**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 

**FOR ANNUAL AND TRANSITION REPORTSPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**ý****ANNUAL REPORT PURSUANTTO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For TheFiscal Year Ended December 27, 2003**

 

**OR**

 

**TRANSITION REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe Transition Period from                      to                      **

 

**CommissionFile Number 0-25507**

 

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**iPARTY CORP.**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **DELAWARE**                                                    |   | **76-0547750**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |   | (IRS Employer  Identification No.) |
|                                                            |   |                               |
| **270 BRIDGE STREET, SUITE 301  DEDHAM, MASSACHUSETTS**         |   | **02026**                          |
| (Address of Principal Executive Offices)                        |   | (Zip Code)                         |

 

**(781)329-3952**

(Registrant’sTelephone Number, Including Area Code)

 

SecuritiesRegistered pursuant to Section 12(b) of the Act:

 

| **Title of Each Class**           |   | **Name of Each Exchange on Which Registered** |
|-----------------------------------|--------|-----------------------------------------------|
| **COMMON STOCK, $.001 PAR VALUE** |   | **AMERICAN STOCK EXCHANGE**                   |

 

SecuritiesRegistered pursuant to Section 12(g) of the Act:  **None**

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ýNo o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. ý

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).Yes oNo ý

 

On June 28, 2003, the aggregate market value of the voting commonequity of the registrant (consisting of common stock, $.001 par value (the“common stock”)) held by nonaffiliates of the registrant was approximately$4,017,807  based on the closing pricefor such common stock on said date as reported by the American StockExchange.  On March 22, 2004 therewere 20,752,519 shares of common stock, $.001 par value, issued andoutstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the proxy statement for the annual stockholders’ meeting tobe held June 10, 2004 are incorporated by reference into Part III.

 

 

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**PARTI**

 

**ITEM1.  BUSINESS**

 

**General**

 

We believe we area leading brand in the party industry in the markets we serve and a leadingresource in those markets for consumers seeking party goods, party planningadvice and relevant information.  We area party goods retailer operating stores throughout New England, where 35 of our38 retail stores are located.  We alsolicense the name iparty.com (at www.iparty.com) to a third party in exchangefor royalties, which to date have not been significant.  We generated $56.7 million in total revenuesand $0.8 million of net income in fiscal 2003.

 

Our 38 retail stores are located predominantly in New England with 21stores in Massachusetts, 6 in Connecticut, 4 in New Hampshire, 3 in RhodeIsland and 1 in Maine.  We also operate3 stores in Florida.  Our stores rangein size from approximately 8,000 square feet to 20,300 square feet and averageapproximately 9,800 square feet in size. We lease all of these properties, typically for 10 years, with optionsfrom our landlords to renew our leases for an additional 5 or 10 years.

 

Our stores feature over 20,000 products ranging from greeting cards andballoons to more unique merchandise such as piñatas, tiny toys, masquerade andHawaiian Luau items.  Our sales aredriven by the following events: Halloween, Christmas, Easter, Valentine’s Day, New Year’s, IndependenceDay, St. Patrick’s Day, Thanksgiving and Chanukah.  We also focus our business closely on lifetime events such asanniversaries, graduations, birthdays, and bridal or baby showers.

 

Our business has a seasonal pattern whereby in the past two years wehave realized over one-third of our annual revenues in our fourth quarter,which includes Halloween and Christmas, and approximately 25% of our revenuesin the second quarter, which includes school graduations.  Also, during these past two years, we havehad net income in our second and fourth quarters and generated losses in ourfirst and third quarters.

 

Our executive offices are located at 270 Bridge Street, Suite 301,Dedham, Massachusetts, 02026.  Our phonenumber is (781) 329-3952.  Our licensedwebsite is located at www.iparty.com. The information on our licensed website is not a part of this AnnualReport.

 

Where a reference is made in this Annual Report to a particular year oryears, it is a reference to our 52-week fiscal year, unless the contextindicates otherwise.  For example,“2003” refers to our 52-week fiscal year ended December 27, 2003, “2002”refers to our 52-week fiscal year ended December 28, 2002 and “2001”refers to our 52-week fiscal year ended December 29, 2001.

 

**Organization**

 

While we arepresently a party goods retail chain operating 38 stores, when we were firstincorporated as iParty Corp. (“iParty”) on March 12, 1998 we were anInternet-based merchant of party goods and services.  On July 2, 1998, iParty Corp. merged into WSI Acquisitions,Corp. and began trading on the OTC Bulletin Board under ticker symbol “IPTY”.  On January 2, 2000, iParty Corp. waslisted on the American Stock Exchange under ticker symbol “IPT”.

 

On August 3, 2000, iParty Retail Stores Corp. (“iParty Retail”)was incorporated as a wholly-owned subsidiary of iParty Corp. to operate achain of retail stores selling party goods. On August 15, 2000 iParty Retail acquired inventory, fixed assetsand the leases of 33 retail stores from The Big Party Corporation (“The BigParty”), a privately-held company which was operating under bankruptcyprotection, in exchange for cash and the assumption of certainliabilities.  This acquisition wasapproved on August 16, 2000 by the United States Bankruptcy Court for theDistrict of Delaware.  We subsequentlyopened an additional 5 stores through December 27, 2003.

 

On July 8,2003 we signed an agreement with Taymark, Inc. (“Taymark”) to license the iParty.com name toTaymark.  In return, Taymark pays us a15% royalty on all net sales realized through its operation ofwww.iparty.com.  The term of this agreementis for a period of two (2) years, unless sooner terminated.  If this

 

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agreement is notterminated, it is automatically renewed for successive one-year periods.  Previously we operated the website withTaymark under a fulfillment agreement.

 

**CapitalStructure**

 

Our capital structure consists of common stock and six series ofconvertible preferred stock.  We havealso issued warrants and we have a stock option plan.

 

Our common stock has a par value of $0.001 per share.  We have 150,000,000 shares of common stockauthorized, 18,780,204 of which were issued and outstanding as ofDecember 27, 2003.  These sharesare listed on the American Stock Exchange and trade under the symbol “IPT”.

 

We have six different series of convertible preferred stock, SeriesA-F.  Each share of Series A convertiblepreferred stock is convertible into 1.000 share of common stock.  Each share of Series B convertible preferredstock is presently convertible into 12.870 shares of common stock.  Each share of Series C convertible preferredstock is presently convertible into 13.106 shares of common stock.  Each share of Series D convertible preferredstock is presently convertible into 14.055 shares of common stock.  Each share of Series E convertible preferredstock is presently convertible into 10.359 shares of common stock.  Each share of Series F convertible preferredstock is presently convertible into 10.367 shares of common stock.  We had a total of 2,464,805 shares ofconvertible preferred stock outstanding as of December 27, 2003, whichwere convertible to 18,908,024 shares of common stock at that date.  Our convertible preferred stock is presentedon our balance sheet at its carrying value, which was $17,197,766 atDecember 27, 2003.

 

We also have a Stockholder Rights Plan (the “Plan”).  The Plan associates rights to our capitalstock, such that each share of our common stock is entitled to one right andeach share of our preferred stock is entitled to such number of rights equal tothe number of common shares into which it is convertible.  The rights will become exercisable only inthe event that, with certain exceptions, an acquiring party accumulates 10percent or more of our voting stock or if a party announces an offer to acquire15 percent or more of our voting stock. When exercisable, each right entitles the holder to purchase from us oneone-hundredth of a share of a new series of Series G junior preferred stock atan initial purchase price of $2.00.  Inaddition, upon the occurrence of certain events, holders of the rights will beentitled to purchase either iParty Corp. stock or shares in an “acquiringentity” at half of market value.

 

The holders of our convertible preferred stock have a liquidationpreference senior to the holders of our common stock.  In the event of liquidation, our convertible preferredstockholders would be entitled to a liquidation value, which was $22,181,996 atDecember 27, 2003.  This amount isin excess of the carrying value of the preferred stock due to amounts allocatedto warrants, which were issued in connection with certain issuances of ourconvertible preferred stock.  Thedifference of approximately $5.0 million will be accreted when and if theliquidation event occurs.  The holdersof our Series B-F convertible preferred stock are also entitled toanti-dilution protection in the event we issue common stock, or certain rights,including option activity in excess of certain amounts, to purchase or convertinto common stock, at a price below their conversion prices.

 

The Series B-F preferred stockholders are entitled to participate individends when and if declared by the Board of Directors.

 

In connection with the issuance of certain convertible preferred stockand certain licensing and marketing arrangements, we have issued warrants tothe respective holders.  AtDecember 27, 2003 we had 8,982,899 warrants outstanding, which wereexercisable into 13,563,212 shares of our common stock.  Substantially all of the warrants containanti-dilution provisions.  Theirconversion prices would be adjusted in the event we issue common stock, orcertain rights, including option activity in excess of certain amounts, topurchase or convert into common stock, at a price below their exerciseprices.  The majority of the warrantsexpire in 2005.

 

Under our stock option plan we have authorized options to purchase11,000,000 shares of our common stock. At December 27, 2003 we had options outstanding to purchase8,517,718 shares of common stock.

 

The following chart summarizes our capital structure atDecember 27, 2003.

 

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|                                 |   | **Dec 27,  2003**                                       |   |
|--------------------------------------|--------|---------------------------------------------------------|--------|
|                                 |   | **Number of  Shares/  Warrants/  Options  Outstanding** |   | **Conversion/  Exercise  Ratios** |   | **Total  Common  Shares  Issued  and  Issuable (1)** |   | **Weighted  Average  Exercise  Price per  Common  Share  Issuable** |   | **Liquidation  Value** |   |
| Common stock                         |   | 18,780,204                                              |   |   |   | 18,780,204 |   |   |   | $ | — |   |
|                                 |   |                                                    |   |   |   |   |   |   |   |   |   |
| Series A convertible preferred stock |   | 1,000,000                                               |   | 1.000 |   | 1,000,000 |   |   |   | 1,000,000 |   |
| Series B convertible preferred stock |   | 611,080                                                 |   | 12.870 |   | 7,864,678 |   |   |   | 12,221,600 |   |
| Series C convertible preferred stock |   | 100,000                                                 |   | 13.106 |   | 1,310,600 |   |   |   | 2,000,000 |   |
| Series D convertible preferred stock |   | 250,000                                                 |   | 14.055 |   | 3,513,750 |   |   |   | 5,000,000 |   |
| Series E convertible preferred stock |   | 389,439                                                 |   | 10.359 |   | 4,034,193 |   |   |   | 1,460,396 |   |
| Series F convertible preferred stock |   | 114,286                                                 |   | 10.367 |   | 1,184,803 |   |   |   | 500,000 |   |
| Total convertible preferred stock    |   | 2,464,805                                               |   |   |   | 18,908,024 |   |   |   | 22,181,996 |   |
|                                 |   |                                                    |   |   |   |   |   |   |   |   |   |
| Warrants                             |   | 528,210                                                 |   | 1.000 |   | 528,210 |   | $ | 3.79 |   | — |   |
| Warrants                             |   | 5,224,760                                               |   | 1.600 |   | 8,359,616 |   | 1.25 |   | — |   |
| Warrants                             |   | 500,000                                                 |   | 1.600 |   | 800,000 |   | 1.25 |   | — |   |
| Warrants                             |   | 929,929                                                 |   | 1.600 |   | 1,487,886 |   | 1.25 |   | — |   |
| Warrants                             |   | 1,250,000                                               |   | 1.470 |   | 1,837,500 |   | 1.36 |   | — |   |
| Warrants                             |   | 550,000                                                 |   | 1.000 |   | 550,000 |   | 2.88 |   | — |   |
| Total warrants                       |   | 8,982,899                                               |   |   |   | 13,563,212 |   |   |   | — |   |
|                                 |   |                                                    |   |   |   |   |   |   |   |   |   |
| Stock options                        |   | 8,517,718                                               |   | 1.000 |   | 8,517,718 |   | $ | 0.99 |   | — |   |
|                                 |   |                                                    |   |   |   |   |   |   |   |   |   |
| Total                                |   |                                                    |   |   |   | 59,769,158 |   |   |   | $ | 22,181,996 |   |

 

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(1) Includes common stock outstanding andcommon stock issuable upon conversion of convertible preferred stock andexercise of outstanding warrants and stock options.

 

**Competition**

 

The party suppliesretailing business is highly competitive. We compete with a variety of smaller and larger retailers, includingsingle owner-operated party supplies stores, specialty party suppliesretailers, discount department stores, general mass merchants and supermarkets,as well as catalog and Internet merchants.

 

Although barriersto entry are minimal, as new competitors can open new stores and/or launch newInternet sites at a relatively low cost, we believe that the costs to remaincompetitive can be significant.  Thesecosts include the hiring of human resources with industry knowledge and the marketingcosts associated with building a widely recognized brand.

 

**Certain RisksAssociated with the Party Supplies Industry**

 

Party supplies businesses are often affected by general economicdevelopments affecting consumer confidence or spending patterns, theavailability of retail store space on reasonable lease terms, the cost andavailability of labor, availability of products and the type, number andlocation of competing retailers.  Inaddition, factors such as increased cost of goods, unseasonable weather and thepotential scarcity of experienced management and hourly employees may alsoadversely affect the party supplies industry in general and our results ofoperations and financial condition in particular.

 

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**IntellectualProperty**

 

We hold trademarks for “iParty”and “iParty.com” issued by the U.S. Patent and Trademark Office.  Trademark registrations for “iParty” wereissued on February 19, 2002 and August 26, 2003 under U.S.registration No. 2,541,025 and No. 2,756,735. The trademark registration for “iParty.com” was issued onNovember 12, 2002 under U.S. registration No. 2,649,801.

 

**Employees**

 

As of March 1, 2004 we had223 full-time employees and 510 part-time employees.  None of these employees are represented by a labor union, and weconsider our relationship with our employees to be good.

 

**AvailableInformation**

 

Our licensed Internet website address is www.iparty.com.  Our Annual Reports on Form 10-K, QuarterlyReports on Form 10-Q, Current Reports on Form 8-K and amendments to thosereports filed or furnished pursuant to Section 13(a) or 15(d) of theSecurities Exchange Act of 1934 are available through our licensed Internetwebsite as soon as reasonably practicable after we electronically file suchmaterial with, or furnish it to, the SEC. Our licensed Internet website and the information contained therein orconnected thereto are not intended to be incorporated into this Annual Reporton Form 10-K.

 

The public may read and copy any materials that we file with the SEC atthe SEC’s website, www.sec.gov, which contains reports, proxy and informationstatements and other information that public companies are required to filewith the SEC.  In addition, the publicmay read and copy any materials we file with the SEC at the SEC’s Public ReferenceRoom at 450 Fifth Street, N.W., Washington, D.C., 20549.  The public may obtain information about theSEC’s Public Reference Room by calling 1-800-SEC-0330.

 

**ITEM2.  PROPERTIES**

 

Thefollowing table identifies the number of our stores operating as ofDecember 27, 2003, December 28, 2002 and December 29, 2001, bystate.

 
|          |   | **Number of  Stores, for the fiscal year ended** |   |
|---------------|--------|--------------------------------------------------|--------|
|          |   | **Dec 27,  2003**                                |   | **Dec 28,  2002** |   | **Dec 29,  2001** |   |
| **States**    |   | **End  of  Period**                              |   | **Closings** |   | **Openings** |   | **End  of  Period** |   | **Closings** |   | **Openings** |   | **End  of  Period** |   | **Closings** |   | **Openings** |   | **Beginning  of  Period** |   |
| Connecticut   |   | 6                                                |   | — |   | 1 |   | 5 |   | — |   | — |   | 5 |   | — |   | — |   | 5 |   |
| Florida       |   | 3                                                |   | — |   | — |   | 3 |   | — |   | — |   | 3 |   | — |   | — |   | 3 |   |
| Maine         |   | 1                                                |   | — |   | — |   | 1 |   | — |   | — |   | 1 |   | — |   | — |   | 1 |   |
| Massachusetts |   | 21                                               |   | — |   | 2 |   | 19 |   | — |   | 1 |   | 18 |   | — |   | — |   | 18 |   |
| New Hampshire |   | 4                                                |   | — |   | — |   | 4 |   | — |   | 1 |   | 3 |   | — |   | — |   | 3 |   |
| Rhode Island  |   | 3                                                |   | — |   | — |   | 3 |   | — |   | — |   | 3 |   | — |   | — |   | 3 |   |
| Total         |   | 38                                               |   | — |   | 3 |   | 35 |   | — |   | 2 |   | 33 |   | — |   | — |   | 33 |   |

 

Our 38 stores range in size from approximately 8,000 square feet toapproximately 20,300 square feet and average approximately 9,800 squarefeet.  We lease all of our retailstores.  The leases generally providefor fixed minimum rentals, which typically increase periodically during thelife of the lease, and, in some instances, contingent rentals based on apercentage of sales in excess of specified minimum sales levels, as well asrelated occupancy costs, such as property taxes and common areamaintenance.  The leases are typicallyfor 10 years with options from our landlords to renew our leases for anadditional 5 or 10 years.

 

In addition to our stores, we lease office space at 270 Bridge Street,Suite 301, Dedham, Massachusetts, 02026. The lease, which expires November 30, 2011, is for 10,600 squarefeet of space and the monthly rent is $17,500. We also lease office and retail space at 1457 VFW Parkway, West Roxbury,Massachusetts, 02132.  This lease, whichexpires December 31, 2012, is for 20,000 square feet of space.  The retail store uses 10,688 square feet andthe remainder is used primarily for our corporate training center.  The total monthly rent for the retail storeand

 

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corporate office space is $17,100, subject to certain Consumer PriceIndex escalation clauses.  We believethat these spaces are adequate for our immediate needs.

 

We believe that all properties are adequately covered by insurance.

 

**ITEM 3.  LEGALPROCEEDINGS**

 

We are not a party toany material pending legal proceedings other than routine matters in theordinary course of business.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

No matters were submitted to a vote of our security holders during thefourth quarter of fiscal 2003.

