Committee determines shall be used in
         calculating the aggregate value which a Participant shall be entitled
         to receive upon exercise of such SAR.

                  (n) "Fair Market Value": As applied to a specific date, the
         fair market value of a Share on such date as determined in good faith
         by the Committee in the following manner:

                           (i) If the Shares are then listed on any national or
                  regional stock exchange, the Fair Market Value shall be the
                  last quoted sales price of a Share on the date in question, or
                  if there are no reported sales on such date, on the last
                  preceding date on which sales were reported;

                           (ii) If the Shares are not so listed, then the Fair
                  Market Value shall be the mean between the bid and ask prices
                  quoted by a market maker or other recognized specialist in the
                  Shares at the close of the date in question; or

                           (iii) In the absence of either of the foregoing, the
                  Fair Market Value shall be determined by the Committee in its
                  absolute discretion after giving consideration to the book
                  value, the revenues, the earnings history and the prospects of
                  the Company in light of market conditions generally.

The Fair Market Value determined in such manner shall be final, binding and
conclusive on all parties.

                  (o) "Incentive Bonus": An Award granted pursuant to Section 8
         of the Plan.

                  (p) "ISO": An Option intended to qualify as an "incentive
         stock option," as defined in Section 422 of the Code or any statutory
         provision that may replace such Section and designated as an incentive
         stock option by the Committee.

                  (q) "Officer": An officer of the Company or its Subsidiaries
         meeting the definition of "officer" in Rule 16a-1(f) (or any successor
         provision) promulgated by the Commission under the Exchange Act.

                  (r) "NQSO": An Option not intended to be an ISO and designated
         as a nonqualified stock option by the Committee.

                  (s) "Option": Any ISO or NQSO granted under the Plan.

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                  (t) "Participant": An officer or other employee of or
         Consultant to the Company or any of its Subsidiaries who has been
         granted an Award under the Plan.

                  (u) "Performance Measures": The Performance Measures described
         in Section 9.1 of the Plan.

                  (v) "Performance Period": For the purposes of the grant of
         Performance Shares, the time period during which the applicable
         performance goal(s) must be met.

                  (w) "Performance Shares": An Award granted pursuant to Section
         7 of the Plan.

                  (x) "Plan": This The Shaw Group Inc. 2001 Employee Incentive
         Compensation Plan, as the same may be amended from time to time.

                  (y) "Related": (i) In the case of an SAR, an SAR that is
         granted in connection with, and to the extent exercisable, in whole or
         in part, in lieu of, an Option or another SAR; and (ii) in the case of
         an Option, an Option with respect to which and to the extent an SAR is
         exercisable, in whole or in part, in lieu thereof, has been granted.

                  (z) "Restricted Stock": Shares which have been awarded to a
         Participant under Section 6 hereof.

                  (aa) "Restriction Period": The time period during which
         Restricted Stock awarded under the Plan must be held before it becomes
         fully vested, unless additional conditions have been placed upon the
         vesting thereof.

                  (bb) "SAR": A stock appreciation right awarded to a
         Participant under Section 5.3 hereto.

                  (cc) "Shares": Shares of the Company's authorized but unissued
         or reacquired no par value per share common stock, or such other class
         or kind of shares or other securities as may be applicable pursuant to
         the provisions of Section 4.4 hereof.

                  (dd) "Subsidiary": Any "subsidiary corporation" of the
         Company, as such term is defined in Section 424(f) of the Code.

3.       PARTICIPATION.

         Participants shall be selected by the Committee from the officers
(whether or not they are directors), employees of the Company or its
Subsidiaries (either full or part-time) and Consultants. An Award may be granted
to an employee, in connection with hiring, retention or otherwise, prior to the
date the employee first performs services for the Company or the Subsidiaries,
provided that such Awards shall not become vested prior to the date the employee
first performs such services.

4.       SHARES SUBJECT TO PLAN.

         4.1 Shares Subject to the Plan. The maximum number of Shares that may
be delivered to Participants and their beneficiaries pursuant to the Plan shall
be equal to the sum of: (i) 3.5 million shares of

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Common Stock and (ii) any shares of Common Stock that are represented by awards
granted under the Company's 1993 Employee Stock Option Plan, as amended and
restated, which are forfeited, expire or are canceled without the delivery of
shares of Common Stock or which result in the forfeiture of shares of Common
Stock back to the Company. The limitations established by the preceding sentence
shall be subject to adjustment as provided in Section 4.4 of the Plan.

         4.2 Accounting for Number of Shares. For purposes of determining the
aggregate number of Shares available for delivery to Participants pursuant to
the Plan, any Shares granted under the Plan which are forfeited back to the
Company because of the failure to meet an award contingency or condition shall
again be available for delivery pursuant to new Awards granted under the Plan.
Any Shares covered by an Award (or portion of an Award) granted under the Plan,
which is forfeited or canceled, expires or is settled in cash, shall be deemed
not to have been delivered for purposes of determining the maximum number of
Shares available for delivery under the Plan. Likewise, if any Option is
exercised by tendering Shares to the Company as full or partial payment in
connection with the exercise of an Option under this Plan or the Prior Plan,
only the number of Shares issued net of the Shares tendered shall be deemed
delivered for purposes of determining the maximum number of Shares available for
delivery under the Plan. Further, Shares issued under the Plan through the
settlement, assumption or substitution of outstanding Awards or obligations to
grant future Awards as a result of acquiring another entity shall not reduce the
maximum number of Shares available for delivery under the Plan.

         4.3 Maximum Total Option and SAR Awards. Notwithstanding the provisions
of Section 4.1, over the term of the Plan, the total number of Shares that may
be issued upon exercise of all Options and SARs granted under the Plan shall not
exceed 3.5 million shares of Common Stock. The limitations in this Section 4.3
shall be subject to adjustment as provided in Section 4.4 below.

         4.4 Adjustments. In the event of a corporate transaction involving the
Company (including, without limitation, any stock dividend, stock split,
extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination or exchange of shares, or other
similar transactions or award), the Committee may adjust Awards as well as the
total number of shares subject to the Plan to preserve the benefits or potential
benefits of the Awards. Action by the Committee may include: (i) adjustment of
the number and kind of Shares (or other securities or property) which may be
delivered under the Plan; (ii) adjustment of the number and kind of Shares (or
the securities or property) subject to outstanding Awards; (iii) adjustment of
the Exercise Price of outstanding Options and SARs; and (iv) any other
adjustments that the Committee determines to be equitable, in its sole
discretion.

5.       AWARDS OF OPTIONS AND SARS.

         5.1 General Terms And Conditions. The Committee shall have full and
complete authority and discretion, except as expressly limited by the Plan, to
grant Options and SARs and to provide any and all terms and conditions (which
need not be identical among the Participants) thereof. In particular, the
Committee shall prescribe the following terms and conditions:

                  (a) The Exercise Price of the Option or SAR, which may not be
         less than 100% of the Fair Market Value per Share at the date of grant
         of the Option or SAR;

                  (b) The number of Shares subject to, and the expiration date
         of, the Option or SAR;

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                  (c) The manner, time and rate (cumulative or otherwise) of
         exercise of the Option or SAR; provided, however, that except as
         otherwise specified in the Plan, no Option or SAR awarded to a
         Participant who is an Officer shall expressly provide for exercise
         prior to the expiration of six months from the date of grant; and

                  (d) The restrictions or conditions (such as performance
         goals), if any, to be placed upon the Option or SAR, the exercisability
         of the Option or SAR or upon the Shares which may be issued upon
         exercise of the Option or SAR. The Committee may, as a condition of
         granting an Option or SAR, require that a Participant agree not to
         thereafter exercise one or more Options or SARs previously granted to
         such Participant.

         5.2 Maximum Award Of Options and SARs. The number of Shares that may be
allotted by the Committee pursuant to Options and SARs awarded to any individual
Participant shall not exceed, in any fiscal year, 2.0 million Shares (subject to
adjustment pursuant to Section 4.4 of the Plan). If an Option is in tandem with
an SAR, such that the exercise of the Option or SAR with respect to a Share
cancels the tandem SAR or Option right, respectively, with respect to such
Share, the tandem Option and SAR rights with respect to such Share shall be
counted as covering but one Share for purposes of applying the limitations of
this Section 5.2.

         5.3 SAR Awards.

                  (a) Grant of SARs. An SAR shall, upon its exercise, entitle
         the Participant to whom such SAR was granted to receive a number of
         Shares or cash or combination thereof, as the Committee in its
         discretion shall determine, the aggregate value of which (i.e., the sum
         of the amount of cash and/or Fair Market Value of such Shares on date
         of exercise) shall equal the amount by which the Fair Market Value per
         Share on the date of such exercise shall exceed the Exercise Price of
         such SAR multiplied by the number of Shares with respect of which such
         SAR shall have been exercised. An SAR may be related to an Option or
         may be granted independently of an Option, as the Committee shall from
         time to time in each case determine. A Related SAR may be granted at
         the time of grant of an Option or, in the case of an NQSO, at any time
         thereafter during the term of the NQSO.

                  (b) Related SARs. The Exercise Price of a Related SAR shall be
         the same as the Exercise Price of the Related Option. A Related SAR
         shall be exercisable only at such time or times and only to the extent
         that the Related Option is exercisable and then only when the Fair
         Market Value per Share on the date of exercise exceeds the Exercise
         Price. A Related SAR shall expire no later than the Related Option.
         Upon exercise of a Related SAR, in whole or in part, the Related Option
         shall be cancelled automatically to the extent of the number of Shares
         covered by such exercise, and such Shares shall no longer be available
         for delivery pursuant to future Awards. Conversely, if the Related
         Option is exercised, in whole or in part, the Related SAR shall be
         cancelled automatically to the extent of the number of Shares covered
         by the Option exercise.

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5.4      Exercise of Options and SARs.

                  (a) General Exercise Rights. Except as provided in Section
         5.9, an Option or SAR ranted under the Plan shall be exercisable during
         the lifetime of the Participant to whom such Option or SAR was granted
         only by such Participant, and except as provided in Section 5.4(c) and
         Section 5.9 hereof, no Option or SAR may be exercised unless at the
         time such Participant exercises such Option or SAR, such Participant is
         an employee of and has continuously since the grant thereof been an
         employee of, the Company or an any of its Subsidiaries. Transfer of
         employment between Subsidiaries or between Subsidiary and the Company
         shall not be considered an interruption or termination of employment
         for any purpose under this Plan. Neither shall a leave of absence at
         the request, or with the approval, of the Company or Subsidiary be
         deemed an interruption or termination of employment, so long as the
         period of such leave does not exceed 90 days, or, if longer, so long as
         the Participant's right to re-employment with the Company or Subsidiary
         is guaranteed by contract. An Option or SAR also shall contain such
         conditions upon exercise (including, without limitation, conditions
         limiting the time of exercise to specified periods) as may be required
         to satisfy applicable regulatory requirements, including, without
         limitation, Rule 16b-3 (or any successor rule) promulgated by the
         Commission.

                  (b) Notice Of Exercise. An Option or SAR may not be exercised
         with respect to less than 100 Shares, unless the exercise relates to
         all Shares covered by the Option or SAR at the date of exercise. An
         Option or SAR may be exercised by delivery of a written notice to the
         Company, which shall state the election to exercise the Option or SAR
         and the number of whole Shares in respect of which it is being
         exercised, and shall be signed by the person or persons so exercising
         the Option or SAR. In the case of an exercise of an Option or SAR, such
         notice shall either: (i) if applicable, be accompanied by payment of
         the full Exercise Price and all applicable withholding taxes, in which
         event the Company shall deliver any certificate(s) representing Shares
         to which the Participant is entitled as a result of the exercise as
         soon as practicable after the notice has been received; or (ii) fix a
         date (not less than 5 nor more than 15 business days from the date such
         notice has been received by the Company) for the payment of the full
         Exercise Price and all applicable withholding taxes, against delivery
         by the Company of any certificate(s) representing Shares to which the
         Participant is entitled to receive as a result of the exercise. Payment
         of such Exercise Price and withholding taxes shall be made as provided
         in Sections 5.4(d) and 13, respectively. In the event the Option or SAR
         shall be exercised pursuant to Section 5.4(c)(i) or Section 5.9 hereof,
         by any person or persons other than the Participant, such notice shall
         be accompanied by appropriate proof of the right of such person or
         persons to exercise the Option or SAR.

                  (c) Exercise After Termination Of Employment. Except as
         otherwise determined by the Committee at the date of grant of the
         Option or SAR and as is provided in the applicable Agreement evidencing
         the Award, upon termination of a Participant's employment with the
         Company or any of its Subsidiaries, such Participant (or in the case of
         death, the person(s) to whom the Option is transferred by will or the
         laws of descent and distribution) may exercise such Option or SAR
         during the following periods of time (but in no event after the
         expiration date of such Option or SAR) to the extent that such
         Participant was entitled to exercise such Option or SAR (or portion
         thereof) at the date of such termination (i.e., the Option or SAR (or
         portion thereof) must be "vested" at the time of termination to be
         exercisable thereafter):

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                           (i) In the case of termination as a result of death,
                  disability or retirement of the Participant, the Option or SAR
                  shall remain exercisable for a one-year period following such
                  termination; for this purpose, "disability" shall exist when
                  the Participant is unable to engage in any substantial,
                  gainful activity by reason of any medically determinable
                  physical or mental impairment which can be expected to result
                  in death or which has lasted or can be expected to last for a
                  continuous period of not less than 12 months, as determined by
                  the Committee in its sole discretion, and "retirement" shall
                  mean voluntary retirement at or after the Participant's normal
                  retirement date as determined by the Committee in its sole
                  discretion;

                           (ii) In the case of termination for Cause, the Option
                  shall immediately terminate and shall no longer be
                  exercisable; and

                           (iii) In the case of termination for any reason other
                  than those set forth in subparagraphs (i) and (ii) above, the
                  Option or SAR shall remain exercisable for three months after
                  the date of termination.

         To the extent the Option or SAR is not exercised within the foregoing
         periods of time, the Option or SAR shall automatically terminate at the
         end of the applicable period of time. Notwithstanding the foregoing
         provisions, failure to exercise an ISO within the periods of time
         prescribed under Sections 421 and 422 of the Code shall cause an ISO to
         cease to be treated as an "incentive stock option" for purposes of
         Section 421 of the Code.

                  (d) Payment of Option Exercise Price. Upon the exercise of an
         Option, payment of the Exercise Price shall be made either (i) in cash
         (by a certified check, bank draft or money order payable in United
         States dollars), (ii) with the consent of the Committee and subject to
         Section 5.4(e) hereof, by delivering the Participant's duly-executed
         promissory note and related documents, (iii) with the consent of the
         Committee, by delivering Shares already owned by the Participant valued
         at Fair Market Value as of the date of exercise, (iv) with the consent
         of the Committee, by irrevocably authorizing a third party to sell
         shares of Common Stock (or a sufficient portion of such shares)
         acquired upon exercise of the Option and remit to the Company a
         sufficient portion of the sales proceeds to pay the entire Exercise
         Price and any tax withholding resulting from such exercise, or (v) by a
         combination of the foregoing forms of payment.

                  (e) Payment With Loan. The Committee may, in its sole
         discretion, assist any Participant in the exercise of one or more
         Options granted to such Participant under the Plan by authorizing the
         extension of a loan to such Participant from the Company. Except as
         otherwise provided in this Section 5.4(e), the terms of any loan
         (including the interest rate and terms of repayment) shall be
         established by the Committee in its sole discretion. Any such loan by
         the Company shall be with full recourse against the Participant to whom
         the loan is granted, shall be secured in whole or in part by the Shares
         so purchased, and shall bear interest at a rate not less than the
         minimum interest rate required at the time of purchase of the Shares in
         order to avoid having imputed interest or original issue discount under
         Sections 483 or 1272 of the Code. In addition, any such loan by the
         Company shall become immediately due and payable in full, at the option
         of the Company, upon termination of the Participant's employment with
         the Company or its Subsidiaries for any reason or upon the sale of any
         Shares acquired with such loan to the extent of the cash and fair
         market value of any property received by the Participant in such sale.
         The Committee may make arrangements for the application of payroll
         deductions from compensation payable to the Participant to amounts
         owing to the Company under any such loan. Until any loan by the Company
         under this

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         Section 5.4(e) is fully paid in cash, the Shares shall be pledged to
         the Company as security for such loan and the Company shall retain
         physical possession of the stock certificates evidencing the Shares so
         purchased together with a duly executed stock power for such Shares. No
         loan shall be made hereunder unless counsel for the Company shall be
         satisfied that the loan and the issuance of Shares funded thereby will
         be in compliance with all applicable federal, state and local laws, and
         such counsel shall be consulted prior to the funding of any such loan.

         5.5 Settlement of Awards of Options and SARs. Settlement of Awards of
Options and SARs is subject to Section 10.

         5.6 Options or SARs Awarded To Consultants. Any provision of this
Section 5 to the contrary notwithstanding, (i) an Option or SAR may be exercised
at any time by a Participant who is a Consultant during the applicable period in
the manner provided in Section 5.4(b) above; provided, that in the event of the
death of a Participant who is a Consultant, the Option or SAR may be exercised
by the executors or administrators of the estate of such Consultant or by the
person or persons who shall have acquired the Option or SAR directly by bequest
or inheritance; and (ii) the Exercise Price for an Option or SAR awarded to a
Consultant must be paid in cash (by a certified check, bank draft of money
order).

