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

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

                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 30, 2000

                                       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                                      13-4012236
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)

              1457 VFW PARKWAY                                     02132
           BOSTON, 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. / /

     The Issuer's  revenues for its most recent  fiscal year ended  December 30,
2000 were $18,619,877.

     On March 27, 2001,  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  $1,944,911 based on

<PAGE>

the closing price for such Common Stock on said date as reported by the American
Stock Exchange.

     On March 27, 2001, there were 12,966,075 shares of Common Stock,  $.001 par
value, issued and outstanding.


<PAGE>


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


<PAGE>

                                     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,  2001,  we  moved  our   executive   offices  to  Boston,
Massachusetts  from New York, New York. Our executive offices are now located at
1457 VFW  Parkway,  Boston,  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 in three channels:  retail stores,
Internet and catalog. This year we expect to further integrate the marketing and
positioning  of  these  channels  and by 2002  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;  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

<PAGE>

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.

     Although the consumer  interacts  only with us, the actual  fulfillment  is
performed by a network of strategic partners, vendors, and subcontractors. These
strategic  partners  ship  direct  to the  consumer.  Typically,  the  strategic
partners are catalog companies and/or established direct marketing merchants.

     Taymark,  one of the largest  direct  marketer's  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  maybe   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.  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.  StarGreetings  intends to offer a personalized video greeting from
celebrities from entertainment,  music, fashion, politics and animation who will
talk about the special occasion, such as a birthday, anniversary, etc.

     As of March 30, 2001, we have  exclusive  StarGreeting  contracts with five
celebrities.  We have no plans to attempt to sign up additional  celebrities  in
fiscal year 2001. The agreements are substantially  similar and consist of three
compensation components:  (1) a flat fee; (2) a commission upon the sale of each
greeting  (a  portion of which is  payable  to the  charity  of the  celebrities
choice); and (3) an option to purchase common stock. The terms of the agreements
range from one to three years.

     The concept  underlying  StarGreetings is licensed to  StarGreetings,  Inc.
through August 15, 2018. We pay a 2.5% royalty on the gross revenues received in
connection  with each greeting.  To date, no revenues have been generated  using
this concept and we have no plans to launch this service in fiscal year 2001.

      Since inception, we have spent approximately $1,000,000 on construction of
our web site and $100,000 on development of  StarGreetings  video  software.  In
fiscal year 2001, we do not expect to invest in the further  construction of our
web site or the StarGreetings concept.

--------------------------------------------------------------------------------
                                       2
<PAGE>

  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 30, 2000 and
December 31, 1999, we incurred  commission expense under this agreement totaling
$13,128 and $0, respectively.

     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 30, 2000 and
December 31, 1999, 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 catalog and 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.

  Patents and Trademarks

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

     A provisional patent application for our StarGreetings  "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".  The applications for the trademarks  "iParty" and "iParty.com"
were filed with the U.S.  Patent and  Trademark  Office on April 29,  1999.  The
application for the trademark "StarGreetings" was filed with the U.S. Patent and
Trademark Office on August 17, 1999.

--------------------------------------------------------------------------------
                                       3
<PAGE>

Employees

     We have 178 full-time  employees and 530 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

     We  lease   office  and  retail   space  at  1457  VFW   Parkway,   Boston,
Massachusetts,  02132.  The lease,  which runs through  October 9, 2002,  is for
20,000  square feet.  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.

       We also lease office space at 130 West 30th Street, 10th Floor, New York,
New York 10001. The lease runs through March 31, 2005. The total monthly rent is
$17,833.  We are  currently  marketing  the space for a possible  sublet that we
believe will have been finalized by the end of June 2001.

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 are 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 are in discussions  concerning the portion  thereof which belongs to us.
The Big Party filed a complaint to the U.S. Bankruptcy Court for the District of
Delaware  in  January  2001  seeking  payment  of  $625,568  on  account  of the
inventory.  We are disputing the amount claimed and intend to file an answer and
a possible  counterclaim  for amounts  due on account of the escrow  referred to
above.  We are also in  negotiations  with  The Big  Party  seeking  to reach an
agreeable  compromise.  This matter is in the preliminary stages. In the opinion
of our  management,  we are  adequately  reserved  and this should not result in
final judgement or settlement  that would have a material  adverse effect on our
financial condition or results of operations.

       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.






--------------------------------------------------------------------------------
                                       4
<PAGE>

                                     PART II

ITEM 5.   MARKET FOR AND DIVIDENDS ON THE REGISTRANT'S 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 31,
1999 and December 30, 2000. 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 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--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
Fourth Quarter--1999..........................................   $2.81    $2.19
Third Quarter--1999...........................................    3.93     2.62
Second Quarter--1999..........................................    5.00     2.44
First Quarter--1999...........................................    6.68     3.12

  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.

  Approximated Number of Equity Security Holders

     The  approximate  number of record  holders of our Common Stock as of March
27,  2001  was 98.  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,  including  information  set forth
under Item 6 "Plan of Operations" 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

--------------------------------------------------------------------------------
                                       5
<PAGE>

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  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, through catalogues and 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 Pokemon  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.

       In April 2000, we launched our catalogue  operation,  specializing in the
seasonal party needs of the consumer.

       On August 15, 2000 iParty Retail purchased assets  consisting of 33 store
leases,  fixtures and  inventory  from The Big Party.  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 31, 1999 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  30,  2000  and  December  31,  1999  were   $18,619,877  and  $138,545
respectively.  For the year ended December 30, 2000,  revenue from retail stores
totaled  $17,469,777 and revenue from the Internet totaled  $1,150,100.  For the
year ended December 31, 1999,  revenue from retail stores totaled $0 and revenue
from the Internet totaled  $138,545.  The increase in Internet revenue is due to
increased traffic,  revenue from repeat customers and 2000 having a full year of
operations.

       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 the year ended  December  30,  2000 and  December  31,  1999 were
$11,734,011 or 63% of revenue and $111,961 or 81% of revenue  respectively.  For
the year ended  December  30,  2000,  cost of products  sold from retail  stores
totaled  $10,609,756  or 61% of  revenue  and  cost of  products  sold  from the
Internet totaled  $1,124,255 or 98% of revenue.  For the year ended December 31,
1999,  cost of products sold from retail stores  totaled $0 and cost of products
sold from the Internet totaled $111,961 or 81% of revenue.  The increase in cost
of products  sold  percentage  for the Internet is due to an  accounting  change
related to the recording of coupon expense, which is now recorded as a reduction
to revenue.

       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, we entered into a product  fulfillment  agreement with Taymark.

--------------------------------------------------------------------------------
                                       6
<PAGE>

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, we 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 included in
intangible assets on the accompanying Balance Sheet and was being amortized over
the initial term of the fulfillment  agreement.  For the year ended December 30,
2000 and December 31, 1999  amortization of fulfillment  partner warrant expense
was $4,532,930 and $755,488,  respectively  resulting from the  amortization  of
this warrant.  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.

       Marketing and sales expenses  consist  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 30, 2000 and December 31, 1999 were  $13,058,710  and $4,016,539,
respectively. For the year ended December 30, 2000, marketing and sales expenses
for retail stores  totaled  $5,045,884  and marketing and sales expenses for the
Internet  totaled  $8,012,826.  Included in the marketing and sales expenses for
the  Internet  was   $1,586,803   resulting   from  the   amortization   of  the
Margaritaville  warrant.  For the year ended  December 31, 1999,  marketing  and
sales expenses for retail stores totaled $0 and marketing and sales expenses for
the Internet  totaled  $4,016,539.  Included in the marketing and sales expenses
for  the  Internet  was  $45,337   resulting  from  the   amortization   of  the
Margaritaville  warrant.  The increase in marketing  and sales  expenses for the
Internet was due to having a full year of  operations  in 2000.  The increase in
the amortization of the Margaritaville warrant was due to a $1,042,756 write-off
of the remaining  unamortized value of the 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.

       Product  and  technology  development  expenses  consist  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  expenses for the year
ended December 30, 2000 and December 31, 1999 were  $5,173,828  and  $2,418,516,
respectively. The increase in product and technology development expenses is due
to increased site  development in 2000.  The Company is  transitioning  from the
site  development  phase to a site  maintenance  phase and  expects  that  these
expenses will be lower in 2001.

       General  and  administrative  ("G&A")  expenses  consist of  payroll  and
related   expenses  for  executive,   finance  and   administrative   personnel,
professional  fees  and  other  general  corporate  expenses.  Consolidated  G&A
expenses  for the year  ended  December  30,  2000 and  December  31,  1999 were
$3,682,312 and $2,010,470,  respectively.  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.  For the year ended December 31, 1999, G&A for retail stores totaled
$0 and G&A for the  Internet  totaled  $2,010,470.  The  decrease in G&A for the
Internet is due to an effort to reduce the level of spending in this area.

       Restructuring  expenses  consist  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. The expense of $1,093,328
is a one-time charge.

     For the year ended  December 30, 2000 and  December  31, 1999,  we incurred
$5,784 and $518,915 in losses resulting from  abandonment of assets.  The losses
for 1999  consisted  of  approximately  $273,000  due to a write-off of web site
development  costs  incurred  during 1998 and 1999. It was  determined  that the
costs, which had been capitalized as property and equipment, were abandoned when
we selected new vendors for support of our web site,  necessitating the creation
of a new web site and integration components.  The remaining $246,000 represents
capitalized  production  and  development  costs that were  written  off when we
modified the StarConcept.

