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

                                   FORM 10-KSB

                                   (MARK ONE)

                 [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934.

                   FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001

                                       OR

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

                        FOR THE TRANSITION PERIOD FROM TO

                         COMMISSION FILE NUMBER 0-25507

                                  IPARTY CORP.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
                       ----------------------------------

                     DELAWARE                                      76-0547750
         (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
         INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)

                  1457 VFW PARKWAY                                     02132
            WEST ROXBURY, MASSACHUSETTS                              (ZIP CODE)
     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (617) 323-0822

                (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)

         SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

    COMMON STOCK, $.001 PAR VALUE                AMERICAN STOCK EXCHANGE
        (TITLE OF EACH CLASS)        (NAME OF EACH EXCHANGE ON WHICH REGISTERED)

       SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: NONE

     Check  whether  the issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing  requirements  for the past 90 days.  Yes /x/ No
/_/

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-B is not contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /x/

     The Issuer's  revenues for its most recent  fiscal year ended  December 29,
2001 were $47,983,404.

     On March 26, 2002,  the  aggregate  market value of the voting stock of the
Registrant  (consisting of common stock,  $.001 par value (the "Common  Stock"))
held by non-affiliates  of the Registrant was approximately  $5,209,852 based on
the closing price for such Common Stock on said date as reported by the American
Stock Exchange.
On March 26,  2002,  there were  15,787,430  shares of Common  Stock,  $.001 par
value, issued and outstanding.


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                                     PART I

ITEM 1. BUSINESS

  Our History

     We were previously known as WSI  Acquisitions,  Inc. and were  incorporated
under  the laws of the  State of  Texas.  On June 30,  1998,  in order to change
domicile, WSI Acquisitions, Inc. merged with WSI Acquisitions, Corp., a Delaware
corporation, with WSI Acquisitions, Corp. being the surviving entity. On July 2,
1998, iParty Corp., a Delaware corporation,  which was a wholly-owned subsidiary
of  iParty  LLC,  a  Delaware  limited  liability   company,   merged  into  WSI
Acquisitions, Corp. and WSI Acquisitions, Corp. changed its name to iParty Corp.
iParty LLC,  which was created on December 11,  1997,  commenced  operations  in
January 1998 to launch an  Internet-based  merchant of party goods and services.
As a result of the merger, iParty LLC became our majority  shareholder.  Neither
WSI Acquisitions,  Corp. nor WSI Acquisitions,  Inc. had operations prior to the
merger with iParty Corp.

     On December  15, 2000,  we moved our  executive  offices to West  Roxbbury,
Massachusetts  from New York, New York. Our executive offices are now located at
1457 VFW Parkway, West Roxbury, Massachusetts,  02132. Our phone number is (617)
323-0822. Our web site is located at  http://www.iparty.com.  The information on
our web site is not a part of this Report.

  Our Business

     We intend to become a  leading  brand in the party  industry  and a leading
resource for consumers  seeking party goods,  party planning advice and relevant
information.  We are a  multi-channel  retailer  through the operation of our 33
retail stores and our Internet  site.  This year we expect to further  integrate
the marketing and positioning of these channels and by 2003 we expect to provide
an integrated shopping experience to our consumers.

  Retail Operation

     On August 3,  2000,  iParty  Retail  Stores  Corp.  ("iParty  Retail")  was
incorporated  as a wholly owned  subsidiary of the Company to operate a chain of
retail stores selling party goods.  On August 15, 2000,  iParty Retail  acquired
certain  assets  from The Big Party  Corporation  ("The Big  Party"),  which was
operating under the protection of the Bankruptcy Court of the State of Delaware.
iParty  Retail  acquired  inventory,  fixed  assets  and the leases of 33 retail
stores from The Big Party in  consideration  of cash and  assumption  of certain
liabilities.  The Big Party filed for  bankruptcy  protection  during the second
quarter of 2000 and the acquisition was approved by the United States Bankruptcy
Court, District of Delaware on August 16, 2000.

     The retail  stores are  located  throughout  New  England  with the highest
concentration of 18 stores in Massachusetts.  Of the others, five are located in
Connecticut,  three in Rhode Island,  three in New  Hampshire,  one in Maine and
three in Florida. Our stores average 10,000 square feet in size and feature over
20,000  products  ranging  from  greeting  cards  and  balloons  to more  unique
merchandise such as pinatas, gag gifts,  masquerade and Hawaiian Luau items. Our
sales are driven by the  following  events:  New Year's,  Valentine's  Day,  St.
Patrick's  Day,  Easter,  Memorial Day,  Fourth of July,  Labor Day,  Halloween,
Thanksgiving,  Christmas and Chanukah and lifetime events such as anniversaries,
graduations, birthdays, and bridal or baby showers.

  Internet Operation

     We intend to become the premier brand in the on-line party industry and the
leading  resource on the  Internet for  consumers  seeking  party  goods,  party
services,  party  planning  advice and  information.  Our web site was initially
launched in February 1999.

     From children's birthday parties to weddings,  from Super Bowl to Halloween
parties, we intend to make it easy and convenient for the party-giving  consumer
to select themes,  make  comprehensive  plans, and purchase all of the goods and
services needed for a successful  event.  Our  operational  goal is to provide a

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simple,  seamless transaction process for the consumer. When a consumer comes to
our web site,  the consumer is able to select a theme,  fill a virtual  shopping
basket  with  goods  and  services,  and pay for  everything  at one time at the
check-out  screen.  Once the order has been placed,  the consumer is notified of
the order's  status via e-mail.  The consumer is also able to dial our toll-free
number,  1-800-4iParty,  to talk to a  customer  service  representative  who is
knowledgeable about our products.

     Taymark,  one of the  largest  direct  marketers  of party  supplies in the
United  States,   provides   inventory  and  fulfillment   services  to  deliver
merchandise  ordered on our web site, or through a toll-free  telephone  number,
directly to  consumers.  Taymark  provides our customers  with customer  service
through a toll-free  telephone  number.  The initial term of our agreement  with
Taymark runs through December 31, 2002 and it may be renewed by us under certain
circumstances.  The agreement  contains  certain  restrictions on competition by
Taymark.  Nothing in the agreement prohibits us from fulfilling orders placed on
our web site directly or through third-parties.

  The Design and Content of Our Web Site

     Our  web  site,  which  was  initially   launched  in  February  1999,  was
re-developed  and launched in October  1999.  Our goal in designing our web site
was, and continues to be, to allow the consumer to easily  navigate our web site
and to pay for everything ordered in one payment transaction without ever having
to leave our web site.

     Currently,  our web site contains two key  features:  the  PartyMarket  and
PartyTalk.  The  PartyMarket  resembles a mall of shops devoted  entirely to the
goods and services  that relate to the party theme chosen by the  consumer.  The
PartyMarket's theme channels include birthday,  milestone,  seasonal,  basic and
costumes. Within each channel, the consumer can select a specific party, such as
anniversaries  or  weddings  in the  milestone  channel or New Year's Eve in the
seasonal  channel.  Once the consumer has selected a theme, they will be able to
order party goods, favors, gift wrap, cards and invitations for direct shipment.
As the consumer selects products, the products are added to the shopping basket,
and when the consumer is finished  shopping,  the  transaction is completed at a
simple check-out screen.

     PartyTalk is a continuation of the PartyMarket.  It carries news,  articles
and  features.  The  content is directed  at our target  consumers:  mothers and
party-givers.  Articles include topics such as Tips & Trends,  the Craft Corner,
the Safety Zone and Party Tips.

     We also have a  wholly-owned  subsidiary,  StarGreetings,  Inc., a Delaware
corporation,  through which we intended to offer a  personalized  video greeting
service where celebrities talk in the greeting about the special occasion,  such
as a  birthday,  anniversary,  etc.  There  have  been  no  operations  in  this
subsidiary  since 1999 and we do not expect to invest further in this concept in
fiscal year 2002.

  Sales and Marketing

     On September 27, 1999, we entered into two separate agreements with America
Online, Inc. a Shopping Channel Promotion Agreement and an Advertising  Purchase
Agreement. Pursuant to the terms of the Shopping Channel Promotion Agreement, we
occupied  Featured  Branding  Position on the front page of AOL's Kid's,  Toys &
Babies Commerce Center.  The position featured a direct link to our web site. We
also occupied a Gold Position in AOL's Tabletop & Entertainment Commerce Center.
Total payments in connection with these agreements were to be $1.28 million. The
two agreements  were  terminated on September 29, 2000, with total payments made
through  the  termination  date  totaling  $1,166,849.  Under  the  terms of the
termination agreement, no further obligation is required from either party.

     On August 11, 1999, we entered into an 18 month  agreement  with  LinkShare
Corporation to provide services,  using  LinkShare's  proprietary  software,  to
facilitate  establishing  links between our web site and tracking  sales through
such  affiliates.  We paid LinkShare a one-time fee and will pay commissions for
sales  completed  through the system.  For the years ended December 29, 2001 and
December 30, 2000, no commission  expense was incurred under the agreement.  The

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agreement  terminated  on February 11, 2002.  No further  obligation is required
from either party.

     On December 21,  1999,  we entered into a product  license  agreement  with
Margaritaville  Holdings.  Under the agreement,  we license the "Margaritaville"
name for use in a distinct  area of our web site which we will use for the offer
and sale of Margaritaville  related products.  The initial term of the agreement
runs through December 20, 2002. We will pay a 6% royalty on the sale of products
which bear the "Margaritaville"  name. For the years ended December 29, 2001 and
December 30, 2000, we did not incur any royalty expense associated with the sale
of products which bear the "Margaritaville" name.

  Competition

     The party supplies  retailing  business is highly  competitive.  We compete
with a variety of smaller and larger retailers,  including single owner-operated
party supply stores,  specialty party supply retailers,  general mass merchants,
super markets,  department stores,  catalog and Internet stores. Our competitors
include Hallmark and American Greetings for cards and invitations, Party City in
the retail business, and Celebrate Express in the Internet business.

     Although  barriers to entry are minimal,  as new  competitors  can open new
stores  and/or  launch new Internet  sites at a relatively  low cost, we believe
that the costs to remain  competitive,  can be significant.  These costs include
the  development of a robust site,  the hiring of human  resources with industry
knowledge  and  the  marketing   costs   associated   with  the  building  of  a
widely-recognized brand.

  Intellectual Property

     The concept underlying the StarGreetingsSM  personalized  greeting services
is licensed to StarGreetings  Inc. for 20 years pursuant to a License  Agreement
dated August 15, 1998,  by and between  StarGreetings  Inc. and Star  Greetings,
LLC, a Delaware limited liability company.

     A    provisional    patent    application    for    our     StarGreetingsSM
"athlete/celebrity"  video greeting  concept was filed with the U.S.  Patent and
Trademark  Office on November  20, 1998 in the name of Mr.  Byron Hero, a former
director,  a principal  shareholder and our former Chief Executive Officer.  Mr.
Hero has agreed to assign the patent, if issued, to StarGreetings LLC which will
in turn assign the patent to StarGreetings,  Inc. We filed a patent  application
covering the StarGreeting concept in the third quarter of 1999.

     We  have   applied   for  the   trademarks   "iParty",   "iParty.com"   and
"StarGreetings". Three applications for the trademarks "iParty" and "iParty.com"
were  filed  with the U.S.  Patent and  Trademark  Office on April 29,  1999 and
October 3, 2000. The  application  for the trademark  "StarGreetings"  was filed
with the U.S.  Patent and  Trademark  Office on August 17, 1999.  One  trademark
registration   for   "iParty"  was  issued  on  February  19,  2002  under  U.S.
registration No. 2,541,025.

  Employees

     We have 190 full-time  employees and 600 part-time  employees.  None of our
employees are  represented  by a labor union,  and we consider our  relationship
with our employees to be good.

ITEM 2. PROPERTIES

     The Company leases all of its retail stores.  The leases generally  provide
for a fixed  minimum  rental  and a rental  based on a percent  of sales  once a
minimum sales level has been reached.

     We  lease  office  and  retail  space at 1457 VFW  Parkway,  West  Roxbury,
Massachusetts,  02132.  The lease,  which runs through  October 9, 2002,  is for
20,000  square feet. We are currently in the process of extending the lease term
through  December  2012.  The  retail  store  uses  10,688  square  feet and the
remainder is used for our corporate  office.  The total monthly rent is $10,219.
We believe that our space is adequate for our immediate  needs.  We believe that
this property is adequately covered by insurance.

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     We leased office space at 130 West 30th Street,  10th Floor,  New York, New
York 10001.  The lease ran through  March 31, 2005.  The total  monthly rent was
$17,833.  In June 2001 the landlord  recaptured the New York office relieving us
of any obligation on the lease agreement.

ITEM 3. LEGAL PROCEEDINGS

     Pursuant to an Asset Purchase  Agreement  dated August 2, 2000, as amended,
we  purchased  from The Big Party,  Debtor and  Debtor-in-Possession,  33 retail
locations and the assets located therein,  including  inventory.  We and The Big
Party were in disagreement concerning the value and amount due on account of the
inventory. In addition, the parties set up a $100,000 escrow of funds paid under
the agreement as security for rental payments and other adjustments due, and the
parties were in discussions  concerning the portion thereof which belongs to us.
The Big Party filed a complaint with the U.S.  Bankruptcy Court for the District
of  Delaware  in January  2001  seeking  payment of  $625,568  on account of the
inventory.  Both parties  agreed to a  settlement  amount of $357,500 in October
2001. The settlement was approved by the U.S.  Bankruptcy Court for the District
of Delaware in November 2001. The settlement  amount,  which was paid in January
2002 was adequately reserved for at December 29, 2001.

     We are not a party to any other material pending legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not Applicable.


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                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

  Principal Market

     The American Stock  Exchange is the principal  market for our Common Stock,
where our shares are traded under the symbol "IPT."

  Market Information

     The following table sets forth the range of high and low bid quotations for
our Common Stock for each of the quarters of the fiscal years ended December 30,
2000 and December 29, 2001. Our Common Stock began trading on the American Stock
Exchange  under the name  iParty  Corp.,  symbol  "IPT" on January 3, 2000.  Our
Common  Stock was quoted on the OTC  Electronic  Bulletin  Board  under the name
iParty  Corp.,  symbol "IPTY"  commencing  July 1998.  Prior to that time,  from
February 1998,  until July 1998, our Common Stock was quoted on the OTC Bulletin
Board under the name of WSI Acquisitions,  Inc.,  symbol "WSIA".  The quotations
represent inter-dealer prices without retail markup, mark down or commission and
may not necessarily represent actual transactions.

PERIOD                                                            HIGH      LOW
------                                                            ----      ---
Fourth Quarter--2001..........................................   $0.70    $0.15
Third Quarter--2001...........................................    0.27     0.09
Second Quarter--2001..........................................    0.25     0.10
First Quarter--2001...........................................    0.30     0.12
Fourth Quarter--2000..........................................   $0.31    $0.13
Third Quarter--2000................................. ..........   0.69     0.25
Second Quarter--2000................................. .........   2.38     0.38
First Quarter--2000...........................................    4.25     2.06

  Dividends

     We have never  paid a cash  dividend  on our shares of Common  Stock and we
have no present expectation of doing so in the foreseeable future.

  Approximate Number of Equity Security Holders

     The  approximate  number of record  holders of our Common Stock as of March
26,  2002,  was 105.  Such  number  of record  owners  was  determined  from our
shareholder  records, and does not include beneficial owners of our Common Stock
whose  shares are held in the names of various  security  holders,  dealers  and
clearing agencies. We believe that the number of beneficial owners of our Common
Stock held by others as or in nominee names exceeds 500 in number.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

     Certain   statements  in  this  Form  10-KSB  constitute   "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of  1995  (the  "Act").  The  words  "anticipates,"   "believes,"   "estimates,"
"expects,"  "plans,"  "intends"  and other similar  expressions  are intended to
identify these  forward-looking  statements,  but are not the exclusive means of
identifying  them.  We  desire  to avail  ourselves  of  certain  "safe  harbor"
provisions of the Act and are therefore including this special note to enable us
to do so.  Forward-looking  statements included in this Form 10-KSB or hereafter
included in other  publicly  available  documents  filed with the Securities and
Exchange  Commission,  reports to our stockholders and other publicly  available
statements   issued  or  released  by  us  involve  known  and  unknown   risks,
uncertainties,   and  other  factors  which  could  cause  our  actual  results,
performance  (financial or operating) or  achievements to differ from the future
results,  performance (financial or operating) achievements expressed or implied
by such forward looking statements.  Such future results are based upon our best
estimates  based  upon  current  conditions  and  the  most  recent  results  of
operations.  Various  risks,  uncertainties  and  contingencies  could cause our
actual  results,  performance or  achievements  to differ  materially from those
expressed in, or implied by, these  statements,  including,  but not limited to,
the  following:  the success or failure of our efforts to implement our business

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strategy; our inability to obtain additional financing, if required; third-party
suppliers failure to fulfill their obligations to us; intense  competition;  the
failure of our systems or those of our  third-party  suppliers;  and  government
regulation of the Internet.

  Overview

     We intend to become the premier  multi-channel  party supply  resource with
distribution on-line and through our retail stores.