         5.7 Rights As A Shareholder. A Participant shall have no rights as a
shareholder with respect to any Shares issuable on exercise of an Option or SAR
until the date of the issuance of a stock certificate to the Participant for
such Shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Section 4.4 hereof.

         5.8 Special Provisions for ISOs.

         Any provision of the Plan to the contrary notwithstanding, the
following special provisions shall apply to all ISOs granted under the Plan:

                  (a) The Option must be expressly designated as an ISO by the
         Committee and in the Agreement evidencing the Option;

                  (b) No ISO shall be granted more than ten years from the
         Effective Date of the Plan and no ISO shall be exercisable more than
         ten years from the date such ISO is granted;

                  (c) The Exercise Price of any ISO shall not be less than the
         Fair Market Value per Share on the date such ISO is granted;

                  (d) Any ISO shall not be transferable by the Participant to
         whom such ISO is granted other than by will or the laws of descent and
         distribution and shall be exercisable during such Participant's
         lifetime only by such Participant;

                  (e) No ISO shall be granted to any individual who, at the time
         such ISO is granted, owns stock possessing more than 10% of the total
         combined voting power of all classes of stock of the Company or any
         Subsidiary unless the Exercise Price of such ISO is at least 110% of
         the Fair Market Value per Share at the date of grant and such ISO is
         not exercisable after the expiration of five years from the date such
         ISO is granted;

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                  (f) The aggregate Fair Market Value (determined as of the time
         any ISO is granted) of any Company stock with respect to which any ISOs
         granted to a Participant are exercisable for the first time by such
         Participant during any calendar year (under this Plan and all other
         stock option plans of the Company and any of its Subsidiary and any
         predecessor of any such corporations) shall not exceed $100,000 as
         required under Section 422(d)(i) of the Code. (To the extent the
         $100,000 limit is exceeded, the $100,000 in Options, measured as
         described above, granted earliest in time will be treated as ISOs); and

                  (g) any other terms and conditions as may be required in order
         that the ISO qualifies as an "incentive stock option" under Section 422
         of the Code or successor provision.

Notwithstanding the provisions of Section 5.4(c)(i), the favorable tax treatment
available pursuant to Section 422 of the Code upon the exercise of an ISO will
not be available to a Participant who exercises any ISO more than (i) 12 months
after the date of termination of employment due to the Participant's disability
or (ii) three months after the date of termination of employment due to
retirement of the Participant.

         5.9 Limited Transferability. No Option or SAR, nor any interest
therein, may be assigned, encumbered or transferred except, in the event of the
death of a Participant, by will or the laws of descent and distribution.
Notwithstanding the foregoing, the Committee shall have the discretionary
authority to grant NQSOs and SARs (that are not Related to an ISO) that are
transferable by the Participant to the Participant's children, grandchildren,
spouse, one or more trusts for the benefit of such family members, or a
partnership in which such family members were the only partners. The holder of
an NQSO or SAR transferred pursuant to this Section 5.9 shall be bound by the
terms and conditions that govern the NQSO or SAR during the period that it was
held by the Participant; provided, however, that such transferee may not
transfer the NQSO or SAR except by will or the laws of descent and distribution.

6.       RESTRICTED STOCK.

         6.1 General Terms/Conditions. The Committee may, in its discretion,
grant one or more Awards of Restricted Stock to any Participant. Each Award of
Restricted Stock shall be evidenced by an Agreement which shall specify the
number of Shares to be issued to the Participant, the date of such issuance, the
price, if any, to be paid for such Shares by the Participant, the Restriction
Period and any other conditions imposed on such Shares as the Committee, in its
discretion, shall determine. Notwithstanding the foregoing, the Committee shall
impose upon each Award of Restricted Stock made to a Participant who is an
Officer a Restriction Period expiring no earlier than six months after the date
of grant of the Restricted Stock.

         6.2 Maximum Award Of Restricted Stock. The maximum number of Shares
that may be allotted by the Committee pursuant to Restricted Stock awarded to
any individual Participant shall not exceed, in any fiscal year, 25,000 Shares.

         6.3 Restrictions And Forfeitures.

                  (a) Shares included in Restricted Stock Awards may not be
         sold, assigned, transferred, pledged or otherwise disposed of or
         encumbered, either voluntarily or involuntarily, until such Shares have
         fully vested.

                                      -10-
<PAGE>

                  (b) Participants holding shares of Restricted Stock granted
         hereunder may be granted the right to exercise full voting rights with
         respect to those Shares during the Restriction Period. During the
         Restriction Period, Participants holding shares of Restricted Stock
         granted hereunder may be credited with regular cash dividends paid with
         respect to the underlying Shares while they are so held. The Committee
         may apply any restrictions to the dividends that the Committee deems
         appropriate. Without limiting the generality of the preceding sentence,
         if the grant or vesting of Restricted Stock is designed to comply with
         one or more of the Performance Measures set forth in Section 9.1, the
         Committee may apply any restrictions it deems appropriate to the
         payment of dividends declared with respect to such Restricted Stock,
         such that the dividends and/or the Restricted Stock maintain
         eligibility under Section 162(m) of the Code.

                  (c) In the event that the Participant shall have paid any cash
         for the Restricted Stock, the Agreement shall specify whether and to
         what extent such cash shall be returned upon a forfeiture (with or
         without an earnings factor).

                  (d) The Restricted Stock shall be evidenced by a stock
         certificate registered only in the name of the Participant, which stock
         certificate shall be held by the Company until the Restricted Stock has
         fully vested.

                  (e) The occurrence of any of the following events shall cause
         the immediate vesting of the Restricted Stock:

                           (i) the death of the Participant;

                           (ii) the retirement of the Participant on or after
                  the Participant's normal retirement date;

                           (iii) the disability of the Participant.

                  For the purposes of this Subsection, the term "disability"
                  shall be defined as such term is defined in Section 5.4(c)(i).
                  Notwithstanding the foregoing, to the extent a condition(s)
                  other than a Restriction Period has been imposed by the
                  Committee upon the Restricted Stock, the occurrence of the
                  foregoing shall not cause immediate vesting unless and until
                  such condition(s) has been met.

                  (f) A Restricted Stock Award shall be entirely forfeited by
         the Participant in the event that prior to vesting, the Participant
         breaches any terms or conditions of the Plan, the Participant resigns
         from or is terminated by the Company, or any condition(s) imposed upon
         vesting are not met.

         6.4 Legend On Certificates. Each certificate evidencing a Restricted
Stock Award under the Plan shall be registered in the name of the Participant
and deposited by the Participant, together with a stock power endorsed in blank,
with the Company and shall bear the following (or a similar) legend:

                  "The transferability of this certificate and the shares of
         Common Stock represented hereby are subject to the terms and conditions
         (including forfeiture) contained in The Shaw Group Inc. 2001 Employee
         Incentive Compensation Plan and a Restricted Stock Agreement

                                      -11-
<PAGE>

         entered into between the registered owner and The Shaw Group Inc.
         Copies of such Plan and Agreement are on file in the offices of the
         Secretary of The Shaw Group Inc., 8545 United Plaza Boulevard, Baton
         Rouge, Louisiana 70809."

         6.5 Section 83(b) Elections. Within 30 days after the issuance of
shares of Restricted Stock to a Participant under the Plan, the Participant
shall decide whether or not to file an election pursuant to Section 83(b) of the
Code and Treasury Regulation Section 1.83-2 (and state law counterparts) with
respect to such Restricted Stock. If the Participant does file such an election,
the Participant shall promptly furnish the Company with a copy of such election.

7.       PERFORMANCE SHARES.

         7.1 Grant of Performance Shares. Subject to the terms of the Plan,
Performance Shares may be granted to Participants in such amounts and upon such
terms, and at any time and from time to time, as shall be determined by the
Committee, provided that no more than 25,000 Shares may be subject to any
Performance Share Awards granted to any individual Participant in any fiscal
year.

         7.2 Value of Performance Shares. Each Performance Share shall have an
initial value equal to the Fair Market Value of a Share on the date of grant.
The Committee shall set performance goals in its discretion which, depending on
the extent to which they are met, will determine the number and/or value of
Performance Shares that will be paid out to the Participant.

         7.3 Earning of Performance Shares. Subject to the terms of the Plan,
after the applicable Performance Period has ended, the holder of Performance
Shares shall be entitled to receive payout on the number and value of
Performance Shares earned by the Participant over the Performance Period, to be
determined as a function of the extent to which the corresponding performance
goals have been achieved.

         7.4 Form and Timing of Payment of Performance Shares. Payment of earned
Performance Shares shall be made in a single lump sum following the close of the
applicable Performance Period. Subject to the terms of this Plan, the Committee,
in its sole discretion, may pay earned Performance Shares in the form of cash or
in Shares (or in a combination thereof) which have an aggregate Fair Market
Value equal to the value of the earned Performance Shares at the close of the
applicable Performance Period. Such Shares may be granted subject to any
restrictions deemed appropriate by the Committee. The determination of the
Committee with respect to the form of payout of such Awards shall be set forth
in the Agreement pertaining to the grant of the Award of Performance Shares.

         At the discretion of the Committee, Participants may be entitled to
receive any dividends declared with respect to Shares which have been earned in
connection with grants of Performance Shares which have been earned, but not yet
distributed to Participants (such dividends shall be subject to the same
accrual, forfeiture, and payout restrictions as apply to dividends earned with
respect to Shares of Restricted Stock, as set forth in Section 6 hereof). In
addition, Participants may, at the discretion of the Committee, be entitled to
exercise their voting rights with respect to such Shares.

         7.5 Termination of Employment Due to Death, Disability, or Retirement.
Unless determined otherwise by the Committee and set forth in the Agreement
evidencing an Award of Performance Shares, in the event the employment of a
Participant is terminated by reason of death, disability, or retirement during a
Performance Period, the Participant or his legal representative shall receive a
payout of the Performance

                                      -12-
<PAGE>

Shares which is prorated, as specified by the Committee, in its sole discretion.
For purposes of this Section 7.5, the term "disability" shall be defined as such
term is defined in Section 5.4(c)(i).

         Payment of earned Performance Shares shall be made at a time specified
by the Committee in its sole discretion and set forth in the Agreement
evidencing such Award. Notwithstanding the foregoing, with respect to
Performance Shares that have been awarded with the intention of qualifying as
"performance-based compensation" under Section 162(m) of the Code to a
Participant who retires during a Performance Period, payment shall be made
pursuant to such Performance Share Award at the same time as payments are made
to Participants who did not terminate employment during the applicable
Performance Period.

         7.6 Termination of Employment for Other Reasons. In the event that a
Participant's employment terminates for any reason other than those reasons set
forth in Section 7.5 above, all Performance Shares shall be forfeited by the
Participant to the Company unless determined otherwise by the Committee, as set
forth in the Agreement evidencing such Award.

         7.7 Non-Transferability. Except as otherwise provided in an Agreement
evidencing such Award of Performance Shares, Performance Shares may not be sold,
assigned, transferred, pledged or otherwise disposed of or encumbered, either
voluntarily or involuntarily, until such Performance Shares have fully vested.
Further, except as otherwise provided in an Agreement evidencing such Award of
Performance Shares, a Participant's rights under the Plan shall be exercisable
during the Participant's lifetime only by the Participant or the Participant's
legal representative.

8.       INCENTIVE BONUSES.

         8.1 Awards of Incentive Bonuses. The Committee shall have the
discretionary authority to designate Participants to whom Incentive Bonuses are
to be paid. Incentive Bonuses shall be determined exclusively by the Committee
pursuant to procedures established by the Committee; provided, however, that for
any fiscal year, no individual Participant may receive Incentive Bonuses
aggregating more than $5 million.

         8.2 Terms and Conditions. The Committee, at the time an Incentive Bonus
is made, shall specify the terms and conditions that govern the granting
thereof. Such terms and conditions may include, by way of example and not
limitation, requirements that the Participant complete a specified period of
employment with the Company or a Subsidiary, or that the Company or Subsidiary
or the Participant attain stated objectives or goals as a prerequisite to
payment under an Incentive Bonus. The Committee, at the time the Incentive Bonus
is granted shall also specify what amount shall be payable under the Incentive
Bonus and whether amounts shall be payable in the event of the Participant's
death, disability or retirement.

         8.3 Settlement of Incentive Bonuses. Settlement of Incentive Bonuses is
subject to Section 10.

9.       PERFORMANCE-BASED COMPENSATION.

         9.1 Performance Measures. The Committee may designate whether an Award
being granted to any Participant is intended to be "performance-based
compensation" as that term is used in Section 162(m) of the Code. Any such
Awards designated by the Committee to be "performance-based compensation" shall
be conditioned on the achievement of one or more Performance Measures, to the
extent required by Code Section

                                      -13-
<PAGE>

162(m). The Performance Measures that may be used by the Committee for such
Awards shall be based on any one or more of the following, as selected by the
Committee:

                  (a) Earnings per share;

                  (b) Net income (before or after taxes);

                  (c) Return measures (including, but not limited to, return on
         assets, capital, equity or sales);

                  (d) Earnings before or after taxes;

                  (e) Share price (including, but not limited to, growth measure
         and total shareholder return);

                  (f) Gross revenues;

                  (g) Working capital measures; or

                  (h) Backlog.

For Awards under this Section 9 intended to be "performance-based compensation",
(i) the grant of the Awards and the establishment of the Performance Measures
shall be made during the period required by Section 162(m) of the Code and (ii)
the Committee shall certify in writing that the Performance Measure has been
met. The Committee shall have the discretion to define the Performance Measures
on a corporation or subsidiary or business division basis or in comparison with
peer group performance.

         9.2 Board Authority. In the event that applicable tax and/or securities
laws change to permit the Committee discretion to alter the governing
Performance Measures without obtaining shareholder approval of such changes, the
Board of Directors of the Company shall have the sole discretion to make changes
in the Performance Measures without shareholder approval.

10.      SETTLEMENT OF AWARDS.

         The obligation to make payments and distributions with respect to
Awards may be satisfied through cash payments, the delivery of shares of Common
Stock, the granting of replacement Awards, or combination thereof as the
Committee shall determine, in its sole discretion. Satisfaction of any such
obligations under an Award, which is sometimes referred to as "settlement" of
the Award, may be subject to such conditions, restrictions, and contingencies as
the Committee shall determine. The Committee may permit or require the deferral
of any Award payment, subject to such rules and procedures as it may establish,
which may include provisions for the payment or crediting of interest or
dividend equivalents. Each Subsidiary shall be liable for payment of cash due
under the Plan with respect to any Participant to the extent that such benefits
are attributable to the services rendered for that Subsidiary by the
Participant. Any disputes relating to liability of a Subsidiary for cash
payments shall be resolved by the Committee.

                                      -14-
<PAGE>

11.      CONSULTANTS.

         An Award made to a Consultant hereunder must be supported by bona fide
services actually rendered by the Company to the Consultant. However, in no
event shall an Award be made to a Consultant (i) for services rendered by the
Consultant in connection with the offer or sale of securities in a capital
raising transaction or (ii) who directly or indirectly promotes or maintains a
market for the Company's securities.

12.      GOVERNMENT REGULATIONS.

         This Plan, the granting of Awards under this Plan and the issuance or
transfer of Shares (and/or the payment of money) pursuant thereto are subject to
all applicable federal and state laws, rules and regulations and to such
approvals by any regulatory or governmental agency (including without limitation
"no action" positions of the Commission) which may, in the opinion of counsel
for the Company, be necessary or advisable in connection therewith. Without
limiting the generality of the foregoing, no Awards may be granted under this
Plan, and no Shares shall be issued by the Company, pursuant to or in connection
with any such Award, unless and until, in each such case, all legal requirements
applicable to the issuance or payment have, in the opinion of counsel to the
Company, been complied with. In connection with any stock issuance or transfer,
the person acquiring the Shares shall, if requested by the Company, give
assurances satisfactory to counsel to the Company in respect of such matters as
the Company may deem desirable to assure compliance with all applicable legal
requirements. The Company shall not be required to deliver any Shares under the
Plan prior to (i) the admission of such Shares to listing or for quotation on
any stock exchange or automated quotation system on which Shares may then be
listed or quoted, and (ii) the completion and effectiveness of such registration
or other qualification of such Shares under any state or federal law, rule or
regulation, as the Committee shall determine to be necessary or advisable.

13.      TAX WITHHOLDING.

         The Company shall have the right to withhold from amounts due
Participants, or to collect from Participants directly, the amount which the
Company deems necessary to satisfy any taxes required by law to be withheld at
any time by reason of participation in the Plan, and the obligations of the
Company under the Plan shall be conditional on payment of such taxes. The
Participant may, prior to the due date of any taxes, pay such amounts to the
Company in cash, or with the consent of the Committee, in Shares (which shall be
valued at their Fair Market Value on the date of payment). There is no
obligation under this Plan that any Participant be advised of the existence of
the tax or the amount required to be withheld. Without limiting the generality
of the foregoing, in any case where it determines that a tax is or will be
required to be withheld in connection with the issuance or transfer or vesting
of Shares under this Plan, the Company may pursuant to such rules as the
Committee may establish, reduce the number of such Shares so issued or
transferred by such number of Shares as the Company may deem appropriate in its
sole discretion to accomplish such withholding or make such other arrangements
as it deems satisfactory. Notwithstanding any other provision of this Plan, the
Committee may impose such conditions on the payment of any withholding
obligation as may be required to satisfy applicable regulatory requirements,
including, without limitation, Rule 16b-3 (or successor provision) promulgated
by the Commission.

