Exhibit 10.1

SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of September 15, 2006,
by and among iParty Corp., a Delaware corporation, with headquarters located at
270 Bridge Street, Suite 301, Dedham, Massachusetts 02026 (the ”Company”), and
the investors listed on the Schedule of Buyers attached hereto (individually, a
“Buyer” and collectively, the “Buyers”).

WHEREAS:

A.            The Company and each Buyer is executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”), and
Rule 506 of Regulation D (“Regulation D”) as promulgated by the United States
Securities and Exchange Commission (the “SEC”) under the 1933 Act.

B.            The Company has authorized a new series of senior subordinated
notes of the Company, in substantially the form attached hereto as Exhibit A
(the “Notes”).

C.            Each Buyer wishes to purchase, and the Company wishes to sell,
upon the terms and conditions stated in this Agreement, (i) that aggregate
principal amount of the Notes set forth opposite such Buyer’s name in column (3)
on the Schedule of Buyers attached hereto (which aggregate amount for all Buyers
shall be $2,500,000), and (ii) warrants, in substantially the form attached
hereto as Exhibit B (the “Warrants”), to acquire up to that number of shares of
the Company’s common stock, par value $.001 per share (the “Common Stock”), set
forth opposite such Buyer’s name in column (4) of the Schedule of Buyers (as
exercised, collectively, the “Warrant Shares”).

D.            Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement, substantially in the form attached hereto as Exhibit C (the
“Registration Rights Agreement”), pursuant to which the Company has agreed to
provide certain registration rights with respect to the Warrant Shares under the
1933 Act and the rules and regulations promulgated thereunder, and applicable
state securities laws.

E.             The Notes, the Warrants and the Warrant Shares collectively are
referred to herein as the “Securities”.

F.             The Notes will rank senior to all outstanding and future
indebtedness of the Company, other than Senior Indebtedness (as defined in the
Notes).

NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

1.             PURCHASE AND SALE OF NOTES AND WARRANTS.

(A)           PURCHASE OF NOTES AND WARRANTS.

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(I)            SUBJECT TO THE SATISFACTION (OR WAIVER) OF THE CONDITIONS SET
FORTH IN SECTIONS 6 AND 7 BELOW, THE COMPANY SHALL ISSUE AND SELL TO EACH BUYER,
AND EACH BUYER SEVERALLY, BUT NOT JOINTLY, AGREES TO PURCHASE FROM THE COMPANY
ON THE CLOSING DATE (AS DEFINED BELOW), (X) A PRINCIPAL AMOUNT OF NOTES AS IS
SET FORTH OPPOSITE SUCH BUYER’S NAME IN COLUMN (3) ON THE SCHEDULE OF BUYERS AND
(Y) WARRANTS TO ACQUIRE UP TO THAT NUMBER OF WARRANT SHARES AS IS SET FORTH
OPPOSITE SUCH BUYER’S NAME IN COLUMN (4) ON THE SCHEDULE OF BUYERS, (THE
“CLOSING”).

(II)           CLOSING.  THE DATE AND TIME OF THE CLOSING (THE “CLOSING DATE”)
SHALL BE 10:00 A.M., NEW YORK CITY TIME, ON THE DATE HEREOF (OR SUCH LATER DATE
AS IS MUTUALLY AGREED TO BY THE COMPANY AND EACH BUYER) AFTER NOTIFICATION OF
SATISFACTION (OR WAIVER) OF THE CONDITIONS TO THE CLOSING SET FORTH IN SECTIONS
6 AND 7 BELOW AT THE OFFICES OF SCHULTE ROTH & ZABEL LLP, 919 THIRD AVENUE, NEW
YORK, NEW YORK 10022.

(III)          PURCHASE PRICE.  THE AGGREGATE PURCHASE PRICE FOR THE NOTES AND
THE WARRANTS TO BE PURCHASED BY EACH BUYER AT THE CLOSING (THE “PURCHASE PRICE”)
SHALL BE THE AMOUNT SET FORTH OPPOSITE SUCH BUYER’S NAME IN COLUMN (5) OF THE
SCHEDULE OF BUYERS.  EACH BUYER SHALL PAY $1.00 FOR EACH $1.00 OF PRINCIPAL
AMOUNT OF NOTES AND RELATED WARRANTS TO BE PURCHASED BY SUCH BUYER AT THE
CLOSING.

(B)           FORM OF PAYMENT.  ON THE CLOSING DATE, (I) EACH BUYER SHALL PAY
ITS PURCHASE PRICE TO THE COMPANY FOR THE NOTES AND THE WARRANTS TO BE ISSUED
AND SOLD TO SUCH BUYER AT THE CLOSING BY WIRE TRANSFER OF IMMEDIATELY AVAILABLE
FUNDS IN ACCORDANCE WITH THE COMPANY’S WRITTEN WIRE INSTRUCTIONS AND (II) THE
COMPANY SHALL DELIVER TO EACH BUYER (A) THE NOTES (IN THE PRINCIPAL AMOUNTS AS
SUCH BUYER SHALL REQUEST) WHICH SUCH BUYER IS THEN PURCHASING AND (B) THE
WARRANTS (IN THE AMOUNTS AS SUCH BUYER SHALL REQUEST) WHICH SUCH BUYER IS
PURCHASING, IN EACH CASE DULY EXECUTED ON BEHALF OF THE COMPANY AND REGISTERED
IN THE NAME OF SUCH BUYER OR ITS DESIGNEE.

2.             BUYER’S REPRESENTATIONS AND WARRANTIES.

Each Buyer represents and warrants with respect to only itself that:

(A)           NO PUBLIC SALE OR DISTRIBUTION.  SUCH BUYER IS (I) ACQUIRING THE
NOTES AND THE WARRANTS AND (II) UPON EXERCISE OF THE WARRANTS (OTHER THAN
PURSUANT TO A CASHLESS EXERCISE (AS DEFINED IN THE WARRANTS)) WILL ACQUIRE THE
WARRANT SHARES ISSUABLE UPON EXERCISE OF THE WARRANTS, FOR ITS OWN ACCOUNT AND
NOT WITH A VIEW TOWARDS, OR FOR RESALE IN CONNECTION WITH, THE PUBLIC SALE OR
DISTRIBUTION THEREOF, EXCEPT PURSUANT TO SALES REGISTERED OR EXEMPTED UNDER THE
1933 ACT; PROVIDED, HOWEVER, THAT BY MAKING THE REPRESENTATIONS HEREIN, SUCH
BUYER DOES NOT AGREE TO HOLD ANY OF THE SECURITIES FOR ANY MINIMUM OR OTHER
SPECIFIC TERM AND RESERVES THE RIGHT TO DISPOSE OF THE SECURITIES AT ANY TIME IN
ACCORDANCE WITH OR PURSUANT TO A REGISTRATION STATEMENT OR AN EXEMPTION UNDER
THE 1933 ACT.  SUCH BUYER IS ACQUIRING THE SECURITIES HEREUNDER IN THE ORDINARY
COURSE OF ITS BUSINESS.  SUCH BUYER DOES NOT PRESENTLY HAVE ANY AGREEMENT OR
UNDERSTANDING, DIRECTLY OR INDIRECTLY, WITH ANY PERSON TO DISTRIBUTE ANY OF THE
SECURITIES.

(B)           ACCREDITED INVESTOR STATUS.  SUCH BUYER IS AN “ACCREDITED
INVESTOR” AS THAT TERM IS DEFINED IN RULE 501(A) OF REGULATION D.

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(C)           RELIANCE ON EXEMPTIONS.  SUCH BUYER UNDERSTANDS THAT THE
SECURITIES ARE BEING OFFERED AND SOLD TO IT IN RELIANCE ON SPECIFIC EXEMPTIONS
FROM THE REGISTRATION REQUIREMENTS OF UNITED STATES FEDERAL AND STATE SECURITIES
LAWS AND THAT THE COMPANY IS RELYING IN PART UPON THE TRUTH AND ACCURACY OF, AND
SUCH BUYER’S COMPLIANCE WITH, THE REPRESENTATIONS, WARRANTIES, AGREEMENTS,
ACKNOWLEDGMENTS AND UNDERSTANDINGS OF SUCH BUYER SET FORTH HEREIN IN ORDER TO
DETERMINE THE AVAILABILITY OF SUCH EXEMPTIONS AND THE ELIGIBILITY OF SUCH BUYER
TO ACQUIRE THE SECURITIES.

(D)           INFORMATION.  SUCH BUYER AND ITS ADVISORS, IF ANY, HAVE BEEN
FURNISHED WITH ALL MATERIALS RELATING TO THE BUSINESS, FINANCES AND OPERATIONS
OF THE COMPANY AND MATERIALS RELATING TO THE OFFER AND SALE OF THE SECURITIES
WHICH HAVE BEEN REQUESTED BY SUCH BUYER.  SUCH BUYER AND ITS ADVISORS, IF ANY,
HAVE BEEN AFFORDED THE OPPORTUNITY TO ASK QUESTIONS OF THE COMPANY.  NEITHER
SUCH INQUIRIES NOR ANY OTHER DUE DILIGENCE INVESTIGATIONS CONDUCTED BY SUCH
BUYER OR ITS ADVISORS, IF ANY, OR ITS REPRESENTATIVES SHALL MODIFY, AMEND OR
AFFECT SUCH BUYER’S RIGHT TO RELY ON THE COMPANY’S REPRESENTATIONS AND
WARRANTIES CONTAINED HEREIN.  SUCH BUYER UNDERSTANDS THAT ITS INVESTMENT IN THE
SECURITIES INVOLVES A HIGH DEGREE OF RISK.  SUCH BUYER HAS SOUGHT SUCH
ACCOUNTING, LEGAL AND TAX ADVICE AS IT HAS CONSIDERED NECESSARY TO MAKE AN
INFORMED INVESTMENT DECISION WITH RESPECT TO ITS ACQUISITION OF THE SECURITIES.

(E)           NO GOVERNMENTAL REVIEW.  SUCH BUYER UNDERSTANDS THAT NO UNITED
STATES FEDERAL OR STATE AGENCY OR ANY OTHER GOVERNMENT OR GOVERNMENTAL AGENCY
HAS PASSED ON OR MADE ANY RECOMMENDATION OR ENDORSEMENT OF THE SECURITIES OR THE
FAIRNESS OR SUITABILITY OF THE INVESTMENT IN THE SECURITIES NOR HAVE SUCH
AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING OF THE
SECURITIES.

(F)            TRANSFER OR RESALE.  SUCH BUYER UNDERSTANDS THAT EXCEPT AS
PROVIDED IN THE REGISTRATION RIGHTS AGREEMENT: (I) THE SECURITIES HAVE NOT BEEN
AND ARE NOT BEING REGISTERED UNDER THE 1933 ACT OR ANY STATE SECURITIES LAWS,
AND MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED OR TRANSFERRED UNLESS (A)
SUBSEQUENTLY REGISTERED THEREUNDER, (B) SUCH BUYER SHALL HAVE DELIVERED TO THE
COMPANY AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, TO THE EFFECT
THAT SUCH SECURITIES TO BE SOLD, ASSIGNED OR TRANSFERRED MAY BE SOLD, ASSIGNED
OR TRANSFERRED PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION, OR (C) SUCH
BUYER PROVIDES THE COMPANY WITH REASONABLE ASSURANCE THAT SUCH SECURITIES CAN BE
SOLD, ASSIGNED OR TRANSFERRED PURSUANT TO RULE 144 OR RULE 144A PROMULGATED
UNDER THE 1933 ACT, AS AMENDED, (OR A SUCCESSOR RULE THERETO) (COLLECTIVELY,
“RULE 144”); (II) ANY SALE OF THE SECURITIES MADE IN RELIANCE ON RULE 144 MAY BE
MADE ONLY IN ACCORDANCE WITH THE TERMS OF RULE 144 AND FURTHER, IF RULE 144 IS
NOT APPLICABLE, ANY RESALE OF THE SECURITIES UNDER CIRCUMSTANCES IN WHICH THE
SELLER (OR THE PERSON (AS DEFINED IN SECTION 3(S)) THROUGH WHOM THE SALE IS
MADE) MAY BE DEEMED TO BE AN UNDERWRITER (AS THAT TERM IS DEFINED IN THE 1933
ACT) MAY REQUIRE COMPLIANCE WITH SOME OTHER EXEMPTION UNDER THE 1933 ACT OR THE
RULES AND REGULATIONS OF THE SEC THEREUNDER; AND (III) NEITHER THE COMPANY NOR
ANY OTHER PERSON IS UNDER ANY OBLIGATION TO REGISTER THE SECURITIES UNDER THE
1933 ACT OR ANY STATE SECURITIES LAWS OR TO COMPLY WITH THE TERMS AND CONDITIONS
OF ANY EXEMPTION THEREUNDER.

(G)           LEGENDS.  SUCH BUYER UNDERSTANDS THAT THE CERTIFICATES OR OTHER
INSTRUMENTS REPRESENTING THE NOTES AND THE WARRANTS AND, UNTIL SUCH TIME AS THE
RESALE OF THE WARRANT SHARES HAVE BEEN REGISTERED UNDER THE 1933 ACT AS
CONTEMPLATED BY THE REGISTRATION RIGHTS AGREEMENT, THE STOCK CERTIFICATES
REPRESENTING THE WARRANT SHARES, EXCEPT AS SET FORTH

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below, shall bear any legend as required by the “blue sky” laws of any state and
a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such Warrants or stock certificates or
other instruments):

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
OR OTHER INSTRUMENTS NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE OR OTHER
INSTRUMENTS HAVE NOT BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE
144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

The legend set forth above shall be removed and the Company shall issue a
certificate or other instruments without such legend to the holder of the
Securities upon which it is stamped, if, unless otherwise required by state
securities laws or regulations, (i) such Securities are registered for resale
under the 1933 Act, (ii) in connection with a sale, assignment or other
transfer, such holder provides the Company with an opinion of counsel, in a form
reasonably acceptable to the Company, to the effect that such sale, assignment
or transfer of the Securities may be made without registration under the
applicable requirements of the 1933 Act, or (iii) such holder provides the
Company with an opinion of counsel, in a form reasonably acceptable to the
Company, to the effect that the Securities can be sold, assigned or transferred
pursuant to Rule 144 or Rule 144A.

(H)           VALIDITY; ENFORCEMENT.  THIS AGREEMENT, AND THE REGISTRATION
RIGHTS AGREEMENT TO WHICH SUCH BUYER IS A PARTY HAVE BEEN DULY AND VALIDLY
AUTHORIZED, EXECUTED AND DELIVERED ON BEHALF OF SUCH BUYER AND SHALL CONSTITUTE
THE LEGAL, VALID AND BINDING OBLIGATIONS OF SUCH BUYER ENFORCEABLE AGAINST SUCH
BUYER IN ACCORDANCE WITH THEIR RESPECTIVE TERMS, EXCEPT AS SUCH ENFORCEABILITY
MAY BE LIMITED BY GENERAL PRINCIPLES OF EQUITY OR TO APPLICABLE BANKRUPTCY,
INSOLVENCY, REORGANIZATION, MORATORIUM, LIQUIDATION AND OTHER SIMILAR LAWS
RELATING TO, OR AFFECTING GENERALLY, THE ENFORCEMENT OF APPLICABLE CREDITORS’
RIGHTS AND REMEDIES.

(I)            NO CONFLICTS.  THE EXECUTION, DELIVERY AND PERFORMANCE BY SUCH
BUYER OF THIS AGREEMENT, AND THE REGISTRATION RIGHTS AGREEMENT TO WHICH SUCH
BUYER IS A PARTY AND THE CONSUMMATION BY SUCH BUYER OF THE TRANSACTIONS
CONTEMPLATED HEREBY AND THEREBY WILL NOT (I) RESULT IN A VIOLATION OF THE
ORGANIZATIONAL DOCUMENTS OF SUCH BUYER OR (II) CONFLICT WITH, OR

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constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party, or (iii) result in a violation of any
law, rule, regulation, order, judgment  or decree (including federal and state
securities laws) applicable to such Buyer, except in the case of clauses (ii)
and (iii) above, for such conflicts, defaults, rights or violations which would
not, individually or in the aggregate, reasonably be expected to have a material
adverse effect on the ability of such Buyer to perform its obligations
hereunder.

(J)            RESIDENCY.  SUCH BUYER IS A RESIDENT OF THAT JURISDICTION
SPECIFIED BELOW ITS ADDRESS ON THE SCHEDULE OF BUYERS.

(K)           CERTAIN TRADING ACTIVITIES.  SUCH BUYER HAS NOT DIRECTLY OR
INDIRECTLY ENGAGED IN ANY SHORT SALES INVOLVING THE COMPANY’S SECURITIES SINCE
THE TIME THAT SUCH BUYER WAS FIRST CONTACTED WITH RESPECT TO THE TRANSACTIONS
CONTEMPLATED HEREBY.  “SHORT SALES” MEANS ALL “SHORT SALES” AS DEFINED IN RULE
200 PROMULGATED UNDER REGULATION SHO UNDER THE 1934 ACT, AND ALL TYPES OF DIRECT
AND INDIRECT STOCK PLEDGES, FORWARD SALES CONTRACTS, PUTS, OPTIONS, CALLS, SHORT
SALES, SWAPS AND SIMILAR ARRANGEMENTS (INCLUDING ON A TOTAL RETURN BASIS) AND
SALES AND OTHER TRANSACTIONS THROUGH NON-US BROKER DEALERS OR FOREIGN BROKERS.

3.             REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to each of the Buyers, except as set forth
on the disclosure schedule dated as of the date hereof and provided to the
Buyers in connection herewith (the “Disclosure Schedule”), that:

(A)           ORGANIZATION AND QUALIFICATION.  THE COMPANY AND ITS
“SUBSIDIARIES” (WHICH FOR PURPOSES OF THIS AGREEMENT MEANS ANY ENTITY IN WHICH
THE COMPANY, DIRECTLY OR INDIRECTLY, OWNS CAPITAL STOCK OR HOLDS AN EQUITY OR
SIMILAR INTEREST) ARE ENTITIES DULY ORGANIZED AND VALIDLY EXISTING IN GOOD
STANDING UNDER THE LAWS OF THE JURISDICTION IN WHICH THEY ARE FORMED, AND HAVE
THE REQUISITE POWER AND AUTHORIZATION TO OWN THEIR PROPERTIES AND TO CARRY ON
THEIR BUSINESS AS NOW BEING CONDUCTED.  EACH OF THE COMPANY AND ITS SUBSIDIARIES
IS DULY QUALIFIED AS A FOREIGN ENTITY TO DO BUSINESS AND IS IN GOOD STANDING IN
EVERY JURISDICTION IN WHICH ITS OWNERSHIP OF PROPERTY OR THE NATURE OF THE
BUSINESS CONDUCTED BY IT MAKES SUCH QUALIFICATION NECESSARY, EXCEPT TO THE
EXTENT THAT THE FAILURE TO BE SO QUALIFIED OR BE IN GOOD STANDING WOULD NOT HAVE
A MATERIAL ADVERSE EFFECT.  AS USED IN THIS AGREEMENT, “MATERIAL ADVERSE EFFECT”
MEANS ANY MATERIAL ADVERSE EFFECT ON THE BUSINESS, PROPERTIES, ASSETS,
OPERATIONS, RESULTS OF OPERATIONS, CONDITION (FINANCIAL OR OTHERWISE) OR
PROSPECTS OF THE COMPANY AND ITS SUBSIDIARIES, TAKEN AS A WHOLE, OR ON THE
TRANSACTIONS CONTEMPLATED HEREBY AND THE OTHER TRANSACTION DOCUMENTS OR BY THE
AGREEMENTS AND INSTRUMENTS TO BE ENTERED INTO IN CONNECTION HEREWITH OR
THEREWITH, OR ON THE AUTHORITY OR ABILITY OF THE COMPANY TO PERFORM ITS
OBLIGATIONS UNDER THE TRANSACTION DOCUMENTS (AS DEFINED BELOW).  THE COMPANY HAS
NO SUBSIDIARIES EXCEPT AS SET FORTH IN SECTION 3(A) TO THE DISCLOSURE SCHEDULES.