--------------------------------------------------------------------------------
                                       7
<PAGE>

       The non-cash  compensation  expense consists of the amortization of stock
options  granted to  consultants  related to the  Internet  operation.  Non-cash
compensation  expense for the year ended December 30, 2000 and December 31, 1999
were $812,510 and $847,741, respectively.

       Interest income on cash and cash  equivalents for the year ended December
30, 2000 and  December 30, 1999 was $733,163  and  $289,721,  respectively.  The
increase in income was due to higher cash and investment balances resulting from
our financing activities,  principally the private placement of Series B, C, and
D Convertible Preferred Stock completed in 1999, and Series E and F completed in
2000.

       Interest  expense for the year ended  December  30, 2000 and December 31,
1999 was $149,346 and $1,004,051, respectively. The interest expense in 2000 was
related to the iParty  Retail line of credit.  The interest  expense in 1999 was
related to convertible  notes payable that were converted to preferred  stock in
September 1999.

  Liquidity and Capital Resources

       We used cash in operating activities for the year ended December 30, 2000
and December 31, 1999 totaling  $14,159,135  and  $6,175,729,  respectively.  In
addition,  we  invested  cash in  property  and  equipment,  including  web site
development  expenditures,  acquisition of operating  assets from The Big Party,
and marketable  securities for the year ended December 30, 2000 and December 31,
1999 totaling  $4,670,459 and $2,489,786,  respectively.  During 2000, we raised
$2,491,035,  net of offering  expenses in financing with the proceeds being used
towards the purchase the 33 retail stores from The Big Party. The purchase price
of those assets totaled $4,858,289.  We also used $2,800,790 of our bank line to
fund our working capital and capital expenditures in the fourth quarter of 2000.
During 1999, we raised $26,992,079,  net of offering expenses, in financing with
the proceeds being used for working capital and capital expenditures.

       To date, we raised an aggregate of $30.9 million in equity financing.  In
September  2000,  Paragon  Capital  LLC  issued a $7.5  million  line of credit,
secured by inventory, to the iParty Retail.

       On August 1, 2000, the Company  established a line of credit with a bank.
The new agreement  permits maximum  borrowings equal to the lesser of $7,500,000
or the borrowing base, as defined.  Interest on the line of credit for the first
$5,000,000 borrowed ("Line Interest Rate") will be payable at the greater of the
bank's  base rate (9.5% at  December  30,  2000) 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.  This agreement expires on July 31, 2003. As of
December  30, 2000,  the Company had  $2,800,790  outstanding  under the line of
credit.  At December 30, 2000,  the Company was out of  compliance  with certain
loan covenants and had obtained waivers on all such covenants.

       As of March 2001,  the Company and its lender have modified its borrowing
facility  by  adjusting  certain  covenants  and other  provisions  based on the
Company's  operating  plan for 2001. As of January 2001,  the Company was out of
compliance with certain of the amended covenants and had obtained waivers on all
such covenants.

       We believe, based on currently proposed plans and assumptions relating to
its 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  our  operations  and  working  capital
requirements  for at  least  twelve  months.  In the  event  that  our  plans or
assumptions change or prove inaccurate (due to unanticipated expenses, increased
competition, unfavorable economic conditions, or other unforeseen circumstances)
we  could  be  required  to seek  additional  financing  sooner  than  currently
expected.  There  can be no  assurance  that  such  additional  funding  will be
available to us, or if available,  that the terms of such  additional  financing
will be acceptable to us.

    Acquisitions

--------------------------------------------------------------------------------
                                       8
<PAGE>

     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  consolidating the field 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 AND SUPPLEMENTARY DATA

     See Index to Financial Statements attached hereto.

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

     Not applicable.






--------------------------------------------------------------------------------
                                       9
<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...........   50    Chief Executive Officer, Director
Patrick Farrell........   33    President, Chief Financial Officer
Robert Jevon...........   48    Director
Robert H. Lessin.......   45    Director
Stuart G. Moldaw.......   73    Director
Christina Weaver.......   30    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 January 1999. 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 N2KInc.  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 Jevon has been a Director of our company since  February  2000.  Mr.
Jevon is a Partner of Boston Millennia Partners,  a venture capital firm and has
held such position  since  February  2000,  and has been a Principal of the firm
since  1997.  Mr.  Jevon's  primary   investment  focus  is  business  services,
information  technology  and life  sciences.  Mr.  Jevon  serves on the Board of
Directors of Proteome,  Inc., an Internet-based provider of biological knowledge
databases to  pharmaceutical  and  biotechnology  researchers,  and  TeleCommute
Solutions, Inc., a provider of telecommunication  services. Prior to his current
position, Mr. Jevon was a Venture Affiliate of Boston Capital Ventures from 1995
to 1996 and was a Principal of Watch Hill  Corporation  from 1993 to 1995.  From
1989 to 1992, he was the  Controller  of Bolt Beranek & Newman's  Communications
Division.  He is a graduate of  Haverford  College and holds an M.B.A.  from the
Amos Tuck School at Dartmouth College.

     Robert H. Lessin has been a Director of our  company  since July 1998.  Mr.
Lessin has been Chairman of Wit Capital Corp., an on-line  broker-dealer,  since
April 1998.  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.

--------------------------------------------------------------------------------
                                       10
<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. Jevon and Moldaw and Ms. Weaver, and a compensation committee consisting
of Messrs. Jevon and Perisano. We also have an executive committee consisting of
Messrs. Perisano,  Lessin and Moldaw. 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.

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

     No person  who,  during the fiscal  year ended  December  30,  2000,  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 a 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
2000,  1999 and 1998 (see footnotes  below) to our Chief  Executive  Officer and
other  executive  officers that received  compensation  during 2000 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)...  2000    $249,522      --             --           464,260
                                             1999     111,442      --             --           797,230
                                             1998          --      --             --            50,000

Patrick Farrell, President and Chief
  Financial Officer (2)....................  2000    $146,032      --             --           165,657
                                             1999      87,939      --             --           190,000
                                             1998          --      --             --                --

John Jolly, Former Chief Operating
  Officer(3)...............................  2000    $135,641      --             --           308,675
                                             1999          --      --             --                --
                                             1998          --      --             --                --

Byron Hero, Former Chief Executive
  Officer(4)...............................  2000          --      --             --                --
                                             1999    $ 72,917      --       $145,836                --
                                             1998    $104,166      --             --           300,000
Maureen Broughton Murrah,
  Former President(5)......................  2000          --      --       $250,000                --
                                             1999    $154,919      --          5,000                --
                                             1998    $ 69,327      --             --           300,000
</TABLE>

--------------------------------------------------------------------------------
                                       11
<PAGE>

------------------
(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 will receive 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.  Payments made under this agreement are reflected
         in other annual compensation.

(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  option  on  a  cashless  basis   generating   taxable
         compensation.

<TABLE>
<CAPTION>

                                                       OPTION 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.........    464,260         17.3%         $ 0.69      6/15/2010

Patrick Farrell, President
  and Chief Financial Officer.................    165,657          6.2%         $ 0.69      6/15/2010

John Jolly, Former Chief Operating Officer(1).    250,000         11.5%         $ 1.50      4/14/2010
                                                   58,675                       $ 0.69      6/15/2010

</TABLE>

------------------
(1)      As a result of his  termination,  Mr.  Jolly's  options  will expire on
         4/15/01 if not exercised.

  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  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.

EMPLOYMENT AND CONSULTING AGREEMENTS

     We have  entered  into a  consulting  agreement  with Mr.  Perisano for the
services  of Mr.  Perisano  and his wife,  Ms.  Dionne.  The  consulting  period
terminated on December 31, 1999.  Pursuant to this  agreement,  Mr. Perisano was
entitled to options to purchase  25,000 shares of common stock,  at the price on
the date of grant ($1.43),  and additional  options to purchase 25,000 shares of

--------------------------------------------------------------------------------
                                       12
<PAGE>
common stock in the event their  consulting  hours exceed 100. Their  consulting
hours exceeded 100 on January 19, 1999.  Consequently,  Mr. Perisano was granted
options to purchase  25,000 shares of common stock at an exercise price of $5.38
per share, the price of the common stock on such date.

     We have  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). Such options will vest as follows:  provided that Mr. Perisano
remains  continuously  employed by us, options with respect to 112,500 shares of
common stock will vest on March 30, 2000, 1/24th of the remaining 225,000 shares
of common stock will vest each month beginning on April 30, 2000 for a period of
24 months.  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 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
then current salary for a period of six months.  The agreement  contains certain
customary 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 provides for Mr. Farrell
to serve as our  President and Chief  Financial  Officer and as President of our
subsidiary,  iParty  Retail for a term which  expires  December  31,  2001.  The
agreement  provides for an initial base salary of $165,000 per year. If employed
at the end of the term,  Mr.  Farrell  will  receive  a bonus  equal to four and
one-half  months of his base salary.  If we terminate the  employment  agreement
without  cause,  Mr.  Farrell is entitled to receive his full then  current base
salary for a period of four and one-half months from the date of termination.

--------------------------------------------------------------------------------
                                       13
<PAGE>

     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.

     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 StarGreeting,
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 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.