14.      ADMINISTRATION OF PLAN.

         14.1 The Committee. The Plan shall be administered by the Committee,
which shall be comprised of two or more members of the Board of Directors, each
of whom shall be a "Non-Employee Director" as defined in Rule 16b-3(b)(3) (or
any successor provision) promulgated by the Commission and each of whom shall
qualify as an "outside director" as defined in Section 162(m) of the Code.

                                      -15-
<PAGE>

         14.2 Committee Action. A majority of the members of the Committee at
the time in office shall constitute a quorum for the transaction of business,
and any determination or action may be taken at a meeting by a majority vote or
may be taken without a meeting by a written resolution signed by all members of
the Committee. All decisions and determinations of the Committee shall be final,
conclusive and binding upon all Participants and upon all other persons claiming
any rights under the Plan with respect to any Award. Members of the Board of
Directors and members of the Committee acting under the Plan shall be fully
protected in relying in good faith upon the advice of counsel and shall incur no
liability except for willful misconduct in the performance of their duties.

         14.3 Committee Authority. In amplification of the Committee's powers
and duties, but not by way of limitation, the Committee shall have full
authority and power to:

                  (a) Construe and interpret the provisions of the Plan and
         establish, amend and rescind rules and regulations relating to the Plan
         and to make all other determinations that may be necessary or advisable
         for the administration of the Plan not inconsistent with the Plan;

                  (b) Decide all questions of eligibility for Plan participation
         and for the grant of Awards;

                  (c) Determine the types of Awards and the number of Shares
         covered by the Awards, if any, to be granted to any Participant, to
         establish the terms, conditions, Performance Measures, restrictions and
         other provisions of such Awards, and (subject to the restrictions
         imposed by Section 17) to cancel or suspend Awards;

                  (d) Adopt forms of agreements and other documents consistent
         with the Plan;

                  (e) Engage agents to perform legal, accounting and other such
         professional services as it may deem proper for administering the Plan;
         and

                  (f) Take such other actions as may be reasonably required or
         appropriate to administer the Plan or to carry out the Committee
         activities contemplated by other sections of this Plan.

         14.4 Indemnification. In addition to such other rights of
indemnification as they may have as directors or as members of the Committee,
the Board of Directors and the members of the Committee shall be indemnified by
the Company against the reasonable expenses, including court costs and
reasonable attorneys' fees, actually incurred in connection with the defense of
any action, suit or proceeding, or in connection with any appeal therein, to
which they or any of them may be a party by reason of any action taken or
failure to act under or in connection with the Plan or any Award granted
hereunder, and against all amounts paid by them in settlement thereof or paid by
them in satisfaction of a judgment in any such action, suit or proceeding,
except where such indemnification is expressly prohibited by applicable law.

15.      CHANGE OF CONTROL.

         Subject to the provisions of Section 4.4 (relating to the adjustment of
Shares), or except as otherwise provided in the Agreement evidencing the Award,
upon the occurrence of a Change of Control:

                  (a) all outstanding Options (regardless of whether in tandem
         with SARs) shall become fully exercisable,

                                      -16-
<PAGE>

                  (b) all outstanding SARs (regardless of whether in tandem with
         Options) shall become fully exercisable,

                  (c) all Restricted Stock and Performance Shares shall become
         fully vested, and

                  (d) All Incentive Bonuses that have been approved and accrued
         shall become fully payable.

16.      EFFECTIVE DATE AND SHAREHOLDER APPROVAL.

         The Effective Date of the Plan shall be November 27, 2000 (the date the
Plan was approved by the Board of Directors) subject to receipt within one year
of such date the approval of the Plan by the holders of a majority of the total
voting power of the voting securities of the Company present in person or
represented by proxy at a meeting of shareholders at which the approval of such
Plan is considered.

17.      AMENDMENT AND TERMINATION.

         17.1 The Plan

                  (a) Amendment. The Board of Directors may amend the Plan from
         time to time in its sole discretion unless the amendment would,
         pursuant to any applicable federal, state or local law or pursuant to
         the rules of the exchange upon which the Common Stock is then trading,
         require shareholder approval, in which event such approval shall be
         obtained. However, no amendment shall adversely affect the rights of
         any Participant under any Award theretofore made under the Plan,
         without the Participant's consent.

                  (b) Termination. The Plan shall terminate automatically on the
         tenth anniversary of the Effective Date, and the Board of Directors may
         suspend or terminate the Plan at any earlier time. Upon termination of
         the Plan, no additional Awards shall be granted under the Plan;
         provided, however, that the terms of the Plan shall continue in full
         force and effect with respect to outstanding Awards and Shares issued
         under the Plan.

                                      -17-
<PAGE>

         17.2 Awards. Subject to the terms and conditions and the limitations of
the Plan, the Committee may in the exercise of its sole discretion modify,
extend or renew the terms of outstanding Awards granted under the Plan, or
accept the surrender of outstanding Awards (to the extent not theretofore
exercised). Notwithstanding the foregoing, however, no modification of an Award
shall, without the consent of the Participant, impair any rights or obligations
under any Awards theretofore granted under the Plan.

18.      MISCELLANEOUS.

         18.1 No Individual Rights. No person shall have any claim or right to
be granted an Award under the Plan, or having been selected as a Participant for
one Award, to be so selected again. Neither the establishment of the Plan nor
any amendments thereto, nor the granting of any Award under the Plan, shall be
construed as in any way modifying or affecting, or evidencing any intention or
understanding with respect to, the terms of the employment of any Participant
with the Company or any of its Subsidiaries.

         18.2 Multiple Awards. Subject to the terms and restrictions set forth
in the Plan, a Participant may hold more than one Award.

         18.3 Written Notice. As used herein, any notices required hereunder
shall be in writing and shall be given on the forms, if any, provided or
specified by the Committee. Written notice shall be effective upon actual
receipt by the person to whom such notice is to be given; provided, however,
that in the case of notices to Participants and their transferees, heirs,
legatees and legal representatives, notice shall be effective upon delivery if
delivered personally or three business days after mailing, registered first
class postage prepaid to the last known address of the person to whom notice is
given. Written notice shall be given to the Committee and the Company at the
following address or such other address as may be specified from time to time:

                  The Shaw Group Inc.
                  4171 Essen Lane
                  Baton Rouge, Louisiana  70809
                  Attention:  Secretary

         18.4 Unfunded Plan. The Plan shall be unfunded and shall not create
(and shall not be construed to create) a trust or a separate fund or funds. The
Plan shall not establish any fiduciary relationship between the Company and any
Participant. To the extent any person holds any obligation of the Company by an
Award granted under the Plan, such obligation shall merely constitute a general
unsecured liability of the Company and accordingly, shall not confer upon such
person any right, title or interest in any assets of the Company.

         18.5 Applicable Law; Severability. The Plan shall be governed by and
construed in all respects in accordance with the laws of the State of Louisiana.
If any provision of the Plan shall be held by a court of competent jurisdiction
to be invalid or unenforceable, the remaining provisions of the Plan shall
continue to be fully effective.

                                      -18-<PAGE>

                                                                     Exhibit 4.2

                                    SERIES A

                             CONVERTIBLE PREFERRED

                         SECURITIES PURCHASE AGREEMENT

                      BY AND AMONG DIRECT CORPORATION AND

                          SSM VENTURE PARTNERS, L.P.,

               NORO-MOSELEY PARTNERS II, L.P. AND DAVID F. BELLET

                             DATED DECEMBER 2, 1994
<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<S>      <C>                                                                    <C>
1.       Authorization and Sale of Shares......................................  1
         1.1      Authorization................................................  1
         1.2      Sale of Shares...............................................  1
         1.3      Use of Proceeds..............................................  1

2.       The Closing...........................................................  2

3.       Representations of the Company and its Subsidiaries...................  2
         3.1      Organization and Standing....................................  2
         3.2      Subsidiaries.................................................  2
         3.3      Capitalization...............................................  3
         3.4      Stockholder List and Agreements..............................  3
         3.5      Issuance of Shares...........................................  4
         3.6      Authority for Agreement......................................  4
         3.7      Governmental Consents........................................  4
         3.8      Litigation...................................................  5
         3.9      Financial Statements.........................................  5
         3.10     Reserves and other Insurance Liabilities.....................  6
         3.11     Absence of Liabilities.......................................  6
         3.12     Taxes........................................................  7
         3.13     Property and Assets..........................................  7
         3.14     Patents and Trademarks.......................................  8
         3.15     Insurance....................................................  8
         3.16     Material Contracts and Obligations...........................  8
         3.17     Compliance...................................................  8
         3.18     Absence of Changes...........................................  9
         3.19     Employees.................................................... 10
         3.20     ERISA........................................................ 10
         3.21     Books and Records............................................ 10
         3.22     Accounts and Notes Receivable................................ 11
         3.23     "Sensitive" Payments......................................... 11
         3.24     U.S. Real Property Holding Corporation....................... 11
         3.25     Disclosures.................................................. 11

4.       Representations of the Purchasers..................................... 12
         4.1      Investment................................................... 12
         4.2      Authority.................................................... 12
         4.3      Experience................................................... 12
         4.4      Accredited Investor.......................................... 12

5.       Conditions to the Obligations of the Purchasers....................... 12
         5.1      Accuracy of Representations and Warranties................... 12
         5.2      Performance.................................................. 12
         5.3      Opinion of Counsel........................................... 13
         5.4      Other Agreements............................................. 13
         5.5      Certificates and Documents................................... 13
         5.6      Minimum Investment........................................... 14
         5.7      Compliance Certificate....................................... 14
</TABLE>

                                       i
<PAGE>

<TABLE>
<S>      <C>                                                                    <C>
         5.8      Absence of Material Adverse Change........................... 14
         5.9      Bank Financing............................................... 14
         5.10     Other Matters................................................ 14

6.       Conditions to the Obligations of the Company.......................... 14
         6.1      Accuracy of Representations and Warranties................... 15
         6.2      Compliance Certificate........................................15

7.       Covenants of the Company.............................................. 15
         7.1      Inspection................................................... 15
         7.2      Observer Rights.............................................. 15
         7.3      Financial Statements and Other Information................... 16
         7.4      Material Changes and Litigation.............................. 17
         7.5      Key Man Insurance............................................ 18
         7.6      Right of First Refusal....................................... 18
         7.7      Auditor and Actuary.......................................... 19
         7.8      Compensation of Executive Officers and Selection of
                  President and Chief Operating Officer........................ 20
         7.9      Additional Covenants......................................... 20
         7.10     Negative Covenants........................................... 21
         7.11     Expenses of Directors and Purchaser Representatives.......... 23
         7.12     Reservation of Common Stock.................................. 23
         7.13     Disaster Recovery Plan and Implementation.................... 24
         7.14     Director and Officer Insurance............................... 24
         7.15     Stock Option Plan............................................ 24
         7.16     Interested Party Transactions................................ 24
         7.17     Termination of Covenants..................................... 24

8.       Registration Rights................................................... 24
         8.1      Certain Definitions.......................................... 24
         8.2      Sale or Transfer of Shares; Legend........................... 25
         8.3      Required Registrations....................................... 26
         8.4      Incidental Registration...................................... 28
         8.5      Registration Procedures...................................... 29
         8.6      Allocation of Expenses....................................... 30
         8.7      Indemnification and Contribution............................. 30
         8.8      Indemnification with Respect to Underwritten Offering........ 32
         8.9      Information by Holder........................................ 33
         8.10     "Stand-Off" Agreement........................................ 33
         8.11     Limitations on Subsequent Registration Rights................ 33
         8.12     Rule 144 Requirements........................................ 34
         8.13     Selection of Underwriter..................................... 34
         8.14     Mergers, Etc................................................. 34
</TABLE>

                                       ii
<PAGE>

<TABLE>
<S>      <C>                                                                    <C>
9.       Successors and Assigns................................................ 35

10.      Transfers of Certain Rights........................................... 35

11.      Confidentiality....................................................... 35

12.      Survival of Representations and Warranties............................ 36

13.      Expenses.............................................................. 36

14.      Notices............................................................... 36

15.      Brokers............................................................... 36

16.      Irrevocable Proxy..................................................... 37

17.      Entire Agreement...................................................... 37

18.      Amendments and Waivers................................................ 37

19.      Counterparts.......................................................... 37

20.      Headings.............................................................. 37

21.      Severability.......................................................... 38

22.      Governing Law......................................................... 38
</TABLE>

Exhibits

Exhibit A -.......Purchaser List

Exhibit B -.......Articles of Amendment

Exhibit C -.......Disclosure Letter

Exhibit D -.......Stockholder List

Exhibit E -.......Form of Opinion - Wyatt, Tarrant & Combs

Exhibit F -.......Form of Stockholders Agreement

Exhibit G -.......Form of Noncompetition and Confidentiality Agreement

Exhibit H -.......Form of Indemnification Agreement

                                      iii
<PAGE>

                          SECURITIES PURCHASE AGREEMENT

         This Securities Purchase Agreement is made and entered into as of this
2nd day of December, 1994, by and among Direct Corporation, a Tennessee
corporation (the "Company"), and the individuals and entities listed on Exhibit
A hereto (the "Purchasers").

         In consideration of the mutual promises and covenants contained in this
Agreement, the parties hereto agree as follows:

         1.       Authorization and Sale of Shares.

                  1.1      Authorization. The Company has, or before the Closing
(as defined in Section 2) will have, duly authorized the sale and issuance of
244,812 shares of its Series A Convertible Preferred Stock, no par value (the
"Series A Preferred"), having the rights, restrictions, privileges, preferences
and voting powers set forth in the Articles of Amendment to the Company's
Charter attached hereto as Exhibit B (the "Articles of Amendment"). The Company
has, or on or before the Closing will have, adopted and filed the Articles of
Amendment with the Secretary of State of the State of Tennessee.

                  1.2      Sale of Shares. Subject to the terms and conditions
of this Agreement, at the Closing the Company will sell and issue to each of the
Purchasers, and each of the Purchasers will purchase, the number of shares of
Series A Preferred set forth opposite such Purchaser's name on Exhibit A for the
                                                               ---------
purchase price of $24.51 per share. The shares of Series A Preferred being sold
under this Agreement are referred to as the "Shares". The Company's agreement
with each of the Purchasers is a separate agreement, and the sale of Shares to
each of the Purchasers is a separate sale.

                  1.3      Use of Proceeds. The Company will use the proceeds
from the sale of the Shares as follows:

                           (i)      Approximately $2.0 million of the net
proceeds will be contributed to the capital of Direct Insurance Company, to
provide increased capacity to write and retain non-standard automobile
insurance;

                           (ii)     Approximately $.8 million will be utilized
to retire intercompany receivables and payables between Direct Insurance Company
and Direct General Insurance Agency of Louisiana, Inc.;

                           (iii)    The remaining net proceeds of approximately
$3.0 million will be utilized for future acquisitions of one or more shell
property and casualty insurance companies. The
<PAGE>

Company has no current commitments to acquire a shell company, however, the
Company is actively evaluating possible acquisition candidates; and

                           (iv)     Until the net proceeds from the sale of the
Shares are used for such acquisitions, the Company will utilize such proceeds to
reduce subsidiary borrowings under its principal credit facility, manage
intercompany cash flow requirements and/or invest in short--term interest
bearing securities.

         2.       The Closing. The closing ("Closing") of the sale and purchase
of the Shares under this Agreement shall take place at the offices of Bass,
Berry & Sims, 2500 First American Center, 10:00 a.m. on December 2, 1994, or at
such other time, date, and place as are mutually agreeable to the Company and
special counsel to the Purchasers, but in no event later than December 30, 1994.
At the Closing, the Company will deliver to each of the Purchasers a certificate
for the number of Shares being purchased by such Purchaser, registered in the
name of such Purchaser, against payment to the Company of the purchase price
therefor, by wire transfer, check, or other method mutually acceptable to the
Company and the Purchaser. The date of the Closing is hereinafter referred to as
the "Closing Date". If at the Closing any of the conditions specified in Section
5 shall not have been fulfilled, each of the Purchasers shall, at its election,
be relieved of all of its obligations under this Agreement without thereby
waiving any other rights he or it may have reason of such failure or such
non-fulfillment.

         3.       Representations of the Company and its Subsidiaries. Subject
to and except as disclosed by the Company and its subsidiaries in Exhibit C
hereto (the "Disclosure Letter"), the Company and its subsidiaries hereby
represent and warrant to each of the Purchasers as follows:

                  3.1      Organization and Standing. The Company is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Tennessee and has full corporate power and authority to
conduct its business as presently conducted and as proposed to be conducted by
it and to enter into and perform this Agreement and to carry out the
transactions contemplated by this Agreement. The Company is duly qualified to do
business as a foreign corporation and is in good standing in every other
jurisdiction in which the failure to so qualify would have a material adverse
effect on the operations or financial condition of the Company. The Company has
furnished to special counsel to the Purchasers true and complete copies of its
Charter and Bylaws, each as amended to date and presently in effect.

                  3.2      Subsidiaries. Each subsidiary of the Company has been
duly incorporated and is validly existing as a corporation under the laws of the
jurisdiction of its incorporation and is duly under the

                                       2
<PAGE>

laws of the jurisdiction of its incorporation and is duly licensed or qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on the conduct of the business or the ownership of the Company and its
subsidiaries, taken as a whole; all of the issued and outstanding shares of each
such subsidiary have been duly and validly issued and are fully paid and
nonassessable; and, except as set forth in Exhibit C, all of such shares are
owned by the Company, free and clear of any mortgage, pledge, lien, encumbrance,
claim or equity. A complete list of the Company's subsidiaries, containing the
state of incorporation, all foreign qualifications and setting forth any
minority ownership interest, is set forth in Exhibit C.