(B)           AUTHORIZATION; ENFORCEMENT; VALIDITY.  THE COMPANY HAS THE
REQUISITE POWER AND AUTHORITY TO ENTER INTO AND PERFORM ITS OBLIGATIONS UNDER
THIS AGREEMENT, THE NOTES, THE REGISTRATION RIGHTS AGREEMENT, THE IRREVOCABLE
TRANSFER AGENT INSTRUCTIONS (AS DEFINED IN

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Section 5(b)), the Warrants, and each of the other agreements entered into by
the parties hereto in connection with the transactions contemplated by this
Agreement (collectively, the “Transaction Documents”) and to issue the
Securities in accordance with the terms hereof and thereof.  The execution and
delivery of the Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Notes and the Warrants and the reservation for
issuance and issuance of Warrant Shares issuable upon exercise of the Warrants,
have been duly authorized by the Company’s Board of Directors and (other than
the filing with the SEC of (i) a Form D under Regulation D of the 1933 Act, in
accordance with Section 4(b) hereof, (ii) one or more Registration Statements in
accordance with the requirements of the Registration Rights Agreement and (iii)
one or more Current Reports on Form 8-K pursuant to Section 4(i) hereof) no
further filing, consent, or authorization is required by the Company, its Board
of Directors or its stockholders.  This Agreement and the other Transaction
Documents of even date herewith have been duly executed and delivered by the
Company, and constitute the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of applicable
creditors’ rights and remedies.

(C)           ISSUANCE OF SECURITIES.  THE ISSUANCE OF THE NOTES AND THE
WARRANTS ARE DULY AUTHORIZED AND ARE FREE FROM ALL TAXES, LIENS AND CHARGES WITH
RESPECT TO THE ISSUE THEREOF.  AS OF THE CLOSING, A NUMBER OF SHARES OF COMMON
STOCK SHALL HAVE BEEN DULY AUTHORIZED AND RESERVED FOR ISSUANCE WHICH EQUALS
130% OF THE MAXIMUM NUMBER OF SHARES COMMON STOCK ISSUABLE UPON EXERCISE OF THE
WARRANTS.  UPON EXERCISE IN ACCORDANCE WITH THE WARRANTS, THE WARRANT SHARES
WILL BE VALIDLY ISSUED, FULLY PAID AND NONASSESSABLE AND FREE FROM ALL
PREEMPTIVE OR SIMILAR RIGHTS, TAXES, LIENS AND CHARGES WITH RESPECT TO THE ISSUE
THEREOF, WITH THE HOLDERS BEING ENTITLED TO ALL RIGHTS ACCORDED TO A HOLDER OF
COMMON STOCK.  THE OFFER AND ISSUANCE BY THE COMPANY OF THE SECURITIES IS EXEMPT
FROM REGISTRATION UNDER THE 1933 ACT.

(D)           NO CONFLICTS.  THE EXECUTION, DELIVERY AND PERFORMANCE OF THE
TRANSACTION DOCUMENTS BY THE COMPANY AND THE CONSUMMATION BY THE COMPANY OF THE
TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY (INCLUDING, WITHOUT LIMITATION, THE
ISSUANCE OF THE NOTES AND THE WARRANTS AND THE RESERVATION FOR ISSUANCE AND
ISSUANCE OF THE WARRANT SHARES) WILL NOT (I) RESULT IN A VIOLATION OF THE
CERTIFICATE OF INCORPORATION (AS DEFINED IN SECTION 3(R)) OF THE COMPANY OR ANY
OF ITS SUBSIDIARIES, ANY CAPITAL STOCK OF THE COMPANY OR BYLAWS (AS DEFINED IN
SECTION 3(R)) OF THE COMPANY OR ANY OF ITS SUBSIDIARIES OR (II) CONFLICT WITH,
OR CONSTITUTE A DEFAULT (OR AN EVENT WHICH WITH NOTICE OR LAPSE OF TIME OR BOTH
WOULD BECOME A DEFAULT) UNDER, OR GIVE TO OTHERS ANY RIGHTS OF TERMINATION,
AMENDMENT, ACCELERATION OR CANCELLATION OF, ANY AGREEMENT, INDENTURE OR
INSTRUMENT TO WHICH THE COMPANY OR ANY OF ITS SUBSIDIARIES IS A PARTY, OR (III)
RESULT IN A VIOLATION OF ANY LAW, RULE, REGULATION, ORDER, JUDGMENT OR DECREE
(INCLUDING FEDERAL AND STATE SECURITIES LAWS AND REGULATIONS AND THE RULES AND
REGULATIONS OF THE AMERICAN STOCK EXCHANGE (THE “PRINCIPAL MARKET”)) APPLICABLE
TO THE COMPANY OR ANY OF ITS SUBSIDIARIES OR BY WHICH ANY PROPERTY OR ASSET OF
THE COMPANY OR ANY OF ITS SUBSIDIARIES IS BOUND OR AFFECTED.

(E)           CONSENTS.  EXCEPT AS SET FORTH IN SECTION 3(E) OF THE DISCLOSURE
SCHEDULES, THE COMPANY IS NOT REQUIRED TO OBTAIN ANY CONSENT, AUTHORIZATION OR
ORDER OF, OR MAKE ANY FILING OR REGISTRATION WITH, ANY COURT, GOVERNMENTAL
AGENCY OR ANY REGULATORY OR SELF-REGULATORY AGENCY

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or any other Person in order for it to execute, deliver or perform any of its
obligations under or contemplated by the Transaction Documents, in each case in
accordance with the terms hereof or thereof (other than the filing with the SEC
of (i) a Form D under Regulation D of the 1933 Act, in accordance with Section
4(b) hereof, (ii) one or more Registration Statements  in accordance with the
requirements of the Registration Rights Agreement, and (iii) one or more Current
Reports on Form 8-K pursuant to Section 4(i) hereof).  All consents,
authorizations, orders, filings and registrations which the Company is required
to obtain pursuant to the preceding sentence have been obtained or effected on
or prior to the Closing Date, and the Company and its Subsidiaries are unaware
of any facts or circumstances which would prevent the Company from obtaining or
effecting any of the registration, application or filings pursuant to the
preceding sentence.  The Company is not in violation of the listing requirements
of the Principal Market and has no knowledge of any facts which would reasonably
lead to delisting or suspension of the Common Stock in the foreseeable future.

(F)            ACKNOWLEDGMENT REGARDING BUYER’S PURCHASE OF SECURITIES.  THE
COMPANY ACKNOWLEDGES AND AGREES THAT EACH BUYER IS ACTING SOLELY IN THE CAPACITY
OF ARM’S LENGTH PURCHASER WITH RESPECT TO THE TRANSACTION DOCUMENTS AND THE
TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY.  THE COMPANY FURTHER ACKNOWLEDGES
THAT NO BUYER IS (I) AN OFFICER OR DIRECTOR OF THE COMPANY, (II) TO THE
KNOWLEDGE OF THE COMPANY, AN “AFFILIATE” OF THE COMPANY (AS DEFINED IN RULE 144)
OR (III) TO THE KNOWLEDGE OF THE COMPANY, A “BENEFICIAL OWNER” OF MORE THAN 10%
OF THE SHARES OF COMMON STOCK (AS DEFINED FOR PURPOSES OF RULE 13D-3 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE “1934 ACT”)).  THE COMPANY
FURTHER ACKNOWLEDGES THAT NO BUYER IS ACTING AS A FINANCIAL ADVISOR OR FIDUCIARY
OF THE COMPANY (OR IN ANY SIMILAR CAPACITY) WITH RESPECT TO THE TRANSACTION
DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY, AND ANY ADVICE
GIVEN BY A BUYER OR ANY OF ITS REPRESENTATIVES OR AGENTS IN CONNECTION WITH THE
TRANSACTION DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY IS
MERELY INCIDENTAL TO SUCH BUYER’S PURCHASE OF THE SECURITIES.  THE COMPANY
FURTHER REPRESENTS TO EACH BUYER THAT THE COMPANY’S DECISION TO ENTER INTO THE
TRANSACTION DOCUMENTS HAS BEEN BASED SOLELY ON THE INDEPENDENT EVALUATION BY THE
COMPANY AND ITS REPRESENTATIVES.

(G)           NO GENERAL SOLICITATION; PLACEMENT AGENT’S FEES.  NEITHER THE
COMPANY, NOR ANY OF ITS AFFILIATES, NOR ANY PERSON ACTING ON ITS OR THEIR
BEHALF, HAS ENGAGED IN ANY FORM OF GENERAL SOLICITATION OR GENERAL ADVERTISING
(WITHIN THE MEANING OF REGULATION D) IN CONNECTION WITH THE OFFER OR SALE OF THE
SECURITIES.  THE COMPANY SHALL BE RESPONSIBLE FOR THE PAYMENT OF ANY PLACEMENT
AGENT’S FEES, FINANCIAL ADVISORY FEES, OR BROKERS’ COMMISSIONS (OTHER THAN FOR
PERSONS ENGAGED BY ANY BUYER OR ITS INVESTMENT ADVISOR) RELATING TO OR ARISING
OUT OF THE TRANSACTIONS CONTEMPLATED HEREBY.  THE COMPANY SHALL PAY, AND HOLD
EACH BUYER HARMLESS AGAINST, ANY LIABILITY, LOSS OR EXPENSE (INCLUDING, WITHOUT
LIMITATION, ATTORNEY’S FEES AND OUT-OF-POCKET EXPENSES) ARISING IN CONNECTION
WITH ANY SUCH CLAIM.  THE COMPANY HAS NOT ENGAGED ANY PLACEMENT AGENT OR OTHER
AGENT IN CONNECTION WITH THE SALE OF THE SECURITIES.

(H)           NO INTEGRATED OFFERING.  NONE OF THE COMPANY, ITS SUBSIDIARIES,
ANY OF THEIR AFFILIATES, AND ANY PERSON ACTING ON THEIR BEHALF HAS, DIRECTLY OR
INDIRECTLY, MADE ANY OFFERS OR SALES OF ANY SECURITY OR SOLICITED ANY OFFERS TO
BUY ANY SECURITY, UNDER CIRCUMSTANCES THAT WOULD REQUIRE REGISTRATION OF ANY OF
THE SECURITIES UNDER THE 1933 ACT OR CAUSE THIS OFFERING OF THE SECURITIES TO BE
INTEGRATED WITH PRIOR OFFERINGS BY THE COMPANY FOR PURPOSES OF THE 1933 ACT

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or any applicable stockholder approval provisions, including, without
limitation, under the rules and regulations of any exchange or automated
quotation system on which any of the securities of the Company are listed or
designated.  None of the Company, its Subsidiaries, their affiliates and any
Person acting on their behalf will take any action or steps referred to in the
preceding sentence that would require registration of any of the Securities
under the 1933 Act or cause the offering of the Securities to be integrated with
other offerings.

(I)            DILUTIVE EFFECT.  THE COMPANY UNDERSTANDS AND ACKNOWLEDGES THAT
THE NUMBER OF WARRANT SHARES ISSUABLE UPON EXERCISE OF THE WARRANTS MAY INCREASE
IN CERTAIN CIRCUMSTANCES.  THE COMPANY FURTHER ACKNOWLEDGES THAT ITS OBLIGATION
TO ISSUE THE WARRANT SHARES UPON EXERCISE OF THE WARRANTS IN ACCORDANCE WITH
THIS AGREEMENT AND THE WARRANTS IS ABSOLUTE AND UNCONDITIONAL REGARDLESS OF THE
DILUTIVE EFFECT THAT SUCH ISSUANCE MAY HAVE ON THE OWNERSHIP INTERESTS OF OTHER
STOCKHOLDERS OF THE COMPANY.

(J)            APPLICATION OF TAKEOVER PROTECTIONS; RIGHTS AGREEMENT.  THE
COMPANY AND ITS BOARD OF DIRECTORS HAVE TAKEN ALL NECESSARY ACTION, IF ANY, IN
ORDER TO RENDER INAPPLICABLE ANY CONTROL SHARE ACQUISITION, BUSINESS
COMBINATION, POISON PILL (INCLUDING ANY DISTRIBUTION UNDER A RIGHTS AGREEMENT)
OR OTHER SIMILAR ANTI-TAKEOVER PROVISION UNDER THE CERTIFICATE OF INCORPORATION
OR THE LAWS OF THE JURISDICTION OF ITS FORMATION WHICH IS OR COULD BECOME
APPLICABLE TO ANY BUYER AS A RESULT OF THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE COMPANY’S ISSUANCE OF THE
SECURITIES AND ANY BUYER’S OWNERSHIP OF THE SECURITIES.

(K)           SEC DOCUMENTS; FINANCIAL STATEMENTS.  EXCEPT AS DISCLOSED IN
SECTION 3(K) TO THE DISCLOSURE SCHEDULES, DURING THE TWO (2) YEARS PRIOR TO THE
DATE HEREOF, THE COMPANY HAS FILED ALL REPORTS, SCHEDULES, FORMS, STATEMENTS AND
OTHER DOCUMENTS REQUIRED TO BE FILED BY IT WITH THE SEC PURSUANT TO THE
REPORTING REQUIREMENTS OF THE 1934 ACT (ALL OF THE FOREGOING FILED PRIOR TO THE
DATE HEREOF AND ALL EXHIBITS INCLUDED THEREIN AND FINANCIAL STATEMENTS, NOTES
AND SCHEDULES THERETO AND DOCUMENTS INCORPORATED BY REFERENCE THEREIN BEING
HEREINAFTER REFERRED TO AS THE “SEC DOCUMENTS”).  THE COMPANY HAS DELIVERED TO
THE BUYERS OR THEIR RESPECTIVE REPRESENTATIVES TRUE, CORRECT AND COMPLETE COPIES
OF THE SEC DOCUMENTS NOT AVAILABLE ON THE EDGAR SYSTEM.  AS OF THEIR RESPECTIVE
DATES, THE SEC DOCUMENTS COMPLIED IN ALL MATERIAL RESPECTS WITH THE REQUIREMENTS
OF THE 1934 ACT AND THE RULES AND REGULATIONS OF THE SEC PROMULGATED THEREUNDER
APPLICABLE TO THE SEC DOCUMENTS, AND NONE OF THE SEC DOCUMENTS, AT THE TIME THEY
WERE FILED WITH THE SEC, CONTAINED ANY UNTRUE STATEMENT OF A MATERIAL FACT OR
OMITTED TO STATE A MATERIAL FACT REQUIRED TO BE STATED THEREIN OR NECESSARY IN
ORDER TO MAKE THE STATEMENTS THEREIN, IN THE LIGHT OF THE CIRCUMSTANCES UNDER
WHICH THEY WERE MADE, NOT MISLEADING.  AS OF THEIR RESPECTIVE DATES, THE
FINANCIAL STATEMENTS OF THE COMPANY INCLUDED IN THE SEC DOCUMENTS COMPLIED AS TO
FORM IN ALL MATERIAL RESPECTS WITH APPLICABLE ACCOUNTING REQUIREMENTS AND THE
PUBLISHED RULES AND REGULATIONS OF THE SEC WITH RESPECT THERETO.  SUCH FINANCIAL
STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES, CONSISTENTLY APPLIED, DURING THE PERIODS
INVOLVED (EXCEPT (I) AS MAY BE OTHERWISE INDICATED IN SUCH FINANCIAL STATEMENTS
OR THE NOTES THERETO, OR (II) IN THE CASE OF UNAUDITED INTERIM STATEMENTS, TO
THE EXTENT THEY MAY EXCLUDE FOOTNOTES OR MAY BE CONDENSED OR SUMMARY STATEMENTS)
AND FAIRLY PRESENT IN ALL MATERIAL RESPECTS THE FINANCIAL POSITION OF THE
COMPANY AS OF THE DATES THEREOF AND THE RESULTS OF ITS OPERATIONS AND CASH FLOWS
FOR THE PERIODS THEN ENDED (SUBJECT, IN THE CASE OF UNAUDITED STATEMENTS, TO
NORMAL YEAR-END AUDIT ADJUSTMENTS).  NO OTHER INFORMATION PROVIDED BY OR ON
BEHALF OF THE COMPANY TO THE BUYERS WHICH IS NOT

8

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included in the SEC Documents, including, without limitation, information
referred to in Section 2(d) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstance under which they are or
were made, not misleading.

(L)            ABSENCE OF CERTAIN CHANGES.  SINCE DECEMBER 31, 2005, THERE HAS
BEEN NO MATERIAL ADVERSE CHANGE AND NO MATERIAL ADVERSE DEVELOPMENT IN THE
BUSINESS, PROPERTIES, OPERATIONS, CONDITION (FINANCIAL OR OTHERWISE), RESULTS OF
OPERATIONS OR PROSPECTS OF THE COMPANY AND ITS SUBSIDIARIES TAKEN AS A WHOLE. 
EXCEPT AS DISCLOSED IN SECTION 3(L) TO THE DISCLOSURE SCHEDULES, SINCE DECEMBER
31, 2005, THE COMPANY HAS NOT (I) DECLARED OR PAID ANY DIVIDENDS, (II) SOLD ANY
ASSETS, INDIVIDUALLY OR IN THE AGGREGATE, IN EXCESS OF $100,000 OUTSIDE OF THE
ORDINARY COURSE OF BUSINESS OR (III) HAD CAPITAL EXPENDITURES, INDIVIDUALLY OR
IN THE AGGREGATE, IN EXCESS OF $100,000.  THE COMPANY HAS NOT TAKEN ANY STEPS TO
SEEK PROTECTION PURSUANT TO ANY BANKRUPTCY LAW NOR DOES THE COMPANY HAVE ANY
KNOWLEDGE OR REASON TO BELIEVE THAT ITS CREDITORS INTEND TO INITIATE INVOLUNTARY
BANKRUPTCY PROCEEDINGS OR ANY ACTUAL KNOWLEDGE OF ANY FACT WHICH WOULD
REASONABLY LEAD A CREDITOR TO DO SO.  THE COMPANY IS NOT AS OF THE DATE HEREOF,
AND AFTER GIVING EFFECT TO THE TRANSACTIONS CONTEMPLATED HEREBY TO OCCUR AT THE
CLOSING, WILL NOT BE INSOLVENT (AS DEFINED BELOW).  FOR PURPOSES OF THIS SECTION
3(L), “INSOLVENT” MEANS (I) THE PRESENT FAIR SALEABLE VALUE OF THE COMPANY’S
ASSETS IS LESS THAN THE AMOUNT REQUIRED TO PAY THE COMPANY’S TOTAL INDEBTEDNESS
(AS DEFINED IN SECTION 3(S)), (II) THE COMPANY IS UNABLE TO PAY ITS DEBTS AND
LIABILITIES, SUBORDINATED, CONTINGENT OR OTHERWISE, AS SUCH DEBTS AND
LIABILITIES BECOME ABSOLUTE AND MATURED, (III) THE COMPANY INTENDS TO INCUR OR
BELIEVES THAT IT WILL INCUR DEBTS THAT WOULD BE BEYOND ITS ABILITY TO PAY AS
SUCH DEBTS MATURE OR (IV) THE COMPANY HAS UNREASONABLY SMALL CAPITAL WITH WHICH
TO CONDUCT THE BUSINESS IN WHICH IT IS ENGAGED AS SUCH BUSINESS IS NOW CONDUCTED
AND IS PROPOSED TO BE CONDUCTED.

(M)          NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR CIRCUMSTANCES. 
EXCEPT FOR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, NO EVENT, LIABILITY,
DEVELOPMENT OR CIRCUMSTANCE HAS OCCURRED OR EXISTS WITH RESPECT TO THE COMPANY,
ITS SUBSIDIARIES OR THEIR RESPECTIVE BUSINESS, PROPERTIES, PROSPECTS, OPERATIONS
OR FINANCIAL CONDITION, THAT WOULD BE REQUIRED TO BE DISCLOSED BY THE COMPANY
UNDER APPLICABLE SECURITIES LAWS ON A CURRENT REPORT ON FORM 8-K FILED WITH THE
SEC.

