Document:

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.

 

(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 

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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 

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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

 

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
 

 

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
 

 

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
 

 

(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.

 14
 

 

(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 

 15
 

 

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) 

 16
 

 

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.

 17
 

 

(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.

 18
 

 

(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 

 19
 

 

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.

 20

 

(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.

 21
 

 

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.

 22
 

 

(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.

 23
 

 

(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.

 24
 

 

(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

 25
 

 

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 

 26
 

 

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 

 27
 

 

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

  	
   

  

 

 ixExhibit
10.2

THE ISSUANCE AND SALE OF THE SECURITY REPRESENTED
BY THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS. 
THIS SECURITY MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
(I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THIS SECURITY
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, THIS SECURITY
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITY.

iParty Corp.

Senior
Subordinated Note

	
  Issuance Date: September 15, 2006

  	
  Original Principal
  Amount: U.S. $2,500,000

  

 

FOR VALUE RECEIVED, iParty
Corp., a Delaware corporation (the “Company”),
hereby promises to pay to HIGHBRIDGE INTERNATIONAL LLC or registered assigns (“Holder”) the amount set out above as the Original Principal
Amount (as reduced pursuant to the terms hereof pursuant to redemption or
otherwise, the “Principal”) when due, whether
upon the Maturity Date (as defined below), acceleration, redemption or
otherwise (in each case in accordance with the terms hereof) and to pay
interest (“Interest”) on any outstanding
Principal at a rate per annum equal to the Interest Rate (as defined below),
from the date set out above as the Issuance Date (the “Issuance Date”)
until the same becomes due and payable, whether upon an Interest Date (as
defined below), the Maturity Date, acceleration, redemption or otherwise (in
each case in accordance with the terms hereof). 
This Senior Subordinated Note (including all Senior Subordinated Notes
issued in exchange, transfer or replacement hereof, this “Note”)
is one of an issue of Senior Subordinated Notes (collectively, the “Notes” and such other Senior Subordinated Notes, the “Other Notes”) issued pursuant to the Securities Purchase
Agreement (as defined below).  Certain
capitalized terms are defined in Section 25.

(1)           MATURITY.  On the Maturity Date, the Holder shall
surrender this Note to the Company and the Company shall pay to the Holder an
amount in cash representing all outstanding Principal, accrued and unpaid
Interest and accrued and unpaid Late Charges, if any.  The “Maturity
Date” shall be September 15,
2009.

(2)           INTEREST; INTEREST RATE.  (a)     Interest on this Note shall
commence accruing on the Issuance Date and shall be computed on the basis of a
365-day year and actual days elapsed and shall be payable in arrears on the
last day of each Calendar Quarter during the period beginning on the Issuance
Date and ending on, and including, the Maturity

 

 

Date (each, an “Interest Date”) with
the first Interest Date being December 31, 2006.  Interest shall be payable on each Interest
Date, to the record holder of this Note on the applicable Interest Date, in
cash.

(b)       From and after the occurrence of an Event
of Default, the Interest Rate shall be increased to fifteen percent (15%).  In the event that such Event of Default is
subsequently cured, the adjustment referred to in the preceding sentence shall
cease to be effective as of the date of such cure; provided that the Interest
as calculated at such increased rate during the continuance of such Event of
Default shall continue to apply to the extent relating to the days after the
occurrence of such Event of Default through and including the date of cure of
such Event of Default.

(3)           RIGHTS UPON EVENT OF DEFAULT.

(a)       Event of Default.  Each of the following events shall constitute
an “Event of Default”:

(i)            the Company’s
failure to pay to the Holder any amount of Principal (including, without
limitation, any redemption payments), Interest, Late Charges or other amounts
when and as due under this Note or any other Transaction Document (as defined
in the Securities Purchase Agreement), except, in the case of a failure to pay
Interest and Late Charges when and as due, in which case only if such failure
continues for a period of at least three (3) Business Days;

(ii)           any
default under, redemption of or acceleration prior to maturity of any
Indebtedness of the Company or any of its Subsidiaries (as defined in Section
3(a) of the Securities Purchase Agreement), other than with respect to any
Other Notes;

(iii)          the Company or any
of its Subsidiaries, pursuant to or within the meaning of Title 11, U.S. Code,
or any similar Federal, foreign or state law for the relief of debtors
(collectively, “Bankruptcy Law”), (A) commences a voluntary case, (B) consents to the entry of
an order for relief against it in an involuntary case, (C) consents to the
appointment of a receiver, trustee, assignee, liquidator or similar official (a
“Custodian”),
(D) makes a general assignment for the benefit of its creditors or (E) admits
in writing that it is generally unable to pay its debts as they become due;

(iv)          a court of competent
jurisdiction enters an order or decree under any Bankruptcy Law that (A) is for
relief against the Company or any of its Subsidiaries in an involuntary case,
(B) appoints a Custodian of the Company or any of its Subsidiaries or (C)
orders the liquidation of the Company or any of its Subsidiaries;

(v)           a final judgment or
judgments for the payment of money aggregating in excess of $250,000 are
rendered against the Company or any of its Subsidiaries and which judgments are
not, within sixty (60) days after the entry thereof, bonded, discharged or
stayed pending appeal, or are not discharged within sixty (60) days after the
expiration of such stay; provided, however, that any judgment which is covered
by insurance or an indemnity from a credit worthy party shall not be included
in

 2
 

 

 

calculating the $250,000
amount set forth above so long as the Company provides the Holder a written
statement from such insurer or indemnity provider (which written statement
shall be reasonably satisfactory to the Holder) to the effect that such
judgment is covered by insurance or an indemnity and the Company will receive
the proceeds of such insurance or indemnity within thirty (30) days of the
issuance of such judgment;

(vi)          the Company breaches
any representation, warranty, covenant or other term or condition of any
Transaction Document, except, in the case of a breach of a covenant which is
curable, only if such breach continues for a period of at least ten (10)
consecutive Business Days;

(vii)         any material breach
or material failure in any respect to comply with Section 10 of this Note; or

(viii)        any Event of Default
(as defined in the Other Notes) occurs with respect to any Other Notes.