 

**PART II**

 

**ITEM5.  MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

The American Stock Exchange is the principal market for our commonstock, where our shares are traded under the symbol “IPT”.  Our common stock began trading on theAmerican Stock Exchange under the name iParty Corp., symbol “IPT”, onJanuary 2, 2000.  Our common stockwas quoted previously on the OTC Electronic Bulletin Board under the nameiParty Corp., symbol “IPTY”, commencing July 1998.  Prior to that time, from February 1998until July 1998, our common stock was quoted on the OTC Bulletin Boardunder the name of WSI Acquisitions, Inc., symbol “WSIA”.

 

The following table setsforth the range of high and low sales prices on the American Stock Exchange forour common stock for each of the fiscal quarters of 2003 and 2002:

 

**MARKET PRICE OF COMMON STOCK**

 
| **Period**     |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| **2003**       |   |     |   |    |   |
| Fourth quarter |   | $        | 1.34   |    | $      | 0.53 |   |
| Third quarter  |   | 0.74     |   | 0.23    |   |
| Second quarter |   | 0.32     |   | 0.20    |   |
| First quarter  |   | 0.26     |   | 0.13    |   |
| **2002**       |   |     |   |    |   |
| Fourth quarter |   | $        | 0.31   |    | $      | 0.15 |   |
| Third quarter  |   | 0.42     |   | 0.25    |   |
| Second quarter |   | 0.42     |   | 0.24    |   |
| First quarter  |   | 0.79     |   | 0.28    |   |

 

We have never paid a cashdividend on our shares of common stock and have no expectation of doing so forthe foreseeable future.  Our existingline of credit agreement with Wells Fargo Retail Finance II, LLC generallyprohibits the payment of any dividends or other distributions to any of ourclasses of capital stock.

 

The approximate number of record holders of our common stock as ofMarch 22, 2004 was 114.  The numberof record owners was determined from our stockholder records, and does notinclude beneficial owners of our common stock whose shares are held in thenames of various security holders, dealers and clearing agencies.  We believe that the number of beneficialowners of our common stock held by others as or in nominee names exceeds 500 innumber.

 

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**ITEM 6.  SELECTED FINANCIAL DATA**

 
|                                                                            |   | **2003**   |       | **2002**   |   | **2001**   |   | **2000**    |       | **1999**    |   |
|---------------------------------------------------------------------------------|--------|------------|------------|------------|--------|------------|--------|-------------|------------|-------------|--------|
| **Statement of  Operations Data:**                                              |   |       |       |       |   |       |   |        |       |        |   |
| Revenues                                                                        |   | $          | 56,697,246 |       | $      | 52,177,923 |   | $           | 47,983,404 |        | $      | 18,619,877 |   | $ | 138,545 |   |
| Operating costs:                                                                |   |       |       |       |   |       |   |        |       |        |   |
| Cost of products sold                                                           |   | 31,758,625 |       | 30,420,475 |   | 28,966,573 |   | 11,734,011  |       | 111,961     |   |
| Marketing and sales                                                             |   | 18,027,299 |       | 16,195,066 |   | 14,961,563 |   | 18,232,538  |       | 6,435,055   |   |
| General and administrative                                                      |   | 5,855,065  |       | 5,578,633  |   | 5,906,869  |   | 3,725,704   |       | 2,010,470   |   |
| Amortization of fulfillment partner warrant                                     |   | —     |       | —     |   | —     |   | 4,532,930   |       | 755,488     |   |
| Restructuring expenses                                                          |   | —     |       | —     |   | —     |   | 1,093,328   |       | —      |   |
| Loss resulting from abandonment of assets                                       |   | —     |       | —     |   | —     |   | 5,784       |       | 518,915     |   |
| Special charge                                                                  |   | —     |       | 396,465    |   | —     |   | —      |       | —      |   |
| Stock option compensation expense                                               |   | —     |       | —     |   | 320,373    |   | 812,510     |       | 847,741     |   |
|                                                                            |   |       |       |       |   |       |   |        |       |        |   |
| Operating income (loss)                                                         |   | 1,056,257  |       | (412,716   | )      | (2,171,974 | )      | (21,516,928 | )          | (10,541,085 | )      |
|                                                                            |   |       |       |       |   |       |   |        |       |        |   |
| Interest income (expense), net                                                  |   | (208,067   | )          | (271,853   | )      | (264,332   | )      | 583,817     |       | (714,330    | )      |
|                                                                            |   |       |       |       |   |       |   |        |       |        |   |
| Income (loss) before taxes                                                      |   | 848,190    |       | (684,569   | )      | (2,436,306 | )      | (20,933,111 | )          | (11,255,415 | )      |
|                                                                            |   |       |       |       |   |       |   |        |       |        |   |
| Income taxes                                                                    |   | 97,233     |       | —     |   | —     |   | —      |       | —      |   |
|                                                                            |   |       |       |       |   |       |   |        |       |        |   |
| Net income (loss)                                                               |   | $          | 750,957    |       | $      | (684,569   | )      | $           | (2,436,306 | )           | $      | (20,933,111 | ) | $ | (11,255,415 | ) |
|                                                                            |   |       |       |       |   |       |   |        |       |        |   |
| Net income (loss) available to common  stockholders                             |   | $          | 750,957    |       | $      | (774,719   | )      | $           | (2,436,306 | )           | $      | (23,182,465 | ) | $ | (32,713,366 | ) |
|                                                                            |   |       |       |       |   |       |   |        |       |        |   |
| Basic and diluted net income (loss) per  share                                  |   | $          | 0.02       |       | $      | (0.04      | )      | $           | (0.18      | )           | $      | (1.85 | ) | $ | (1.02 | ) |
|                                                                            |   |       |       |       |   |       |   |        |       |        |   |
| Basic and diluted net income (loss) per  share available to common stockholders |   | $          | 0.02       |       | $      | (0.05      | )      | $           | (0.18      | )           | $      | (2.05 | ) | $ | (2.97 | ) |
|                                                                            |   |       |       |       |   |       |   |        |       |        |   |
| Weighted-average shares outstanding:                                            |   |       |       |       |   |       |   |        |       |        |   |
| Basic                                                                           |   | 36,683,142 |       | 16,219,436 |   | 13,411,866 |   | 11,321,578  |       | 11,005,421  |   |
| Diluted                                                                         |   | 38,868,484 |       | 16,219,436 |   | 13,411,866 |   | 11,321,578  |       | 11,005,421  |   |
|                                                                            |   |       |       |       |   |       |   |        |       |        |   |
| **Other Data:**                                                                 |   |       |       |       |   |       |   |        |       |        |   |
| Net cash provided by (used in) operating  activities                            |   | $          | 1,368,798  |       | $      | 581,930    |   | $           | (2,616,844 | )           | $      | (14,159,135 | ) | $ | (6,175,729 | ) |
| Net cash used in investing activities                                           |   | (1,166,258 | )          | (775,147   | )      | (210,738   | )      | (4,086,471  | )          | (2,488,783  | )      |
| Net cash provided by (used in) financing  activities                            |   | (86,412    | )          | 120,476    |   | 224,412    |   | 4,574,556   |       | 26,991,066  |   |
| Capital expenditures                                                            |   | 1,166,258  |       | 775,147    |   | 210,738    |   | 202,059     |       | 1,534,669   |   |

 
|                                                             |   | **Dec 27, 2003** |      | **Dec 28, 2002** |   | **Dec 29, 2001** |   | **Dec 30, 2000** |      | **Dec 31, 1999** |   |
|------------------------------------------------------------------|--------|------------------|-----------|------------------|--------|------------------|--------|------------------|-----------|------------------|--------|
| **Balance Sheet Data:**                                          |   |             |      |             |   |             |   |             |      |             |   |
| Working capital                                                  |   | $                | 4,178,436 |             | $      | 4,021,692        |   | $                | 4,841,696 |             | $      | 6,455,832 |   | $ | 18,023,632 |   |
| Total assets                                                     |   | 15,151,980       |      | 13,815,883       |   | 14,533,218       |   | 16,343,053       |      | 27,256,750       |   |
| Total long-term liabilities and convertible  preferred stock (1) |   | 406,469          |      | 19,266,414       |   | 20,929,419       |   | 23,458,131       |      | 21,693,386       |   |
|                                                                  |        |                  |           |                  |        |                  |        |                  |           |                  |        |  |  |  |  |  |

 

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(1) The holders of our Series A-F convertible preferred stock have theright to a liquidation preference, which was not considered under our controlin 2002, 2001, 2000 and 1999. Therefore their carrying values have beenexcluded from stockholders’ equity for these periods. Their carrying values areincluded in stockholders’ equity in 2003 as redemption is solely within ourcontrol.

 

**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following discussion should be read in conjunction with theConsolidated Financial Statements of the Company and the related Notes theretoincluded elsewhere herein.*

 

**Overview**

 

At the end of 2003 we operated 38 retail stores, including 35 in NewEngland and 3 in Florida, and for the year we had net income of approximately$0.8 million, the first year of profitability in our history.  In 2003 we also

 

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achieved a 4.8% increase in comparable stores sales, defined as salesfrom those stores open for at least one full year.  This marks our second consecutive year of solid comparable storesales growth.  Our sales results werehighlighted by an outstanding Halloween season, which led the way to anincrease in comparable stores sales of 20.8% for the month of October and12.6% for our fourth quarter.  Halloweenis our most important season and our merchants, store operations team and therest of our organization prepared many months in advance for it.

 

In November 2003, we relocated our headquarters from West Roxbury,Massachusetts to larger office space in Dedham, Massachusetts and inJanuary 2004 we completed the renovation of our previous headquarters intoa new corporate training facility. During 2003 and early 2004 we enhanced our corporate governance byexpanding our Board of Directors with the addition of four new independentdirectors.  Also in January 2004,we concluded negotiations extending the maturity date of our bankline-of-credit agreement until January 2007 and added the option toincrease the line in increments of $2,500,000 beyond the present limit of$7,500,000, to a limit of $12,500,000, upon 15 days written notice, as long aswe are in compliance of debt covenants and the provisions of the loanagreement.  Our inventory and accountsreceivable secure our line of credit.

 

We believe that all of these accomplishments have positioned us forcontinued success.  Our goals in 2004include accelerating our growth by opening between four and seven new storesduring the year.  We also expect toinstall a new point-of-sale system in our retail stores during the year, whichshould allow us to better serve our customers and achieve additional operatingefficiencies in 2004 and beyond.

 

**Forward LookingStatements**

 

Certain statements in this Annual Report, and particularly thismanagement discussion and analysis, constitute “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  The words “anticipate”,“believe”, “estimate”, “expect”, “plan”, “intend” and other similar expressionsare intended to identify these forward-looking statements, but are not theexclusive means of identifying them. Forward-looking statements included in this Annual Report or hereafterincluded in other publicly available documents filed with the Securities andExchange Commission, reports to our stockholders and other publicly availablestatements 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 futureresults, performance (financial or operating) or achievements expressed orimplied by such forward looking statements. Such future results are based upon our best estimates based upon currentconditions and the most recent results of operations.  Various risks, uncertainties and contingencies could cause ouractual results, performance or achievements to differ materially from thoseexpressed in, or implied by, these statements, including, but not limited to,the following:  the success or failureof our efforts to implement our business strategy; our inability to obtainadditional financing, if required; third-party suppliers’ failure to fulfilltheir obligations to us; unseasonable weather; intense competition; theavailability of retail store space on reasonable lease terms; the failure ofour systems or those of our third-party suppliers; and general economicdevelopments affecting consumer confidence or spending patterns, particularlyin the New England region.

 

**Fiscal2003 Compared to Fiscal 2002**

 

*Revenues*

 

Our consolidated revenues for 2003 were $56,697,246, an increase of$4,519,323, or 8.7% from the prior year. Revenues include the selling price of party goods sold, net of returnsand discounts, and are recognized at the point of sale.  This increase was due to an increase of 4.8%in comparable stores sales, sales from three new stores that opened in thesecond half of 2003 and sales from two new stores that opened in March andSeptember 2002 which were not included in comparable stores sales in 2003until they had been open for one full year. The increase in comparable stores sales was largely attributable to astronger Halloween season compared to the prior year.

 

*Cost of products sold*

 

In 2003 our consolidated cost of products sold was 56.0% of revenues, adecrease of 2.3 percentage points from the prior year.  Cost of products sold consists of the costof merchandise sold to customers and the occupancy costs for our stores.  This decrease was primarily attributable toimproved vendor pricing and terms.

 

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In 2003, we refined our methodology for accounting for vendor rebates,discounts and freight.  We alsocontinued to refine our methodology for estimating an appropriate allowance forobsolete and excess inventory.  The netimpact of these adjustments increased pre-tax income by $141,757, net income by$125,455 and had no impact on basic and diluted earnings per share.

 

*Marketing and sales expense*

 

Our consolidated marketing and sales expense for 2003 was $18,027,299or 31.8% of revenues, an increase of $1,832,233, or 0.8 percentage points, as apercentage of revenues, from the prior year. Marketing and sales expense consists primarily of advertising, publicrelations and promotional expenditures, as well as all store payroll andrelated expenses for personnel engaged in marketing and selling activities.

 

As a percentage of revenues, the increase in marketing and salesexpense was attributable to the addition of retail store management staff toprovide closer supervision of our retail stores, an upgrade to our stores’telecommunications network to improve reliability and establish the capabilityto support future systems enhancements, and higher store pre-opening costs as aresult of opening three stores in 2003 compared to two stores in 2002.

 

*General and administrative expense*

 

Our consolidated general and administrative (“G&A”) expense for2003 was $5,855,065 or 10.3% of revenue, an increase of $276,432 and decreaseof 0.4 percentage points, as a percentage of revenues, from the prioryear.  G&A expense consists ofpayroll and related expenses for executive, merchandising, finance andadministrative personnel, as well as information technology, professional feesand other general corporate expenses.

 

The increase in G&A costs was attributable to an increase inprofessional fees associated with information technology, including consultingfees associated with enhancing systems, and increased labor costs for positionsadded to support growth.

 

*Interest expense*

 

Our interest expense was $212,227 in 2003, a decrease of $68,671 fromthe prior year.  This decrease was dueto the expiration of capital leases in 2002.

 

*Income taxes*

 

In 2003 our provision for income taxes was $97,233, which included$30,000 for federal alternative minimum taxes and $67,233 for state incometaxes.  We were able to utilizeapproximately $997,000 of net operating loss carryforwards for federal incometax purposes in 2003, which were fully reserved for in the prior year due tothe uncertainty of future taxable income.

 

At the end of 2003 we had estimated net operating loss carryforwards ofapproximately $23.7 million, which begin to expire in 2018.  In accordance with Section 382 of theInternal Revenue Code, the use of these carryforwards may be subject to annuallimitations based upon certain ownership changes of our stock that may haveoccurred or that may occur.

 

**Fiscal2002 Compared to Fiscal 2001**

 

*Revenues*

 

Our consolidated revenues for 2002 were $52,177,923, an increase of$4,194,519, or 8.7% from the prior year. Revenues include the selling price of party goods sold, net of returnsand discounts, as well as outbound shipping and handling charges billed.  Revenues are recognized at the point of salefor retail sales and upon shipment to customers for Internet sales

 

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Our retail stores revenues were $51,547,321 in 2002, an increase of$4,478,386, or 9.5% from the prior year. This increase was due to an increase of 6.0% in comparable stores salesand sales from two new stores that opened in March andSeptember 2002.

 

Our Internet revenues for 2002 were $630,602, a decrease of $283,867,or 31.0% from the prior year.  Ourdecrease in Internet revenues was primarily attributable to the reduction fromthe prior year of marketing support for our Internet business as we shiftedemphasis toward our retail stores business.

 

*Cost of products sold*

 

In 2002 our consolidated cost of products sold was 58.3% of revenues, adecrease of 2.1 percentage points from the prior year.  Cost of products sold consists of the costof merchandise sold to customers, the occupancy costs for our stores, andoutbound shipping and handling costs charged to us by our website fulfillmentpartner, Taymark.

 

In 2002 our cost of products sold from retail stores was 58.1% ofretail stores revenues, a decrease of 1.9 percentage points from the prioryear.  This decrease was primarilyattributable to improved vendor pricing and terms.

 

In 2002 our cost of products sold from the Internet was 76.9% ofInternet revenues, a decrease of 0.8 percentage points from the prioryear.  This decrease reflects areduction in promotional coupon discounts offered to our Internet customers.

 

*Marketing and sales expense*

 

Our consolidated marketing and sales expense for 2002 was $16,195,066or 31.0% of revenue, an increase of $1,233,503, and similar, as a percentage ofrevenues, compared to the prior year. Marketing and sales expense consists primarily of advertising, publicrelations and promotional expenditures, as well as all store payroll andrelated expenses for personnel engaged in marketing and selling activities.

 

As a percentage of revenue, the decrease in marketing and sales expensewas the result of better leverage of store payroll and advertising from strongcomparable store sales.

 

*General and administrative expense*

 

Our consolidated general and administrative (“G&A”) expense for2002 was $5,578,633 or 10.7% of revenue, a decrease of $328,236 and 1.6percentage points, as a percentage of revenues, from the prior year.  G&A expense consists of payroll andrelated expenses for executive, merchandising, finance and administrativepersonnel, as well as information technology, professional fees and othergeneral corporate expenses.

 

The amount spent on G&A for our retail stores was relativelysimilar in 2002 and 2001 as increases for fees associated with redesign of ourwide-area network offset decreases in spending for recruitment and taking ofthe mid-year physical inventory.  OurG&A expense for the Internet for 2002 decreased $383,011 from the prioryear.  This decrease was attributable toa reduction of payroll for finance and technology and a reduction in the costassociated with website hosting and maintenance.

 

*Special charge*

 

As discussed in Note 16 to our consolidated financial statements, werecorded a special charge in 2002 in the amount of $396,465 due to theoverissuance of 590,327 common shares upon conversion of certain shares of ourconvertible preferred stock and the subsequent sale of such common shares intothe public market.  This overissuanceresulted from a previously incorrect application of the anti-dilutionprovisions applicable to our Series B, C and D convertible preferredstock.  This special charge includes$225,000 for professional fees incurred through December 28, 2002 and anon-cash charge of $171,465.