     Our web site was  launched  in  February  1999.  On October  12,  1999,  we
launched  the new  iParty.com  site,  a  destination  for party  goods and party
planning.  From Halloween  costumes to birthday party packs to fog machines,  an
online party magazine to party safety tips,  iParty.com  presents consumers with
what we believe to be a sophisticated, yet fun and easy-to-navigate online party
resource.  Offering convenience and an extensive  assortment of merchandise,  we
believe  iParty.com is refocusing  the party goods industry back to the needs of
the consumer.  At the click of a mouse, party givers can enjoy one-stop shopping
and easy-to-find pricing while purchasing all their party needs.

     On August 15, 2000 iParty Retail Stores Corp.  purchased assets  consisting
of 33 store leases, fixtures and inventory from The Big Party Corporation.  This
enabled us to set up retail operations and to become a multi-channel  outlet for
party supplies.

     For the year ended  December 30, 2000, we changed our fiscal  year-end from
the last day of the calendar year to the last Saturday of December.  This change
was made to align the fiscal year end of the Company to its subsidiaries.

  Results of Operations

    Year ended December 29, 2001 compared to year ended December 30, 2000

     Revenue  includes the selling price of party goods sold, net of returns and
discounts,  as well as  outbound  shipping  and  handling  charges.  Revenue  is
recognized  at the time of sale for  retail  sales  and the  time  products  are
shipped to customers for Internet sales. Consolidated revenue for the year ended
December  29,  2001 and  December  30,  2000  was  $47,983,404  and  $18,619,877
respectively.  For the year ended December 29, 2001,  revenue from retail stores
totaled $47,068,935 and revenue from the Internet totaled $914,469. For the year
ended  December 30, 2000,  revenue from retail stores  totaled  $17,469,777  and
revenue from the Internet totaled  $1,150,100.  The percentage  increase for the
year ended  December 29, 2001  compared to the year ended  December 30, 2000 was
169.4% for the retail  stores.  The increase in revenue for the retail stores is
attributable  to the  Company  owning the retail  stores for the entire  year of
2001. The  percentage  decrease for the year ended December 29, 2001 compared to
the year ended  December  30, 2000 was 20.5% for the  internet.  The decrease in
revenue for the internet  reflects the decrease in promotional  programs offered
on the internet.

     Cost  of  products  sold  consists  of the  cost  of  merchandise  sold  to
customers,  store rent,  warehousing  costs, and outbound  shipping and handling
costs charged to us by our fulfillment  partner,  Taymark.  Consolidated cost of
products  sold for the years ended  December  29, 2001 and December 30, 2000 was
$28,966,573   or  60.4%  of  revenue  and   $11,734,011  or  63.0%  of  revenue,
respectively.  For the year ended December 29, 2001,  cost of products sold from
retail stores totaled  $28,255,913 or 60.0% of revenue and cost of products sold
from the  Internet  totaled  $710,660  or 77.7% of  revenue.  For the year ended
December 30, 2000, cost of products sold from retail stores totaled  $10,609,756
or 60.7% of  revenue  and  cost of  products  sold  from  the  Internet  totaled
$1,124,255  or 97.8% of revenue.  The decrease in the cost of products sold as a
percentage  of revenue  for the  internet  reflects  the  reduction  of internet
promotional programs offered by the Company.

     Amortization  of  fulfillment  partner  warrant  expense  consists  of  the
amortization  of the  estimated  fair value of the warrant  issued to Taymark to
provide inventory and fulfillment services to deliver merchandise ordered on the
site, or directly through a toll-free  telephone number,  directly to consumers.
On July 8, 1999, the Company entered into a product  fulfillment  agreement with
Taymark.  The initial term of the agreement runs through  December 31, 2002. The

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agreement  contains certain  restrictions on competition by the direct marketer.
As additional  consideration  for such  restrictions  and services,  the Company
issued a warrant to  purchase  3,000,000  shares of common  stock at an exercise
price of $3.75. The warrant expires on October 1, 2002. The estimated fair value
of the warrant on the date of issue was approximately $5.3 million as determined
using the  Black-Scholes  option  pricing  model.  The value of the  warrant was
recorded as an intangible asset and was being amortized over the initial term of
the  fulfillment  agreement.  On December 30, 2000, it was  determined  that the
Company  had not met  certain  minimum  purchase  requirements  for the  year as
outlined in the  agreement  with  Taymark.  As a result of this  shortfall,  the
restrictions  on competition by Taymark as outlined in the agreement were lifted
rendering the remaining  unamortized value of the warrant worthless.  Therefore,
the  remaining  balance of  $3,021,954  was  charged to expense.  Total  warrant
amortization   expense  recorded  in  the  year  ended  December  30,  2000  was
$4,532,930.

     Marketing  and sales  expense  consists  primarily of  advertising,  public
relations  and  promotional  expenditures,  as well as all  related  payroll and
related  expenses for  personnel  engaged in marketing  and selling  activities,
including store payroll.  Consolidated marketing and sales expenses for the year
ended December 29, 2001 and December 30, 2000 was $14,843,500  and  $13,058,710,
respectively.  For the year ended December 29, 2001, marketing and sales expense
for retail stores totaled  $14,884,153 and marketing and sales (income)  expense
for the  Internet  totaled  $(40,653).  For the year  ended  December  30,  2000
marketing and sales expense for retail stores  totaled  $5,045,884 and marketing
and sales expense for the Internet totaled $8,012,826. The increase in marketing
and sales  expense for the retail  stores for the year ended  December  29, 2001
reflects the Company  owning the retail stores for the entire year.  Included in
the year ended  December 30, 2000  marketing  and sales expense for the Internet
was $1,586,803 resulting from the amortization of the Margaritaville warrant. On
December 30, 2000 it was determined  that the remaining value of the asset would
not be  realized  over the  remaining  term of the  contract  and was  therefore
charged to expense.  The  decrease in  marketing  spending  for the Internet was
related to lower cost per acquisition in 2001 and to a successful negotiation of
a previously expensed advertising obligation.

     Product and technology  development expense consists principally of payroll
and related expenses for product development,  editorial, systems and operations
personnel and consultants,  and systems  infrastructure related to the Company's
web site.  Product  and  technology  development  expense  for the  years  ended
December  29,  2001  and  December  30,  2000  was  $2,134,390  and  $5,173,828,
respectively.  The  decrease in product and  technology  development  expense is
primarily due to the Company transitioning from a site development phase in 2000
to a site maintenance phase in 2001.

     General and administrative  ("G&A") expense consists of payroll and related
expenses for executive, finance and administrative personnel,  professional fees
and other general  corporate  expenses.  Consolidated  G&A expense for the years
ended  December 29, 2001 and December 30, 2000 was  $3,762,617  and  $3,725,704,
respectively.  For the year ended  December  29,  2001,  G&A for  retail  stores
totaled $3,260,419 and G&A for the Internet totaled $502,198. For the year ended
December 30, 2000,  G&A for retail  stores  totaled  $1,756,140  and G&A for the
Internet totaled $1,926,172.  The increase in G&A for the retail stores reflects
the Company  owning the retail  stores for the entire year.  The decrease in G&A
for the  Internet  is the result of the  Company  closing  its New York  office,
reducing personnel and consolidating general corporate expenses.

     Restructuring  expense consists of expenses incurred as a result of closing
our New York office on December  15, 2000.  These  expenses  include  severance,
relocation and other office closing costs.  Restructuring  (income)  expense was
($141,328)  for the year ended  December  29, 2001 and  $1,093,328  for the year
ended December 30, 2000.  Restructuring income consists of the excess of amounts
provided to close our New York office over actual expenses incurred.  During the
second half of 2001,  due to the  substantial  completion  of the actions of the
2000 restructuring plan, the Company reevaluated its 2000 restructuring accrual.
As a result of this review certain costs  associated with the closure of the New
York  City  headquarters  were  no  longer  required.  This  resulted  from  the
elimination  of  certain  planned  actions as well as the  Company  successfully
negotiating  certain  closing  costs.  As such,  the  Company has  recognized  a
restructuring  credit of $141,328,  which  affected the Internet  segment.  This

                                       7
<PAGE>

credit is  reflected in  "Restructuring  (income)  expense" in the  Consolidated
Statements of Operations.

     The non-cash  compensation  expense  consists of the  amortization of stock
options granted to consultants  related to the Internet operation as well as the
amortization  of stock  options  granted to an  employee  at below  fair  value.
Non-cash compensation expense for the years ended December 29, 2001 and December
30, 2000 was $320,373 and $812,510, respectively.

     Interest  income on cash and cash  equivalents  for the year ended December
29, 2001 and  December 30, 2000 was $117,431  and  $733,163,  respectively.  The
decrease in income was due to lower cash and investment balances.

     Interest expense for the year ended December 29, 2001 and December 30, 2000
was $651,016 and  $149,346,  respectively.  The increase in interest  expense in
2001 was related to the full years impact of the iParty Retail line of credit.

  Liquidity and Capital Resources

     The Company used cash in operating  activities  for the year ended December
29,  2001  and  December  30,  2000   totaling   $2,616,844   and   $14,159,135,
respectively. The Company invested cash in property and equipment, including web
site  development  expenditures,  acquisition  of operating  assets from The Big
Party,  and  marketable  securities  for the years ended  December  29, 2001 and
December 30, 2000 totaling  $243,695 and $4,670,459,  respectively.  In addition
for the years ended  December  29, 2001 and  December  30, 2000 the Company used
$554,187  and  $2,800,790,  respectively,  of its bank line to fund its  working
capital and capital  expenditures.  During 2000, the Company  raised  $2,491,035
from the  issuance of Series E and F preferred  stock.  The  proceeds  were used
towards the  purchase of the 33 retail  stores from The Big Party.  The purchase
price of those assets totaled $4,858,289.

     To date,  the  Company  raised  an  aggregate  of $30.9  million  in equity
financing.

     On August 1, 2000,  the Company  established  a line of credit with a bank.
The agreement  permits maximum  borrowings  equal to the lesser of $7,500,000 or
the borrowing  base.  The line of credit is secured by the Company's  inventory,
and expires on July 31, 2003. As of December 29, 2001, and December 30, 2000 the
Company had $3,354,977 and $2,800,790,  respectively  outstanding under the line
of credit. At December 29, 2001 and December 30, 2000 available borrowings under
the line of credit were approximately $1,500,000 and $2,100,000, respectively.

     In March 2001, the Company and its lender  modified its borrowing  facility
by adjusting  certain  covenants  and other  provisions  based on the  Company's
operating  plan for 2001.  As of December 29, 2001 the Company was in compliance
with all covenants.

     The Company's  prospective cash flows are subject to certain trends, events
and  uncertainties,  including  demands for capital to support growth,  economic
conditions, and contractual matters. The Company's capital expenditures for 2002
are  expected to be  primarily  related to new stores,  store  improvements  and
technology advancements in support of growth and operational enhancement.

     Contractual obligations at December 29, 2001 were as follows:

<TABLE>
<CAPTION>

                                      Less Than                                    After 5
                                      ---------                                    -------
                                      One Year       1-3 Years      4-5 years       Years                Total
                                      --------       ---------      ---------       -----                -----
<S>                                   <C>            <C>            <C>            <C>                   <C>
Line of Credit                        $ 3,354,977    $       -      $       -      $     -           $ 3,354,977

Capital lease obligations                 274,012      260,338              -            -               534,350

Operating leases (including
store leases)                           4,601,989    8,654,069      6,338,906    2,397,892            21,992,856

Other liabilities                               -      250,000              -            -               250,000
                                      -----------   ----------     ----------   ----------          ------------
Total Cotractual
Obligations                           $ 8,230,978   $9,164,407     $6,338,906   $2,397,892          $ 26,132,183
                                      ===========   ==========     ==========   ==========          ============
</TABLE>

                                       8
<PAGE>

     The Company  believes,  based on currently  proposed plans and  assumptions
relating  to our  operations,  that the net  proceeds  from the  financings  and
related interest income,  together with anticipated revenues from operations and
the line of  credit,  will be  sufficient  to fund its  operations  and  working
capital requirements for at least twelve months. In the event that the Company's
plans or assumptions change or prove inaccurate (due to unanticipated  expenses,
increased  competition,  unfavorable  economic  conditions,  or other unforeseen
circumstances)  it could be required to seek  additional  financing  sooner than
currently expected.  There can be no assurance that such additional funding will
be available, or if available,  that the terms of such additional financing will
be acceptable.

  Stockholder rights Plan

     On November  9, 2001,  the Company  announced  that its Board of  Directors
adopted a Stockholder Rights Plan (the "Plan").  Under the Plan each stockholder
of record at the close of business  on November 9, 2001 will  receive a dividend
of one right for each outstanding share of the Company's common stock, par value
$0.001 per share, and each share of the Company's  outstanding  preferred stock,
par value  $0.001 per share,  on an as converted  basis.  The rights will become
exercisable  only in the event,  with certain  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 will 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
shareholder of the Company, including,  without limitation, the right to vote or
receive dividends.

  Critical Accounting Policies

     Financial  Reporting  Release No. 60,  which was  recently  released by the
Securities  and  Exchange  Commission,  (the "SEC")  requires  all  companies to
include a  discussion  of critical  accounting  policies or methods  used in the
preparation  of financial  statements.  Note 3 of the Notes to the  Consolidated
Financial  Statements includes a summary of the significant  accounting policies
and methods used in the preparation of our  Consolidated  Financial  Statements.
The following is a brief discussion of the more significant  accounting policies
and methods  used by us. In  addition,  Financial  Reporting  Release No. 61 was
recently released by the SEC to require all companies to include a discussion to
address,  among  other  things,   liquidity,  off  balance  sheet  arrangements,
contractual obligations and commercial commitments.

  Inventory and Related Allowance for Obsolete and Excess Inventory

     The  Company's  inventory  consists  of party  supplies  and is  valued  at
weighted average cost, which approximates FIFO (first-in,  first-out) or market.
Inventory  has been reduced by an allowance  for obsolete and excess  inventory.
The estimated  allowance is based on management's  review of inventories on hand
compared to  estimated  future  sales.  Actual  results  could differ from these
estimates.

  Income Taxes

     The Company records a valuation  allowance  against its deferred tax assets
because  of the  uncertainty  as to  their  realizability.  Should  the  Company
determine that it would be able to realize its deferred tax assets in the future
an  adjustment  to the deferred tax assets would  increase  income in the period
such determination was made.

                                       9
<PAGE>

  Valuation of Long-Lived Assets

     In  accordance  with  the   requirements  of  SFAS  No.  121,  the  Company
periodically  assesses  whether events or  circumstances  have occurred that may
indicate the carrying  value of its  long-lived  assets may not be  recoverable.
When such events or circumstances indicate the carrying value of an asset may be
impaired,  the Company uses an estimate of the future  undiscounted cash flow to
be derived from the asset over the remaining  useful life of the asset to assess
whether or not the asset is recoverable.  If the future  undiscounted cash flows
to be  derived  over the life of the asset do not exceed  the  asset's  net book
value, the Company recognizes an impairment loss for the amount by which the net
book value of the assets  exceeds the estimated  fair market  value.  We believe
that our estimates of future cash flows are reasonable,  however, future results
and different  assumptions regarding such cash flows could materially affect our
evaluations.

  Revenue recognition

     Revenue is  recognized  at the time of sale for  retail  sales and the time
products are shipped to customers for Internet sales.  Outbound shipping charges
are  included  in  net  revenue.   Sales   returns,   the  impact  of  which  is
insignificant, are recorded at the time of return. In accordance with EITF Issue
No. 00-14,  Accounting  for Certain  Sales  Incentives,  the Company  classifies
discounts as a reduction of revenue.

  Acquisitions

     On August 3, 2000,  iParty Corp.  formed a subsidiary  corporation,  iParty
Retail  Stores  Corp.  On August 15,  2000,  iParty  Retail  Stores  Corp.  paid
approximately $4,900,000 for 33 building leases, fixtures and inventory from The
Big Party Corporation.

     We operate in an un-branded  business arena that has many small players. As
a result, we are considering growing our business through  acquisitions of other
entities.  Any determination to make an acquisition will be based upon a variety
of  factors,  including,  without  limitation,  the  purchase  price  and  other
financial terms of the transaction,  the business  prospects,  and the extent to
which any acquisition would enhance our prospects.  We are not currently engaged
in  identifying  any  potential  acquisition  and  have  no  plans,   agreement,
understanding, or arrangement with respect to any acquisition.

  Effects of Inflation

     We do not view the effects of inflation to have a material  effect upon our
business.

ITEM 7. FINANCIAL STATEMENTS

     See Index to Financial Statements attached hereto.

ITEM 8. CHANGES  IN  AND  DISAGREEMENTS   WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
        FINANCIAL DISCLOSURE

     Not applicable.


                                       10
<PAGE>



                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT

     The following table sets forth certain information  regarding our executive
officers and directors:

NAME                      AGE   POSITION
----                      ---   --------
Sal Perisano...........   51    Chief Executive Officer, Director
Patrick Farrell........   34    President, Chief Financial Officer
Robert H. Lessin.......   47    Director
Stuart G. Moldaw.......   74    Director
Lorenzo Roccia.........   27    Director
Christina Weaver.......   31    Director

     Sal Perisano has been a Director of our company  since October 1998 and our
Chief  Executive  Officer since April 15, 1999. In December 1992,  Mr.  Perisano
co-founded The Big Party Corporation,  a retail chain of 54 party supply stores,
headquartered in West Roxbury,  Massachusetts.  Mr. Perisano served as President
and Chairman of The Big Party  Corporation  from 1992 to December 1998. In 1981,
he co-founded  Videosmith,  which became Boston's  dominant video  retailer.  In
1989,  Videosmith was sold to a publicly  traded company called  Xtravision PLC,
which owned 250 stores  throughout the U.K. and Ireland.  Mr. Perisano stayed on
as a Director and was later named Chief Executive Officer of the parent company,
which was subsequently  acquired by Blockbuster Video. Mr. Perisano holds a B.A.
from Boston College and an M.A. from Harvard University.