(b)       Redemption Right.  Upon the occurrence of an Event of Default
with respect to this Note or any Other Note, the Company shall within two (2)
Business Days deliver written notice thereof via facsimile and overnight
courier (an “Event of Default Notice”) to the Holder.  At any time after the earlier of the Holder’s
receipt of an Event of Default Notice and the Holder becoming aware of an Event
of Default and ending thirty (30) days after the later of (i) the date of the
Holder’s receipt of the Event of Default Notice, (ii) the date of the
expiration of the applicable Blockage Period (as defined in the Subordination
Agreement), if any, and (iii) the date such Event of Default has been cured and
the Holder has received written notice of such cure from the Company setting
forth in reasonable specificity the basis for the cure of the applicable Event
of Default, the Holder may require the Company to redeem all or any portion of
this Note by delivering written notice thereof (the “Event of Default Redemption
Notice”) to the
Company, which Event of Default Redemption Notice shall indicate the portion of
this Note the Holder is electing to redeem. 
Each portion of this Note subject to redemption by the Company pursuant
to this Section 3(b) shall be redeemed by the Company at a price equal to the Outstanding Amount (the “Event
of Default Redemption Price”).  Redemptions required
by this Section 3(b) shall be made in accordance with the provisions of Section
7.  To the extent redemptions required by
this Section 3(b) are deemed or determined by a court of competent jurisdiction
to be prepayments of the Note by the Company, such redemptions shall be deemed
to be voluntary prepayments.

(4)           RIGHTS UPON FUNDAMENTAL
TRANSACTION AND CHANGE OF CONTROL.

(a)       Assumption.  The Company shall not enter into or be party to a Fundamental
Transaction unless the Successor Entity assumes in writing all of the
obligations of the Company under this Note and the other Transaction Documents
in accordance with the provisions of this Section 4(a) pursuant to written
agreements in form and substance reasonably satisfactory to the Required
Holders and approved by the Required Holders prior to such Fundamental Transaction,
including agreements to deliver to each holder of Notes in exchange for such
Notes a security of the
Successor Entity evidenced by a written instrument

 3
 

 

 

substantially similar in form and substance
to the Notes, including, without limitation, having a principal amount and
interest rate equal to the principal amounts and the interest rates of the
Notes held by such holder and having similar ranking to the Notes, and
reasonably satisfactory to the Required Holders.  Upon the occurrence of any Fundamental Transaction, the Successor
Entity shall succeed to, and be substituted for (so that from and after the
date of such Fundamental Transaction, the provisions of this Note referring to
the “Company” shall refer instead to the Successor Entity), and may exercise
every right and power of the Company and shall assume all of the obligations of
the Company under this Note with the same effect as if such Successor Entity
had been named as the Company herein.  The
provisions of this Section shall apply similarly and equally to successive
Fundamental Transactions.

(b)       Redemption Right.  Until the later to occur (i) no sooner than
fifteen (15) days nor later than ten (10) days prior to the consummation of a
Change of Control, or (ii) the public announcement of such Change of Control,
the Company shall deliver written notice thereof via facsimile and overnight
courier to the Holder (a “Change of Control Notice”). 
At any time during the period beginning after the Holder’s receipt of a
Change of Control Notice and ending ten (10) Trading Days after the later of
(x) the date of the consummation of such Change of Control and (y) the date of
the expiration of the applicable Blockage Period (as defined in the
Subordination Agreement), if any, the Holder may require the Company to redeem
all or any portion of this Note by delivering written notice thereof (“Change
of Control Redemption Notice”)
to the Company, which Change of Control Redemption Notice shall indicate the
Outstanding Amount the Holder is electing to redeem.  The portion of this Note subject to
redemption pursuant to this Section 4 shall be redeemed by the Company in cash
at a price equal to the 101% of the Outstanding Amount being redeemed (the “Change
of Control Redemption Price”).  Redemptions required by this Section 4 shall
be made in accordance with the provisions of Section 7 and shall have priority
to payments to shareholders in connection with a Change of Control.  To the extent redemptions required by this
Section 4(b) are deemed or determined by a court of competent jurisdiction to
be prepayments of the Note by the Company, such redemptions shall be deemed to
be voluntary prepayments.

(5)           SECURITY.  This note is an unsecured obligation of the
Company.

(6)           NONCIRCUMVENTION.  The Company hereby covenants and agrees that
the Company will not, by amendment of its Certificate of Incorporation, Bylaws
or through any reorganization, transfer of assets, consolidation, merger,
scheme of arrangement, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms of this Note, and will at all times in good faith carry out all of
the provisions of this Note and take all action as may be required to protect
the rights of the Holder of this Note.