 

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S*tock option compensation expense*

 

Our stock optioncompensation expense consists of the amortization of stock options granted in1998, 1999, 2000 and 2001 for consulting services rendered to us by certain ofour Directors as well as the amortization of stock options granted in 1999 toour Chief Executive Officer at an exercise price of $2.00, which was below thethen-current market price of $3.38.  Thevesting periods ended in 2001 for the compensation arrangements mentioned hencethere was no stock option compensation in 2002.  Stock option compensation expense was $320,373 in 2001.

 

*Interest income*

 

Our interest income on cash and equivalents in 2002 was $9,045, adecrease of $108,386 from the prior year. The decrease in interest income was due to lower cash and investmentbalances and lower prevailing interest rates.

 

*Interest expense*

* *

Our interest expense in 2002 was $280,898, a decrease of $100,865 fromthe prior year.  The decrease ininterest expense was attributable to a reduced interest rate on our borrowingson our line of credit and a reduction of outstanding borrowings throughout theyear.

* *

*Income taxes*

 

We had not provided a benefit for income taxes for 2002 due to theuncertainty of future taxable income.

 

At the end of 2002 we had estimated net operating loss carryforwards ofapproximately $24.6 million, which expire through 2021.  In accordance with Section 382 of theInternal Revenue Code, the use of these carryforwards will be subject to annuallimitations based upon certain ownership changes of our stock that haveoccurred or that may occur.

 

*Net loss available to common stockholders*

 

Our net lossavailable to common stockholders was $774,719 in 2002 due to the inclusion of abeneficial conversion dividend in the amount of $90,150, which reflects theimpact of correcting the conversion ratios of the remaining preferredstockholders to rectify the error discussed in the special charge above.

 

**CriticalAccounting Policies**

 

Our financial statements are based on the application of significantaccounting policies, many of which require management to make significantestimates and assumptions (see Note 2 to the consolidated financialstatements).  We believe the followingaccounting policies to be those most important to the portrayal of ourfinancial condition and those that require the most subjective judgment.  If actual results differ significantly frommanagement’s estimates and projections, there could be a material effect on ourfinancial statements.

 

*Inventory and Related Allowance forObsolete and Excess Inventory*

 

Ourinventory consists of party supplies and is valued at the lower of movingweighted-average cost or market.  Werecord vendor rebates, discounts and certain other adjustments to inventory,including freight costs, and we recognize these amounts in the income statementas the related goods are sold.

 

InJanuary 2003, the Emerging Issues Task Force (“EITF”) issued EITF No.02-16, *Accountingby a Customer (Including a Reseller) for Certain Consideration Received from aVendor*, which states that cash consideration received from a vendoris presumed to be a reduction of the prices of the vendor’s products orservices and should, therefore, be characterized as a reduction of cost ofsales when recognized in the statement of operations.  That presumption is overcome when the consideration is either areimbursement of specific, incremental, identifiable costs incurred to sell thevendor’s products, or a payment for assets or services delivered to thevendor.  Since we treated all rebates asa reduction of the price of the vendor’s products, adoption of EITF Issue No.02-16 in 2003 did not have a material impact on our results of operations.

 

Duringeach interim reporting period we estimate the impact on cost of products soldassociated with inventory shortage.  Theactual inventory shortage is determined upon reconciliation of the annualphysical inventory, which occurs shortly after our year ends, and an adjustmentto cost of products sold is recorded at the end

 

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of the fourthquarter to recognize the difference between the estimated and actual inventoryshortage for the full year.  Theadjustment in the fourth quarter of 2003 included a reduction of $145,983 tothe cost of products sold during the previous three quarters.

 

Wealso make adjustments to reduce the value of our inventory for an allowance forobsolete and excess inventory, which is based on our review of inventories onhand compared to estimated future sales. We conduct reviews periodically throughout the year on each stockkeeping unit (“SKU”).  As we identifyobsolete and excess inventory, we take immediate measures to reduce ourinventory risk on these items and we adjust our allowance accordingly.  Thus, actual results could differ from ourestimates.

 

In2003, we refined our methodology for accounting for vendor rebates, discountsand freight.  We also continued torefine our methodology for estimating an appropriate allowance for obsolete andexcess inventory.  The net impact ofthese adjustments increased pre-tax income by $141,757, net income by $125,455and had no impact on basic and diluted earnings per share.

 

*Revenue Recognition*

 

Revenues include the selling price of party goods sold, net of returnsand discounts, and are recognized at the point of sale.  We estimate returns based upon historicalreturn rates and such amounts have not been significant.

 

*Impairment of Long-Lived Assets*

 

We adopted Statement of Financial Accounting Standards (“SFAS”) No.144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* in 2002, whichrequires that long-lived assets be measured at the lower of carrying amount orfair value less cost to sell.  Theadoption of SFAS No. 144 did not have a material impact on our consolidatedresults of operations in 2002.

 

We review each store for impairment indicators annually, consideringoperating results and cash flows.  Weare not aware of any impairment indicators for any of our stores atDecember 27, 2003.

 

*Income Taxes*

 

Historically,we have not recognized an income tax benefit for our losses.  Accordingly we record a valuation allowanceagainst our deferred tax assets because of the uncertainty of future taxableincome and the realizability of the deferred tax assets.  Should we determine that we will be able torealize our deferred tax assets in the future, an adjustment to our deferredtax assets would increase income in the period we made such a determination.

 

*Previous Restatement of FinancialInformation and Balance Sheet Presentation of Series A-F Convertible PreferredStock*

 

The holders of ourSeries A-F convertible preferred stock have the right to a liquidationpreference, which previously could have been exercised under certain events notwithin our control.  In accordance withEITF Topic D-98, we have included the respective equity securities outside ofpermanent stockholders’ deficit in our accompanying restated balance sheet asof December 28, 2002 at their respective carrying values.

 

During the fourthquarter of 2003, the composition of our Board of Directors changed such thatholders of our convertible preferred stock or the designates of our preferredstockholders no longer constitute a majority of our Board members.  This change in the composition of our Boardof Directors has permitted us to present our convertible preferred stock inequity in the accompanying balance sheet as of December 27, 2003, at itsrespective carrying values as the redemption is solely within our control.

 

We will continueto review and consider the criteria in EITF Topic D-98 at the reporting of eachbalance sheet.

 

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*StockOption Compensation Expense*

 

We account for our stock option compensation agreements with employeesunder the provisions of Accounting Principles Board (“APB”) Opinion No. 25, *Accounting forStock Issued to Employees*. We have adopted the disclosure-only provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*, as amended by SFAS No. 148, *Accountingfor Stock-Based Compensation – Transition and Disclosure, an amendment ofFinancial Accounting Standards Board (“FASB”) Statement No. 123*.

 

*Use of Estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires us to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period.  Our actualresults could differ from our estimates.

 

**New Accounting Pronouncements**

 

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities, anInterpretation of Accounting Research Bulletin (“ARB”) No. 51* (“FIN 46”)*.*  FIN 46 requires certain variable interestentities to be consolidated by the primary beneficiary of the entity if theequity investors in the entity do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties.  FIN 46 is effective forall new variable interest entities created or acquired after January 31,2003.  For variable interest entitiescreated or acquired prior to February 1, 2003, the provisions of FIN 46must be applied for the first interim or annual period beginning afterJune 15, 2003.  However, inOctober 2003, the FASB deferred the effective date of FIN 46 to the end ofthe first interim or annual period ending after December 15, 2003 forthose arrangements involving special purpose entities entered into prior toFebruary 1, 2003.  All otherarrangements within the scope of FIN 46 are subject to its provisions beginningin 2004.  We adopted FIN 46, asrequired, with no material impact to our consolidated financial position orresults of operations.  We do notbelieve that the adoption of the remaining provisions of FIN 46 in 2004 willhave a material impact on our financial position or results of operations.

 

**Liquidityand Capital Resources**

 

Our operatingactivities provided $1,368,798 in net cash in 2003 compared to $581,930 in2002, an increase of $786,868, which was largely due to our growth in netincome, which was $750,957 in 2003, compared to a net loss of $684,569 in2002.  Our increase in net income waspartially offset by an increase in net cash used in inventory, which was$506,799 in 2003 compared to cash provided by inventory of $366,188 in 2002.  The increase in net cash used in inventorywas primarily for the three new stores we opened in 2003.

 

We invested cashin property and equipment, including new store capital expenditures, totaling$1,166,258 in 2003 and $775,147 in 2002. The increase in capital expenditures was largely due to the addition ofthree new stores in 2003 compared to two new stores in 2002.

 

We used $86,412 innet cash in financing activities in 2003 compared to providing $120,476 in netcash in financing activities in 2002. We increased our borrowings under our line of credit by $283,933 in 2003compared to an increase of $121,761 in 2002, largely to finance capitalexpenditures for new stores.

 

At December 27, 2003 we had a line of credit (“the line”) withWells Fargo Retail Finance II, LLC.  Theline had a maturity date of July 31, 2004 and a minimum interest rate of6.5%.  The line allowed for borrowingsequal to the lesser of $7,500,000 or the borrowing base, as defined.  Our inventory and other assets secured ourline.  We were required to maintain aminimum availability under the line in the amount of $300,000.  At December 27, 2003,

 

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we were in compliance with this financial covenant.  The line of credit generally prohibits thepayment of any dividends or other distributions to any of our classes ofcapital stock.

 

The amount outstanding under our line was $3,760,671 as ofDecember 27, 2003 and $3,476,738 on December 28, 2002.  The outstanding balances under the line areclassified as current liabilities in the accompanying consolidated balancesheets since we are required to apply daily lock box receipts to reduce theamount outstanding.  AtDecember 27, 2003, we had approximately $2,117,000 of excess availabilityunder the line of credit.

 

Subsequentto the end of fiscal 2003, we amended the line on January 2, 2004.  The amendment extended the maturity date ofour line to January 2, 2007, eliminated the minimum interest rate of 6.5%,established a new interest rate at the bank’s base rate plus 50 basis pointsand added the option to increase the line in increments of $2,500,000 beyondthe previous limit of $7,500,000, to a limit of $12,500,000, upon 15 dayswritten notice, as long as we are in compliance of debt covenants and theprovisions of the loan agreement.  Ourinventory and accounts receivable secure our line of credit.

 

The amended agreement includes a financial covenant requiring us tomaintain a minimum availability under the line in the amount of 5% of thecredit limit, which at the current limit of $7,500,000, is $375,000.  If we adjust the credit limit in the future,the minimum availability would be 5% of the adjusted credit limit.  The amended agreement also has a covenantthat requires us to limit our capital expenditures to within 110% of thoseamounts included in our business plan, which may be updated from time to time.

 

Our prospective cash flows are subject to certain trends, events anduncertainties, including demands for capital to support growth, economicconditions, and contractual matters.  Weexpect our capital expenditures for 2004 to be primarily related to new stores,a new retail stores point-of-sale computer system, store improvements and othertechnology advancements in support of growth and operational enhancement.

 

Contractual obligations at December 27, 2003 were as follows:

 
|                                              |   | **Payments  Due By Period** |       |
|---------------------------------------------------|--------|-----------------------------|------------|
|                                              |   | **Within  1 Year**          |       | **Within  2 - 3  Years** |   | **Within  4 - 5  Years** |   | **After  5 Years** |   | **Total** |   |
| Line of credit                                    |   | $                           | 3,760,671  |   | $ | — |   | $ | — |   | $ | — |   | $ | 3,760,671 |   |
| Capital lease obligations                         |   | 29,220                      |       | 260 |   | — |   | — |   | 29,480 |   |
| Operating leases (including retail space  leases) |   | 6,097,551                   |       | 11,209,179 |   | 6,647,397 |   | 9,380,416 |   | 33,334,543 |   |
| Earn-out agreement included in accrued  expenses  |   | 250,000                     |       | — |   | — |   | — |   | 250,000 |   |
| Total contractual obligations                     |   | $                           | 10,137,442 |   | $ | 11,209,439 |   | $ | 6,647,397 |   | $ | 9,380,416 |   | $ | 37,374,694 |   |

 

In addition, at December 27, 2003, we had outstanding purchaseorders totaling $822,701 for the acquisition of inventory that was scheduledfor delivery after December 27, 2003.

 

Webelieve, based on our current operating plan, that anticipated revenues fromoperations and borrowings available under the existing line of credit will besufficient to fund our operations and working capital requirements for the next12 months.  Our current operating planincludes the opening of four to seven additional new stores and the replacementof our current point-of-sale system during 2004.

 

In theevent that our operating plan changes or proves inaccurate due to decreasedrevenues, unanticipated expenses, increased competition, unfavorable economicconditions, or other unforeseen circumstances, our liquidity may be negativelyimpacted.  Accordingly, we would berequired to adjust our expenditures to conserve working capital or raise additionalcapital to fund operations.  There canbe no assurance, however, that, should we require additional financing, suchfinancing will be available on terms and conditions acceptable to us.

 

**Acquisitions**

 

We operate in an un-branded business arena that has many smallplayers.  As a result, we may considergrowing our business through acquisitions of other entities.  Any determination to make an acquisitionwill be based

 

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upon a variety of factors, including, without limitation, the purchase priceand other financial terms of the transaction, the business prospects,geographical location and the extent to which any acquisition would enhance ourprospects.  We presently have no plans,agreement, understanding, or arrangement with respect to any acquisition.

 

**StockholderRights Plan**

 

On November 9, 2001, we announced that our Board of Directorsadopted a Stockholder Rights Plan (the “Plan”).  Under the Plan each share of our capital stock outstanding at theclose of business on November 9, 2001 and each share of our capital stockissued subsequent to that date has a right associated with it, such that eachshare of our common stock is entitled to one right and each share of ourpreferred stock is entitled to such number of rights equal to the number ofcommon shares into which it is convertible. The rights will become exercisable only in the event that, with certainexceptions, an acquiring party accumulates 10 percent or more of our votingstock or if a party announces an offer to acquire 15 percent or more of ourvoting stock.  The rights expire onNovember 9, 2011.  Whenexercisable, each right entitles the holder to purchase from us oneone-hundredth of a share of a new series of Series G junior preferred stock atan initial purchase price of $2.00.  Inaddition, upon the occurrence of certain events, holders of the rights will beentitled to purchase either iParty Corp. stock or shares in an “acquiringentity” at half of market value.  Wegenerally will be entitled to redeem the rights at $0.001 per right at any timeuntil the date on which a 10 percent position in our voting stock is acquiredby any person or group.  Until a rightis exercised, the holder of a right will have no rights as a stockholder ofiParty solely by virtue of being a rights holder, including, withoutlimitation, the right to vote or receive dividends.

 

**Effectsof Inflation**

 

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

 

**ITEM 7A.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We do not believethat we have any material market risk exposure owing to foreign currency risk,exchange rate risk, commodity price risk and other relevant market rate orprice risks that require the quantitative and qualitative disclosures set forthin Item 305 of Regulation S-K. We have interest rate risk on our line of creditdebt obligation to the extent that if interest rates were to rise our rate ofinterest under our line of credit would also increase.  We do not believe that this interest raterisk is material and we have not entered into any hedging or similarcontractual arrangements with respect to such risk.  We do not enter into contracts for trading purposes.

 

**ITEM 8.  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

The response tothis item is included in a separate section of this report. See “Index toConsolidated Financial Statements” on page F–1.

 

**ITEM 9.  CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Previouslydisclosed on our Annual Report on Form 10-KSB/A filed with the Securities andExchange Commission on August 12, 2003.

 

**ITEM 9A.  CONTROLS ANDPROCEDURES**

 

(a)          *Evaluation of Disclosure Controlsand Procedures.*  Our management, with the participation ofour Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO,evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) asof December 27, 2003.  In designingand evaluating our disclosure controls and procedures, our managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving their objectives,and our management necessarily applied its judgment in evaluating thecost-benefit relationship of possible controls and procedures.  Based on this evaluation, our CEO and CFOconcluded that, as of December 27, 2003, our disclosure controls andprocedures were (1) designed to ensure that material information relating tous, including our consolidated subsidiaries, is made known to our CEO and CFOby others within those entities, particularly during the period in which thisreport was being prepared and (2) effective, in that they provide reasonableassurance that information required to be disclosed by us in the reports that

 

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we file or submit underthe Securities Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’srules and forms.

 

(b)         *Changes in InternalControls.*  No change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act) occurred during the fiscal quarter endedDecember 27, 2003 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting..

 

**PART III**

 

**ITEM 10.  DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Informationrelating to our directors is incorporated herein by reference to the sectionsentitled “Proposal 1—Election of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance” of our Company’s definitive proxy statementwhich will be filed no later than 120 days after December 27, 2003.

 

We are developinga written code of business conduct and ethics that applies to all ourdirectors, officers and employees.  Weintend to disclose any amendments to, or waivers from, our code of businessconduct and ethics on the Investor Relations page of our website which islocated at www.iparty.com*.*

 

**ITEM 11.  EXECUTIVECOMPENSATION**

 

Informationrequired by Item 11 is incorporated herein by reference to the Sectionsentitled “Proposal 1—Election of Directors—Director Compensation” and“Executive Compensation” of our definitive proxy statement which will be filedno later than 120 days after December 27, 2003.

 

**ITEM 12.  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

 

Informationrelated to security ownership required by Item 12 is incorporated herein byreference to the Section entitled “Stock Ownership” of our definitiveproxy statement which will be filed no later than 120 days afterDecember 27, 2003.

 

Securitiesauthorized under equity compensation plans as of December 27, 2003, wereas follows:

 

**EQUITY COMPENSATION PLAN INFORMATION**

 
|                                                        |   | **Column a**                                                                  |   | **Column b**                                                  |   | **Column c**                                                                                                                                          |      |
|-------------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
| **Plan Category**                                           |   | **Number of  Securities  to be Issued upon Exercise  of Outstanding Options** |   | **Weighted  Average  Exercise Price of  Outstanding Options** |   | **Number of  Securities  Remaining Available  for Future Issuances  under Equity  Compensation Plans  (Excluding Securities  Reflected in Column a)** |      |
| Equity compensation plans approved by  security holders     |   | 8,517,718                                                                     |   | $                                                             | 0.99   |                                                                                                                                                  | 2,126,907 |   |
| Equity compensation plans not approved by  security holders |   | —                                                                        |   | —                                                        |   | —                                                                                                                                                |      |
| Total                                                       |   | 8,517,718                                                                     |   | $                                                             | 0.99   |                                                                                                                                                  | 2,126,907 |   |

 

**ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Informationrequired by Item 13 is incorporated herein by reference to the section entitled“Executive Compensation–Certain Relationships and Related Transactions” of ourdefinitive proxy statement which will be filed no later than 120 days afterDecember 27, 2003.

