The following discussion should be read in conjunction with the unaudited Consolidated Financial Statements and related Notes included in Item 1 of this Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements and related Notes and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", contained in our Annual Report on Form 10-K for the fiscal year ended December 29, 2007.

Certain statements in this Quarterly Report on Form 10-Q, particularly statements contained in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "anticipate", "believe", "estimate", "expect", "plan", "intend" and other similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. Forward-looking statements included in this Quarterly Report on Form 10-Q or hereafter included in other publicly available documents filed with the Securities and Exchange Commission ("SEC"), reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties, and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward looking statements. Such future results are based upon our best estimates based upon current conditions and the most recent results of operations. Various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this Quarterly Report on Form 10-Q. These include, but are not limited to, those described below under the heading "Factors That May Affect Future Results" and in Part II, Item 1A, "Risk Factors" as well as under Item 1A, "Risk Factors" of our most recently filed Annual Report on Form 10-K for the year ended December 29, 2007.

Overview

We believe we are a leading brand in the party industry in the markets we serve and a leading resource in those markets for consumers seeking party goods, party planning advice and relevant information. We are a party goods retailer operating stores throughout New England, where 45 of our 50 retail stores are located. We also license the name "iparty.com" (at www.iparty.com) to a third party in exchange for royalties, which to date have not been significant.

Our 50 retail stores are located predominantly in New England with 25 stores in Massachusetts, 7 in Connecticut, 6 in New Hampshire, 3 in Rhode Island, 3 in Maine and 1 in Vermont. We also operate 5 stores in Florida. Our stores range in size from approximately 8,000 square feet to 20,300 square feet and average approximately 10,200 square feet in size. We lease our properties, typically for 10 years and usually with options from our landlords to renew our leases for an additional 5 or 10 years.

The following table shows the number of stores in operation:

                                          For the three months ended
                                     Mar 29, 2008            Mar 31, 2007
           Beginning of period                  50                      50
           Openings / Acquisitions               2                       -
           Closings                              2                       -
           End of period                        50                      50

Our stores feature over 20,000 products ranging from paper party goods, Halloween costumes, greeting cards and balloons to more unique merchandise such as piņatas, tiny toys, masquerade and Hawaiian Luau items. Our sales are driven by the following holiday and party events: Halloween, Christmas, Easter, Valentine's Day, New Year's, Independence Day, St. Patrick's Day, Thanksgiving, Hanukkah and professional sports playoff events. We also focus our business closely on lifetime events such as anniversaries, graduations, birthdays, and bridal or baby showers.

Trends and Quarterly Summary

Our business has a seasonal pattern. In the past three years, we have realized approximately 36.5% of our annual revenues in our fourth quarter, which includes Halloween and Christmas, and approximately 23.8% of our revenues in the second quarter, which includes school graduations. Also, during the past three years, we have had net income in our second and fourth quarters and generated losses in our first and third quarters.

For the first quarter of 2008, our consolidated revenues were $16.1 million, compared to $15.6 million for the first quarter in 2007. The increase in first quarter revenues from the year-ago period included a 2.2% increase in comparable store sales from stores open more than one year. The increase in consolidated revenue was primarily due to an extra pre-New Years Eve shopping day and increased sales around the NFL playoffs and Super Bowl. Consolidated gross profit margin was 38.2% for the first quarter of 2008 compared to a margin of 39.7% for the same period in 2007. The decline in gross margins was substantially due to one time opening expenses for our two recently acquired stores in Rhode Island, and discounts taken to clear out excess holiday inventories. Consolidated net loss for the first quarter of 2008 was $1.9 million, or $0.08 per share, compared to consolidated net loss of $1.5 million, or $0.07 per share, for the first quarter in 2007.

For the remainder of 2008, we plan to leverage our occupancy costs, marketing and sales expense and general and administrative expenses by focusing on increasing sales in our comparable stores, opening or acquiring additional retail stores, closing underperforming stores as their lease terms expire, and/or opening temporary Halloween stores.