                  3.3      Capitalization. Giving effect to the filing of the
Articles of Amendment, the authorized capital stock of the Company (immediately
prior to the Closing) will consist of 10,000,000 shares of common stock, no par
value (the "Common Stock"), of which 1,007,670 shares are issued and
outstanding, and 1,000,000 shares of preferred stock, no par value (the
"Preferred Stock"); of the 1,000,000 shares of Preferred Stock authorized,
244,812 shares are authorized and constitute the Series A Preferred. Immediately
prior to the Closing, there will be no shares of Series A Preferred issued and
outstanding. All of the issued and outstanding shares of Common Stock have been
duly authorized and validly issued and are full-paid and nonassessable. Except
as set forth in Exhibit C or provided in this Agreement, (i) no subscription,
warrant, option, convertible security or other right (contingent or otherwise)
to purchase or acquire any shares of capital stock of the Company is authorized
or outstanding, (ii) the Company has no obligation (contingent or otherwise) to
issue any subscription, warrant, option, convertible security, or other such
right or to issue or distribute to holders of any shares of its capital stock
any evidences of indebtedness or assets of the Company, and (iii) the Company
has no obligation (contingent or otherwise) to purchase, redeem, or otherwise
acquire any shares of its capital stock or any interest therein or to pay any
dividend or make any other distribution in respect thereof. Except as provided
in this Agreement, no person or entity is entitled to (i) any preemptive or
similar right with respect to the issuance of any capital stock of the Company
or (ii) any rights with respect to the registration of any capital stock of the
Company under the Securities Act of 1933, as amended (the "Securities Act"). All
of the issued and outstanding shares of Common Stock have been offered, issued,
and sold by the Company in compliance with applicable federal and state
securities laws. To the best of the Company's knowledge, no stockholder of the
Company has granted options or other rights to purchase any shares of Common
Stock from such stockholder.

                  3.4      Stockholder List and Agreements. Attached as Exhibit
D is a true and complete list of the stockholders of the Company, showing the
number of shares of Common Stock of the Company held of record and beneficially
by each stockholder as of the date of this Agreement. Except as contemplated by
this Agreement, there are no agreements, written or oral, between the Company
and any holder of its

                                       3
<PAGE>

capital stock, or, to the best knowledge of the Company, among any holders of
its capital stock, relating to the acquisition (including, without limitation,
rights of first refusal or preemptive rights), disposition, or voting of the
capital stock of the Company.

                  3.5      Issuance of Shares. The issuance, sale, and delivery
of the Shares in accordance with this Agreement, and the issuance and delivery
of the shares of Common Stock issuable upon conversion of the Shares, have been
duly authorized by all necessary corporate action on the part of the Company,
and all such shares have been duly reserved for issuance. The Shares when so
issued, sold and delivered against payment therefor in accordance with the
provisions of this Agreement, and the shares of Common Stock issuable upon
conversion of the Shares, when issued upon such conversion, will be duly and
validly issued, fully paid, and nonassessable.

                  3.6      Authority for Agreement. The execution, delivery, and
performance by the Company of this Agreement and all other agreements required
to be executed by the Company or any of its subsidiaries on or prior to Closing
pursuant to Section 5.4 (the "Ancillary Agreements"), and the consummation by
the Company of the transactions contemplated hereby and thereby, have been duly
authorized by all necessary corporate action. This Agreement and the Ancillary
Agreements have been duly executed and delivered by the Company and constitute
valid and binding obligations of the Company enforceable in accordance with
their respective terms. The execution of and performance of the transactions
contemplated by this Agreement and the Ancillary Agreements and compliance with
their provisions by the Company and each of its subsidiaries will not violate
any provision of law and will not conflict with or result in any breach of any
of the terms, conditions, or provisions of, or constitute a default under, or
require a consent or waiver under, its Charter or Bylaws (each as amended to
date and presently in effect) or any indenture, lease, agreement (including any
governmental order, decree or consent), or other instrument to which the Company
or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or any of their properties is bound, or any decree, judgment,
order, statute, rule or regulation applicable to the Company or any of its
subsidiaries.

                  3.7      Governmental Consents. No consent, approval, order,
or authorization of, or registration, qualification, designation, declaration,
or filing with, any governmental authority is required on the part of the
Company or any of its subsidiaries in connection with the execution and delivery
of this Agreement, the offer, issuance, sale, and delivery of the Shares, or the
other transactions to be consummated at the Closing, as contemplated by this
Agreement,

                                       4
<PAGE>

except such filings as shall have been made prior to and shall be effective on
and as of the Closing. Based on the representations made by each of the
Purchasers in Section 4 of this Agreement, the offer and sale of the Shares to
each of the Purchasers will be in compliance with applicable federal and state
securities laws.

                  3.8      Litigation. There is no action, suits or proceeding,
or governmental inquiry or investigation, pending, or, to the best of the
Company's knowledge, any basis therefor or threat thereof, against the Company
or any of its subsidiaries, that questions the validity of this Agreement or the
right of the Company to enter into it, or that might result, either individually
or in the aggregate, in any material adverse change in the assets, condition
(financial or otherwise), business, or prospects of the Company and its
subsidiaries, taken as a whole, nor is there any litigation pending, or, to the
best of the Company's knowledge, any basis therefor or threat thereof, against
the Company by reason of the past employment relationships of any of the
Company's employees, the proposed activities of the Company, or negotiations by
the Company with possible investors in the Company. Set forth in Exhibit C is a
list of all material pending and threatened litigation, including, but not
limited to, all claims of bad faith against the Company, Direct Insurance
Company or any other subsidiary and all claims against the Company, and
governmental inquiries or investigations relating to the Company or any of its
subsidiaries, including any consent or agreed orders currently in effect.

                  3.9      Financial Statements. Except as set forth on Exhibit
C, the Company has furnished to each of the Purchasers (i) a complete and
correct copy of the unaudited balance sheets of the Company (on a consolidated
basis) and each of its subsidiaries (the "Balance Sheets") as at September 30,
1994 (the "Balance Sheet Date"), and the related statements of operations for
the nine months then ended, compiled by the Company and its subsidiaries
(collectively, the "Interim Financial Statements"); (ii) complete and correct
copies of the audited balance sheets of Direct Insurance Company as at December
31, 1993 (the "DIC Audited Balance Sheet Date") and the related statements of
operations and cash flows for the fiscal year then ended prepared, respectively,
in accordance with generally accepted accounting principles and statutory
accounting practices prescribed or permitted by the National Association of
Insurance Commissioners and the Tennessee Department of Commerce and Insurance
(the "DIC Financial Statements"); and (iii) a complete and correct copy of the
unaudited balance sheet of Direct General Insurance Agency, Inc., a Tennessee
corporation, as at December 31, 1993 (the "DGA Balance Sheet Date") and the
related statements of operations for the fiscal year then ended (the "DGA
Financial Statements") (collectively, the Interim Financial Statements, DIC
Financial Statements and DGA Financial Statements are the "Financial
Statements"). With respect to each of the subsidiaries set forth on Exhibit C
for which no Interim Financial Statements are provided, no material activity has
occurred in any such subsidiary as of September 30, 1994. The Financial
Statements are complete and correct, are in accordance with the books and
records of the Company and its subsidiaries and present fairly the financial

                                       5
<PAGE>

condition and results of operations of the Company and its subsidiaries, as at
the dates and for the periods indicated, and, except as set forth on Exhibit C,
have been prepared in accordance with (i) generally accepted accounting
principles consistently applied, or (ii) statutory accounting practices
prescribed or permitted by the National Association of Insurance Commissioners
and the Tennessee Department of Commerce and Insurance. In addition, the Company
has delivered to the Purchasers a consolidated proforma balance sheet as of
September 30, 1994, reflecting the Company and its subsidiaries following the
completion of the investment provided by this Agreement prepared in accordance
with generally accepted accounting principles consistently applied, except for
certain year end audit adjustments, which in the aggregate will not be material,
and footnotes.

                  3.10     Reserves and other Insurance Liabilities. The Direct
Insurance Company's reserves, including, but not limited to, loss reserves
(including loss adjustment expense reserves), loss reserves for claims incurred
but not reported (including loss adjustment expense reserves), and unearned
premiums, determined under statutory accounting practices as at September 30,
1994, as reflected in the Financial Statements, equal or exceed those required
under the insurance laws of the State of Tennessee, including interpretations
thereof by the Department of Commerce and Insurance of the State of Tennessee.
Each reserving assumption utilized by Direct Insurance Company in its
calculations of such reserves is reasonable in light of Direct Insurance
Company's experience, and no information has come to Direct Insurance Company's
attention which would cause it to believe that any such assumption should be
changed in any material respect.

                  3.11     Absence of Liabilities. Except as disclosed in
Exhibit C, the Company and its subsidiaries did not have, at the Balance Sheet
Date, any liabilities of any type that in the aggregate exceeded $250,000,
whether absolute or contingent, that were not fully reflected on the Balance
Sheets, and, since the Balance Sheet Date, neither the Company nor any of its
subsidiaries has incurred or otherwise become subject to any such liabilities or
obligations except in the ordinary course of business. In addition, except as
disclosed in Exhibit C, Direct Insurance Company and Direct General Insurance
Agency, Inc., a Tennessee corporation, respectively, did not have at the DIC and
DGA Balance Sheet Date any liabilities of any type that in the aggregate
exceeded $150,000, whether absolute or contingent, that were not fully reflected
on the DIC Audited Balance Sheet and the DGA Balance Sheet, and, since the DIC
and DGA Balance Sheet Date, neither Direct Insurance Company nor Direct General
Insurance Agency, Inc. has incurred or otherwise become subject to any such
liabilities or obligations except in the ordinary course of business.

                                       6
<PAGE>

                  3.12     Taxes. The amount shown on the Balance Sheets as
provision for taxes is sufficient in all material respects for payment of all
accrued and unpaid federal, state, county, local, and foreign taxes for the
period then ended and all prior periods. The Company and each of its
subsidiaries has filed or has obtained presently effective extensions with
respect to all federal, state, county, local, and foreign tax returns that are
required to be filed by it, such returns are true and correct and all taxes
shown thereon to be due have been timely paid with exceptions not material to
the Company or any of its subsidiaries. Federal income tax returns of the
Company and its subsidiaries have not been audited by the Internal Revenue
Service, and no controversy with respect to taxes of any type is pending or, to
the best knowledge of the Company or any of its subsidiaries, threatened.
Neither the Company nor any of its stockholders has ever filed (a) an election
pursuant to Section 1362 of the Internal Revenue Code of 1986, as amended (the
"Code"), that the Company be taxed as an S Corporation or (b) consent pursuant
to Section 341(f) of the Code relating to collapsible corporations.

                  3.13     Property and Assets. The Company and each of its
subsidiaries has good title to all of their respective properties and assets,
including all properties and assets reflected in the Balance Sheets, the DIC
Audited Balance Sheet and the DGA Balance Sheet, except those disposed of since
the date thereof in the ordinary course of business, and none of such properties
or assets is subject to any mortgage, pledge, lien, security interest, lease,
charge, or encumbrance other than those the material terms of which are
described in the Balance Sheets, the DIC Audited Balance Sheet, the DGA Balance
Sheet or in Exhibit C. The Company and its subsidiaries, taken as a whole, have
all assets and properties necessary to operate the Company and its subsidiaries
as currently operated and as necessary to operate the Company and its
subsidiaries consistent with the Company's business plan provided to the
Purchasers.

                  3.14     Patents and Trademarks. Set forth in Exhibit C is a
true and complete list of all patents, patent applications, trademarks, service
marks, trademark and service mark applications, trade names, copyrights, and
licenses presently owned or held by the Company or necessary for the conduct of
the Company's business as conducted and as proposed to be conducted, as well as
any agreement under which the Company has access to any confidential information
used by the Company in its business (the "Intellectual Property Rights"). The
Company owns, or has the right to use under the agreements or upon the terms
described in Exhibit C, all of the Intellectual Property Rights. To the best of
the Company's knowledge, the business proposed by the Company will not cause the
Company to infringe or violate any of the patents, trademarks, service marks,

                                       7
<PAGE>

trade names, copyrights, licenses, trade secrets, or other proprietary rights of
any other person or entity.

                  3.15     Insurance. The Company maintains valid policies of
workers' compensation insurance and of insurance with respect to its properties
and business of the kinds and in the amounts (i) not less than is customarily
obtained by corporations of established reputation engaged in the same or
similar business and similarly situated, including, without limitation,
insurance against loss, damage, fire, theft, public liability, and other risks
and (ii) in the judgment of the Company's Board of Directors, reasonably
exercised, are adequate to provide the necessary protection to the Company, its
subsidiaries and its business from risks associated with its business. Set forth
in Exhibit C is a complete list of all insurance policies maintained as of the
date hereof by the Company and its subsidiaries.

                  3.16     Material Contracts and Obligations. Exhibit C sets
forth a list of all material agreements of any nature to which the Company
and/or any of its subsidiaries is a party or by which any such entity is bound,
including without limitation (a) each agreement that requires future
expenditures by the Company and/or any of its subsidiaries in excess of $100,000
or that might result in payments to the Company and/or any of its subsidiaries
in excess of $100,000, (b) all employment and consulting agreements, employee
benefit, bonus, pension, profit sharing, stock option, stock purchase, and
similar plans and arrangements, and consulting, distributor and sales
representative agreements, (c) any agreement with any stockholder, officer, or
director of the Company, or any "affiliate" or "associate" of such persons (as
such terms are defined in the rules and regulations promulgated under the
Securities Act), including, without limitation, any agreement or other
arrangement providing for the furnishing of services by, rental of real or
personal property from, or otherwise requiring payments to, any such person or
entity, (d) any agreement relating for the Intellectual Property Rights, and (e)
all reinsurance agreements. The Company has delivered to special counsel to the
Purchasers copies of each of the foregoing agreements. All of such agreements
and contracts are valid, binding, and in full force and effect.

                  3.17     Compliance. Except as set forth in Exhibit C, the
Company and each of its subsidiaries has materially complied with all laws,
regulations, and orders applicable to its present and proposed business and has
all permits and licenses required thereby, including, but not limited to, the
state and local laws, regulations, orders, permits and licenses in each of
Alabama, Arkansas, Georgia, Kentucky, Louisiana, Mississippi, North Carolina and
Tennessee. There is no term or provision of any mortgage, indenture, contract,
agreement, or instrument to which the Company or any of its subsidiaries is a
party or by which it is bound, or of any provision of any state or federal
judgment, decree, order, reasonably likely to materially adversely affect, the
business, prospects, condition (financial or otherwise), affairs, or operations
of the Company or any of its subsidiaries or any of their respective properties
or assets. To the best of the Company's knowledge, no employee of the Company or
any of its

                                       8
<PAGE>

subsidiaries is in violation of any term of any contract or covenant (either
with the Company or with another entity) relating to employment, patents,
proprietary information disclosure, non-competition, or non-solicitation.
Notwithstanding the above, to the best of the Company's knowledge, after due
inquiry, the Company and its subsidiaries have fully complied with all consent
orders and/or decrees entered into by any such party with a federal, state or
local regulatory or governmental entity.

                  3.18     Absence of Changes. Excluding the transactions
contemplated by the Exchange Offer, which was effected on December 2, 1994,
since the Balance Sheet Date, and, with respect to Direct Insurance Company and
Direct General Insurance Agency, Inc., the DIC and DGA Balance Sheet Date, there
has not been:

                           (a)      Any change in the assets, liabilities,
financial condition, or operations of the Company or any of its subsidiaries
from that reflected in the Financial Statements, except changes in the ordinary
course of business that have not been, either individually or in the aggregate,
materially adverse;

                           (b)      Any material change (individually or in the
aggregate), except in the ordinary course of business, in the contingent
obligations of the Company or any of its subsidiaries by way of guaranty,
endorsement, indemnity, warranty, or otherwise;

                           (c)      Any waiver or compromise by the Company or
any of its subsidiaries of a valuable right or of a material debt owed to it;

                           (d)      Any loans, in the aggregate not to exceed
$100,000, made by the Company or any of its subsidiaries to its employees,
officers, or directors other than travel advances made in the ordinary course of
business;

                           (e)      Any extraordinary increases in the
compensation of any of the Company's or any of its subsidiaries' employees,
officers, or directors;

                           (f)      Any declaration or payment of any dividend
or other distribution of the assets of the Company or any of its subsidiaries;

                           (g)      Any issuance or sale by the Company of any
shares of its Common Stock or other securities;

                                       9
<PAGE>

                           (h)      To the best of the Company's knowledge, any
other event or condition of any character that has materially and adversely
affected the Company or any of its subsidiaries' business or prospects; or

                           (i)      Any agreement or commitment by the Company
or any of its subsidiaries or any of its subsidiaries to do any of the things
described in this subsection 3.18.

                  3.19     Employees. None of the employees of the Company or
any of its subsidiaries is represented by any labor union, and there is no labor
strike or other labor trouble pending with respect to the Company (including,
without limitation, any organizational drive) or, to the best knowledge of the
Company, threatened. The Company and its subsidiaries have complied in all
material respects with all applicable state and federal equal opportunity and
other laws relating to employment. No employee of the Company is or will be in
violation of any judgment, decree, or order or any term of any employment
contract, patent disclosure agreement, or other contractor agreement relating to
the relationship of any such employee with the Company or any of its
subsidiaries or any other party because of the nature of the business conducted
or to be conducted by the Company or any subsidiary thereof or the use by the
employee of his best efforts with respect to such business, except where such
violation would not result in any material adverse change in the assets,
condition (financial or otherwise), business, or prospects of the Company and
its subsidiaries, taken as a whole. Neither the Company nor any of its
subsidiaries is aware that any officer or key employee, or that any group of key
employees, intends to terminate their employment with the Company or any of its
subsidiaries, nor does the Company nor any of its subsidiaries have a present
intention to terminate the employment of any of the foregoing. Set forth in
Exhibit C is a list of all employees or consultants (excluding all commissioned
agents) to the Company or any of its subsidiaries that have received payments
from the Company and/or its subsidiaries in the aggregate of $100,000 or more
per annum since December 31, 1992.