STOCK OPTION PLAN

     In July 1998, our Board of Directors adopted the Incentive and Nonqualified
Stock Option Plan,  under which there are currently  7,000,000  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 422A of the
Internal Revenue Code of 1986, as amended 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 administrator are eligible to receive options under
the plan.  Subject to certain  restrictions,  the administrator is authorized to
designate  the number of shares to be covered  by each  award,  the terms of the
award,  the dates on which and the rates at which options or other awards 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 administrator will
fix the exercise  price of a  nonqualified  stock  option at whatever  price the
administrator may determine in good faith.  Unless the administrator  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  administrator  provides
otherwise, options terminate upon the termination of a participant's employment,
except  that 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, awards must be exercised by cash payment to us of the exercise price.
However,  the  administrator  may allow a participant to pay all or a portion of
the exercise price by means of stock.

     In the event of any  change in the  outstanding  shares of common  stock by
reason  of  any  reclassification,   recapitalization,   merger,  consolidation,
reorganization,  spin-off,  issuance of warrants or rights or debentures,  stock
dividend,  stock split or reverse stock split, cash dividend,  property dividend
or similar change in the corporate  structure,  the  administrator  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 as he

--------------------------------------------------------------------------------
                                       14
<PAGE>

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.

     The administrator  may, at any time,  modify,  amend or terminate our stock
option plan as is necessary to maintain  compliance  with  applicable  statutes,
rules or regulations;  provided,  however,  that the administrator may condition
the  effectiveness of any such amendment on the receipt of stockholder  approval
as may be required by applicable statute, rule or regulation.  In addition,  our
plan may be  terminated  by the Board of Directors  as it will  determine in its
sole discretion, in the absence of stockholder approval; provided, however, that
any such termination will not adversely alter or impair any option awarded under
our plan prior to such termination without the consent of the holder thereof.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth, as of March 27, 2001,  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.............................................                503,745(3)               3.76%
Patrick Farrell..........................................                164,915(4)               1.26%
Robert H. Lessin ........................................          11,359,863(5)(7)              61.99%
  c/o WIT Capital
  826 Broadway, 6th Floor
  New York, NY 10003
James McCann ............................................                699,600(6)               5.43%
  1-800 Flowers
  1000 Stewart Avenue
  Westbury, NY 11590r
iParty LLC ..............................................              6,000,000(7)              46.54%
  c/o Robert H. Lessin
  826 Broadway, 6th Floor
  New York, NY 10003
Ajmal Khan ..............................................              3,231,665(8)              20.07%
  The Verus Group
  1177 West Hastings Street
  Vancouver, British Columbia
  Canada V6E 2K3
Stuart G. Moldaw ........................................                351,769(9)               2.64%
  700 Airport Boulevard
  Burlingame, California 94010
Roccia Partners, L.P. ...................................             4,032,130(10)              23.82%
  826 Broadway
  New York, NY 10003
Boston Millennia Partners, LP............................             2,244,930(11)              14.83%
  30 Rowes Wharf
  Suite 330
  Boston, MA 02110
Hampton Associates Limited ..............................             1,261,617(12)               8.91%
  1702 Dina House
  Ruttonjee Centre
  11 Duddell Street
  Central Hong Kong
HMTF-iPC, LLC ...........................................             5,444,939(13)              29.69%
  200 Crescent Court, Suite 1600
  Dallas, TX 75201
Patriot Capital Limited..................................             1,142,860(14)               8.14%
  P.O. Box 438
  Road Town
  Tortola, British Virgin Island
Robert Jevon  ...........................................                75,000(15)               0.58%
  Boston Millennia Partners, LP
  30 Rhowes Wharf
  Suite 330
  Boston, MA 02110
Christina Weaver.........................................                25,000(16)               0.19%
  Hicks, Muse, Tate & Furst Incorporated
  200 Crescent Court, Suite 1600
  Dallas, TX 75201
Taymark..................................................             3,000,000(17)              18.88%
  4875 White Bear Parkway
  White Bear Lake, MN 55110

</TABLE>

--------------------------------------------------------------------------------
                                       15
<PAGE>

<TABLE>
<CAPTION>

<S>                                                               <C>                        <C>

All Officers and Directors as a Group (6 persons).......          12,480,292                 64.26%

</TABLE>

------------------
 (1)   Unless otherwise indicated,  all addresses are c/o iParty Corp., 1457 VFW
       Parkway, Boston, 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 12,966,075 shares outstanding as of March
       27, 2001.

 (3)   Includes  463,745  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
       40,000 shares of common stock.

 (4)   Includes  150,415  shares of common  stock that may be acquired  upon the
       exercise of presently exercisable options issued pursuant to the Plan and
       14,500 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 78.34%  owner,  (2)
       175,000 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) 1,451,980 shares of common stock which may be
       acquired upon the conversion of 145,198  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  46.54%
       shareholder  of iParty Corp.  Mr. Lessin is the manager and 78.334% 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 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) 145,200  shares of common  stock which may be acquired  upon
       the  conversion  of  14,520  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) 127,274  shares of common  stock which may be acquired
       upon the exercise of presently exercisable options issued under the Plan.

(10)   Includes  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 and 1,424,220  shares of common stock which
       may be acquired  upon the exercise of  redeemable  common stock  purchase
       warrants.

(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

--------------------------------------------------------------------------------
                                       16
<PAGE>

       affiliated  entity.  Mr.  Jevon  disclaims  beneficial  ownership of such
       shares  except to the extent of his  ownership  interest in the  entities
       which own such shares.

(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  75,000  shares of common  stock that may be  acquired  upon the
       exercise of presently exercisable options issued pursuant to the Plan.

(16)   Includes  25,000  shares of common  stock that may be  acquired  upon the
       exercise of presently exercisable options issued pursuant to the Plan.

(17)   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.

       Star  Greetings,   Inc.  our   wholly-owned   subsidiary,   licenses  the
StarGreetings concept from StarGreetings, LLC. Mr. Byron Hero, a former director
and  our  former  Chief  Executive  Officer,  is a  member  and the  manager  of
StarGreetings  LLC.  In exchange  for the  license,  we pay the  licensor 2 1/2%
royalty from the gross revenues received from the sale of StarGreetings.

     Pursuant to the terms of an April 1998  finders fee  agreement  between Mr.
Hero and a  predecessor  entity,  prior to him becoming a director or officer of
the  Company,  he was  entitled to receive a finder's fee in the amount of 5% of
the first  $2,000,000  in equity  raised  from any party  introduced  by him. In
connection with our merger, we assumed the obligations under this agreement.  In
connection with the agreement,  $2,000,000 was raised.  As a result, we paid Mr.
Hero $100,000. Mr. Hero is not a registered broker-dealer.

     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
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

--------------------------------------------------------------------------------
                                       17
<PAGE>

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 did not
file any reports on Form 8-K.









--------------------------------------------------------------------------------
                                       18
<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 30, 2001

     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 30, 2001
-------------------------  Executive Officer and Director
     Sal Perisano

   /s/ ROBERT JEVON        Director                              March 30, 2001
-------------------------
     Robert Jevon

  /s/ ROBERT LESSIN        Director                              March 30, 2001
-------------------------
    Robert Lessin

 /s/ STUART G. MOLDAW      Director                              March 30, 2001
-------------------------
   Stuart G. Moldaw

  /s/ CHRISTINA WEAVER     Director                              March 30, 2001
-------------------------
    Christina Weaver

 /s/ PATRICK FARRELL       President, Chief Financial Officer    March 30, 2001
-------------------------  and Principal Financial Officer
   Patrick Farrell








--------------------------------------------------------------------------------
                                       19
<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     --   Fry Multimedia Web Site Development Service Agreement.(1)
 10.4     --   iVillage Web Site Development Service Agreement.(1)
 10.5     --   OrderTrust Agreement between iParty Corp. and OrderTrust.(1)
 10.6     --   Consulting Agreement by Byron Hero.(3)
 10.7     --   Employment Agreement of Patrick Farrell.(3)
 10.8     --   Amended and Restated Employment Agreement of Patrick Farrell.**
 10.9     --   Employment Agreement of Sal Perisano.(2)
 10.10    --   Employment Agreement of Dorice Dionne.(2)
 10.11    --   StarGreetings License Agreement.(1)
 10.12    --   Service  Agreement  between  iParty Corp.  and  TechSpace LLC (as
               amended)(3)
 10.13    --   Consulting Agreement of Sal Perisano.(1)
 10.14    --   Finder's Fee Agreement between iParty LLC and Byron Hero.(1)
 10.15    --   Form of "StarGreeting" Agreement with Celebrities.(3)
 10.16    --   Funding Agreement among iParty Corp.,  Robert H. Lessin and Ajmal
               Khan.(3)
 10.17    --   Fulfillment Agreement between iParty Corp. and Taymark.(3)
 10.18    --   Agreement between iParty Corp. and Rare Medium, Inc.(2)
 10.19    --   Agreement between iParty Corp. and LinkShare Corporation.(2)
 10.20    --   Agreement between iParty Corp. and America Online, Inc.(2)
 10.21    --   Agreement between iParty Corp. and Kirshenbaum Bond Partners.(2)
 10.22    --   Consulting Agreement between iParty Corp. and Stuart Moldaw.(2)
 27.1     --   Financial Data Schedule.**

------------------
(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.

--------------------------------------------------------------------------------
                                       20
<PAGE>

(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.