 

15

----

 

**ITEM 14.  PRINCIPAL ACCOUNTANTFEES AND SERVICES**

 

Informationrequired by Item 14 is incorporated herein by reference to thesection entitled “Independent Public Accountants” of our definitive proxystatement which will be filed no later than 120 days after December 27,2003.

 

**PART IV**

 

**ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTSON FORM 8-K**

 
| (a)    |   | 1. Financial statements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | For a listing of consolidated financial statements which are included  in this document, see page F–1.                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | 2. Financial Statement Schedules:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | All schedules for which provision is made in the applicable  accounting regulation of the Securities and Exchange Commission are not  required under the related instructions or are inapplicable and, therefore,  have been omitted.                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | 3. Exhibits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | The exhibits listed in the Exhibit Index immediately preceding the  exhibits are filed as part of this Annual Report on Form 10-K and are  incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (b)    |   | Reports on Form 8–K:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | During the last quarter of the period covered by this Report, we  filed two current reports on Form 8-K on November 18, 2003 and  December 12, 2003.  The Form 8-K  filed on November 18, 2003 announced our financial results for the fiscal  quarter ended September 27, 2003 and an increase in the size of our  Board of Directors.  The Form 8-K  filed on December 12, 2003 announced an additional increase in the size  of our Board of Directors and the relocation of our corporate office. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (c)    |   | Exhibits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | The exhibits listed in the Exhibit Index immediately preceding the  exhibits are filed as part of this Annual Report on Form 10-K and are  incorporated herein by reference                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (d)    |   | Financial Statement Schedules:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | Included in Item 15(a)(2) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

16

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|                             | iPARTY CORP. |
|----------------------------------|--------------|
|                             |         |   |
|                             | By:          | /s/ SAL PERISANO |   |
|                             |         | Sal Perisano |   |
|                             |         | *Chairman of the Board and  Chief Executive Officer* |   |
|                             |         |   |
| Dated:  March 26, 2004 |         |   |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **SIGNATURE**             |   | **TITLE**                                              |   | **DATE**            |
|---------------------------|--------|--------------------------------------------------------|--------|---------------------|
|                      |   |                                                   |   |                |
| /s/ SAL PERISANO          |   | Chairman of the Board and                              |   | March 26, 2004 |
| Sal Perisano              |   | Chief Executive Officer  (Principal Executive Officer) |   |                |
|                      |   |                                                   |   |                |
| /s/ ROBERT LESSIN         |   | Director                                               |   | March 26, 2004 |
| Robert Lessin             |   |                                                   |   |                |
|                      |   |                                                   |   |                |
| /s/ LORENZO ROCCIA        |   | Director                                               |   | March 26, 2004 |
| Lorenzo Roccia            |   |                                                   |   |                |
|                      |   |                                                   |   |                |
| /s/ CHRISTINA WEAVER-VEST |   | Director                                               |   | March 26, 2004 |
| Christina Weaver-Vest     |   |                                                   |   |                |
|                      |   |                                                   |   |                |
| /s/ DANIEL DE WOLF        |   | Director                                               |   | March 26, 2004 |
| Daniel De Wolf            |   |                                                   |   |                |
|                      |   |                                                   |   |                |
| /s/ FRANK HAYDU           |   | Director                                               |   | March 26, 2004 |
| Frank Haydu               |   |                                                   |   |                |
|                      |   |                                                   |   |                |
| /s/ ERIC SCHINDLER        |   | Director                                               |   | March 26, 2004 |
| Eric Schindler            |   |                                                   |   |                |
|                      |   |                                                   |   |                |
| /s/ PATRICK FARRELL       |   | President and Chief Financial Officer                  |   | March 26, 2004 |
| Patrick Farrell           |   | (Principal Financial Officer and Director)             |   |                |
|                      |   |                                                   |   |                |
| /s/ JOSEPH VASSALLUZZO    |   | Director                                               |   | March 26, 2004 |
| Joseph Vassalluzzo        |   |                                                   |   |                |

 

17

----

 

**i****PARTY CORP.**

 

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Independent Auditors                                                                  |   |   |
|-------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                            |   |   |
| Report of Independent Public Accountants                                                        |   |   |
|                                                                                            |   |   |
| Consolidated Balance Sheets                                                                     |   |   |
|                                                                                            |   |   |
| Consolidated Statements of Operations                                                           |   |   |
|                                                                                            |   |   |
| Consolidated Statements of Convertible  Preferred Stock and Stockholders’ Equity (Deficit) |   |   |
|                                                                                            |   |   |
| Consolidated Statements of Cash Flows                                                           |   |   |
|                                                                                            |   |   |
| Notes to Consolidated Financial Statements                                                      |   |   |

 

F-1

----

 

**Report of IndependentAuditors**

 

Board of Directors and StockholdersiParty Corp.

 

We have audited the accompanying consolidated balance sheets of iPartyCorp. and subsidiaries as of December 27, 2003 and December 28, 2002,and the related consolidated statements of operations, convertible preferredstock and stockholders’ equity (deficit), and cash flows for the years thenended.  These financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audits.  Theconsolidated financial statements of iParty Corp. as of December 29, 2001,were audited by other auditors who have ceased operations and whose reportdated February 22, 2002 expressed an unqualified opinion on thoseconsolidated statements before the reclassification adjustments described inNote 1.

 

We conducted our audits inaccordance with auditing standards generally accepted in the UnitedStates.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion,the 2003 and 2002 consolidated financial statements referred to above presentfairly, in all material respects, the financial position of iParty Corp. andsubsidiaries as of December 27, 2003 and December 28, 2002, and theresults of their operations and their cash flows for the years then ended inconformity with accounting principles generally accepted in the United States.

 

As discussed above, theconsolidated financial statements of the Company for the year endedDecember 29, 2001 were audited by other auditors who have ceasedoperations.  As described in Note 1 tothe consolidated financial statements, the Company has revised its consolidatedstatements of convertible preferred stock and stockholders’ deficit for theyear ended December 29, 2001 to reclassify the Company’s series A – Fconvertible preferred stock outside of permanent stockholders’ deficit as a resultof the application of EITF Topic No. D-98, *Classificationand Measurement of Redeemable Securities.* We have audited the reclassification adjustments described in Note1 that were applied to revise the consolidated statements of convertiblepreferred stock and stockholders’ deficit for the year ended December 29,2001.  With respect to thesereclassification adjustments, our procedures included (a) agreeing thepreviously reported series A – F convertible preferred stock, additional paidin capital and stockholders’ deficit to the previously issued consolidatedfinancial statements, (b) agreeing the adjustments to the underlying recordsobtained from management and (c) testing the mathematical accuracy of thereconciliation of the restated series A – F convertible preferred stock,additional paid in capital and stockholders’ deficit.  In our opinion, such reclassification adjustments are appropriateand have been properly applied.  However,we were not engaged to audit, review, or apply any procedures to the 2001consolidated financial statements of the Company other than with respect tosuch adjustments and, accordingly, we do not express an opinion or any otherform of assurance on the 2001 financial statements taken as a whole.

 
|                   | /s/ Ernst & Young LLP |   |
|------------------------|---------------------------|--------|
| Boston, Massachusetts  |                      |
| February 24, 2004 |                      |

 

F-2

----

 

This is a copy of the audit report previously issued by Arthur AndersenLLP in connection with the consolidated financial statements of iParty Corp. asof December 29, 2001 and December 30, 2000, and for the years thenended, as included in the Annual Report on Form 10-KSB of iParty Corp. for thefiscal year ended December 29, 2001. This audit report has not been reissued by Arthur Andersen LLP inconnection with the filing of this Annual Report on Form 10-K for the fiscalyear ended December 27, 2003.  Theconsolidated balance sheets as of December 29, 2001 and December 30,2000 and the consolidated statements of operations, stockholders’ equity andcash flows for the year ended December 30, 2000 related to this auditreport have not been included in the consolidated financial statements in thisAnnual Report on Form 10-K for the fiscal year ended December 27, 2003.

# ** **

# **Report ofIndependent Public Accountants**

 

To iParty Corp.:

 

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

 

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

 

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

 

 
|                   | /s/ Arthur Andersen LLP |   |
|------------------------|-------------------------|--------|
|                   |                    |
|                   |                    |
| Boston, Massachusetts  |                    |
| February 22, 2002 |                    |

 

F-3

----

 

**iPARTYCORP.CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                               |   | **Dec 27,  2003** |       | **Dec 28,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|-------------------|--------|
| **ASSETS**                                                                                                                                                                         |   |              |       |              |   |
| Current assets:                                                                                                                                                                    |   |              |       |              |   |
| Cash and cash equivalents                                                                                                                                                          |   | $                 | 2,442,471  |              | $      | 2,326,343 |   |
| Restricted cash                                                                                                                                                                    |   | 533,284           |       | 371,952           |   |
| Accounts receivable                                                                                                                                                                |   | 487,934           |       | 445,988           |   |
| Inventory, net                                                                                                                                                                     |   | 9,423,463         |       | 8,916,664         |   |
| Prepaid expenses and other assets                                                                                                                                                  |   | 483,925           |       | 294,370           |   |
| Total current assets                                                                                                                                                               |   | 13,371,077        |       | 12,355,317        |   |
| Property and equipment, net                                                                                                                                                        |   | 1,694,140         |       | 1,128,897         |   |
| Other assets                                                                                                                                                                       |   | 86,763            |       | 331,669           |   |
| Total assets                                                                                                                                                                       |   | $                 | 15,151,980 |              | $      | 13,815,883 |   |
|                                                                                                                                                                               |   |              |       |              |   |
| **LIABILITIES, CONVERTIBLE PREFERRED STOCK  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                              |   |              |       |              |   |
| Current liabilities:                                                                                                                                                               |   |              |       |              |   |
| Accounts payable                                                                                                                                                                   |   | $                 | 3,095,848  |              | $      | 2,752,311 |   |
| Accrued expenses                                                                                                                                                                   |   | 2,306,902         |       | 1,867,496         |   |
| Current portion of capital lease  obligations                                                                                                                                      |   | 29,220            |       | 237,080           |   |
| Borrowings under line of credit                                                                                                                                                    |   | 3,760,671         |       | 3,476,738         |   |
| Total current liabilities                                                                                                                                                          |   | 9,192,641         |       | 8,333,625         |   |
|                                                                                                                                                                               |   |              |       |              |   |
| Long-term liabilities:                                                                                                                                                             |   |              |       |              |   |
| Capital lease obligations, net of current  portion                                                                                                                                 |   | 260               |       | 3,173             |   |
| Other liabilities                                                                                                                                                                  |   | 406,209           |       | 678,932           |   |
| Total long-term liabilities                                                                                                                                                        |   | 406,469           |       | 682,105           |   |
|                                                                                                                                                                               |   |              |       |              |   |
| Commitments and contingencies                                                                                                                                                      |   |              |       |              |   |
|                                                                                                                                                                               |   |              |       |              |   |
| Convertible preferred stock - $.001 par  value; 10,000,000 shares authorized,                                                                                                      |   |              |       |              |   |
| Series A convertible preferred stock -  1,000,000 shares authorized, issued and outstanding (aggregate liquidation  value of $1,000,000 at December 28, 2002)                 |   | —            |       | 1,000,000         |   |
| Series B convertible preferred stock -  1,150,000 shares authorized; 684,799 shares issued and outstanding (aggregate  liquidation value of $13,695,973 at December 28, 2002) |   | —            |       | 10,189,809        |   |
| Series C convertible preferred stock -  100,000 shares authorized, issued and outstanding (aggregate liquidation  value of $2,000,000 at December 28, 2002)                   |   | —            |       | 1,492,000         |   |
| Series D convertible preferred stock -  250,000 shares authorized, issued and outstanding (aggregate liquidation  value of $5,000,000 at December 28, 2002)                   |   | —            |       | 3,652,500         |   |
| Series E convertible preferred stock -  533,333 shares authorized; 466,667 shares issued and outstanding (aggregate  liquidation value of $1,750,000 at December 28, 2002)    |   | —            |       | 1,750,000         |   |
| Series F convertible preferred stock -  114,286 shares authorized, issued and outstanding (aggregate liquidation  value of $500,000 at December 28, 2002)                     |   | —            |       | 500,000           |   |
| Total convertible preferred stock                                                                                                                                                  |   | —            |       | 18,584,309        |   |
|                                                                                                                                                                               |   |              |       |              |   |
| Stockholders’ equity (deficit):                                                                                                                                               |   |              |       |              |   |
| Convertible preferred stock - $.001 par  value; 10,000,000 shares authorized,                                                                                                      |   |              |       |              |   |
| Series A convertible preferred stock -  1,000,000 shares authorized, issued and outstanding (aggregate liquidation  value of $1,000,000 at December 27, 2003)                 |   | 1,000,000         |       | —            |   |
| Series B convertible preferred stock -  1,150,000 shares authorized; 611,080 shares issued and outstanding (aggregate  liquidation value of $12,221,600 at December 27, 2003) |   | 9,092,870         |       | —            |   |
| Series C convertible preferred stock -  100,000 shares authorized, issued and outstanding (aggregate liquidation  value of $2,000,000 at December 27, 2003)                   |   | 1,492,000         |       | —            |   |
| Series D convertible preferred stock -  250,000 shares authorized, issued and outstanding (aggregate liquidation  value of $5,000,000 at December 27, 2003)                   |   | 3,652,500         |       | —            |   |
| Series E convertible preferred stock -  533,333 shares authorized; 389,439 shares issued and outstanding (aggregate  liquidation value of $1,460,396 at December 27, 2003)    |   | 1,460,396         |       | —            |   |
| Series F convertible preferred stock -  114,286 shares authorized, issued and outstanding (aggregate liquidation  value of $500,000 at December 27, 2003)                     |   | 500,000           |       | —            |   |
| Total convertible preferred stock                                                                                                                                                  |   | 17,197,766        |       | —            |   |
|                                                                                                                                                                               |   |              |       |              |   |
| Common stock - $.001 par value; 150,000,000  shares authorized; 18,780,204 and 16,996,570 shares issued and outstanding in  2003 and 2002, respectively                            |   | 18,780            |       | 16,997            |   |
|                                                                                                                                                                               |   |              |       |              |   |
| Additional paid-in capital                                                                                                                                                         |   | 47,554,621        |       | 46,168,101        |   |
| Accumulated deficit                                                                                                                                                                |   | (59,218,297       | )          | (59,969,254       | )      |
| Total stockholders’ equity (deficit)                                                                                                                                          |   | 5,552,870         |       | (13,784,156       | )      |
|                                                                                                                                                                               |   |              |       |              |   |
| Total liabilities, convertible preferred  stock and stockholders’ equity (deficit)                                                                                            |   | $                 | 15,151,980 |              | $      | 13,815,883 |   |

 

The accompanying notes are an integral partof these Consolidated Financial Statements.

 

F-4

----

 

**iPARTY CORP.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                                            |   | **For the  twelve months ended** |       |
|---------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                            |   | **Dec 27,  2003**                |       | **Dec 28,  2002** |   | **Dec 29,  2001** |   |
| Revenues                                                                        |   | $                                | 56,697,246 |   | $ | 52,177,923 |   | $ | 47,983,404 |   |
| Operating costs:                                                                |   |                             |       |   |   |   |   |
| Cost of products sold                                                           |   | 31,758,625                       |       | 30,420,475 |   | 28,966,573 |   |
| Marketing and sales                                                             |   | 18,027,299                       |       | 16,195,066 |   | 14,961,563 |   |
| General and administrative                                                      |   | 5,855,065                        |       | 5,578,633 |   | 5,906,869 |   |
| Special charge                                                                  |   | —                           |       | 396,465 |   | — |   |
| Stock option compensation expense                                               |   | —                           |       | — |   | 320,373 |   |
|                                                                            |   |                             |       |   |   |   |   |
| Operating income (loss)                                                         |   | 1,056,257                        |       | (412,716 | ) | (2,171,974 | ) |
|                                                                            |   |                             |       |   |   |   |   |
| Interest income                                                                 |   | 4,160                            |       | 9,045 |   | 117,431 |   |
|                                                                            |   |                             |       |   |   |   |   |
| Interest expense                                                                |   | (212,227                         | )          | (280,898 | ) | (381,763 | ) |
|                                                                            |   |                             |       |   |   |   |   |
| Income (loss) before income taxes                                               |   | 848,190                          |       | (684,569 | ) | (2,436,306 | ) |
|                                                                            |   |                             |       |   |   |   |   |
| Income taxes                                                                    |   | 97,233                           |       | — |   | — |   |
|                                                                            |   |                             |       |   |   |   |   |
| Net income (loss)                                                               |   | $                                | 750,957    |   | $ | (684,569 | ) | $ | (2,436,306 | ) |
|                                                                            |   |                             |       |   |   |   |   |
| Net income (loss) available to common  stockholders                             |   | $                                | 750,957    |   | $ | (774,719 | ) | $ | (2,436,306 | ) |
|                                                                            |   |                             |       |   |   |   |   |
| Basic and diluted net income (loss) per  share                                  |   | $                                | 0.02       |   | $ | (0.04 | ) | $ | (0.18 | ) |
|                                                                            |   |                             |       |   |   |   |   |
| Basic and diluted net income (loss) per  share available to common stockholders |   | $                                | 0.02       |   | $ | (0.05 | ) | $ | (0.18 | ) |
|                                                                            |   |                             |       |   |   |   |   |
| Weighted-average shares outstanding:                                            |   |                             |       |   |   |   |   |
| Basic                                                                           |   | 36,683,142                       |       | 16,219,436 |   | 13,411,866 |   |
| Diluted                                                                         |   | 38,868,484                       |       | 16,219,436 |   | 13,411,866 |   |

 

The accompanying notes are an integral partof these Consolidated Financial Statements.