                  3.20     ERISA. Except as set forth in Exhibit C, the Company
does not have or otherwise contribute to or participate in any employee benefit
plan subject to the Employee Retirement Income Security Act of 1974.

                  3.21     Books and Records. Except as set forth in Exhibit C,
the minute books of the Company and each of its subsidiaries contain complete
and accurate records of all meetings and other corporate actions of their
respective stockholders and Board of Directors and committees thereof. Each of
the stock ledgers of the Company and its subsidiaries is complete and reflects
all issuances, transfers, repurchases, and cancellations of shares of capital
stock of the Company and its subsidiaries, respectively.

                                       10
<PAGE>

                  3.22     Accounts and Notes Receivable. The accounts and notes
receivable of the Company and its subsidiaries, if any, reflected in the
Financial Statements, and those acquired and accrued thereafter through the date
of Closing are, and shall be, bona fide receivables created in the ordinary
course of business and the allowances for bad debts established in respect
thereof is reasonable.

                  3.23     "Sensitive" Payments. Neither the Company, any of its
subsidiaries, any of their respective officers or directors, nor anyone acting
on behalf of any of them, has made or received any "sensitive" payments, and no
such person has or will maintain any unrecorded cash or non-cash assets out of
which any "sensitive" payments might be made. Except as provided in the next
sentence, "sensitive" payments means whether or not illegal, (i) payments to or
from government officials or employees, (ii) commercial bribes or kick-backs,
(iii) amounts paid with an understanding that rebates or refunds will be made in
contravention of the laws of any jurisdiction, either directly or through a
third party, (iv) political contributions and (v) payments or commitments
(whether made in form of commissions, payments of fees for goods or services
received or otherwise) made with the understanding or under circumstances which
would indicate that all or part thereof is to be paid by the recipient to
government officials or employees or as a commercial bribe, influence payment or
kick-back. However, "sensitive" payments shall not include contributions to
political campaigns or organizations which are permissible under federal and
state election laws.

                  3.24     U.S. Real Property Holding Corporation. The Company
is not now and has never been a "United States Real Property Holding
Corporation" as defined in Section 897(c) (2) of the Code and Section 1.897-2
(b) of the Regulations promulgated by the Internal Revenue Service.

                  3.25     Disclosures. Neither this Agreement nor any exhibit
hereto, nor any report, certificate, or instrument furnished to any of the
Purchasers or their special counsel in connection with the transactions
contemplated by this Agreement, when read together, contains or will contain any
untrue statement of a material fact or omits or will omit to state a material
fact necessary in order to make the statements contained herein or therein, in
light of the circumstances under which they were made, not misleading. The
Company knows of no information or fact that has or would have a material
adverse effect on the business, prospects, or condition (financial or otherwise)
of the Company or its subsidiaries that has not been disclosed to the Purchasers
in writing. The projections, taken as a whole, furnished to Purchasers, were
made with due care based on

                                       11
<PAGE>

assumptions which the Company believed in good faith to be reasonable as of the
date thereof. These projections were made by the Company based on assumptions
which the Company did not consider improbable or unlikely, including, but not
limited to, the performance of Direct General Insurance Agency of Louisiana,
Inc., and allocations of general expenses of the Company and its subsidiaries.

         4.       Representations of the Purchasers. Each of the Purchasers
severally and solely as to such Purchaser represents and warrants to the Company
as follows:

                  4.1      Investment. Such Purchaser is acquiring the Shares,
and the shares of Common Stock into which the Shares may be converted, for his
or its own account for investment and not with a view to, or for sale in
connection with, any distribution thereof, nor with any present intention of
distributing or selling the same; and, except as contemplated by this Agreement
and the Exhibits hereto, such Purchaser has no present or contemplated
agreement, undertaking, arrangement, obligation, indebtedness, or commitment
providing for the disposition thereof.

                  4.2      Authority. Such Purchaser has full power and
authority to enter into and to perform this Agreement in accordance with its
terms. Any Purchaser that is a corporation, partnership, or trust represents
that it has not been organized, reorganized, or recapitalized specifically for
the purpose of investing in the Company.

                  4.3      Experience. Such Purchaser has carefully reviewed the
representations concerning the Company contained in this Agreement and has made
detailed inquiry concerning the Company, its business, and its personnel; the
officers of the Company have made available to such Purchaser any and all
written information that he or it has requested and have answered to such
Purchaser's satisfaction all inquiries made by such Purchaser; and such
Purchaser has adequate net worth and means of providing for its current needs
and contingencies to sustain a complete loss of its investment in the Company;
such Purchaser's overall commitment to investments that are not readily
marketable is not disproportionate to its net worth and such Purchaser's
investment in the Shares will not cause such overall commitment to become
excessive.

                  4.4      Accredited Investor. Each Purchaser is an Accredited
Investor within the definition set forth in Rule 501(a) of Regulation D of the
Securities Act.

         5.       Conditions to the Obligations of the Purchasers. The
obligation of each of the Purchasers to purchase Shares at the Closing is
subject to the fulfillment, or the waiver by such Purchaser, of each of the
following conditions on or before the Closing Date.

                                       12
<PAGE>

                  5.1      Accuracy of Representations and Warranties. Each
representation and warranty contained in Section 3 shall be true on and as of
the Closing Date with the same effect as though such representation and warranty
had been made on and as of that date.

                  5.2      Performance. The Company shall have performed and
complied with all agreements and conditions contained in this Agreement required
to be performed or complied with by the Company prior to or at the Closing.

                  5.3      Opinion of Counsel. Each Purchaser shall have
received an opinion from Wyatt, Tarrant & Combs, counsel for the Company, dated
the Closing Date, addressed to the Purchasers, in the form of Exhibit E.

                  5.4      Other Agreements.

                           (a)      The Stockholders Agreement attached hereto
as Exhibit F (the "Stockholders Agreement") shall have been executed and
delivered by the Company, by each of the Purchasers, and by each of the
Stockholders (as defined therein). All such action shall have been taken as may
be necessary to elect a Board of Directors of the Company, effective upon the
Closing, in accordance with the Stockholders Agreement.

                           (b)      The Noncompetition and Confidentiality
Agreements, a form of which is attached hereto as Exhibit G (the "Noncompetition
Agreements"), shall have been executed and delivered by William Adair and Jackie
Crawford, respectively, and by the Company.

                           (c)      The Indemnity Agreements, a form of which is
attached hereto as Exhibit H (the "Indemnity Agreement") shall have been
executed and delivered by the Company and each of the Purchasers, respectively.

                  5.5      Certificates and Documents. The Company shall have
delivered to special counsel to the Purchasers:

                           (a)      The charters, as amended, of the Company and
each of its subsidiaries, in effect prior to the Closing Date, certified by the
Secretary of State of the state of their incorporation.

                           (b)      Certificates, as of the most recent
practicable dates, as to the corporate good standing of the Company and its
subsidiaries issued by the jurisdictions in which the Company or any of its
subsidiaries is conducting business or is otherwise required to qualify.

                                       13
<PAGE>

                           (c)      Bylaws of the Company and each of its
subsidiaries, certified by its Secretary or Assistant Secretary as of the
Closing Date; and

                           (d)      Resolutions of the Board of Directors of the
Company, authorizing and approving all matters in connection with this
Agreement, the Ancillary Agreements, and the transactions contemplated hereby
and thereby, certified by the Secretary or Assistant Secretary of the Company as
of the Closing Date.

                  5.6      Minimum Investment. Purchasers shall have tendered at
the Closing aggregate consideration of not less than $6,000,000 for the purchase
of Shares.

                  5.7      Compliance Certificate. The Company shall have
delivered to the Purchasers a certificate, executed by the President of the
Company, dated the Closing Date, certifying to the fulfillment of the conditions
specified in subsections 5.2, 5.4 and 5.5 of this Agreement.

                  5.8      Absence of Material Adverse Change. Except as
disclosed in Exhibit C, there shall have been no material adverse change in the
business or financial condition or results of operations of the Company or any
of its subsidiaries, taken as a whole, since the Balance Sheet Date, or, with
respect to Direct Insurance Company and Direct General Insurance Agency, Inc..,
since the DIC and DGA Balance Sheet Date, and no material litigation or other
proceeding shall have been commenced or threatened by any person, including
without limitation any governmental agency, relating to any of the proposed
transactions, or against the Company or any of its subsidiaries or any of their
properties which are material to their business or operations and the Purchasers
shall have received a certificate to that affect, dated the Closing Date, signed
by Chief Executive Officer of the Company.

                  5.9      Bank Financing. On or before the Closing Date, the
Company shall have entered into a credit facility (the "Credit Facility"),
approved by the Purchasers, and provided by First Tennessee Bank, N.A., as
agent, and the other participating banks, with borrowing availability up to
$15.0 million.

                  5.10     Other Matters. All corporate and other proceedings in
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Purchasers and their special counsel,
and the Purchasers and their special counsel shall have received all such
counterpart originals or certified or other copies of such documents as they may
reasonably request.

         6.       Conditions to the Obligations of the Company. The obligations
of the Company under subsection 1.2 of this Agreement are subject to
fulfillment, on or before the Closing Date, of each of the following conditions:

                                       14
<PAGE>

                  6.1      Accuracy of Representations and Warranties. Each of
the representations and warranties of the Purchasers contained in Section 4
shall be true on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of that date.

                  6.2      Compliance Certificate. The Purchasers shall have
delivered to the Company a Certificate, executed by a duly authorized officer of
each of the Purchasers, dated the Closing Date, certifying to the fulfillment of
the conditions specified in subsection 6.1 of this Agreement.

         7.       Covenants of the Company.

                  7.1      Inspection. The Company and its subsidiaries shall
permit each Purchaser, or any authorized representative thereof, to visit and
inspect the properties of the Company and its subsidiaries, including its
corporate and financial records, and to discuss its business and finances with
officers of the Company, during normal business hours following reasonable
notice and as often as may be reasonably requested. In addition, the Company and
its subsidiaries agree to provide the Purchasers, so long as they are holders of
capital stock of the Company, copies of all information reasonably requested by
such Purchasers from the Company or its subsidiaries. All such requested
information shall be provided to the Purchasers within thirty (30) business days
of the request, unless otherwise agreed to in writing.

                  7.2      Observer Rights. The company will permit each holder
of not less than 25% of the Shares (including shares of Common Stock into which
Shares have been converted and as adjusted for stock splits, stock dividends,
and other recapitalizations), or any authorized representatives thereof, to
attend all meetings of the Board of Directors of the Company, and shall, upon
the written request of such holder, provide him or it with such notice of and
other information with respect to such meetings as are delivered to the
directors of the Company. Upon the written request of any such holder, the
Company shall notify such holder, within 10 days thereafter, of the taking of
any written action by the Board of Directors of the Company in lieu of a meeting
thereof. Any holder exercising his or its rights under this subsection, and his
or its representatives, shall maintain the confidentiality of all financial,
confidential, and proprietary information of the Company acquired by them in
exercising such rights.

                                       15
<PAGE>

                  7.3      Financial Statements and Other Information.

                           (a)      During calendar year 1996 and from year to
year thereafter, the Company will deliver to each Purchaser (as soon as
available but not later than as set forth below):

                                    (i)      within ninety (90) days after the
end of each fiscal year of the Company, audited consolidated and consolidating
balance sheets of the Company as at the end of such year and audited
consolidated and consolidating statements of income and of cash flows of the
Company for such year, certified by certified public accountants of established
national reputation selected by the Company, and prepared in accordance with
generally accepted accounting principles;

                                    (ii)     within forty-five (45) days after
the end of each fiscal quarter of the Company, unaudited consolidated and
consolidating balance sheets of the Company as at the end of such quarter,
unaudited consolidated and consolidating statements of income and of cash flows
of the Company for such fiscal quarter and for the current fiscal year to the
end of such fiscal quarter, and the comparable historical financial statements
for the corresponding prior year period;

                                    (iii)    within forty-five (45) days after
the end of each month, an unaudited consolidated balance sheet of the Company as
at the end of such month, unaudited consolidated statements of income and of
cash flows of the Company for such month and for the current fiscal year to the
end of such month, setting forth in comparative form the Company's projected
financial statements for the corresponding periods for the current fiscal year,
and the comparable historical financial statements for the corresponding prior
year period;

                                    (iv)     within three (3) days of delivery
to any regulatory entity or other third party, copies of any Company or
subsidiary financial statements or other financial information (e.g. statutory
audited and unaudited financial statements of the insurance subsidiary);

                                    (v)      as soon as available, but in any
event no later than thirty (30) days prior to commencement of each new fiscal
year (excluding fiscal year 1995), a business plan and projected financial
statements for such fiscal year;

                                    (vi)     within ten (10) days after the
discovery or notification that the Company is not in compliance with this
Agreement or any other material agreement to which the Company is a party, a
detailed statement outlining such noncompliance or default;

                                       16
<PAGE>

                                    (vii)    within ten (10) days of delivery,
such other notices, information, and data with respect to the Company as the
Company delivers to the holders of its Common Stock;

                                    (viii)   within forty-five (45) days after
the end of each fiscal quarter of the Company, an actuarial statement consistent
in form and substance to the annual actuarial statement required to be filed
with the Department of Insurance; and

                                    (ix)     within thirty (30) days after the
end of each month, the Company will provide monthly management reports and the
experience reports.

                           (b)      The foregoing financial statements shall be
prepared on a consolidated basis, unless otherwise designated. The financial
statements delivered pursuant to clauses (ii) and (iii) of paragraph (a) shall
be accompanied by a certificate of the Chief Financial Officer of the Company
stating that such statements have been prepared in accordance with generally
accepted accounting principles consistently applied (except as noted therein)
and fairly present the financial condition of the Company at the date thereof
and for the periods covered thereby. The financial statements delivered pursuant
to clause (ii) shall also be accompanied by a certificate from the Chief
Financial Officer of the Company stating whether the Company is in compliance
with this Agreement, its Charter and Bylaws, and all funded debt agreements
(including loan and security agreements and, with respect to such agreements,
whether there has been a waiver by a third party of any default under such
agreement since delivery of the previous certificate) and, with respect to all
other indentures, leases, agreements and instruments to which the Company is a
party or by which it or any of its properties is bound, that the Company is in
compliance, except where the failure to be in compliance would not result in any
material adverse effect to the assets, condition (financial or otherwise),
business, or prospects of the Company and its subsidiaries, taken as a whole.

                           (c)      During calendar year 1995, the Company shall
deliver to the Purchasers such financial and other information as the Company is
required to deliver to its lenders pursuant to the Credit Facility within the
same time periods and in such form as required by the Credit Facility. In
addition, during calendar year 1995 the Company shall provide the information
set forth in Section 7.3(a) (viii) and (ix).

                  7.4      Material Changes and Litigation. The Company shall
promptly notify the Purchasers of any material adverse change in the business,
properties, assets or condition, financial, or otherwise, of the Company or any
of its subsidiaries and of any litigation or governmental proceeding or
investigation pending or, to the best knowledge of the Company, threatened
against the Company, or any of its subsidiaries, or against any officer,
director, key employee, or principal stockholder of the Company, which may
result in a material adverse effect upon the Company and its subsidiaries, taken
as a whole.

                                       17
<PAGE>

                  7.5      Key Man Insurance. The Company will maintain term
life insurance upon the life of William C. Adair, Jr. in an amount not less than
$5.0 million, with the proceeds payable to the Company to be used by the Company
to finance the redemption of shares of Series A Preferred required by Article 2
Paragraph A(f) of the Articles of Amendment or, if such redemption is either (i)
unnecessary because of the prior conversion or redemption of such Shares or (ii)
illegal, to be used by the Company solely for purposes deemed appropriate by the
Board of Directors. In the event William C. Adair, Jr. dies and shares of Series
A Preferred are outstanding at such time, the Company agrees to escrow the funds
payable pursuant to the term life insurance policy for a period of one year from
the date of receipt or such shorter period of time necessary to fulfill the
redemption obligations in Paragraph (f) of Article 2 of the Articles of
Amendment.

                  7.6      Right of First Refusal.

                           (a)      The Company hereby grants to each Purchaser
a right of first refusal to purchase all or any part of such Purchaser's pro
rata share of New Securities (as defined below) that the Company may, from time
to time, propose to sell and issue, subject to the terms and conditions set
forth below. A Purchaser's pro rata share, for purposes of this subsection 7.6,
shall equal a fraction, the numerator of which is the number of shares of Common
Stock then held by such Purchaser or issuable upon conversion or exercise of any
Shares, convertible securities, options, rights, or warrants then held by such
Purchaser, and the denominator of which is the total number of shares of Common
Stock then outstanding plus the total number of shares of Common Stock issuable
upon conversion or exercise of then outstanding Shares, convertible securities,
options, rights, or warrants.

