**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 **þ
        QUARTERLY REPORT
        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
 
 **For
        the Quarterly Period Ended June 30, 2007**
 
 **OR**
 
 ** ̈
        TRANSITION REPORT
        PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
 
 **For
        the Transition Period from _______________ to
        _______________**
 
 **Commission
        File Number 0-25507**
 
 
 **iPARTY
        CORP.**
 (Exact
        Name of Registrant as Specified in Its Charter)
  **Delaware**
                
                **76-0547750**(State
                    or Other Jurisdiction ofIncorporation
                    or Organization)
                
                (I.R.S.
                    EmployerIdentification
                    No.)**270
                    Bridge Street, Suite 301,**
                    **Dedham,
                      Massachusetts**
                
                **02026**(Address
                    of Principal Executive Offices)
                
                (Zip
                    Code)
  **(781)
        329-3952**
 (Registrant’s
        Telephone Number, Including Area Code)
 
  Indicate
        by check mark whether the registrant:  (1) has filed all reports
        required to be filed by Section 13 or 15(d) of the Securities Exchange Act
        of
        1934 during the preceding 12 months (or for such shorter
 period that
        the
        registrant was required to file such reports), and (2) has been subject to
        such
        filing requirements for the past 90 days. Yes þ No o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
        one).
  Large
        accelerated filer o     Accelerated
        filer o     
Non-accelerated
        filer þ
 
 Indicate
        by check mark whether the registrant is a shell company as defined in
        Rule 12b-2 of the Exchange Act. Yes o No þ
 
 As
        of July
        31, 2007 there were 22,643,722 shares of common stock, $.001 par value,
        outstanding.
  
  **iPARTY
        CORP.**
 **QUARTERLY
        REPORT ON FORM 10-Q**
 **TABLE
        OF CONTENTS**
  PART
                    I - FINANCIAL INFORMATIONPageItem
                    1.
                
                Financial
                    Statements (Unaudited)Consolidated
                    Balance Sheets
                
                2Consolidated
                    Statements of Operations
                
                3Consolidated
                    Statements of Cash Flows
                
                4Notes
                    to
                    Consolidated Financial Statements
                
                5Item
                    2.
                
                Management’s
                    Discussion and Analysis of Financial Condition and Results of
                    Operations
                
                12Item
                    3.
                
                Quantitative
                    and Qualitative Disclosures about Market
                    Risk
                
                22Item
                    4.
                
                Controls
                    and Procedures
                
                22PART
                    II - OTHER INFORMATIONItem
                    1.
                
                Legal
                    Proceedings
                
                23Item
                    1A.
                
                Risk
                    Factors
                
                23Item
                    2.
                
                Unregistered
                    Sales of Equity Securities and Use of
                    Proceeds
                
                24Item
                    3.
                
                Defaults
                    upon Senior Securities
                
                24Item
                    4.
                
                Submission
                    of Matters to a Vote of Security
                    Holders
                
                24Item
                    5.
                
                Other
                    Information
                
                25Item
                    6.
                
                Exhibits
                
                25SIGNATURES
                
                
                
                26EXHIBIT
                    INDEX
                
                
                27Ex.
                    31.1
                
                Certification
                    of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                    ActEx.
                    31.2
                
                Certification
                    of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                    ActEx.
                    32.1
                
                Certification
                    of Chief Executive Officer pursuant to 18 U.S.C. Section
                    1350Ex.
                    32.2
                
                Certification
                    of Chief Financial Officer pursuant to 18 U.S.C. Section
                    1350
 -
              1 -
 **PART
        I - FINANCIAL INFORMATION**
  **Item
          1.  Financial
          Statements**
 
 **iPARTY
                  CORP.**
 **CONSOLIDATED
                  BALANCE SHEETS**
 
 **Jun
                  30, 2007**
              
              
              **Dec
                  30, 2006****(Unaudited)****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              65,015
              
              
              $
              760,376Restricted
                  cash
              
              
              592,504
              
              
              
              706,066Accounts
                  receivable
              
              
              801,367
              
              
              