 

F-5

----

 

**IPARTY CORP.**

**CONSOLIDATED STATEMENTS OF CONVERTIBLE****PREFERRED STOCK ANDSTOCKHOLDERS’ EQUITY (DEFICIT)**

 
|                                                                              |   |                             |       |       |                             |       | **Stockholders’  Equity (Deficit)** |       |
|-----------------------------------------------------------------------------------|--------|----------------------------------|------------|------------|----------------------------------|------------|------------------------------------------|------------|
|                                                                              |   | **Convertible  Preferred Stock** |       |       | **Convertible  Preferred Stock** |       | **Common  Stock**                        |       | **Additional  Paid-In  Capital** |   | **Accumulated  Deficit** |   | **Total  Stockholders’  Equity (Deficit)** |   |
| **Shares**                                                                        |   | **Amount**                       | **Shares** |       | **Amount**                       | **Shares** |                                     | **Amount** |
| Balance December 30, 2000                                                    |   | 3,569,165                        |       | $          | 22,965,666                       |       |                                     | —     |   | $ | — |   | 12,174,745 |   | $ | 12,175 |   | $ | 41,204,890 |   | $ | (56,758,229 | ) | $ | (15,541,164 | ) |
|                                                                              |   |                             |       |       |                             |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of common stock upon conversion of Series  B convertible preferred stock |   | (294,793                         | )          | (2,872,999 | )                                |       | —                                   |       | — |   | 2,947,930 |   | 2,948 |   | 2,870,051 |   | — |   | 2,872,999 |   |
| Non-cash compensation expense                                                     |   | —                           |       | —     |                             |       | —                                   |       | — |   | — |   | — |   | 320,373 |   |   |   | 320,373 |   |
| Net loss                                                                          |   | —                           |       | —     |                             |       | —                                   |       | — |   | — |   | — |   | — |   | (2,436,306 | ) | (2,436,306 | ) |
| Balance December 29, 2001                                                    |   | 3,274,372                        |       | 20,092,667 |                             |       | —                                   |       | — |   | 15,122,675 |   | 15,123 |   | 44,395,314 |   | (59,194,535 | ) | (14,784,098 | ) |
|                                                                              |   |                             |       |       |                             |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of common stock upon conversion of Series  B convertible preferred stock |   | (119,786                         | )          | (1,257,886 | )                                |       | —                                   |       | — |   | 1,197,860 |   | 1,198 |   | 1,256,688 |   | — |   | 1,257,886 |   |
| Issuance of common stock upon conversion of Series  E convertible preferred stock |   | (66,666                          | )          | (250,000   | )                                |       | —                                   |       | — |   | 666,660 |   | 667 |   | 249,333 |   | — |   | 250,000 |   |
| Series B convertible preferred stock adjustment                                   |   | (313,974                         | )          | (314       | )                                |       | —                                   |       | — |   | — |   | — |   | 314 |   | — |   | 314 |   |
| Series C convertible preferred stock adjustment                                   |   | (45,198                          | )          | (45        | )                                |       | —                                   |       | — |   | — |   | — |   | 45 |   | — |   | 45 |   |
| Series D convertible preferred stock adjustment                                   |   | (112,996                         | )          | (113       | )                                |       | —                                   |       | — |   | — |   | — |   | 113 |   | — |   | 113 |   |
| Equity portion of special charge                                                  |   | —                           |       | —     |                             |       | —                                   |       | — |   | — |   | — |   | 171,465 |   | — |   | 171,465 |   |
| Exercise of stock options                                                         |   | —                           |       | —     |                             |       | —                                   |       | — |   | 9,375 |   | 9 |   | 4,679 |   | — |   | 4,688 |   |
| Convertible preferred stock beneficial conversion  dividend                       |   | —                           |       | —     |                             |       | —                                   |       | — |   | — |   | — |   | 90,150 |   | (90,150 | ) | — |   |
| Net loss                                                                          |   | —                           |       | —     |                             |       | —                                   |       | — |   | — |   | — |   | — |   | (684,569 | ) | (684,569 | ) |
| Balance December 28, 2002                                                    |   | 2,615,752                        |       | 18,584,309 |                             |       | —                                   |       | — |   | 16,996,570 |   | 16,997 |   | 46,168,101 |   | (59,969,254 | ) | (13,784,156 | ) |
|                                                                              |   |                             |       |       |                             |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of common stock upon conversion of Series  B convertible preferred stock |   | (73,719                          | )          | (1,096,939 | )                                |       |                                     |       |   |   | 948,690 |   | 948 |   | 1,095,991 |   | — |   | 1,096,939 |   |
| Issuance of common stock upon conversion of Series  E convertible preferred stock |   | (77,228                          | )          | (289,604   | )                                |       |                                     |       |   |   | 823,944 |   | 824 |   | 288,780 |   | — |   | 289,604 |   |
| Reclassification of Series A convertible preferred  stock ( Note 1)               |   | (1,000,000                       | )          | (1,000,000 | )                                |       | 1,000,000                                |       | 1,000,000 |   |   |   |   |   |   |   |   |   | 1,000,000 |   |
| Reclassification of Series B convertible preferred  stock ( Note 1)               |   | (611,080                         | )          | (9,092,870 | )                                |       | 611,080                                  |       | 9,092,870 |   |   |   |   |   |   |   |   |   | 9,092,870 |   |
| Reclassification of Series C convertible preferred  stock ( Note 1)               |   | (100,000                         | )          | (1,492,000 | )                                |       | 100,000                                  |       | 1,492,000 |   |   |   |   |   |   |   |   |   | 1,492,000 |   |
| Reclassification of Series D convertible preferred  stock ( Note 1)               |   | (250,000                         | )          | (3,652,500 | )                                |       | 250,000                                  |       | 3,652,500 |   |   |   |   |   |   |   |   |   | 3,652,500 |   |
| Reclassification of Series E convertible preferred  stock ( Note 1)               |   | (389,439                         | )          | (1,460,396 | )                                |       | 389,439                                  |       | 1,460,396 |   |   |   |   |   |   |   |   |   | 1,460,396 |   |
| Reclassification of Series F convertible preferred  stock ( Note 1)               |   | (114,286                         | )          | (500,000   | )                                |       | 114,286                                  |       | 500,000 |   |   |   |   |   |   |   |   |   | 500,000 |   |
| Exercise of stock options                                                         |   | —                           |       | —     |                             |       | —                                   |       | — |   | 11,000 |   | 11 |   | 1,749 |   | — |   | 1,760 |   |
| Net income                                                                        |   | —                           |       | —     |                             |       | —                                   |       | — |   | — |   | — |   | — |   | 750,957 |   | 750,957 |   |
| Balance December 27, 2003                                                    |   | —                           |       | $          | —                           |       |                                     | 2,464,805  |   | $ | 17,197,766 |   | 18,780,204 |   | $ | 18,780 |   | $ | 47,554,621 |   | $ | (59,218,297 | ) | $ | 5,552,870 |   |

 

The accompanying notes are an integral partof these Consolidated Financial Statements.

 

F-6

----

 

**iPARTYCORP.CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                                |   | **For the  twelve months ended** |      |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------------|-----------|
|                                                                                                |   | **Dec 27,  2003**                |      | **Dec 28,  2002** |   | **Dec 29,  2001** |   |
| **Operating  activities:**                                                                          |   |                             |      |   |   |   |   |
|                                                                                                |   |                             |      |   |   |   |   |
| Net income (loss)                                                                                   |   | $                                | 750,957   |   | $ | (684,569 | ) | $ | (2,436,306 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |                             |      |   |   |   |   |
| Depreciation and amortization                                                                       |   | 601,015                          |      | 633,173 |   | 616,663 |   |
| Non-cash portion of special charge                                                                  |   | —                           |      | 171,465 |   | — |   |
| Deferred rent                                                                                       |   | (22,723                          | )         | 102,518 |   | 201,419 |   |
| Stock option compensation expense                                                                   |   | —                           |      | — |   | 320,373 |   |
| Changes in operating assets and  liabilities:                                                       |   |                             |      |   |   |   |   |
| Accounts receivable                                                                                 |   | (41,946                          | )         | 95,715 |   | 406,589 |   |
| Inventory                                                                                           |   | (506,799                         | )         | 366,188 |   | (1,056,292 | ) |
| Prepaid expenses and other assets                                                                   |   | 55,351                           |      | 36,541 |   | (35,482 | ) |
| Accounts payable                                                                                    |   | 343,537                          |      | 116,151 |   | 220,481 |   |
| Accrued severance and restructuring  expenses                                                       |   | —                           |      | — |   | (775,137 | ) |
| Accrued expenses and other liabilities                                                              |   | 189,406                          |      | (255,252 | ) | (79,152 | ) |
| Net cash provided by (used in) operating  activities                                                |   | 1,368,798                        |      | 581,930 |   | (2,616,844 | ) |
|                                                                                                |   |                             |      |   |   |   |   |
| **Investing  activities:**                                                                          |   |                             |      |   |   |   |   |
|                                                                                                |   |                             |      |   |   |   |   |
| Purchase of property and equipment                                                                  |   | (1,166,258                       | )         | (775,147 | ) | (210,738 | ) |
| Net cash used in investing activities                                                               |   | (1,166,258                       | )         | (775,147 | ) | (210,738 | ) |
|                                                                                                |   |                             |      |   |   |   |   |
| **Financing  activities:**                                                                          |   |                             |      |   |   |   |   |
|                                                                                                |   |                             |      |   |   |   |   |
| Net borrowings under line of credit                                                                 |   | 283,933                          |      | 121,761 |   | 554,187 |   |
| Decrease (increase) in restricted cash                                                              |   | (161,332                         | )         | 296,005 |   | (32,957 | ) |
| Principal payments on capital lease  obligations                                                    |   | (210,773                         | )         | (301,978 | ) | (296,818 | ) |
| Proceeds from exercise of stock options                                                             |   | 1,760                            |      | 4,688 |   | — |   |
| Net cash provided by (used in) financing  activities                                                |   | (86,412                          | )         | 120,476 |   | 224,412 |   |
|                                                                                                |   |                             |      |   |   |   |   |
| **Net increase  (decrease) in cash and cash equivalents**                                           |   | 116,128                          |      | (72,741 | ) | (2,603,170 | ) |
|                                                                                                |   |                             |      |   |   |   |   |
| **Cash and cash  equivalents, beginning of year**                                                   |   | 2,326,343                        |      | 2,399,084 |   | 5,002,254 |   |
|                                                                                                |   |                             |      |   |   |   |   |
| **Cash and cash  equivalents, end of year**                                                         |   | $                                | 2,442,471 |   | $ | 2,326,343 |   | $ | 2,399,084 |   |
|                                                                                                |   |                             |      |   |   |   |   |
| Supplemental disclosure of non-cash  financing activities:                                          |   |                             |      |   |   |   |   |
|                                                                                                |   |                             |      |   |   |   |   |
| Conversion of Series B convertible  preferred stock to common stock                                 |   | $                                | 1,096,939 |   | $ | 1,257,886 |   | $ | 2,872,999 |   |
| Conversion of Series E convertible  preferred stock to common stock                                 |   | 289,604                          |      | 250,000 |   | — |   |
| Total conversion of convertible preferred  stock to common stock                                    |   | $                                | 1,386,543 |   | $ | 1,507,886 |   | $ | 2,872,999 |   |
|                                                                                                |   |                             |      |   |   |   |   |
| Acquisition of assets under capital lease                                                           |   | $                                | —    |   | $ | 7,881 |   | $ | 481,118 |   |

 

The accompanying notes are an integral partof these Consolidated Financial Statements.

 

F-7

----

 

**iPARTYCORP.NOTES TO CONSOLIDATED FINANCIALSTATEMENTSDecember 27, 2003**

 

**1. THE COMPANY**

 

*Background*

 

The Company’s efforts are devoted to the sale of party goods andservices through 38 retail stores.  TheCompany’s retail stores are located throughout New England, with threeadditional stores located in Florida. In 2003, the Company licensed its Internet business to a third party inexchange for royalties under a license agreement, which to date have not beensignificant.  Previously, the Companyoperated the business with the same party under a fulfillment agreement.

 

The stores feature over 20,000 products ranging from greeting cards andballoons to more unique merchandise such as piñatas, gag gifts, masquerade andHawaiian Luau items.  The Company’ssales are driven by the following events: Halloween, Christmas, Easter, Valentine’s Day, New Year’s, IndependenceDay, St. Patrick’s Day, Thanksgiving, and Chanukah.  The Company also focuses its business closely on lifetime eventssuch as anniversaries, graduations, birthdays, and bridal or baby showers.  The Company’s business has a seasonalpattern with higher revenues in the second and fourth quarters, reflectingschool graduations and Halloween, respectively.

 

*Management’s Plans*

 

The Company believes, based on its current operating plan, thatanticipated revenues from operations and borrowings available under theexisting line of credit will be sufficient to fund its operations and working capitalrequirements through the next twelve months. The Company’s current operating plan includes opening four to sevenadditional new stores and replacing its current point-of-sale system during2004.  In the event that the Company’soperating plan changes or proves inaccurate due to decreased revenues,unanticipated expenses, increased competition, unfavorable economic conditionsor other unforeseen circumstances, the Company’s liquidity may be negativelyimpacted.  Accordingly, the Companywould be required to adjust its expenditures in 2004 to conserve workingcapital or raise additional capital to fund operations.  There can be no assurance, however, that,should the Company require additional financing, such financing will beavailable on terms and conditions acceptable to the Company.

 

*Previous Restatement of Financial Information and Balance SheetPresentation of Series A-F Convertible Preferred Stock*

 

Theaccompanying consolidated balance sheet as of December 28, 2002 and thestatements of convertible preferred stock and stockholders’ equity (deficit)for the years ended December 28, 2002 and December 29, 2001 wererestated on Form 10-KSB/A in August 2003 to present the Company’s Series A- F convertible preferred stock outside of permanent stockholders’ deficit as aresult of the application of EITFTopic No. D-98*, Classification and Measurement of RedeemableSecurities.*

 

The effect of thisreclassification was to reduce previously reported total stockholders’ equityby the carrying values of the respective convertible preferred sharesoutstanding of $18,584,309, $20,092,667 and $22,965,666 as of December 28,2002, December 29, 2001 and December 30, 2000 respectively.  The effect of this reclassification on theconversions of preferred stock in 2002 and 2001 within the statements ofconvertible preferred stock and stockholders’ deficit is to increase the amountof convertible preferred stock transferred to additional paid in capital by$1,507,700 in 2002 and $2,872,704 in 2001. These reclassifications did not impact the Company’s results ofoperations or actual cash flows.

 

During the fourth quarterof 2003, the composition of the Company’s Board of Directors changed such thatholders of the Company’s convertible preferred stock or the designates of itspreferred stockholders no longer constitute a majority of the Boardmembers.  Accordingly, the Company haspresented its convertible preferred stock in equity in the accompanying balancesheet as of December 27, 2003, at its respective carrying values as theredemption is solely within the control of the Company.

 

F-8

----

 

**2.  SIGNIFICANTACCOUNTING POLICIES:**

 

*Principles of Consolidation*

 

The consolidated financial statements include the accounts of theCompany and its wholly-owned subsidiaries after elimination of all significantintercompany transactions and balances.

 

*RevenueRecognition*

 

Revenues include the selling price of party goods sold, net of returnsand discounts, and are recognized at the point of sale.  The Company estimates returns based uponhistorical return rates and such amounts have not been significant.

 

*Concentrations*

 

The Companypurchases its inventory from a diverse group of vendors and is not overlydependent upon any single source for its merchandise, often using more than onevendor for similar kinds of products.

 

Accountsreceivable primarily represent amounts due from credit card companies andvendors for inventory rebates. Management does not provide for doubtful accounts as such amounts havenot been significant to date; the Company does not require collateral.

 

*Use of Estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period.  Actual resultscould differ from these estimates.

 

*Cash and Cash Equivalents, Outstanding Checksand Restricted Cash*

 

The Company considers all highly liquid investments with an originalmaturity date of three months or less to be cash equivalents.  Cash equivalents consist primarily of moneymarket accounts and are carried at cost plus accrued interest, whichapproximates fair value.

 

The Company uses controlled disbursement bankingarrangements as part of its cash management program.  Outstanding checks, which were included in accounts payable,totaled $989,816 at December 27, 2003 and $692,166 at December 28,2002.  The Company had sufficient fundsavailable to fund the outstanding checks when they were presented for payment.

 

Restricted cash represents money deposited inblocked accounts established for the benefit of and under the control of WellsFargo Retail Finance II, LLC, the Company’s lender under its line of credit,and constitutes collateral for amounts outstanding under the Company’s line ofcredit.

 

*FairValue of Financial Instruments*

 

The carryingvalues of cash and cash equivalents, accounts receivable and accounts payableapproximate fair value because of the short-term nature of theseinstruments.  The fair value ofborrowings under its line of credit approximates carrying value because thedebt bears interest at a variable market rate.

 

*Inventories*

 

Inventories consist of party supplies and are valued at the lower ofmoving weighted-average cost or market. Inventory has been reduced by an allowance for obsolete and excessinventory, which is based on management’s

 

F-9

----

 

review of inventories on hand compared to estimated future sales.  The Company records vendor rebates,discounts and certain other adjustments to inventory, including freight costs,and these amounts are recognized in the income statement as the related goodsare sold.

 

TheCompany also makes adjustments to reduce the value of its inventory for anallowance for obsolete and excess inventory, which is based on its review ofinventories on hand compared to estimated future sales.

 

In2003, the Company refined its methodology for accounting for vendor rebates,discounts and freight.  The Company alsocontinued to refine its methodology for estimating an appropriate allowance forobsolete and excess inventory.  The netimpact of these adjustments increased pre-tax income by $141,757, net income by$125,455 and had no impact on basic and diluted earnings per share.

 

*Advertising*

 

Advertising costs are expensed upon first showing.  Advertising costs amounted to $2,706,596,$2,705,330 and $2,504,791 for the years ended December 27, 2003,December 28, 2002 and December 29, 2001, respectively.

 

*DeferredRent*

 

Certain operating lease agreements contain scheduled rent increases,which are being amortized over the terms of the agreements using thestraight-line method, and are included in other liabilities in the accompanyingconsolidated balance sheet.  Deferredrent was $406,209 at December 27, 2003 and $428,932 at December 28,2002.