(7)           HOLDER’S REDEMPTIONS.

(a)       Mechanics.  The Company shall deliver the applicable
Event of Default Redemption Price to the Holder within five (5) Business Days
after the Company’s receipt of the Holder’s Event of Default Redemption
Notice.  If the Holder has submitted a
Change of Control Redemption Notice in accordance with Section 4(b), the
Company shall

 4
 

 

 

deliver the applicable Change of Control
Redemption Price to the Holder concurrently with the consummation of such
Change of Control if such notice is received prior to the consummation of such
Change of Control and within ten (10) Business Days after the Company’s receipt
of such notice otherwise.  In the event
of a redemption of less than all of the Outstanding Amount of this Note, the
Company shall promptly cause to be issued and delivered to the Holder a new
Note (in accordance with Section 15(d)) representing the outstanding Principal
which has not been redeemed.  In the
event that the Company does not pay the Redemption Price to the Holder within
the time period required, at any time thereafter and until the Company pays
such unpaid Redemption Price in full, the Holder shall have the option, in lieu
of redemption, to require the Company to promptly return to the Holder all or
any portion of this Note representing the Outstanding Amount that was submitted
for redemption and for which the applicable Redemption Price (together with any
Late Charges thereon) has not been paid. 
Upon the Company’s receipt of such notice, (x) the Redemption Notice shall
be null and void with respect to such Outstanding Amount, and (y) the Company
shall immediately return this Note, or issue a new Note (in accordance with
Section 15(d)) to the Holder representing such Outstanding Amount.  The Holder’s delivery of a notice voiding a
Redemption Notice and exercise of its rights following such notice shall not
affect the Company’s obligations to make any payments of Late Charges which
have accrued prior to the date of such notice with respect to the Outstanding
Amount subject to such notice.

(b)       Redemption by Other Holders.  Upon the Company’s receipt of notice from any
of the holders of the Other Notes for redemption or repayment as a result of an
event or occurrence substantially similar to the events or occurrences described
in Section 3(b) or Section 4(b) (each, an “Other
Redemption Notice”),
the Company shall immediately, but no later than one (1) Business Day of its
receipt thereof, forward to the Holder by facsimile a copy of such notice.  If the Company receives a Redemption Notice
and one or more Other Redemption Notices, during the period beginning on and
including the date which is three (3) Business Days prior to the Company’s
receipt of the Holder’s Redemption Notice and ending on and including the date
which is three Business Days after the Company’s receipt of the Holder’s
Redemption Notice and the Company is unable to redeem all principal, interest
and other amounts designated in such Redemption Notice and such Other
Redemption Notices received during such seven (7) Business Day period, then the
Company shall redeem a pro rata amount from each holder of the Notes (including
the Holder) based on the principal amount of the Notes submitted for redemption
pursuant to such Redemption Notice and such Other Redemption Notices received
by the Company during such seven (7) Business Day period.

(8)           RESTRICTION ON REDEMPTION AND CASH
DIVIDENDS.  Until all of the Notes
have been redeemed or otherwise satisfied in accordance with their terms, the
Company shall not, directly or indirectly, redeem, repurchase or declare or pay
any cash dividend or distribution on its capital stock without the prior
express written consent of the Required Holders.

(8A)        VOLUNTARY PREPAYMENTS.  The Company may from time to time voluntarily
prepay this Note ( a “Voluntary Prepayment”),
in whole or in part, to the extent permitted under the terms of its Senior
Indebtedness, but only so long as the Holder is entitled to receive such
Voluntary Prepayment in accordance with the terms of the Subordination
Agreement without turnover to any Senior Lender, at a price equal to (i) the Outstanding Amount

 5
 

 

 

being prepaid plus
(ii) the Present Value of Interest with respect to such Outstanding Amount
being prepaid (the “Voluntary Prepayment Price”);
provided, that the Company shall give the Holder notice thereof no later than
thirty (30) Business Days in advance of any such Voluntary Prepayment,
specifying the date of such Voluntary Prepayment (the “Voluntary
Prepayment Date”), the Outstanding Amount being prepaid and the
Voluntary Prepayment Price.

(9)           VOTING RIGHTS.  The Holder shall have no voting rights as the
holder of this Note, except as required by law, including but not limited to
the Delaware General Corporation Law, and as expressly provided in this Note.

(10)         COVENANTS.

(a)       Rank.      All payments due under this Note (a) shall rank pari passu with all Other Notes and (b) shall be senior to
all other Indebtedness of the Company, other than Senior Indebtedness,
Capitalized Lease Obligations and Purchase Money Indebtedness.  The Holder of this Note, and each Person
holding this Note, whether upon original issue or upon registration of
transfer, assignment or exchange hereof, agrees for the benefit of all holders
of Senior Indebtedness, whether outstanding on the date of this Note or
thereafter incurred, that the payment of all amounts, expenses, fees,
principal, premium, Interest, Late Charges and any and all other obligations of
any kind of the Company owed in connection with this Note shall be subordinated
to the extent and in the manner hereinafter set forth, to the prior payment in
full in cash of all amounts owing in connection with such Senior
Indebtedness.  Upon the occurrence of an
event of default under the Senior Indebtedness entitling the holder thereof to
accelerate the scheduled payment of such Senior Indebtedness (other than a
payment default described in the immediately preceding sentence), the holder of
this Note shall not be entitled to payment hereunder for a period of 180 days
after notice thereof to such Holder and all holders of Other Notes or until
such default is cured or waived.  If,
during such period, the Holder of this Note shall receive any property or
assets from the Company or any of its controlled affiliates, such property or
assets shall be held by the Holder hereof in trust for the benefit of holders
of Senior Indebtedness.  The holders of
Senior Indebtedness shall not have the right to deliver more than one such
notice in any 12-month period and shall not be entitled to deliver more than
one notice by virtue of the same facts giving rise to such default. If at any
time following a blockage of payments to the holder of the Note pursuant to
this paragraph, the holder of the Note is no longer prohibited from receiving
any payments related to the note, the holder of the Note shall be entitled to
receive all payments with respect to the Note that have been blocked together
with any default interest to the extent provided for by the Note.  Nothing in this paragraph shall prevent the
existence or occurrence of an Event of Default that would otherwise exist or
occur under this Note by virtue of such nonpayment or otherwise, or the Holder’s
other rights as against the Company (which failure shall also be publicly
disclosed in conjunction with such certification).