** Filed herewith.








--------------------------------------------------------------------------------
                                       21
<PAGE>


                                    CONTENTS




REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................................    F-2

CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet--December 30, 2000 and December 31,1999.......    F-3
Consolidated Statements of Operations--Years ended December 30, 2000
and December 31, 1999 ...................................................    F-4
Consolidated Statements of Stockholders' Equity--Years ended December
30, 2000 and December 31, 1999...........................................    F-5
Consolidated Statements of Cash Flows--Years ended December 30, 2000
and December 31, 1999....................................................    F-6
Notes to Consolidated Financial Statements...............................    F-7













                                       F-1
<PAGE>

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 30, 2000 and December 31,
1999,  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  30,  2000 and  December  31,  1999,  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
March 27, 2001









                                       F-2
<PAGE>



<TABLE>
<CAPTION>




                                  iParty Corp.
                           Consolidated Balance Sheets

                                                                                          December 30,                December 31,
ASSETS                                                                                        2000                        1999
                                                                                        -----------------      -------------------
<S>                                                                                     <C>                    <C>
Current assets:
                      Cash and cash equivalents                                         $       5,002,254        $        18,673,304
                      Marketable securities                                                             -                    973,877
                      Cash, restricted                                                            635,000                     51,012
                      Accounts receivable                                                         948,292                     99,476
                      Inventory                                                                 8,226,560                          -
                      Prepaid expenses and other current assets                                    69,812                    428,645
                                                                                        -----------------        -------------------
                        Total current assets                                                   14,881,918                 20,226,314

                      Property and equipment, net                                                 903,849                    860,457
                      Intangible Assets                                                                 -                  6,119,734
                      Other assets                                                                557,286                     50,245
                                                                                        -----------------        -------------------

Total assets                                                                            $      16,343,053        $        27,256,750
                                                                                        =================        ===================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
                      Accounts payable                                                  $       2,415,679        $         1,749,806
                      Accrued severance and restructuring expenses                                775,137                    213,987
                      Accrued expenses                                                          2,434,480                    238,889
                      Line of credit                                                            2,800,790                          -
                                                                                        -----------------        -------------------
                        Total current liabilities                                               8,426,086                  2,202,682

Other Long-term Liabilities:
                      Deferred Payables                                                           492,465                          -
                                                                                        -----------------       --------------------

Total Liabilities                                                                               8,918,551                  2,202,682


Commitments and contingencies (Note 8)

Stockholders' Equity:
                      Preferred stock - $.001 par value; 10,000,000
                      shares authorized;
                        Series A preferred stock - 1,000,000 authorized;
                         1,000,000 shares issued and outstanding                                    1,000                      1,000
                        Series B preferred stock - 1,413,352 authorized;
                         1,413,352 and 1,044,952 shares issued and
                         outstanding                                                                1,414                      1,045
                        Series C preferred stock - 145,198 authorized;
                         145,198  and 100,000 shares issued and
                         outstanding                                                                  145                        100
                        Series D preferred stock - 362,996 authorized;
                         362,996  and 250,000 shares issued and
                         outstanding                                                                  363                        250
                        Series E preferred stock - 533,333 authorized;
                         533,333 shares issued and outstanding                                        533                          -
                        Series F preferred stock - 114,286 authorized;
                         114,286 shares issued and outstanding                                        114                          -
                        Common stock - $.001 par value; 50,000,000 shares
                        authorized;
                         12,174,745 shares and 11,005,421 shares issued and
                         outstanding                                                               12,175                     11,006
                        Additional paid in capital
                                                                                               64,166,987                 58,616,431
                      Accumulated deficit
                                                                                              (56,758,229)              (33,575,764)
                                                                                    ----------------------    ----------------------
                         Total stockholders' equity
                                                                                                7,424,502                 25,054,068
                                                                                    ---------------------     ----------------------

Total liabilities and stockholders' equity                                              $      16,343,053        $        27,256,750
                                                                                   ======================    =======================


</TABLE>


The accompanying Notes to Consolidated Financial Statements are an integral part
of this Consolidated Balance Sheet.



                                      F-3
<PAGE>


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

<TABLE>
<CAPTION>


                                  iParty Corp.
                      Consolidated Statements of Operations

                                                                 For the year ended
                                                      December 30, 2000     December 31, 1999
                                                      -------------------   ---------------------
<S>                                                  <C>                    <C>

 Revenues                                                  $   18,619,877          $     138,545
                                                      -------------------   ---------------------

 Operating costs:
                      Cost of products sold                    11,734,011               111,961
                      Amortization of fulfillment
                       partner warrant                          4,532,930               755,488
                      Marketing and sales                      13,058,710             4,016,539
                      Product and technology
                       development                              5,173,828             2,418,516
                      General and administrative                3,725,704              ,010,470
                      Restructuring expenses                    1,093,328                     -
                      Loss resulting from
                       abandonment of assets                        5,784               518,915
                      Non-cash compensation
                       expense                                    812,510               847,741
                                                      -------------------  --------------------

 Operating loss                                              (21,516,928)          (10,541,085)


                      Interest income                             733,163               289,721
                      Interest Expense                           (149,346)          (1,004,051)
                                                      -------------------  --------------------

 Net loss                                             $       (20,933,111) $       (11,255,415)
                                                      ==================== ====================

 Loss per share:
                      Basic and diluted               $            (2.05)         $      (2.97)
                                                      ===================  ====================

 Weighted Average Shares Outstanding:
                      Basic and diluted                       11,321,578             11,005,421
                                                      ===================  ====================



</TABLE>


<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, 1998                                               -                 -        11,005,421               11,006

                    Issuance of Series A preferred stock upon
                      exercise of warrants including             1,000,000             1,000                -                      -
                      conversion of notes payable, net of
                      issuance costs of $50,000
                    Issuance of Series B and C preferred
                      stock and warrants, net of issuance
                      costs of $1,545,640                        1,144,952             1,145                -                      -
                    Issuance of Series D preferred stock
                      and warrants, net of issuance costs
                      of $7,500                                    250,000               250                -                      -
                    Value of warrants granted under
                    fulfillment and license agreements                   -                 -                -                      -
                    Discount to fair market value of the
                    convertible notes payable                            -                 -                -                      -
                    Preferred stock beneficial conversion
                    feature                                              -                 -                -                      -
                    Non-cash compensation expense
                    Net loss                                             -                 -                -                      -
                                                            --------------      ------------    -------------          -------------
Balance December 31, 1999                                        2,394,952      $      2,395       11,005,421          $      11,006
                                                            ==============      ============    ==============         =============

                    Issuance of Series E preferred stock,
                      net of issuance costs of $8,965              533,333              533                 -                      -
                    Issuance of Series F preferred stock,
                      net of issuance costs of $0                  114,286              114                 -                      -

                    Issuance of Series B and C preferred
                      stock as anti-dilution protection
                      upon issuance of Series E and F
                      preferred stock                              517,503              518
                    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 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

                                                            ==============      ============     =============          ============

                                                                                Additional                           Total
                                                                                Paid-In            Accumulated       Stockholders'
                                                                                Capital             Deficit          Equity
                                                                                -----------------  ---------------   ---------------
 Balance December 31, 1998                                                      1,146,044          (862,398)                 294,652


                    Issuance  of  Series A  preferred
                      stock upon exercise of warrants,
                      including conversion of notes
                      payable, net of issuance costs $50,000                      949,000                 -                  950,000
                    Issuance of Series B and C preferred
                      stock and warrants, net of issuance
                       costs of $1,545,640                                     21,354,284                 -               21,355,429
                    Issuance of Series D preferred
                      stock and warrants, net of issuance
                      costs of $7,500                                           4,992,250                 -                4,992,500
                    Value of warrants granted under fulfillment
                    and license agreements                                      6,920,559                 -                6,920,559
                    Discount to fair market value of the
                    convertible notes payable                                     948,602                 -                  948,602
                    Preferred stock beneficial conversion
                    feature                                                    21,457,951       (21,457,951)                       -
                    Non-cash compensation expense                                 847,741                 -                  847,741
                    Net loss                                                            -       (11,255,415)            (11,255,415)
                                                                              -----------------  -----------------  ----------------

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 issuance 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                    -                     -
                    Net loss
                                                                                        -           (20,933,111)        (20,933,111)
                                                                              -----------          -------------        ------------

Balance December 30, 2000                                                     $64,166,987       $   (56,758,229)      $    7,424,502
                                                                              ===========       ================      ==============


</TABLE>



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

                                       F-5

<PAGE>

<TABLE>
<CAPTION>

                                  iParty Corp.
                      Consolidated Statements of Cash Flows


                                                                               For the year ended
                                                                   December 30, 2000        December 31, 1999
                                                                 ----------------------   ----------------------
<S>                                                              <C>                      <C>
Cash flows from operating activities:

                     Net loss                                      $      (20,933,111)      $      (11,255,415)

                     Adjustments to reconcile net loss to
                       net cash used in operating activities:
                       Depreciation and amortization                         6,755,948                1,297,564
                       Loss resulting from abandonment of
                       assets                                                    5,784                  518,915
                        Reserve for bad debt                                     3,527                   14,258