(N)           CONDUCT OF BUSINESS; REGULATORY PERMITS.  NEITHER THE COMPANY NOR
ITS SUBSIDIARIES IS IN VIOLATION OF ANY TERM OF OR IN DEFAULT UNDER ITS
CERTIFICATE OF INCORPORATION OR BYLAWS OR THEIR ORGANIZATIONAL CHARTER OR
CERTIFICATE OF INCORPORATION OR BYLAWS, RESPECTIVELY.  NEITHER THE COMPANY NOR
ANY OF ITS SUBSIDIARIES IS IN VIOLATION OF ANY JUDGMENT, DECREE OR ORDER OR ANY
STATUTE, ORDINANCE, RULE OR REGULATION APPLICABLE TO THE COMPANY OR ITS
SUBSIDIARIES, AND NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES WILL CONDUCT
ITS BUSINESS IN VIOLATION OF ANY OF THE FOREGOING, EXCEPT FOR POSSIBLE
VIOLATIONS WHICH WOULD NOT, INDIVIDUALLY OR IN THE AGGREGATE, HAVE A MATERIAL
ADVERSE EFFECT.  WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EXCEPT AS
DISCLOSED IN SECTION 3(N) TO THE DISCLOSURE SCHEDULES, THE COMPANY IS NOT IN
VIOLATION OF ANY OF THE RULES, REGULATIONS OR REQUIREMENTS OF THE PRINCIPAL
MARKET AND HAS NO KNOWLEDGE OF ANY FACTS OR CIRCUMSTANCES WHICH WOULD REASONABLY
LEAD TO DELISTING OR SUSPENSION OF THE COMMON STOCK BY THE PRINCIPAL MARKET IN
THE FORESEEABLE FUTURE.  SINCE DECEMBER 31, 2003, (I) THE COMMON STOCK HAS BEEN
DESIGNATED FOR QUOTATION ON THE PRINCIPAL MARKET, (II) TRADING IN THE COMMON
STOCK HAS NOT BEEN SUSPENDED BY THE SEC OR THE PRINCIPAL MARKET AND (III) THE
COMPANY HAS

9

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received no communication, written or oral, from the SEC or the Principal Market
regarding the suspension or delisting of the Common Stock from the Principal
Market.  The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate regulatory authorities
necessary to conduct their respective businesses, except where the failure to
possess such certificates, authorizations or permits would not have,
individually or in the aggregate, a Material Adverse Effect, and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.

(O)           FOREIGN CORRUPT PRACTICES.  NEITHER THE COMPANY, NOR ANY OF ITS
SUBSIDIARIES, NOR ANY DIRECTOR, OFFICER, AGENT, EMPLOYEE OR OTHER PERSON ACTING
ON BEHALF OF THE COMPANY OR ANY OF ITS SUBSIDIARIES HAS, IN THE COURSE OF ITS
ACTIONS FOR, OR ON BEHALF OF, THE COMPANY (I) USED ANY CORPORATE FUNDS FOR ANY
UNLAWFUL CONTRIBUTION, GIFT, ENTERTAINMENT OR OTHER UNLAWFUL EXPENSES RELATING
TO POLITICAL ACTIVITY; (II) MADE ANY DIRECT OR INDIRECT UNLAWFUL PAYMENT TO ANY
FOREIGN OR DOMESTIC GOVERNMENT OFFICIAL OR EMPLOYEE FROM CORPORATE FUNDS; (III)
VIOLATED OR IS IN VIOLATION OF ANY PROVISION OF THE U.S. FOREIGN CORRUPT
PRACTICES ACT OF 1977, AS AMENDED; OR (IV) MADE ANY UNLAWFUL BRIBE, REBATE,
PAYOFF, INFLUENCE PAYMENT, KICKBACK OR OTHER UNLAWFUL PAYMENT TO ANY FOREIGN OR
DOMESTIC GOVERNMENT OFFICIAL OR EMPLOYEE.

(P)           SARBANES-OXLEY ACT.  THE COMPANY IS IN COMPLIANCE WITH ANY AND ALL
APPLICABLE REQUIREMENTS OF THE SARBANES-OXLEY ACT OF 2002 THAT ARE EFFECTIVE AS
OF THE DATE HEREOF WITH RESPECT TO THE COMPANY, AND ANY AND ALL APPLICABLE RULES
AND REGULATIONS PROMULGATED BY THE SEC THEREUNDER THAT ARE EFFECTIVE AS OF THE
DATE HEREOF, EXCEPT WHERE SUCH NONCOMPLIANCE WOULD NOT HAVE, INDIVIDUALLY OR IN
THE AGGREGATE, A MATERIAL ADVERSE EFFECT.

(Q)           TRANSACTIONS WITH AFFILIATES.  EXCEPT AS SET FORTH IN THE SEC
DOCUMENTS FILED AT LEAST TEN DAYS PRIOR TO THE DATE HEREOF AND OTHER THAN THE
GRANT OF STOCK OPTIONS DISCLOSED ON THE DISCLOSURE SCHEDULE, NONE OF THE
OFFICERS, DIRECTORS OR EMPLOYEES OF THE COMPANY IS PRESENTLY A PARTY TO ANY
TRANSACTION WITH THE COMPANY OR ANY OF ITS SUBSIDIARIES (OTHER THAN FOR ORDINARY
COURSE SERVICES AS EMPLOYEES, OFFICERS OR DIRECTORS), INCLUDING ANY CONTRACT,
AGREEMENT OR OTHER ARRANGEMENT PROVIDING FOR THE FURNISHING OF SERVICES TO OR
BY, PROVIDING FOR RENTAL OF REAL OR PERSONAL PROPERTY TO OR FROM, OR OTHERWISE
REQUIRING PAYMENTS TO OR FROM ANY SUCH OFFICER, DIRECTOR OR EMPLOYEE OR, TO THE
KNOWLEDGE OF THE COMPANY, ANY CORPORATION, PARTNERSHIP, TRUST OR OTHER ENTITY IN
WHICH ANY SUCH OFFICER, DIRECTOR, OR EMPLOYEE HAS A SUBSTANTIAL INTEREST OR IS
AN OFFICER, DIRECTOR, TRUSTEE OR PARTNER.

(R)            EQUITY CAPITALIZATION.  AS OF THE DATE HEREOF, THE AUTHORIZED
CAPITAL STOCK OF THE COMPANY CONSISTS OF (I) 150,000,000 SHARES OF COMMON STOCK,
OF WHICH AS OF THE DATE HEREOF, 22,564,487 ARE ISSUED AND OUTSTANDING,
11,000,000 SHARES ARE RESERVED FOR ISSUANCE PURSUANT TO THE COMPANY’S STOCK
OPTION AND PURCHASE PLANS AND 15,709,655 SHARES ARE RESERVED FOR ISSUANCE
PURSUANT TO SECURITIES (OTHER THAN THE WARRANTS) EXERCISABLE OR EXCHANGEABLE
FOR, OR CONVERTIBLE INTO, SHARES OF COMMON STOCK AND (II) 10,000,000 SHARES OF
CONVERTIBLE PREFERRED STOCK, PAR VALUE $0.001 PER SHARE, OF WHICH AS OF THE DATE
HEREOF, 1,150,000 ARE AUTHORIZED AND DESIGNATED AS SERIES B CONVERTIBLE
PREFERRED STOCK, OF WHICH 473,901 SHARES ARE ISSUED AND OUTSTANDING; 100,000 ARE
AUTHORIZED AND DESIGNATED AS SERIES C CONVERTIBLE PREFERRED STOCK, OF WHICH
100,000 SHARES ARE ISSUED AND OUTSTANDING; 250,000 ARE AUTHORIZED AND DESIGNATED
AS SERIES D CONVERTIBLE PREFERRED STOCK, OF WHICH 250,000 SHARES ARE ISSUED AND
OUTSTANDING;

10

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296,667 are authorized and designated as Series E Convertible Preferred Stock,
of which 296,667 shares are issued and outstanding; 114,286 are authorized and
designated as Series F Convertible Preferred Stock, of which 114,286 shares are
issued and outstanding; and 388,664 are authorized and designated as Series G
Convertible Preferred Stock, none of which shares are issued or outstanding.. 
All of such outstanding shares have been, or upon issuance will be, validly
issued and are fully paid and nonassessable.  Except as disclosed in Section
3(r) to the disclosure Schedules: (i) none of the Company’s capital stock is
subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company; (ii) there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, or
exercisable or exchangeable for, any capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its Subsidiaries is or may become bound to issue
additional capital stock of the Company or any of its Subsidiaries or options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into, or exercisable
or exchangeable for, any capital stock of the Company or any of its
Subsidiaries; (iii) there are no outstanding debt securities, notes, credit
agreements, credit facilities or other agreements, documents or instruments
evidencing Indebtedness of the Company or any of its Subsidiaries or by which
the Company or any of its Subsidiaries is or may become bound; (iv) there are no
financing statements securing obligations in any material amounts, either singly
or in the aggregate, filed in connection with the Company or any of its
Subsidiaries; (v) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act (except the Registration Rights Agreement);
(vi) there are no outstanding securities or instruments of the Company or any of
its Subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to redeem a security
of the Company or any of its Subsidiaries; (vii) there are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Securities; (viii) the Company does not have
any stock appreciation rights or “phantom stock” plans or agreements or any
similar plan or agreement; and (ix) the Company and its Subsidiaries have no
liabilities or obligations required to be disclosed in the SEC Documents but not
so disclosed in the SEC Documents, other than those incurred in the ordinary
course of the Company’s or its Subsidiaries’ respective businesses and which,
individually or in the aggregate, do not or would not have a Material Adverse
Effect.  The Company has furnished to the Buyer true, correct and complete
copies of the Company’s Certificate of Incorporation, as amended and as in
effect on the date hereof (the “Certificate of Incorporation”), and the
Company’s Bylaws, as amended and as in effect on the date hereof (the “Bylaws”),
and the terms of all securities convertible into, or exercisable or exchangeable
for, shares of Common Stock and the material rights of the holders thereof in
respect thereto.

(S)           INDEBTEDNESS AND OTHER CONTRACTS.  NEITHER THE COMPANY NOR ANY OF
ITS SUBSIDIARIES (I) HAS ANY OUTSTANDING INDEBTEDNESS (AS DEFINED BELOW), (II)
IS A PARTY TO ANY CONTRACT, AGREEMENT OR INSTRUMENT, THE VIOLATION OF WHICH, OR
DEFAULT UNDER WHICH, BY THE OTHER PARTY(IES) TO SUCH CONTRACT, AGREEMENT OR
INSTRUMENT (OTHER THAN REAL PROPERTY LEASES) WOULD RESULT IN A MATERIAL ADVERSE
EFFECT, (III) IS IN VIOLATION OF ANY TERM OF OR IN DEFAULT UNDER ANY CONTRACT,
AGREEMENT OR INSTRUMENT RELATING TO ANY INDEBTEDNESS, EXCEPT WHERE SUCH
VIOLATIONS AND DEFAULTS WOULD NOT RESULT, INDIVIDUALLY OR IN THE AGGREGATE, IN A
MATERIAL ADVERSE EFFECT, OR (IV) IS A PARTY

11

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to any contract, agreement or instrument relating to any Indebtedness, the
performance of which, in the judgment of the Company’s officers, has or is
expected to have a Material Adverse Effect.  Section 3(s) to the Disclosure
Schedules provides a detailed description of the material terms of any such
outstanding Indebtedness.  For purposes of this Agreement:  (x) “Indebtedness”
of any Person means, without duplication (A) all indebtedness for borrowed
money, (B) all obligations issued, undertaken or assumed as the deferred
purchase price of property or services (other than trade payables entered into
in the ordinary course of business), (C) all reimbursement or payment
obligations with respect to letters of credit, surety bonds and other similar
instruments, (D) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses, (E) all indebtedness
created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to any property
or assets acquired with the proceeds of such indebtedness (even though the
rights and remedies of the seller or bank under such agreement in the event of
default are limited to repossession or sale of such property), (F) all monetary
obligations under any leasing or similar arrangement which, in connection with
generally accepted accounting principles, consistently applied for the periods
covered thereby, is classified as a capital lease, (G) all indebtedness referred
to in clauses (A) through (F) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any mortgage, lien, pledge, charge, security interest or other encumbrance upon
or in any property or assets (including accounts and contract rights) owned by
any Person, even though the Person which owns such assets or property has not
assumed or become liable for the payment of such indebtedness, and (H) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (A) through (G) above; (y) “Contingent
Obligation” means, as to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to any indebtedness, lease,
dividend or other obligation of another Person if the primary purpose or intent
of the Person incurring such liability, or the primary effect thereof, is to
provide assurance to the obligee of such liability that such liability will be
paid or discharged, or that any agreements relating thereto will be complied
with, or that the holders of such liability will be protected (in whole or in
part) against loss with respect thereto; and (z) “Person” means an individual, a
limited liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization and a government or any department or
agency thereof.

(T)            ABSENCE OF LITIGATION.  THERE IS NO ACTION, SUIT, PROCEEDING,
INQUIRY OR INVESTIGATION BEFORE OR BY THE PRINCIPAL MARKET, ANY COURT, PUBLIC
BOARD, GOVERNMENT AGENCY, SELF-REGULATORY ORGANIZATION OR BODY PENDING OR, TO
THE KNOWLEDGE OF THE COMPANY, THREATENED AGAINST OR AFFECTING THE COMPANY, THE
COMMON STOCK OR ANY OF THE COMPANY’S SUBSIDIARIES OR ANY OF THE COMPANY’S OR ITS
SUBSIDIARIES’ OFFICERS OR DIRECTORS IN THEIR CAPACITIES AS SUCH, WHICH
INDIVIDUALLY OR IN THE AGGREGATE WOULD HAVE A MATERIAL ADVERSE EFFECT.

(U)           INSURANCE.  THE COMPANY AND EACH OF ITS SUBSIDIARIES ARE INSURED
BY INSURERS OF RECOGNIZED FINANCIAL RESPONSIBILITY AGAINST SUCH LOSSES AND RISKS
AND IN SUCH AMOUNTS AS MANAGEMENT OF THE COMPANY BELIEVES TO BE PRUDENT AND
CUSTOMARY IN THE BUSINESSES IN WHICH THE COMPANY AND ITS SUBSIDIARIES ARE
ENGAGED.  NEITHER THE COMPANY NOR ANY SUCH SUBSIDIARY HAS BEEN REFUSED ANY
INSURANCE COVERAGE SOUGHT OR APPLIED FOR AND NEITHER THE COMPANY NOR ANY SUCH
SUBSIDIARY HAS ANY REASON TO BELIEVE THAT IT WILL NOT BE ABLE TO RENEW ITS
EXISTING INSURANCE COVERAGE AS AND WHEN SUCH COVERAGE EXPIRES OR TO OBTAIN
SIMILAR COVERAGE FROM SIMILAR INSURERS

12

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as may be necessary to continue its business at a cost that would not have a
Material Adverse Effect.

(V)           EMPLOYEE RELATIONS.  (I)  NEITHER THE COMPANY NOR ANY OF ITS
SUBSIDIARIES IS A PARTY TO ANY COLLECTIVE BARGAINING AGREEMENT OR EMPLOYS ANY
MEMBER OF A UNION.  THE COMPANY AND ITS SUBSIDIARIES BELIEVE THAT THEIR
RELATIONS WITH THEIR EMPLOYEES ARE GOOD.  NO EXECUTIVE OFFICER OF THE COMPANY OR
ANY OF ITS SUBSIDIARIES (AS DEFINED IN RULE 501(F) OF THE 1933 ACT) HAS NOTIFIED
THE COMPANY OR ANY SUCH SUBSIDIARY THAT SUCH OFFICER INTENDS TO LEAVE THE
COMPANY OR OTHERWISE TERMINATE SUCH OFFICER’S EMPLOYMENT WITH THE COMPANY OR ANY
SUCH SUBSIDIARY.  NO EXECUTIVE OFFICER OF THE COMPANY OR ANY OF ITS
SUBSIDIARIES, TO THE KNOWLEDGE OF THE COMPANY, IS, OR IS NOW EXPECTED TO BE, IN
VIOLATION OF ANY MATERIAL TERM OF ANY MATERIAL EMPLOYMENT CONTRACT,
CONFIDENTIALITY, DISCLOSURE OR PROPRIETARY INFORMATION AGREEMENT,
NON-COMPETITION AGREEMENT, OR ANY OTHER MATERIAL CONTRACT OR AGREEMENT OR ANY
MATERIAL RESTRICTIVE COVENANT, AND THE CONTINUED EMPLOYMENT OF EACH SUCH
EXECUTIVE OFFICER DOES NOT SUBJECT THE COMPANY OR ANY OF ITS SUBSIDIARIES TO ANY
LIABILITY WITH RESPECT TO ANY OF THE FOREGOING MATTERS.

(II)           THE COMPANY AND ITS SUBSIDIARIES ARE IN COMPLIANCE WITH ALL
FEDERAL, STATE, LOCAL AND FOREIGN LAWS AND REGULATIONS RESPECTING LABOR,
EMPLOYMENT AND EMPLOYMENT PRACTICES AND BENEFITS, TERMS AND CONDITIONS OF
EMPLOYMENT AND WAGES AND HOURS, EXCEPT WHERE FAILURE TO BE IN COMPLIANCE WOULD
NOT, EITHER INDIVIDUALLY OR IN THE AGGREGATE, REASONABLY BE EXPECTED TO RESULT
IN A MATERIAL ADVERSE EFFECT.

(W)          TITLE.  THE COMPANY AND ITS SUBSIDIARIES HAVE GOOD AND MARKETABLE
TITLE IN FEE SIMPLE TO ALL REAL PROPERTY AND GOOD AND MARKETABLE TITLE TO ALL
PERSONAL PROPERTY OWNED BY THEM WHICH IS MATERIAL TO THE BUSINESS OF THE COMPANY
AND ITS SUBSIDIARIES, IN EACH CASE FREE AND CLEAR OF ALL LIENS, ENCUMBRANCES AND
DEFECTS EXCEPT SUCH AS DO NOT MATERIALLY AFFECT THE VALUE OF SUCH PROPERTY AND
DO NOT INTERFERE WITH THE USE MADE AND PROPOSED TO BE MADE OF SUCH PROPERTY BY
THE COMPANY AND ANY OF ITS SUBSIDIARIES.   ANY REAL PROPERTY AND FACILITIES HELD
UNDER LEASE BY THE COMPANY AND ANY OF ITS SUBSIDIARIES ARE HELD BY THEM UNDER
VALID, SUBSISTING AND ENFORCEABLE LEASES WITH SUCH EXCEPTIONS AS ARE NOT
MATERIAL AND DO NOT INTERFERE WITH THE USE MADE AND PROPOSED TO BE MADE OF SUCH
PROPERTY AND BUILDINGS BY THE COMPANY AND ITS SUBSIDIARIES.

(X)            INTELLECTUAL PROPERTY RIGHTS.  THE COMPANY AND ITS SUBSIDIARIES
OWN OR POSSESS ADEQUATE RIGHTS OR LICENSES TO USE ALL TRADEMARKS, TRADE NAMES,
SERVICE MARKS, SERVICE MARK REGISTRATIONS, SERVICE NAMES, PATENTS, PATENT
RIGHTS, COPYRIGHTS, INVENTIONS, LICENSES, APPROVALS, GOVERNMENTAL
AUTHORIZATIONS, TRADE SECRETS AND OTHER INTELLECTUAL PROPERTY RIGHTS
(“INTELLECTUAL PROPERTY RIGHTS”) NECESSARY TO CONDUCT THEIR RESPECTIVE
BUSINESSES AS NOW CONDUCTED.  NONE OF THE COMPANY’S MATERIAL INTELLECTUAL
PROPERTY RIGHTS HAVE EXPIRED OR TERMINATED, OR ARE EXPECTED TO EXPIRE OR
TERMINATE, WITHIN THREE YEARS FROM THE DATE OF THIS AGREEMENT.  THE COMPANY DOES
NOT HAVE ANY KNOWLEDGE OF ANY INFRINGEMENT BY THE COMPANY OR ITS SUBSIDIARIES OF
INTELLECTUAL PROPERTY RIGHTS OF OTHERS.  THERE IS NO CLAIM, ACTION OR PROCEEDING
BEING MADE OR BROUGHT, OR TO THE KNOWLEDGE OF THE COMPANY, BEING THREATENED,
AGAINST THE COMPANY OR ITS SUBSIDIARIES REGARDING ITS INTELLECTUAL PROPERTY
RIGHTS.  THE COMPANY IS UNAWARE OF ANY FACTS OR CIRCUMSTANCES WHICH MIGHT GIVE
RISE TO ANY OF THE FOREGOING INFRINGEMENTS OR CLAIMS, ACTIONS OR PROCEEDINGS. 
THE COMPANY AND ITS SUBSIDIARIES HAVE TAKEN REASONABLE SECURITY MEASURES TO
PROTECT THE SECRECY, CONFIDENTIALITY AND VALUE OF ALL OF THEIR MATERIAL
INTELLECTUAL PROPERTIES.