(b)       Incurrence of Indebtedness.  So long as this Note is outstanding, the Company shall not, and
the Company shall not permit any of its Subsidiaries to, directly or
indirectly, incur or guarantee, assume or suffer to exist any Indebtedness,
other than (i) the Indebtedness evidenced by this Note and the Other Notes and
(ii) Permitted Indebtedness.

 6
 

 

 

(c)       Existence of Liens.  So
long as this Note is outstanding, the Company shall not, and the Company
shall not permit any of its Subsidiaries to, directly or indirectly, allow or
suffer to exist any mortgage, lien,
pledge, charge, security interest or other encumbrance upon or in any property
or assets (including accounts and contract rights) owned by the Company
or any of its Subsidiaries (collectively, “Liens”)
other than Permitted Liens.

(d)       Restricted Payments.  The
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, redeem, defease, repurchase, repay or make any payments
in respect of, by the payment of cash or cash equivalents (in whole or in part,
whether by way of open market purchases, tender offers, private transactions or
otherwise), all or any portion of any Permitted Indebtedness (other than the Senior Indebtedness or as otherwise
permitted or provided under this Note or the Other Notes), whether by way of
payment in respect of principal of (or premium, if any) or interest on, such
Indebtedness if at the time such payment is due or is otherwise made or, after
giving effect to such payment, an event constituting, or that with the passage
of time and without being cured would constitute, an Event of Default has
occurred and is continuing.

(11)         PARTICIPATION.  The Holder, as the holder of this Note, shall
not be entitled to any dividends paid or distributions made to the holders of
Common Stock.

(12)         VOTE TO ISSUE, OR CHANGE THE TERMS
OF, NOTES.  The affirmative vote at a
meeting duly called for such purpose or the written consent without a meeting
of the Required Holders shall be required for any change or amendment to this
Note or the Other Notes.

(13)         TRANSFER.  This Note may be offered, sold, assigned or
transferred by the Holder without the consent of the Company, subject only to
the provisions of Section 2(f) of the Securities Purchase Agreement.

(14)         REGISTRATION. 
The Company shall maintain a register (the “Register”) for the recordation of the names and addresses of
the holders of each Note and the principal amount of the Notes held by such
holders (the “Registered Notes”).  The entries in the Register shall be
conclusive and binding for all purposes absent manifest error.  The Company and the holders of the Notes
shall treat each Person whose name is recorded in the Register as the owner of
a Note for all purposes, including, without limitation, the right to receive
payments of principal and interest hereunder, notwithstanding notice to the
contrary.  A Registered Note may be
assigned or sold in whole or in part only by registration of such assignment or
sale on the Register.  Upon its receipt
of a request to assign or sell all or part of any Registered Note by a Holder,
the Company shall record the information contained therein in the Register and
issue one or more new Registered Notes in the same aggregate principal amount
as the principal amount of the surrendered Registered Note to the designated
assignee or transferee pursuant to Section 21.

(15)         REISSUANCE OF THIS NOTE.

(a)       Transfer.  If this Note is to be transferred, the Holder
shall surrender this Note to the Company, whereupon the Company will forthwith
issue and deliver upon the written order of the Holder a new Note (in
accordance with Section 15(d)), registered

 7
 

 

 

in the Company’s Register of Notes as the
Holder may request in writing , representing the outstanding Principal being
transferred by the Holder and, if less then the entire outstanding Principal is
being transferred, a new Note (in accordance with Section 15(d)) to the Holder
representing the outstanding Principal not being transferred.  The Holder and any assignee, by acceptance of
this Note, acknowledge and agree that, by reason of the provisions of this
Section 15(a), following redemption of any portion of this Note, the
outstanding Principal represented by this Note may be less than the Principal
stated on the face of this Note.

(b)       Lost, Stolen or Mutilated Note.  Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 15(d)) representing the outstanding Principal.

(c)       Note Exchangeable for Different
Denominations.  This Note is
exchangeable, upon the surrender hereof by the Holder at the principal office
of the Company, for a new Note or Notes (in accordance with Section 15(d) and
in principal amounts of at least $100,000 and multiples of $10,000)
representing in the aggregate the outstanding Principal of this Note, and each
such new Note will represent such portion of such outstanding Principal as is
designated by the Holder at the time of such surrender.