                        Amortization of discount on issuance
                        of convertible notes                                                            948,602
                       Non-cash compensation expense                           812,510                  847,741
                       Decrease (increase) in:
                        Accounts receivable                                  (852,342)                 (99,476)
                        Invesntory                                         (3,368,271)                        -
                        Prepaid expenses and other current
                        assets                                                 358,833                (368,368)
                        Other assets                                         (507,041)                 (40,575)
                        Increase (decrease) in:
                        Accounts payable                                       665,873                1,452,299
                        Accrued severance and restructuring
                        expenses                                               561,150                  213,987
                        Accrued expenses                                     1,962,145                  238,889
                        Deferred payables                                      375,860                   55,850
                                                                ----------------------   ----------------------
                       Net cash used in operating activities              (14,159,135)              (6,175,729)
                                                                ----------------------   ----------------------

Cash flows from investing activities:

                     Purchase of property and equipment                      (202,059)              (1,534,669)
                     Acquisition of operating assets                       (4,858,289)                       -
                     Advances to officer                                            -                    19,763
                     Purchase of marketable securities                        973,877                 (973,877)
                     Increase in restricted cash                             (583,988)                  (1,013)
                       Net cash used in investing activities               (4,670,459)              (2,489,796)
                                                                ----------------------   ----------------------

Cash flows from financing activities:

                     Proceeds from notes payable                                     -                2,000,000
                     Proceeds from line of credit, net                       2,800,790                        -
                     Proceeds from sale of preferred stock,
                     net of offering costs                                   2,491,035               24,992,079
                     Payments on capital lease obligations                   (133,281)                        -
                     Net cash provided by financing
                       activities                                            5,158,544               26,992,079
                                                                 ---------------------   ----------------------

Net (decrease) increase in cash and cash equivalents
                                                                          (13,671,050)               18,326,553
Cash and cash equivalents, beginning of period
                                                                           18,673,304                   346,751
                                                                 ---------------------   ----------------------

Cash and cash equivalents, end of period                         $          5,002,254    $           18,673,304
                                                                 ======================  ======================

Cash paid for:
                     Interest expense                            $           149,346     $                     -

                                                                 ======================   ======================

Supplemental disclosure of non-cash financing activities:
                     Conversion of notes payable to Series A
                     preferred stock                            $                 -       $              250,000

                                                                ======================    ======================

                     Conversion of notes payable and
                       accrued interest to Series B             $                 -                     2,055,850
                       preferred stock
                                                                 ======================   ======================

                     Conversion of Series B preferred stock to
                     common stock                               $             1,039        $                   -
                                                                 ======================   ======================

                     Acquisition of assets under capital lease  $           483,332        $                   -

                                                                 ======================   ======================

</TABLE>

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

                                       F-6

<PAGE>



                                  IPARTY CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. MANAGEMENT'S PLAN

       Since its inception,  the Company has incurred  significant  losses which
have resulted in an accumulated  deficit of $56,758,229 as of December 30, 2000.
These losses have been funded  through the issuance of both common and preferred
stock  along with  advances  under the  Company's  borrowing  facility  with its
lender.

       The Company is an Internet-based  merchant of party supplies and operates
33 stores as explained  more  thoroughly  below.  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.

       As  discussed  in Note 12, as of March  2001,  the Company and its lender
have modified its borrowing  facility by adjusting  certain of the covenants and
other provisions  based on the Company's  operating plan for the year 2001. This
is projected  to enable the Company to maintain  compliance  with these  revised
financial  covenants.  The  Company  is also in  discussions  with the lender to
increase the borrowing  facility to  $10,000,000.  In addition,  the Company has
implemented  changes  to  reduce  the  losses  of its  internet  business  while
improving  the  profitability  factors  of its  retail  business.  Based  on the
modifications to the borrowing facility with its lender,  along with 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, 2002.

2. THE COMPANY

     iParty  LLC,   which  was  created  on  December  11,  1997  to  launch  an
Internet-based  merchant of party goods and  services,  commenced  operations in
January  1998. On March 12, 1998,  iParty Corp.  was organized as a wholly owned
subsidiary  of iParty LLC and the net assets and  operations  of iParty LLC were
transferred to iParty Corp. On April 9, 1998,  StarGreetings,  Inc. ("Star") was
incorporated as a wholly owned subsidiary of iParty Corp. to develop and operate
a personalized celebrity greeting service.

     Effective July 2, 1998,  iParty Corp.  ("iParty" or the  "Company")  merged
into WSI  Acquisition  Corp.  ("WSI"),  an  inactive  company.  The  merger  was
consummated  through an exchange of shares that resulted in iParty LLC receiving
6,000,000 common shares or 54.5% of the outstanding shares of WSI. In connection
with the merger and as a condition thereof, WSI sold, in two private placements,
an aggregate of 4,585,000  shares of common stock of which 3,624,043 shares were
sold for $.01 per share and 960,957  shares,  together with warrants to purchase
1,000,000 shares of Series A preferred  stock,  were sold for $1.00 per share or
aggregate  proceeds of $997,197  before  related  expenses.  The merger has been
treated as a  re-capitalization  for accounting  purposes and iParty's  historic
capital  accounts were  retroactively  adjusted to reflect the 6,000,000  shares
issued by WSI in the transaction.  In addition,  as WSI had no assets before the
merger and the private placements,  the 420,421 outstanding common shares of WSI
have  been  recorded  at par value  with a  corresponding  charge to  additional
paid-in capital.  The statement of operations  reflects the operations of iParty
from the  commencement  of its operations  from March 12, 1998 and also reflects
the operations of iParty LLC, the predecessor company, from January 1998 through
March 12, 1998.  In connection  with the merger,  WSI changed its name to iParty
Corp.

       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


                                       F-7
<PAGE>

acquisition  was approved by the United  States  Bankruptcy  Court,  District of
Delaware.

     The  Company's  efforts are devoted to the sale of party goods and services
through retail stores and the Internet.

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:

     During 1998, the Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive  Income." Statement of Financial  Accounting  Standards (SFAS) No.
130 establishes standards for reporting  comprehensive income and its components
in the financial statements.  Other comprehensive  income, as defined,  includes
all changes in equity (net assets)  during a period from  nonowner  sources.  To
date, the Company has not had any transactions  that are required to be reported
as comprehensive income.

  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 7).

  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
and sales returns are included in net revenue.

     In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101 Revenue  Recognition in Financial  Statements.
SAB No. 101 as amended by SAB No.  101(a),  is  effective as of January 1, 2000.
Adoption of SAB 101 did not have a material  impact on the  Company's  financial
position or results of operations.

       In fiscal  2000,  the  Company  adopted  the  provisions  of EITF  00-14,
Accounting for Certain Sales Incentives. Accordingly, the Company has classified
discounts as a reduction of revenue. The Company did not reclassify discounts in
the prior year,  as the amount was not  material to the  consolidated  financial
statements.

  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  $5,002,254 and  $18,673,304 as of December 30,
2000 and December 31, 1999,  respectively.  As of December 30, 2000 and December
31, 1999,  cash  equivalents  consist  primarily of  investments in money market
accounts.


                                       F-8
<PAGE>

  Marketable securities:

     The  Company  determines  the  appropriate   classification  of  marketable
securities at the time of acquisition and  reevaluates  such  determinations  at
each  balance  sheet date.  Marketable  securities  which meet the  criteria for
classification as available-for-sale  are carried at fair value, based on quoted
market  prices,  with  unrealized  gains and losses  reported as a component  of
comprehensive  income. As of December 30, 2000 and December 31, 1999, all of the
Company's marketable securities were classified as available-for-sale.

  Fair value of financial instruments:

       SFAS No.  107,  Disclosures  about Fair Value of  Financial  Instruments,
requires  disclosure  about  fair  value  of  financial  instruments.  Financial
instruments  consist  of  cash  and  cash  equivalents,  marketable  securities,
accounts  receivable,  accounts  payable,  notes  payable  and  bank  debt.  The
estimated fair value of these financial instruments  approximates their carrying
value as of December 30, 2000 and December 31, 1999.

  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  includes  merchandise  at the  stores and the  warehouse,  as well as
merchandise-in-transit to the extent the company has title.

  Store Pre-opening Costs:

     In April 1998,  the  American  Institute of  Certified  Public  Accountants
(AICPA) issued Statement of Position (SOP) 98-5,  Reporting on Costs of Start-up
Activities,  Requiring all costs associated with pre-opening,  pre-operating and
organization activities to be expensed as incurred. The Company adopted SOP 98-5
during the year ended  December 30, 2000.  Adoption of this  statement  does not
have a  material  impact on the  Company's  financial  position  or  results  of
operations.

  Stock-based compensation:

     The Company has elected to follow Accounting Principles Board (APB) Opinion
No. 25,  "Accounting  for Stock Issued to Employees" in accounting for its stock
option  incentive plan. As such,  compensation  expense would be recorded on the
date of grant if the current market price of the  underlying  stock exceeded the
exercise  price  of the  option.  In  accordance  with  Statement  of  Financial
Accounting  Standards  No. 123,  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:

             Asset Classification               Estimated Useful Life
             --------------------               ---------------------
             Furniture and Fixtures                  7 years
             Equipment under Capital Leases          3-7 years or life of lease
             Computers and Equipment                 5 years
             Motor Vehicles                          5 years

Property and equipment consist of the following:
                                                    Dec. 30,2000   Dec. 31, 1999
                                                    ------------   -------------
     Computers, equipment, equipment under capital
           leases and furniture and fixtures         $ 1,304,428      $  624,821
       Web site and related software                     646,572         646,572
                                                      ----------      ----------
                                                       1,951,000      $1,271,393
     Less accumulated depreciation                   $(1,047,151)      (410,936)
                                                     -----------      ----------

     Total                                          $    903,849      $  860,457
                                                    ============      ==========


                                      F-9
<PAGE>

   Software costs:

     In accordance with SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", issued in March 1998 and adopted by the
Company,  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.