     Patrick  Farrell  has been our  President  since  November  2000 and  Chief
Financial Officer since April 1999. From 1996 until joining iParty,  Mr. Farrell
was a Director,  Financial Planning & Analysis and Controller for N2K Inc. where
he helped negotiate that company's merger with CDnow. Prior to N2K, he served as
Controller  at EMI Music  Group/Angel  Records  and as Manager  of  Finance  and
Accounting  for  Polygram/Def  Jam  Recordings,  Inc. He began his  professional
career at Arthur  Andersen  LLP,  where he was an Audit  Senior  when he left in
1994.  Mr. Farrell holds an M.B.A.  from New York  University and graduated with
honors  in  Accounting  from  Temple   University  and  is  a  Certified  Public
Accountant.

     Robert H. Lessin has been a Director of our  company  since July 1998.  Mr.
Lessin has been  Chairman of  Soundview  Ventures,  the  venture  capital arm of
technology  investment  banking firm  Soundview  Technology  Group,  Inc.  since
October  2001.  From April 1998 through  October 2001, Mr Lessin was Chairman of
Soundview Technology Group.  (formerly Wit Capital Corp.). From 1993 until 1997,
Mr. Lessin was Vice Chairman of Salomon Smith Barney, where he served as head of
its  Investment  Banking  Division.  Mr.  Lessin  also  serves  on the  Board of
Directors of CBS MarketWatch.com, a financial and news provider on the Internet.

     Stuart G. Moldaw has been a Director of our company since October 1999. Mr.
Moldaw has been  Chairman  of  Gymboree  Corporation,  a  specialty  retailer of
apparel and  accessories for children,  since 1994.  From 1980 through  February
1990,  Mr. Moldaw served as a general  partner of U.S.  Venture  Partners and he
currently  serves as a special venture  partner of such entity.  Mr. Moldaw also
serves as a Director and Chairman  Emeritus of Ross Stores,  Inc.,  an off-price
retailer of apparel and home accessories.

     Lorenzo  Roccia has been a Director  of our Company  since  April 2001.  Mr
Roccia is Chairman and Chief  Executive  Officer of Roccia Venture  Partners,  a
Latin American  venture  capital fund dedicated to investing in US companies for
Latin American  expansion.  Prior to establishing  Roccia Venture Partners,  Mr.
Roccia was a Senior  Analyst in the Private  Equity Group at Wit Soundview and a
consultant to Wit Soundview's management team. From 1996 to 1998, Mr. Roccia was
a member of the Venture  Services  Group of Salomon Smith  Barney.  He currently
serves  on the  Board  of  Directors  of  Depilight  S.A.,  a chain  of  medical
technology  service centers  located  throughout  Venezuela.  Mr. Roccia holds a
degree in Political Science from Northeastern University.


                                       11
<PAGE>

     Christina  Weaver has been a Director of our company since  December  2000.
Ms. Weaver is an Associate of Hicks, Muse, Tate & Furst  Incorporated,  a global
private equity  investment  firm,  which she joined in February 1995. Ms. Weaver
also serves on the Board of  Directors  of Vidrio  Formas SA de CV. She received
her  undergraduate  degree from Harvard  University and her M.B.A.  from Harvard
Business School.


COMMITTEES OF THE BOARD OF DIRECTORS

     We have no nominating  committee.  We have an audit committee consisting of
Messrs.  Lessin  and  Roccia  and  Ms.  Weaver,  and  a  compensation  committee
consisting of Messrs.  Roccia and Perisano.  We also have an executive committee
consisting of Messrs. Perisano, Lessin and Moldaw.

CERTAIN REPORTS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

     No person  who,  during the fiscal  year ended  December  29,  2001,  was a
Director,  Officer or  beneficial  owner of more than ten  percent of our Common
Stock (which is the only class of our securities  registered under Section 12 of
the Securities Exchange Act of 1934 (the "Act") (a "Reporting  Person"),  failed
to file on a timely basis,  reports required by Section 16 of the Act during the
most recent fiscal year.  The foregoing is based solely upon our review of Forms
3 and 4  during  the most  recent  fiscal  year as  furnished  to us under  Rule
16a-3(d) under the Act, and Forms 5 and amendments  thereto furnished to us with
respect to our most recent fiscal year.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY EXECUTIVE OFFICER COMPENSATION TABLE

     The following table summarizes the aggregate cash  compensation paid during
2001,  2000 and 1999 (see footnotes  below) to our Chief  Executive  Officer and
other  executive  officers that received  compensation  during 2001 in excess of
$100,000 in salary and bonus  pursuant to their  contracts.  Currently,  options
have been granted to management as indicated below.

<TABLE>
<CAPTION>

SECURITIES UNDER
NAME AND PRINCIPAL POSITION                 YEAR     SALARY     BONUS    COMPENSATION    OPTIONS/SAR'S
---------------------------                 ----     ------     -----    ------------    -------------
<S>                                         <C>      <C>        <C>      <C>             <C>

Sal Perisano, Chief Executive Officer(1)...  2001    $250,000       -              -         1,478,772
                                             2000     249,522       -              -           464,260
                                             1999     111,442       -              -           797,230

Patrick Farrell, President and Chief
  Financial Officer (2)....................  2001    $165,000       -       $ 27,202           574,430
                                             2000     146,032       -              -           165,657
                                             1999      87,939       -              -           190,000

John Jolly, Former Chief Operating
  Officer(3)...............................  2001    $131,098       -              -                 -
                                             2000    $135,641       -              -           308,675
                                             1999           -       -              -                 -

Byron Hero, Former Chief Executive
  Officer(4)...............................  2001           -       -              -                 -
                                             2000           -       -              -                 -
                                             1999    $ 72,917       -       $145,836

Maureen Broughton Murrah,
  Former President(5)......................  2001           -       -              -                 -
                                             2000           -       -       $250,000                 -
                                             1999    $154,919       -          5,000                 -
</TABLE>
--------------------
(1)      Mr. Perisano did not begin his employment with us until March 30, 1999.

(2)      Mr. Farrell did not begin his employment with us until April 1, 1999.

(3)      Mr. Jolly did not begin his employment with us until April 26, 2000. On
         December 15, 2000, Mr. Jolly was terminated as a result of the New York
         office  closing and  received  severance  payments  equal to six months
         salary.

(4)      Mr. Hero resigned as our Chief Executive  Officer as of April 15, 1999.
         Mr. Hero did not receive any severance  payment in connection  with his
         resignation.  On April  15,  1999,  Mr.  Hero  entered  into a 12 month
         consulting  agreement  with us.  Payments made under this agreement are
         reflected in other annual compensation.

                                       12
<PAGE>

(5)      Ms.  Broughton  Murrah  resigned as our President on November 15, 1999.
         Ms.  Broughton  Murrah  did  not  receive  any  severance   payment  in
         connection with her resignation. In February 2000, Ms. Broughton Murrah
         exercised  stock  options  on  a  cashless  basis  generating   taxable
         compensation.

<TABLE>
<CAPTION>

                                                   OPTIONS GRANTED IN LAST
                                                        FISCAL YEAR
                                                        -----------
                                                 NUMBER OF     PERCENT OF
                                                 SECURITIES    TOTAL OPTIONS
                                                 UNDERLYING    GRANTED TO
                                                 OPTIONS       EMPLOYEES IN     EXERCISE    EXPIRATION
NAME AND PRINCIPAL POSITION                      GRANTED       FISCAL YEAR       PRICE        DATE
---------------------------                      -------       -----------       -----        ----
<S>                                              <C>           <C>              <C>         <C>

Sal Perisano, Chief Executive Officer.........  1,478,772         36.4%         $ 0.25        3/08/2011

Patrick Farrell, President
  and Chief Financial Officer.................    574,430         14.1%         $ 0.25        3/08/2011

</TABLE>
------------------

EMPLOYMENT AND CONSULTING AGREEMENTS

     We entered into an employment  agreement with Mr. Perisano,  which provides
for him to act as our Chief  Executive  Officer for a term expiring on March 30,
2002 and  devote  substantially  his full  working  time  and  attention  to our
business. The agreement provided for an initial annual salary of $150,000, which
amount was increased to $250,000  beginning January 1, 2000 plus a discretionary
bonus to be determined by the Board of Directors. As described in the agreement,
on March 30, 1999 Mr.  Perisano was granted  options to purchase an aggregate of
337,500  shares of common stock under our stock  purchase  plan with an exercise
price  equal to the fair market  value of the common  stock on the date of grant
($3.75) and as of  December  29,  2001 all such  options had vested.  As further
described in the agreement,  on August 26, 1999 Mr. Perisano was granted options
to purchase an aggregate of 434,730 shares of common stock pursuant to our stock
purchase plan with an exercise  price equal to $2.00.  Such options will vest as
follows: provided that Mr. Perisano remains continuously employed by us, options
with respect to 144,910 shares of common stock vested on August 26, 2000, 1/24th
of the remaining 289,820 began vesting and continue to vest each month beginning
September 26, 2000 for a period of 24 months. The agreement provides that if Mr.
Perisano is terminated  without  cause,  or resigns for "good reason" he will be
entitled to receive his then  current  salary for a period of nine  months.  The
agreement contains certain restrictions on competition.

     We have entered  into an  employment  agreement  with Mr.  Perisano,  which
provides for him to act as our Chief Executive  Officer for a term commencing on
March 31, 2002 and expiring on March 30, 2004 and devote  substantially his full
working time and attention to our business. The agreement provides for an annual
salary of $250,000 plus a  discretionary  bonus to be determined by the Board of
Directors.  The agreement  provides that if Mr.  Perisano is terminated  without
cause,  or resigns  for "good  reason" he will be  entitled  to receive his then
current salary for a period of twelve  months.  The agreement  contains  certain
restrictions on competition.

     We have entered into an employment agreement with Ms. Dionne. The agreement
provides  that she will act as Senior Vice  President--Merchandising  for a term
expiring on March 30, 2002 and devote  substantially  her full  working time and
attention to our business.  The agreement  provides for an initial annual salary
of $100,000,  which amount was increased to $125,000  beginning January 1, 2000,
plus a  discretionary  bonus to be  determined  by the  Board of  Directors.  As
described  in the  agreement,  on March  30,  1999 she was  granted  options  to
purchase an  aggregate of 337,500  shares of common stock  pursuant to our stock
option plan with an exercise  price equal to the fair market value of the common
stock on the date of grant ($3.75 per share). Such options will vest as follows:
provided that she remains  continuously  employed by us, options with respect to
112,500 shares of common stock vested on March 30, 2000, 1/24th of the remaining
225,000  shares of common  stock began  vesting and  continue to vest each month
beginning on April 30, 2000 for a period of 24 months.  The  agreement  provides
that if she is  terminated  without  cause,  she will be entitled to receive her

                                       13
<PAGE>

then current salary for a period of six months.  The agreement  contains certain
customary restrictions on competition.

     We have  entered  into an  employment  agreement  with  Ms.  Dionne,  which
provides for her to act as our Senior Vice  President--Merchandising  for a term
commencing  on  March  31,  2002  and  expiring  on March  30,  2004 and  devote
substantially her full working time and attention to our business. The agreement
provides  for an annual  salary of  $150,000  plus a  discretionary  bonus to be
determined by the Board of Directors.  The agreement provides that if Ms. Dionne
is terminated  without  cause,  she will be entitled to receive her then current
salary  for  a  period  of  twelve  months.   The  agreement   contains  certain
restrictions on competition.

     We entered into an employment  agreement  with Mr.  Farrell dated March 12,
1999 which  provided for Mr.  Farrell to serve as our Senior Vice  President and
Chief  Financial  Officer for a term which  expired on December  31,  2000.  The
agreement  provided  for an  initial  base  salary  of  $115,000  per  year.  In
connection  with the  agreement Mr.  Farrell was granted  options to purchase an
aggregate of 115,000 shares of common stock under our stock option plan. Options
with respect to 50,000  shares vested on August 1, 1999 and options with respect
to the  remaining  65,000 shares vested on February 1, 2000. If we terminate the
employment  agreement without cause, Mr. Farrell is entitled to receive his full
then  current  base  salary  for a  period  of  three  months  from  the date of
termination  and half of his then  current  base  salary  for a period  of three
months thereafter.

     On November 1, 2000, we amended Mr.  Farrell's  employment  agreement dated
March 12, 1999.  The amended  employment  agreement  provided for Mr. Farrell to
serve as our  President  and Chief  Financial  Officer and as  President  of our
subsidiary,  iParty  Retail for a term which  expired  December  31,  2001.  The
agreement  provided for an initial base salary of $165,000 per year. If employed
at the end of the term,  Mr.  Farrell  would have received a bonus equal to four
and  one-half  months  of his  base  salary.  If we  terminated  the  employment
agreement  without cause,  Mr. Farrell would have received his full then current
base  salary  for a  period  of  four  and  one-half  months  from  the  date of
termination.

     We have  entered  into an  employment  agreement  with Mr.  Farrell,  which
provides for him to act as our President and Chief Financial  Officer for a term
commencing  on  January  1,  2002 and  expiring  on March  31,  2004 and  devote
substantially his full working time and attention to our business. The agreement
provides  for an annual  salary of  $165,000  plus a  discretionary  bonus to be
determined by the Board of Directors. The agreement provides that if Mr. Farrell
is  terminated  without  cause,  he will be entitled to receive his then current
salary for a period of six months. The agreement  contains certain  restrictions
on competition.

     We have entered into a consulting  agreement with Mr. Moldaw, a Director of
our company,  dated  September 7, 1999.  The agreement has a term of three years
but may be terminated by either party upon 90 days'  written  notice.  Under the
terms of agreement, Mr. Moldaw was granted options to purchase 100,000 shares of
common  stock with an exercise  price of $2.00 per share.  Such  options vest as
follows:  provided  that  Mr.  Moldaw  is  still  providing  us with  consulting
services,  options  with  respect  to 33,334  shares of common  stock  vested on
September 6, 2000.  1/24th of options  with  respect to 66,666  shares of common
stock began  vesting and  continue to vest each month  beginning on September 6,
2000 for a period of 24 months.  This  consulting  agreement  was  terminated on
December 28, 2001. As a result of this  termination,  Mr. Moldaw's options fully
vested on that date.

     We entered into a  consulting  agreement  with Mr.  Byron Hero,  our former
Chief  Executive  Officer  and a former  Director,  dated  April  14,  1999.  In
connection with the consulting  agreement,  Mr. Hero's employment  agreement was
terminated  and Mr. Hero resigned as Chief  Executive  Officer and a Director of
our company.  Mr. Hero did not receive any severance  payment in connection with
his  resignation  as  Chief  Executive  Officer.  Pursuant  to the  terms of the
consulting   agreement,   Mr.   Hero   served  as   non-executive   Chairman  of
StarGreetings,  Inc., our wholly-owned subsidiary,  until April 14, 2000. During
the term of the agreement, Mr. Hero received a fee of $20,833.33 per month. As a
result of the  modification  of the  StarConcept,  Mr.  Hero was  terminated  on
September  30, 1999 and he will be entitled to receive his fee for the remainder
of the contract.  Under Mr. Hero's employment agreement,  he was granted options
to  purchase  an  aggregate  of 300,000  shares of common  stock under our stock

                                       14
<PAGE>

option  plan.  Such  options  remain  in  effect.  As a  result  of  Mr.  Hero's
termination,  his options  expired on July 14, 2000.  He did not exercise any of
his options.

INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

     Our certificate of  incorporation  and bylaws provide that we indemnify all
of our  directors and officers to the fullest  extent  permitted by the Delaware
General  Corporation Law. Under our certificate of incorporation and bylaws, any
director or officer, who in his or her capacity as such is made or threatened to
be made,  party to any suit or proceeding,  will be  indemnified.  A director or
officer will be  indemnified  if it is  determined  that the director or officer
acted in good  faith  and in a manner  he  reasonably  believed  to be in or not
opposed  to our best  interests.  Insofar  as  indemnification  for  liabilities
arising under the  Securities  Act may be permitted to  directors,  officers and
persons  controlling  our  company  pursuant  to  the  foregoing  provision,  or
otherwise,   we  have  been  advised  that  in  the  opinion  of  the  SEC  such
indemnification  is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.

     We maintain a directors' and officers'  liability insurance policy covering
certain  liabilities that may be incurred by directors and officer in connection
with  the  performance  of  their  duties.  We pay the  entire  premium  for the
liability  insurance.  We have key-man life insurance  policies in the amount of
$2,000,000 on the lives of both Mr.  Perisano and Ms. Dorice Dionne,  our Senior
Vice President--Merchandising.