13

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(Y)           ENVIRONMENTAL LAWS.  THE COMPANY AND ITS SUBSIDIARIES (I) ARE IN
COMPLIANCE WITH ANY AND ALL ENVIRONMENTAL LAWS (AS HEREINAFTER DEFINED), (II)
HAVE RECEIVED ALL PERMITS, LICENSES OR OTHER APPROVALS REQUIRED OF THEM UNDER
APPLICABLE ENVIRONMENTAL LAWS TO CONDUCT THEIR RESPECTIVE BUSINESSES AND (III)
ARE IN COMPLIANCE WITH ALL TERMS AND CONDITIONS OF ANY SUCH PERMIT, LICENSE OR
APPROVAL WHERE, IN EACH OF THE FOREGOING CLAUSES (I), (II) AND (III), THE
FAILURE TO SO COMPLY WOULD BE REASONABLY EXPECTED TO HAVE, INDIVIDUALLY OR IN
THE AGGREGATE, A MATERIAL ADVERSE EFFECT.  THE TERM “ENVIRONMENTAL LAWS” MEANS
ALL FEDERAL, STATE, LOCAL OR FOREIGN LAWS RELATING TO POLLUTION OR PROTECTION OF
HUMAN HEALTH OR THE ENVIRONMENT (INCLUDING, WITHOUT LIMITATION, AMBIENT AIR,
SURFACE WATER, GROUNDWATER, LAND SURFACE OR SUBSURFACE STRATA), INCLUDING,
WITHOUT LIMITATION, LAWS RELATING TO EMISSIONS, DISCHARGES, RELEASES OR
THREATENED RELEASES OF CHEMICALS, POLLUTANTS, CONTAMINANTS, OR TOXIC OR
HAZARDOUS SUBSTANCES OR WASTES (COLLECTIVELY, “HAZARDOUS MATERIALS”) INTO THE
ENVIRONMENT, OR OTHERWISE RELATING TO THE MANUFACTURE, PROCESSING, DISTRIBUTION,
USE, TREATMENT, STORAGE, DISPOSAL, TRANSPORT OR HANDLING OF HAZARDOUS MATERIALS,
AS WELL AS ALL AUTHORIZATIONS, CODES, DECREES, DEMANDS OR DEMAND LETTERS,
INJUNCTIONS, JUDGMENTS, LICENSES, NOTICES OR NOTICE LETTERS, ORDERS, PERMITS,
PLANS OR REGULATIONS ISSUED, ENTERED, PROMULGATED OR APPROVED THEREUNDER.

(Z)            SUBSIDIARY RIGHTS.  THE COMPANY OR ONE OF ITS SUBSIDIARIES HAS
THE UNRESTRICTED RIGHT TO VOTE, AND (SUBJECT TO LIMITATIONS IMPOSED BY
APPLICABLE LAW) TO RECEIVE DIVIDENDS AND DISTRIBUTIONS ON, ALL CAPITAL
SECURITIES OF ITS SUBSIDIARIES AS OWNED BY THE COMPANY OR SUCH SUBSIDIARY.

(AA)         TAX STATUS.  THE COMPANY AND EACH OF ITS SUBSIDIARIES (I) HAS MADE
OR FILED ALL FOREIGN, FEDERAL AND STATE INCOME AND ALL OTHER TAX RETURNS,
REPORTS AND DECLARATIONS REQUIRED BY ANY JURISDICTION TO WHICH IT IS SUBJECT,
(II) HAS PAID ALL TAXES AND OTHER GOVERNMENTAL ASSESSMENTS AND CHARGES THAT ARE
MATERIAL IN AMOUNT, SHOWN OR DETERMINED TO BE DUE ON SUCH RETURNS, REPORTS AND
DECLARATIONS, EXCEPT THOSE BEING CONTESTED IN GOOD FAITH AND (III) HAS SET ASIDE
ON ITS BOOKS PROVISION REASONABLY ADEQUATE FOR THE PAYMENT OF ALL TAXES FOR
PERIODS SUBSEQUENT TO THE PERIODS TO WHICH SUCH RETURNS, REPORTS OR DECLARATIONS
APPLY.  THERE ARE NO UNPAID TAXES IN ANY MATERIAL AMOUNT CLAIMED TO BE DUE BY
THE TAXING AUTHORITY OF ANY JURISDICTION, AND THE OFFICERS OF THE COMPANY KNOW
OF NO BASIS FOR ANY SUCH CLAIM.

(BB)         INTERNAL ACCOUNTING CONTROLS.  THE COMPANY AND EACH OF ITS
SUBSIDIARIES MAINTAIN A SYSTEM OF INTERNAL ACCOUNTING CONTROLS SUFFICIENT TO
PROVIDE REASONABLE ASSURANCE THAT (I) TRANSACTIONS ARE EXECUTED IN ACCORDANCE
WITH MANAGEMENT’S GENERAL OR SPECIFIC AUTHORIZATIONS, (II) TRANSACTIONS ARE
RECORDED AS NECESSARY TO PERMIT PREPARATION OF FINANCIAL STATEMENTS IN
CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND TO MAINTAIN ASSET
AND LIABILITY ACCOUNTABILITY, (III) ACCESS TO ASSETS OR INCURRENCE OF
LIABILITIES IS PERMITTED ONLY IN ACCORDANCE WITH MANAGEMENT’S GENERAL OR
SPECIFIC AUTHORIZATION AND (IV) THE RECORDED ACCOUNTABILITY FOR ASSETS AND
LIABILITIES IS COMPARED WITH THE EXISTING ASSETS AND LIABILITIES AT REASONABLE
INTERVALS AND APPROPRIATE ACTION IS TAKEN WITH RESPECT TO ANY DIFFERENCE.

(CC)         RANKING OF NOTES.  EXCEPT AS DISCLOSED IN SECTION 3(CC) TO THE
DISCLOSURE SCHEDULES, NO INDEBTEDNESS OF THE COMPANY IS SENIOR TO OR RANKS PARI
PASSU WITH THE NOTES IN RIGHT OF PAYMENT, WHETHER WITH RESPECT OF PAYMENT OF
REDEMPTIONS, INTEREST, DAMAGES OR UPON LIQUIDATION OR DISSOLUTION OR OTHERWISE.

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(DD)         FORM S-3 ELIGIBILITY.  THE COMPANY IS ELIGIBLE TO REGISTER THE
WARRANT SHARES FOR RESALE BY THE BUYERS USING FORM S-3 PROMULGATED UNDER THE
1933 ACT.

(EE)         MANIPULATION OF PRICE.  THE COMPANY HAS NOT, AND TO ITS KNOWLEDGE
NO ONE ACTING ON ITS BEHALF HAS, (I) TAKEN, DIRECTLY OR INDIRECTLY, ANY ACTION
DESIGNED TO CAUSE OR TO RESULT IN THE STABILIZATION OR MANIPULATION OF THE PRICE
OF ANY SECURITY OF THE COMPANY TO FACILITATE THE SALE OR RESALE OF ANY OF THE
SECURITIES, (II) OTHER THAN THE AGENT, SOLD, BID FOR, PURCHASED, OR PAID ANY
COMPENSATION FOR SOLICITING PURCHASES OF, ANY OF THE SECURITIES, OR (III) OTHER
THAN THE AGENT, PAID OR AGREED TO PAY TO ANY PERSON ANY COMPENSATION FOR
SOLICITING ANOTHER TO PURCHASE ANY OTHER SECURITIES OF THE COMPANY.

(FF)           DISCLOSURE.  THE COMPANY CONFIRMS THAT NEITHER IT NOR ANY OTHER
PERSON ACTING ON ITS BEHALF HAS PROVIDED ANY OF THE BUYERS OR THEIR AGENTS OR
COUNSEL WITH ANY INFORMATION THAT CONSTITUTES OR COULD REASONABLY BE EXPECTED TO
CONSTITUTE MATERIAL, NONPUBLIC INFORMATION THAT HAS NOT BEEN PREVIOUSLY
DISCLOSED PUBLICLY OR THAT WILL NOT BE DISCLOSED AS PART OF THE 8-K FILING (AS
DEFINED IN SECTION 4(I) BELOW).  THE COMPANY UNDERSTANDS AND CONFIRMS THAT EACH
OF THE BUYERS WILL RELY ON THE COMPANY’S REPRESENTATIONS IN EFFECTING
TRANSACTIONS IN SECURITIES OF THE COMPANY IN CONNECTION WITH THE TRANSACTIONS
CONTEMPLATED HEREUNDER.  ALL DISCLOSURE PROVIDED TO THE BUYERS REGARDING THE
COMPANY, ITS BUSINESS AND THE TRANSACTIONS CONTEMPLATED HEREBY, INCLUDING THE
SCHEDULES TO THIS AGREEMENT, FURNISHED BY OR ON BEHALF OF THE COMPANY IS TRUE
AND CORRECT AND DOES NOT CONTAIN ANY UNTRUE STATEMENT OF A MATERIAL FACT OR OMIT
TO STATE ANY MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS MADE
THEREIN, IN THE LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT
MISLEADING.  EACH PRESS RELEASE ISSUED BY THE COMPANY DURING THE TWELVE (12)
MONTHS PRECEDING THE DATE OF THIS AGREEMENT DID NOT AT THE TIME OF RELEASE
CONTAIN ANY UNTRUE STATEMENT OF A MATERIAL FACT OR OMIT TO STATE A MATERIAL FACT
REQUIRED TO BE STATED THEREIN OR NECESSARY IN ORDER TO MAKE THE STATEMENTS
THEREIN, IN THE LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY ARE MADE, NOT
MISLEADING.  NO EVENT OR CIRCUMSTANCE HAS OCCURRED OR INFORMATION EXISTS WITH
RESPECT TO THE COMPANY OR ANY OF ITS SUBSIDIARIES OR ITS OR THEIR BUSINESS,
PROPERTIES, PROSPECTS, OPERATIONS OR FINANCIAL CONDITIONS, WHICH, UNDER
APPLICABLE LAW, RULE OR REGULATION, REQUIRES PUBLIC DISCLOSURE OR ANNOUNCEMENT
BY THE COMPANY BUT WHICH HAS NOT BEEN SO PUBLICLY ANNOUNCED OR DISCLOSED IN A
TIMELY MANNER AND IN ACCORDANCE WITH SUCH APPLICABLE LAW, RULE OR REGULATION.

4.             COVENANTS.

(A)           BEST EFFORTS.  EACH PARTY SHALL USE ITS BEST EFFORTS TIMELY TO
SATISFY EACH OF THE CONDITIONS TO BE SATISFIED BY IT AS PROVIDED IN SECTIONS 6
AND 7 OF THIS AGREEMENT.

(B)           FORM D AND BLUE SKY.  THE COMPANY AGREES TO FILE A FORM D WITH
RESPECT TO THE SECURITIES AS REQUIRED UNDER REGULATION D AND TO PROVIDE A COPY
THEREOF TO EACH BUYER PROMPTLY AFTER SUCH FILING.  THE COMPANY SHALL, ON OR
BEFORE THE CLOSING DATE, TAKE SUCH ACTION AS THE COMPANY SHALL REASONABLY
DETERMINE IS NECESSARY IN ORDER TO OBTAIN AN EXEMPTION FOR OR TO QUALIFY THE
SECURITIES FOR SALE TO THE BUYERS AT THE CLOSING PURSUANT TO THIS AGREEMENT
UNDER APPLICABLE SECURITIES OR “BLUE SKY” LAWS OF THE STATES OF THE UNITED
STATES (OR TO OBTAIN AN EXEMPTION FROM SUCH QUALIFICATION), AND SHALL PROVIDE
EVIDENCE OF ANY SUCH ACTION SO TAKEN TO THE BUYERS ON OR PRIOR TO THE CLOSING
DATE.  THE COMPANY SHALL MAKE ALL FILINGS AND REPORTS RELATING

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to the offer and sale of the Securities required under applicable securities or
“Blue Sky” laws of the states of the United States following the Closing Date.

(C)           REPORTING STATUS.  UNTIL THE DATE ON WHICH THE INVESTORS (AS
DEFINED IN THE REGISTRATION RIGHTS AGREEMENT) SHALL HAVE SOLD ALL THE WARRANT
SHARES AND NONE OF THE WARRANTS IS OUTSTANDING (THE “REPORTING PERIOD”), THE
COMPANY SHALL FILE ALL REPORTS, IF ANY,  REQUIRED TO BE FILED BY IT WITH THE SEC
PURSUANT TO THE 1934 ACT, AND THE COMPANY SHALL NOT TERMINATE ITS STATUS AS AN
ISSUER REQUIRED TO FILE REPORTS UNDER THE 1934 ACT EVEN IF THE 1934 ACT OR THE
RULES AND REGULATIONS THEREUNDER WOULD OTHERWISE PERMIT SUCH TERMINATION.

(D)           USE OF PROCEEDS.  THE COMPANY WILL USE THE PROCEEDS FROM THE SALE
OF THE SECURITIES FOR GENERAL CORPORATE PURPOSES, INCLUDING GENERAL AND
ADMINISTRATIVE EXPENSES AND NOT FOR (I) EXCEPT AS SET FORTH IN SECTION 4(D) OF
THE DISCLOSURE SCHEDULES, THE REPAYMENT OF ANY OUTSTANDING INDEBTEDNESS OF THE
COMPANY OR ANY OF ITS SUBSIDIARIES OR (II) THE REDEMPTION OR REPURCHASE OF ANY
OF ITS OR ITS SUBSIDIARIES’ EQUITY SECURITIES.

(E)           FINANCIAL INFORMATION.  SO LONG AS ANY NOTES ARE OUTSTANDING, THE
COMPANY AGREES TO SEND THE FOLLOWING TO EACH INVESTOR DURING THE REPORTING
PERIOD (I) UNLESS THE FOLLOWING ARE FILED WITH THE SEC THROUGH EDGAR AND ARE
AVAILABLE TO THE PUBLIC THROUGH THE EDGAR SYSTEM, WITHIN ONE (1) BUSINESS DAY
AFTER THE FILING THEREOF WITH THE SEC, A COPY OF ITS ANNUAL REPORTS ON FORM
10-K, ANY INTERIM REPORTS OR ANY CONSOLIDATED BALANCE SHEETS, INCOME STATEMENTS,
STOCKHOLDERS’ EQUITY STATEMENTS AND/OR CASH FLOW STATEMENTS FOR ANY PERIOD OTHER
THAN ANNUAL, ANY CURRENT REPORTS ON FORM 8-K AND ANY REGISTRATION STATEMENTS
(OTHER THAN ON FORM S-8) OR AMENDMENTS FILED PURSUANT TO THE 1933 ACT AND (II)
COPIES OF ANY NOTICES AND OTHER INFORMATION MADE AVAILABLE OR GIVEN TO THE
STOCKHOLDERS OF THE COMPANY GENERALLY, CONTEMPORANEOUSLY WITH THE MAKING
AVAILABLE OR GIVING THEREOF TO THE STOCKHOLDERS.

(F)            LISTING.  THE COMPANY SHALL PROMPTLY SECURE THE LISTING OF ALL OF
THE REGISTRABLE SECURITIES (AS DEFINED IN THE REGISTRATION RIGHTS AGREEMENT)
UPON EACH NATIONAL SECURITIES EXCHANGE AND AUTOMATED QUOTATION SYSTEM, IF ANY,
UPON WHICH THE COMMON STOCK IS THEN LISTED (SUBJECT TO OFFICIAL NOTICE OF
ISSUANCE) AND SHALL MAINTAIN SUCH LISTING OF ALL REGISTRABLE SECURITIES FROM
TIME TO TIME ISSUABLE UNDER THE TERMS OF THE TRANSACTION DOCUMENTS.  THE COMPANY
SHALL MAINTAIN THE COMMON STOCKS’ AUTHORIZATION FOR QUOTATION ON THE PRINCIPAL
MARKET.  NEITHER THE COMPANY NOR ANY OF ITS SUBSIDIARIES SHALL TAKE ANY ACTION
WHICH WOULD BE REASONABLY EXPECTED TO RESULT IN THE DELISTING OR SUSPENSION OF
THE COMMON STOCK ON THE PRINCIPAL MARKET.  THE COMPANY SHALL PAY ALL FEES AND
EXPENSES IN CONNECTION WITH SATISFYING ITS OBLIGATIONS UNDER THIS SECTION 4(F).

(G)           FEES.  SUBJECT TO SECTION 8 BELOW, AT THE CLOSING, THE COMPANY
SHALL PAY A NON-ACCOUNTABLE EXPENSE ALLOWANCE OF $75,000 (OF WHICH $20,000 HAS
BEEN PAID) TO HIGHBRIDGE INTERNATIONAL LLC, (A BUYER) OR ITS DESIGNEE(S) (IN
ADDITION TO ANY OTHER EXPENSE AMOUNTS PAID TO ANY BUYER PRIOR TO THE DATE OF
THIS AGREEMENT), WHICH AMOUNT SHALL BE WITHHELD BY SUCH BUYER FROM ITS PURCHASE
PRICE AT THE CLOSING.  THE COMPANY SHALL BE RESPONSIBLE FOR THE PAYMENT OF ANY
PLACEMENT AGENT’S FEES, FINANCIAL ADVISORY FEES, OR BROKER’S COMMISSIONS (OTHER
THAN FOR PERSONS ENGAGED BY ANY BUYER) RELATING TO OR ARISING OUT OF THE
TRANSACTIONS CONTEMPLATED HEREBY.  THE COMPANY SHALL PAY, AND HOLD EACH BUYER
HARMLESS AGAINST, ANY LIABILITY, LOSS OR EXPENSE (INCLUDING, WITHOUT LIMITATION,
REASONABLE ATTORNEY’S FEES AND OUT-OF-POCKET EXPENSES)

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arising in connection with any claim relating to any such payment.  Except as
otherwise set forth in the Transaction Documents, each party to this Agreement
shall bear its own expenses in connection with the sale of the Securities to the
Buyers.

(H)           PLEDGE OF SECURITIES.  THE COMPANY ACKNOWLEDGES AND AGREES THAT,
SUBJECT TO APPLICABLE LAWS, RULES AND REGULATIONS, THE SECURITIES MAY BE PLEDGED
BY AN INVESTOR (AS DEFINED IN THE REGISTRATION RIGHTS AGREEMENT) IN CONNECTION
WITH A BONA FIDE MARGIN AGREEMENT OR OTHER LOAN OR FINANCING ARRANGEMENT THAT IS
SECURED BY THE SECURITIES.  THE PLEDGE OF SECURITIES SHALL NOT BE DEEMED TO BE A
TRANSFER, SALE OR ASSIGNMENT OF THE SECURITIES HEREUNDER, AND NO INVESTOR
EFFECTING A PLEDGE OF SECURITIES SHALL BE REQUIRED TO PROVIDE THE COMPANY WITH
ANY NOTICE THEREOF OR OTHERWISE MAKE ANY DELIVERY TO THE COMPANY PURSUANT TO
THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT, INCLUDING, WITHOUT LIMITATION,
SECTION 2(F) HEREOF; PROVIDED THAT AN INVESTOR AND ITS PLEDGEE SHALL BE REQUIRED
TO COMPLY WITH THE PROVISIONS OF SECTION 2(F) HEREOF IN ORDER TO EFFECT A SALE,
TRANSFER OR ASSIGNMENT OF SECURITIES TO SUCH PLEDGEE.  THE COMPANY HEREBY AGREES
TO EXECUTE AND DELIVER SUCH DOCUMENTATION AS A PLEDGEE OF THE SECURITIES MAY
REASONABLY REQUEST IN CONNECTION WITH A PLEDGE OF THE SECURITIES TO SUCH PLEDGEE
BY AN INVESTOR.