              1,116,042Inventory,
                  net
              
              
              13,970,586
              
              
              
              12,264,737Prepaid
                  expenses and other assets
              
              
              1,035,983
              
              
              
              752,172Total
                  current assets
              
              
              16,465,455
              
              
              
              15,599,393Property
                  and equipment, net
              
              
              4,508,648
              
              
              
              4,817,993Intangible
                  assets, net
              
              
              1,939,390
              
              
              
              2,153,482Other
                  assets
              
              
              102,030
              
              
              
              126,505Total
                  assets
              
              $
              23,015,523
              
              
              $
              22,697,373**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              7,467,587
              
              
              $
              5,516,406Accrued
                  expenses
              
              
              2,536,384
              
              
              
              3,070,003Current
                  portion of capital lease obligations
              
              
              30,473
              
              
              
              343,761Current
                  notes payable
              
              
              587,373
              
              
              
              551,515Borrowings
                  under line of credit
              
              
              1,476,163
              
              
              
              1,162,719Total
                  current liabilities
              
              
              12,097,980
              
              
              
              10,644,404Long-term
                  liabilities:Capital
                  lease obligations, net of current portion
              
              
              25,834
              
              
              
              42,456Notes
                  payable, net of discount $443,192
              
              
              3,487,943
              
              
              
              3,736,309Other
                  liabilities
              
              
              1,017,764
              
              
              
              929,199Total
                  long-term liabilities
              
              
              4,531,541
              
              
              
              4,707,964Commitments
                  and contingenciesStockholders'
                  equity:Convertible
                  preferred stock - $.001 par value; 10,000,000 shares
                  authorized,Series
                  B convertible preferred stock - 1,150,000 shares authorized; 470,401
                  and
                  471,401shares
                  issued and outstanding at Jun 30, 2007 and Dec 30, 2006,
                  respectively(aggregate
                  liquidation value of $9,408,024 at Jun 30, 2007)
              
              
              6,999,570
              
              
              
              7,014,450Series
                  C convertible preferred stock - 100,000 shares authorized, issued
                  and
                  outstanding(aggregate
                  liquidation value of $2,000,000 at Jun 30, 2007)
              
              
              1,492,000
              
              
              
              1,492,000Series
                  D convertible preferred stock - 250,000 shares authorized, issued
                  and
                  outstanding(aggregate
                  liquidation value of $5,000,000 at Jun 30, 2007)
              
              
              3,652,500
              
              
              
              3,652,500Series
                  E convertible preferred stock - 296,667 shares authorized, issued
                  and
                  outstanding(aggregate
                  liquidation value of $1,112,500 at Jun 30, 2007)
              
              
              1,112,500
              
              
              
              1,112,500Series
                  F convertible preferred stock - 114,286 shares authorized, issued
                  and
                  outstanding(aggregate
                  liquidation value of $500,000 at Jun 30, 2007)
              
              
              500,000
              
              
              
              500,000Total
                  convertible preferred stock
              
              
              13,756,570
              
              
              
              13,771,450Common
                  stock - $.001 par value; 150,000,000 shares authorized; 22,622,825
                  and
                  22,603,877shares
                  issued and outstanding at Jun 30, 2007 and Dec 30, 2006,
                  respectively
              
              
              22,623
              
              
              
              22,604Additional
                  paid-in capital
              
              
              51,717,660
              
              
              
              51,671,084Accumulated
                  deficit
              
              
              (59,110,851
              )
              
              
              (58,120,133
              )Total
                  stockholders' equity
              
              
              6,386,002
              
              
              
              7,345,005Total
                  liabilities and stockholders' equity
              
              $
              23,015,523
              
              
              $
              22,697,373


The
          accompanying notes are an integral part of these Consolidated Financial
          Statements.
 -
              2 -
  **iPARTY
                    CORP.****CONSOLIDATED
                    STATEMENTS OF
                    OPERATIONS**
 