DIRECTOR COMPENSATION

     Under  our  1998  Incentive  and  Non-qualified  Stock  Option  Plan,  each
non-employee  director is granted,  on the effective date of the commencement of
his or her term as director,  options to purchase 25,000 shares of common stock.
In addition,  each of our directors who is not an executive  officer is granted,
on an annual basis on the last  trading date in August of each year,  commencing
August 1998,  options to acquire  25,000 shares of common stock,  at an exercise
price equal to the fair market value of the underlying  common stock on the date
of grant.

STOCK OPTION PLAN

     In July  1998,  our  Board of  Directors  adopted  the 1998  Incentive  and
Nonqualified  Stock  Option  Plan,  under which there are  currently  11,000,000
shares of common stock reserved for issuance. Our plan provides for the award of
options,  which may either be  incentive  stock  options  within the  meaning of
Section 422 of the  Internal  Revenue  Code of 1986,  as amended (the "Code") or
non-qualified  options which are not subject to special tax treatment  under the
Code. Our Board of Directors or a committee  appointed by our Board  administers
our stock option plan.  Officers,  directors,  key employees of, and consultants
to,  us or any  parent  or  subsidiary  corporation  selected  by the  Board are
eligible to receive options under the plan.  Except for automatic  annual grants
of options (each covering 25,000 shares of common stock) to directors, the Board
is  authorized  to designate  the number of shares to be covered by each option,
the terms of the option,  the dates on which and the rates at which  options may
be exercised, the method of payment and other terms.

     The exercise price for incentive stock options cannot be less than the fair
market value of the stock  subject to the option on the grant date (110% of such
fair  market  value  in  the  case  of  incentive  stock  options  granted  to a
stockholder who owns more than 10% of our common stock).  The Board will fix the
exercise  price of a  nonqualified  stock option at whatever price the Board may
determine in good faith in  accordance  with  applicable  law.  Unless the Board
determines  otherwise,  options  generally have a 10-year term (or five years in
the case of incentive  stock options  granted to a participant  owning more than
10% of the total voting power of our capital  stock).  Unless the Board provides
otherwise,  the unvested portion of options terminates upon the termination of a
participant's  employment,  and the  participant  may  exercise an option to the
extent it was  exercisable on the date of termination for a period of time after
termination  (generally  between 3 months and one year).  Options  may always be
exercised by paying with cash, certified check or bank check, and if established
by  us,  through  a  "same  day  sale"  commitment  from  a  participant  and  a
broker-dealer  selected by us that is a member of the  National  Association  of

                                       15
<PAGE>

Securities  Dealers.  The Board may also  permit,  in its  discretion,  that the
exercise  price  be paid  with  shares  that  have  generally  been  held by the
participant for at least 6 months, or through additional methods selected by the
Board, or through a combination of methods, if permitted under applicable law.

     In the event of any  change in the  outstanding  shares of common  stock by
reason  of  any  reclassification,   recapitalization,   merger,  consolidation,
reorganization,  spin-off,  stock dividend,  stock split or reverse stock split,
exchange of shares or similar change in the corporate structure,  the Board will
make an appropriate adjustment in the aggregate number of shares available under
our stock option plan and in the number of shares and price per share subject to
outstanding  options.  In the event that we are  reorganized,  consolidated,  or
merged with another  corporation,  or if all or substantially  all of our assets
are sold or exchanged,  the holder of the option is entitled to receive upon the
exercise  of his or her  option,  the same number and kind of shares of stock or
the same amount of property,  cash or other  securities  as he or she would have
been entitled to receive upon the happening of any such corporate event as if he
had  exercised  such option and had been  immediately  prior to such event,  the
holder of the number of shares covered by such option.

     Outstanding  options will vest and become  immediately  exercisable in full
upon the occurrence of: (i) if not previously  approved by the Board, any person
or entity  becoming the  beneficial  owner of 30 percent or more of the combined
voting  power of our then  outstanding  securities;  (ii) the first day on which
shares of our common stock are purchased  pursuant to a tender offer or exchange
offer, unless the offer was previously  approved,  or not opposed, by the Board;
(iii) approval of our stockholders of: an agreement to merge or consolidate with
or into another  corporation in which we do not survive, or an agreement to sell
or dispose of all or substantially all of our assets,  unless in either case the
Board  has  resolved  that the  options  will not  vest;  or (iv)  change in the
composition of the Board members over a two-year  period so that the members who
sit on the Board at the beginning of the period no longer  constitute a majority
of the Board at the end of the period, unless the election or nomination of each
new  director  was  approved by at least a majority of the members then still in
office who were directors at the beginning of the period. In addition, the Board
has the authority to accelerate the vesting of any option at any time.

     The Board may, at any time,  modify,  amend or  terminate  our stock option
plan; provided,  however,  that the Board may condition the effectiveness of any
such  amendment  on the  receipt of  stockholder  approval as may be required by
applicable statute,  rule or regulation.  Any such termination,  modification or
amendmant may not, without the consent of the participant,  adversely affect the
rights conferred by an outstanding option.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table sets forth,  as of March 26, 2002 certain  information
with respect to the beneficial  ownership of each class of our equity securities
by each director, beneficial owners of 5% or more of our common stock, the named
executive officers and all of our directors and executive officers as a group.

<TABLE>
<CAPTION>

                                                                    NUMBER OF COMMON
                                                                  SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER(1)                                             OWNED(2)            PERCENT OF CLASS
---------------------------                                             --------            ----------------
<S>                                                               <C>                       <C>

Sal Perisano.............................................              1,530,513(3)               8.9%
Patrick Farrell..........................................                451,417(4)               2.8%
Robert H. Lessin ........................................          11,747,863(5)(7)              54.6%
  c/o Soundview Ventures
  1700 East Putnam Ave
  Old Greenwich, CT. 06870
James McCann ............................................                699,600(6)               4.4%
  1-800 Flowers
  1000 Stewart Avenue
  Westbury, NY 11590r
iParty LLC ..............................................              6,000,000(7)              38.0%
  c/o Robert H. Lessin
  1700  East Putnam Ave.
  Old Greenwich, CT. 06870
Ajmal Khan ..............................................              3,231,665(8)              17.0%
  The Verus Group
  1177 West Hastings Street
  Vancouver, British Columbia
  Canada V6E 2K3

                                       16
<PAGE>

Stuart G. Moldaw ........................................                887,485(9)               5.3%
  1550 El Camino Real
  Suite 290
  Menlo Park, CA. 94025
Roccia Partners, L.P. ...................................             4,082,130(10)              20.5%
  826 Broadway
  New York, NY 10003
Boston Millennia Partners, LP............................             2,244,930(11)              12.4%
  30 Rowes Wharf
  Suite 330
  Boston, MA 02110
Hampton Associates Limited ..............................             1,261,617(12)               7.4%
  1702 Dina House
  Ruttonjee Centre
  11 Duddell Street
  Central Hong Kong
HMTF-iPC, LLC ...........................................             5,444,939(13)              25.6%
  200 Crescent Court, Suite 1600
  Dallas, TX 75201
Patriot Capital Limited..................................             1,142,860(14)               6.8%
  P.O. Box 438
  Road Town
  Tortola, British Virgin Island
Christina Weaver.........................................                50,000(15)               0.3%
  Hicks, Muse, Tate & Furst Incorporated
  200 Crescent Court, Suite 1600
  Dallas, TX 75201
Taymark..................................................             3,000,000(16)              16.0%
  4875 White Bear Parkway
  White Bear Lake, MN 55110

All Officers and Directors as a Group (6 persons).......                 18,749,408              55.5%

</TABLE>

 ---------------------
 (1)     Unless otherwise  indicated,  all addresses are c/o iParty Corp.,  1457
         VFW Parkway, West Roxbury, Massachusetts, 02132.

 (2)     Beneficial  ownership has been determined in accordance with Rule 13d-3
         under the Securities and Exchange Act, and unless otherwise  indicated,
         represents  shares for which the  beneficial  owner has sole voting and
         investment  power.  The percentage of class is calculated in accordance
         with Rule 13d-3 and is based on  15,787,430  shares  outstanding  as of
         March 26, 2002.

 (3)     Includes 1,385,513 shares of common stock that may be acquired upon the
         exercise of presently  exercisable  options issued pursuant to the Plan
         (including  50,000 options in connection with his consulting  agreement
         and 25,000 in  connection  with his role as a Director of the  Company)
         and 145,000 shares of common stock.

 (4)     Includes  406,917  shares of common stock that may be acquired upon the
         exercise of presently  exercisable  options issued pursuant to the Plan
         and 44,500 shares of common stock.

 (5)     Includes (1)  6,000,000  shares of common stock owned by iParty LLC, in
         which Mr.  Lessin is a member and the  manager and a 78.3%  owner,  (2)
         200,000  shares of common stock which may be acquired upon the exercise
         of presently  exercisable  options  issued under the Plan,  (3) 273,268
         shares of common  stock  which may be  acquired  upon the  exercise  of
         presently  exercisable  warrants,  (4) 1,814,980 shares of common stock
         which  may be  acquired  upon  the  conversion  of  181,498  shares  of
         presently  convertible Series B convertible preferred stock (5) 792,950
         shares of common  stock  which may be  acquired  upon the  exercise  of
         redeemable common stock purchase warrants,  and (6) 2,666,665 shares of
         common  stock  which may be  acquired  upon the  conversion  of 266,666
         shares of presently convertible Series E convertible preferred stock.

 (6)     Includes  699,000  shares of common stock owned by iParty LLC, in which
         Mr.  McCann is a member and a 11.66% owner.  Such shares  represent his
         ownership interest in iParty LLC.

 (7)     iParty  LLC  is a  Delaware  limited  liability  company  and  a  38.3%
         shareholder  of iParty Corp.  Mr. Lessin is the manager and 78.3% owner
         of iParty LLC.

 (8)     Includes (1) 75,000  shares of common stock which may be acquired  upon
         the exercise of presently  exercisable  options issued  pursuant to the
         Plan, (2) 25,000 shares of common stock held by Verus Capital Corp., of
         which Mr. Khan is the sole  stockholder,  and (3)  2,666,665  shares of

                                       17
<PAGE>

         common  stock  which may be  acquired  upon the  conversion  of 266,666
         shares of presently  convertible Series E convertible  preferred stock.
         Also  includes  presently  exercisable  options,  held by Verus Capital
         Corp.,  to purchase  225,000  and 240,000  shares of Series A preferred
         stock from Henslowe Trading Limited and Ruffino  Developments  Limited,
         respectively.

 (9)     Includes (1) 508,190  shares of common stock which may be acquired upon
         the  conversion  of 50,819  shares of  presently  convertible  Series B
         convertible  preferred  stock,  (2) 79,295 shares of common stock which
         may be acquired upon the exercise of redeemable  common stock  purchase
         warrants,  and (3) 300,000 shares of common stock which may be acquired
         upon the exercise of  presently  exercisable  options  issued under the
         Plan.

(10)     Includes  (1)  2,607,910  shares of common  stock which may be acquired
         upon the conversion of 260,791 shares of presently convertible Series B
         convertible preferred stock, (2) 1,424,220 shares of common stock which
         may be acquired upon the exercise of redeemable  common stock  purchase
         warrants  and (3) 50,000  shares of common  stock which may be acquired
         upon the exercise of  presently  exercisable  options  issued under the
         Plan.

(11)     Includes 1,451,980 shares of common stock that may be acquired upon the
         conversion  of  145,198  shares  of  presently   convertible  Series  C
         convertible  preferred  stock and 792,950  shares of common stock which
         may be acquired upon the exercise of redeemable  common stock  purchase
         warrants owned by Boston Millennia Partners Limited  Partnership and an
         affiliated entity.

(12)     Includes (1) 651,100  shares of common stock which may be acquired upon
         the  conversion  of 65,110  shares of  presently  convertible  Series B
         convertible  preferred  stock, (2) 254,942 shares of common stock which
         may be acquired upon the exercise of presently exercisable warrants and
         (3)  355,575  shares of common  stock  which may be  acquired  upon the
         exercise of redeemable common stock purchase warrants.

(13)     Includes  3,629,960  shares of common stock which may be acquired  upon
         the  conversion  of 362,996  shares of presently  convertible  Series D
         convertible  preferred stock and 1,814,979 shares of common stock which
         may be acquired upon the exercise of redeemable  common stock  purchase
         warrants owned by HMTF-iPC,  LLC. HMTF-iPC,  LLC is a limited liability
         company  of which the sole  member is HMTF  Bridge  Partners,  L.P.,  a
         limited  partnership  the sole general  partner of which is HMTF Bridge
         Partners, LLC, a limited liability company of which Mr. Thomas O. Hicks
         is the sole  member.  Accordingly,  Mr.  Hicks  may be deemed to be the
         beneficial  owner of all or a portion  of the stock  owned of record by
         HMTF-iPC,  LLC. Mr. Hicks expressly  disclaims (1) the existence of any
         group and (2) beneficial ownership with respect to any shares of common
         stock not owned of record by him.

(14)     Includes  1,142,860  shares of common stock which may be acquired  upon
         the  conversion  of 114,286  shares of presently  convertible  Series F
         convertible preferred stock.

(15)     Includes  50,000  shares of common stock that may be acquired  upon the
         exercise of presently exercisable options issued pursuant to the Plan.

(16)     Includes 3,000,000 shares of common stock that may be acquired upon the
         exercise of presently exercisable warrants.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     For  information   concerning  the  employment  agreements  and  consulting
agreements  between us and certain of our  officers  and  directors  see Item 10
"Executive Compensation". Mr. Perisano, and Ms. Dionne are husband and wife.

     We  entered  into a  Funding  Agreement,  dated as of March 31,  1999,  and
amended as of April 14,  1999,  with Mr.  Ajmal Khan,  a former  director of the
Company,  and Mr.  Robert H.  Lessin,  a director of the Company  (the  "Funding
Agreement"). Pursuant to the terms of the Funding Agreement each of Mr. Kahn (or

                                       18
<PAGE>

his designees) and Mr. Lessin  advanced  certain funds to us. In connection with
each such funding,  the funding party received a 10% Senior  Secured  Promissory
Note  ("Notes")  for the amount  funded and warrants to purchase  such number of
shares of Common  Stock  equal to the amount  funded  divided by the closing bid
price of the  Common  Stock on the date of each  such  funding.  $2,000,000  was
funded pursuant to the Funding Agreement  ($1,125,000 by Mr. Lessin and $875,000
by Hampton Associates Limited.  Mr. Khan's designee under the Funding Agreement)
and  warrants  to  purchase  528,210  shares of Common  Stock  were  issued at a
weighted-average  exercise  price of $3.79 per  share.  In  connection  with our
private  placement  of Series B  Convertible  Preferred  Stock and Common  Stock
purchase warrants, the $2,000,000 principal amount of the Notes and an aggregate
of $55,850 of interest  were  converted  into the shares  offered in the private
placement at the offering price. In addition,  Mr. Lessin purchased  $841,000 of
Units at the offering price.

     On August 11, 2000, the Company  completed a private  placement of Series E
Convertible  Preferred Stock with Messrs.  Khan and Lessin,  raising proceeds of
$2,000,000.  Messrs. Khan and Lessin invested $1,000,000 each. The financing was
comprised  of 533,333  shares of Series E Preferred  Stock  convertible  into an
aggregate of 5,333,333 shares of common stock.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

     (A) 1. Financial Statements

         See Index to Financial Statements Attached hereto.

         2. Exhibits:

         Incorporated by reference to the Exhibit Index at the end of this
Report.

     (B) Reports on Form 8-K

     During the last quarter of the period  covered by this  Report,  we filed a
report on Form 8-K on November 12, 2001  reporting  adoption of a  Stockholder's
Rights Plan.


                                       19
<PAGE>

                                   SIGNATURES

     IN ACCORDANCE  WITH SECTION 13 OR 15(D) OF THE EXCHANGE ACT, THE REGISTRANT
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED.

                                          iPARTY CORP.

                                          By:          /s/ SAL PERISANO
                                              ---------------------------------
                                                        Sal Perisano
                                                Chief Executive Officer and
                                                Principal Executive Officer

Dated: March 27, 2002

     IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON
THE DATES INDICATED.