 

*NetIncome (Loss) per Share*

 

Net income per basic share is computed by dividing net income by theweighted-average number of common shares outstanding, plus the common shareequivalents of Series B-F preferred stock. The common share equivalents of Series B-F are included in thecalculation of net income per basic share in accordance with EITF Topic D-95, *Effect ofParticipating Convertible Securities on the Computation of Basic Earnings PerShare*, since the preferred stockholders are entitled to participatein dividends when and if declared by the Board of Directors.  For the periods with net losses, the Companyexcludes those common share equivalents since their impact would be anti-dilutive.

 

Net income per diluted share is computed by dividing net income by theweighted average number of common shares outstanding, plus the common shareequivalents of Series A-F preferred stock, plus the common share equivalents ofthe “in the money” stock options and warrants as computed by the treasurymethod.  For the periods with netlosses, the Company excludes those common share equivalents since their impactwould be anti-dilutive.

 

The following table sets forth the computation of basic and diluted netincome (loss) per share available to common stockholders:

 

F-10

----

 

 
|                                                                            |   | **2003**   |    | **2002**   |   | **2001**   |   |
|---------------------------------------------------------------------------------|--------|------------|---------|------------|--------|------------|--------|
| Net income (loss)                                                               |   | $          | 750,957 |       | $      | (684,569   | )      | $ | (2,436,306 | ) |
| Preferred stock beneficial conversion  feature                                  |   | —     |    | (90,150    | )      | —     |   |
|                                                                            |   |       |    |       |   |       |   |
| Net income (loss) available to common  stockholders                             |   | $          | 750,957 |       | $      | (774,719   | )      | $ | (2,436,306 | ) |
|                                                                            |   |       |    |       |   |       |   |
| Basic and diluted net income (loss) per  share available to common stockholders |   | $          | 0.02    |       | $      | (0.05      | )      | $ | (0.18 | ) |
|                                                                            |   |       |    |       |   |       |   |
| Weighted-average shares outstanding:                                            |   |       |    |       |   |       |   |
| Common shares                                                                   |   | 17,652,805 |    | 16,219,436 |   | 13,411,866 |   |
| Common share equivalents of Series B-F  convertible preferred stock             |   | 19,030,337 |    | —     |   | —     |   |
| Basic weighted-average shares outstanding                                       |   | 36,683,142 |    | 16,219,436 |   | 13,411,866 |   |
|                                                                            |   |       |    |       |   |       |   |
| Common share equivalents of Series A  convertible preferred stock               |   | 1,000,000  |    | —     |   | —     |   |
| Common share equivalents of “in the money”  stock options             |   | 1,185,342  |    | —     |   | —     |   |
| Common share equivalents of “in the money”  warrants                  |   | —     |    | —     |   | —     |   |
| Diluted weighted-average shares outstanding                                     |   | 38,868,484 |    | 16,219,436 |   | 13,411,866 |   |

 

The common share equivalents of "out of the money" stockoptions and warrants which were excluded from the computation of diluted netincome per share available to common stockholders in 2003 were 2,157,980 and13,563,212, respectively, because to do so would have been anti-dilutive.

 

*StockOption Compensation Expense*

 

The Company accounts for its stock option compensation agreements withemployees under the provisions of Accounting Principles Board (“APB”) OpinionNo. 25, *Accountingfor Stock Issued to Employees*. The Company has adopted the disclosure-only provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 123, *Accounting for Stock-Based Compensation*,as amended by SFAS No. 148, *Accounting for Stock-Based Compensation — Transitionand Disclosure, an amendment of Financial Accounting Standards Board (“FASB”)Statement No. 123*.

 

The Company has computed the value of options using the Black-Scholesoption pricing model prescribed by SFAS No. 123.  The weighted-average fair value of the options granted was $0.38per share during 2003, $0.29 per share during 2002, and $0.16 per share during2001, using the Black-Scholes option-pricing model with the followingassumptions:  no dividend yield,volatility of 113% to 125% in 2003, 125% in 2002 and 125% in 2001, a risk-freeinterest rate of 2.13% to 3.51% in 2003, 4.86% to 5.95% in 2002, and 5.44% to6.75% in 2001, and an expected life of five years from date of the grant.  Had compensation cost for the Company’sstock option plan been determined based upon the fair value at the grant datefor awards under the plan consistent with the methodology prescribed under SFAS123, the Company’s net income (loss) and net income (loss) per share and net income(loss) available to common stockholders and net income (loss) per shareavailable to common stockholders would have been the following pro formaamounts:

 
|                                                                             |   | **2003** |    | **2002** |   | **2001**   |   |
|----------------------------------------------------------------------------------|--------|----------|---------|----------|--------|------------|--------|
| Net income (loss):                                                               |   |     |    |     |   |       |   |
| Reported                                                                         |   | $        | 750,957 |     | $      | (684,569   | )      | $ | (2,436,306 | ) |
| Stock option compensation expense                                                |   | (480,268 | )       | (671,029 | )      | (1,146,653 | )      |
| Pro forma                                                                        |   | $        | 270,689 |     | $      | (1,355,598 | )      | $ | (3,582,959 | ) |
|                                                                             |   |     |    |     |   |       |   |
| Basic and diluted net income (loss) per  share:                                  |   |     |    |     |   |       |   |
| Reported                                                                         |   | $        | 0.02    |     | $      | (0.04      | )      | $ | (0.18 | ) |
| Pro forma                                                                        |   | $        | 0.01    |     | $      | (0.08      | )      | $ | (0.27 | ) |
|                                                                             |   |     |    |     |   |       |   |
| Net income (loss) available to common  stockholders:                             |   |     |    |     |   |       |   |
| Reported                                                                         |   | $        | 750,957 |     | $      | (774,719   | )      | $ | (2,436,306 | ) |
| Stock option compensation expense                                                |   | (480,268 | )       | (671,029 | )      | (1,146,653 | )      |
| Pro forma                                                                        |   | $        | 270,689 |     | $      | (1,445,748 | )      | $ | (3,582,959 | ) |
|                                                                             |   |     |    |     |   |       |   |
| Basic and diluted net income (loss) per  share available to common stockholders: |   |     |    |     |   |       |   |
| Reported                                                                         |   | $        | 0.02    |     | $      | (0.05      | )      | $ | (0.18 | ) |
| Pro forma                                                                        |   | $        | 0.01    |     | $      | (0.09      | )      | $ | (0.27 | ) |

 

F-11

----

 

*Propertyand Equipment*

 

Property and equipment are stated at cost less accumulated depreciationand are depreciated on the straight-line method over the estimated useful livesof the assets.  Expenditures formaintenance and repairs are charged to operations as incurred.  A listing of the estimated useful life ofthe various categories of property and equipment is as follows:

 
| **Asset  Classification**                     |   | **Estimated  Useful Life**           |
|-----------------------------------------------|--------|--------------------------------------|
| Computers, equipment,  furniture and fixtures |   | 3 years                              |
| Equipment under capital  leases               |   | Lesser of term of lease or  3 years  |
| Leasehold improvements                        |   | Lesser of term of lease or  10 years |

 

*Accounting for the Impairment of Long-LivedAssets*

 

The Company adopted SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*,**infiscal 2002, which requires that long-lived assets be measured at the lower ofcarrying amount or fair value less cost to sell.  The adoption of SFAS No. 144 did not have a material impact onthe Company’s consolidated results of operations.

 

*NewAccounting Pronouncements*

 

InJanuary 2003, the Emerging Issues Task Force (“EITF”) issued EITF No.02-16, *Accountingby a Customer (Including a Reseller) for Certain Consideration Received from aVendor*, which states that cash consideration received from a vendor ispresumed to be a reduction of the prices of the vendor’s products or servicesand should, therefore, be characterized as a reduction of cost of sales whenrecognized in the statement of operations. That presumption is overcome when the consideration is either areimbursement of specific, incremental, identifiable costs incurred to sell thevendor’s products, or a payment for assets or services delivered to thevendor.  Since the Company treated allrebates as a reduction of the price of the vendor’s products, adoption of EITFIssue No. 02-16 in 2003 did not have a material impact on its results ofoperations.

 

In January 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities*,*an Interpretation of Accounting Research Bulletin(“ARB”) No. 51* (“FIN 46”)*.* FIN 46 requires certain variable interest entities to be consolidated bythe primary beneficiary of the entity if the equity investors in the entity donot have the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties.  FIN 46 is effective for all new variableinterest entities created or acquired after January 31, 2003.  For variable interest entities created oracquired prior to February 1, 2003, the provisions of FIN 46 must beapplied for the first interim or annual period beginning after June 15,2003.  However, in October 2003,the FASB deferred the effective date of FIN 46 to the end of the first interimor annual period ending after December 15, 2003 for those arrangementsinvolving special purpose entities entered into prior to February 1,2003.  All other arrangements within thescope of FIN 46 are subject to its provisions beginning in 2004.  The Company adopted FIN 46, as required,with no material impact to its consolidated financial position or results ofoperations.  The Company does notbelieve that the adoption of the remaining provisions of FIN 46 in 2004 will havea material impact on its financial position or results of operations.

 

*Reclassifications*

 

Certain reclassifications havebeen made to prior year’s amounts to conform to the current year presentation.

 

**3.  PROPERTY AND EQUIPMENT:**

 

Property and equipment consist of the following:

 

F-12

----

 
|                                          |   | **Dec 27,  2003** |      | **Dec 28,  2002** |   |
|-----------------------------------------------|--------|-------------------|-----------|-------------------|--------|
| Computers, equipment, furniture and  fixtures |   | $                 | 1,602,502 |              | $      | 1,548,483 |   |
| Equipment under capital leases                |   | 289,737           |      | 731,795           |   |
| Leasehold improvements                        |   | 996,460           |      | 499,035           |   |
|                                          |   |              |      |              |   |
| Property and equipment                        |   | 2,888,699         |      | 2,779,313         |   |
| Less accumulated depreciation                 |   | (1,194,559        | )         | (1,650,416        | )      |
|                                          |   |              |      |              |   |
| Property and equipment, net                   |   | $                 | 1,694,140 |              | $      | 1,128,897 |   |

 

**4.  LEASES:**

 

TheCompany conducts the majority of its operations in leased facilities withcertain leased equipment accounted for as operating and capital leases.  Real estate leases generally provide forfixed minimum rentals, which typically increase periodically during the life ofthe lease, and, in some instances, contingent rentals based on a percentage ofsales in excess of specified minimum sales levels, as well as occupancy costs,such as property taxes and common area maintenance.  The leases are typically for 10 years with options from theCompany’s landlords to renew their leases for an additional 5 or 10 years.

 

Theoriginal cost of assets under capital leases at December 27, 2003 andDecember 28, 2002 was $289,737 and $731,795, respectively. The accumulateddepreciation of assets under capital leases at December 27, 2003 andDecember 28, 2002 was $286,847 and $448,399, respectively.  The amortization related to those assetsunder capital lease is included in depreciation expense.

 

AtDecember 27, 2003 the minimum rental commitments under all non-cancelablecapital and operating leases with initial or remaining terms of more than oneyear were as follows:

 
| **Year**                                                 |   | **Capital** |   | **Operating** |       |
|----------------------------------------------------------|--------|-------------|--------|---------------|------------|
| 2004                                                     |   | $           | 30,007 |          | $          | 6,097,551 |   |
| 2005                                                     |   | 263         |   | 5,894,131     |       |
| 2006                                                     |   | —      |   | 5,315,048     |       |
| 2007                                                     |   | —      |   | 4,001,568     |       |
| 2008                                                     |   | —      |   | 2,645,829     |       |
| Thereafter                                               |   | —      |   | 9,380,416     |       |
| Total future minimum lease payments                      |   | 30,270      |   | $             | 33,334,543 |   |
|                                                     |   |        |   |          |       |
| Less amount representing interest                        |   | 790         |   |          |       |
|                                                     |   |        |   |          |       |
| Present value of minimum lease payments                  |   | 29,480      |   |          |       |
| Less current portion of obligation under  capital leases |   | 29,220      |   |          |       |
|                                                     |   |        |   |          |       |
| Long-term obligation under capital leases                |   | $           | 260    |          |       |   |

 

The Company’s rental expense under operating leases amounted to$5,323,409 in 2003, $4,746,886 in 2002 and $4,336,976 in 2001.  Included in these amounts are contingentrentals totaling $37,948 in 2003, $24,941 in 2002 and $19,083 in 2001.

 

**5.  ACCRUED EXPENSES:**

 

Theonly accrued expense which exceeds 5% of the respective totals on the balancesheets at December 27, 2003 and December 28, 2002 was accrued payrolland benefits of $461,204 at December 27, 2003.

 

F-13

----

 

**6.  INCOME TAXES:**

 

A reconciliation ofthe effective rate with the federal statutory rate is as follows:

 
|                                       |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Federal statutory rate                     |   | 34.00    | %      | -34.00   | %      | -34.00   | %      |
| State income taxes, net of federal benefit |   | 8.10     | %      | -6.00    | %      | -6.00    | %      |
| Permanent differences                      |   | 2.90     | %      | 10.00    | %      | 0.00     | %      |
| Change in valuation allowance              |   | -33.50   | %      | 30.00    | %      | 40.00    | %      |
| Effective tax rate                         |   | 11.50    | %      | 0.00     | %      | 0.00     | %      |

 

Deferred tax assets consist ofthe following:

 
|                                                |   | **2003**    |      | **2002**    |   |
|-----------------------------------------------------|--------|-------------|-----------|-------------|--------|
| Net operating loss carryforwards                    |   | $           | 9,436,000 |        | $      | 9,826,000 |   |
| Inventory reserves                                  |   | 557,000     |      | 548,000     |   |
| Deferred rent                                       |   | 162,000     |      | 171,000     |   |
| Excess book over tax depreciation and  amortization |   | 156,000     |      | 173,000     |   |
| Accrued vacation                                    |   | 90,000      |      | 81,000      |   |
| Other                                               |   | 40,000      |      | 99,000      |   |
|                                                |   | 10,441,000  |      | 10,898,000  |   |
| Less valuation allowance                            |   | (10,441,000 | )         | (10,898,000 | )      |
| Net deferred tax asset                              |   | $           | —    |        | $      | — |   |

 

The Company has recorded a valuation allowance against its deferred taxassets because of the uncertainty regarding the realizability of these assetsagainst future taxable income.

 

The Company used approximately $997,000 and $371,000 of net operatingloss carryforwards in 2003 and 2002, respectively.

 

As of December 27, 2003, the Company has estimated net operatingloss carryforwards of approximately $23.7 million, which begin to expire in2018.  In accordance withSection 382 of the Internal Revenue Code, the use of some of thesecarryforwards will be subject to annual limitations based upon ownershipchanges of the Company’s stock which may have occurred.

 

The Company made cash payments for state income taxes of $77,279 in2003 and $16,500 in 2002.  The Companymade no cash payments for federal income taxes during these three years.

 

**7. CONTRACTUAL ARRANGEMENTS:**

 

*License Arrangement*

 

On July 8, 1999, theCompany entered into a product fulfillment agreement with Taymark, a directmarketer of party supplies, to utilize the direct marketer’s inventory andfulfillment services to deliver merchandise ordered on the Company’s website,or directly through a toll-free telephone number, to consumers.

 

On July 8, 2003 the Companysigned a new agreement with Taymark to license the iParty.com name to Taymark,which now operates the website at www.iparty.com.  In return, Taymark pays the Company a 15% royalty on all netsales realized through its operation of www.iparty.com.  The term of this agreement is for a periodof two (2) years, unless sooner terminated. If this agreement is not terminated, it shall be automatically renewedfor successive one year periods.

 

F-14

----

 

*Earn-outagreement*

 

The Company purchased from The Big Party, Debtor andDebtor-in-Possession (the “sellers”) in 2000 inventory, fixed assets and theleases of 33 retail stores in consideration of cash and assumption of certainliabilities.  In addition, the Companyagreed to pay the sellers, no later than March 31, 2004, an amountequivalent to the greater of $250,000, or a percentage of the aggregateoperating results of the 33 acquired locations.  In connection with the Company’s purchase accounting in 2000, theCompany accrued the guaranteed amount of $250,000, which based on actualresults is the minimum and final amount due as of December 27, 2003.

 

**8.  RELATED PARTY TRANSACTIONS:**

 

On August 26, 1999 the Company granted its Chief Executive Officeroptions to purchase an aggregate of 434,730 shares of the Company’s commonstock pursuant to the Company’s stock option plan with an exercise price of$2.00, which was below the then-current market price of $3.38.  As of December 29, 2001 all suchoptions had vested.  These options werefully expensed as of December 29, 2001. The Company charged $273,971 related to this stock option grant to stockoption compensation expense in 2001, the final year of vesting.

 

**9.  LINE OF CREDIT:**

 

At December 27, 2003 the Company had a line of credit (“the line”)with Wells Fargo Retail Finance II, LLC. The line had a maturity date of July 31, 2004 and a minimuminterest rate of 6.5%.  The line allowedfor borrowings equal to the lesser of $7,500,000 or the borrowing base, asdefined.  Inventory and other assetssecured the line.  The Company wasrequired to maintain a minimum availability under the line in the amount of$300,000.  At December 27, 2003,the Company was in compliance with this financial covenant.  The line of credit generally prohibits thepayment of any dividends or other distributions to any of the Company’s classesof capital stock.

 

The amounts outstanding under the line of credit as ofDecember 27, 2003 and December 28, 2002 were $3,760,671 and$3,476,738, respectively.  Theoutstanding balances under the line are classified as current liabilities inthe accompanying consolidated balance sheets since the Company is required toapply daily lock box receipts to reduce the amount outstanding.  At December 27, 2003, the Company hadapproximately $2,117,000 of excess availability under the line of credit.

 

On January 2, 2004 the Company amended its existing line ofcredit.  The amendment extended thematurity date of the line to January 2, 2007, eliminated the minimuminterest rate of 6.5%, established a new interest rate at the bank’s base rateplus 50 basis points and added the option to increase the line in increments of$2,500,000 beyond the previous limit of $7,500,000, to a limit of $12,500,000,upon 15 days written notice, as long as the Company is in compliance of alldebt covenants and the provisions of the loan agreement.  Inventory and accounts receivable secure theCompany’s line of credit.