Acquisitions

We operate in a largely un-branded market that has many small businesses. As a result, we have considered, and may continue to consider, growing our business through acquisitions of other entities. Any determination to make an acquisition will be based upon a variety of factors, including, without limitation, the purchase price and other financial terms of the transaction, the entities' prospects, geographical location and the extent to which any acquisition would enhance our operating results and financial position.

On August 15, 2007, we entered into an Asset Purchase Agreement to purchase two franchised Party City Corporation retail stores in Lincoln, Rhode Island and Warwick, Rhode Island, in exchange for aggregate consideration of $1,350,000 plus up to $400,000 for associated inventory. On January 2, 2008, we completed the purchase of the two stores. The aggregate consideration paid was $1,350,000 plus approximately $195,000 for associated inventory. The values of $750,000 and $475,000 ascribed to the intangible assets for the non-compete agreement and occupancy valuations, respectively, related to the 2008 Rhode Island stores acquisition are based on preliminary valuations which are subject to revision upon finalization of these valuations. Funding for the purchase was obtained from our existing line of credit with Wells Fargo Retail Finance. The stores were converted into iParty stores immediately following the closing of the transaction.

Results of Operations

Fiscal year 2008 has 52 weeks and ends on December 27, 2008. Fiscal year 2007 had 52 weeks and ended on December 29, 2007.

The first quarter of fiscal year 2008 had 13 weeks and ended on March 29, 2008. The first quarter of fiscal year 2007 had 13 weeks and ended on March 31, 2007.

Three Months Ended March 29, 2008 Compared to Three Months Ended March 31, 2007

Revenues

Revenues include the selling price of party goods sold, net of returns and
discounts, and are recognized at the point of sale. Our consolidated revenues
for the first quarter of fiscal 2008 were $16,144,088, an increase of $544,929,
or 3.5% from the first quarter of the prior fiscal year.

                                         For the three months ended
                                       Mar 29, 2008      Mar 31, 2007
               Revenues               $   16,144,088     $  15,599,159

               Increase in revenues              3.5 %            15.2 %

Sales for the first quarter of fiscal 2008 included sales from 48 comparable stores (defined as stores open for at least one full year) and two stores that were acquired in January 2008. Comparable store sales for the quarter increased by 2.2%.

Cost of products sold and occupancy costs

Cost of products sold and occupancy costs consist of the cost of merchandise sold to customers and the occupancy costs for our stores. Our cost of products sold and occupancy costs for the first quarter of fiscal 2008 were $9,983,347, or 61.8% of revenues, an increase of $576,573 and an increase of 1.5 percentage points, as a percentage of revenues, from the first quarter of the prior fiscal year.

                                                    For the three months ended
                                                 Mar 29, 2008        Mar 31, 2007
    Cost of products sold and occupancy costs   $    9,983,347      $    9,406,774

    Percentage of revenues                                61.8 %              60.3 %

As a percentage of revenues, the increase in cost of products sold and occupancy costs was primarily attributable to clearance markdowns of seasonal product, taken to clear out excess holiday inventories. The excess holiday inventories were caused by sluggish sales in December 2007, due in part to unusually inclement weather in New England.

Marketing and sales expense

Marketing and sales expense consists primarily of advertising and promotional expenditures, all store payroll and related expenses for personnel engaged in marketing and selling activities and other non-payroll expenses associated with operating our stores. Our consolidated marketing and sales expense for the first quarter of fiscal 2008 was $5,849,752, or 36.2% of revenues, an increase of $263,678 and an increase of 0.4 percentage points, as a percentage of revenues, from the first quarter of the prior fiscal year.

                                          For the three months ended
                                       Mar 29, 2008        Mar 31, 2007
             Marketing and sales      $    5,849,752      $    5,586,074

             Percentage of revenues             36.2 %              35.8 %

As a percentage of revenues, the increase in marketing and sales expense was primarily attributable to preopening expenses associated with the two Rhode Island stores that were acquired on January 2, 2008.

General and administrative expense

General and administrative ("G&A") expense consists of payroll and related expenses for executive, merchandising, finance and administrative personnel, as well as information technology, professional fees and other general corporate expenses. Our consolidated G&A expense for the first quarter of fiscal 2008 was $1,963,165, or 12.2% of revenues, an increase of $80,308 and an increase of 0.1 percentage points, as a percentage of revenues, from the first quarter of the prior fiscal year.