(d)       Issuance of New Notes.  Whenever the Company is required to issue a
new Note pursuant to the terms of this Note, such new Note (i) shall be of like
tenor with this Note, (ii) shall represent, as indicated on the face of such
new Note, the Principal remaining outstanding (or in the case of a new Note
being issued pursuant to Section 15(a) or Section 15(c), the Principal
designated by the Holder which, when added to the principal represented by the
other new Notes issued in connection with such issuance, does not exceed the
Principal remaining outstanding under this Note immediately prior to such
issuance of new Notes), (iii) shall have an issuance date, as indicated on the
face of such new Note, which is the same as the Issuance Date of this Note,
(iv) shall have the same rights and conditions as this Note (subject, however,
to any actions already taken under or with respect to this Note at any time
prior thereto), and (v) shall represent accrued unpaid Interest and Late
Charges on the Principal and Interest of this Note, from the Issuance Date.

(16)         REMEDIES, CHARACTERIZATIONS, OTHER
OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Note shall be
cumulative and in addition to all other remedies available under this Note and
any of the other Transaction Documents at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit the Holder’s right to pursue actual and consequential damages for
any failure by the Company to comply with the terms of this Note.  Amounts set forth or provided for herein with
respect to payments, redemption and the like (and the computation thereof)
shall be the amounts to be received by the Holder and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof).  The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder and that the remedy at law for any such breach
may be inadequate.  The Company therefore
agrees that, in the event of any such breach

 8
 

 

 

or threatened breach, the Holder shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required.

(17)         PAYMENT OF COLLECTION, ENFORCEMENT
AND OTHER COSTS.  If (a) this Note is
placed in the hands of an attorney for collection or enforcement or is
collected or enforced through any legal proceeding or the Holder otherwise
takes action to collect unpaid amounts due under this Note or to enforce the
provisions of this Note or (b) there occurs any bankruptcy, reorganization,
receivership of the Company or other proceedings affecting Company creditors’
rights and involving a claim under this Note, then the Company shall pay the
reasonable costs incurred by the Holder for such collection, enforcement or
action or in connection with such bankruptcy, reorganization, receivership or
other proceeding, including, but not limited to, attorneys’ fees and
disbursements.

(18)         CONSTRUCTION; HEADINGS.  This Note shall be deemed to be jointly
drafted by the Company and all the Holders and shall not be construed against
any person as the drafter hereof.  The
headings of this Note are for convenience of reference and shall not form part
of, or affect the interpretation of, this Note.

(19)         FAILURE OR INDULGENCE NOT WAIVER.  No failure or delay on the part of the Holder
in the exercise of any power, right or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.

(20)         DISPUTE RESOLUTION.  In the case of a dispute as to the
determination of the arithmetic calculation of any Redemption Price, the
Company shall submit the disputed determinations or arithmetic calculations via
facsimile within one (1) Business Day of receipt of the Redemption Notice or
other event giving rise to such dispute, as the case may be, to the
Holder.  If the Holder and the Company
are unable to agree upon such determination or calculation within one (1)
Business Day of such disputed determination or arithmetic calculation being
submitted to the Holder, then the Company shall, within one (1) Business Day
submit via facsimile the disputed arithmetic calculation of any Redemption
Price to the Company’s independent, outside accountant.  The Company, at the Company’s expense, shall
cause the accountant to perform the determinations or calculations and notify
the Company and the Holder of the results no later than five (5) Business Days
from the time it receives the disputed determinations or calculations.  Such accountant’s determination or
calculation shall be binding upon all parties absent demonstrable error.

(21)         NOTICES; PAYMENTS.

(a)       Notices.  Whenever notice is required to be given under
this Note, unless otherwise provided herein, such notice shall be given in accordance
with Section 9(f) of the Securities Purchase Agreement.  The Company shall provide the Holder with
prompt written notice of all actions taken pursuant to this Note, including in
reasonable detail a description of such action and the reason therefore.

 9

 

 

(b)       Payments.  Whenever any payment of cash is to be made by
the Company to any Person pursuant to this Note, such payment shall be made in
lawful money of the United States of America by a check drawn on the account of
the Company and sent via overnight courier service to such Person at such
address as previously provided to the Company in writing (which address, in the
case of each of the Holders, shall initially be as set forth on the Schedule of
Buyers attached to the Securities Purchase Agreement); provided that the Holder
may elect to receive a payment of cash via wire transfer of immediately
available funds by providing the Company with prior written notice setting out
such request and the Holder’s wire transfer instructions.  Whenever any amount expressed to be due by
the terms of this Note is due on any day which is not a Business Day, the same
shall instead be due on the next succeeding day which is a Business Day and, in
the case of any Interest Date which is not the date on which this Note is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of Interest due on such date.  Any amount of Principal or other amounts due
under the Transaction Documents, other than Interest, which is not paid when
due shall result in a late charge being incurred and payable by the Company in
an amount equal to interest on such amount at the rate of fifteen percent (15%)
per annum from the date such amount was due until the same is paid in full (“Late
Charge”).

(22)         CANCELLATION.  After all Principal, accrued Interest and
other amounts at any time owed on this Note has been paid in full, this Note
shall automatically be deemed canceled, shall be surrendered to the Company for
cancellation and shall not be reissued.

(23)         WAIVER OF NOTICE.  To the extent permitted by law, the Company
hereby waives demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement
of this Note and the Securities Purchase Agreement.