      SIGNATURE                         TITLE                        DATE
      ---------                         -----                        ----

   /s/ SAL PERISANO        Chief Executive Officer, Principal    March 27, 2002
-------------------------  Executive Officer and Director
     Sal Perisano

  /s/ ROBERT LESSIN        Director                              March 27, 2002
-------------------------
    Robert Lessin

 /s/ STUART G. MOLDAW      Director                              March 27, 2002
-------------------------
   Stuart G. Moldaw

 /s/ LORENZO ROCCIA        Director                              March 27, 2002
-------------------------
     Lorenzo Roccia

  /s/ CHRISTINA WEAVER     Director                              March 27, 2002
-------------------------
    Christina Weaver

 /s/ PATRICK FARRELL       President, Chief Financial Officer    March 27, 2002
-------------------------  and Principal Financial Officer
   Patrick Farrell


                                       20
<PAGE>


                                 EXHIBIT INDEX

EXHIBIT
NUMBER   DESCRIPTION
  3.1     --   Restated  Certificate of Incorporation  of WSI Acquisition  Corp.
               and  Certificate of Merger by iParty Corp.  into WSI  Acquisition
               Corp.(1)
  3.2     --   By-Laws of WSI Acquisition Corp., as amended.(1)
  4.1     --   Certificate of Designation of Series B Preferred Stock of iParty
               Corp.(2)
  4.2     --   Certificate of Designation of Series C Preferred Stock of iParty
               Corp.(2)
  4.3     --   Certificate of Designation of Series D Preferred Stock of iParty
               Corp.
  4.4     --   Certificate of Designation of Series E Preferred Stock of iParty
               Corp.(5)
  4.5     --   Certificate of Designation of Series F Preferred Stock of iParty
               Corp.(6)
  4.6     --   Warrant Agreement between iParty Corp., Continental Stock
               Transfer and Trust Company and Commonwealth Associates, LP.(2)
  4.7     --   Warrant Agreement between iParty Corp., Continental Stock
               Transfer and Trust Company and Commonwealth Associates, LP.(2)
 10.1     --   Merger Agreement by and between iParty Corp. and WSI Acquisitions
               Corp.(1)
 10.2     --   1998 Incentive and Non-Qualified Stock Option Plan.(1)
 10.3     --   Employment Agreement of Patrick Farrell.(3)
 10.4     --   Amended and Restated Employment Agreement of Patrick Farrell.(3)
 10.5     --   Employment Agreement of Patrick Farrell **
 10.6     --   Employment Agreement of Sal Perisano.(3)
 10.7     --   Employment Agreement of Sal Perisano.**
 10.8     --   Employment Agreement of Dorice Dionne.(3)
 10.9     --   Employment Agreement of Dorice Dionne. **
 10.10    --   StarGreetings License Agreement.(1)
 10.11    --   Funding Agreement among iParty Corp., Robert H. Lessin and Ajmal
               Khan.(3)
 10.12    --   Fulfillment Agreement between iParty Corp. and Taymark.(3)
 10.13    --   Agreement between iParty Corp. and LinkShare Corporation.(2)
 10.14    --   Agreement between iParty Corp. and America Online, Inc.(2)
 10.15    --   Consulting Agreement between iParty Corp. and Stuart Moldaw.(2)
 10.16    --   Rights Agreement between iParty Corp. and Continental Stock
               Transfer & Trust, as Rights Agent. (7)
 99.1     --   Letter to SEC from iParty Corp. regarding audited financial
               statements.**
                            -------------------------

(1)  Incorporated  herein in its entirety by reference to iParty's  Registration
     Statement  on Form  10-SB,  Registration  No.  0-25507,  as filed  with the
     Securities and Exchange Commission on March 8, 1999.
(2)  Incorporated  herein in its entirety by  reference  to  Amendment  No. 2 to
     iParty's Registration Statement on Form 10-SB, Registration No. 0-25507, as
     filed with the Securities and Exchange Commission on October 19, 1999.
(3)  Incorporated  herein in its entirety by  reference  to  Amendment  No. 1 to
     iParty's Registration Statement on Form 10-SB, Registration No. 0-25507, as
     filed with the Securities and Exchange Commission on July 12, 1999.
(4)  Incorporated herein by reference to iParty's Annual Report on Form 10-KSB
     for the year ended December 31, 1999.
(5)  Incorporated herein in its entirety by reference to iParty's Current Report
     on Form 8-K, filed with the  Securities  and Exchange  Commission on August
     30, 2000.
(6)  Incorporated herein in its entirety by reference to iParty's Current Report
     on Form 8-K, filed with the Securities and Exchange Commission on September
     15, 2000.
(7)  Incorporated herein in its entirety by reference to iParty's Current Report
     on Form 8-K, filed with the Securities and Exchange  Commission on November
     12, 2001.

** Filed herewith.


                                       21
<PAGE>


                                    CONTENTS

                                                                            Page

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.......... ......................    F-1

CONSOLIDATED FINANCIAL STATEMENTS


  Consolidated Balance Sheets--December 29, 2001 and
  December 30, 2000........................................................  F-2


  Consolidated Statements of Operations--Years ended December 29, 2001
  and December 30, 2000 .................................................    F-3


  Consolidated Statements of Stockholders' Equity--Years ended December
  29, 2001 and December 30, 2000.........................................    F-4


  Consolidated Statements of Cash Flows--Years ended December 29,
  2001 and December 30, 2000.............................................    F-5


  Notes to Consolidated Financial Statements.............................    F-6



                                       22
<PAGE>

                                       F-1

Report of Independent Public Accountants


To iParty Corp.:

We have audited the accompanying  consolidated balance sheets of iParty Corp. (a
Delaware  corporation) and subsidiaries as of December 29, 2001 and December 30,
2000,  and the related  consolidated  statements  of  operations,  stockholders'
equity, and cash flows for the years then ended. These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements, based on our audits.

We  conducted  our audits in  accordance  with  accounting  standards  generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of iParty Corp. and subsidiaries
as of  December  29,  2001 and  December  30,  2000,  and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States.



Boston, Massachusetts
February 22, 2002


                                      F-1
<PAGE>

<TABLE>
<CAPTION>
                                                            iParty Corp.
                                                     Consolidated Balance Sheets

                                                                                December 29, 2001    December 30, 2000
                                                                                -----------------    -----------------
<S>                                                                             <C>                  <C>

                                     ASSETS

Current assets:
   Cash and cash equivalents                                                         $  2,399,084        $  5,002,254
   Cash, restricted                                                                       667,957             635,000
   Accounts receivable                                                                    541,703             948,292
   Inventory,net                                                                        9,282,852           8,226,560
   Prepaid expenses and other current assets                                              337,997              69,812
                                                                                      -----------        ------------
       Total current assets                                                            13,229,593          14,881,918

   Property and equipment, net                                                            979,042             903,849
   Other assets                                                                           324,583             557,286
                                                                                      -----------        ------------

Total assets                                                                        $ 14,533,218         $ 16,343,053
                                                                                    =============        ============

                            LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                                  $  2,636,160        $  2,415,679
  Accrued severance and restructuring expenses                                                 -             775,137
  Accrued expenses                                                                     2,122,748           2,201,035
  Current portion of capital lease obligations                                           274,012             233,445
  Line of credit                                                                       3,354,977           2,800,790
                                                                                      ----------          ----------
       Total current liabilities                                                       8,387,897           8,426,086

Long-term liabilities:
  Capital lease obligations, net of current portion                                      260,338             116,605
  Other long term liabilities
                                                                                         576,414             375,860
                                                                                     -----------          -----------
       Total long term liabilities                                                       836,752             492,465


Total liabilities                                                                      9,224,649           8,918,551

Commitments and contingencies (Note 8)

Stockholders' equity:
  Preferred stock - $.001 par value; 10,000,000 shares authorized, Series A
     preferred stock - 1,000,000 shares authorized,
       issued and outstanding                                                              1,000               1,000
     Series B preferred stock - 1,413,352 shares authorized,
       1,118,559 and 1,413,352 shares issued and outstanding                               1,119               1,414
     Series C preferred stock - 145,198 shares authorized,
       issued and outstanding                                                                145                 145
     Series D preferred stock - 362,996 shares authorized,
       issued and outstanding                                                                363                 363
     Series E preferred stock - 533,333 shares authorized,
       issued and outstanding                                                                533                 533
     Series F preferred stock - 114,286 shares authorized,
       issued and outstanding                                                                114                 114
  Common stock - $.001 par value; 150,000,000 shares authorized,
       15,122,675 shares and 12,174,745 shares issued and outstanding                     15,123              12,175
  Additional paid in capital                                                          64,484,707          64,166,987
  Accumulated deficit                                                                (59,194,535)        (56,758,229)
                                                                                     ------------        ------------

       Total stockholders' equity                                                      5,308,569           7,424,502
                                                                                     ------------        -----------

Total liabilities and stockholders' equity                                          $ 14,533,218        $ 16,343,053
                                                                                    =============       ============

</TABLE>

The  accompanying  Notes are an integral  part of these  Consolidated  Financial
Statements

                                      F-2
<PAGE>


<TABLE>
<CAPTION>

                                                            iParty Corp.
                                                Consolidated Statements of Operations

                                                                              For the year ended
                                                                   December 29, 2001        December 30, 2000
                                                                   -----------------        -----------------
<S>                                                                <C>                      <C>

 Revenues                                                               $  47,983,404         $  18,619,877

 Operating costs:
      Cost of products sold                                                28,966,573            11,734,011
      Amortization of fulfillment partner warrant                                   -             4,532,930
      Marketing and sales                                                  14,843,500            13,058,710
      Product and technology development                                    2,134,390             5,173,828
      General and administrative                                            3,762,617             3,725,704
      Restructuring (income) expense                                        (141,328)             1,093,328
      Loss resulting from abandonment of assets                                     -                 5,784
      Non-cash compensation expense                                           320,373               812,510
                                                                         ------------            ----------

 Operating loss                                                           (1,902,721)          (21,516,928)

     Interest income                                                          117,431               733,163
     Interest expense                                                        (651,016)             (149,346)
                                                                         ------------           -----------

 Net loss                                                              $  (2,436,306)        $ (20,933,111)
                                                                       ==============        ==============

 Loss per share:
      Basic and diluted (Note 3)                                         $     (0.18)          $     (2.05)
                                                                         ============          ============

 Weighted average shares outstanding:
      Basic and diluted                                                    13,411,866            11,321,578
                                                                         ============          ============

</TABLE>

The  accompanying  Notes are an integral  part of these  Consolidated  Financial
Statements.

                                      F-3
<PAGE>


<TABLE>
<CAPTION>

                                                            iParty Corp.
                                     Consolidated Statements of Changes in Stockholders' Equity

                                                                       Preferred Stock   (All Classes)            Common Stock
                                                                       Shares             Amount            Shares         Amount
                                                                       ------             ------            ------         ------
<S>                                                                    <C>                <C>               <C>            <C>

Balance December 31, 1999                                                                $    2,395       11,005,421      $   11,006
                                                                      2,394,952

  Issuance of Series E preferred stock, net of issuance costs of        533,333                533                -               -
    $8,965
  Issuance of Series F preferred stock, net of issuance costs of        114,286                114                -               -
    $0
  Issuance of Series B  and C preferred stock as anti-dilution
  protection                                                            517,503                518                -               -
       upon issuance of Series E and F preferred stock
  Issuance of Series D preferred stock as anti-dilution protection
     upon issuance of Series E and F preferred stock                    112,996                113                -               -

  Exercise of stock options                                                   -                  -          130,274             130

  Issuance of common stock upon conversion of Series B preferred
    preferred stock                                                   (103,905)               (104)        1,039,050          1,039
  Preferred stock beneficial conversion feature                              -                   -               -                -

   Non-cash compensation expense                                             -                   -               -                -

   Net loss                                                                  -                   -               -                -
                                                                     -----------          --------        ----------     -----------
Balance December 30, 2000                                            3,569,165           $   3,569       12,174,745      $   12,175

  Issuance of common stock upon conversion of Series B preferred      (294,793)               (295)       2,947,930           2,948
  Non-cash compensation expense
  Net loss                                                                   -                   -                -               -
                                                                     -----------         ---------       ----------      -----------
   Balance December 29, 2001                                         3,274,372           $   3,274       15,122,675       $   15,123
                                                                     =========           =========       ==========      ===========

                                                                                        Additional                         Total
                                                                                         Paid-In      Accumulated      Stockholders'
                                                                                        Capital         Deficit            Equity
                                                                                        -------         -------            ------
Balance December 31, 1999                                                           $ 58,616,431       $(33,575,764)    $ 25,054,068

       Issuance of Series E preferred stock, net of issuance costs of $8,965           1,990,502                  -       1,991,035
       Issuance of Series F preferred stock, net of issunace costs of $0                 499,886                  -         500,000
       Issuance of Series B and C preferred stock as anti-dilution protection
         upon issuance of Series E and F preferred stock                                    (518)                 -               -
       Issuance of Series D preferred stock as anti-dilution protection
         upon issuance of Series E and F preferred stock                                    (113)                 -               -
       Exercise of stock options                                                            (130)                 -               -
       Issuance of common stock upon conversion of Series B
         preferred stock                                                                    (935)                 -               -
       Preferred stock beneficial conversion feature                                   2,249,354         (2,249,354)              -
       Non-cash compensation expense                                                     812,510                  -         812,510
       Net loss                                                                                -        (20,933,111)    (20,933,111)
                                                                                  --------------       ------------     -----------
                                                                                    $ 64,166,987       $(56,758,229)    $ 7,424,502

Balance December 30, 2000

       Issuance of common stock upon conversion of Series B preferred stock              (2,653)                 -               -
       Non-cash compensation expense                                                    320,373                  -         320,373
       Net loss                                                                               -         (2,436,306)     (2,436,306)
                                                                                  --------------       ------------     -----------
Balance December 29, 2001                                                          $  64,484,707      $(59,194,535)     $ 5,308,569
                                                                                  ==============      ============      ===========

</TABLE>


                                      F-4
<PAGE>


<TABLE>
<CAPTION>

                                                            iParty Corp.
                                                Consolidated Statements of Cash Flows

                                                                            For the year ended
                                                                December 29, 2001       December 30, 2000
                                                                -----------------       -----------------
<S>                                                             <C>                     <C>

Cash flows from operating activities:

    Net loss                                                        $ (2,436,306)           $ (20,933,111)

    Adjustments to reconcile net loss to
        net cash used in operating activities:
       Depreciation and amortization                                     616,663                6,755,948
       Loss resulting from abandonment of assets                               -                    5,784
       Provisions for reserve for bad debt                                     -                    3,527
       Non-cash compensation expense                                     320,373                  812,510
       Decrease (increase) in:
          Accounts receivable                                            406,589                 (852,342)
          Inventory                                                   (1,056,292)
                                                                                                (3,368,271)
          Prepaid expenses and other current assets                     (268,185)                 358,833
          Other assets                                                   232,703                 (507,041)

       Increase (decrease) in:
          Accounts payable                                               220,481                  665,873
          Accrued severance and restructuring expenses                  (775,137)                 561,150
          Accrued expenses                                               (78,287)               1,962,145
          Other long term liabilities                                    200,554                  375,860
                                                                      -----------             ------------
       Net cash used in operating activities                          (2,616,844)             (14,159,135)
                                                                      -----------             ------------

Cash flows from investing activities:

    Purchase of property and equipment                                  (210,738)                 (202,059)
    Acquisition of operating assets                                            -                (4,858,289)
    Purchase of marketable securities                                          -                   973,877
    Increase in restricted cash                                          (32,957)                 (583,988)
                                                                      -----------             -------------
       Net cash used in investing activities                            (243,695)               (4,670,459)
                                                                      -----------             -------------

Cash flows from financing activities:

    Net borrowings under line of credit agreement                        554,187
                                                                                                 2,800,790
    Proceeds from sale of preferred stock, net of offering costs               -                 2,491,035
    Principal payments on capital lease obligations                     (296,818)                 (133,281)
                                                                      -----------             -------------
       Net cash provided by financing activities                         257,369                 5,158,544
                                                                      -----------             -------------

Net decrease in cash and cash equivalents                             (2,603,170)              (13,671,050)

Cash and cash equivalents, beginning of year                           5,002,254                18,673,304
                                                                      -----------             ------------
Cash and cash equivalents, end of year                              $  2,399,084              $  5,002,254
                                                                     ============             ============
Cash paid for:
    Interest expense                                                $    651,016              $   149,346
                                                                     ============             ============

Supplemental disclosure of non-cash financing activities:

    Conversion of Series B preferred stock to common stock          $      2,948              $     1,039
                                                                     ============             ===========
    Acquisition of assets under capital lease                       $    481,118              $   482,332
                                                                     ============             ===========

</TABLE>

The  accompanying  Notes are an integral  part of these  Consolidated  Financial
Statements.


                                      F-5
<PAGE>



                                  IPARTY CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. MANAGEMENT'S PLAN

     The  Company is a multi  channel  retailer  of party  supplies  through the
operation  of 33  retail  stores  and an  internet  e-commerce  site.  The party
supplies  retailing  business is highly  competitive  and  barriers to entry are
minimal.  To some extent all  retailing  concepts  are  susceptible  to consumer
confidence  as well as  overall  consumer  spending.  Those  factors  impact the
predictability of the operating forecasts and plans.

     The  Company  has  implemented  changes  to  integrate  the two  businesses
resulting in a reduction in losses of its internet  business while improving the
profitability  factors of its retail  business.  Based on its current  operating
plan and the impact of the changes made in 2001,  the Company  believes  that it
will have the  necessary  financing  in place to fund the  Company's  operations
through at least January 1, 2003.

2. THE COMPANY

     The  Company's  efforts are devoted to the sale of party goods and services
through retail stores and the Internet.  The Company's retail stores are located
throughout  New England with three  additional  stores  located in Florida.  The
Company was originally launched as an Internet-based merchant of party goods and
services.  On August 3, 2000,  iParty Retail Stores Corp.  ("iParty Retail") was
incorporated as a wholly owned  subsidiary of iParty Corp. to operate a chain of
retail stores selling party goods.  On August 15, 2000,  iParty Retail  acquired
certain assets from The Big Party Corporation  ("The Big Party").  iParty Retail
acquired inventory, fixed assets and the leases of 33 retail stores from The Big
Party in  consideration of cash and assumption of certain  liabilities.  The Big
Party filed for bankruptcy  protection during the second quarter of 2000 and the
acquisition  was approved by the United  States  Bankruptcy  Court,  District of
Delaware.

3. SIGNIFICANT ACCOUNTING POLICIES

  Principles of consolidation:

     The consolidated  financial  statements include the accounts of the Company
and  its  wholly  owned   subsidiaries  after  elimination  of  all  significant
intercompany transactions and balances.