                                            For the three months ended
                                         Mar 29, 2008        Mar 31, 2007
           General and administrative   $    1,963,165      $    1,882,857

           Percentage of revenues                 12.2 %              12.1 %

As a percentage of revenues, the increase in general and administrative expense was primarily attributable to amortization of the intangible assets associated with the two Rhode Island stores that were acquired on January 2, 2008.

Operating loss

Our operating loss for the first quarter of fiscal 2008 was $1,652,176, or 10.2% of revenues, compared to an operating loss of $1,276,546, or 8.2% of revenues for the first quarter of the prior fiscal year.

Interest expense

Our interest expense in the first quarter of fiscal 2008 was $214,028, a decrease of $14,016 from the first quarter of the prior fiscal year. The decrease in the first quarter of fiscal 2008 was primarily due to a lower effective rate for borrowings under our line of credit in the first quarter of 2008 versus the first quarter of 2007.

Income taxes

We have not provided for income taxes for the first quarter of fiscal 2008 or fiscal 2007 due to the availability of net operating loss (NOL) carryforwards to eliminate taxable income during those periods. No benefit has been recognized with respect to NOL carryforwards due to the uncertainty of future taxable income.

At the end of fiscal 2007, we had estimated net operating loss carryforwards of approximately $21.2 million, which begin to expire in 2018. In accordance with
Section 382 of the Internal Revenue Code, the use of these carryforwards will be subject to annual limitations based upon certain ownership changes of our stock that have occurred or that may occur.

Net Loss

Our net loss in the first quarter of fiscal 2008 was $1,864,528, or $0.08 per basic and diluted share, compared to a net loss of $1,502,856, or $0.07 per basic and diluted share, in the first quarter of the prior fiscal year.

Liquidity and Capital Resources

Our primary uses of cash are:

· purchases of inventory, including purchases under our Supply Agreement with Amscan, as described more fully below;

· occupancy expenses of our stores;

· employee salaries; and

· new store openings, including acquisitions.

Our primary sources of cash are:

· cash from operating activities; and

· debt, including our line of credit and notes payable.

Our prospective cash flows are subject to certain trends, events and uncertainties, including demands for capital to support growth, improve our infrastructure, respond to economic conditions, and meet contractual commitments. We expect our capital expenditures for 2008 to include amounts related to improving existing stores and possibly amounts related to asset purchases for new stores and other expenditures related to opening new stores. We believe, based on our current operating plan, that anticipated revenues from operations and borrowings available under our existing line of credit will be sufficient to fund our operations, working capital requirements and capital expenditures through the next twelve months. In the event that our operating plan changes due to changes in our strategic plans, lower-than-expected revenues, unanticipated expenses, increased competition, unfavorable economic conditions or other unforeseen circumstances, our liquidity may be negatively impacted. If so, we would be required to adjust our expenditures in 2008 to conserve working capital or raise additional capital, possibly including debt or equity financing, to fund operations and our growth strategy. There can be no assurance, that, should we seek or require additional financing, such financing will be available, if at all, on terms and conditions acceptable to us, affecting our ability to effectuate our acquisition strategy.

Our operating activities used $34,354 in the first three months of fiscal 2008 compared to $1,803,153 used in the first three months of the prior fiscal year, a decrease of $1,768,799. The decrease in cash used in operating activities was primarily due to higher accounts payable growth. The higher accounts payable growth is primarily related to differences in the timing of payments to vendors at year end 2007 compared to the timing of those payments at year end 2006.

We used $1,657,523 in investing activities in the first three months of fiscal 2008 compared to $112,046 in the first three months of the prior fiscal year, an increase of $1,545,477. The cash invested in the first three months of fiscal 2008 was primarily due to the acquisition in January 2008 of two retail stores located in Rhode Island and the related non-compete agreement (see discussion below). The cash invested in the first three months of fiscal 2007 was primarily due to fixture and equipment improvements in our existing retail stores, plus the implementation of a new human resource information and payroll system.