(I)            DISCLOSURE OF TRANSACTIONS AND OTHER MATERIAL INFORMATION.  ON OR
BEFORE 8:30 A.M., NEW YORK TIME, ON THE FIRST BUSINESS DAY FOLLOWING THE DATE OF
THIS AGREEMENT, THE COMPANY SHALL FILE A CURRENT REPORT ON FORM 8-K DESCRIBING
THE TERMS OF THE TRANSACTIONS CONTEMPLATED BY THE TRANSACTION DOCUMENTS IN THE
FORM REQUIRED BY THE 1934 ACT AND ATTACHING THE MATERIAL TRANSACTION DOCUMENTS
(INCLUDING, WITHOUT LIMITATION, THIS AGREEMENT (AND ALL SCHEDULES TO THIS
AGREEMENT), THE FORM OF EACH OF THE NOTES, THE FORM OF WARRANT, AND THE
REGISTRATION RIGHTS AGREEMENT) AS EXHIBITS TO SUCH FILING (INCLUDING ALL
ATTACHMENTS, THE “8-K FILING”).  FROM AND AFTER THE FILING OF THE 8-K FILING
WITH THE SEC, NO BUYER SHALL BE IN POSSESSION OF ANY MATERIAL, NONPUBLIC
INFORMATION RECEIVED FROM THE COMPANY, ANY OF ITS SUBSIDIARIES OR ANY OF THEIR
RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS, THAT IS NOT DISCLOSED IN
THE 8-K FILING.  THE COMPANY SHALL NOT, AND SHALL CAUSE EACH OF ITS SUBSIDIARIES
AND ITS AND EACH OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS,
NOT TO, PROVIDE ANY BUYER WITH ANY MATERIAL, NONPUBLIC INFORMATION REGARDING THE
COMPANY OR ANY OF ITS SUBSIDIARIES FROM AND AFTER THE FILING OF THE 8-K FILING
WITH THE SEC WITHOUT THE EXPRESS WRITTEN CONSENT OF SUCH BUYER.  SUBJECT TO THE
FOREGOING, NEITHER THE COMPANY, ITS SUBSIDIARIES NOR ANY BUYER SHALL ISSUE ANY
PRESS RELEASES OR ANY OTHER PUBLIC STATEMENTS WITH RESPECT TO THE TRANSACTIONS
CONTEMPLATED HEREBY; PROVIDED, HOWEVER, THAT THE COMPANY SHALL BE ENTITLED,
WITHOUT THE PRIOR APPROVAL OF ANY BUYER, TO MAKE ANY PRESS RELEASE OR OTHER
PUBLIC DISCLOSURE WITH RESPECT TO SUCH TRANSACTIONS (I) IN SUBSTANTIAL
CONFORMITY WITH THE 8-K FILING AND CONTEMPORANEOUSLY THEREWITH AND (II) AS IS
REQUIRED BY APPLICABLE LAW AND REGULATIONS (PROVIDED THAT IN THE CASE OF CLAUSE
(I) EACH BUYER SHALL BE CONSULTED BY THE COMPANY IN CONNECTION WITH ANY SUCH
PRESS RELEASE OR OTHER PUBLIC DISCLOSURE PRIOR TO ITS RELEASE).

(J)            RESTRICTION ON REDEMPTION AND CASH DIVIDENDS.  SO LONG AS ANY
NOTES ARE OUTSTANDING, THE COMPANY SHALL NOT, DIRECTLY OR INDIRECTLY, REDEEM, OR
DECLARE OR PAY ANY CASH DIVIDEND OR DISTRIBUTION ON, THE COMMON STOCK WITHOUT
THE PRIOR EXPRESS WRITTEN CONSENT OF THE HOLDERS OF NOTES REPRESENTING NOT LESS
THAN A MAJORITY OF THE AGGREGATE PRINCIPAL AMOUNT OF THE THEN OUTSTANDING NOTES.

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(K)           ADDITIONAL NOTES; VARIABLE SECURITIES; DILUTIVE ISSUANCES.  SO
LONG AS ANY BUYER BENEFICIALLY OWNS ANY NOTES, THE COMPANY WILL NOT ISSUE ANY
NOTES OTHER THAN TO THE BUYERS AS CONTEMPLATED HEREBY AND THE COMPANY SHALL NOT
ISSUE ANY OTHER SECURITIES THAT WOULD CAUSE A BREACH OR DEFAULT UNDER THE
NOTES.  FOR SO LONG AS ANY WARRANTS REMAIN OUTSTANDING, THE COMPANY SHALL NOT,
IN ANY MANNER, ISSUE OR SELL ANY RIGHTS, WARRANTS OR OPTIONS TO SUBSCRIBE FOR OR
PURCHASE COMMON STOCK OR DIRECTLY OR INDIRECTLY CONVERTIBLE INTO OR EXCHANGEABLE
OR EXERCISABLE FOR COMMON STOCK AT A PRICE WHICH VARIES OR MAY VARY WITH THE
MARKET PRICE OF THE COMMON STOCK, INCLUDING BY WAY OF ONE OR MORE RESET(S) TO
ANY FIXED PRICE UNLESS THE CONVERSION, EXCHANGE OR EXERCISE PRICE OF ANY SUCH
SECURITY CANNOT BE LESS THAN THE THEN APPLICABLE EXERCISE PRICE (AS DEFINED IN
THE WARRANTS) WITH RESPECT TO THE COMMON STOCK INTO WHICH ANY WARRANT IS
EXERCISABLE.  FOR LONG AS ANY WARRANTS REMAIN OUTSTANDING, THE COMPANY SHALL
NOT, IN ANY MANNER, ENTER INTO OR AFFECT ANY DILUTIVE ISSUANCE (AS DEFINED IN
THE WARRANTS) IF THE EFFECT OF SUCH DILUTIVE ISSUANCE IS TO CAUSE THE COMPANY TO
BE REQUIRED TO ISSUE UPON EXERCISE OF ANY WARRANT ANY SHARES OF COMMON STOCK IN
EXCESS OF THAT NUMBER OF SHARES OF COMMON STOCK WHICH THE COMPANY MAY ISSUE UPON
EXERCISE OF THE WARRANTS WITHOUT BREACHING THE COMPANY’S OBLIGATIONS UNDER THE
RULES OR REGULATIONS OF THE ELIGIBLE MARKET (AS DEFINED IN THE WARRANTS).

(L)            CORPORATE EXISTENCE.  SO LONG AS ANY BUYER BENEFICIALLY OWNS ANY
SECURITIES, THE COMPANY SHALL NOT BE PARTY TO ANY FUNDAMENTAL TRANSACTION (AS
DEFINED IN THE NOTES) UNLESS THE COMPANY IS IN COMPLIANCE WITH THE PROVISIONS
GOVERNING FUNDAMENTAL TRANSACTIONS SET FORTH IN THE NOTES AND THE WARRANTS, IF
AND AS APPLICABLE.

(M)          RESERVATION OF SHARES.  SO LONG AS ANY BUYER OWNS ANY WARRANTS, THE
COMPANY SHALL TAKE ALL ACTION NECESSARY TO AT ALL TIMES HAVE AUTHORIZED, AND
RESERVED FOR THE PURPOSE OF ISSUANCE, NO LESS THAN 130% OF THE NUMBER OF SHARES
OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS THEN OUTSTANDING (WITHOUT
TAKING INTO ACCOUNT ANY LIMITATIONS ON THE EXERCISE OF THE WARRANTS SET FORTH IN
THE WARRANTS).

(N)           CONDUCT OF BUSINESS.  SO LONG AS ANY OF THE NOTES REMAIN
OUTSTANDING, THE BUSINESS OF THE COMPANY AND ITS SUBSIDIARIES SHALL NOT BE
CONDUCTED IN VIOLATION OF ANY LAW, ORDINANCE OR REGULATION OF ANY GOVERNMENTAL
ENTITY, EXCEPT WHERE SUCH VIOLATIONS WOULD NOT RESULT, EITHER INDIVIDUALLY OR IN
THE AGGREGATE, IN A MATERIAL ADVERSE EFFECT.

(O)           ADDITIONAL ISSUANCES OF SECURITIES.

(I)            FOR PURPOSES OF THIS SECTION 4(O), THE FOLLOWING DEFINITIONS
SHALL APPLY.

(1)           “CONVERTIBLE SECURITIES” MEANS ANY STOCK OR SECURITIES (OTHER THAN
OPTIONS) CONVERTIBLE INTO OR EXERCISABLE OR EXCHANGEABLE FOR SHARES OF COMMON
STOCK.

(2)           “OPTIONS” MEANS ANY RIGHTS, WARRANTS OR OPTIONS TO SUBSCRIBE FOR
OR PURCHASE SHARES OF COMMON STOCK OR CONVERTIBLE SECURITIES.

(3)           “COMMON STOCK EQUIVALENTS” MEANS, COLLECTIVELY, OPTIONS AND
CONVERTIBLE SECURITIES.

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(II)           FROM THE DATE HEREOF UNTIL THE DATE THAT IS 10 TRADING DAYS (AS
DEFINED IN THE NOTES) FOLLOWING THE EFFECTIVE DATE (AS DEFINED IN THE
REGISTRATION RIGHTS AGREEMENT) (THE “TRIGGER DATE”), THE COMPANY WILL NOT,
DIRECTLY OR INDIRECTLY, FOR ITS OWN ACCOUNT, OFFER, SELL, GRANT ANY OPTION TO
PURCHASE, OR OTHERWISE DISPOSE OF (OR ANNOUNCE ANY OFFER, SALE, GRANT OR ANY
OPTION TO PURCHASE OR OTHER DISPOSITION OF) ANY OF ITS OR ITS SUBSIDIARIES’
EQUITY OR EQUITY EQUIVALENT SECURITIES, INCLUDING WITHOUT LIMITATION ANY DEBT,
PREFERRED STOCK OR OTHER INSTRUMENT OR SECURITY THAT IS, AT ANY TIME DURING ITS
LIFE AND UNDER ANY CIRCUMSTANCES, CONVERTIBLE INTO OR EXCHANGEABLE OR
EXERCISABLE FOR SHARES OF COMMON STOCK OR COMMON STOCK EQUIVALENTS (ANY SUCH
OFFER, SALE, GRANT, DISPOSITION OR ANNOUNCEMENT BEING REFERRED TO AS A
“SUBSEQUENT PLACEMENT”).

(III)          FROM THE DATE HEREOF UNTIL THE EIGHTEEN (18) MONTH ANNIVERSARY OF
THE CLOSING DATE, THE COMPANY WILL NOT, DIRECTLY OR INDIRECTLY, EFFECT ANY
SUBSEQUENT PLACEMENT UNLESS THE COMPANY SHALL HAVE FIRST COMPLIED WITH THIS
SECTION 4(O)(III).

(1)           THE COMPANY SHALL DELIVER TO EACH BUYER AN IRREVOCABLE WRITTEN
NOTICE (THE ”OFFER NOTICE”) OF ANY PROPOSED OR INTENDED ISSUANCE OR SALE OR
EXCHANGE (THE ”OFFER”) OF THE SECURITIES BEING OFFERED (THE “OFFERED
SECURITIES”) IN A SUBSEQUENT PLACEMENT, WHICH OFFER NOTICE SHALL (W) IDENTIFY
AND DESCRIBE THE OFFERED SECURITIES, (X) DESCRIBE THE PRICE AND OTHER TERMS UPON
WHICH THEY ARE TO BE ISSUED, SOLD OR EXCHANGED, AND THE NUMBER OR AMOUNT OF THE
OFFERED SECURITIES TO BE ISSUED, SOLD OR EXCHANGED, (Y) IDENTIFY THE PERSONS OR
ENTITIES (IF KNOWN) TO WHICH OR WITH WHICH THE OFFERED SECURITIES ARE TO BE
OFFERED, ISSUED, SOLD OR EXCHANGED AND (Z) OFFER TO ISSUE AND SELL TO OR
EXCHANGE WITH SUCH BUYERS AT LEAST TWENTY-FIVE PERCENT (25%) OF THE OFFERED
SECURITIES, ALLOCATED AMONG SUCH BUYERS (A) BASED ON SUCH BUYER’S PRO RATA
PORTION OF THE AGGREGATE PRINCIPAL AMOUNT OF NOTES PURCHASED HEREUNDER (THE
“BASIC AMOUNT”), AND (B) WITH RESPECT TO EACH BUYER THAT ELECTS TO PURCHASE ITS
BASIC AMOUNT, ANY ADDITIONAL PORTION OF THE OFFERED SECURITIES ATTRIBUTABLE TO
THE BASIC AMOUNTS OF OTHER BUYERS AS SUCH BUYER SHALL INDICATE IT WILL PURCHASE
OR ACQUIRE SHOULD THE OTHER BUYERS SUBSCRIBE FOR LESS THAN THEIR BASIC AMOUNTS
(THE “UNDERSUBSCRIPTION AMOUNT”).

(2)           TO ACCEPT AN OFFER, IN WHOLE OR IN PART, SUCH BUYER MUST DELIVER A
WRITTEN NOTICE TO THE COMPANY PRIOR TO THE END OF THE FIFTH (5TH) BUSINESS DAY
AFTER SUCH BUYER’S RECEIPT OF THE OFFER NOTICE (THE “OFFER PERIOD”), SETTING
FORTH THE PORTION OF SUCH BUYER’S BASIC AMOUNT THAT SUCH BUYER ELECTS TO
PURCHASE AND, IF SUCH BUYER SHALL ELECT TO PURCHASE ALL OF ITS BASIC AMOUNT, THE
UNDERSUBSCRIPTION AMOUNT, IF ANY, THAT SUCH BUYER ELECTS TO PURCHASE (IN EITHER
CASE, THE “NOTICE OF ACCEPTANCE”).  IF THE BASIC AMOUNTS SUBSCRIBED FOR BY ALL
BUYERS ARE LESS THAN THE TOTAL OF ALL OF THE BASIC AMOUNTS, THEN EACH BUYER WHO
HAS SET FORTH AN UNDERSUBSCRIPTION AMOUNT IN ITS NOTICE OF ACCEPTANCE SHALL BE
ENTITLED TO PURCHASE, IN ADDITION TO THE BASIC AMOUNTS SUBSCRIBED FOR, THE
UNDERSUBSCRIPTION AMOUNT IT HAS SUBSCRIBED FOR; PROVIDED, HOWEVER, THAT IF THE
UNDERSUBSCRIPTION AMOUNTS SUBSCRIBED FOR EXCEED THE DIFFERENCE BETWEEN THE TOTAL
OF ALL THE BASIC AMOUNTS AND THE BASIC AMOUNTS SUBSCRIBED FOR (THE “AVAILABLE
UNDERSUBSCRIPTION AMOUNT”), EACH BUYER WHO HAS SUBSCRIBED FOR ANY
UNDERSUBSCRIPTION AMOUNT SHALL BE ENTITLED TO PURCHASE ONLY THAT PORTION OF THE
AVAILABLE UNDERSUBSCRIPTION AMOUNT AS THE BASIC AMOUNT OF SUCH BUYER BEARS TO
THE TOTAL BASIC AMOUNTS OF ALL BUYERS THAT HAVE SUBSCRIBED FOR UNDERSUBSCRIPTION
AMOUNTS, SUBJECT TO

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rounding by the Company to the extent its deems reasonably necessary, which
process shall be repeated until the Buyers shall have an opportunity to
subscribe for any remaining Undersubscription Amount.

(3)           THE COMPANY SHALL HAVE THIRTY (30) CALENDAR DAYS FROM THE
EXPIRATION OF THE OFFER PERIOD ABOVE TO OFFER, ISSUE, SELL OR EXCHANGE ALL OR
ANY PART OF SUCH OFFERED SECURITIES AS TO WHICH A NOTICE OF ACCEPTANCE HAS NOT
BEEN GIVEN BY THE BUYERS (THE “REFUSED SECURITIES”), BUT ONLY TO THE OFFEREES
DESCRIBED IN THE OFFER NOTICE (IF SO DESCRIBED THEREIN) AND ONLY UPON TERMS AND
CONDITIONS (INCLUDING, WITHOUT LIMITATION, UNIT PRICES AND INTEREST RATES) THAT
ARE NOT MORE FAVORABLE TO THE ACQUIRING PERSON OR PERSONS OR LESS FAVORABLE TO
THE COMPANY THAN THOSE SET FORTH IN THE OFFER NOTICE.

(4)           IN THE EVENT THE COMPANY SHALL PROPOSE TO SELL LESS THAN ALL THE
REFUSED SECURITIES (ANY SUCH SALE TO BE IN THE MANNER AND ON THE TERMS SPECIFIED
IN SECTION 4(O)(III)(3) ABOVE), THEN EACH BUYER MAY, AT ITS SOLE OPTION AND IN
ITS SOLE DISCRETION, REDUCE THE NUMBER OR AMOUNT OF THE OFFERED SECURITIES
SPECIFIED IN ITS NOTICE OF ACCEPTANCE TO AN AMOUNT THAT SHALL BE NOT LESS THAN
THE NUMBER OR AMOUNT OF THE OFFERED SECURITIES THAT SUCH BUYER ELECTED TO
PURCHASE PURSUANT TO SECTION 4(O)(III)(2) ABOVE MULTIPLIED BY A FRACTION, (I)
THE NUMERATOR OF WHICH SHALL BE THE NUMBER OR AMOUNT OF OFFERED SECURITIES THE
COMPANY ACTUALLY PROPOSES TO ISSUE, SELL OR EXCHANGE (INCLUDING OFFERED
SECURITIES TO BE ISSUED OR SOLD TO BUYERS PURSUANT TO SECTION 4(O)(III)(3) ABOVE
PRIOR TO SUCH REDUCTION) AND (II) THE DENOMINATOR OF WHICH SHALL BE THE ORIGINAL
AMOUNT OF THE OFFERED SECURITIES.  IN THE EVENT THAT ANY BUYER SO ELECTS TO
REDUCE THE NUMBER OR AMOUNT OF OFFERED SECURITIES SPECIFIED IN ITS NOTICE OF
ACCEPTANCE, THE COMPANY MAY NOT ISSUE, SELL OR EXCHANGE MORE THAN THE REDUCED
NUMBER OR AMOUNT OF THE OFFERED SECURITIES UNLESS AND UNTIL SUCH SECURITIES HAVE
AGAIN BEEN OFFERED TO THE BUYERS IN ACCORDANCE WITH SECTION 4(O)(III)(1) ABOVE.

(5)           SIMULTANEOUSLY WITH THE CLOSING OF THE ISSUANCE, SALE OR EXCHANGE
OF ALL OR LESS THAN ALL OF THE REFUSED SECURITIES, THE BUYERS SHALL ACQUIRE FROM
THE COMPANY, AND THE COMPANY SHALL ISSUE TO THE BUYERS, THE NUMBER OR AMOUNT OF
OFFERED SECURITIES SPECIFIED IN THE NOTICES OF ACCEPTANCE, AS REDUCED PURSUANT
TO SECTION 4(O)(III)(3) ABOVE IF THE BUYERS HAVE SO ELECTED, UPON THE TERMS AND
CONDITIONS SPECIFIED IN THE OFFER. NOTWITHSTANDING ANYTHING TO THE CONTRARY
CONTAINED IN THIS AGREEMENT, IF THE COMPANY DOES NOT CONSUMMATE THE CLOSING OF
THE ISSUANCE, SALE OR EXCHANGE OF ALL OR LESS THAN ALL OF THE REFUSED
SECURITIES, WITHIN TWENTY (20) BUSINESS DAYS OF THE EXPIRATION OF THE OFFER
PERIOD, THE COMPANY SHALL ISSUE TO THE BUYERS, THE NUMBER OR AMOUNT OF OFFERED
SECURITIES SPECIFIED IN THE NOTICES OF ACCEPTANCE, AS REDUCED PURSUANT TO
SECTION 4(O)(III)(3) ABOVE IF THE BUYERS HAVE SO ELECTED, UPON THE TERMS AND
CONDITIONS SPECIFIED IN THE OFFER.  THE PURCHASE BY THE BUYERS OF ANY OFFERED
SECURITIES IS SUBJECT IN ALL CASES TO THE PREPARATION, EXECUTION AND DELIVERY BY
THE COMPANY AND THE BUYERS OF A PURCHASE AGREEMENT RELATING TO SUCH OFFERED
SECURITIES SUBSTANTIALLY SIMILAR TO AGREEMENTS EXECUTED BY OTHER INVESTORS IN OR
PURCHASERS OF SUCH OFFERED SECURITIES.  ANY OFFERED SECURITIES NOT ACQUIRED BY
THE BUYERS OR OTHER PERSONS IN ACCORDANCE WITH SECTION 4(O)(III)(3) ABOVE MAY
NOT BE ISSUED, SOLD OR EXCHANGED UNTIL THEY ARE AGAIN OFFERED TO THE BUYERS
UNDER THE PROCEDURES SPECIFIED IN THIS AGREEMENT.