  Comprehensive income:

     Statement  of  Financial  Accounting  Standards  (SFAS) No. 130,  Reporting
Comprehensive Income,  establishes standards for reporting  comprehensive income
and its components in the financial  statements.  Other comprehensive income, as
defined,  includes all changes in equity during a period from nonowner  sources.
For the years ended December 29, 2001 and December 30, 2000  comprehensive  loss
equals net loss.

  Concentrations:

     The  Company's  Internet  operation  relies on a single  vendor as its sole
provider of inventory,  fulfillment and shipping  services.  While management of
the Company  believes it could obtain  similar  services  from other vendors for
similar  terms,  a disruption  in the services  received  from this vendor could
materially  harm the  Company's  Internet  business.  In July 1999,  the Company
granted  this vendor a warrant to  purchase  3,000,000  shares of the  Company's
common stock at an exercise price of $3.75 per share. (See Note 8).

  Revenue recognition:

     Revenue is  recognized  at the time of sale for  retail  sales and the time
products are shipped to customers for Internet sales.  Outbound shipping charges
are  included  in  net  revenue.   Sales   returns,   the  impact  of  which  is
insignificant, are recorded at the time of return. In accordance with EITF Issue
No. 00-14,  Accounting  for Certain  Sales  Incentives,  the Company  classifies

                                      F-6
<PAGE>

discounts as a reduction of revenue.

  Use of estimates:

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.

  Cash and cash equivalents:

     Cash  equivalents  are  carried  at  cost  plus  accrued  interest,   which
approximates  fair value.  The Company  considers all highly liquid  investments
with an original  maturity date of three months or less to be cash  equivalents.
Cash and cash equivalents were $2,399,084 and $5,002,254 as of December 29, 2001
and December 30,  2000,  respectively.  As of December 29, 2001 and December 30,
2000,  cash  equivalents  consist  primarily  of  investments  in  money  market
accounts.

  Fair value of financial instruments:

     SFAS No.  107,  Disclosures  about  Fair  Value of  Financial  Instruments,
requires  disclosure  about fair value of  financial  instruments.  The carrying
values of cash and cash equivalents,  accounts receivable,  and accounts payable
approximate  fair value  because of the short term nature of these  instruments.
The fair  value of debt  approximates  carrying  value  because  the debt  bears
interest at a variable market rate.

  Inventory and Related Allowance for Obsolete and Excess Inventory:

     The  Company's  inventory  consists  of party  supplies  and is  valued  at
weighted average cost, which approximates FIFO (first-in,  first-out) or market.
Inventory  has been reduced by an allowance  for obsolete and excess  inventory.
The estimated  allowance is based on management's  review of inventories on hand
compared to  estimated  future  sales.  Actual  results  could differ from these
estimates.

  Stock-based compensation:

     The Company has elected to follow Accounting Principles Board Opinion (APB)
No. 25,  "Accounting  for Stock Issued to Employees" in accounting for its stock
option incentive plan. As such,  compensation expense is recorded on the date of
grant if the current market price of the  underlying  stock exceeds the exercise
price  of  the  option.  In  accordance  with  SFAS  No.  123,  "Accounting  for
Stock-Based   Compensation"   the  Company  provides  the  necessary  pro  forma
disclosures as if the fair value method had been applied.

  Property and equipment:

     Property and equipment are stated at cost less accumulated depreciation and
are depreciated on the  straight-line  method over the estimated useful lives of
the assets, ranging from three to seven years.  Expenditures for maintenance and
repairs are charged to operations as incurred. A listing of the estimated useful
life of the various categories of property and equipment is as follows:

<TABLE>
<CAPTION>

Asset Classification                               Estimated Useful Life
--------------------                               ---------------------
<S>                                                <C>
Computers, equipment, furniture and fixtures       3-5 years
Equipment under capital leases                     3-7 years of life of lease
Motor vehicles                                     5 years
Leasehold improvements                             Lesser of life of lease or life of asset

</TABLE>

                                      F-7
<PAGE>

Property and equipment consist of the following:

<TABLE>
<CAPTION>

                                                           Dec. 29, 2001           Dec. 30, 2000
                                                           -------------           -------------
<S>                                                        <C>                     <C>

Computers, equipment, equipment under
 capital leases and furniture and fixtures                 $1,535,717              $1,304,428
Web site and related costs                                    460,568                 646,572
                                                            1,996,285               1,951,000
Less accumulated depreciation                             (1,017,243)             (1,047,151)
                                                          -----------             -----------

Total                                                       $ 979,042               $ 903,849
                                                          ===========             ===========
</TABLE>

   Software costs:

     In accordance  with Statement of Position (SOP) 98-1,  "Accounting  for the
Costs of Computer  Software  Developed or Obtained for Internal  Use,"  external
direct costs of materials and services incurred in connection with developing or
obtaining  internal-use software were capitalized.  Such costs will be amortized
using the  straight-line  method  over an  estimated  useful life of three years
beginning  when the  software  is ready for its  intended  use or over its known
useful life, whichever is shorter.

  Income Taxes:

     The Company  accounts for income taxes in accordance  with the Statement of
Financial  Accounting  Standards  (SFAS) No. 109,  Accounting  for Income Taxes,
which  requires  the  use of the  liability  method.  This  standard  determines
deferred  income  taxes  based  on  the  estimated  future  tax  effects  of any
differences  between  the  financial  statement  and tax  basis  of  assets  and
liabilities,  given the  provisions  of the enacted tax laws.  The  deferred tax
provision represents the change in the deferred tax asset or liability balance.

  Accounting for the Impairment of Long-Lived Assets:

     The  Company  accounts  for  long-lived   assets  in  accordance  with  the
provisions of SFAS No. 121,  Accounting for the Impairment of Long-Lived  Assets
and for Long  Lived  Assets to be  Disposed  Of  ("SFAS  121").  This  statement
establishes  financial  accounting and reporting standards for the impairment of
long-lived assets,  certain  identifiable  intangibles,  and goodwill related to
those  assets  to be held  and  used,  and for  long-lived  assets  and  certain
identifiable  intangibles to be disposed of. SFAS No. 121 requires,  among other
things,  that the  entity  review its  long-lived  assets  and  certain  related
intangibles for impairment  whenever changes in circumstances  indicate that the
carrying amount of an asset may not be fully recoverable.

     In  accordance  with  the   requirements  of  SFAS  No.  121,  the  Company
periodically  assesses  whether events or  circumstances  have occurred that may
indicate the carrying  value of its  long-lived  assets may not be  recoverable.
When such events or circumstances indicate the carrying value of an asset may be
impaired,  the Company uses an estimate of the future  undiscounted cash flow to
be derived from the asset over the remaining  useful life of the asset to assess
whether or not the asset is recoverable.  If the future  undiscounted cash flows
to be  derived  over the life of the asset do not exceed  the  asset's  net book
value, the Company recognizes an impairment loss for the amount by which the net
book value of the assets  exceeds the estimated  fair market value.  At December
29, 2001  management  does not  believe  that any of its  long-lived  assets are
impaired.  See Note 8 for  discussion of impairment  charges  recorded in fiscal
2000.

  Earnings per Share:

     The Company has computed  net income  (loss) per share in  accordance  with
SFAS No. 128,  Earnings per Share.  Under the  provisions of SFAS No. 128, basic
net income  (loss) per common  share  ("Basic  EPS") is computed by dividing net
income  (loss) by the  weighted  average  number of common  shares  outstanding.
Diluted  net income  (loss) per common  share  ("Diluted  EPS") is  computed  by
dividing net income (loss) by the weighted  average  number of common shares and
dilutive common share  equivalents  then  outstanding  using the  treasury-stock
method.

                                      F-8
<PAGE>

     The following table sets forth the computation  basic and diluted  earnings
per share:

<TABLE>
<CAPTION>

                                                           2001                  2000
                                                           ----                  ----
<S>                                                        <C>                   <C>

Net loss                                                 $ (2,436,306)         $(20,933,111)
Preferred stock beneficial conversion feature                        -           (2,249,354)
                                                          ------------         -------------

Net loss attributable to common shareholders             $ (2,436,306)         $(23,182,465)
                                                         =============         =============

Loss per Share
   Basic and diluted                                         $  (0.18)             $  (2.05)
                                                             =========             =========

Weighted Average Shares Outstanding
   Basic and diluted                                        13,411,866            11,321,578
                                                            ==========         =============
</TABLE>


     As  of  December  29,  2001   47,728,465   potential   common  shares  were
outstanding, including 23,743,720 shares upon the conversion of preferred stock,
16,474,421 shares upon the exercise of warrants with a weighted average exercise
price of $1.87 and  7,510,324  shares upon the exercise of stock  options with a
weighted  average  exercise  price  of  $1.07,  but not  included  in the  above
calculation as their effect would have been anti-dilutive.

     As  of  December  30,  2000   47,812,248   potential   common  shares  were
outstanding, including 26,691,650 shares upon the conversion of preferred stock,
16,474,421 shares upon the exercise of warrants with a weighted average exercise
price of $1.87 and  4,646,177  shares upon the exercise of stock  options with a
weighted  average  exercise  price  of  $1.99,  but not  included  in the  above
calculation as their effect would have been anti-dilutive.

  Recently Issued Accounting Standards:

     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.  SFAS No.
133 establishes  accounting and reporting standards for derivative  instruments,
including   certain   derivative   instruments   included  in  other   contracts
(collectively referred to as derivatives),  and for hedging activities. SFAS No.
133 (as amended by SFAS No. 137 and SFAS 138) was effective January 1, 2001. The
adoption  of SFAS NO.  133 did not have an  impact  on the  Company's  financial
position or results of operations,  because it has no derivative  instruments or
hedging activities.

     In June 2001, the FASB issued SFAS No. 141, Business  Combinations and SFAS
No. 142,  Goodwill  and Other  Intangible  Assets.  SFAS 141  requires  business
combinations  initiated  after  June 30,  2001 to be  accounted  for  using  the
purchase  method.  It also  specifies  the types of acquired  intangible  assets
required to be recognized and reported  separately  from goodwill.  SFAS No. 142
will require that goodwill and certain  intangibles no longer be amortized,  but
instead be tested for impairment at least annually.  SFAS No. 142 is required to
be applied  starting with fiscal years  beginning  after  December 15, 2001. The
Company  believes  that the  adoption  of SFAS Nos.  141 and 142 will not have a
material  impact on the Company's  financial  position or results of operations,
because it currently has no goodwill or other intangible assets recorded.

     In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 modifies the rules for accounting
for the  impairment  of long-lived  assets.  The new rules are effective for the
Company  January 1, 2002. The Company does not believe that the adoption of SFAS
No. 144 will have a  material  impact on the  Company's  financial  position  or
results of operations.

  Reclassifications:

     Certain  reclassifications have been made to prior years amounts to conform
to the current year presentation.


                                      F-9
<PAGE>

4. SEGMENT REPORTING:

     SFAS No.  131,  Disclosures  About  Segments of an  Enterprise  and Related
Information,  establishes  standards  for the way  business  enterprises  report
information about operating segments in annual financial statements and requires
that those enterprises  report selected  information about operating segments in
interim financial reports issued to shareholders.

     Operating segments represent  components of the Company's business that are
evaluated  regularly by  management in assessing  the  performance  and resource
allocation.  The Company has determined that its reportable  segments consist of
Retail Operations and Internet Operations.

     The Retail Operations include the sales and related expenses from 33 retail
stores primarily located  throughout New England with the highest  concentration
of 18 stores in Massachusetts.  Of the others,  five are located in Connecticut,
three in  Rhode  Island,  three in New  Hampshire,  one in  Maine  and  three in
Florida.

     The Internet  Operations  include the sales and related  expenses  from the
Internet and the Company's catalog.

     The reporting  segments  follow the same  accounting  policies used for the
Company's  consolidated financial statements and are described in the summary of
significant  accounting policies.  Management evaluates a segment's  performance
based  upon  net  revenue,  operating  income  (loss)  and  net  income  (loss).
Inter-segment  transactions are uncommon and not material.  Therefore, they have
not been separately  reflected in the financial  table below.  The totals of the
reportable  segments' revenues,  net profits and assets agree with the Company's
comparable amount contained in the audited financial  statements.  Revenues from
customers  outside  of the  United  States  are not  material.  No one  customer
accounts for more than 10% of the Company's consolidated revenues.

     The  Company's  financial  data for segment  reporting  for the years ended
December 29, 2001 and December 30, 2000, are as follows:

<TABLE>
<CAPTION>


                                             2001                                                  2000
                                             ----                                                  ----
                          Internet          Retail           Total              Internet          Retail           Total
                          --------          ------           -----              --------          ------           -----
<S>                       <C>               <C>              <C>                <C>               <C>              <C>

Net revenue                 $ 914,469    $ 47,068,935     $ 47,983,404          $ 1,150,100  $ 17,469,777         $18,619,877
                          ===========    ============     ============          ===========  ============         ===========

Operating (loss)
income                    $(1,165,320)     $ (737,401)     $(1,902,721)         $(21,531,533) $     14,605       $(21,516,928)
                          ============     ===========     ============         ============  ============       =============

Net loss                  $(1,075,900)    $(1,360,406)     $(2,436,306)        $(20,798,370)  $  (134,741)       $(20,933,111)
                          ============    ============     ============         ============  ============       =============

Total assets                $2,721,046    $ 11,812,172     $ 14,533,218          $10,284,649  $  6,058,404         $16,343,053
                            ==========    ============     ============         ============  ============         ===========

Deprec/amort                $ 433,978        $ 182,655        $ 616,663          $ 6,739,674  $     16,274         $ 6,755,948
                            ==========       =========        =========         ============  ============         ===========

Capital exp.                  $  2,025       $ 689,831        $ 691,856            $ 744,121  $    249,582           $ 993,703
                              ========       =========        =========            =========  ============           =========
</TABLE>

5. ACQUISITION:

     On August 15,  2000,  the  Company,  through its  wholly-owned  subsidiary,
iParty Retail, pursuant to an Asset Purchase Agreement,  acquired certain assets
from The Big Party Corporation. The Company acquired inventory, fixed assets and
the leases of 33 retail stores from The Big Party in  consideration  of cash and
assumption  of certain  liabilities.  This  transaction  was  accounted for as a
purchase in accordance  with APB No. 16,  Accounting  for Business  Combinations
and, accordingly,  the results of the acquired Big Party stores since August 15,
2000 have been  included  in the  accompanying  statements  of  operations.  The
purchase price was allocated to the acquired assets as follows:


                                      F-10
<PAGE>

         Purchase price:

            Cash paid                                       $ 3,975,000
            Payable to seller                                   650,000
            Transaction costs                                   235,000
                                                                -------

            Total purchase price                            $ 4,860,000
                                                            ===========

            Net tangible assets acquired:
               Inventory                                    $ 4,860,000
                                                            ===========

     Payable to seller includes  amounts  reserved for the purchase of inventory
(See Note 8) as well as  $250,000  representing  the minimum  contingent  future
obligation based upon store performance.

     In addition to acquiring inventory, iParty purchased leasehold improvements
at the acquired stores.  The fair value of the acquired inventory and leaseholds
exceeded  the  purchase  price.  As a result,  due to the fact that the purchase
price  approximated the fair value of the inventory,  no value could be assigned
to the long-term assets.

     Unaudited pro forma results of operations  for the year ended  December 30,
2000,  as if the  acquisition  had  occurred  as of the  beginning  of the year,
follow. The pro forma results include estimates and assumptions which management
believes are reasonable.  The pro forma financial information is not necessarily
indicative of the operating results that would have occurred had the acquisition
occurred  as of the dates  indicated,  nor are they  necessarily  indicative  of
future operating results.

                                                                (Unaudited)
                                                                Year ended
                                                             December 30, 2000

        Revenue                                                     $ 43,643,931

        Operating loss                                            $ (24,172,716)

        Net loss                                                  $ (23,721,075)
        Beneficial conversion dividend                              $(2,249,354)
                                                                    ------------

        Net loss available to common shareholders                 $ (25,970,429)
                                                                  ==============

        Loss per share:
          Basic and diluted                                            $  (2.29)
                                                                       =========

        Weighted average shares:
          Basic and diluted                                           11,321,578
                                                                      ==========

6. RESTRUCTURING COSTS

     In fiscal 2000, the Company decided to close its New York City headquarters
and transfer this operation to its Wesy Roxbury, Massachusetts location. As part
of operating expenses, the Company recorded $1,093,328 of restructuring expenses
related to this facility closure in 2000.  These costs are primarily  related to
severance  for a group of employees  and other exit costs related to closing the
New York facility.

<TABLE>
<CAPTION>

                                        Severance               Other               Total
                                        ---------               -----               -----
<S>                                     <C>                     <C>                 <C>

Amounts provided in 2000                  $485,286             $608,042          $1,093,328
  Amounts paid in 2000                     (87,486)            (230,705)           (318,191)
                                           --------            ---------          ----------

  Balance at December 30, 2000              397,800             377,337             775,137

  Amounts paid in 2001                    (397,800)            (236,009)           (633,809)
  Excess of amounts provided                     -             (141,328)           (141,328)
                                          ---------            ---------          ----------

  Balance at December 29, 2001            $      -             $      -            $       -
                                          =========            =========           =========
</TABLE>

                                      F-11
<PAGE>

     During the second half of 2001,  due to the  substantial  completion of the
actions  of the  2000  restructuring  plan,  the  Company  reevaluated  its 2000
restructuring  accrual. As a result of this review certain costs associated with
the  closure of the New York City  headquarters  were no longer  required.  This
resulted from the  elimination of certain planned actions as well as the Company
successfully  negotiating certain closing costs. As such, the Company recognized
a restructuring  credit of $141,328,  which affected the Internet segment.  This
credit is  reflected in  "Restructuring  (income)  expense" in the  Consolidated
Statements of Operations.