Our financing activities provided $1,686,561 in the first three months of fiscal 2008 compared to providing $1,218,346 in the first three months of the prior fiscal year, an increase of $468,215. The increase was primarily related to the borrowings in 2008 to finance the acquisition of the two retail stores located in Rhode Island and the non-compete agreement.

As mentioned above, on January 2, 2008, we completed the purchase from the franchisees of two franchised Party City Corporation ("Party City") retail stores in Lincoln, Rhode Island and Warwick, Rhode Island. The purchase was made pursuant to the Asset Purchase Agreement entered into on August 15, 2007 (the "Asset Purchase Agreement"). The aggregate consideration for the assets purchased and related non-competition covenants was $1,350,000, plus approximately $195,000 for associated inventory, paid in cash at closing, on terms and conditions specified in the Asset Purchase Agreement. Funding for the purchase was obtained from our existing line of credit with Wells Fargo Retail Finance II, LLC ("Wells Fargo"). Both locations were converted into iParty stores immediately following the closing.

We have a line of credit (the "line") with Wells Fargo, which expires on January 2, 2010. The maximum loan amount available under the line of credit with Wells Fargo is $12,500,000, which may be increased up to a maximum level of $15,000,000, upon 15 days written notice, as long as we are in compliance with all debt covenants and the other provisions of the loan agreement. The agreement permits us, at our option, to use the London Interbank Offered Rate ("LIBOR") for certain of our borrowings rather than the bank's base rate. Borrowings under our line of credit are secured by our inventory and accounts receivable. We borrow against these assets at agreed upon advance rates, which vary at different times of the year.

Our inventory consists of party supplies which are valued at the lower of weighted-average cost or market and are reduced by an allowance for obsolete and excess inventory and other adjustments, including vendor rebates, discounts and freight costs. Our line of credit availability calculation allows us to borrow against "acceptable inventory at cost", which is based on our inventory at cost and applies adjustments that our lender has approved, which may be different than adjustments we use for valuing our inventory in our financial statements, such as the adjustment to reserve for inventory shortage. The amount of "acceptable inventory at cost" was approximately $15,200,226 at March 29, 2008.

Our accounts receivable consist primarily of vendor rebate receivables and credit card receivables. Our line of credit availability calculation allows us to borrow against "eligible credit card receivables", which are the credit card receivables for the previous two to three days of business. The amount of "eligible credit card receivables" was approximately $210,112 at March 29, 2008.

Our total borrowing base is determined by adding the "acceptable inventory at cost" times an agreed upon advance rate plus the "eligible credit card receivables" times an agreed upon advance rate but not to exceed our established credit limit, which was $12.5 million at March 29, 2008. Under the terms of our line of credit, our $12,500,000 credit limit was further reduced by (1) a minimum availability block, (2) customer deposits, (3) gift certificates, (4) merchandise credits and (5) outstanding letters of credit. The amounts outstanding under our line were $4,121,547 at March 29, 2008 and $2,458,525 as of March 31, 2007. Therefore, our additional availability was $3,906,743 at March 29, 2008 and $4,867,362 at March 31, 2007.

The outstanding balances under our line are classified as current liabilities in the accompanying consolidated balance sheets since we are required to apply daily lock-box receipts to reduce the amount outstanding.

Our line of credit includes a number of covenants, including a financial covenant requiring us to maintain a minimum availability under the line of 5% of the credit limit. The agreement also has a covenant that requires us to limit our capital expenditures to within 110% of those amounts included in our business plan, which may be updated from time to time. At March 29, 2008, we were in compliance with these financial covenants.

On January 17, 2006, we amended our line to allow for a $500,000 term loan, which increased our borrowing base, but was contained within the $12.5 million credit limit. The interest rate on the term loan was the bank's prime rate plus 125 basis points. During the time the term loan remained outstanding, the interest rate on the line of credit was the bank's base rate plus 75 basis points. The term loan had an amended maturity date of October 31, 2007. We repaid the term loan on March 2, 2007.

On August 7, 2006, we amended our agreement with Wells Fargo to permit us to enter into a Supply Agreement with Amscan and an Asset Purchase Agreement with Party City. The amendment also allows for us to incur the indebtedness represented by the Amscan Note, defined below, and the Party City Note, defined below, and to incur other unsecured subordinated indebtedness consented to by Wells Fargo.