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(6)           ANY OFFERED SECURITIES NOT ACQUIRED BY THE BUYERS OR OTHER PERSONS
IN ACCORDANCE WITH SECTION 4(O)(III)(3) ABOVE MAY NOT BE ISSUED, SOLD OR
EXCHANGED UNTIL THEY ARE AGAIN OFFERED TO THE BUYERS UNDER THE PROCEDURES
SPECIFIED IN THIS AGREEMENT.

(IV)          THE RESTRICTIONS CONTAINED IN SUBSECTIONS (II) AND (III) OF THIS
SECTION 4(O) SHALL NOT APPLY IN CONNECTION WITH THE ISSUANCE OF ANY EXCLUDED
SECURITIES (AS DEFINED IN THE WARRANTS).

5.             REGISTER; TRANSFER AGENT INSTRUCTIONS.

(A)           REGISTER.  THE COMPANY SHALL MAINTAIN AT ITS PRINCIPAL EXECUTIVE
OFFICES (OR SUCH OTHER OFFICE OR AGENCY OF THE COMPANY AS IT MAY DESIGNATE BY
NOTICE TO EACH HOLDER OF SECURITIES), A REGISTER FOR THE NOTES AND THE WARRANTS
IN WHICH THE COMPANY SHALL RECORD THE NAME AND ADDRESS OF THE PERSON IN WHOSE
NAME THE NOTES AND THE WARRANTS HAVE BEEN ISSUED (INCLUDING THE NAME AND ADDRESS
OF EACH TRANSFEREE), THE PRINCIPAL AMOUNT OF NOTES HELD BY SUCH PERSON AND THE
NUMBER OF WARRANT SHARES ISSUABLE UPON EXERCISE OF THE WARRANTS HELD BY SUCH
PERSON.  THE COMPANY SHALL KEEP THE REGISTER OPEN AND AVAILABLE AT ALL TIMES
DURING BUSINESS HOURS FOR INSPECTION OF ANY BUYER OR ITS LEGAL REPRESENTATIVES.

(B)           TRANSFER AGENT INSTRUCTIONS.  THE COMPANY SHALL ISSUE IRREVOCABLE
INSTRUCTIONS TO ITS TRANSFER AGENT, AND ANY SUBSEQUENT TRANSFER AGENT, TO ISSUE,
SUBJECT TO ANY APPLICABLE LAW, RULE, REGULATION, STOCK EXCHANGE LISTING
REQUIREMENT OR COURT ORDER, CERTIFICATES OR CREDIT SHARES TO THE APPLICABLE
BALANCE ACCOUNTS AT THE DEPOSITORY TRUST COMPANY (“DTC”), REGISTERED IN THE NAME
OF EACH BUYER OR ITS RESPECTIVE NOMINEE(S), FOR WARRANT SHARES ISSUED AT THE
CLOSING OR UPON EXERCISE OF THE WARRANTS IN SUCH AMOUNTS AS SPECIFIED FROM TIME
TO TIME BY EACH BUYER TO THE COMPANY UPON EXERCISE OF THE WARRANTS IN THE FORM
OF EXHIBIT D ATTACHED HERETO (THE “IRREVOCABLE TRANSFER AGENT INSTRUCTIONS”). 
THE COMPANY WARRANTS THAT NO INSTRUCTION OTHER THAN THE IRREVOCABLE TRANSFER
AGENT INSTRUCTIONS REFERRED TO IN THIS SECTION 5(B), OR THE STOP TRANSFER
INSTRUCTIONS TO GIVE EFFECT TO SECTION 2(G) HEREOF, WILL BE GIVEN BY THE COMPANY
TO ITS TRANSFER AGENT, AND THAT THE SECURITIES SHALL OTHERWISE BE FREELY
TRANSFERABLE ON THE BOOKS AND RECORDS OF THE COMPANY AS AND TO THE EXTENT
PROVIDED IN THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS.  IF A BUYER
EFFECTS A SALE, ASSIGNMENT OR TRANSFER OF THE SECURITIES IN ACCORDANCE WITH
SECTION 2(F), THE COMPANY SHALL PERMIT THE TRANSFER AND SHALL PROMPTLY INSTRUCT
ITS TRANSFER AGENT TO ISSUE ONE OR MORE CERTIFICATES OR CREDIT SHARES TO THE
APPLICABLE BALANCE ACCOUNTS AT DTC IN SUCH NAME AND IN SUCH DENOMINATIONS AS
SPECIFIED BY SUCH BUYER TO EFFECT SUCH SALE, TRANSFER OR ASSIGNMENT.  IN THE
EVENT THAT SUCH SALE, ASSIGNMENT OR TRANSFER INVOLVES WARRANT SHARES SOLD,
ASSIGNED OR TRANSFERRED PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR
PURSUANT TO RULE 144, THE TRANSFER AGENT SHALL ISSUE SUCH SECURITIES TO THE
BUYER, ASSIGNEE OR TRANSFEREE, AS THE CASE MAY BE, WITHOUT ANY RESTRICTIVE
LEGEND.  THE COMPANY ACKNOWLEDGES THAT A BREACH BY IT OF ITS OBLIGATIONS
HEREUNDER WILL CAUSE IRREPARABLE HARM TO A BUYER.  ACCORDINGLY, THE COMPANY
ACKNOWLEDGES THAT THE REMEDY AT LAW FOR A BREACH OF ITS OBLIGATIONS UNDER THIS
SECTION 5(B) WILL BE INADEQUATE AND AGREES, IN THE EVENT OF A BREACH OR
THREATENED BREACH BY THE COMPANY OF THE PROVISIONS OF THIS SECTION 5(B), THAT A
BUYER SHALL BE ENTITLED, IN ADDITION TO ALL OTHER AVAILABLE REMEDIES, TO AN
ORDER AND/OR INJUNCTION RESTRAINING ANY BREACH AND REQUIRING IMMEDIATE ISSUANCE
AND TRANSFER, WITHOUT THE NECESSITY OF SHOWING ECONOMIC LOSS AND WITHOUT ANY
BOND OR OTHER SECURITY BEING REQUIRED.

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6.             CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.

The obligation of the Company hereunder to issue and sell the Notes and the
related Warrants to each Buyer at the Closing is subject to the satisfaction, at
or before the Closing Date, of each of the following conditions, provided that
these conditions are for the Company’s sole benefit and may be waived by the
Company at any time in its sole discretion by providing each Buyer with prior
written notice thereof:

(I)            SUCH BUYER SHALL HAVE EXECUTED EACH OF THE TRANSACTION DOCUMENTS
TO WHICH IT IS A PARTY AND DELIVERED THE SAME TO THE COMPANY.

(II)           SUCH BUYER AND EACH OTHER BUYER SHALL HAVE DELIVERED TO THE
COMPANY THE PURCHASE PRICE (LESS, IN THE CASE OF HIGHBRIDGE INTERNATIONAL LLC,
THE AMOUNTS WITHHELD PURSUANT TO SECTION 4(G)) FOR THE NOTES AND THE RELATED
WARRANTS BEING PURCHASED BY SUCH BUYER AT THE CLOSING BY WIRE TRANSFER OF
IMMEDIATELY AVAILABLE FUNDS PURSUANT TO THE WIRE INSTRUCTIONS PROVIDED BY THE
COMPANY.

(III)          THE REPRESENTATIONS AND WARRANTIES OF SUCH BUYER SHALL BE TRUE
AND CORRECT IN ALL MATERIAL RESPECTS AS OF THE DATE WHEN MADE AND AS OF THE
CLOSING DATE AS THOUGH MADE AT THAT TIME (EXCEPT FOR REPRESENTATIONS AND
WARRANTIES THAT SPEAK AS OF A SPECIFIC DATE), AND SUCH BUYER SHALL HAVE
PERFORMED, SATISFIED AND COMPLIED IN ALL MATERIAL RESPECTS WITH THE COVENANTS,
AGREEMENTS AND CONDITIONS REQUIRED BY THIS AGREEMENT TO BE PERFORMED, SATISFIED
OR COMPLIED WITH BY SUCH BUYER AT OR PRIOR TO THE CLOSING DATE.

7.             CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.

The obligation of each Buyer hereunder to purchase the Notes and the related
Warrants at the Closing is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions, provided that these conditions are
for each Buyer’s sole benefit and may be waived by such Buyer at any time in its
sole discretion by providing the Company with prior written notice thereof:

(I)            THE COMPANY SHALL HAVE EXECUTED AND DELIVERED TO SUCH BUYER
(A) EACH OF THE TRANSACTION DOCUMENTS, (B) THE NOTES (IN SUCH PRINCIPAL AMOUNTS
AS SUCH BUYER SHALL REQUEST) BEING PURCHASED BY SUCH BUYER AT THE CLOSING
PURSUANT TO THIS AGREEMENT, AND (C) THE WARRANTS (IN SUCH AMOUNTS AS SUCH BUYER
SHALL REQUEST) BEING PURCHASED BY SUCH BUYER AT THE CLOSING PURSUANT TO THIS
AGREEMENT.

(II)           SUCH BUYER SHALL HAVE RECEIVED THE OPINION OF POSTERNAK
BLANKSTEIN & LUND LLP, THE COMPANY’S OUTSIDE COUNSEL, DATED AS OF THE CLOSING
DATE, IN SUBSTANTIALLY THE FORM OF EXHIBIT E ATTACHED HERETO.

(III)          THE COMPANY SHALL HAVE DELIVERED TO SUCH BUYER A COPY OF THE
IRREVOCABLE TRANSFER AGENT INSTRUCTIONS, IN THE FORM OF EXHIBIT D ATTACHED
HERETO, WHICH INSTRUCTIONS SHALL HAVE BEEN DELIVERED TO AND ACKNOWLEDGED IN
WRITING BY THE COMPANY’S TRANSFER AGENT.

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(IV)          THE COMPANY SHALL HAVE DELIVERED TO SUCH BUYER A CERTIFICATE
EVIDENCING THE FORMATION AND GOOD STANDING OF THE COMPANY AND EACH OF ITS
SUBSIDIARIES IN SUCH ENTITY’S JURISDICTION OF FORMATION ISSUED BY THE SECRETARY
OF STATE (OR COMPARABLE OFFICE) OF SUCH JURISDICTION, AS OF A DATE WITHIN 10
DAYS OF THE CLOSING DATE.

(V)           THE COMPANY SHALL HAVE DELIVERED TO SUCH BUYER A CERTIFICATE
EVIDENCING THE COMPANY’S QUALIFICATION AS A FOREIGN CORPORATION AND GOOD
STANDING ISSUED BY THE SECRETARY OF STATE (OR COMPARABLE OFFICE) OF EACH
JURISDICTION IN WHICH THE COMPANY CONDUCTS BUSINESS, AS OF A DATE WITHIN 10 DAYS
OF THE CLOSING DATE.

(VI)          THE COMPANY SHALL HAVE DELIVERED TO SUCH BUYER A CERTIFIED COPY OF
THE CERTIFICATE OF INCORPORATION AS CERTIFIED BY THE SECRETARY OF STATE OF THE
STATE OF DELAWARE WITHIN TEN (10) DAYS OF THE CLOSING DATE.

(VII)         THE COMPANY SHALL HAVE DELIVERED TO SUCH BUYER A CERTIFICATE,
EXECUTED BY THE SECRETARY OF THE COMPANY AND DATED AS OF THE CLOSING DATE, AS TO
(I) THE RESOLUTIONS CONSISTENT WITH SECTION 3(B) AS ADOPTED BY THE COMPANY’S
BOARD OF DIRECTORS IN A FORM REASONABLY ACCEPTABLE TO SUCH BUYER, (II) THE
CERTIFICATE OF INCORPORATION AND (III) THE BYLAWS, EACH AS IN EFFECT AT THE
CLOSING, IN THE FORM ATTACHED HERETO AS EXHIBIT F.

(VIII)        THE REPRESENTATIONS AND WARRANTIES OF THE COMPANY SHALL BE TRUE
AND CORRECT AS OF THE DATE WHEN MADE AND AS OF THE CLOSING DATE AS THOUGH MADE
AT THAT TIME (EXCEPT FOR REPRESENTATIONS AND WARRANTIES THAT SPEAK AS OF A
SPECIFIC DATE) AND THE COMPANY SHALL HAVE PERFORMED, SATISFIED AND COMPLIED IN
ALL RESPECTS WITH THE COVENANTS, AGREEMENTS AND CONDITIONS REQUIRED BY THE
TRANSACTION DOCUMENTS TO BE PERFORMED, SATISFIED OR COMPLIED WITH BY THE COMPANY
AT OR PRIOR TO THE CLOSING DATE.  SUCH BUYER SHALL HAVE RECEIVED A CERTIFICATE,
EXECUTED BY THE CHIEF EXECUTIVE OFFICER OF THE COMPANY, DATED AS OF THE CLOSING
DATE, TO THE FOREGOING EFFECT AND AS TO SUCH OTHER MATTERS AS MAY BE REASONABLY
REQUESTED BY SUCH BUYER IN THE FORM ATTACHED HERETO AS EXHIBIT G.

(IX)           THE COMPANY SHALL HAVE DELIVERED TO SUCH BUYER A LETTER FROM THE
COMPANY’S TRANSFER AGENT CERTIFYING THE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING AS OF A DATE WITHIN FIVE DAYS OF THE CLOSING DATE.

(X)            THE COMMON STOCK (I) SHALL BE DESIGNATED FOR QUOTATION OR LISTED
ON THE PRINCIPAL MARKET AND (II) SHALL NOT HAVE BEEN SUSPENDED, AS OF THE
CLOSING DATE, BY THE SEC OR THE PRINCIPAL MARKET FROM TRADING ON THE PRINCIPAL
MARKET NOR SHALL SUSPENSION BY THE SEC OR THE PRINCIPAL MARKET HAVE BEEN
THREATENED, AS OF THE CLOSING DATE, EITHER (A) IN WRITING BY THE SEC OR THE
PRINCIPAL MARKET OR (B) BY FALLING BELOW THE MINIMUM LISTING MAINTENANCE
REQUIREMENTS OF THE PRINCIPAL MARKET.

(XI)           SUCH BUYER SHALL HAVE RECEIVED A DULY EXECUTED AND DELIVERED
SUBORDINATION AGREEMENT IN THE FORM ATTACHED HERETO AS EXHIBIT H FROM PARTY CITY
CORPORATION.

(XII)          THE COMPANY SHALL HAVE OBTAINED ALL GOVERNMENTAL, REGULATORY OR
THIRD PARTY CONSENTS AND APPROVALS, IF ANY, NECESSARY FOR THE SALE OF THE
SECURITIES PRIOR TO THE CLOSING OF ANY SUCH SALE IN CONNECTION THEREWITH.

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(XIII)         THE COMPANY SHALL HAVE DELIVERED TO SUCH BUYER SUCH OTHER
DOCUMENTS RELATING TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AS SUCH
BUYER OR ITS COUNSEL MAY REASONABLY REQUEST.

8.             TERMINATION.  IN THE EVENT THAT THE CLOSING SHALL NOT HAVE
OCCURRED WITH RESPECT TO A BUYER ON OR BEFORE FIVE (5) BUSINESS DAYS FROM THE
DATE HEREOF DUE TO THE COMPANY’S OR SUCH BUYER’S FAILURE TO SATISFY THE
CONDITIONS SET FORTH IN SECTIONS 6 AND 7 ABOVE (AND THE NONBREACHING PARTY’S
FAILURE TO WAIVE SUCH UNSATISFIED CONDITION(S)), THE NONBREACHING PARTY SHALL
HAVE THE OPTION TO TERMINATE THIS AGREEMENT WITH RESPECT TO SUCH BREACHING PARTY
AT THE CLOSE OF BUSINESS ON SUCH DATE WITHOUT LIABILITY OF ANY PARTY TO ANY
OTHER PARTY; PROVIDED, HOWEVER, THIS IF THIS AGREEMENT IS TERMINATED PURSUANT TO
THIS SECTION 8, THE COMPANY SHALL REMAIN OBLIGATED TO REIMBURSE THE
NON-BREACHING BUYERS FOR THE EXPENSES DESCRIBED IN SECTION 4(G) ABOVE.

9.             MISCELLANEOUS.

(A)           GOVERNING LAW; JURISDICTION; JURY TRIAL.  ALL QUESTIONS CONCERNING
THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT
SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
STATE OF NEW YORK OR ANY OTHER JURISDICTIONS) THAT WOULD CAUSE THE APPLICATION
OF THE LAWS OF ANY JURISDICTIONS OTHER THAN THE STATE OF NEW YORK.  EACH PARTY
HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND
FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY
TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN, AND HEREBY IRREVOCABLY
WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM
THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT
SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE
VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER.  EACH PARTY HEREBY
IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING
SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH
PARTY AT THE ADDRESS FOR SUCH NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT
SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE
THEREOF.  NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT
TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW.  EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

(B)           COUNTERPARTS.  THIS AGREEMENT MAY BE EXECUTED IN TWO OR MORE
IDENTICAL COUNTERPARTS, ALL OF WHICH SHALL BE CONSIDERED ONE AND THE SAME
AGREEMENT AND SHALL BECOME EFFECTIVE WHEN COUNTERPARTS HAVE BEEN SIGNED BY EACH
PARTY AND DELIVERED TO THE OTHER PARTY; PROVIDED THAT A FACSIMILE SIGNATURE
SHALL BE CONSIDERED DUE EXECUTION AND SHALL BE BINDING UPON THE SIGNATORY
THERETO WITH THE SAME FORCE AND EFFECT AS IF THE SIGNATURE WERE AN ORIGINAL, NOT
A FACSIMILE SIGNATURE.

(C)           HEADINGS.  THE HEADINGS OF THIS AGREEMENT ARE FOR CONVENIENCE OF
REFERENCE AND SHALL NOT FORM PART OF, OR AFFECT THE INTERPRETATION OF, THIS
AGREEMENT.

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(D)           SEVERABILITY.  IF ANY PROVISION OF THIS AGREEMENT SHALL BE INVALID
OR UNENFORCEABLE IN ANY JURISDICTION, SUCH INVALIDITY OR UNENFORCEABILITY SHALL
NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF THE REMAINDER OF THIS AGREEMENT IN
THAT JURISDICTION OR THE VALIDITY OR ENFORCEABILITY OF ANY PROVISION OF THIS
AGREEMENT IN ANY OTHER JURISDICTION.