7. INCOME TAXES:

     As of December 29, 2001 and December  30, 2000,  the Company has  estimated
net operating loss  carryforwards of  approximately  $27,090,000 and $24,559,000
respectively,  which  begin to expire  in 2018 and are  subject  to  review  and
possible  adjustment  by the Internal  Revenue  Service.  The United  States Tax
Reform Act of 1986 contains  provisions  that may limit the net  operating  loss
carryforwards   available   to  be  used  in  any  given  year   under   certain
circumstances, including significant changes in ownership interests. The Company
has recorded a valuation  allowance  against its deferred tax assets  because of
the uncertainty regarding their realizability.

     The effects of significant  items comprising the Company's net deferred tax
assets as of December 29, 2001 and December 30, 2000 are as follows:


                                                 2001             2000
                                                 ----             ----
      Net operating loss carryforwards          $ 10,909,171      $9,889,839
      Other                                          725,364         957,326
      Less valuation allowance                  (11,634,535)    (10,847,165)
                                                ------------    ------------

      Net deferred asset                               $   -           $   -
                                                       =====           =====

8. COMMITMENTS AND CONTINGENCIES:

  Legal proceedings:

     Pursuant to an Asset Purchase  Agreement  dated August 2, 2000, as amended,
the Company purchased from The Big Party,  Debtor and  Debtor-in-Possession,  33
retail  locations  and the assets  located  therein,  including  inventory.  The
Company and The Big Party were in  disagreement  concerning the value and amount
due on account of the  inventory.  In  addition,  the  parties set up a $100,000
escrow of funds paid under the  agreement  as security  for rental  payments and
other  adjustments  due,  and the parties  were in  discussions  concerning  the
portion thereof,  which belongs to the Company.  The Big Party filed a complaint
in the U.S.  Bankruptcy  Court for the  District  of  Delaware  in January  2001
seeking payment of $625,568 on account of the inventory.  Both parties agreed to
a settlement  amount of $357,500 in October 2001. The U.S.  Bankruptcy Court for
the  District  of  Delaware  approved  the  settlement  in  November  2001.  The
settlement amount,  which was paid in January 2002, was adequately  reserved for
at December 29, 2001.

  Leases:

     The Company leases  certain  equipment and conducts its operation in leased
facilities  under  operating lease  agreements that expire through 2013.  Future
minimum  lease  payments  under all  operating  leases  are,  approximately,  as
follows:

                                     Year                     Amount
                                     ----                     ------
                             2002                          $4,601,989
                             2003                           4,458,964
                             2004                           4,195,105
                             2005                           3,512,084
                             2006                           2,826,822
                             Thereafter                     2,397,892
                                                            ---------

                             Total                       $ 21,992,856
                                                         ============

                                      F-12
<PAGE>


     The Company's  rental  expense under  operating  leases for the years ended
December 29, 2001 and December 30, 2000,  amounted to $4,336,976 and $1,892,762,
respectively.

  Capital Leases:

     The Company leases  computers,  equipment and certain  fixtures under lease
agreements that qualify for capitalized  treatment under SFAS NO. 13, Accounting
for  Leases.   These  agreements  require  monthly  payments  totaling  $29,753,
including  interest  at rates  ranging up to 18%,  and  expire at various  times
through 2002 and 2003.

     Future minimum lease payments for assets under capital lease obligations at
December 29, 2001 are as follows:

                                         Year                       Amount
                                         ----                       ------
              2002                                               $ 365,120
              2003                                                 293,533
                                                                   -------
              Total minimum lease payments                         658,653
              Less: Amounts representing interest                  124,303
                                                                   -------

              Present value of net minimum lease payments          534,350
              Less: Other maturities                               274,012
                                                                   -------

              Long-term obligation                               $ 260,338
                                                                 =========

     The original  cost and  accumulated  depreciation  of assets under  capital
leases at December  29, 2001 and December 30, 2000 was $723,916 and $171,091 and
$222,233 and $14,816, respectively.

   Consulting agreements:

     On September  7, 1999,  the Company  entered  into a three year  consulting
agreement with one of its outside  directors.  Compensation  under the agreement
consists of options to purchase  100,000  shares of the  Company's  common stock
with an exercise  price of $2.00.  The  options  vest  ratably  over three years
provided that the director is still providing consulting services to the Company
on those dates.  The fair market value of the Company's  stock on the grant date
was $3.94.  In  accordance  with EITF  Issue No.  96-18,  Accounting  for Equity
Instruments  That Are  Issued  to Other  Than  Employees  for  Acquiring,  or in
Conjunction  with  Selling  Goods  or  Services,  at the end of  each  financial
reporting  period  prior to vesting,  the value of these  shares (as  calculated
using the  Black-Scholes  option pricing  model) are  remeasured  using the then
current  fair value of the  Company's  common  stock.  At that  point,  deferred
compensation and the non-cash compensation  recognized during the period will be
adjusted accordingly.  Upon vesting, the fair value of the options that vest (as
calculated using the Black-Scholes  option pricing model) are remeasured for the
last  time  using the then  current  value of the  Company's  common  stock.  On
December  28,  2001,  the  Company  terminated  this  consulting  agreement  and
accelerated the vesting of the remaining options.  The fair value of the options
was  remeasured for the last time upon  termination  of the  agreement.  For the
years ended December 29, 2001 and December 30, 2000, the Company charged $17,754
and $122,783, respectively, related to this consulting agreement to expense.

     On March 9, 2001 and April 5, 2001,  the Company  granted  100,000  options
each to two  consultants  for past services  performed.  In accordance with EITF
96-18 these options were valued using the  Black-Scholes  options  pricing model
and fully expensed.  The Company  charged  $28,648 to  compensation  expense for
these consulting services in 2001.

  Employment agreements:

     The Company has entered  into  employment  agreements  with  several of its
executives.  The  agreements  expire on March 30,  2004 and  provide  for annual
salaries aggregating $565,000. In addition,  the executives were granted options
to purchase an aggregate  of 5,270,534  shares of the  Company's  common  stock,
which vest in various  increments  provided the executives  remain  continuously
employed by the Company. In addition to base salary, the agreements provide that
the executives may receive an annual  performance bonus at the discretion of the

                                      F-13
<PAGE>

Compensation  Committee  of the Board of  Directors.  The  agreements  also have
termination  clauses that call for severance  payments  ranging up to one year's
salary.

  Advertising agreement:

     On September 27, 1999, the Company entered into two agreements with America
Online,  Inc., (AOL) a Shopping Channel  Promotion  Agreement and an Advertising
Purchase  Agreement to provide  promotions on the AOL web site  requiring  total
payments  of  $1,276,481  over  the term of the  agreement.  The term of the two
agreements was ten months  commencing  October 1, 1999. The two agreements  were
terminated on September 29, 2000. The total payments made totaled $1,015,480 for
the year ended December 30, 2000. Under the terms of the termination  agreement,
no further obligation is required from either party.

  Fulfillment agreement:

     On July 8, 1999, the Company entered into a product  fulfillment  agreement
with a direct marketer of party supplies.  Under the agreement, the Company will
utilize the direct  marketer's  inventory  and  fulfillment  services to deliver
merchandise  ordered on the Company's web site, or directly  through a toll-free
telephone number, directly to consumers.  The initial term of the agreement runs
through  December 31, 2002.  The  agreement  contains  certain  restrictions  on
competition  by the  direct  marketer.  As  additional  consideration  for  such
restrictions  and services,  the Company issued a warrant to purchase  3,000,000
shares of common  stock at an exercise  price of $3.75.  The warrant  expires on
October 1, 2002.  The  estimated  fair value of the warrant on the date of issue
was  approximately  $5.3 million as determined  using the  Black-Scholes  option
pricing model.  The value of the warrant was recorded as an intangible asset and
was being  amortized  over the initial  term of the  fulfillment  agreement.  On
December  30,  2000,  it was  determined  that the  Company  had not met certain
minimum  purchase  requirements  for the year as outlined in the agreement  with
Taymark.  As a result of this  shortfall,  the  restrictions  on  competition by
Taymark as  outlined in the  agreement  were  lifted,  rendering  the  remaining
unamortized value of the warrant worthless.  Therefore, the remaining balance of
$3,021,954 was charged to expense.  Total warrant  amortization expense recorded
in the year ended December 30, 2000 was $4,532,930.

  Advertising and public relations agency agreements:

     On  September  29,  1999,  the  Company  entered  into  an  agreement  with
Kirshenbaum Bond & Partners ("Kirshenbaum") to create a marketing communications
program  during the period from July 1, 1999 through  June 30, 2000.  The annual
fee payable to Kirshenbaum was $1,026,000 to be paid in 12 monthly installments.
In addition to the annual fee,  the Company  paid a 15%  commission  on Internet
advertising  and a 4%  commission  on TV and radio  advertising  placed  through
Kirshenbaum. This agreement was terminated on March 15, 2000. For the year ended
December 30, 2000, the Company  charged  $195,750 of this annual fee to expense.
Under the terms of the termination agreement,  no further obligation is required
from either party.

  License agreement:

     On December 21, 1999, the Company entered into a product license  agreement
with  Margaritaville  Holdings.  Under the agreement,  the Company  licenses the
"Margaritaville"  name for use in a distinct  area of the  iParty.com  Web site,
which shall be used to aggregate and offer for sale products that are consistent
with themes associated with Margaritaville and Jimmy Buffet. The initial term of
the agreement runs through December 20, 2002. For consideration for the license,
the  Company  will  pay  a 6%  royalty  on  sales  of  products  that  bear  the
"Margaritaville" name. As additional consideration, the Company issued a warrant
to purchase  550,000 shares of common stock at an exercise  price of $2.88.  The
warrant expires on December 21, 2004. The estimated fair value of the warrant on
the date of issue  was  approximately  $1.6  million  as  determined  using  the
Black-Scholes option pricing model. The value of the warrant was being amortized
over the life of the agreement. On December 30, 2000, it was determined that the
remaining  value  of the  asset,  $1,042,756,  would  not be  realized  over the
remaining term of the contract and therefore the remaining amount was charged to
expense.  For the year ended December 30, 2000 total  amortization  recorded was

                                      F-14
<PAGE>

$1,586,801.  This amount was included in marketing and sales in the accompanying
statement of operations.

9. STOCKHOLDERS' EQUITY

  Series A preferred stock:

     On June 30, 1998,  the Company's  Board of Directors  designated  1,000,000
shares of the  Company's  authorized  10,000,000  shares of  preferred  stock as
Series A preferred  stock.  Such shares have a par value of $0.001,  an original
issue price per share of $1.00, bear no dividends, have a liquidation preference
senior to the Company's common stock and are convertible, on a one to one basis,
as adjusted,  into shares of the Company's common stock. As of December 29, 2001
and December 30, 2000,  there were 1,000,000  shares of Series A preferred stock
outstanding.

  Series B and C preferred stock:

     During  1999,  the  Company  completed  a  private  placement  of  Series B
convertible  preferred  stock and  redeemable  common stock  purchase  warrants,
raising gross proceeds of $20,899,000.  The financing was comprised of 1,044,952
shares of Series B preferred stock  convertible  into an aggregate of 10,449,520
shares of common  stock and the  issuance of warrants to purchase an  additional
5,224,760  shares of common stock at an exercise  price of $2.00 per share.  The
Series B preferred  stock is  convertible at any time into a number of shares of
common  stock equal to the  quotient  derived by dividing  (1) $20.00 by (2) the
conversion price in effect at the time of the conversion. The initial conversion
price is $2.00 per share,  reflecting an initial  conversion ratio of 10:1. With
certain exceptions,  the conversion price will be adjusted on a weighted-average
basis  in the  event  the  Company  issues  common  stock at a price  below  the
conversion price. The Series B preferred stock will  automatically  convert into
common  stock at the  conversion  price then in effect in the event the  Company
consummates  a secondary  public  offering  resulting  in gross  proceeds to the
Company of at least $10,000,000. The Series B preferred stock will be treated as
prior to the Company's common stock, and pari passu with the Company's Series A,
C, D, E and F  preferred  stock in the event of a  liquidation  of the  Company.
Holders  of Series B  preferred  stock vote on an  as-if-converted  basis on all
matters  submitted to a vote of the  Company's  shareholders.  Each common stock
purchase warrant is exercisable for a period of five years,  commencing one year
from the issue  date,  at an initial  exercise  price of $2.00 per share.  Under
certain circumstances,  the common stock warrants are protected against dilution
upon the  occurrence  of certain  events  including the sale of common stock for
less than fair market value or less than the  conversion  price.  Commencing one
year from the issue date, the Company may, on 30-days notice,  redeem the common
stock warrants at a price of $0.05 per warrant if the average  closing bid price
of the common stock equals or exceeds $8.00 per share for 20 consecutive trading
days within a period of 30 consecutive trading days.

     The net proceeds of  $19,513,000  were  allocated to the Series B preferred
stock  and  warrants  based on  their  relative  fair  values  of  approximately
$14,160,000 and $5,353,000,  respectively.  In addition,  the preferred  stock's
conversion features provide for an immediate benefit to its holders, computed by
determining  the fair value of the common stock obtained upon  conversion,  less
the relative fair value of the  preferred  stock.  In  accordance  with Emerging
Issues Task Force ("EITF") Issue No. 98-5, Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios
the value of the preferred stock's  beneficial  conversion feature cannot exceed
the  relative  fair  value  assigned  to the  preferred  stock.  Such  amount of
$14,160,000  was reflected as a dividend in connection  with the issuance of the
Series B preferred stock.

     In addition,  the Company  sold Series C  convertible  preferred  stock and
redeemable common stock purchase warrants.  The Series C financing was comprised
of 100,000 shares of Series C preferred stock  convertible into 1,000,000 shares
of common stock and the issuance of warrants to purchase an  additional  500,000
shares of common stock at an exercise  price of $2.00 per share,  raising  gross
proceeds of $2,000,000.  The terms of the Series C preferred stock are identical
to those of the Series B Preferred Stock.

                                      F-15
<PAGE>

     The net  proceeds of  $1,840,000  were  allocated to the Series C preferred
stock  and  warrants  based on  their  relative  fair  values  of  approximately
$1,332,000  and  $508,000,  respectively.  In addition,  the  preferred  stock's
conversion features provide for an immediate benefit to its holders, computed by
determining  the fair value of the common stock obtained upon  conversion,  less
the relative fair value of the preferred  stock.  In accordance  with EITF Issue
No. 98-5,  the value of the  preferred  stock's  beneficial  conversion  feature
cannot exceed the relative  fair value  assigned to the  preferred  stock.  Such
amount of $1,332,000 was reflected as a dividend in connection with the issuance
of the Series C preferred stock.

     The  placement  agent in the  Series B and C  financings  received  fees of
approximately $1,329,000 and warrants to purchase 929,929 shares of common stock
at an  exercise  price of $2.00 per  share.  At the time of grant,  the  929,929
warrants had an estimated fair value of approximately $2.9 million as determined
using the Black-Scholes option pricing model.

     As of December 29, 2001,  there were 1,118,559 shares of Series B preferred
stock,  145,198  shares of Series C  preferred  stock and  attached  warrants to
purchase  10,553,732  shares of common  stock at an exercise  price of $1.27 per
share  outstanding.  As of December 30,  2000,  there were  1,413,352  shares of
Series B  preferred  stock,  145,198  shares  of  Series C  preferred  stock and
attached  warrants to purchase  10,553,732 shares of common stock at an exercise
price of $1.27 per share outstanding. During fiscal years 2001 and 2000, 294,793
and 103,905 shares  respectively  of Series B preferred  stock were converted to
2,947,930 and 1,039,050 shares common stock respectively.

  Series D preferred stock:

     On December 20, 1999, the Company completed a private placement of Series D
convertible  preferred  stock and  redeemable  common stock  purchase  warrants,
raising proceeds of $5,000,000. The financing was comprised of 250,000 shares of
Series D preferred stock  convertible  into an aggregate of 2,500,000  shares of
common  stock and the issuance of warrants to purchase an  additional  1,250,000
shares of common  stock at an  exercise  price of $2.00 per share.  The Series D
preferred  stock is  convertible  at any time  into a number of shares of common
stock equal to the quotient derived by dividing (1) $20.00 by (2) the conversion
price in effect at the time of the conversion.  The initial  conversion price is
$2.00 per share,  reflecting an initial  conversion  ratio of 10:1. With certain
exceptions, the conversion price will be adjusted on a weighted-average basis in
the event the Company issues common stock at a price below the conversion price.
The Series D preferred stock will automatically convert into common stock at the
conversion price then in effect in the event the Company consummates a secondary
public  offering  resulting  in  gross  proceeds  to  the  Company  of at  least
$10,000,000.  The  Series D  preferred  stock  will be  treated  as prior to the
Company's  common stock, and pari passu with the Company's Series A, B, C, E and
F  preferred  stock in the event of a  liquidation  of the  Company.  Holders of
Series  D  preferred  stock  vote on an  as-if-converted  basis  on all  matters
submitted to a vote of the Company's  shareholders.  Each common stock  purchase
warrant is exercisable for a period of five years,  commencing one year from the
issue  date,  at an initial  exercise  price of $2.00 per share.  Under  certain
circumstances, the common stock warrants are protected against dilution upon the
occurrence  of certain  events  including the sale of common stock for less than
fair market value or less than the  conversion  price.  Commencing one year from
the issue date, the Company may, on thirty-days notice,  redeem the common stock
warrants at a price of $.05 per warrant if the average  closing bid price of the
common stock equals or exceeds $8.00 per share for 20  consecutive  trading days
within a period of 30 consecutive trading days.