 **For
                    the three months ended**
                
                
                **For
                    the six months ended****Jun
                    30, 2007**
                
                
                **July
                    1, 2006**
                
                
                **Jun
                    30, 2007**
                
                
                **July
                    1, 2006**Revenues
                
                $
                20,411,919
                
                
                $
                18,587,169
                
                
                $
                36,011,078
                
                
                $
                32,132,968Operating
                    costs:Cost
                    of products sold and occupancy costs
                
                
                11,600,874
                
                
                
                10,897,816
                
                
                
                21,007,648
                
                
                
                19,396,070Marketing
                    and sales
                
                
                6,079,698
                
                
                
                5,993,016
                
                
                
                11,665,772
                
                
                
                11,348,114General
                    and administrative
                
                
                1,989,197
                
                
                
                1,404,412
                
                
                
                3,872,054
                
                
                
                3,097,688Operating
                    income (loss)
                
                
                742,150
                
                
                
                291,925
                
                
                
                (534,396
                )
                
                
                (1,708,904
                )Interest
                    income
                
                
                1,747
                
                
                
                336
                
                
                
                3,481
                
                
                
                592Interest
                    expense
                
                
                (231,759
                )
                
                
                (170,329
                )
                
                
                (459,803
                )
                
                
                (328,113
                )Income
                    (loss) before income taxes
                
                
                512,138
                
                
                
                121,932
                
                
                
                (990,718
                )
                
                
                (2,036,425
                )Income
                    taxes
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
                    income (loss)
                
                $
                512,138
                
                
                $
                121,932
                
                
                $
                (990,718
                )
                
                $
                (2,036,425
                )Income
                    (loss) per share:Basic
                
                $
                0.01
                
                
                $
                0.00
                
                
                $
                (0.04
                )
                
                $
                (0.09
                )Diluted
                
                $
                0.01
                
                
                $
                0.00
                
                
                $
                (0.04
                )
                
                $
                (0.09
                )Weighted-average
                    shares outstanding:Basic
                
                
                38,199,738
                
                
                
                37,728,932
                
                
                
                22,618,685
                
                
                
                22,545,872Diluted
                
                
                40,054,445
                
                
                
                39,283,126
                
                
                
                22,618,685
                
                
                
                22,545,872
  The
        accompanying notes are an integral part of these Consolidated Financial
        Statements.
 -
            3 -
  **iPARTY
                      CORP.****CONSOLIDATED
                      STATEMENTS OF CASH
                      FLOWS**
 
 **For
                      the six months ended****Jun
                      30, 2007**
                  
                  
                  **Jul
                      1, 2006****Operating
                      activities:**Net
                      loss
                  
                  $
                  (990,718
                  )
                  
                  $
                  (2,036,425
                  )Adjustments
                      to reconcile net loss to net cash (used in) provided by operating
                      activities:Depreciation
                      and amortization
                  
                  
                  843,498
                  
                  
                  
                  577,879Deferred
                      rent
                  
                  
                  88,565
                  
                  
                  
                  110,936Non
                      cash stock based compensation expense
                  
                  
                  30,438
                  
                  
                  
                  14,577Non
                      cash warrant expense
                  
                  
                  102,275
                  
                  
                  
                  -Changes
                      in operating assets and liabilities:Accounts
                      receivable
                  
                  
                  314,675
                  
                  
                  
                  581,452Inventory
                  
                  
                  (1,705,849
                  )
                  
                  
                  (499,000
                  )Prepaid
                      expenses and other assets
                  
                  
                  (295,837
                  )
                  
                  
                  (634,767
                  )Accounts
                      payable
                  
                  
                  1,951,181
                  
                  
                  
                  2,829,194Accrued
                      expenses and other liabilities
                  
                  
                  (534,915
                  )
                  
                  
                  (374,298
                  )Net
                      cash (used in) provided by operating activities
                  
                  
                  (196,687
                  )
                  
                  
                  569,548**Investing
                      activities:**Purchase
                      of property and equipment
                  
                  
                  (305,163
                  )
                  
                  
                  (179,997
                  )Net
                      cash used in investing activities
                  