(E)           ENTIRE AGREEMENT; AMENDMENTS.  THIS AGREEMENT AND THE OTHER
TRANSACTION DOCUMENTS SUPERSEDE ALL OTHER PRIOR ORAL OR WRITTEN AGREEMENTS
BETWEEN THE BUYERS, THE COMPANY, THEIR AFFILIATES AND PERSONS ACTING ON THEIR
BEHALF WITH RESPECT TO THE MATTERS DISCUSSED HEREIN, AND THIS AGREEMENT, THE
OTHER TRANSACTION DOCUMENTS AND THE INSTRUMENTS REFERENCED HEREIN AND THEREIN
CONTAIN THE ENTIRE UNDERSTANDING OF THE PARTIES WITH RESPECT TO THE MATTERS
COVERED HEREIN AND THEREIN AND, EXCEPT AS SPECIFICALLY SET FORTH HEREIN OR
THEREIN, NEITHER THE COMPANY NOR ANY BUYER MAKES ANY REPRESENTATION, WARRANTY,
COVENANT OR UNDERTAKING WITH RESPECT TO SUCH MATTERS.  NO PROVISION OF THIS
AGREEMENT MAY BE AMENDED OR WAIVED OTHER THAN BY AN INSTRUMENT IN WRITING SIGNED
BY THE COMPANY AND THE HOLDERS OF AT LEAST A MAJORITY OF THE AGGREGATE NUMBER OF
REGISTRABLE SECURITIES ISSUED AND ISSUABLE HEREUNDER, AND ANY AMENDMENT TO THIS
AGREEMENT MADE IN CONFORMITY WITH THE PROVISIONS OF THIS SECTION 9(E) SHALL BE
BINDING ON ALL BUYERS AND HOLDERS OF SECURITIES, AS APPLICABLE.  NO SUCH
AMENDMENT OR WAIVER SHALL BE EFFECTIVE TO THE EXTENT THAT IT APPLIES TO LESS
THAN ALL OF THE HOLDERS OF THE APPLICABLE SECURITIES THEN OUTSTANDING.  NO
CONSIDERATION SHALL BE OFFERED OR PAID TO ANY PERSON TO AMEND OR CONSENT TO A
WAIVER OR MODIFICATION OF ANY PROVISION OF ANY OF THE TRANSACTION DOCUMENTS
UNLESS THE SAME CONSIDERATION ALSO IS OFFERED TO ALL OF THE PARTIES TO THE
TRANSACTION DOCUMENTS, HOLDERS OF NOTES OR HOLDERS OF THE WARRANTS, AS THE CASE
MAY BE.  THE COMPANY HAS NOT, DIRECTLY OR INDIRECTLY, MADE ANY AGREEMENTS WITH
ANY BUYERS RELATING TO THE TERMS OR CONDITIONS OF THE TRANSACTIONS CONTEMPLATED
BY THE TRANSACTION DOCUMENTS EXCEPT AS SET FORTH IN THE TRANSACTION DOCUMENTS.

(F)            NOTICES.  ANY NOTICES, CONSENTS, WAIVERS OR OTHER COMMUNICATIONS
REQUIRED OR PERMITTED TO BE GIVEN UNDER THE TERMS OF THIS AGREEMENT MUST BE IN
WRITING AND WILL BE DEEMED TO HAVE BEEN DELIVERED:  (I) UPON RECEIPT, WHEN
DELIVERED PERSONALLY; (II) UPON RECEIPT, WHEN SENT BY FACSIMILE (PROVIDED
CONFIRMATION OF TRANSMISSION IS MECHANICALLY OR ELECTRONICALLY GENERATED AND
KEPT ON FILE BY THE SENDING PARTY); OR (III) ONE BUSINESS DAY AFTER DEPOSIT WITH
AN OVERNIGHT COURIER SERVICE, IN EACH CASE PROPERLY ADDRESSED TO THE PARTY TO
RECEIVE THE SAME.  THE ADDRESSES AND FACSIMILE NUMBERS FOR SUCH COMMUNICATIONS
SHALL BE:

If to the Company:

iParty Corp.

270 Bridge Street, Suite 301

Dedham, Massachusetts 02026
Telephone:  (781) 329-3952
Facsimile:  (781) 326-7143
Attention:  Sal Perisano, CEO

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With a copy to:

Posternak Blankstein & Lund LLP
Prudential Tower
800 Boylston Street
Boston, Massachusetts 02199-8004

Telephone:  (617) 973-6100
Facsimile:  (617) 367-2315
Attention: Donald H. Siegel, P.C.

If to the Transfer Agent:

Continental Stock Transfer & Trust Co.

17 Battery Place

New York, New York 10004

Telephone:  212-509-4000
Facsimile:  212-509-5150
Attention: Roger Bernhammer

If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers, with copies to such Buyer’s representatives as set forth on the Schedule
of Buyers,

with a copy (for informational purposes only) to:

Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York  10022
Telephone:  (212) 756-2000
Facsimile:  (212) 593-5955
Attention:  Eleazer N. Klein, Esq.

or to such other address and/or facsimile number and/or to the attention of such
other Person as the recipient party has specified by written notice given to
each other party five (5) days prior to the effectiveness of such change. 
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (C)
provided by an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above, respectively.

(G)           SUCCESSORS AND ASSIGNS.  THIS AGREEMENT SHALL BE BINDING UPON AND
INURE TO THE BENEFIT OF THE PARTIES AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS,
INCLUDING ANY PURCHASERS OF THE NOTES OR THE WARRANTS.  THE COMPANY SHALL NOT
ASSIGN THIS AGREEMENT OR ANY RIGHTS OR OBLIGATIONS HEREUNDER WITHOUT THE PRIOR
WRITTEN CONSENT OF THE HOLDERS OF AT LEAST A MAJORITY OF THE AGGREGATE NUMBER OF
REGISTRABLE SECURITIES ISSUED AND ISSUABLE HEREUNDER, INCLUDING BY WAY OF A
FUNDAMENTAL TRANSACTION (UNLESS THE COMPANY IS IN COMPLIANCE WITH THE APPLICABLE
PROVISIONS GOVERNING FUNDAMENTAL TRANSACTIONS SET FORTH IN THE NOTES AND THE
WARRANTS).  A BUYER MAY ASSIGN, WITHOUT CONSENT OF THE COMPANY, (I) SOME OR ALL
OF ITS RIGHTS HEREUNDER TO ANY AFFILIATE OF

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the Buyer or (ii) all of its rights hereunder (other than under Section
4(o)(iii)) to any unaffiliated Person, in which event such assignee shall be
deemed to be a Buyer hereunder with respect to such assigned rights.

(H)           NO THIRD PARTY BENEFICIARIES.  THIS AGREEMENT IS INTENDED FOR THE
BENEFIT OF THE PARTIES HERETO AND THEIR RESPECTIVE PERMITTED SUCCESSORS AND
ASSIGNS, AND IS NOT FOR THE BENEFIT OF, NOR MAY ANY PROVISION HEREOF BE ENFORCED
BY, ANY OTHER PERSON.

(I)            SURVIVAL.  UNLESS THIS AGREEMENT IS TERMINATED UNDER SECTION 8,
THE REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE BUYERS CONTAINED IN
SECTIONS 2 AND 3 AND THE AGREEMENTS AND COVENANTS SET FORTH IN SECTIONS 4, 5 AND
9 SHALL SURVIVE THE CLOSING.  EACH BUYER SHALL BE RESPONSIBLE ONLY FOR ITS OWN
REPRESENTATIONS, WARRANTIES, AGREEMENTS AND COVENANTS HEREUNDER.

(J)            FURTHER ASSURANCES.  EACH PARTY SHALL DO AND PERFORM, OR CAUSE TO
BE DONE AND PERFORMED, ALL SUCH FURTHER ACTS AND THINGS, AND SHALL EXECUTE AND
DELIVER ALL SUCH OTHER AGREEMENTS, CERTIFICATES, INSTRUMENTS AND DOCUMENTS, AS
ANY OTHER PARTY MAY REASONABLY REQUEST IN ORDER TO CARRY OUT THE INTENT AND
ACCOMPLISH THE PURPOSES OF THIS AGREEMENT AND THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED HEREBY.

(K)           INDEMNIFICATION.  IN CONSIDERATION OF EACH BUYER’S EXECUTION AND
DELIVERY OF THE TRANSACTION DOCUMENTS AND ACQUIRING THE SECURITIES THEREUNDER
AND IN ADDITION TO ALL OF THE COMPANY’S OTHER OBLIGATIONS UNDER THE TRANSACTION
DOCUMENTS, THE COMPANY SHALL DEFEND, PROTECT, INDEMNIFY AND HOLD HARMLESS EACH
BUYER AND EACH OTHER HOLDER OF THE SECURITIES AND ALL OF THEIR STOCKHOLDERS,
PARTNERS, MEMBERS, OFFICERS, DIRECTORS, EMPLOYEES AND DIRECT OR INDIRECT
INVESTORS AND ANY OF THE FOREGOING PERSONS’ AGENTS OR OTHER REPRESENTATIVES
(INCLUDING, WITHOUT LIMITATION, THOSE RETAINED IN CONNECTION WITH THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT) (COLLECTIVELY, THE “INDEMNITEES”)
FROM AND AGAINST ANY AND ALL ACTIONS, CAUSES OF ACTION, SUITS, CLAIMS, LOSSES,
COSTS, PENALTIES, FEES, LIABILITIES AND DAMAGES, AND EXPENSES IN CONNECTION
THEREWITH (IRRESPECTIVE OF WHETHER ANY SUCH INDEMNITEE IS A PARTY TO THE ACTION
FOR WHICH INDEMNIFICATION HEREUNDER IS SOUGHT), AND INCLUDING REASONABLE
ATTORNEYS’ FEES AND DISBURSEMENTS (THE “INDEMNIFIED LIABILITIES”), INCURRED BY
ANY INDEMNITEE AS A RESULT OF, OR ARISING OUT OF, OR RELATING TO (A) ANY
MISREPRESENTATION OR BREACH OF ANY REPRESENTATION OR WARRANTY MADE BY THE
COMPANY IN THE TRANSACTION DOCUMENTS OR ANY OTHER CERTIFICATE, INSTRUMENT OR
DOCUMENT CONTEMPLATED HEREBY OR THEREBY, (B) ANY BREACH OF ANY COVENANT,
AGREEMENT OR OBLIGATION OF THE COMPANY CONTAINED IN THE TRANSACTION DOCUMENTS OR
ANY OTHER CERTIFICATE, INSTRUMENT OR DOCUMENT CONTEMPLATED HEREBY OR THEREBY OR
(C) ANY CAUSE OF ACTION, SUIT OR CLAIM BROUGHT OR MADE AGAINST SUCH INDEMNITEE
BY A THIRD PARTY (INCLUDING FOR THESE PURPOSES A DERIVATIVE ACTION BROUGHT ON
BEHALF OF THE COMPANY) AND ARISING OUT OF OR RESULTING FROM (I) THE EXECUTION,
DELIVERY, PERFORMANCE OR ENFORCEMENT OF THE TRANSACTION DOCUMENTS OR ANY OTHER
CERTIFICATE, INSTRUMENT OR DOCUMENT CONTEMPLATED HEREBY OR THEREBY, (II) ANY
TRANSACTION FINANCED OR TO BE FINANCED IN WHOLE OR IN PART, DIRECTLY OR
INDIRECTLY, WITH THE PROCEEDS OF THE ISSUANCE OF THE SECURITIES OR (III) THE
STATUS OF SUCH BUYER OR HOLDER OF THE SECURITIES AS AN INVESTOR IN THE COMPANY
PURSUANT TO THE TRANSACTIONS CONTEMPLATED BY THE TRANSACTION DOCUMENTS;
PROVIDED, HOWEVER, THAT THE COMPANY SHALL HAVE NO OBLIGATION TO INDEMNIFY ANY
INDIVIDUAL OR ENTITY HARMED DIRECTLY OR INDIRECTLY AS A RESULT OF, AND TO THE
EXTENT OF, ANY BUYER’S WILLFUL MISCONDUCT.  TO THE EXTENT THAT THE FOREGOING
UNDERTAKING BY THE COMPANY MAY BE UNENFORCEABLE FOR ANY

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reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.  Except as otherwise set forth herein, the mechanics and
procedures with respect to the rights and obligations under this Section 9(k)
shall be the same as those set forth in Section 6 of the Registration Rights
Agreement.

(L)            NO STRICT CONSTRUCTION.  THE LANGUAGE USED IN THIS AGREEMENT WILL
BE DEEMED TO BE THE LANGUAGE CHOSEN BY THE PARTIES TO EXPRESS THEIR MUTUAL
INTENT, AND NO RULES OF STRICT CONSTRUCTION WILL BE APPLIED AGAINST ANY PARTY.

(M)          REMEDIES.  EACH BUYER AND EACH HOLDER OF THE SECURITIES SHALL HAVE
ALL RIGHTS AND REMEDIES SET FORTH IN THE TRANSACTION DOCUMENTS AND ALL RIGHTS
AND REMEDIES WHICH SUCH HOLDERS HAVE BEEN GRANTED AT ANY TIME UNDER ANY OTHER
AGREEMENT OR CONTRACT AND ALL OF THE RIGHTS WHICH SUCH HOLDERS HAVE UNDER ANY
LAW.  ANY PERSON HAVING ANY RIGHTS UNDER ANY PROVISION OF THIS AGREEMENT SHALL
BE ENTITLED TO ENFORCE SUCH RIGHTS SPECIFICALLY (WITHOUT POSTING A BOND OR OTHER
SECURITY), TO RECOVER DAMAGES BY REASON OF ANY BREACH OF ANY PROVISION OF THIS
AGREEMENT AND TO EXERCISE ALL OTHER RIGHTS GRANTED BY LAW.  FURTHERMORE, THE
COMPANY RECOGNIZES THAT IN THE EVENT THAT IT FAILS TO PERFORM, OBSERVE, OR
DISCHARGE ANY OR ALL OF ITS OBLIGATIONS UNDER THE TRANSACTION DOCUMENTS, ANY
REMEDY AT LAW MAY PROVE TO BE INADEQUATE RELIEF TO THE BUYERS.  THE COMPANY
THEREFORE AGREES THAT THE BUYERS SHALL BE ENTITLED TO SEEK TEMPORARY AND
PERMANENT INJUNCTIVE RELIEF IN ANY SUCH CASE WITHOUT THE NECESSITY OF PROVING
ACTUAL DAMAGES AND WITHOUT POSTING A BOND OR OTHER SECURITY.

(N)           PAYMENT SET ASIDE.  TO THE EXTENT THAT THE COMPANY MAKES A PAYMENT
OR PAYMENTS TO THE BUYERS HEREUNDER OR PURSUANT TO ANY OF THE OTHER TRANSACTION
DOCUMENTS OR THE BUYERS ENFORCE OR EXERCISE THEIR RIGHTS HEREUNDER OR
THEREUNDER, AND SUCH PAYMENT OR PAYMENTS OR THE PROCEEDS OF SUCH ENFORCEMENT OR
EXERCISE OR ANY PART THEREOF ARE SUBSEQUENTLY INVALIDATED, DECLARED TO BE
FRAUDULENT OR PREFERENTIAL, SET ASIDE, RECOVERED FROM, DISGORGED BY OR ARE
REQUIRED TO BE REFUNDED, REPAID OR OTHERWISE RESTORED TO THE COMPANY, A TRUSTEE,
RECEIVER OR ANY OTHER PERSON UNDER ANY LAW (INCLUDING, WITHOUT LIMITATION, ANY
BANKRUPTCY LAW, FOREIGN, STATE OR FEDERAL LAW, COMMON LAW OR EQUITABLE CAUSE OF
ACTION), THEN TO THE EXTENT OF ANY SUCH RESTORATION THE OBLIGATION OR PART
THEREOF ORIGINALLY INTENDED TO BE SATISFIED SHALL BE REVIVED AND CONTINUED IN
FULL FORCE AND EFFECT AS IF SUCH PAYMENT HAD NOT BEEN MADE OR SUCH ENFORCEMENT
OR SETOFF HAD NOT OCCURRED.

(O)           INDEPENDENT NATURE OF BUYERS’ OBLIGATIONS AND RIGHTS.  THE
OBLIGATIONS OF EACH BUYER UNDER ANY TRANSACTION DOCUMENT ARE SEVERAL AND NOT
JOINT WITH THE OBLIGATIONS OF ANY OTHER BUYER, AND NO BUYER SHALL BE RESPONSIBLE
IN ANY WAY FOR THE PERFORMANCE OF THE OBLIGATIONS OF ANY OTHER BUYER UNDER ANY
TRANSACTION DOCUMENT.  NOTHING CONTAINED HEREIN OR IN ANY OTHER TRANSACTION
DOCUMENT, AND NO ACTION TAKEN BY ANY BUYER PURSUANT HERETO OR THERETO, SHALL BE
DEEMED TO CONSTITUTE THE BUYERS AS A PARTNERSHIP, AN ASSOCIATION, A JOINT
VENTURE OR ANY OTHER KIND OF ENTITY, OR CREATE A PRESUMPTION THAT THE BUYERS ARE
IN ANY WAY ACTING IN CONCERT OR AS A GROUP WITH RESPECT TO SUCH OBLIGATIONS OR
THE TRANSACTIONS CONTEMPLATED BY THE TRANSACTION DOCUMENTS.  EACH BUYER CONFIRMS
THAT IT HAS INDEPENDENTLY PARTICIPATED IN THE NEGOTIATION OF THE TRANSACTION
CONTEMPLATED HEREBY WITH THE ADVICE OF ITS OWN COUNSEL AND ADVISORS.  EACH BUYER
SHALL BE ENTITLED TO INDEPENDENTLY PROTECT AND ENFORCE ITS RIGHTS, INCLUDING,
WITHOUT LIMITATION, THE RIGHTS ARISING OUT OF THIS AGREEMENT OR OUT OF ANY OTHER
TRANSACTION DOCUMENTS, AND IT SHALL NOT BE

28

--------------------------------------------------------------------------------

NECESSARY FOR ANY OTHER BUYER TO BE JOINED AS AN ADDITIONAL PARTY IN ANY
PROCEEDING FOR SUCH PURPOSE.

(P)           INDIVIDUAL BUYER.   NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO
THE CONTRARY, OR ANY REFERENCES TO “BUYERS” HEREIN, HIGHBRIDGE INTERNATIONAL LLC
ACKNOWLEDGES AND THE COMPANY CONFIRMS THAT HIGHBRIDGE INTERNATIONAL LLC IS THE
ONLY BUYER PARTY TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

[Signature Page Follows]

29

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

 

COMPANY:

 

 

 

 

 

 

 

 

 

iPARTY CORP.

 

 

 

 

 

 

 

 

 

By:

 

/s/ SAL PERISANO

 

 

 

 

Name:

 

Sal Perisano

 

 

 

 

Title:

 

Chief Executive Officer

 

30

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

 

BUYERS:

 

 

 

 

 

 

 

 

 

HIGHBRIDGE INTERNATIONAL LLC

 

 

 

 

 

 

 

 

 

By:

 

HIGHBRIDGE CAPITAL MANAGEMENT, LLC

 

 

 

 

 

 

 

 

 

By:

 

/s/ ADAM J. CHILL

 

 

 

 

Name:

 

Adam J. Chill

 

 

 

 

Title:

 

Managing Director

 

31

--------------------------------------------------------------------------------

 

SCHEDULE OF BUYERS

 

(1)

 

(2)

 

(3)

 

(4)

 

(5)

 

(6)

Buyer

 

Address and
Facsimile Number

 

Aggregate
Principal
Amount of
Notes

 

Number of
Warrant Shares

 

Purchase Price

 

Legal Representative’s Address and Facsimile Number

 

 

 

 

 

 

 

 

 

 

 

Highbridge International LLC

 

c/o Highbridge Capital Management, LLC

9 West 57th Street, 27th Floor

New York, New York 10019

Attention: Ari J. Storch

                 Adam J. Chill

Facsimile: (212) 751-0755

Telephone: (212) 287-4720

Residence: Cayman Islands

 

$2,500,000

 

2,083,334

 

$2,500,000

 

Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 10022

Attention: Eleazer Klein, Esq.

Facsimile: (212) 593-5955

Telephone: (212) 756-2376

 

 

 

 

 

 

 

 

 

 

 

 

 

--------------------------------------------------------------------------------

 

EXHIBITS

Exhibit A

 

Form of Notes

Exhibit B

 

Form of Warrants

Exhibit C

 

Registration Rights Agreement

Exhibit D

 

Irrevocable Transfer Agent Instructions

Exhibit E

 

Form of Outside Company Counsel Opinion

Exhibit F

 

Form of Secretary’s Certificate

Exhibit G

 

Form of Officer’s Certificate

Exhibit H

 

Form of Subordination Agreement

 

 

DISCLOSURE SCHEDULES

 

 

Schedule 3(a)

 

Subsidiaries

Schedule 3(c)

 

Issuance of Securities

Schedule 3(e)

 

Consents

Schedule 3(k)

 

SEC Documents; Financial Statements

Schedule 3(l)

 

Absence of Certain Changes

Schedule 3(n)

 

Conduct of Business; Regulatory Permits

Schedule 3(r)

 

Capitalization

Schedule 3(s)

 

Indebtedness and Other Contracts

Schedule 4(d)

 

Use of Proceeds

 

--------------------------------------------------------------------------------

Disclosure Schedule

to Securities Purchase Agreement

by and among

iPARTY CORP.

and

the investors listed on the Schedule of Buyers attached thereto

dated as of September 15, 2006

The inclusion of any information in any section of this Disclosure Schedule
shall not be deemed to be an admission or evidence of the materiality of such
item or that it is required to be disclosed, nor shall it establish a standard
of materiality for any purpose whatsoever.  Capitalized terms used but not
defined in this Disclosure Schedule shall have the respective meanings given to
them in the Securities Purchase Agreement (the “Agreement”).  The sections
referred to below correspond to the applicable sections of the Agreement.