(24)         GOVERNING LAW; JURISDICTION; JURY
TRIAL.  This Note shall be construed
and enforced in accor­dance with, and all questions concerning the
construction, validity, interpretation and performance of this Note 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.  The Company 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.  The Company
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 it set forth on the signature page hereto 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.  In the event that any provision of this Note
is invalid or unenforceable under any applicable statute or rule of law, then
such provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute

  	  
 	 10
 	  
 

 
  
 

 

 

or rule of law. 
Any such provision which may prove invalid or unenforceable under any
law shall not affect the validity or enforceability of any other provision of
this Note.  Nothing contained herein
shall be deemed or operate to preclude the Holder from bringing suit or taking
other legal action against the Company in any other jurisdiction to collect on
the Company’s obligations to the Holder, to realize on any collateral or any
other security for such obligations, or to enforce a judgment or other court
ruling in favor of the Holder.  THE COMPANY 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 NOTE OR ANY
TRANSACTION CONTEMPLATED HEREBY.

(25)         CERTAIN DEFINITIONS.  For purposes of this Note, the following
terms shall have the following meanings:

(a)       “Amscan Subordination Agreement”
shall mean the Subordination Agreement, among the Holder, Amscan, Inc. and the
Company, with respect to certain indebtedness of the Company to Amscan, Inc,
which shall be reasonably satisfactory to the Holder in form and substance.

(b)       “Business
Day” means any day
other than Saturday, Sunday or other day on which commercial banks in The City
of New York are authorized or required by law to remain closed.

(c)       “Calendar
Quarter” means each
of: the period beginning on and including January 1 and ending on and including
March 31; the period beginning on and including April 1 and ending on and
including June 30; the period beginning on and including July 1 and ending on
and including September 30; and the period beginning on and including October 1
and ending on and including December 31.

(d)       “Capitalized
Lease Obligations” means without duplication, all monetary
obligations of the Company or any of its Subsidiaries under any leasing or
similar arrangement which, in accordance with GAAP, would be classified as
capitalized leases, and, for purposes of this Agreement and each other
Transaction Document, the amount of such obligations shall be the capitalized
amount thereof, determined in accordance with GAAP and the amount of such
obligations outstanding at any one time shall not to exceed $1,500,000 in the
aggregate.

(e)       “Change of Control” means any Fundamental Transaction other
than (i) any reorganization, recapitalization or reclassification of the Common
Stock in which holders of the Company’s voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving entity
or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (ii) pursuant to a migratory merger effected solely for the
purpose of changing the jurisdiction of incorporation of the Company.

  	  
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(f)        “Common Stock”
means the common stock, par value $.001 per share, of the Company.

(g)       “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.

(h)       “Eligible
Institutional Lender” means (I) with respect to any transfer by
Wells Fargo Retail Finance II, LLC or any of its affiliates (a “Wells Fargo Entity”) during the continuance
of an Event of Default (as defined in the Senior Indebtedness Agreement), any
Person and (II) otherwise, (a) any Wells Fargo Entity, (b) a commercial bank
having total assets in excess of $5,000,000,000 or any affiliate or subsidiary
thereof, so long as such affiliate or subsidiary is (i) not an investment fund,
managed account or other similar investment vehicle or an investment adviser
(as defined in the Investment Advisers Act of 1940, as amended) to any such
investment fund, managed account or other similar investment vehicle or an
entity directly or indirectly established by or on behalf of any of the foregoing,
(ii) regularly engaged in the business of lending to companies in the retail
industry, and (iii) regularly engaged in the business of providing asset based
loans, (c) a savings and loan association or savings bank organized under the
laws of the United States or any State thereof having a net worth, determined
in accordance with GAAP, in excess of $250,000,000, (d) GMAC, GE Capital, Fleet
Capital, Gordon Brothers, CIT Group, or Brookside Capital, or (e) any other
entity acceptable to the Holder.

(i)        “Eligible Market” means the Principal Market, The New York
Stock Exchange, Inc., the American Stock Exchange, the Nasdaq National Market
or The Nasdaq Capital Market.

(j)        “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into (whether or
not the Company is the surviving corporation) another Person, or (ii) sell,
assign, transfer, convey or otherwise dispose of all or substantially all of
the properties or assets of the Company to another Person, or (iii) allow another
Person or Persons to make a purchase, tender or exchange offer that is accepted
by the holders of more than the 50% of the outstanding shares of Voting Stock (not including any shares of
Voting Stock held by the Person or Persons making or party to, or associated or
affiliated with the Person or Persons making or party to, such purchase, tender
or exchange offer), or (iv) consummate a stock purchase agreement or
other business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby such other
Person acquires more than the 50% of either the outstanding shares of
Voting Stock (not including
any shares of Voting Stock held by the other Person or other Persons making or
party to, or associated or affiliated with the other Persons making or party
to, such stock purchase agreement or other business combination), or (v) reorganize, recapitalize
or reclassify its Common Stock, (vi) any “person” or “group” (as these
terms are

  	  
 	 12
 	  
 

 
  
 

 

 

used for purposes of Sections 13(d) and 15(d)
of the Exchange Act) is or shall become the “beneficial owner” (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% of the issued
and outstanding Common Stock or the aggregate ordinary voting power represented
by issued and outstanding Common Stock.

(k)       “GAAP” means United States generally accepted accounting
principles, consistently applied.