                  
                  (305,163
                  )
                  
                  
                  (179,997
                  )**Financing
                      activities:**Net
                      borrowings under line of credit
                  
                  
                  313,444
                  
                  
                  
                  961,582Principal
                      payments on notes payable
                  
                  
                  (314,783
                  )
                  
                  
                  -Decrease
                      in restricted cash
                  
                  
                  113,562
                  
                  
                  
                  102,023Principal
                      payments on capital lease obligations
                  
                  
                  (329,910
                  )
                  
                  
                  (230,827
                  )Deferred
                      financing costs
                  
                  
                  22,899
                  
                  
                  
                  (87,353
                  )Proceeds
                      from exercise of stock options
                  
                  
                  1,277
                  
                  
                  
                  1,170Net
                      cash (used in) provided by financing activities
                  
                  
                  (193,511
                  )
                  
                  
                  746,595**Net
                      increase (decrease) in cash and cash equivalents**
                  
                  
                  (695,361
                  )
                  
                  
                  1,136,146**Cash
                      and cash equivalents, beginning of period**
                  
                  
                  760,376
                  
                  
                  
                  699,194**Cash
                      and cash equivalents, end of period**
                  
                  $
                  65,015
                  
                  
                  $
                  1,835,340Supplemental
                      disclosure of non-cash financing activities:Conversion
                      of Series B convertible preferred stock to common stock
                  
                  $
                  14,880
                  
                  
                  $
                  7,451
  The
              accompanying notes are an integral part of these Consolidated Financial
              Statements.
 -
                4 -
 **iPARTY
          CORP.**
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
 **June
        30, 2007**
 **(Unaudited)**
 
 **1.  BASIS
        OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**:
 
 *Interim
        Financial Information*
 
 The
        interim consolidated financial statements as of June 30, 2007 have been prepared
        by the Company pursuant to the rules and regulations of the Securities and
        Exchange Commission (the “SEC”) for interim financial
        reporting.  These consolidated statements are unaudited and, in the
        opinion of management, include all adjustments (consisting of normal recurring
        adjustments and accruals) necessary to present fairly the consolidated balance
        sheets, consolidated operating results, and consolidated cash flows for the
        periods presented in accordance with generally accepted accounting
        principles.  The consolidated balance sheet at December 30, 2006 has
        been derived from the audited consolidated financial statements at that
        date.  Operating results for the Company on a quarterly basis may not
        be indicative of the results for the entire year due, in part, to the
        seasonality of the party goods industry.  Historically, higher
        revenues and operating income have been experienced in the second and fourth
        fiscal quarters, while the Company has generated losses in the first and
        third
        quarters.  Certain information and footnote disclosures normally
        included in financial statements prepared in accordance with generally accepted
        accounting principles have been omitted in accordance with the rules and
        regulations of the SEC.  These consolidated financial statements
        should be read in conjunction with the audited consolidated financial
        statements, and accompanying notes, included in the Company’s Annual Report on
        Form 10-K, for the year ended December 30, 2006.
 
 *Principles
        of Consolidation*
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        wholly-owned subsidiaries after elimination of all significant intercompany
        transactions and balances.
 
 *Revenue
        Recognition*
 
 Revenues
        include the selling price of party goods sold, net of returns and discounts,
        and
        are recognized at the point of sale.  The Company estimates returns
        based upon historical return rates and such amounts have not been
        significant.
 
 *Concentrations*
 
 The
        Company purchases its inventory from a diverse group of
        vendors.  Three suppliers account for approximately 36% of the
        Company’s purchase of merchandise, but the Company does not believe that it is
        overly dependent upon any single source for its merchandise, often using
        more
        than one vendor for similar kinds of products.  The Company entered
        into a Supply Agreement with its largest supplier on August 7, 2006, which
        will
        obligate the Company to purchase increased levels of merchandise until
        2012.  The Supply Agreement provides for a ramp-up period during 2006
        and 2007 and, for five years beginning with calendar year 2008, requires
        the
        Company to purchase on an annual basis merchandise equal to the total number
        of
        stores open during such calendar year, multiplied by $180,000.  The
        Supply Agreement provides for penalties in the event the Company fails to
        attain
        the annual purchase commitment that would require the Company to pay the
        difference between the purchases for that year and the annual purchase
        commitment for that year. The Company is not aware of any reason or circumstance
        that would prevent the minimum purchase amount commitments under the Supply
        Agreement from being met.
 