     The net  proceeds of  $4,993,000  were  allocated to the Series D preferred
stock  and  warrants  based on  their  relative  fair  values  of  approximately
$3,646,000 and  $1,347,000,  respectively.  In addition,  the preferred  stock's
conversion features provide for an immediate benefit to its holders, computed by
determining  the fair value of the common stock obtained upon  conversion,  less
the relative fair value of the preferred  stock.  In accordance  with EITF Issue
No. 98-5,  the value of the  preferred  stock's  beneficial  conversion  feature
cannot exceed the relative  fair value  assigned to the  preferred  stock.  Such
amount of $3,646,000 was reflected as a dividend in connection with the issuance
of the Series D preferred stock.

                                      F-16
<PAGE>

     The  market  price at the  time of the  Series D  preferred  stock  private
placement was $3.19,  therefore  triggering the  anti-dilution  provision in the
Series B and C preferred stock. The effect of this  anti-dilution  provision was
(1) an adjustment to the exercise price of the redeemable  common stock purchase
warrants  attached  to the Series B and C  preferred  stock to $1.81 and (2) the
issuance of 695,966 additional redeemable common stock purchase warrants with an
exercise  price of $1.81 to the holders of the  warrants  issued in the Series B
and C financings.

     Upon  issuance of the  additional  warrants and  adjustment to the exercise
price  of the  warrants,  the  Company  allocated  approximately  $2,242,000  to
additional paid in capital which  represents the fair value of the new warrants,
and the increase in value of the then outstanding warrants related to the Series
B and C Preferred Stock. This amount was reflected as a dividend.

       As of December 29, 2001, and December 30, 2000 there were 362,996 shares
of Series D preferred stock and attached warrants to purchase 1,814,979 shares
of common stock at an exercise price of $1.37 per share outstanding.

  Series E preferred stock:

     On August 11, 2000, the Company  completed a private  placement of Series E
convertible  preferred stock, raising proceeds of $2,000,000.  The financing was
comprised  of 533,333  shares of Series E preferred  stock  convertible  into an
aggregate of 5,333,333  shares of common stock.  The Series E preferred stock is
convertible  at any time into a number of  shares of common  stock  equal to the
quotient  derived by dividing (1) $3.75 by (2) the conversion price in effect at
the time of the conversion.  The initial  conversion  price is $0.375 per share,
reflecting an initial  conversion  ratio of 10:1. With certain  exceptions,  the
conversion price will be adjusted on a  weighted-average  basis in the event the
Company  issues common stock at price below the conversion  price.  The Series E
preferred stock will  automatically  convert into common stock at the conversion
price then in effect in the event the  average  closing  bid price of the common
stock equals or exceeds $10.00 per share for 20 consecutive  trading days within
a period of 30 consecutive  trading days.  The Series E preferred  stock will be
treated  as  prior to the  Company's  common  stock,  and  pari  passu  with the
Company's  Series A, B, C, D and F preferred stock in the event of a liquidation
of the Company.  Holders of Series E preferred stock vote on an  as-if-converted
basis on all matters submitted to a vote of the Company's shareholders.

     The Series E investment price of $0.375 was lower than the conversion price
for  the  Series  B,  C  and  D  preferred  stock,   therefore   triggering  the
anti-dilution  provision in the Series B, C and D preferred stock. The effect of
this  anti-dilution  provision was (1) an adjustment to the conversion  price of
the  Series B, C and D  preferred  stock to $1.47 (2) the  issuance  of  373,125
additional  shares of Series B  preferred  stock,  35,706  additional  shares of
Series C  preferred  stock and 89,265  additional  shares of Series D  preferred
stock (3) an adjustment  to the exercise  price of the  redeemable  common stock
purchase  warrants  attached to the Series B and C preferred  stock to $1.35 (4)
the issuance of 2,539,092  additional  redeemable common stock purchase warrants
with an  exercise  price of $1.35 to the holders of the  warrants  issued in the
Series  B and C  financings,  (5) an  adjustment  to the  exercise  price of the
redeemable  common stock  purchase  warrants  attached to the Series D preferred
stock to $1.47 (6) the issuance of 446,327  additional  redeemable  common stock
purchase warrants with an exercise price of $1.47 to the holders of the warrants
issued in the Series D financings.

     Upon  issuance of the  additional  warrants and  adjustment to the exercise
price of the warrants,  the Company allocated  $1,691,527 to additional  paid-in
capital,  which represents the fair value of the new warrants,  and the increase
in value of the then  outstanding  warrants  related  to the  Series  B, C and D
preferred  stock.   This  amount  has  been  reflected  as  a  dividend  in  the
accompanying consolidated financial statements.

     As of December 29, 2001 and December 30, 2000, there were 533,333 shares of
Series E preferred stock outstanding.

                                      F-17
<PAGE>

  Series F preferred stock:

     On September 15, 2000, the Company  completed a private placement of Series
F convertible  preferred stock, raising proceeds of $500,000.  The financing was
comprised  of 114,286  shares of Series F preferred  stock  convertible  into an
aggregate of 1,142,860  shares of common stock.  The Series F preferred stock is
convertible  at any time into a number of  shares of common  stock  equal to the
quotient derived by dividing (1) $4.375 by (2) the conversion price in effect at
the time of the conversion.  The initial  conversion price is $0.4375 per share,
reflecting an initial  conversion  ratio of 10:1. With certain  exceptions,  the
conversion price will be adjusted on a  weighted-average  basis in the event the
Company issues common stock at a price below the conversion  price. The Series F
preferred stock will  automatically  convert into common stock at the conversion
price then in effect in the event the  average  closing  bid price of the common
stock equals or exceeds $10.00 per share for 20 consecutive  trading days within
a period of 30 consecutive  trading days.  The Series F preferred  stock will be
treated  as  prior to the  Company's  common  stock,  and  pari  passu  with the
Company's  Series A, B, C, D and E preferred stock in the event of a liquidation
of the Company.  Holders of Series F preferred stock vote on an  as-if-converted
basis on all matters submitted to a vote of the Company's shareholders.

     The Series F preferred stock investment price of $0.4375 was lower than the
conversion price for the Series B, C and D preferred stock, therefore triggering
the anti-dilution provision in the Series B, C and D preferred stock. The effect
of this anti-dilution provision was (1) an adjustment to the conversion price of
the  Series  B, C and D  preferred  stock to $1.37  (2) the  issuance  of 99,189
additional shares of Series B preferred stock, 9,492 additional shares of Series
C preferred stock and 23,731  additional  shares of Series D preferred stock (3)
an  adjustment to the exercise  price of the  redeemable  common stock  purchase
warrants  attached  to the  Series B and C  preferred  stock  to  $1.27  (4) the
issuance of 663,950 additional redeemable common stock purchase warrants with an
exercise  price of $1.27 to the holders of the  warrants  issued in the Series B
and C  financings  (5) an  adjustment  to the exercise  price of the  redeemable
common stock purchase warrants attached to the Series D preferred stock to $1.37
(6) the issuance of 118,652 additional redeemable common stock purchase warrants
with an  exercise  price of $1.37 to the holders of the  warrants  issued in the
Series D financings.

     Upon  issuance of the  additional  warrants and  adjustment to the exercise
price of the warrants,  the Company  allocated  $557,827 to  additional  paid in
capital which represents the fair value of the new warrants, and the increase in
value  of  the  then  outstanding  warrants  related  to the  Series  B, C and D
Preferred  Stock.   This  amount  has  been  reflected  as  a  dividend  in  the
accompanying financial statements.

     As of December 29, 2001 and December 30, 2000, there were 114,286 shares of
Series F preferred stock outstanding.

10.  WARRANTS

     At December 29, 2001 and December  30,  2000,  there were several  warrants
outstanding for shares of the Company's stock.  Substantially all of the warrant
agreements contain certain anti-dilution  provisions,  which, if triggered,  can
result in  additional  shares  being  available to the warrant  holder  and/or a
reduction in the exercise price for each share. Certain anti-dilution provisions
were  triggered in fiscal  2000,  which  resulted in the issuance of  additional
warrants.  The following table summarizes the Company's  outstanding warrants at
December 29, 2001 and December 30, 2000:

               Warrant Shares        Exercise Price       Expiration Date
               --------------        --------------       ---------------
                     528,210             $ 3.79               4/16/09
                   8,286,002             $ 1.27               8/26/05
                     792,950             $ 1.27               9/10/05
                   1,474,780             $ 1.27               9/10/05
                   1,814,979             $ 1.37              12/20/05
                     577,500             $ 2.88              12/21/04
                   3,000,000             $ 3.75              12/31/02
                   ---------

                  16,474,421
                  ==========

                                      F-18
<PAGE>

11. LINE OF CREDIT:

     On August 1, 2000,  the Company  established  a line of credit with Paragon
Capital  Corp  (subsequently  purchased  by Wells  Fargo  Retail  Finance).  The
agreement  permits maximum  borrowings  equal to the lesser of $7,500,000 or the
borrowing  base. The line of credit is secured by the Company's  inventory,  and
expires on July 31, 2003.  As of December  29,  2001,  and December 30, 2000 the
Company had $3,354,977 and $2,800,790, respectively,  outstanding under the line
of credit. The outstanding balances under the line of credit are classified as a
current  liability  in  the  accompanying  consolidated  balance  sheets  due to
provisions  in the  agreement  which  require the Company to maintain an account
with the  lender  whereby  lock box  receipts  are  applied to reduce the amount
outstanding  under the  agreement  on a daily  basis.  At December  29, 2001 and
December  30,  2000  available   borrowings   under  the  line  of  credit  were
approximately $1,500,000 and $2,100,000, respectively.

     Interest on the line of credit for the first  $5,000,000  borrowed  will be
payable at the  greater of the bank's  base rate plus 1% or 8%.  Interest on the
sub-line  borrowing,  money borrowed  between  $5,000,000 and $7,500,000 will be
payable at the bank rate plus 2%. The  agreement  also provides for a commitment
fee of 1% or $75,000 and an annual facility fee of 0.5% per annum of the maximum
amount of the special sub-line.

     The agreement provides for certain financial  covenants including inventory
levels,  advance  rate,  tangible  net worth and  operating  performance  of the
internet  segment.  At December 29, 2001 the Company was in compliance  with all
the covenants related to the line of credit.

12. STOCK OPTION PLAN:

     Under the Company's 1998 Incentive and  Nonqualified  Stock Option Plan, as
amended (the "1998 Plan")  options to acquire  11,00,000  shares of common stock
may be granted to  officers,  directors,  key  employees  and  consultants.  The
exercise  price for  qualified  incentive  options  cannot be less than the fair
market  value  of the  stock  on the  grant  date  and  the  exercise  price  of
nonqualified  options can be fixed by the Board.  Qualified incentive options to
purchase  the  Company's  common  stock under the 1998 Plan have been granted to
employees,  directors and consultants of the Company at fair market value at the
date of grant. Generally, the options become exercisable over periods up to four
years and expire 10 years from the date of grant.  On  February  27,  2001,  the
Company  increased  the  number  of  shares  available  under  the 1998  Plan to
11,000,000.

     A summary of the  Company's  stock options  outstanding  as of December 29,
2001 and  December  30,  2000 and  activity  during  the years then ended are as
follows:

<TABLE>
<CAPTION>

                                                                      Weighted Ave.
                                                     Shares           Exercise Price         Price Range
                                                     ------           --------------         -----------
<S>                                                  <C>              <C>                    <C>

Outstanding - December 31, 1999                       3,345,030           $2.99            $1.00 - $5.38
  Granted                                             2,686,215           $1.15            $0.13 - $4.25
  Expired/Forfeited                                 (1,050,068)           $2.96            $0.31 - $5.00
  Exercised                                           (335,000)           $2.14            $1.06 - $2.50
                                                      ---------           -----

Outstanding - December 30, 2000                       4,646,177           $1.99            $0.31 - $5.38
  Granted                                             4,063,957           $0.25            $0.10 - $0.36
  Expired/Forfeited                                 (1,199,810)           $1.84            $0.10 - $5.25
                                                    -----------           -----

Outstanding - December 29, 2001                       7,510,324           $1.07            $0.10 - $5.38
                                                      =========           =====

Exercisable - December 29, 2001                       3,528,516           $1.67            $0.13 - $5.38
                                                      =========           =====

</TABLE>

                                      F-19
<PAGE>

     The following  table  summarizes  information  for options  outstanding and
exercisable at December 29, 2001:

<TABLE>
<CAPTION>
                                 Options Outstanding                        Options Exercisable
                                 -------------------                        -------------------
                                          Ave.        Wtd. Ave.                           Wtd. Ave.
                                          ----        ---------                           ---------
                                       remaining      exercise                             exercise
                                       ---------      --------                             --------
    Price range           Shares          life          price             Shares            price
    -----------           ------          ----          -----             ------            -----
    <S>                   <C>          <C>            <C>                 <C>             <C>

    $0.10-$0.20           278,350         9.2          $0.18                34,213          $0.13
    $0.21-$0.30         3,774,077         9.4          $0.25             1,048,901          $0.25
    $0.31-$0.45           209,700         8.8          $0.33               136,452          $0.32
    $0.46-$0.68           127,940         8.6          $0.50                42,647          $0.50
    $0.69-$0.99         1,006,527         8.4          $0.69               398,417          $0.69
    $1.00-$1.53           125,000         4.4          $1.09               125,000          $1.09
    $1.54-$2.30           659,730         7.0          $1.99               659,730          $1.99
    $2.31-$3.45           305,000         5.5          $2.85               305,000          $2.85
    $3.46-$5.38         1,024,000         5.3          $3.81               778,156          $3.81
                        ---------                      -----            ----------          -----

  Total                 7,510,324                      $1.07             3,528,516          $1.67
                        ==========                     =====            ==========          =====
</TABLE>

     The effect of applying  SFAS 123 on the years ended  December  29, 2001 and
December  30,  2000 pro  forma  net  loss as  stated  below  is not  necessarily
representative  of the  effects on  reported  net loss for future  years due to,
among other things,  the vesting  period of the stock options and the fair value
of additional  stock option grants in future  years.  The weighted  average fair
value of the options  granted  during the year ended December 30, 2000 have been
estimated  at $0.95  per  share on the date of  grant  using  the  Black-Scholes
option-pricing  model  with  the  following  assumptions:   no  dividend  yield,
volatility of 115%, a risk-free interest rate of 5.44% to 6.75%, and an expected
life of five years from date of the grant.  The  weighted  average fair value of
the options  granted during the year ended December 29, 2001 have been estimated
at $0.16 per share on the date of grant using the  Black-Scholes  option-pricing
model with the following assumptions:  no dividend yield,  volatility of 125%, a
risk-free  interest  rate of 4.85% to 5.83%,  and an expected life of five years
from date of the grant.  Had  compensation  cost for the Company's  stock option
plan been  determined  based  upon the fair  value at the grant  date for awards
under the plan consistent with the  methodology  prescribed  under SFAS 123, the
Company's  net loss and net loss per share  would  have been the  following  pro
forma amounts:

                                              2001                2000
                                              ----                ----
 Net loss
    Reported                             $ (2,436,306)       $ (20,933,111)
                                         =============       ==============

    Pro forma                            $ (3,582,959)       $ (22,818,910)
                                         =============       ==============

 Net loss per share
    Reported                                 $  (0.18)            $  (2.05)
                                             =========            =========

    Pro forma                                $  (0.27)            $  (2.21)
                                             =========            =========

13. STOCKHOLDER RIGHTS PLAN:

     On November  9, 2001,  the Company  announced  that its Board of  Directors
adopted a Stockholder Rights Plan (the "Plan").  Under the Plan each stockholder
of record at the close of business  on November 9, 2001 will  receive a dividend
of one right for each outstanding share of the Company's common stock, par value
$0.001 per share, and each share of the Company's  outstanding  preferred stock,
par value  $0.001 per share,  on an as converted  basis.  The rights will become
exercisable  only in the event,  with certain  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 will 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

                                      F-20
<PAGE>

right is  exercised,  the  holder  thereof,  as such,  will  have no rights as a
shareholder of the Company, including,  without limitation, the right to vote or
receive dividends.


14. PROFIT SHARING 401(k) PLAN:

     During  2000,  the  Company  adopted  the iParty  401(k)  Plan,  which is a
qualified  profit  sharing plan  covering  substantially  all of its  employees.
Contributions to this plan are at the discretion of the Board of Directors.  The
Company's  expense,  including  matching  contributions  and  any  discretionary
amounts for the years ended  December 29, 2001 and December 30, 2000 was $43,893
and $13,967, respectively.


                                      F-21