(l)        “Indebtedness” of any Person means, without duplication (i)
all indebtedness for borrowed money, (ii) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services, including
(without limitation) “capital leases” in accordance with generally accepted accounting
principles (other than trade payables entered into in the ordinary course of
business), (iii) all reimbursement or payment obligations with respect to
letters of credit, surety bonds and other similar instruments, (iv) 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, (v) 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), (vi) 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, (vii) all indebtedness referred to in clauses
(i) through (vi) 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 (viii) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (i) through (vii) above.

(m)      “Interest
Rate” means the Prime Rate as of the
first (1st) Business
Day of each Calendar Quarter plus one percent (1.0%).

(n)       “Outstanding Amount” means the sum of (A)
the portion of the Principal to be redeemed or otherwise with respect to which
this determination is being made, (B) accrued and unpaid Interest with respect
to such Principal and (C) accrued and unpaid Late Charges with respect to such
Principal and Interest.

(o)       “Parent
Entity” of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common stock or
equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such
Person or Parent Entity, the Person or Parent Entity with the largest public
market capitalization as of the date of consummation of the Fundamental
Transaction.

(p)       “Party City Subordination Agreement” shall mean that certain
subordination agreement, dated as of the Issuance Date, among Party City
Corporation, the

  	  
 	 13
 	  
 

 
  
 

 

 

Holder and the Company with respect to
certain indebtedness of the Company to Party City Corporation.

(q)       “Permitted Indebtedness” means (A) the Senior Indebtedness,
(B) Indebtedness incurred by the Company that is made expressly subordinate in
right of payment to the Indebtedness evidenced by this Note, as reflected in a
written agreement acceptable to the Holder and approved by the Holder in writing,
and which Indebtedness does not provide at any time for (1) the payment,
prepayment, repayment, repurchase or defeasance, directly or indirectly, of any
principal or premium, if any, thereon until ninety-one (91) days after the
Maturity Date or later and (2) total interest and fees at a rate in excess of
the Interest Rate hereunder (C) Indebtedness secured by Permitted Liens, (D)
Capitalized Lease Obligations, (E) Purchase Money Indebtedness, (F)
Indebtedness to trade creditors incurred in the ordinary course of business,
(G) Indebtedness of the Company to Amscan, Inc. and Party City Corporation,
which is covered by the terms of the Amscan Subordination Agreement and the
Party City Subordination Agreement, respectively, and (H) extensions, refinancings
and renewals of any items of Permitted Indebtedness, provided that the
principal amount is not increased or the terms modified to impose more
burdensome terms upon the Company or its Subsidiary, as the case may be.

(r)        “Permitted Liens”
means (i) any Lien for taxes not yet due or delinquent or being
contested in good faith by appropriate proceedings for which adequate reserves
have been established in accordance with GAAP, (ii) any statutory Lien arising
in the ordinary course of business by operation of law with respect to a
liability that is not yet due or delinquent, (iii) any Lien created by
operation of law, such as materialmen’s liens, mechanics’ liens and other
similar liens, arising in the ordinary course of business with respect to a
liability that is not yet due or delinquent or that are being contested in good
faith by appropriate proceedings, (iv)
Liens securing the Company’s obligations under the Notes, (v) Liens (A) upon or
in any equipment acquired or held by the Company or any of its Subsidiaries to
secure the purchase price of such equipment or indebtedness incurred solely for
the purpose of financing the acquisition or lease of such equipment, or (B)
existing on such equipment at the time of its acquisition, provided that the
Lien is confined solely to the property so acquired and improvements thereon,
and the proceeds of such equipment, (vi) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clauses (i) and (v) above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the Indebtedness being extended,
renewed or refinanced does not increase, (vii) Liens securing the Company’s
obligations under the Senior Indebtedness, Capitalized Lease Obligations and
Purchase Money Indebtedness; (viii) leases or subleases and licenses and
sublicenses granted to others in the ordinary course of the Company’s business,
not interfering in any material respect with the business of the Company and
its Subsidiaries taken as a whole, (ix) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payments of custom duties in
connection with the importation of goods and (x) Liens arising from judgments,
decrees or attachments in circumstances not constituting an Event of Default
under Section 3(a)(v).

  	  
 	 14
 	  
 

 
  
 

 

 

(s)       “Person” means an individual, a limited
liability company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization, any other entity 
and a government or any department or agency thereof.

(t)        “Present Value of Interest” means
the amount of any interest that, but for a Voluntary Prepayment, would have
accrued under this Note at the Interest Rate for the period from the Voluntary
Prepayment Date through the Maturity Date discounted to the present value of
such interest using a discount rate equal to the Interest Rate in effect on the
applicable date of determination.

(u)       “Prime Rate” shall mean as of a particular date, the prime
rate of interest as published on that date in The Wall Street Journal
(Eastern Edition), and generally defined therein as “the base rate on corporate
loans posted by at least 75% of the nation’s 30 largest banks.”  If The Wall Street Journal is not
published on a date for which the Prime Rate must be determined, the Prime Rate
shall be the prime rate published in The Wall Street Journal on the
nearest-preceding date on which The Wall Street Journal was published.

(v)       “Principal
Market” means the American Stock Exchange.

(w)      “Purchase
Money Indebtedness” means Indebtedness used to acquire fixed assets
for the Company or any of its Subsidiaries, obtained for the sole purpose of
financing all or any part of the acquisition cost thereof, which may be secured
by such assets, but is otherwise non-recourse to the Company and its
Subsidiaries.