 Accounts
        receivable primarily represent amounts due from credit card companies and
        vendors for inventory rebates.  Management does not provide for
        doubtful accounts as such amounts have not been significant to date; the
        Company
        does not require collateral.
  -
            5 -
  *Use
        of
        Estimates*
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires management to make estimates
        and assumptions that affect the reported amounts of assets and liabilities
        and
        disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period.  Actual results could differ from these
        estimates.
 
 *Cash
        and Cash Equivalents and Restricted Cash*
 
 The
        Company considers all highly liquid investments with an original maturity
        date
        of three months or less to be cash equivalents.  Cash equivalents
        consist primarily of store cash funds and daily store receipts in transit
        to our
        concentration bank and are carried at cost.
 
 The
        Company uses controlled disbursement banking arrangements as part of its
        cash
        management program.  Outstanding checks, which were included in
        accounts payable, totaled $1,702,446 at June 30, 2007 and $2,316,026 at December
        30, 2006.  The decrease in outstanding checks as of June 30, 2007 is
        due to the timing of store lease payments.
 
 Restricted
        cash represents funds on deposit established for the benefit of and under
        the
        control of Wells Fargo Retail Finance II, LLC, the Company’s lender under its
        line of credit, and constitutes collateral for amounts outstanding under
        the
        Company’s line of credit.
 
 *Fair
        Value of Financial Instruments*
 
 The
        carrying values of cash and cash equivalents, accounts receivable and accounts
        payable approximate fair value because of the short-term nature of these
        instruments.  The fair value of borrowings under the Company’s line of
        credit approximates carrying value because the debt bears interest at a variable
        market rate.  The fair value of the capital lease obligations
        approximates the carrying value.   The fair value of the notes
        payable approximates the carrying value.   The fair value of the
        warrants was determined by using the Black-Scholes model (volatility of 108%,
        interest of 4.73% and expected life of five years).
 
 *Inventories*
 
 Inventories
        consist of party supplies and are valued at the lower of moving weighted-average
        cost or market.  Inventory has been reduced by an allowance for
        obsolete and excess inventory, which is based on management’s 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 goods are sold.
 
 The
        activity in the allowance for obsolete and excess inventory is as
        follows:
  **Six
                    months ended**
                
                
                **Twelve
                    months ended****Jun
                    30, 2007**
                
                
                **Dec
                    30, 2006**Beginning
                    balance
                
                $
                1,079,814
                
                
                $
                1,098,972Increases
                    to reserve
                
                
                190,000
                
                
                
                524,550Write-offs
                    against reserve
                
                
                (2,232
                )
                
                
                (543,708
                )Ending
                    balance
                
                $
                1,267,582
                
                
                $
                1,079,814
 *Income
        Taxes*
 
 The
        Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
        Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
        interpretation of FASB Statement No. 109” (“FIN 48”) on December 31, 2006. At
        the adoption date and as of June 30, 2007, the Company had no material
        unrecognized tax benefits and no adjustments to liabilities, retained earnings
        or operations were required.
  -
            6 -
  The
        Company recognizes interest and penalties related to uncertain tax positions
        in
        income tax expense which were zero for the six months ended June 30,
        2007.
 
 Tax
        years
        2003 through 2006 are subject to examination by the federal and state taxing
        authorities. There are no income tax examinations currently in
        process.
 