                           (b)      "New Securities" shall mean any capital
stock of the Company whether now authorized or not, and rights, options, or
warrants to purchase capital stock, and securities of any type whatsoever that
are, or may become, convertible into capital stock; provided, however, that the
term "New Securities" does not include (i) the Shares issuable under this
Agreement or the shares of Common Stock issuable upon conversion of the Shares;
(ii) securities offered to the public pursuant to a Registration Statement (as
defined in subsection 8. 1); (iii) securities issued for the acquisition of
another corporation by the Company by merger, purchase of substantially all the
assets of such corporation, or other reorganization resulting in the ownership
by the Company of not less than a majority of the voting power of such
corporation; (iv) not more than 60,000 shares of Common Stock issued to
employees or consultants of the Company pursuant to a stock option plan,
employee stock purchase plan, restricted stock plan, or other employee stock
plan or agreement; or (v) securities issued as a result of any stock split,
stock dividend, or reclassification of Common Stock, distributable on a pro rata
basis to all holders of Common Stock.

                                       18
<PAGE>

                           (c)      In the event the Company intends to issue
New Securities, it shall give each Purchaser written notice of such intention,
describing the type of New Securities to be issued, the price thereof, and the
general terms upon which the Company proposes to effect such issuance. Each
Purchaser shall have thirty (30) days from the date of any such notice to agree
to purchase all or part of his or its pro rata share of such New Securities for
the price and upon the general terms and conditions specified in the Company's
notice by giving written notice to the Company stating the quantity of New
Securities to be so purchased. Each Purchaser shall have a right of
over-allotment such that if any Purchaser fails to exercise its right hereunder
to purchase its total pro rata portion of New Securities, the other Purchasers
may purchase such portion on a pro rata basis, by giving written notice to the
Company within five (5) days from the date that the Company provides written
notice to the other Purchasers of the amount of New Securities with respect to
which such nonpurchasing Purchaser has failed to exercise in full its or his
right hereunder.

                           (d)      In the event any Purchaser or Purchasers
fail to exercise the foregoing right of first refusal with respect to any New
Securities within such 30-day period (or the additional five-day period provided
for over-allotments), the Company may within 90 days thereafter sell any or all
of such New Securities not agreed to be purchased by the Purchasers, at a price
and upon general terms no more favorable to the purchasers thereof than
specified in the notice given to each Purchaser pursuant to paragraph (c) above.
In the event the Company has not sold such New Securities within such 90-day
period, the Company shall not thereafter issue or sell any New Securities
without first offering such New Securities to the Purchasers in the manner
provided above.

                           (e)      Purchaser may apportion its pro rata share
among itself and its general partners, officers, limited partners, and any other
party mutually agreed to by the Company and the Purchaser, in such proportions
as it deems appropriate.

                  7.7      Auditor and Actuary. The Company shall retain a firm
of certified public accountants of established national reputation to audit its
books and records at least annually beginning with the audit for the calendar
year 1995. In addition, the Company shall retain an actuarial firm of national
reputation to provide actuarial services to the Company beginning with the
actuarial review for the year ended December 31, 1995 and continuing thereafter.

                                       19
<PAGE>

                  7.8      Compensation of Executive Officers and Selection of
President and Chief Operating Officer.

                           (a)      The Compensation Committee of the Board of
Directors of the Company shall establish the aggregate compensation to be paid
to each of the executive officers of the Company and each of its subsidiaries.
The Company agrees to obtain the consent of a majority of the outstanding Shares
prior to implementing any compensation increase to its executive officers,
consultants or any other persons who receive in the aggregate from the Company
or its subsidiaries or affiliates more than $175,000 per annum and, with respect
to William C. Adair, Jr., more than $250,000 plus year end bonus payable in the
ordinary course of business consistent with the Company's historic practice.

                           (b)      The Company shall use its best reasonable
efforts, including but not limited to the engagement of an executive search firm
of national reputation acceptable to the Purchasers, to employ an individual as
President and Chief Operating Officer and the employment thereof shall be
subject to the consent of a majority of the outstanding Shares. In addition, any
subsequent employment of another person in such capacity shall be subject to the
consent of a majority of the outstanding Shares.

                  7.9      Additional Covenants. So long as any of the Shares
are outstanding, the Company agrees as follows:

                           (a)      The Company will promptly pay and discharge,
or cause to be paid and discharged, when due and payable, all lawful taxes,
assessments, and governmental charges or levies imposed upon the income,
profits, property, or business of the Company or any subsidiary; provided,
however, that any such tax, assessment, charge, or levy need not be paid if the
validity thereof shall currently be contested in good faith by appropriate
proceedings and if the Company shall have set aside on its books adequate
reserves therefor; and provided, further, that the Company will pay all such
taxes, assessments, charges, or levies forthwith upon the commencement of
proceedings to foreclose any lien that may have attached as security therefor.
The Company will promptly pay or cause to be paid when due, or in conformance
with customary trade terms, all other indebtedness incident to the operations of
the Company;

                           (b)      The Company will keep its properties and
those of its subsidiaries in good repair, working order, and condition,
reasonable wear and tear excepted, and from time to time make all needful and
proper repairs, renewals, replacements, additions, and improvements thereto; and
the Company will at all times comply with the provisions of all material leases
to which any of them is a party or under which any of them occupies property so
as to prevent any loss or forfeiture thereof or thereunder;

                           (c)      The Company will keep its assets that are of
an insurable character insured by financially sound and reputable insurers
against loss or damage by fire, extended coverage, and explosion insurance in
amounts customary for companies in similar

                                       20
<PAGE>

businesses similarly situated; and the Company will maintain, with financially
sound and reputable insurers, insurance against other hazards, risks, and
liabilities to persons and property to the extent and in the manner customary
for companies in similar businesses similarly situated;

                           (d)      The Company will keep true records and books
of account in which full, true and correct entries will be made of all dealings
or transactions in relation to its business and affairs in accordance with
generally accepted accounting principles applied on a consistent basis;

                           (e)      The Company will comply with the
requirements of all applicable laws, rules, regulations, and orders of any
governmental authority, except to the extent such noncompliance does not
constitute a willful disregard for the law, rule, regulation or order or such
noncompliance would not result in a material adverse effect on the assets,
condition (financial or otherwise) business or prospects of the Company and its
subsidiaries, taken as a whole;

                           (f)      The Company shall maintain in full force and
effect its corporate existence, rights, and franchises and all licenses and
other rights to use patents, processes, licenses, trademarks, trade names,
service marks or copyrights owned or possessed by it or any subsidiary and
deemed by the Company to be necessary to the conduct of its business; and

                           (g)      Each of the Company's subsidiaries shall
continue to be wholly owned by the Company, except for Direct Insurance Agency
Midwest, Inc. which will continue to be 75% (or greater) owned by the Company.

                  7.10     Negative Covenants. So long as Shares are
outstanding, the Company (consistent with the provisions of the Articles of
Amendment) shall not, without the prior written consent of the holders of not
less than fifty-one percent (51%) of the outstanding Shares:

                           (a)      Authorize or issue any class or series of
stock, including, but not limited to, Convertible Securities (as defined in the
Company's Articles of Amendment to its Charter dated the date hereof, the
"Articles of Amendment"), in addition to Common Stock and Series A Preferred;

                           (b)      Authorize or issue additional shares of
Common Stock at a price per share less than the Initial Conversion Price (as
defined in the Articles of Amendment) or authorize or issue additional shares of
Series A Preferred;

                                       21
<PAGE>

                           (c)      Effect an exchange, reclassification or
cancellation of all or part of the shares of Series A Preferred;

                           (d)      Effect an exchange, or create a right of
exchange, of all or part of the shares of another class or series into the
shares of Series A Preferred;

                           (e)      Create a class or series of shares having
rights, preferences or privileges prior to or on a parity with the shares of
Series A Preferred;

                           (f)      (i) Effect a cash dividend during any of
calendar years 1995, 1996 or 1997 or (ii) effect a cash dividend during calendar
year 1998 and any year thereafter, excluding any annual cash dividend not to
exceed the lesser of $500,000 or 5% of the preceding year's net income as stated
in the audited financial statements for such year (subject to all other
limitations imposed by the Tennessee Business Corporation Act, as amended, or
other state or federal regulatory entity), or any other distribution of assets
(including cash, securities and intangible assets or other property) other than
as set forth in Paragraph 2A(b) of the Articles of Amendment; it being agreed
that to the extent any cash dividend shall be paid on any Common Stock, the
holders of Series A Preferred Stock shall participate in such dividend as though
such shares had been converted to Common Stock immediately prior to the record
date for such dividend;

                           (g)      Enter (or permit any corporation, a majority
of the voting stock of which is owned or controlled by the Company, to enter)
into debt instruments as the maker or guarantor which, in the aggregate, are in
an amount greater than $2.0 million, except any credit facility approved by the
Board of Directors to provide (i) funding for notes receivable properly
generated (in the ordinary course of business and consistent with all applicable
laws and regulations) by Direct Financial Services, Inc. and (ii) funding for
policies of insurance sold on an installment billing basis in the ordinary
course of business and consistent with all applicable laws and regulations by
any of the subsidiaries;

                           (h)      Make (or permit any corporation, a majority
of the voting stock of which is owned or controlled by the Company to make) any
loan or advance to, or own any stock or other securities of, any subsidiary or
other corporation, partnership, or other entity unless (i) it is wholly owned by
the Company, (ii) it is Direct Insurance Agency Midwest, Inc., so long as a
majority of its voting stock is controlled by the Company, or (iii) with respect
to Direct Insurance Company, if such investments are consistent with state and
federal laws and regulations applicable to such portfolio investments;.

                           (i)      Make (or permit any corporation, a majority
of the voting stock of which is owned or controlled by the Company, to make) any
loan(s) or advance(s) which, in the aggregate, are greater than $100, 000 to any
person (s), including, without limitation, any employee or director of the
Company or any subsidiary, except advances and similar expenditures in the
ordinary course of business or under

                                       22
<PAGE>

the terms of an employee stock or option plan approved by the Board of
Directors;

                           (j)      (i) Enter into any merger, share exchange,
business combination or consolidation (or permit any corporation, a majority of
the voting stock of which is owned or controlled by the Company, to enter into
any such transaction, excluding a transaction between wholly-owned subsidiaries
of the Company) with any other corporation or other entity, (ii) sell, lease, or
otherwise dispose of all or substantially all of its properties or assets, (iii)
acquire all or substantially all of the properties or assets of any other
corporation or entity, except no vote of the holders of the Series A Preferred
shall be required for any acquisition by the Company or its subsidiaries in
which (y) the aggregate consideration paid (including the assumption of
liabilities) does not exceed $2.0 million; and (z) the transaction involves the
acquisition of a business or assets of a business constituting the same business
being conducted by the Company as of the time of the acquisition, or (iv)
liquidate, dissolve or wind up the Company's affairs; or

                           (k)      Amend the Company's Charter in any way if
such amendment would cancel or adversely change, alter or affect the preferences
or rights (including, without limitation, the conversion privilege, the
redemption privilege or the liquidation preference) of the Series A Preferred.

                  7.11     Expenses of Directors and Purchaser Representatives.
The Company shall promptly reimburse in full each director of the Company who is
not an employee of the Company and who was elected as a director solely or in
part by the holders of Series A Preferred for all of his reasonable
out-of-pocket expenses incurred in attending each meeting of the Board of
Directors of the Company, any committee thereof of which the director is a
member or otherwise acting on behalf of the Company or its subsidiaries. In
addition, the Company agrees to promptly reimburse in full each Purchaser
representative, not a director, for all reasonable out-of-pocket expenses
incurred in attending any meetings of, or performing any functions (as requested
by the Company) on behalf of, the Company; provided, however, that the Company
will not be required to reimburse more than two (2) such Purchaser
representatives for attendance at a meeting or the performance of such functions
unless requested by the Company to attend such meeting or perform such function
or unless otherwise approved by an officer of the Company.

                  7.12     Reservation of Common Stock. The Company shall
reserve and maintain a sufficient number of shares of Common Stock for issuance
upon conversion of all of the outstanding Shares.

                                       23
<PAGE>

                  7.13     Disaster Recovery Plan and Implementation. The
Company agrees to use its best effort to prepare a disaster recovery plan
satisfactory to the Purchasers to be presented to the Board of Directors on or
before March 31, 1995 and, upon approval by the Board of Directors, to implement
such plan promptly thereafter.

                  7.14     Director and Officer Insurance. The Company shall
obtain, and maintain thereafter, a policy of insurance covering the Company's
directors and officers for actions they may take in such capacities. The policy
of insurance shall be in an amount and underwritten by a firm acceptable to the
Board of Directors and the Purchasers, such acceptance by the Purchasers shall
not be unreasonably withheld.

                  7.15     Stock Option Plan. The Company shall not authorize
more than 60,000 shares of Common Stock or other securities for issuance under
any stock incentive plan.

                  7.16     Interested Party Transactions. Neither the Company
nor any of its subsidiaries shall enter into any transaction with any of the
Company's or its subsidiaries' officers, directors or shareholders or affiliates
thereof, unless the terms of such transaction are no less favorable than those
which could be obtained from unaffiliated parties and such transactions are
approved by a majority of the disinterested members of the Company's Board of
Directors.

                  7.17     Termination of Covenants. The covenants of the
Company contained in this Section 7 shall terminate, and be of no further force
or effect, upon the closing date of a Registration Statement (as defined in
subsection 8.1) covering the Company's first public offering of Common Stock,
resulting in gross proceeds to the Company of at least $10,000,000, at a price
to the public per share of Common Stock of at least two and one-half (2.5) times
the Current Conversion Price (as defined in the Articles of Amendment and as
adjusted for stock splits, stock dividends, recapitalization and similar events)

         8.       Registration Rights.

                  8.1      Certain Definitions. As used in this Section 8 and
elsewhere in this Agreement, the following terms shall have the following
respective meanings:

         "Commission" means the Securities and Exchange Commission, or any other
Federal agency at the time administering the Securities Act.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any similar Federal statute, and the rules and regulations of the Commission
issued under such Act, as they each may, from time to time, be in effect.

                                       24
<PAGE>

         "Registration Statement" means a registration statement filed by the
Company with the Commission for a public offering and sale of securities of the
Company (other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation).

         "Registration Expenses" means the expenses described in subsection 8.6.

         "Registrable Shares" means (i) the shares of Common Stock issued or
issuable upon conversion of the Shares, (ii) any shares of Common Stock acquired
by the Purchasers pursuant to subsection 7.6 hereof and any shares of Common
Stock issuable upon the conversion or exercise of capital stock or other
securities of the Company acquired by the Purchasers pursuant to subsection 7.6
hereof, and (iii) any other shares of Common Stock of the Company issued in
respect of such shares (because of stock splits, stock dividends,
reclassification, recapitalization, or similar events); provided, however, that
shares of Common Stock that are Registrable Shares shall cease to be Registrable
Shares (y) upon any sale pursuant to a Registration Statement, Section 4(1) of
the Securities Act, or Rule 144 under the Securities Act, or (z) upon any sale
in any manner to a person or entity that, by virtue of Section 10 of this
Agreement, is not entitled to the rights provided by this Section 8. Wherever
reference is made in this Agreement to a request or consent of holders of a
certain percentage of Registrable Shares, the determination of such percentage
shall include shares of Common Stock issuable upon conversion of the Shares even
if such conversion has not yet been effected.

         "Securities Act" means the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission issued
under such Act, as they each may, from time to time, be in effect.

         "Shares" shall have the meaning specified in subsection 1.2.

         "Stockholders" means the Purchasers and any persons or entities to whom
the rights granted under this Section 8 are transferred by any Purchasers, their
successors or assigns pursuant to Section 10 hereof.

                  8.2      Sale or Transfer of Shares; Legend.

                           (a)      The Shares and the Registrable Shares and
shares issued in respect of the Shares or the Registrable Shares shall not be
sold or transferred unless either (i) they first shall have been registered
under the Securities Act, or (ii) the Company first shall have been furnished
with an opinion of legal counsel, reasonably satisfactory to the Company, to the
effect that such sale or transfer is exempt from the registration requirements
of the Securities Act.

                                       25
<PAGE>

                           (b)      Notwithstanding the foregoing, no
registration or opinion of counsel shall be required for (i) a transfer by a
Purchaser that is a partnership to a partner of such partnership or a retired
partner of such partnership who retires after the date hereof, or to the estate
of any such partner or retired partner, if the transferee agrees in writing to
be subject to the terms of this Section 8 to the same extent as if he were an
original Purchaser hereunder, or (ii) a transfer made in accordance with Rule
144 or Rule 144A under the Securities Act.

                           (c)      Each certificate representing the Shares and
the Registrable Shares and shares issued in respect of the Shares or the
Registrable Shares shall bear a legend substantially in the following form:

                  THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
                  NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
                  1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR
                  OTHERWISE TRANSFERRED, PLEDGED, OR HYPOTHECATED
                  UNLESS AND UNTIL SUCH SHARES ARE REGISTERED UNDER
                  SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO
                  THE COMPANY IS OBTAINED TO THE EFFECT THAT SUCH
                  REGISTRATION IS NOT REQUIRED.

         The foregoing legend shall be removed from the certificates
representing any Registrable Shares, at the request of the holder thereof, at
such time as they become eligible for resale pursuant to Rule 144(k) under the
Securities Act. No representation contained elsewhere herein or in any document
executed in connection with the transactions contemplated hereby shall be
construed to preclude the Purchasers from effecting at any time a resale of any
of the shares (or the underlying Common Stock upon conversion of the Shares)
pursuant to the provisions of Rule 144A. If requested by the Purchaser (or
Purchasers), the Company shall use its best efforts to permit the shares (or
underlying Common Stock) to be designated PORTAL securities in accordance with
the rules and regulations adopted by the National Association of Securities
Dealers, Inc. relating to trading in the PORTAL Market.