     During 1999 the Company replaced its Web site,  necessitating the write-off
of $273,288 of previously capitalized software costs. On September 30, 1999, the
Company  modified  the Star  Concept  (see  Note 8) and as a  result,  wrote off
$245,627 of  capitalized  production  and  development  costs.  In total,  these
amounts  are  included  in loss  resulting  from  abandonment  of  assets in the
accompanying statement of operations for the year ended December 31, 1999.

     On August 5, 1999, the Company entered into a fixed-fee agreement with Rare
Medium Inc. to develop a new Web site, including the development of a new visual
identity,  additional functionality and a new technical infrastructure to better
support  the  scalability  of the  Company's  Web  site.  The  fixed fee for the
services provided was $500,000,  which was depreciated over the estimated useful
life of the related asset.

  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
to be  Disposed  Of" ("SFAS  No.  12").  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 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 (see Note 8).

  Intangible Assets:

     Intangible Assets consist of the estimated fair value of warrants issued to
the  Company's   fulfillment   partner,   Taymark,   and   Margaritaville   less
amortization.  The  intangible  assets  are  amortized  over  the  life  of  the
agreement.  For further discussion on accounting for Intangible Assets (See Note
7).

  Other Assets:

     Other assets consist of the following at December 30, 2000 and December 31,
1999:

                                                  2000                1999
                                                  ----                ----
                   Deposits                       $ 442,861       $  50,245
                   Loan Origination Costs         $ 132,880       $       0
                                                  ---------       ---------
                                                  $ 575,741       $  50,245
                   Less Accumulated Amortization  $(18,455)       $       0
                                                  ---------       ---------

                   Other Assets, Net              $ 557,286       $  50,245
                                                  =========       =========


                                       F-10
<PAGE>

  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.

     The  following  table sets forth the  computation  of  pro-forma  basic and
diluted earnings per share:

                                                       2000            1999
                                                    -----------    ------------
Net loss.......................................... $(20,933,111)   $(11,255,415)
Preferred stock beneficial conversion feature..... $( 2,249,354)   $(21,457,951)
                                                   -------------   -------------

Net (loss) available to common shareholders....... $(23,182,465)   $(32,713,366)
                                                   =============   =============

Weighted Average Shares Outstanding:
  Basic and diluted...............................    11,321,578      11,005,421
                                                   =============   =============

Loss per share--basic and diluted:................ $      (2.05)   $      (2.97)
                                                   =============   =============

       As of December 30, 2000 and December 31, 1999,  47,812,248 and 30,995,916
potential common shares were outstanding,  respectively, but not included in the
above calculation as their effect would have been anti-dilutive.

  Recently Issued Accounting Standards:

       In March 2000, the FASB issued  Interpretation  No. 44,  "Accounting  for
Certain  Transactions  Involving Stock  Compensation - An  Interpretation of APB
Opinion No. 25". This interpretation provides guidance on the application of APB
Opinion No. 25, including (1) the definition of an employee (2) the criteria for
determining  whether  a  plan  qualifies  as  a  noncompensatory  plan  (3)  the
accounting  consequence  of various  modifications  to the terms of a previously
fixed  stock  option or award and (4) the  accounting  for an  exchange of stock
compensation awards in a business combination.  This interpretation is effective
July 1, 2000 and the effects of applying this interpretation are recognized on a
prospective  basis. The adoption of this  interpretation did not have a material
impact on the Company's results of operations or financial condition.

  Reclassifications:

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

4. SEGMENT REPORTING:

       In June 1997, the FASB issued SFAS No. 131,  "Disclosures  about Segments
of an Enterprise and Related  Information." This statement 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.


                                       F-11
<PAGE>

       The Retail  Operations  include  the sales and related  expenses  from 33
retail stores located  throughout New England with the highest  concentration of
18 stores in  Massachusetts;  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 our offline 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 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 year ended
December 30, 2000 and December 31, 1999, are as follows:

<TABLE>
<CAPTION>

-----------------    ---------------- -------------- ----------------    ---------------- -------- ----------------
                                          2000                                             1999
                                          ----                                             ----
                        Internet         Retail           Total             Internet      Retail        Total
                        --------         ------           -----             --------      ------        -----
-----------------    ---------------- -------------- ----------------    ---------------- -------- ----------------
<S>                  <C>              <C>            <C>                 <C>              <C>      <C>

Net revenue
                     $   1,150,100    $17,469,777    $  18,619,877       $     138,545    $    0   $     138,545
-----------------    ---------------- -------------- ----------------    ---------------- -------- ----------------
Operating
(loss) income        $(21,531,533)    $    14,605    $(21,516,928)       $(10,541,085)    $    0   $(10,541,085)
-----------------    ---------------- -------------- ----------------    ---------------- -------- ----------------
Net loss             $(20,798,370)    $ (134,741)    $(20,933,111)       $(11,255,415)    $    0   $(11,255,415)
-----------------    ---------------- -------------- ----------------    ---------------- -------- ----------------
-----------------    ---------------- -------------- ----------------    ---------------- -------- ----------------
Total assets         $  10,284,649    $ 6,058,404    $  16,343,053       $  27,256,750    $    0   $  27,256,750
-----------------    ---------------- -------------- ----------------    ---------------- -------- ----------------
Deprec/amort         $   6,739,674    $    16,274    $   6,755,948       $   1,297,654    $    0   $   1,297,654
-----------------    ---------------- -------------- ----------------    ---------------- -------- ----------------
Capital exp.         $     174,710    $    27,349    $     202,059       $   1,534,669    $    0   $   1,534,669
-----------------    ---------------- -------------- ----------------    ---------------- -------- ----------------

</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 Big Party since August 15, 2000 have been
included in the  accompanying  statement of  operations.  The purchase price was
allocated to the acquired assets as follows:

  Purchase price:

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

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

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

       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.


                                       F-12
<PAGE>

       Unaudited pro forma results of  operations  for the years ended  December
30, 2000 and December 31, 1999, as if iParty and The Big Party had been combined
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.

<TABLE>
<CAPTION>

      --------------------------------------  ----------------------  ---------------------
                                                            Year ended
      --------------------------------------  ----------------------  ---------------------
      --------------------------------------  ----------------------  ---------------------
                                                   December 30, 2000      December 31, 1999
                                                                ----                   ----
     --------------------------------------   ----------------------  ---------------------
     <S>                                      <C>                     <C>

      Revenue                                           $ 43,643,931            $49,066,040
      --------------------------------------  ----------------------  ---------------------
      Operating loss                                    $(24,172,716)         $ (9,687,910)
      --------------------------------------  ----------------------  ---------------------

      --------------------------------------  ----------------------  ---------------------
      Net loss                                          $(23,721,075)         $(15,826,128)
      --------------------------------------  ----------------------  ---------------------
      Beneficial conversion dividend
                                                        $ (2,249,354)         $(21,457,951)
      --------------------------------------  ----------------------  ---------------------
      Net loss available to common
      shareholders                                      $(25,970,429)         $(37,284,079)
      --------------------------------------  ----------------------  ---------------------
      Loss per share:
      --------------------------------------  ----------------------  ---------------------
       Basic and diluted                                   $  (2.29)              $  (3.39)
      --------------------------------------  ----------------------  ---------------------
      Weighted average shares:
      --------------------------------------  ----------------------  ---------------------
      Basic and diluted                                   11,321,578             11,005,421
      --------------------------------------  ----------------------  ---------------------

</TABLE>

6. RESTRUCTURING COSTS

       In  fiscal  2000,  the  Company  decided  to  close  its  New  York  City
headquarters and transfer this operation to its Boston,  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)             (239,779)             (327,265)
  -------------------------------------- -- --------------------- --------------------- --------------------
  -------------------------------------- -- --------------------- --------------------- --------------------
  Balance at December 30, 2000                          $397,800              $368,263              $766,063
  -------------------------------------- -- --------------------- --------------------- --------------------

</TABLE>

7. INCOME TAXES:

     As of December 30, 2000 and December  31, 1999,  the Company has  estimated
net operating loss  carryforwards of approximately  $24,558,824 and $10,000,000,
respectively, which begin to expire in 2018. The Company has recorded a deferred
tax asset offset by a valuation  allowance because of the uncertainty  regarding
its realizability.