Section 3(a) — Organization and Qualification

iParty Retail Stores Corp., a Delaware corporation, is wholly-owned by and is
the only subsidiary of the Company.

Section 3(c) — Issuance of Securities

The offer and issuance by the Company of the Securities is exempt from
registration under the 1933 Act provided each Buyer is an “accredited investor”
as represented and warranted to the Company pursuant to Section 2(b) of the
Agreement.

Section 3(e) — Consents

In accordance with the Company Guide of the American Stock Exchange LLC (the
“AMEX Company Guide”), including without limitation Sections 301, 302, 303, 306,
331, 332, 333 thereof, the Company must file with and receive approval from the
American Stock Exchange for additional listing of the common stock of the
Company issuable upon exercise of the Warrants.

--------------------------------------------------------------------------------

Section 3(k) - SEC Documents.

No exceptions.

Section 3(l) — Absence of Certain Changes

1.    The Company acquired certain assets and inventory from Party City
Corporation in conjunction with its acquisition of a Party City store located in
Peabody, MA on August 7, 2006.

2.    Through July 31, 2006, the Company incurred capital expenditures of
approximately $201,000.

Section 3(n) — Conduct of Business; Regulatory Permits

The Company has received verbal notification by AMEX from time to time that the
Company has failed to maintain stockholders’ equity of at least $4 million
(owing to the seasonal nature of its business) and is therefore, at such times,
not in compliance with the AMEX’s continued listing standards set forth in
Section 1003(a)(ii) of the AMEX Company Guide; although the Company has met this
test at its fiscal year ends.  The Company has not received any written notice
from the AMEX regarding the initiation of any delisting proceedings.

The AMEX Company Guide, including without limitation, Sections 127, 1001, 1002,
1003, 1009, and 1010 thereof, invests the AMEX with considerable discretionary
authority with respect to whether securities may be suspended from trading or be
removed from listing on the AMEX.  Accordingly, the Company’s continued listing
on the American Stock Exchange could be adversely affected if the AMEX were to
determine to exercise this broad discretionary authority in a manner adverse to
the Company.

In addition, please see the discussion under Section 3(r) of the Disclosure
Schedule below regarding certain matters described in the Company’s press
release and Current Report on Form 8-K, both dated October 31, 2002.

Section 3(r) — Equity Capitalization

The number of shares set aside and reserved for issuance pursuant to securities
of the Company (other than the Warrants) exercisable or exchangeable for, or
convertible into, shares of Common Stock will need to be adjusted to give effect
to the antidilution protections afforded such securities in connection with the
issuance of the Warrants upon consummation of the transactions contemplated by
this Agreement.

ii

--------------------------------------------------------------------------------

On October 31, 2002, the Company issued a press release to announce that it had
concluded it had incorrectly applied the anti-dilution provisions of its Series
B, C and D convertible preferred stock (the “Affected Preferred Stock”) in
conjunction with dilutive financings in August and September 2000.  The
Company’s press release was filed as an exhibit to a Current Report on Form 8-K
filed by the Company on that same day with the SEC.

As more fully explained in the press release and 8-K, the Company had determined
that it inadvertently issued additional shares of Affected Preferred Stock,
instead of adjusting the Affected Preferred Stock’s conversion ratios.  The
Company had also miscalculated the number of common shares issuable upon
conversion of the Affected Preferred Stock. The Company had also determined that
it mistakenly issued additional warrant certificates, instead of adjusting the
Affected Warrants’ conversion ratios.  The warrant calculations had also
mistakenly omitted the dilutive effect of a warrant issued by the Company in
December 1999.

As a result of these errors, beginning in September 2000, the Company believed
and treated holders of Affected Preferred Stock as if they were entitled to
approximately 2.3 million more common shares upon conversion of their Affected
Preferred Stock than they were in fact entitled to.  Of this overstated amount,
590,327 common shares were issued upon conversions of shares of Affected
Preferred Stock and sold in the public market (the “Overissued Shares”)
beginning in October 2000.  On October 31, 2002, the Company’s Board of
Directors ratified the issuance of the Overissued Shares.

Based upon consultation with Delaware counsel, the Company has been advised that
the Overissued Shares likely constitute void shares and may not constitute
validly issued, fully paid and nonassessable as a matter of Delaware law,
notwithstanding the subsequent ratification of the issuance of such shares by
the Company’s Board of Directors.  The Company has consistently treated the
ratified Overissued Shares as validly issued, fully paid and nonassessable
shares for all purposes since the press release and Form 8-K filing on October
31, 2002 but cannot warrant or represent this as a legal matter for the reasons
outlined herein.

Additional disclosure of the accounting treatment and implications of this
matter are contained in the above-mentioned press release, as well as in the
footnotes to the financial statements in the Company’s Annual Report on Form
10-K.

(i)                Preemptive rights or any similar rights or liens or
encumbrances on Company’s capital stock:  The Company has a Stockholder Rights
Plan (the “Plan”) effective November 9, 2001.  Under the Plan each share of the
Company’s capital stock outstanding at the close of business on November 9, 2001
and each share of the Company’s capital stock issued subsequent to that date has
a right associated with it, such that each share of its common stock is entitled
to one right and each share of its preferred stock is entitled to such number of
rights equal to the number of common shares into which it is convertible. The
rights are exercisable only in the event, with certain

iii

--------------------------------------------------------------------------------

exceptions, an acquiring party accumulates 10 percent or more of the Company’s
voting stock, or if a party announces an offer to acquire 15 percent or more of
the Company’s voting stock.  The rights expire on November 9, 2011. When
exercisable, each right entitles the holder to purchase from the Company, one
one-hundredth of a share of a new series of Series G junior preferred stock at
an initial purchase price of $2.00.  In addition, upon the occurrence of certain
events, holders of the rights will be entitled to purchase either iParty Corp.
stock or shares in an “acquiring entity” at half of market value.  The Company
generally will be entitled to redeem the rights at $0.001 per right at any time
until the date on which a 10 percent position in its voting stock is acquired by
any person or group.  Until a right is exercised, the holder thereof, as such,
will have no rights as a stockholder of the Company, including, without
limitation, the right to vote or receive dividends.  The Plan is filed as an
exhibit to the Company’s Current Report on Form 8-K, filed with the SEC on
November 16, 2001.  The Company’s Board of Directors has taken action to amend
the Plan and to waive the Plan’s provisions with respect to the acquisition of
Warrant Shares contemplated by this Agreement.

(ii)               All outstanding options and warrants and subscription rights:

Options

The Company has an Amended and Restated 1998 Incentive and Nonqualified Stock
Option Plan (the “1998 Plan”), pursuant to which options to acquire up to
11,000,000 shares of common stock may be granted to officers, directors, key
employees and consultants.  As of September 15, 2006, 412,959 options have been
issued and exercised, 10,268,988 options have been issued and remain
unexercised, and 318,053 options remain available for future grants under the
1998 Plan.

WARRANTS

As of September 15, 2006, there were 528,210 warrants outstanding exercisable
for 528,210 shares of the Company’s common stock.

(iii)              Outstanding debt securities, notes, credit agreements, credit
facilities, etc.:  Please refer to Section 3(s) below for a description of (i)
the Company’s Loan and Security Agreement, as amended, with Wells Fargo Retail
Finance II, LLC; and (ii) the Company’s indebtedness to Party City Corporation
and Amscan, Inc.

The Company and/or its Subsidiary has capital/equipment leases with each of the
following:

IKON Office Solutions, Inc.

Key Equipment Finance, Inc.

IBM Credit Corporation

For details please refer to Schedule 3(r)(iii) attached hereto.

iv

--------------------------------------------------------------------------------

(iv)              Financing statements securing obligations in any material
amounts:  As of July 24, 2006, when a UCC search was last conducted, there were
22 UCC financing statements, one amendment, and one assignment with respect to
the Company filed with the Secretary of State of Delaware, and there were nine
UCC financing statements, one amendment, one continuation, and one assignment
with respect to its Subsidiary.  In addition, there was one UCC financing
statement with respect to the Subsidiary on file with the Secretary of the
Commonwealth of Massachusetts.   A summary of each such filing indicating the
debtor, secured party, collateral, jurisdiction, original file date and number
and related filings is attached at the end of this Disclosure Schedule under the
caption “UCC Search Results.”

(v)               Registration agreements:  Holders of each of the Company’s
outstanding series of convertible preferred stock (Series B, C, D, E, and F)
have registration rights.

(vi)              Outstanding securities with redemption or similar provisions: 
The Company’s outstanding series of convertible preferred stock (Series B, C, D,
E, and F) have the benefit of certain redemption and similar provisions,
including liquidation preferences, as set forth in the Company’s Certificate of
Incorporation, as amended to date.

(vii)                Anti-dilution provisions that will be triggered by issuance
of the Securities: The Company’s various series of convertible preferred stock
all contain anti-dilution provisions as set forth in the Company’s Certificate
of Incorporation, as amended to date, and subject to the final determination of
the exercise price of the Warrants the issuance of the Securities will result in
further adjustments to the applicable conversion prices of the Company’s Series
B, C, D, E, and F convertible preferred stock.

True and complete copies of the Company’s Certificate of Incorporation and
By-laws, each as amended and in effect, are contained as exhibits to the
Company’s various SEC Edgar filings, as indicated on the Exhibit Index of the
Company’s most recent Annual Report on Form 10-K as filed with the SEC on March
30, 2006 and are publicly available on the SEC’s Edgar site.

Provide the terms of all securities convertible into, or exercisable or
exchangeable for, shares of iParty common stock and the material rights of the
holders thereof in respect thereto:

A description of the Company’s outstanding convertible preferred stock, stock
options, warrants, and rights plan is included in the footnotes to the financial
statements filed with the Company’s most recent Annual Report on Form 10-K and
Quarterly Report on Form 10-Q.  The terms of the Company’s various outstanding
series of convertible preferred stock are set forth in the Company’s Certificate
of Incorporation (including the Certificate of Designations included therein),
contained as exhibits to the Company’s various SEC Edgar filings, as indicated
on the Exhibit Index of the Company’s most

v

--------------------------------------------------------------------------------

recent Annual Report on Form 10-K as filed with the SEC on March 30, 2006 and
are publicly available on the SEC’s Edgar site.

Section 3(s) — Indebtedness and Other Contracts

The Company is a party to a Loan and Security Agreement, as amended, with Wells
Fargo Retail Finance II, LLC, which provides for a line of credit up to $12.5
million, has a maturity date of January 2, 2007, and bears interest at the
lender’s base rate plus 50 basis points. On January 17, 2006, the Company
amended its agreement to allow for a $500,000 term loan that increased the
Company’s borrowing base, but did not increase the $12.5 million credit limit.
The Company borrowed the full $500,000 on that date. The interest rate on the
term loan is the lender’s base rate plus 125 basis points. During the time the
term loan remains outstanding, the interest rate on the line of credit is the
lender’s base rate plus 75 basis points. The term loan is currently outstanding
and is due and payable in full on October 31, 2006.

In connection with a Supply Agreement entered into by the Company with Amscan,
Inc. on August 7, 2006, Amscan agreed to extend out through October 31, 2006
approximately $1,150,000 in trade payables, and granted the Company the right,
exercisable in October, 2006, to term out those trade payables over three years,
pursuant to a Subordinated Note bearing interest at 11% per annum, with
principal and interest to be repaid in 36 equal monthly installments beginning
November 1, 2006 (the “Amscan Note”).  The Company intends to exercise this
option.

In conjunction with the Company’s purchase of Party City Corporation’s retail
store and related assets located in Peabody, Massachusetts, the Company issued
to Party City Corporation its $600,000 Subordinated Promissory Note due August
7, 2010 (the “Party City Note”), bearing interest at 12.25% per annum, interest
only payable quarterly in arrears and the entire principal balance due on August
7, 2010.

The Company is also party to the capitalized leases referred to in Section 3(r)
above.  The terms of the capitalized leases are summarized in Schedule 3(r)(iii)
attached hererto.

The Company’s indebtedness is further described under the caption “Liquidity and
Capital Resources” of the Company’s most recent Annual Report on Form 10-K and
Quarterly Report on Form 10-Q; and also, with respect to Amscan Inc. and Party
City Corporation, is further described in the Company’s Current Report on Form
8-K as filed with the SEC on August 7, 2006.

Section 3(cc) — Ranking of Notes

The Notes contemplated by this Agreement rank junior to the indebtedness under
the Company’s term note and line of credit with Wells Fargo, pari passu with the

vi

--------------------------------------------------------------------------------

capital/equipments leases, and senior to the Party City Note, and, when
executed, the Amscan Note.

Section 3(dd) — Form S-3 Eligibility

The Company meets the registrant requirements sets forth in General Instruction
I.A. of Form S-3.  However, in order for the Company to meet the transaction
requirements in respect of the Warrant Shares set forth in General Instruction
I.B.4(a)(3) of Form S-3, the Company will need to provide the information
required by Rule 14a-3(b) under the Exchange Act to all record holders of the
Warrants (as provided for in General Instruction I.B.4(b)(3)) and the
information required by Items 401, 402, and 403 of Regulation S-K (as provided
for in General Instruction I.B.4(c)(1)-(3)) to all holders of rights exercisable
for the Company’s common stock, holders of securities convertible into the
Company’s common stock, and participants in plans that may invest in the
Company’s common stock, securities convertible into the Company’s common stock,
or warrants or options exercisable for the Company’s common stock, respectively.

Section 4(d) —  Use of Proceeds

Initially, the net proceeds from the sale of the Securities will be applied to
pay down revolving credit indebtedness of the Company to Wells Fargo.

[Remainder of page blank.  Section 3(r)(iii) — follows on next page.]

vii

--------------------------------------------------------------------------------

Schedule 3(r)(iii)

 

 

 

Lease

 

Average

 

 

 

 

 

Exp.

 

Monthly

 

Lessor

 

Lease #

 

Date

 

Payment

 

IBM

 

D00B70424

 

07/23/07

 

$

106.87

 

IBM

 

D00B70571

 

06/30/07

 

$

106.87

 

IBM

 

D00B70730

 

07/23/07

 

$

106.87

 

IBM

 

D00B70732

 

07/23/07

 

$

106.87

 

IBM

 

D00B70750

 

07/23/07

 

$

106.87

 

IBM

 

D00B70752

 

07/23/07

 

$

106.87

 

IBM

 

D00B70769

 

06/30/07

 

$

106.87

 

IBM

 

D00B70772

 

06/30/07

 

$

106.87

 

IBM

 

D00B70775

 

06/30/07

 

$

106.87

 

IBM

 

D00B70778

 

07/23/07

 

$

106.87

 

IBM

 

D00B70780

 

06/30/07

 

$

106.87

 

IBM

 

D00B70803

 

06/30/07

 

$

525.04

 

IBM

 

D00B70815

 

06/30/07

 

$

106.87

 

IBM

 

D00B70827

 

07/23/07

 

$

106.87

 

IBM

 

D00B70831

 

06/30/07

 

$

106.87

 

IBM

 

D00B70832

 

06/30/07

 

$

106.87

 

IBM

 

D00B70839

 

07/23/07

 

$

106.87

 

IBM

 

D00B70844

 

06/30/07

 

$

106.87

 

IBM

 

D00B70851

 

07/23/07

 

$

106.87

 

IBM

 

D00B70854

 

07/23/07

 

$

106.87

 

IBM

 

D00B70857

 

06/30/07

 

$

106.87

 

IBM

 

D00B70866

 

06/30/07

 

$

106.87

 

IBM

 

D00B70868

 

07/23/07

 

$

106.87

 

IBM

 

D00B70877

 

08/01/07

 

$

3,926.40

 

IBM

 

D00B70904

 

08/01/07

 

$

525.15

 

IBM

 

D00B70929

 

06/30/07

 

$

558.98

 

IBM

 

D00B70977

 

06/30/07

 

$

525.17

 

IBM

 

D00B71376

 

08/01/07

 

$

3,924.05

 

IBM

 

D00B79116

 

08/01/07

 

$

145.21

 

IBM

 

D00B79117

 

08/01/07

 

$

265.28

 

IBM

 

D00B79118

 

08/01/07

 

$

268.40

 

IBM

 

D00B79119

 

08/01/07

 

$

211.95

 

IBM

 

D00B79120

 

08/01/07

 

$

43.44

 

IBM

 

D00B79121

 

08/01/07

 

$

246.16

 

IBM

 

D00B79122

 

08/01/07

 

$

79.75

 

IBM

 

D00B79123

 

08/01/07

 

$

264.61

 

IBM

 

D00B79124

 

08/01/07

 

$

13.01

 

IBM

 

D00B80636

 

08/01/07

 

$

240.80

 

IBM

 

D00B80643

 

08/01/07

 

$

240.80

 

IBM

 

D00B80754

 

08/01/07

 

$

1,325.59

 

IBM

 

D00B80801

 

08/01/07

 

$

416.50

 

 

viii

--------------------------------------------------------------------------------

 

IBM

 

D00B80825

 

08/01/07

 

$

414.38

 

IBM

 

D00B80899

 

08/01/07

 

$

240.80

 

IBM

 

D00B81029

 

08/01/07

 

$

416.51

 

IBM

 

D00B81041

 

08/01/07

 

$

416.51

 

IBM

 

D00B81091

 

08/01/07

 

$

440.29

 

IBM

 

D00B81095

 

08/01/07

 

$

416.51

 

IBM

 

D00B81096

 

08/01/07

 

$

416.51

 

IBM

 

D00B81108

 

08/01/07

 

$

309.90

 

IBM

 

D00B81133

 

08/01/07

 

$

309.90

 

IBM

 

D00B81263

 

08/01/07

 

$

555.99

 

IBM

 

D00B81275

 

08/01/07

 

$

416.51

 

IBM

 

D00B81289

 

08/01/07

 

$

309.90

 

IBM

 

D00B81291

 

08/01/07

 

$

416.51

 

IBM

 

D00B81295

 

08/01/07

 

$

309.90

 

IBM

 

D00B81302

 

08/01/07

 

$

416.51

 

IBM

 

D00B81306

 

08/01/07

 

$

416.51

 

IBM

 

D00B81322

 

08/01/07

 

$

416.51

 

IBM

 

D00B81323

 

08/01/07

 

$

416.51

 

IBM

 

D00B81335

 

08/01/07

 

$

220.66

 

IBM

 

D00B81340

 

08/01/07

 

$

309.90

 

IBM

 

D00B81349

 

08/01/07

 

$

309.90

 

IBM

 

D00B81355

 

08/01/07

 

$

309.90

 

IBM

 

D00B81359

 

08/01/07

 

$

416.51

 

IBM

 

D00B81379

 

08/01/07

 

$

309.90

 

IBM

 

D00B81380

 

08/01/07

 

$

243.99

 

IBM

 

D00B81381

 

08/01/07

 

$

309.90

 

IBM

 

D00B81385

 

08/01/07

 

$

416.51

 

IBM

 

D00B81395

 

08/01/07

 

$

240.71

 

IBM

 

D00B81402

 

08/01/07

 

$

416.51

 

IBM

 

D00B81410

 

08/01/07

 

$

240.71

 

IBM

 

D00B81415

 

08/01/07

 

$

327.29

 

IBM

 

D00B81424

 

08/01/07

 

$

309.90

 

IBM

 

D00B81496

 

08/01/07

 

$

444.49

 

IBM

 

D00B81643

 

08/01/07

 

$

353.98

 

IBM

 

D00B96232

 

08/01/07

 

$

553.34

 

IBM

 

D00B96212

 

08/01/07

 

$

1,781.29

 

IBM

 

D00B95361

 

08/01/07

 

$

3,306.62

 

IBM

 

D00B99815

 

11/01/07

 

$

7,673.67

 

KEY

 

CW01142084

 

04/15/09

 

$

511.35

 

IKON

 

1151964-JH4688

 

02/23/09

 

$

2,625.00

 

 

ix

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