 

The amended agreement includes a financial covenant requiring theCompany to maintain a minimum availability under the line of credit of 5% ofthe credit limit, which at the current limit of $7,500,000, is $375,000.  If the Company adjusts the credit limit inthe future, the minimum availability would be 5% of the adjusted creditlimit.  The amended agreement also has acovenant that requires the Company to limit its capital expenditures to within110% of those amounts included in its business plan, which may be updated fromtime to time.

 

The Company made cash payments for interest of $217,268 in 2003,$285,515 in 2002 and $392,351 in 2001.

 

**10.  PREFERRED STOCK:**

 

The following table summarizes the changes in the number of shares ofconvertible preferred stock during the past two years.

 

F-15

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|                                 |   | **Shares  Issued  and  Outstanding  as of 12/27/03** |   | **Conversions  to  Common  Stock** |   | **Shares  Historically  Reported as  Issued and  Outstanding  as of 12/28/02** |   | **Conversions  to  Common  Stock** |   | **Adjustments** |   | **Shares  Historically  Reported as  Issued and  Outstanding  as of 12/29/01** |   |
|--------------------------------------|--------|------------------------------------------------------|--------|------------------------------------|--------|--------------------------------------------------------------------------------|--------|------------------------------------|--------|-----------------|--------|--------------------------------------------------------------------------------|--------|
| Series A convertible preferred stock |   | 1,000,000                                            |   | —                             |   | 1,000,000                                                                      |   | —                             |   | —          |   | 1,000,000                                                                      |   |
| Series B convertible preferred stock |   | 611,080                                              |   | (73,719                            | )      | 684,799                                                                        |   | (119,786                           | )      | (313,974        | )      | 1,118,559                                                                      |   |
| Series C convertible preferred stock |   | 100,000                                              |   | —                             |   | 100,000                                                                        |   | —                             |   | (45,198         | )      | 145,198                                                                        |   |
| Series D convertible preferred stock |   | 250,000                                              |   | —                             |   | 250,000                                                                        |   | —                             |   | (112,996        | )      | 362,996                                                                        |   |
| Series E convertible preferred stock |   | 389,439                                              |   | (77,228                            | )      | 466,667                                                                        |   | (66,666                            | )      | —          |   | 533,333                                                                        |   |
| Series F convertible preferred stock |   | 114,286                                              |   | —                             |   | 114,286                                                                        |   | —                             |   | —          |   | 114,286                                                                        |   |
| Total                                |   | 2,464,805                                            |   | (150,947                           | )      | 2,615,752                                                                      |   | (186,452                           | )      | (472,168        | )      | 3,274,372                                                                      |   |

 

The table aboveincludes adjustments in 2002 to correct an inappropriate application ofanti-dilution provisions for certain classes of its convertible preferredstock.

 

OnOctober 31, 2002, the Company concluded it had incorrectly applied theanti-dilution provisions of its Series B, C and D convertible preferred stock(the “Affected Preferred Stock”) in conjunction with dilutive financings inAugust and September 2000. The Company determined that it inadvertently issued additional shares ofAffected Preferred Stock, instead of adjusting the Affected Preferred Stock’sconversion ratios.  The Company alsomiscalculated the number of common shares issuable upon conversion of theAffected Preferred Stock.  As a resultof the above transactions, the anti-dilution provisions of the Company’s SeriesE and Series F convertible preferred stock were also triggered, increasing thenumber of shares issuable upon conversion of the Company’s Series E and SeriesF convertible preferred stock.

 

See Note 16 foradditional information on this subject.

 

*Series A Convertible Preferred Stock*

 

The shares of Series A convertible preferred stock are immediatelyconvertible into 1,000,000 shares of common stock on a 1.00 to 1.00 ratio atDecember 27, 2003, and carry an aggregate liquidation value of $1,000,000($1.00 per common share issuable upon conversion) at December 27,2003.  Holders of Series A convertiblepreferred stock have a liquidation preference senior to the Company’s commonstockholders, and are *pari passu* with the Company’s Series B, C,D, E and F convertible preferred stock. Holders of Series A convertible preferred stock are not entitled to anydividends.

 

Until their shares of the Series A convertible preferred stock areconverted into shares of common stock, holders of Series A convertiblepreferred stock are not entitled to vote on matters submitted to a vote of theCompany’s stockholders, except to the extent otherwise expressly provided bythe General Corporation Law of Delaware. On January 13, 2004, all sharesof Series A convertible preferred stock were converted into common stock.

 

*Series B Convertible Preferred Stock*

 

The shares of Series B convertible preferred stock are immediatelyconvertible into 7,864,678 shares of common stock on a 1.000 to 12.870 ratio atDecember 27, 2003, and carry an aggregate liquidation value of $12,221,600($1.55 per common share issuable upon conversion) at December 27,2003.  With certain exceptions, the conversionprice will be adjusted on a weighted-average basis in the event the Companyissues common stock or certain rights, including option activity in excess ofcertain amounts, to purchase or convert into common stock as defined in theCompany’s Certificate of Incorporation as amended at a price below theconversion price.  The Series Bconvertible preferred stock will automatically convert into common stock at theconversion price then in effect in the event the Company consummates asecondary public offering resulting in gross proceeds to the Company of atleast $10,000,000.

 

F-16

----

 

In the event of liquidation, the holders of Series B convertiblepreferred stock have preference to holders of the Company’s common stock, andare *paripassu* with the Company’s Series A, C, D, E and F convertiblepreferred stock.

 

Holders of Series B convertible preferred stock are entitled to 12votes per share (i.e., one vote for each whole number of shares of common stockinto which each such share is presently convertible) on all matters submittedto a vote of the Company’s stockholders and are entitled to participate individends when and if declared by the Board of Directors.

 

*Series C Convertible Preferred Stock*

 

The shares of Series C convertible preferred stock are immediatelyconvertible into 1,310,600 shares of common stock on a 1.000 to 13.106 ratio atDecember 27, 2003, and carry an aggregate liquidation value of $2,000,000($1.53 per common share issuable upon conversion) at December 27, 2003.  With certain exceptions, the conversionprice will be adjusted on a weighted-average basis in the event the Companyissues common stock or certain rights, including option activity in excess ofcertain amounts, to purchase or convert into common stock as defined in theCompany’s Preferred Stock Charter at a price below the conversion price.  The Series C convertible preferred stockwill automatically convert into common stock at the conversion price then ineffect in the event the Company consummates a secondary public offeringresulting in gross proceeds to the Company of at least $10,000,000.

 

In the event of liquidation, the holders of Series C convertiblepreferred stock have preference to holders of the Company’s common stock, andare *paripassu* with the Company’s Series A, B, D, E and F convertiblepreferred stock.

 

Holders of Series C convertible preferred stock are entitled to 13votes per share (i.e., one vote for each whole number of shares of common stockinto which each such share is presently convertible) on all matters submittedto a vote of the Company’s stockholders and are entitled to participate individends when and if declared by the Board of Directors.

 

*Series D Convertible Preferred Stock*

 

The shares of Series D convertible preferred stock are immediately convertibleinto 3,513,750 shares of common stock on a 1.000 to 14.055 ratio atDecember 27, 2003, and carry an aggregate liquidation value of $5,000,000($1.42 per common share issuable upon conversion) at December 27, 2003.  With certain exceptions, the conversionprice will be adjusted on a weighted-average basis in the event the Companyissues common stock or certain rights, including option activity in excess ofcertain amounts, to purchase or convert into common stock as defined in theCompany’s Preferred Stock Charter at a price below the conversion price.  The Series D convertible preferred stockwill automatically convert into common stock at the conversion price then ineffect in the event the Company consummates a secondary public offeringresulting in gross proceeds to the Company of at least $10,000,000.

 

In the event of liquidation, the holders of Series D convertiblepreferred stock have preference to holders of the Company’s common stock, andare *paripassu* with the Company’s Series A, B, C, E and F convertiblepreferred stock.

 

Holders of Series D convertible preferred stock are entitled to 14votes per share (i.e., one vote for each whole number of shares of common stockinto which each such share is presently convertible) on all matters submittedto a vote of the Company’s stockholders and are entitled to participate individends when and if declared by the Board of Directors.

 

*Series E Convertible Preferred Stock*

 

The shares of Series E convertible preferred stock are immediatelyconvertible into 4,034,193 shares of common stock on a 1.000 to 10.359 ratio atDecember 27, 2003, and carry an aggregate liquidation value of $1,460,396($0.36 per common share issuable upon conversion) at December 27, 2003.  With certain exceptions, the conversion pricewill be adjusted on a weighted-average basis in the event the Company issuescommon stock or certain rights, including option activity in excess of certainamounts, to purchase or convert into common stock as defined in the Company’sPreferred Stock Charter at a price below the conversion price.  The Series E convertible

 

F-17

----

 

preferred stock will automatically convert into common stock at theconversion price then in effect in the event the average closing bid price ofthe common stock equals or exceeds $10.00 per share for 20 days within any30-day period.

 

In the event of liquidation, the holders of Series E convertiblepreferred stock have preference to holders of the Company’s common stock, andare *paripassu* with the Company’s Series A, B, C, D and F convertiblepreferred stock.

 

Holders of Series E convertible preferred stock are entitled to 10votes per share (i.e., one vote for each whole number of shares of common stockinto which each such share is presently convertible) on all matters submittedto a vote of the Company’s stockholders and are entitled to participate individends when and if declared by the Board of Directors.

 

*Series F Convertible Preferred Stock*

 

The shares of Series F convertible preferred stock are immediatelyconvertible into 1,184,803 shares of common stock on a 1.000 to 10.367 ratio atDecember 27, 2003, and carry an aggregate liquidation value of $500,000($0.42 per common share issuable upon conversion) at December 27, 2003.  With certain exceptions, the conversionprice will be adjusted on a weighted-average basis in the event the Companyissues common stock or certain rights, including option activity in excess ofcertain amounts, to purchase or convert into common stock as defined in theCompany’s Preferred Stock Charter at a price below the conversion price.  The Series F convertible preferred stockwill automatically convert into common stock at the conversion price then ineffect in the event the average closing bid price of the common stock equals orexceeds $10.00 per share for 20 days within any 30-day period.

 

In the event of liquidation, the holders of Series F convertiblepreferred stock have preference to holders of the Company’s common stock, andare pari passu with the Company’s Series A, B, C, D and E convertible preferredstock.

 

Holders of Series F preferred stock are entitled to 10 votes per share(i.e., one vote for each whole number of shares of common stock into which eachsuch share is presently convertible) on all matters submitted to a vote of theCompany’s stockholders and are entitled to participate in dividends when and ifdeclared by the Board of Directors.

 

*Accretion of Dividends in the Event of Liquidation*

 

The carrying values of Series A-F convertible preferred stock have beendetermined based on their fair market values at the original dates ofissuance.  In certain cases, warrantswere issued, which the Company allocated value to and included in additionalpaid in capital.  Should such a liquidationevent occur, the difference between the carrying value of the convertiblepreferred stock and their liquidation value will be accreted.  This amount was $4,984,230 onDecember 27, 2003.

 

**11.  WARRANTS:**

 

At December 27, 2003, there were several warrants outstanding forshares of the Company’s common stock. These warrants were issued in connection with certain preferred stockfinancings and certain licensing and marketing arrangements.  Substantially all of the warrant agreementscontain certain anti-dilution provisions, which protect the warrant holdersagainst dilution upon the occurrence of certain events, including the sale ofcommon stock or certain rights, including option activity in excess of certainamounts, to purchase or convert into common stock, as defined in the warrantagreement for less than fair market value or less than the exercise price ofthe previously issued warrants.  If suchan event occurs, this can result in additional shares being available to thewarrant holder and a reduction in the exercise price for each share.

 

The followingtable summarizes the Company’s outstanding warrants, including the impact ofanti-dilution events which occurred in previous years, at December 27,2003:

 

F-18

----

 

| **Number  of  Warrants** |   | **Total  Common  Shares  Issuable** |   | **Exercise  Price per  Common  Share  Issuable** |   | **Expiration  Date** |   |
|--------------------------|--------|-------------------------------------|--------|--------------------------------------------------|--------|----------------------|--------|
| 528,210                  |   | 528,210                             |   | $                                                | 2.63   | -                    | $      | 5.13 |   | 04/16/09 | - | 08/15/09 |   |
| 5,224,760                |   | 8,359,616                           |   |                                             |   | 1.25                 |   |   |   | 08/26/05 |   |
| 500,000                  |   | 800,000                             |   |                                             |   | 1.25                 |   |   |   | 08/26/05 |   |
| 929,929                  |   | 1,487,886                           |   |                                             |   | 1.25                 |   |   |   | 08/26/05 |   |
| 1,250,000                |   | 1,837,500                           |   |                                             |   | 1.36                 |   |   |   | 08/26/05 |   |
| 550,000                  |   | 550,000                             |   |                                             |   | 2.88                 |   |   |   | 12/21/04 |   |
| 8,982,899                |   | 13,563,212                          |   |                                             |   | $                    | 1.43   |   |   |   |   |   |
|                          |        |                                     |        |                                                  |        |                      |        |  |  |  |  |  |  |  |

 

Commencing one year from theissue date, the Company may, at its option, on a 30-day notice, redeem certaincommon stock warrants at a price of $0.05 per warrant if the average closingbid price of the common stock equals or exceeds $8.00 per share for 20 dayswithin any 30-day period.

 

**12.  STOCK OPTION PLAN:**

 

Underthe Company’s Amended and Restated 1998 Incentive and Nonqualified Stock OptionPlan (the “1998 Plan”) options to acquire 11,000,000 shares of common stock maybe granted to officers, directors, key employees and consultants.  The exercise price for qualified incentiveoptions cannot be less than the fair market value of the stock on the grantdate and the exercise price of nonqualified options can be fixed by theBoard.  Qualified incentive options topurchase the Company’s common stock under the 1998 Plan have been granted toemployees, directors and consultants of the Company at fair market value at thedate of grant.  Generally, the optionsbecome exercisable over periods up to four years, and expire ten years from thedate of grant.

 

F-19

----

 

A summary of the Company’s stock options is as follows:

 

|                                          |   | **Number of Stock Options** |   | **Weighted Average Exercise Price** |   | **Price Range** |   |
|-----------------------------------------------|--------|-----------------------------|--------|-------------------------------------|--------|-----------------|--------|
| Outstanding  - December 30, 2000         |   | 4,646,177                   |   | $                                   | 1.99   |            | $      | 0.10 |   | $ | 5.38 |   |
| Granted                                       |   | 4,076,597                   |   | 0.25                                |   | 0.10            | -      | 0.48 |   |
| Expired/Forfeited                             |   | (1,199,810                  | )      | 1.84                                |   | 0.10            | -      | 5.25 |   |
|                                          |   |                        |   |                                |   |            |   |   |   |
| Outstanding  - December 29, 2001         |   | 7,522,964                   |   | 1.07                                |   | 0.10            | -      | 5.38 |   |
| Granted                                       |   | 863,457                     |   | 0.33                                |   | 0.21            | -      | 0.67 |   |
| Expired/Forfeited                             |   | (133,862                    | )      | 0.31                                |   | 0.10            | -      | 0.50 |   |
| Exercised                                     |   | (9,375                      | )      | 0.50                                |   | 0.50            |   | 0.50 |   |
|                                          |   |                        |   |                                |   |            |   |   |   |
| Outstanding  - December 28, 2002         |   | 8,243,184                   |   | 1.01                                |   | 0.11            | -      | 5.38 |   |
| Granted                                       |   | 455,555                     |   | 0.45                                |   | 0.15            | -      | 1.06 |   |
| Expired/Forfeited                             |   | (170,021                    | )      | 0.29                                |   | 0.15            | -      | 0.44 |   |
| Exercised                                     |   | (11,000                     | )      | 0.16                                |   | 0.16            |   | 0.16 |   |
|                                          |   |                        |   |                                |   |            |   |   |   |
| Outstanding  - December 27, 2003         |   | 8,517,718                   |   | 0.99                                |   | 0.11            | -      | 5.38 |   |
|                                          |   |                        |   |                                |   |            |   |   |   |
| Exercisable  - December 27, 2003         |   | 6,855,612                   |   | $                                   | 1.16   |            | 0.11   | - | 5.38 |   |
|                                          |   |                        |   |                                |   |            |   |   |   |
| Available  for grant - December 27, 2003 |   | 2,126,907                   |   |                                |   |            |   |   |   |
|                                               |        |                             |        |                                     |        |                 |        |  |  |  |  |  |  |

 

The followingtable summarizes information for options outstanding and exercisable atDecember 27, 2003:

 

| **Price  Range** |                           | **Outstanding** |                                            | **Exercisable** |                                   |
|------------------|--------------------------------|-----------------|-------------------------------------------------|-----------------|----------------------------------------|
|             | **Number  of  Stock  Options** |            | **Weighted  Average  Remaining  Life  (Years)** |            | **Weighted  Average  Exercise  Price** |   | **Number  of  Stock  Options** |   | **Weighted  Average  Exercise  Price** |   |
| $                | 0.11                           | -               | $                                               | 0.20            |                                   | 268,800 |   | 7.8 |   | $ | 0.18 |   | 131,949 |   | $ | 0.17 |   |
| 0.21             | -                              | 0.30            |                                            | 3,842,232       |                                   | 7.3 |   | 0.25 |   | 2,765,771 |   | 0.25 |   |
| 0.31             | -                              | 0.50            |                                            | 1,131,679       |                                   | 8.1 |   | 0.35 |   | 835,336 |   | 0.35 |   |
| 0.51             | -                              | 1.00            |                                            | 1,217,027       |                                   | 6.2 |   | 0.71 |   | 1,083,826 |   | 0.71 |   |
| 1.01             | -                              | 3.50            |                                            | 1,063,980       |                                   | 5.2 |   | 2.23 |   | 1,044,730 |   | 2.25 |   |
| 3.51             | -                              | 5.38            |                                            | 994,000         |                                   | 5.3 |   | 3.82 |   | 994,000 |   | 3.82 |   |
| Total            |                           |            |                                            | 8,517,718       |                                   | 6.8 |   | $ | 0.99 |   | 6,855,612 |   | $ | 1.16 |   |
|                  |                                |                 |                                                 |                 |                                        |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company has reserved 40,988,954 shares of common stock for issuancein connection with the conversion of convertible preferred stock and theexercise of warrants and stock options.