       The effects of  significant  items  comprising the Company's net deferred
tax assets as of December 30, 2000 and December 31, 1999 are as follows:

                                                       2000              1999
                                                       ----              ----
       Net operating loss carryforward            $  9,889,839      $  4,027,000
         Other                                         957,326         1,113,406
         Less valuation allowance                  (10,847,165)      (5,140,406)
                                                  ------------       -----------

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

8. COMMITMENTS AND CONTINGENCIES:

  Legal proceedings:


                                       F-13
<PAGE>

     The Company is a  defendant  in one  lawsuit  that is being  handled in the
ordinary  course of  business.  Pursuant to an Asset  Purchase  Agreement  dated
August  2,  2000,  as  amended,   the  Company  purchased  from  The  Big  Party
Corporation,  Debtor  and  Debtor-in-Possession  ("The  Big  Party")  33  retail
locations and the assets located therein,  including inventory.  The Company and
The Big Party are in disagreement concerning the value and amount due on account
of the  inventory  and The Big  Party  is  claiming  that  $625,568  is due.  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 are
in discussions  concerning the portion thereof which belongs to the Company. The
Big Party filed a complaint  to the U.S.  Bankruptcy  Court for the  District of
Delaware  in  January  2001  seeking  payment  of  $625,568  on  account  of the
inventory.  The Company is disputing  the amount  claimed and intends to file an
answer  and a possible  counterclaim  for  amounts  due on account of the escrow
referred  to  above.  The  Company  is also in  negotiations  with The Big Party
seeking to reach an  agreeable  compromise.  This  matter is in the  preliminary
stages.  In the  opinion  of the  management  of the  Company,  the  Company  is
adequately  reserved and this should not result in final judgement or settlement
that would have a material adverse effect on the Company's  financial  condition
or results of operations.

  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
               -----                      ------
               2001                    $  4,588,953
               2002                       4,616,948
               2003                       4,436,005
               2004                       4,191,953
               2005                       3,408,264
               Thereafter                 5,902,346
                                          ---------

                Total                  $ 27,144,469
                                       ============


The Company's rental expense under operating leases for the years ended December
30,  2000  and  December  31,  1999,   amounted  to  $1,892,762   and  $105,164,
respectively.

  Capital Leases:

       The Company leases  computers and equipment  under lease  agreements that
qualify for  capitalized  treatment  under SFAS NO. 13,  Accounting  for Leases.
These agreements  require monthly payments totaling $32,950,  including interest
at rates ranging up to 18%, and expire at various times through 2003.

       Future minimum lease payments for assets under capital lease  obligations
at December 30, 2000 are as follows:

              Year                                                    Amount
              ----                                                    ------
              2001                                                  $279,312
              2002                                                   110,883
              2003                                                     8,360
              --------------------------------------------------------------
              Total minimum lease payments                          $398,555
              Less: Amounts representing interest                     48,505
                                                                     -------

              Present value of net minimum lease payments           $350,050
              Less: Current maturities                              $233,445
                                                                    --------

              Long-term obligation                                  $116,605

       The current capital lease  obligation is recorded on the balance sheet as
an accrued  liability and the long-term  capital lease obligation is recorded as
an element of the long-term deferred payable.

  Finder's fee arrangement:


                                       F-14
<PAGE>

     The Company  and its former  Chief  Executive  Officer  ("former  CEO") had
entered into an agreement prior to his resignation,  which called for the former
CEO to receive a finder's  fee in the  amount of 5% of the first  $2,000,000  in
equity raised from any party  introduced  by the former CEO. In connection  with
this  agreement,  as of December 31, 1999,  amounts in excess of $2,000,000 have
been raised.  As a result,  $50,000 has been paid to the former CEO in both 1999
and 1998.

  License and StarGreetings agreements:

     Star entered into an agreement with  StarGreetings,  LLC, as the creator of
the StarGreetings concept  ("StarConcept"),  to license the exclusive use of the
StarConcept on the web sites of the Company and Star. The agreement  calls for a
royalty of 2 1/2% of revenues derived from the StarConcept,  payable  quarterly.
StarGreetings,  LLC is owned,  in part, by the Company's  former CEO. No amounts
were  payable to  StarGreetings,  LLC under the  agreement  for the years  ended
December 30, 2000 and December 31, 1999.

     The Company has entered into several  agreements with celebrities to secure
their services with Star. The agreements are  substantially the same and consist
of  three  separate   compensation   components.   The  first   component  is  a
participation  fee  (and  any  related  expenses).  The  second  component  is a
commission  payable to the  celebrity  and to a charity of their choice upon the
sale of each StarGreeting. The third component is an option to purchase stock in
the Company.  During 1999,  the Company  entered into ten such  agreements  with
terms  ranging  from one to three  years.  No  commissions  were due under these
agreements  as of  December  31,  1999 or December  30,  2000.  The value of the
options  approximated  $612,000,  as determined using the  Black-Scholes  option
pricing model.  Upon the modification of the  StarConcept,  the Company expensed
the remaining unamortized value of the options in 1999.

     The Company  entered into a 12 month  consulting  agreement with the former
CEO which  expired on April 14,  1999.  As a result of the  modification  of the
StarConcept, the former CEO was terminated on September 30, 1999 and his fee for
the  remainder of the contract  was  recorded  for in accrued  severance.  As of
December 30, 2000 and December  31, 1999,  approximately  $0 and $73,000 of this
fee remains in accrued expenses, respectively.

     Consulting agreements:

     The Company  entered  into a consulting  agreement  with one of its outside
directors.  The agreement was in effect from September 15, 1998 through December
31,  1999.  Compensation  under the  agreement  consists  of options to purchase
50,000  shares of the  Company's  common  stock,  of which  25,000  options were
granted on  September  15, 1998 and 25,000  options  were granted on January 20,
1999 when the consultant's time on behalf of the Company exceeded 100 hours. For
the period ended December 31, 1998, the Company  charged $23,089 of the value of
the options  granted  ($102,487) to expense.  On April 1, 1999,  the  consulting
agreement was terminated and the remaining  $79,398 value of the options granted
was charged to expense during 1999.

     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 Emerging Issues Task Force (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) will be 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 shares that
vest (as  calculated  using the  Black-Scholes  option  pricing  model)  will be
remeasured  for the last time  using  the then  current  value of the  Company's
common stock.  For the years ended  December 30, 2000 and December 31, 1999, the
Company  charged  $122,783  and  $40,928  of the  value of the  options  granted
($368,350) to expense, respectively.


                                     F-15
<PAGE>

  Employment agreements:

     The Company has entered  into  employment  agreements  with  several of its
executives.  The agreements expire from December 31, 1999 through March 30, 2002
and  provide  for  annual  salaries  aggregating  $540,000.  In  addition,   the
executives were granted options to purchase an aggregate of 2,303,892  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 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., 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 through the termination date totaled
$1,015,480  and $151,369 for the years ended  December 30, 2000 and December 31,
1999.  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 included in intangible assets on the
accompanying  balance sheet and was being amortized over the initial term of the
fulfillment  agreement.  For the years ended  December 30, 2000 and December 31,
1999  amortization  of fulfillment  partner  warrant  expense was $4,532,930 and
$755,488,  respectively,  resulting from the  amortization  of this warrant.  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.

  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.  For the year ended December 31, 1999, the Company charged $442,500
of this annual fee to expense.  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 will license the


                                       F-16
<PAGE>

"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 included in
intangible assets on the accompanying balance sheet was being amortized over the
life of the  agreement.  For the years ended  December 30, 2000 and December 31,
1999,  the Company  charged  $1,586,801  and $45,337,  respectively,  to expense
related  to the  amortization  of the  agreement  which  has  been  included  in
marketing and sales in the accompanying statement of operations. 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 was  therefore
charged to expense.

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 30, 2000
and December 31, 1999,  there were 1,000,000  shares of Series A preferred stock
outstanding.  The shares of preferred  stock were issued in connection  with the
exercise of outstanding warrants. The exercise of the warrants resulted in gross
proceeds of $1,000,000 including the conversion of $250,000 in notes payable.

  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 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 and D
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 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


                                       F-17
<PAGE>

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,  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 has been reflected as a dividend in
the accompanying financial statements.

     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.

     The net proceeds of $1,840,000  were  allocated to the 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
has been reflected as a dividend in the accompanying financial statements.

     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. The Series B financing  included
the conversion of $2,000,000 of the Company's outstanding 10% Senior Convertible
Notes and $55,850 of accrued  interest into 102,792 shares of Series B preferred
stock.

       As of  December  31,  1999,  there  were  1,044,952  shares  of  Series B
preferred  stock,  100,000  shares of  Series C  preferred  stock  and  attached
warrants to purchase  7,350,656  shares of common stock at an exercise  price of
$1.81 per share outstanding. As of December 30, 2000, there were 1,413,352 share
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 year 2000, 103,905 shares of
Series B preferred stock was converted to common stock. See notes on Series D, E
and F  preferred  stock for  explanation  of  additional  preferred  Shares  and
warrants issued in fiscal years 1999 and 2000.

  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 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 and C
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,


                                       F-18
<PAGE>

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 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
has been reflected as a dividend in the accompanying financial statements.

     The  market  price at the time of this  transaction  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 has been  reflected  as a dividend in the
accompanying financial statements.

       As of December 31, 1999,  there were 250,000 shares of Series D preferred
stock and attached  warrants to purchase  1,250,000 shares of common stock at an
exercise price of $2.00 per share  outstanding.  As of 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.  See notes on Series E and F preferred stock for explanation
of additional preferred shares and warrants issued in fiscal year 2000.

  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 and D 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 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


                                       F-19
<PAGE>

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 financial statements.

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

  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 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 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 30, 2000,  there were 114,286 shares of Series F preferred
stock outstanding.