(x)        “Redemption
Notices” means, collectively, the Event of Default Redemption
Notices and the Change of Control Redemption Notices, and, each of the
foregoing, individually, a Redemption Notice.

(y)       “Redemption
Prices” means, collectively, the Event of Default Redemption Price
and the Change of Control Redemption Price, and, each of the foregoing,
individually, a Redemption Price.

(z)        “Required Holders” means the holders of Notes representing at
least a majority of the aggregate principal amount of the Notes then
outstanding.

(aa)     “SEC” means the United States Securities
and Exchange Commission.

(bb)     “Securities
Purchase Agreement”
means that certain securities purchase agreement dated the Subscription Date by
and among the Company and the initial holders of the Notes pursuant to which
the Company issued the Notes.

(cc)     “Senior
Indebtedness” means Indebtedness, in an amount not to exceed $15
million in the aggregate outstanding at any one time, under that certain Loan
and Security Agreement, by and among the Company and certain of its
Subsidiaries and Wells Fargo Retail Finance II, LLC, dated as of August 23,
2000, as amended by the First Amendment to Loan and Security Agreement dated as
of May 23, 2002, as amended by the Second Amendment to Loan and Security
Agreement dated as of January 2, 2004, as amended

  	  
 	 15
 	  
 

 
  
 

 

 

by the Third Amendment to Loan and Security
Agreement dated as of April 27, 2005 (the “Third Amendment”), as amended by the Fourth Amendment to
Loan and Security Agreement dated as of January 17, 2006 (the “Fourth Amendment”), and as amended by a Consent and Fifth
Amendment to Loan Agreement dated as of August 7, 2006, and any amendment,
restatement, extensions, refinancings and renewals of such Senior Indebtedness
(the “Senior Indebtedness Agreement”),
provided that such terms do not: (i) require any payment to be made earlier
than any date originally required in the Senior Indebtedness Agreement; (ii)
change the amount or schedule of any prepayment of principal, if any (other
than to reduce the amount of such payment), (iii) increase the interest rate of
the Senior Indebtedness above the highest rate of interest specified therein as
of the date hereof (it being understood that the imposition of a default rate
of interest in the amount and under the circumstances as permitted in such
Senior Indebtedness Agreement as in effect on the date hereof and the provision
of a LIBOR option at a rate less than the base rate option provided under the
Senior Indebtedness Agreement shall not be restricted by this clause (iii)), or
(iv) amend the borrowing base (or any component thereof) to provide the
borrowers thereunder with more credit availability; provided, however,
the Senior Indebtedness Agreement may be amended, without limitation: (a) to
provide a seasonal amendment, consistent with past practices and substantially
in the form of the Third Amendment or the Fourth Amendment (excluding the waiver
of default contained therein), (b) to increase the maximum amount of credit
available under the Senior Indebtedness Agreement, provided the sum of such
credit available under the Senior Indebtedness Agreement and any outstanding
Senior Indebtedness, in the aggregate, at any one time does not exceed $15
million, and (c) to reflect an assignment of such Senior Indebtedness,
provided, that such assigned Senior Indebtedness shall not be held by any
entity other than an Eligible Institutional Lender.”

(dd)     “Senior
Lender” shall mean Wells Fargo Retail Finance II, LLC or such
successor lender pursuant to any outstanding Senior Indebtedness.

(ee)     “Subordination
Agreement” shall mean that certain subordination agreement with
respect to the Senior Indebtedness, by and among Wells Fargo Retail Finance II,
LLC and the Holder, dated on even date herewith, as such may be amended from
time to time.

(ff)       “Subscription Date” means September 15, 2006.

(gg)     “Successor
Entity” means the Person, which may be the Company, formed by, resulting from or
surviving any Fundamental Transaction or the Person with which such Fundamental
Transaction shall have been made, provided that if such Person is not a publicly
traded entity whose common stock or equivalent equity security is quoted or
listed for trading on an Eligible Market, Successor Entity shall mean such
Person’s Parent Entity.

(hh)     “Trading
Day” means any day
on which the Common Stock are traded on the Principal Market, or, if the
Principal Market is not the principal trading market for the Common Stock, then
on the principal securities exchange or securities market on which the Common
Stock are then traded.

  	  
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(ii)       “Voting
Stock” of a Person means capital stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
to elect, or the general power to appoint, at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time capital stock of any other class or classes shall have or might
have voting power by reason of the happening of any contingency).

(26)         DISCLOSURE.
Upon receipt or delivery by the Company of any notice in accordance with the
terms of this Note, unless the Company has in good faith determined that the
matters relating to such notice do not constitute material, nonpublic
information relating to the Company or its Subsidiaries, the Company shall
within one (1) Business Day after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K
or otherwise. In the event that the Company believes that a notice contains
material, nonpublic information, relating to the Company or its Subsidiaries,
the Company shall indicate to the Holder contemporaneously with delivery of
such notice, and in the absence of any such indication, the Holder shall be
allowed to presume that all matters relating to such notice do not constitute
material, nonpublic information relating to the Company or its Subsidiaries.

[Signature Page Follows]

 

  	  
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IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed as of the Issuance Date set out above.

	
  

  	
  IPARTY CORP.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ SAL PERISANO

  
	
   

  	
   

  	
  Name: Sal Perisano

  
	
   

  	
   

  	
  Title: Chief Executive Officer

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