 

F-20

----

 

**13.  STOCKHOLDER RIGHTS PLAN:**

 

The Company has a Stockholder Rights Plan (the “Plan”) effectiveNovember 9, 2001.  Under the Planeach share of the Company’s capital stock outstanding at the close of businesson November 9, 2001 and each share of the Company’s capital stock issuedsubsequent to that date has a right associated with it, such that each share ofits common stock is entitled to one right and each share of its preferred stockis entitled to such number of rights equal to the number of common shares intowhich it is convertible.

 

The rights are exercisable only in the event, with certain exceptions,an acquiring party accumulates 10 percent or more of the Company’s votingstock, or if a party announces an offer to acquire 15 percent or more of theCompany’s voting stock.  The rightsexpire on November 9, 2011.

 

When exercisable, each right entitles the holder to purchase from theCompany, one one-hundredth of a share of a new series of Series G juniorpreferred stock at an initial purchase price of $2.00.  In addition, upon the occurrence of certainevents, holders of the rights will be entitled to purchase either iParty Corp.stock or shares in an “acquiring entity” at half of market value.  The Company generally will be entitled toredeem the rights at $0.001 per right at any time until the date on which a 10percent position in its voting stock is acquired by any person or group.  Until a right is exercised, the holderthereof, as such, will have no rights as a stockholder of the Company,including, without limitation, the right to vote or receive dividends.

 

**14.  PROFIT SHARING 401(k) PLAN:**

 

The iParty 401(k)Plan is a qualified profit sharing plan covering substantially all of itsemployees.  Contributions to this planare at the discretion of the Board of Directors.  The Company’s expense, including matching contributions and anydiscretionary amounts was $95,405 in 2003, $88,532 in 2002 and $43,893 in 2001.

 

**15.  SEGMENT REPORTING:**

 

SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information*, establishesstandards for the way business enterprises report information about operatingsegments in annual financial statements and requires that those enterprisesreport selected information about operating segments in interim financialreports issued to stockholders.

 

In the past theCompany had determined that its reportable segments consisted of a retailstores operation and an Internet operation. In 2003, with the transition of the Internet operation to a licensearrangement and the insignificance of the revenues prior to the transition(less than 2%) and results of operations (less than 5%) to the overallbusiness, the Company no longer reports Internet operating segment information.

 

**16.  SPECIAL CHARGE:**

 

OnOctober 31, 2002, the Company concluded it had incorrectly applied theanti-dilution provisions of its Series B, C and D convertible preferred stock(the “Affected Preferred Stock”) in conjunction with dilutive financings inAugust and September 2000.

 

The Companydetermined that it inadvertently issued additional shares of Affected PreferredStock, instead of adjusting the Affected Preferred Stock’s conversionratios.  The Company also miscalculatedthe number of common shares issuable upon conversion of the Affected PreferredStock.

 

The Company also reviewed the anti-dilution provisions of certain ofits warrants to purchase common stock that were issued in conjunction with theAffected Preferred Stock (the “Affected Warrants”), and has determined that itmistakenly issued additional warrant certificates, instead of adjusting theAffected Warrants’ conversion ratios.  The warrant calculations****alsomistakenly omitted the dilutive effect of a warrant issued by the Company inDecember 1999.

 

F-21

----

 

The Company hasperformed the calculations to compute the correct number of shares of AffectedPreferred Stock and Affected Warrants that should be issued and outstanding asof December 28, 2002, along with the appropriate conversion ratios ineffect at December 28, 2002.  TheCompany has notified each holder of Affected Preferred Stock as ofDecember 2, 2002.  The Company hasalso instructed its transfer agent to apply any Affected Stock conversionsusing the corrected ratios and prices. The Company has presented its balance sheet, earnings per share and allfootnotes information for 2002, in accordance with the correctedinformation.  The accountingimplications of this situation are as follows:

 

•                  Beginningin September 2000, the Company believed and treated holders of AffectedPreferred Stock as if they were entitled to approximately 2.3 million morecommon shares upon conversion of their Affected Preferred Stock than they werein fact entitled to.  Of this overstatedamount, since October 2000, 590,327 common shares have been issued uponconversions of shares of Affected Preferred Stock and sold in the public market(the “Overissued Shares”).  OnOctober 31, 2002, the Company’s Board of Directors ratified the issuanceof the Overissued Shares.

 

•                  Beginningin September 2000, the Company believed and treated holders of Affected Warrantsas if they were entitled to 116,291 fewer common shares upon exercise of theirAffected Warrants than they were in fact entitled to.  None of the Affected Warrants have been exercised as ofMarch 22, 2004.

 

The impact ofthese matters has not required the Company to make any changes to itspreviously reported earnings per share. The impact of the common stock equivalents did not affect quarterly orannual diluted loss per share, since such the inclusion of such shares wouldhave been anti-dilutive.  The impact ofcommon stock equivalents did not impact quarterly diluted net income per sharein such periods of profit, given the minimal amount of net income in comparisonto the weighted-average shares outstanding.

 

The Companyrecorded a special charge for the year ended December 28, 2002 in theamount of $396,465, which included a non-cash charge of $171,465 for therecognition of the Overissued Shares, and $225,000 of professional feesincurred through December 28, 2002.

 

The Company also recorded a beneficial conversion dividend in the amountof $90,150 in the fourth quarter of 2002, which reflects the impact ofanti-dilution adjustments to the conversion ratios of the Series E and Fconvertible preferred stock.

 

F-22

----

 

**17.  QUARTERLY FINANCIAL DATA (UNAUDITED):**

 

**QUARTERLY FINANCIAL DATA**

 
|                                 |   | **Mar 27,  2003** |       | **Jun 28,  2003** |   | **Sep 27,  2003** |   | **Dec 27,  2003** |       |
|--------------------------------------|--------|-------------------|------------|-------------------|--------|-------------------|--------|-------------------|------------|
| Revenues                             |   | $                 | 10,287,577 |              | $      | 13,805,555        |   | $                 | 11,878,460 |   | $ | 20,725,654 |   |
| Cost of products sold (1)(2)         |   | 6,241,696         |       | 7,849,863         |   | 7,060,170         |   | 10,606,896        |       |
| Operating income (loss)              |   | (1,112,847        | )          | 407,938           |   | (970,273          | )      | 2,731,439         |       |
| Net income (loss)                    |   | (1,164,266        | )          | 351,777           |   | (1,034,727        | )      | 2,598,173         |       |
|                                 |   |              |       |              |   |              |   |              |       |
| Net income (loss) per share          |   |              |       |              |   |              |   |              |       |
| Basic                                |   | $                 | (0.07      | )                 | $      | 0.01              |   | $                 | (0.06      | ) | $ | 0.07 |   |
| Diluted                              |   | $                 | (0.07      | )                 | $      | 0.01              |   | $                 | (0.06      | ) | $ | 0.06 |   |
|                                 |   |              |       |              |   |              |   |              |       |
| Weighted-average shares outstanding: |   |              |       |              |   |              |   |              |       |
| Basic                                |   | 16,999,935        |       | 36,678,915        |   | 17,687,448        |   | 36,688,228        |       |
| Diluted                              |   | 16,999,935        |       | 37,747,608        |   | 17,687,448        |   | 41,091,732        |       |

 
|                                           |   | **Mar 28, 2002** |       | **Jun 29, 2002** |   | **Sep 28, 2002** |   | **Dec 28, 2002** |       |
|------------------------------------------------|--------|------------------|------------|------------------|--------|------------------|--------|------------------|------------|
| Revenues                                       |   | $                | 10,586,041 |             | $      | 13,084,475       |   | $                | 10,901,242 |   | $ | 17,606,165 |   |
| Cost of products sold (1)                      |   | 6,646,619        |       | 7,674,326        |   | 6,635,891        |   | 9,463,639        |       |
| Operating income (loss)                        |   | (846,020         | )          | 323,627          |   | (1,130,862       | )      | 1,240,539        |       |
| Net income (loss)                              |   | (942,938         | )          | 271,938          |   | (1,205,604       | )      | 1,192,035        |       |
|                                           |   |             |       |             |   |             |   |             |       |
| Basic and diluted net income (loss) per  share |   | $                | (0.06      | )                | $      | 0.01             |   | $                | (0.07      | ) | $ | 0.03 |   |
|                                           |   |             |       |             |   |             |   |             |       |
| Weighted-average shares outstanding:           |   |             |       |             |   |             |   |             |       |
| Basic                                          |   | 15,583,346       |       | 43,001,847       |   | 16,432,187       |   | 37,852,593       |       |
| Diluted                                        |   | 15,583,346       |       | 44,977,981       |   | 16,432,187       |   | 38,890,193       |       |

 

----

(1)  Cost of products soldconsists of the cost of merchandise sold to customers and the occupancy costsfor stores.

 

(2)  The adjustment in thefourth quarter of 2003 included a reduction of $145,983 to the cost of productssold during the previous three quarters due to the completion of physicalinventories, for which shortage had been estimated during the year.

 

F-23

----

 

**EXHIBITINDEX**

 
| **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                 |   | Certificate of Designation of Series A Preferred Stock of WSI  Acquisitions, Corp.(1)                                                                                                                         |
| 3.3                 |   | Certificate of Designation of Series B Preferred Stock of iParty  Corp.(2)                                                                                                                                    |
| 3.4                 |   | Certificate of Designation of Series C Preferred Stock of iParty  Corp.(2)                                                                                                                                    |
| 3.5                 |   | Certificate of Designation of Series D Preferred Stock of iParty  Corp.(4)                                                                                                                                    |
| 3.6                 |   | Certificate of Designation of Series E Preferred Stock of iParty  Corp.(5)                                                                                                                                    |
| 3.7                 |   | Certificate of Correction to Certificate of Designation of Series E  Preferred Stock of iParty Corp.(12)                                                                                                      |
| 3.8                 |   | Certificate of Designation of Series F Preferred Stock of iParty  Corp.(6)                                                                                                                                    |
| 3.9                 |   | Certificate of Designation of Series G Junior Preferred Stock of  iParty Corp.(11)                                                                                                                            |
| 3.10                |   | By-Laws of WSI Acquisition Corp., as amended.(1)                                                                                                                                                              |
| 4.1                 |   | Warrant Agreement between iParty Corp., Continental Stock Transfer  & Trust Company and Commonwealth Associates, LP.(2)                                                                                   |
| 4.2                 |   | Warrant Agreement between iParty Corp., Continental Stock Transfer  & Trust Company and Commonwealth Associates, LP.(2)                                                                                   |
| 4.3                 |   | Taymark Warrant Certificate.(10)                                                                                                                                                                              |
| 4.4                 |   | Margaritaville Holdings LLC Warrant Certificate.(10)                                                                                                                                                          |
| 10.1                |   | Agreement and Plan of Merger between iParty Corp. and WSI  Acquisitions Corp.(1)                                                                                                                              |
| 10.2                |   | 1998 Incentive and Non-Qualified Stock Option Plan.(1)                                                                                                                                                        |
| 10.3                |   | Amended and Restated 1998 Incentive and Non-Qualified Stock Option  Plan.(12)                                                                                                                                 |
| 10.4                |   | First Employment Agreement of Patrick Farrell.(3)                                                                                                                                                             |
| 10.5                |   | Amended and Restated First Employment Agreement of Patrick  Farrell.(3)                                                                                                                                       |
| 10.6                |   | Second Employment Agreement of Patrick Farrell.(8)                                                                                                                                                            |
| 10.7                |   | First Employment Agreement of Sal Perisano.(3)                                                                                                                                                                |
| 10.8                |   | Second Employment Agreement of Sal Perisano.(8)                                                                                                                                                               |
| 10.9                |   | First Employment Agreement of Dorice Dionne.(3)                                                                                                                                                               |
| 10.10               |   | Second Employment Agreement of Dorice Dionne.(8)                                                                                                                                                              |
| 10.11               |   | Fulfillment Agreement between iParty Corp. and Taymark.(3)                                                                                                                                                    |
| 10.12               |   | Extension to Fulfillment Agreement between iParty Corp. and  Taymark.(12)                                                                                                                                     |
| 10.13               |   | Consulting Agreement between iParty Corp. and Stuart Moldaw.(2)                                                                                                                                               |
| 10.14               |   | Rights Agreement between iParty Corp. and Continental Stock Transfer  & Trust, as Rights Agent. (7)                                                                                                       |
| 10.15               |   | Loan and Security Agreement between iParty Retail Stores Corp. and  Paragon Capital LLC.(12)                                                                                                                  |
| 10.16               |   | First Amendment to Loan and Security Agreement by and among iParty  Corp., iParty Retail Stores Corp. and Wells Fargo Retail Finance, LLC.(9)                                                                 |
| 10.17               |   | Asset Purchase Agreement by and among iParty Retail Stores Corp. and  The Big Party Corporation.(5)                                                                                                           |
| 10.18               |   | Amendment No. 1 to Asset Purchase Agreement by and among iParty  Retail Stores Corp. and The Big Party Corporation.(5)                                                                                        |
| 10.19               |   | Amendment No. 2 to Asset Purchase Agreement by and among iParty  Retail Stores Corp. and The Big Party Corporation.(5)                                                                                        |
| 10.20               |   | Stock Purchase Agreement by and among iParty Corp., Ajmal Khan and  Robert Lessin.(5)                                                                                                                         |
| 10.21               |   | Stock Purchase Agreement between iParty Corp. and Patriot Capital Ltd.(6)                                                                                                                                     |
| 10.22               |   | Agreement between iParty Corp. and Margaritaville Holdings LLC.(10)                                                                                                                                           |
| 10.23               |   | StarGreetings License Agreement.(1)                                                                                                                                                                           |
| 10.24               |   | Funding Agreement among iParty Corp., Robert Lessin and Ajmal  Khan.(3)                                                                                                                                       |
| 10.25               |   | Lease between E & D Realty Trust, Lessor, and The Big Party,  Inc., Lessee, for a Portion of the Premises at 1455-1457 VFW Parkway, West  Roxbury, MA, Including First and Second Amendments thereto.(12) |
| 10.26               |   | Trademark Security Agreement between iParty Retail Stores Corp. and  Paragon Capital LLC.(12)                                                                                                                 |
| 10.27               |   | Trademark Security Agreement between iParty Corp. and Wells Fargo  Retail Finance, LLC.(12)                                                                                                                   |
| 10.28               |   | Web Site License Agreement between iParty Corp. and Taymark, Inc.(13)                                                                                                                                         |
| 10.29               |   | Second Amendment to Loan and Security Agreement by and among iParty  Corp., iParty Retail Stores Corp. and Wells Fargo Retail Finance II, LLC.(14)                                                            |

 

----

 
| 21.1 | **     |   | Subsidiaries of Registrant.                                                                   |
|------|--------|--------|-----------------------------------------------------------------------------------------------|
| 23.1 | **     |   | Consent of Ernst & Young LLP, Independent Auditors.                                       |
| 23.2 |   |   | Explanation Concerning Absence of Current Written Consent of Arthur  Andersen LLP.(12)        |
| 31.1 | **     |   | Certification of Chief Executive Officer pursuant to Section 302  of Sarbanes-Oxley Act. |
| 31.2 | **     |   | Certification of Chief Financial Officer pursuant to  Section 302 of Sarbanes-Oxley Act. |
| 32.1 | **     |   | Certification of Chief Executive Officer pursuant to  Section 906 of Sarbanes-Oxley Act. |
| 32.2 | **     |   | Certification of Chief Financial Officer pursuant to  Section 906 of Sarbanes-Oxley Act. |

 

----

| **   | Filed  herewith.                                                                                                                                                                                                                               |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)  | Filed  as an exhibit 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 and incorporated herein by reference.                       |
| (2)  | Filed  as an exhibit 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 and incorporated herein by reference. |
| (3)  | Filed  as an exhibit 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 and incorporated herein by reference.    |
| (4)  | Filed  as an exhibit to iParty’s Annual Report on Form 10-KSB for the year ended  December 31, 1999, as filed with the Securities and Exchange Commission  on April 14, 2000 and incorporated herein by reference.              |
| (5)  | Filed  as an exhibit to iParty’s Current Report on Form 8-K, filed with the  Securities and Exchange Commission on August 30, 2000 and incorporated  herein by reference.                                                            |
| (6)  | Filed  as an exhibit to iParty’s Current Report on Form 8-K, filed with the  Securities and Exchange Commission on September 15, 2000 and  incorporated herein by reference.                                                         |
| (7)  | Filed  as an exhibit to iParty’s Current Report on Form 8-K, filed with the  Securities and Exchange Commission on November 16, 2001 and incorporated  herein by reference.                                                          |
| (8)  | Filed  as an exhibit to iParty’s Annual Report on Form 10-KSB for the year ended  December 29, 2001, as filed with the Securities and Exchange Commission  on March 27, 2002 and incorporated herein by reference.              |
| (9)  | Filed  as an exhibit to iParty’s Quarterly Report on Form 10-QSB for the quarterly  period ended June 29, 2002, as filed with the Securities and Exchange  Commission on August 13, 2002 and incorporated herein by reference.  |
| (10) | Filed  as an exhibit to iParty’s Registration Statement on Form SB-2, Registration  No. 333-40568, as filed with the Securities and Exchange Commission on  June 30, 2000 and incorporated herein by reference.                      |
| (11) | Included  as an exhibit (Exhibit C) to Exhibit 99.2 to iParty’s Current Report on Form  8-K, filed with the Securities and Exchange Commission on November 16,  2001 and incorporated herein by reference.                           |
| (12) | Filed  as an exhibit to iParty’s Annual Report on Form 10-KSB for the year ended  December 28, 2002, filed with the Securities and Exchange Commission on  March 28, 2003 and incorporated herein by reference.                 |
| (13) | Filed  as an exhibit to iParty’s Quarterly Report on Form 10-Q, filed with the  Securities and Exchange Commission on August 12, 2003 and incorporated  herein by reference.                                                         |
| (14) | Filed  as an exhibit to iParty’s Current Report on Form 8-K, filed with the  Securities and Exchange Commission on January 29, 2004 and incorporated  herein by reference.                                                           |

 

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