                                      F-20
<PAGE>

10.  WARRANTS

       At December 30, 2000 and December 31, 1999,  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 and 1999,  which  resulted  in the  issuance of
additional  warrants.  The following table summarizes the Company's  outstanding
warrants at December 30, 2000 and December 31, 1999:

<TABLE>
<CAPTION>

       ---------------- ------------ -------------- ----- -------------- ------------ --------------
                           2000                                             1999
                           ----                                             ----
       ---------------- ------------ -------------- ----- -------------- ------------ --------------
       <S>              <C>          <C>                   <C>           <C>          <C>

       Warrant          Exercise     Expiration            Warrant       Exercise     Expiration
       Shares           Price        Date                  Shares        Price        Date
       ---------------- ------------ -------------- ----- -------------- ------------ --------------
          528,210       $   3.79           4/16/09           528,210     $   3.79            4/16/09
       ---------------- ------------ -------------- ----- -------------- ------------ --------------
        8,286,002       $   1.27           8/26/05         5,771,180     $   1.81            8/26/05
       ---------------- ------------ -------------- ----- -------------- ------------ --------------
          792,950       $   1.27           9/10/05           552,291     $   1.81            9/10/05
       ---------------- ------------ -------------- ----- -------------- ------------ --------------
        1,474,780       $   1.27           9/10/05         1,027,184     $   1.81            9/10/05
       ---------------- ------------ -------------- ----- -------------- ------------ --------------
        1,814,979       $   1.37          12/20/05         1,250,000     $   2.00           12/20/05
       ---------------- ------------ -------------- ----- -------------- ------------ --------------
          577,500       $   2.88          12/21/04           577,500     $   2.88           12/21/04
       ---------------- ------------ -------------- ----- -------------- ------------ --------------
        3,000,000       $   3.75          12/31/02         3,000,000     $   3.75           12/31/02
       ----------                                         ----------
       16,474,421                                         12,706,365
       ==========                                         ==========
       ---------------- ------------ -------------- ----- -------------- ------------ --------------

</TABLE>

11. NOTES PAYABLE

 Note payable:

     During  December  1998,  the  Company  borrowed  $125,000  from each of two
shareholders,  which was  payable in 90 days,  at an  interest  rate of 6.5% per
annum.  The  shareholders  are also  holders of warrants  to  purchase  Series A
convertible  preferred  stock. In connection  with such  borrowing,  a provision
allowed the  shareholders  to request  payment in the form of application of the
principal  amount  against  the  exercise  price  of an  appropriate  number  of
warrants.

     On January  20,  1999,  the  shareholders  exercised  warrants  to purchase
250,000 Series A preferred shares and applied the $250,000 outstanding principal
amount of the notes in payment of the exercise price of the warrants.

       As of December 30, 2000 and December 31, 1999, there was no notes payable
balance outstanding for the Company.

  Funding agreement:

     The Company entered into a Funding Agreement dated as of March 31, 1999 and
amended as of April 14, 1999,  with two of its directors.  Pursuant to the terms
of the Funding  Agreement,  each director  advanced certain funds to the Company
totaling  $2,000,000.  In connection  with each such funding,  the funding party
received a 10% Senior Secured Promissory Note 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.  During 1999,  $2,000,000 was advanced to the Company and, accordingly,
warrants  to  purchase  528,210  shares of common  stock have been  issued  with
exercise prices ranging from $2.63 to $5.13 per share.

     The fair  market  value of the  warrants  was  treated as a discount on the
issuance of the note and  accordingly  was netted  against the principal  amount
outstanding  and amortized  over the life of the debt.  The  discount,  totaling
approximately $949,000, was expensed as interest expense in 1999.

     On  September  10,  1999,   the  note  holders   converted  the  $2,000,000
outstanding  balance  and  $55,850 of accrued  interest  into Series B Preferred
Stock.

12. LINE OF CREDIT:


                                       F-21
<PAGE>

       On August 1, 2000, the Company  established a line of credit with a bank.
The new agreement  permits maximum  borrowings equal to the lesser of $7,500,000
or the borrowing base, as defined.

       Interest on the line of credit for the first  $5,000,000  borrowed ("Line
Interest  Rate") will be payable at the greater of the bank's base rate (9.5% at
December 30,  2000) 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.

       This  agreement  expires on July 31, 2003.  As of December 30, 2000,  the
Company had $2,800,790 outstanding under the line of credit.

       At December 30, 2000, the Company was out of compliance with certain loan
covenants and had obtained waivers on all such covenants.

       As of March 2001,  the Company and its lender have  modified the facility
by adjusting  certain  covenants  and other  provisions  based on the  Company's
operating  plan for 2001. As of January 2001,  the Company was out of compliance
with certain of these  amended  covenants  and had obtained  waivers on all such
covenants.

13. STOCK OPTION PLAN:

       On July 14, 1998, the Company adopted the 1998 Incentive and Nonqualified
Stock Option Plan,  as amended (the "1998 Plan") under which  options to acquire
2,500,000  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 plan  administrator.
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 August 24, 1999, the Company increased the number of options available
under  the 1998  Plan to  4,000,000  shares.  On August  7,  2000,  the  Company
increased  the  number of  options  available  under the 1998 Plan to  7,000,000
shares.

     A summary of the Company's stock options outstanding as of December 30,2000
and December 31, 1999 and activity during the years then ended are as follows:

<TABLE>
<CAPTION>

------------------------------------------- -- -------------------- -------------------- -------------------
                                                                      Weighted Ave.
                                                     Shares           Exercise Price         Price Range
------------------------------------------- -- -------------------- -------------------- -------------------
<S>                                            <C>                  <C>                  <C>
Outstanding - January 1, 1999                            1,025,000                $2.17        $1.06 - $2.50
------------------------------------------- -- -------------------- -------------------- -------------------
  Granted                                                2,750,030                $3.32        $1.00 - $5.38
------------------------------------------- -- -------------------- -------------------- -------------------
  Expired/Forfeited                                      (430,000)                $3.17        $1.13 - $5.00
------------------------------------------- -- -------------------- -------------------- -------------------
  Exercised                                                      0                $0.00                $0.00
------------------------------------------- -- -------------------- -------------------- -------------------
------------------------------------------- -- -------------------- -------------------- -------------------
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        $0.13 - $5.38
------------------------------------------- -- -------------------- -------------------- -------------------
------------------------------------------- -- -------------------- -------------------- -------------------
Exercisable - December 30, 2000                          1,662,200                $2.76        $0.31 - $5.38
------------------------------------------- -- -------------------- -------------------- -------------------

</TABLE>

                                      F-22

<PAGE>

       The following table  summarizes  information for options  outstanding and
exercisable at December 30, 2000:

<TABLE>
<CAPTION>

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

       $0.13-$0.20            47,350           10.0         $0.16                 -               $0.00
 ----------------- -- -------------- -------------- ------------- --- ------------- -- ----------------
       $0.21-$0.30            11,050            9.9         $0.25                 -               $0.00
 ----------------- -- -------------- -------------- ------------- --- ------------- -- ----------------
       $0.31-$0.45           191,196            9.7         $0.32           150,000               $0.31
 ----------------- -- -------------- -------------- ------------- --- ------------- -- ----------------
       $0.46-$0.68           182,340            9.7         $0.50                 -               $0.00
 ----------------- -- -------------- -------------- ------------- --- ------------- -- ----------------
       $0.69-$1.02         1,522,011            8.7         $0.71           100,000               $1.00
 ----------------- -- -------------- -------------- ------------- --- ------------- -- ----------------
       $1.03-$1.53           275,000            8.5         $1.49            25,000               $1.43
 ----------------- -- -------------- -------------- ------------- --- ------------- -- ----------------
       $1.54-$2.30           659,730            8.0         $1.99           346,540               $1.99
 ----------------- -- -------------- -------------- ------------- --- ------------- -- ----------------
       $2.31-$3.45           636,500            7.5         $2.97           400,012               $2.95
 ----------------- -- -------------- -------------- ------------- --- ------------- -- ----------------
       $3.46-$5.18         1,021,000            6.5         $3.78           540,648               $3.72
 ----------------- -- -------------- -------------- ------------- --- ------------- -- ----------------
       $5.19-$5.38           100,000            8.1         $5.28           100,000               $5.28
                             -------            ---         -----           -------               -----
       Total               4,646,177            8.6         $1.99         1,662,200               $2.76
                           =========            ===         =====         =========               =====
 ----------------- -- -------------- -------------- ------------- --- ------------- -- ----------------

</TABLE>

     The effect of applying Statement of Financial  Accounting Standards No. 123
"Accounting  for  Stock-Based  Compensation"  ("SFAS  123")  on the  year  ended
December  30, 2000 and  December  31, 1999 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 31,
1999 have  been  estimated  at $2.85  per  share on the date of grant  using the
Black-Scholes  option-pricing model with the following assumptions:  no dividend
yield,  volatility of 95%, a risk-free  interest rate of 5.38% to 6.64%,  and an
expected  life of five years from date of vesting.  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 vesting. 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:

                                            2000              1999
                                         -----------      ------------
Net loss
  --as reported.....................   $(20,933,111)     $(11,255,415)
                                       =============     =============

  --pro forma.......................   $(22,818,910)     $(14,395,826)
                                       =============     =============

Net loss per share
  --as reported.....................   $      (2.05)     $      (2.97)
                                       =============     =============

  --pro forma.......................   $      (2.21)     $      (3.26)
                                       =============     =============

     In  connection  with  the  stock  options  granted  to  consultants  and to
employees  with  exercise  prices less than fair market  value,  the Company has
$477,513  of  remaining  compensation  expense  which will be recorded in future
periods as these options vest.

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 year ended December 30, 2000 was $13,967.



                                       F-23
<PAGE>