                           (d)      The Company agrees, upon the request of any
Purchaser, to make available to such Purchaser and to any prospective transferee
of any Shares or Registrable Shares of such Purchaser the information concerning
the Company described in Rule 144A(d) (4) under the Securities Act.

                  8.3      Required Registrations.

                           (a)      At any time after the closing of the
Company's first underwritten public offering of shares of Common Stock pursuant
to a Registration Statement, a Stockholder or Stockholders holding in the
aggregate at least 50% of the Registrable Shares may request, in writing, that
the Company effect the registration on Form S-1, Form S-2, or Form S-3, as
applicable, (or any successor form) of Registrable Shares owned by such
Stockholder or Stockholders having an aggregate offering price of at least
$3,000,000 (based on the then current

                                       26
<PAGE>

market price or fair value). If the holders initiating the registration intend
to distribute the Registrable Shares by means of an underwriting, they shall so
advise the Company in their request. In the event such registration is
underwritten, the right of other Stockholders to participate shall be
conditioned on such Stockholders' participation in such underwriting. Upon
receipt of any such request, the Company shall promptly give written notice of
such proposed registration to all Stockholders. Such Stockholders shall have the
right, by giving written notice to the Company within thirty (30) days after the
Company provides its notice, to elect to have included in such registration such
of their Registrable Shares as such Stockholders may request in such notice of
election; provided that if the underwriter (if any) managing the offering
determines in good faith that, because of marketing factors, all of the
Registrable Shares requested to be registered by all Stockholders may not be
included in the offering, then all Stockholders who have requested registration
shall participate in the offering pro rata based upon the number of Registrable
Shares that they have requested to be so registered. Thereupon, the Company
shall, as expeditiously as possible, use its best efforts to effect the
registration,. on Form S-1, Form S-2 or Form S-3 (or any successor form), of all
Registrable Shares that the Company has been requested to so register.

                           (b)      The Company shall not be required to effect
more than two registrations pursuant to paragraph (a) above. In addition, the
Company shall not be required to effect any registration (other than on Form S-3
or any successor form relating to secondary offerings) within six (6) months
after the effective date of any other Registration Statement of the Company.

                           (c)      If at the time of any request to register
Registrable Shares pursuant to this subsection 8.3, the Company is engaged or
has fixed plans to engage within thirty (30) days of the time of the request in
a registered public offering as to which the Stockholders may include
Registrable Shares pursuant to subsection 8.4 or is engaged in any other
activity that, in the good faith determination of the Company's Board of
Directors, would be adversely affected by the requested registration to the
material detriment of the Company, then the Company may at its option direct
that such request be delayed for a period not in excess of six months from the
effective date of such offering or the date of commencement of such other
material activity, as the case may be, such right to delay a request to be
exercised by the Company not more than once in any two year period.

                                       27
<PAGE>

                  8.4      Incidental Registration.

                           (a)      Whenever the Company proposes to file a
Registration Statement (other than pursuant to subsection 8.3) at any time and
from time to time, it will, prior to such filing, give written notice to all
Stockholders of its intention to do so and, upon the written request of a
Stockholder or Stockholders given within thirty (30) days after the Company
provides such notice (which request shall state the intended method of
disposition of such Registrable Shares), the Company shall use its best efforts
to cause all Registrable Shares that the Company has been requested by such
Stockholder or Stockholders to register to be registered under the Securities
Act to the extent necessary to permit their sale or other disposition in
accordance with the intended methods of distribution specified in the request of
such Stockholder or Stockholders; provided that the Company shall have the right
to postpone or withdraw any registration effected pursuant to this subsection
8.4 without obligation to any Stockholder.

                           (b)      In connection with any offering by the
Company under this subsection 8.4 involving an underwriting, the Company shall
not be required to include any Registrable Shares in such offering unless the
holders thereof accept the terms of the underwriting as agreed upon between the
Company and the underwriters selected by it (provided that such terms must be
consistent with this Agreement), and then only in such quantity as will not, in
the good faith opinion of the underwriters, jeopardize the success of the
offering by the Company. If in the opinion of the managing underwriter the
registration of all, or part of, the Registrable Shares that the holders have
requested to be included would materially and adversely affect such public
offering, then the Company shall be required to include in the underwriting only
that number of Registrable Shares, if any, that the managing underwriter
believes may be sold without causing such adverse effect; provided that (i) in
no event shall the number of Registrable Shares included in the offering be
reduced below 25% of the total number of shares of Common Stock (giving effect
to the conversion into Common Stock of all securities convertible thereunto)
included in the offering, and (ii) no persons or entities other than the
Company, the Stockholders and persons or entities holding registration rights
granted in accordance with Section 8.11 hereof shall be permitted to include
securities in the offering. If the number of Registrable Shares to be included
in the underwriting in accordance with the foregoing is less than the total
number of shares that the holders of Registrable Shares have requested to be
included, then the holders of Registrable Shares who have requested registration
and other holders of shares of Common Stock entitled to include shares of Common
Stock in such registration shall participate in the underwriting pro rata based
upon their total ownership of shares of Common Stock of the Company (giving
effect to the conversion into Common Stock of all securities convertible
thereunto). If any holder would thus be entitled to include more shares than
such holder requested to be registered, the excess shall be allocated among
other requesting holders pro rata based upon their total ownership of
Registrable Shares.

                                       28
<PAGE>

                  8.5      Registration Procedures. If and whenever the Company
is required by the provisions of this Agreement to use its best efforts to
effect the registration of any of the Registrable Shares under the Securities
Act, the Company shall:

                           (a)      file with the Commission a Registration
Statement with respect to such Registrable Shares and use its best efforts to
cause that Registration Statement to become and remain effective;

                           (b)      as expeditiously as possible prepare and
file with the Commission any amendments and supplements to the Registration
Statement and the prospectus included in the Registration Statement as may be
necessary to keep the Registration Statement effective, in the case of a firm
commitment underwritten public offering, until each underwriter has completed
the distribution of all securities purchased by it and, in the case of any other
offering, until the earlier of the sale of all Registrable Shares covered
thereby or one hundred twenty (120) days after the effective date thereof;

                           (c)      as expeditiously as possible furnish to each
selling Stockholder such reasonable numbers of copies of the prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as the selling Stockholders may
reasonably request in order to facilitate the public sale or other disposition
of the Registrable Shares owned by the selling Stockholder; and

                           (d)      as expeditiously as possible use its best
efforts to register or qualify the Registrable Shares covered by the
Registration Statement under the securities or Blue Sky laws of such states as
the selling Stockholders shall reasonably request, and do any and all other acts
and things that may be necessary or desirable to enable the selling Stockholders
to consummate the public sale or other disposition in such states of the
Registrable Shares owned by the selling Stockholder; provided, however, that the
Company shall not be required in connection with this paragraph (d) to qualify
as a foreign corporation or execute a general consent to service of process in
any jurisdiction.

         If the Company has delivered preliminary or final prospectuses to the
selling Stockholders and after having done so the prospectus is amended to
comply with the requirements of the Securities Act, the Company shall promptly
notify the selling Stockholders and, if requested, the selling Stockholders
shall immediately cease making offers of Registrable Shares and return all
prospectuses to the Company. The Company shall promptly provide the selling
Stockholders with revised prospectuses and, following receipt of the revised
prospectuses, the selling Stockholders shall be free to resume making offers of
the Registrable Shares.

                                       29
<PAGE>

                  8.6      Allocation of Expenses. The Company will pay all
Registration Expenses of all registrations under this Agreement; provided,
however, that if a registration under Section 8.3 is withdrawn at the request of
the Stockholders requesting such registration (other than as a result of
information concerning the business or financial condition of the Company that
is made known to the Stockholders after the date on which such registration was
requested) and if the requesting Stockholders elect not to have such
registration counted as a registration requested under subsection 8.3, the
requesting Stockholders shall pay the Registration Expenses of such registration
pro rata in accordance with the number of their Registrable Shares included in
such registration. For purposes of this Section, the term "Registration
Expenses" shall mean all expenses incurred by the Company in complying with this
Section 8, including, without limitation, all registration and filing fees,
exchange listing fees, printing expenses, fees, and expenses of counsel for the
Company and the fees and expenses of one counsel selected by the selling
Stockholders to represent the selling Stockholders, state Blue Sky fees and
expenses, and the expense of any special audits incident to or required by any
such registration, but excluding underwriting discounts, selling commissions,
and the fees and expenses of selling Stockholders' own counsel (other than the
counsel selected to represent all selling Stockholders).

                  8.7      Indemnification and Contribution. In the event of any
registration of any of the Registrable Shares under the Securities Act pursuant
to this Agreement, the Company will indemnify and hold harmless the seller of
such Registrable Shares, each underwriter of such Registrable Shares, and each
other person, if any, who controls such seller or underwriter within the meaning
of the Securities Act or the Exchange Act against any losses, claims, damages,
or liabilities, joint or several, to which such seller, underwriter, or
controlling person may become subject under the Securities Act, the Exchange
Act, state securities or Blue Sky laws, or otherwise, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement under which such Registrable Shares
were registered under the Securities Act, any preliminary prospectus, or final
prospectus contained in the Registration Statement, or any amendment or
supplement to such Registration Statement, or arise out of or are based upon the
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and the
Company will reimburse such seller, underwriter, and each such controlling
person for any legal or any other expenses reasonably incurred by such seller,
underwriter, or controlling person in connection with investigating or defending
any such loss, claim, damage, liability, or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage, or liability arises out of or is based upon any untrue statement
or omission made in such Registration Statement, preliminary prospectus, or
final prospectus, or any such amendment or supplement, in reliance upon and in
conformity with

                                       30
<PAGE>

information furnished to the Company, in writing, by or on behalf of such
seller, underwriter, or controlling person specifically for use in the
preparation thereof.

         In the event of any registration of any of the Registrable Shares under
the Securities Act pursuant to this Agreement, each seller of Registrable
Shares, severally and not jointly, will indemnify and hold harmless the Company,
each of its directors and officers and each underwriter (if any) and each
person, if any, who controls the Company or any such underwriter within the
meaning of the Securities Act or the Exchange Act, against any losses, claims,
damages, or liabilities, joint or several, to which the Company, such directors
and officers, underwriter, or controlling person may become subject under the
Securities Act, Exchange Act, state securities or Blue Sky laws, or otherwise,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement under which
such Registrable Shares were registered under the Securities Act, any
preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to the Registration Statement, or
arise out of or are based upon any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if the statement or omission was made in reliance upon
and in conformity with information relating to such seller furnished in writing
to the Company by or on behalf of such seller specifically for use in connection
with the preparation of such Registration Statement, prospectus, amendment, or
supplement; provided, however, that the obligations of such Stockholders
hereunder shall be limited to an amount equal to the proceeds to each
Stockholder of Registrable Shares sold in connection with such registration.

         Each party entitled to indemnification under this subsection 8.7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 8. The Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying Party
shall pay such expense if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate due to actual
or potential differing interests between the Indemnified Party and any other
party represented by such counsel in such proceeding. No Indemnifying Party, in
the defense of any such claim or litigation, shall, except with the consent of
each Indemnified Party, consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by
the

                                       31
<PAGE>

claimant or plaintiff to such Indemnified Party of a release from all liability
in respect of such claim or litigation, and no Indemnified Party shall consent
to entry of any judgment or settle such claim or litigation without the prior
written consent of the Indemnifying Party.

         In order to provide for just and equitable contribution to joint
liability under the Securities Act or otherwise, in any case in which either (i)
any holder of Registrable Shares exercising rights under this Agreement, or any
controlling person of any such holder, makes a claim for indemnification
pursuant to this Section 8.7 but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 8.7 provides for indemnification in such case, or (ii) contribution
may be required on the part of any such selling Stockholder or any such
controlling person in circumstances for which indemnification is provided under
this Section 8.7; then, in each such case, the Company and such Stockholder will
contribute to the aggregate losses, claims, damages, or liabilities to which
they may be subject (after contribution from others) in such proportions so that
such holder is responsible for the portion represented by the percentage that
the public offering price of its Registrable Shares offered by the Registration
Statement bears to the public offering price of all securities offered by such
Registration Statement, and the Company is responsible for the remaining
portion; provided, however, that, in any such case, (A) no such holder will be
required to contribute any amount in excess of the proceeds to it of all
Registrable Shares sold by it pursuant to such Registration Statement, and (B)
no person or entity guilty of fraudulent misrepresentation, within the meaning
of Section 11(f) of the Securities Act, shall be entitled to contribution from
any person or entity who is not guilty of such fraudulent misrepresentation.

                  8.8      Indemnification with Respect to Underwritten
Offering. In the event that Registrable Shares are sold pursuant to a
Registration Statement in an underwritten offering pursuant to

                                       32
<PAGE>

subsection 8.3(a), the Company agrees to enter into an underwriting agreement
containing customary representations and warranties with respect to the business
and operations of an issuer of the securities being registered and customary
covenants and agreements to be performed by such issuer, including without
limitation customary provisions with respect to indemnification by the Company
of the underwriters of such offering.

                  8.9      Information by Holder. Each holder of Registrable
Shares included in any registration shall furnish to the Company such
information regarding such holder and the distribution proposed by such holder
as the Company may request in writing and as shall be required in connection
with any registration, qualification or compliance referred to in this Section
8.

                  8.10     "Stand-Off" Agreement. Each Stockholder, if requested
by the Company and an underwriter of Common Stock or other securities of the
Company, shall agree not to sell or otherwise transfer or dispose of any
Registrable Shares or other securities of the Company held by such Stockholder
for a specified period of time (not to exceed 120 days) following the effective
date of a Registration Statement; provided, that:

                           (a)      such agreement shall only apply to the first
such Registration Statement covering Common Stock of the Company to be sold on
its behalf to the public in an underwritten offering; and

                           (b)      all Stockholders holding not less than the
number of shares of Common Stock held by such Stockholder (including shares of
Common Stock issuable upon the conversion of Shares, or other convertible
securities, or upon the exercise of options, warrants or rights) and all
officers and directors of the Company enter into similar agreements.

         Such agreement shall be in writing in a form satisfactory to the
Company and such underwriter. The Company may impose stop-transfer instructions
with respect to the Registrable Shares or other securities subject to the
foregoing restriction until the end of the standoff period.

                  8.11     Limitations on Subsequent Registration Rights. The
Company shall not, without the prior written consent of Stockholders holding at
least 51% of the Registrable Shares, enter into any agreement (other than this
Agreement) with any holder or prospective holder of any securities of the
Company that would allow such holder or prospective holder (a) to include
securities of the Company in any registration filed under subsection 8.3 or 8.4
or (b) to make a demand registration.

                                       33
<PAGE>

                  8.12     Rule 144 Requirements. After the earliest of (i) the
closing of the sale of securities of the Company pursuant to a Registration
Statement, (ii) the registration by the Company of a class of securities under
Section 12 of the Exchange Act, or (iii) the issuance by the Company of an
offering circular pursuant to Regulation A under the Securities Act, the Company
agrees to:

                           (a)      comply with the requirements of Rule 144(c)
under the Securities Act with respect to current public information about the
Company;

                           (b)      use its best efforts to file with the
Commission in a timely manner all reports and other documents required of the
Company under the Securities Act and the Exchange Act (at any time after it has
become subject to such reporting requirements); and

                           (c)      furnish to any holder of Registrable Shares
upon request (i) a written statement by the Company as to its compliance with
the requirements of said Rule 144(c), and the reporting requirements of the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements), (ii) a copy of the most recent annual or quarterly
report of the Company, and (iii) such other reports and documents of the Company
as such holder may reasonably request to avail itself of any similar rule or
regulation of the Commission allowing it to sell any such securities without
registration.

                  8.13     Selection of Underwriter. In the case of any
registration effected pursuant to this Section 8, the Company shall have the
right to designate the managing underwriter in any underwritten offering,
subject to the approval of the holders of a majority of the Registrable Shares
requested to be included in such offering, which approval shall not be
unreasonably withheld.

                  8.14     Mergers, Etc. The Company shall not, directly or
indirectly, enter into any merger, consolidation, or reorganization in which the
Company shall not be the surviving corporation unless the proposed surviving
corporation shall, prior to such merger, consolidation, or reorganization, agree
in writing to assume the obligations of the Company under this Section 8, and
for that purpose references hereunder to "Registrable Shares" shall be deemed to
be references to the securities that the Stockholders would be entitled to
receive in exchange for Registrable Shares under any such merger, consolidation,
or reorganization; provided, however, that the provisions of this Section 8
shall not apply in the event of any merger, consolidation, or reorganization in
which the Company is not the surviving corporation if all Stockholders are
entitled to receive in exchange for their Registrable Shares consideration
consisting solely of (i) cash, (ii) securities of the acquiring corporation that
may be immediately sold to the public without registration under the Securities
Act, or (iii) securities of the acquiring corporation that

                                       34
<PAGE>
the acquiring corporation has agreed to register within 90 days of completion of
the transaction for resale to the public pursuant to the Securities Act.

         9.       Successors and Assigns. Except as provided in Section 10, the
provisions of this Agreement shall be binding upon, and inure to the benefit of,
the respective successors, assigns, heirs, executors, and administrators of the
parties hereto.