Our Supply Agreement with Amscan gives us the right to receive certain additional rebates and more favorable pricing terms over the term of the agreement than generally were available to us under our previous terms with Amscan. The right to receive additional rebates, and the amount of such rebates, are subject to our achievement of increased levels of purchases and other factors provided for in the Supply Agreement. In exchange, the Supply Agreement obligates us to purchase increased levels of merchandise from Amscan until 2012. The Supply Agreement provided for a ramp-up period during 2006 and 2007 and, for five years beginning with calendar year 2008, requires us to purchase on an annual basis merchandise equal to the total number of our stores open during such calendar year, multiplied by $180,000. The Supply Agreement provides for penalties in the event we fail to attain the annual purchase commitment that would require us to pay to Amscan the difference between the purchases for that year and the annual purchase commitment for that year. Although we do not expect to incur any penalties under this supply agreement, if they were to occur, there could be a material adverse effect on our uses and sources of cash.

The Supply Agreement also provided for Amscan to extend, until October 31, 2006, approximately $1,150,000 of certain currently due Amscan payables owed by us to Amscan which would otherwise have been payable by us on August 8, 2006 (the "extended payables") and gave us the right, at our option, to convert the extended payables into a subordinated promissory note.

On October 24, 2006, we elected to convert $1,143,896 of extended payables originally due to Amscan as of August 8, 2006 as well as an additional $675,477 of payables due to Amscan as of September 28, 2006 into a single subordinated promissory note in the total principal amount of $1,819,373 ("the Amscan Note"). The Amscan Note bears interest at the rate of 11.0% per annum and is payable in thirty-six (36) equal monthly installments of principal and interest of $59,562.48 commencing on November 1, 2006, and on the first day of each month thereafter until October 1, 2009, when the entire remaining principal balance and all accrued interest is due and payable.

On August 7, 2006, we also entered into and simultaneously closed an Asset Purchase Agreement with Party City, an affiliate of Amscan, pursuant to which we acquired a Party City retail party goods store in Peabody, Massachusetts and received a five-year non-competition covenant from Party City, for aggregate consideration of $2,450,000, payable by a subordinated note in the principal amount of $600,000, which will bear interest at the rate of 12.25% per annum (the "Party City Note") and $1,850,000 in cash. The Party City Note is payable by quarterly interest-only payments over four years, with the full principal amount due at the note's maturity on August 7, 2010.

On September 15, 2006, we entered into a Securities Purchase Agreement pursuant to which we raised $2.5 million through a combination of subordinated debt and warrants issued to Highbridge International LLC ("Highbridge"), an institutional accredited investor.

Under the terms of the financing, we issued Highbridge a three-year $2.5 million subordinated note (the "Highbridge Note") that bears interest at an interest rate of prime plus one percent. The Highbridge Note matures on September 15, 2009. In addition, we issued Highbridge a warrant (the "Highbridge Warrant") exercisable for 2,083,334 shares of our common stock at an exercise price of $0.475 per share, or 125% of the closing price of our common stock on the day immediately prior to the closing of the transaction. We allocated approximately $613,651 of value to the Highbridge Warrant using the Black-Scholes model with volatility of 108%, interest of 4.73% and expected life of five years. The Highbridge Warrant is being amortized using the effective interest method over the life of the Highbridge Note. The agreements entered into in connection with the financing provide for certain restrictions and covenants consistent with Highbridge's status as a subordinated lender, and also grant Highbridge resale registration rights with respect to the shares of common stock underlying the Highbridge Warrant.

The issuance of the Highbridge Warrant triggered certain anti-dilution provisions of our Series B, C, and D convertible preferred stock. As a result, the outstanding shares of these three series of preferred stock are now convertible into an aggregate of 442,354 additional shares of common stock. The issuance of the Highbridge Warrant, however, did not trigger the anti-dilution provisions of our Series E or F convertible preferred stock or any of our other outstanding warrants.

Contractual obligations at March 29, 2008 were as follows:

                                                              Payments Due By Period
. . .