         10.      Transfers of Certain Rights.

                           (a)      The rights granted to a Purchaser under
subsection 7.3, subsection 7.6, and Section 8 may be transferred by such
Purchaser to another Purchaser, to any affiliate of the Company or to any person
or entity acquiring at least twenty-five percent (25%) of the Shares or
Registrable Shares; provided, however, that the Company is given written notice
by the transferee at the time of such transfer stating the name and address of
the transferee and identifying the securities with respect to which such rights
are being assigned.

                           (b)      Transferees. Any transferee (other than a
Purchaser) to whom rights under subsection 7.3, subsection 7.6, or Section 8 are
transferred shall, as a condition to such transfer, deliver to the Company a
written instrument by which such transferee agrees to be bound by the
obligations imposed upon Purchasers under Section 11, subsection 7.6, or Section
8, as the case may be, to the same extent as if such transferee were a Purchaser
hereunder.

                           (c)      Subsequent Transferees. A transferee to whom
rights are transferred pursuant to this Section 10 may not again transfer such
rights to any other person or entity, other than as provided in (a) or (b)
above.

                           (d)      Partners and Stockholders. Notwithstanding
anything to the contrary herein, any Purchaser that is a partnership or
corporation may transfer rights granted to such Purchaser under subsection 7.3,
subsection 7.6, or Section 8 to any partner or stockholder thereof to whom
Shares are transferred pursuant to subsection 8.2 and who delivers to the
Company an opinion of counsel as to the transfer of such securities under
applicable state and federal securities laws and a written instrument in
accordance with subparagraph (b) above. In the event of such transfer, such
partner or stockholder shall be deemed a Purchaser for purposes of this Section
10 and may again transfer such rights to any other person or entity that
acquires Shares from such partner or stockholder, in accordance with, and
subject to, the provisions of subparagraphs (a), (b), and (c) above.

         11.      Confidentiality. Each Purchaser agrees that he or it will keep
confidential and will not disclose or divulge any confidential, proprietary, or
secret information that such Purchaser may obtain from the Company pursuant to
financial statements, reports, and other materials submitted by the Company to
such Purchaser pursuant to this Agreement, or pursuant to visitation or
inspection rights granted

                                      35
<PAGE>

hereunder, unless such information is known, or until such information becomes
known, to the public; provided, however, that a Purchaser may disclose such
information (i) to its attorneys, accountants, consultants, and other
professionals to the extent necessary to obtain their services in connection
with its investment in the Company, (ii) to any prospective purchaser of any
Shares from such Purchaser as long as such prospective purchaser agrees in
writing to be bound by the provisions of this Section, or (iii) to any affiliate
of such Purchaser or to a partner, shareholder or subsidiary of such Purchaser.

         12.      Survival of Representations and Warranties. All agreements,
representations, and warranties contained herein shall survive the execution and
delivery of this Agreement and the closing of the transactions contemplated
hereby.

         13.      Expenses. The Company shall pay all of the costs, fees, and
expenses of the Purchasers (including, but not limited to, the costs, fees and
expenses of Bass, Berry & Sims, special counsel to the Purchasers) incurred in
connection with the preparation of and entering into this Agreement and the
closing of the transactions contemplated hereby.

         14.      Notices. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be delivered
by hand or mailed by first class certified or registered mail, return receipt
requested, postage prepaid:

         If to the Company, at 905 East Trinity Lane, Nashville, Tennessee
37207, Attention: President, or at such other address or addresses as may have
been furnished in writing by the Company, to the Purchasers, with a copy to
Adair and Sheuerman, 4171 Lamar Avenue, Memphis, Tennessee 38118, Attn: Tammy
Adair;

         If to a Purchaser, at his or its address set forth on Exhibit A, or at
such other address or addresses as may have been furnished to the Company in
writing by such Purchaser, with a copy to Bass, Berry & Sims, 2500 First
American Center, Nashville, Tennessee 37238, Attn: Howard H. Lamar III.

         Notices provided in accordance with this Section 14 shall be deemed
delivered upon personal delivery or three business days after deposit in the
mail.

         15.      Brokers. The Company and each Purchaser (i) represents and
warrants to the other parties hereto that he or it has retained no finder or
broker in connection with the transactions contemplated by

                                       36
<PAGE>

this Agreement, and (ii) will indemnify and save the other parties harmless from
and against any and all claims, liabilities or obligations with respect to
brokerage or finders' fees or commissions, or consulting fees in connection with
the transactions contemplated by this Agreement asserted by any person on the
basis of any statement or representation alleged to have been made by such
indemnifying party.

         16.      Irrevocable Proxy. As a condition to the execution and
performance under this Agreement, the Company has required that Noro-Moseley
Partners II, L.P. irrevocably appoint SSM Venture Partners, L.P. as its proxy
with respect to the voting rights associated with Section 7.10(a) only;
therefore, Noro-Moseley Partners II, L.P. hereby appoints SSM Venture Partners,
L.P. as its proxy, only to the extent and scope of the voting rights contained
in Section 7.10(a), and such appointment is irrevocable and coupled with an
interest and such appointment shall continue for a period of five years from the
date of this Agreement.

         17.      Entire Agreement. This Agreement and the Ancillary Agreements
referenced herein, collectively embody the entire agreement and understanding
between the parties hereto with respect to the subject matter hereof and thereof
and supersedes all prior agreements and understandings relating to such subject
matter.

         18.      Amendments and Waivers. Except as otherwise expressly set
forth in this Agreement, any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), with the written
consent of the Company and the holders of at least 67% of the Shares; provided
Section 8 may be amended with the consent of the holders of less than all
Registrable Shares only in a manner that affects all Registrable Shares in the
same fashion and no condition set forth in Section 6 may be waived with respect
to any Purchaser who does not consent thereto. Any amendment or waiver effected
in accordance with this Section 18 shall be binding upon each holder of any
Shares (including shares of Common Stock into which such Shares have been
converted), each future holder of all such securities, and the Company. No
waivers of or exceptions to any term, condition or provision of this Agreement,
in any one or more instances, shall be deemed to be, or construed as, a further
or continuing waiver of any such term, condition or provision.

         19.      Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

         20.      Headings. The headings of the sections, subsections, and
paragraphs of this Agreement have been added for convenience only and shall not
be deemed to be a part of this Agreement.

                                       37
<PAGE>

         21.      Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision.

         22.      Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Tennessee, excluding that
body of laws pertaining to conflicts of laws.

                                       38
<PAGE>

         IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of
the day and year first above written.

                                    DIRECT CORPORATION:

                                    /s/Jacqueline C. Adair
                                    --------------------------------------------
                                    Title: President

                                    PURCHASERS:

                                    SSM VENTURE PARTNERS, L.P.

                                    By: SSM Corporation, as General
                                        Partner of SSMI, L.P., as
                                        General Partner of SSM Venture
                                        Partners, L.P.

                                    By: /s/R. Wilson Orr III
                                        ----------------------------------------
                                        R. Wilson Orr III, Vice
                                        President

                                    NORO-MOSELEY PARTNERS, L.P.

                                    By: Its General Partner,
                                        Moseley & Company II

                                    By: /s/Jack R. Kelly
                                        ----------------------------------------
                                        Jack R. Kelly, General
                                        Partner

                                    DAVID F. BELLET - TRUSTEE
                                    PROFIT SHARING PLAN - DLJSC -
                                    CUSTODIAN
                                    FBO DAVID F. BELLET

                                    /s/David F. Bellet
                                    --------------------------------------------
                                    David F. Bellet

                                      39

<PAGE>
                                    AMENDMENT
                                       TO
                          SECURITIES PURCHASE AGREEMENT

        THIS AMENDMENT is made and entered into this 25th day of November 1996,
by and among Direct General Corporation, f/k/a Direct Corporation, a Tennessee
corporation (the "Company"), and SSM Venture Partners, L.P., Noro-Moseley
Partners II, L.P. and David F. Bellett - Trustee Profit Sharing Plan - DLJSC
Custodian (the "Purchasers").

                                W I T N E S S E T H:

        WHEREAS, the Company and the Purchasers entered into that certain
Securities Purchase Agreement as of December 2, 1994 (the "Purchase Agreement");

        WHEREAS, in order to facilitate the issuance and sale of a newly
designated Series B Convertible Preferred Stock, without par value (the "Series
B Preferred"), by the Company to Eldon Capital Partners, L.P. and Eldon Capital
Partners (International), L.P. (collectively referred to herein as the "Eldon
Investors"), the Company at the Purchasers desire to amend the Purchase
Agreement as provided herein; and

        WHEREAS, in connection with the investment by the Eldon Investors in the
Series B Preferred, the Company and the Purchasers also desire to amend the
Company's Charter as provided herein.

        NOW, THEREFORE, each of the parties hereto hereby agrees as follows:

        1. Section 7.3(a) of the Purchase Agreement shall be deleted in its
entirety and replaced with the following:

        "(a) The Company will maintain, and will cause each of its subsidiaries
        to maintain, a system of accounting established and administered in
        accordance with generally accepted accounting principles, and will
        accrue, and will cause each of its subsidiaries to accrue, all such
        liabilities as shall be required by generally accepted accounting
        principles. The Company will deliver (in duplicate) to each holder of
        any Shares purchased pursuant to this Agreement:

                (i) within 150 days after the end of the fiscal year ending
        December 31, 1996, and within 90 days after the end of each fiscal year
        of the Company thereafter, an unqualified audit of the Company and its
        subsidiaries on a consolidated and consolidating basis, as of the close
        of such fiscal year, including a balance sheet and statement of income
        and surplus, with notes thereon, together with the unqualified audit
        report and opinion of Ernst & Young, LLP or other "Big Six" independent
        public accountant, showing the financial condition of the Company and
        its subsidiaries at the close of such year and the results of operations
        during such year,

<PAGE>

        such financial statements to be prepared in accordance with generally
        accepted accounting principles;

                (ii) within 65 days after the end of each fiscal year of Direct
        Insurance Company and any other property, casualty insurance company
        wholly-owned, directly or indirectly, by the Company (an "Affiliated
        Insurer"), unaudited financial statements prepared on the basis of
        statutory accounting practices prescribed or permitted by the National
        Association of Insurance Commissions and the Department of Insurance of
        the applicable jurisdiction ("Statutory Accounting Basis") in the form
        required to be filed with the Tennessee Commissioner of Commerce and
        Insurance, or, with respect to any other state, the administrative head
        of the department of such state charged with responsibility for
        regulations of insurance companies (the "Commissioner").

                (iii) in the case of fiscal year ending December 31, 1996 only,
        within 90 days after the end of such fiscal year of the Company
        unaudited, consolidated and consolidating financial statements of the
        Company;

                (iv) within 150 days after the end of each fiscal year of each
        Affiliated Insurer an audit of such Affiliated Insurer and its
        subsidiaries, as prescribed by its state of domicile, as of the close of
        such fiscal year, together with the audit report and opinion of such
        "Big Six" independent public accountant, showing the financial condition
        of such Affiliated Insurer of its subsidiaries at the close of such year
        and the results of operations during such year, such financial
        statements to be prepared on the Statutory Accounting Basis and to
        contain no qualifications which are unacceptable to the Purchasers;

                (v) within forty-five (45) days after the end of the first three
        fiscal quarters of each fiscal year of the Company, financial statements
        of the Company, such financial statements to include an income statement
        and balance sheet, certified as accurate by an officer of the Company;

                (vi) within forty-five (45) days after the end of each fiscal
        quarter, quarterly financial statements for each Affiliated Insurer
        prepared on a Statutory Accounting Basis, in the form required to be
        filed with the Commissioner;

                (vii) as soon as available after the end of each month, monthly
        management information reports generated in the ordinary course of the
        business, detailing among other things gross premiums written and loss
        experience for such month;

                (viii) promptly upon receipt thereof, copies of all reports
        submitted to the Company by independent public accountants in connection
        with each annual, interim or special audit of the books of the Company
        or any of its subsidiaries made by such

                                       2
<PAGE>

        accountants, including, without limitation, the comment letter submitted
        by such accountants to management in connection with their annual audit;

                (ix) immediately upon any executive officer of the Company
        obtaining knowledge of any condition or event which constitutes a
        default under this Agreement, an Officer's Certificate describing the
        same and the period of existence thereof and what action the Company has
        taken, is taking and proposes to take with respect thereto;

                (x) immediately upon any principal officer of the Company or any
        other officer of the Company involved in its financial administration
        obtaining knowledge of the occurrence of any (i) "reportable event", as
        such term is defined in section 4043 of ERISA, or (ii) "prohibited
        transaction", as such term is defined in Section 4975 of the Internal
        Revenue Code, in connection with any employee pension benefit plan of
        the Company or any trust created thereunder, a written notice specifying
        the nature thereof, what action the Company has taken, is taking and
        proposes to take with respect thereto, and, when known, any action taken
        or threatened by the Internal Revenue Service or the Pension Benefit
        Guaranty Corporation with respect thereto; and

                (xi) with reasonable promptness, such other financial reports
        and information and data with respect to the Company or any of its
        subsidiaries as from time to time may be reasonably requested.

        2. Section 7.3(b) of the Purchase Agreement shall be amended by deleting
entirely the first two sentences of such section, and by deleting "(ii)" in the
third sentence of such section and replacing it with "(v)."

        3. Section 7.3(c) of the Purchase Agreement shall be deleted in its
entirety.

        4. Section 7.5 of the Purchase Agreement shall be deleted in its
entirety and replaced with the following:

        "The Company will use its best efforts to obtain and maintain term life
        insurance upon the lives of each of William C. Adair, Jr. and James R.
        Tuerff in a amount not less than $1.0 million for each policy, with
        proceeds payable to the Company to be used by the Company first to cover
        the costs of replacing either such person as an employee of the Company
        and second for purposes deemed appropriate by the Board of Directors of
        the Company."

                                       3
<PAGE>

        5. Section 7.7 of the Purchase Agreement shall be amended by adding the
following to the last sentence of such section:

        "; provided, however, that such actuarial firm may be the same firm as
        the firm of certified public accountants referred to in this Section
        7.7."

        6. Section 8.3(b) of the Purchase Agreement shall be amended by deleting
the first sentence of such Section 8.3(b) in its entirety and replacing such
sentence with the following:

        "The Company shall not be required to effect more than two registrations
        pursuant to paragraph (a) above, except that, as to any registration,
        the Company will not be deemed to have effected such registration for
        the purposes of this paragraph (b) unless, in the case of a registration
        initiated by any Stockholder or Stockholders, such registration shall
        have permitted the Stockholders to dispose of at least the lesser of (i)
        50% of the Registrable Shares or (ii) 75% of the Registrable Shares
        which such Stockholder or Stockholders shall have requested to be
        included in such registration. Furthermore, the Company shall be deemed
        to have effected a registration pursuant to paragraph (a) above if, in
        the case of a registration initiated by any security holder of the
        Company other than a Stockholder, such registration shall have permitted
        the Stockholders pursuant to Section 8.4 hereof to dispose of at least
        50% of the Registrable Shares."

        7. Section 8.4(b) of the Purchase Agreement shall be amended by deleting
the second sentence of such Section 8.4(b) in its entirety and replacing such
sentence with the following:

        "If in the opinion of the managing underwriter the registration of all,
        or part of, the Registrable Shares that the holders have requested to be
        included would materially and adversely affect such public offering,
        then the Company shall be required to include in the underwriting only
        that number of Registrable Shares, if any, that the managing underwriter
        believes may be sold without causing such adverse effect."

        In addition, each of the Purchasers hereby consents to (i) the creation
and authorization by the Company of the Series B Preferred, having the rights,
preferences and privileges contained in the Certificate of Designation attached
as Exhibit A hereto, (ii) the issuance and sale of such Series B Preferred to
the Eldon Investors in accordance with the Preferred Stock Purchase Agreement
between the Company and the Eldon Investors attached as Exhibit B hereto, (iii)
the issuance and sale to Eldon Capital, Incorporated, by the Company, of a
warrant to purchase shares of Common Stock, without par value, of the Company in
accordance with the Common Stock Purchase Warrant attached as Exhibit C hereto
and (iv) the amendment of the Company's Charter through the filing by the
Company of (a) the Amended and Restated Charter of the Company in the form
attached hereto as Exhibit 17 (particularly as such Amended and Restated Charter
alters the preferences or rights of the Purchasers as holders of the Company's
Series A Preferred) and (b) the Certificate of Designation authorizing the
Series B Preferred attached as Exhibit E hereto.

                                       4
<PAGE>

        Furthermore, each of the Purchasers hereby waives its right of first
refusal set forth in Section 7.6 of the Purchase Agreement to purchase its pro
rata share of the Series B Preferred and the Common Stock issuable upon exercise
of the Common Stock Purchase Warrant.

        All defined terms used and not otherwise defined herein shall have the
meaning given to them in the Purchase Agreement.

                                       5
<PAGE>

        IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date set forth above.

                               DIRECT GENERAL CORPORATION

                               By:  /s/ James R. Tuerff
                                    --------------------------------------------

                               Its:
                                    --------------------------------------------

                               PURCHASERS:

                               SSM VENTURE PARTNERS, L.P.

                               By:  SSM Corporation, as General Partner of SSM,
                                    L.P., as General Partner of SSM Venture
                                    Partners, L.P.

                               By:  /s/ R. Wilson III
                                    --------------------------------------------

                               NORO-MOSELEY PARTNERS II, L.P.

                               By:  Its General Partner,
                                    Moseley & Corn any II

                               By:  /s/ Jack R. Kelly
                                    --------------------------------------------

                               David F. Bellet - Trustee
                               Profit Sharing Plan - DLJSC - Custodian
                               FBO David F. Bellet

                               -------------------------------------------------
                               David F. Bellet

                                       6

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