 *Net
        Income (Loss) per Share*
 
 Net
        income
        (loss) per basic share is computed by dividing net income (loss) by the weighted
        average number of common shares outstanding plus the common share equivalents
        of
        Series B-F preferred stock.  The common share equivalents of Series
        B-F are included in the calculation of net income (loss) per basic share
        in
        accordance with EITF Topic D-95, *Effect of Participating Convertible
        Securities on the Computation of Basic Earnings Per Share*, since the
        preferred stockholders are entitled to participate in dividends when and
        if
        declared by the Board of Directors.  For periods with net losses, the
        Company excludes those common share equivalents since their impact would
        be
        anti-dilutive.
 
 Net
        income
        (loss) per diluted share is computed by dividing net income (loss) by the
        weighted average number of common shares outstanding, plus the common share
        equivalents of Series B-F preferred stock, plus the common share equivalents
        of
        the “in the money” stock options and warrants as computed by the treasury
        method.  For periods with net losses, the Company excludes those
        common share equivalents since their impact would be anti-dilutive.
 
 As
        of June
        30, 2007, there were 28,433,195 potential additional common share equivalents
        outstanding, which were not included in the calculation of diluted net loss
        per
        share for the six months then ended because their effect would be
        anti-dilutive.  These included 15,576,913 shares upon the conversion
        of immediately convertible preferred stock, 2,083,334 shares upon the exercise
        of a warrant with an exercise price of $0.475 per share, 528,210 shares upon
        the
        exercise of warrants with a weighted average exercise price of $3.79 per
        share
        and 10,244,738 shares upon the exercise of stock options with a weighted
        average
        exercise price of $0.59 per share.
 
 *Stock
        Option Compensation Expense*
 
 On
        January
        1, 2006, the Company adopted the Financial Accounting Standards Board (“FASB”)
        Statement No. 123(R), *Share-Based Payments*, using the modified
        prospective method.  Under this method, stock based compensation
        expense is recognized for new grants beginning in 2006 and any unvested grants
        prior to the adoption of Statement No. 123(R).  Prior to fiscal 2006,
        the Company accounted for share-based payments to employees using the Accounting
        Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to
        Employees*, and the disclosure-only provisions of Statement No. 123,
*Accounting for Stock-Based Compensation*.  Because the Company
        granted stock options to employees at exercise prices equal to fair market
        value
        on the date of grant, no stock based compensation cost was recognized for
        option
        grants in periods prior to fiscal 2006.
 
 In
        response to Statement No. 123(R), on September 21, 2005, the Company’s Board of
        Directors approved an acceleration of the vesting of certain unvested and
        “out-of-the-money” stock options previously awarded to employees and officers
        with exercise prices equal to or greater than $0.69 per
        share.  Options held by non-employee directors were excluded from the
        vesting acceleration.  As a result, options to purchase approximately
        1.0 million shares of the Company’s common stock became exercisable
        immediately.  Based upon the Company’s closing stock price of $0.46 on
        September 21, 2005, none of these options had intrinsic value on the date
        of
        acceleration.
 
 In
        making
        the decision to accelerate these options, the Company’s Board of Directors
        considered the interest of the stockholders as it would reduce the Company’s
        reported stock based compensation expense in future periods following the
        effectiveness of Statement No. 123(R). The future stock based compensation
        expense that was eliminated was approximately $508,000 on a pre-tax
        basis.
 
 Under
        Statement No. 123(R), the Company uses the Black-Scholes option pricing model
        to
        determine the fair value of stock based compensation.  The
        Black-Scholes model requires the Company to make several subjective assumptions,
        including the estimated length of time employees will retain their vested
        stock
        options before exercising them (“expected term”), and the estimated volatility
        of the Company’s common stock price over the expected term, which is based on
        historical volatility of the Company’s common stock over a time period equal to
        the expected term.  The Black-Scholes model also requires a risk-free
        interest rate, which is based on the U.S. Treasury yield curve in effect
        at the
        time of the grant, and the dividend yield on the Company’s common stock, which
        is assumed to be zero since the Company does not pay dividends and has no
        current plans to do so in the future.  Changes in these assumptions
        can materially affect the estimate of fair value of stock based compensation
        and
        consequently, the related expense recognized on the consolidated statement
        of
        operations.  Under the modified prospective method, stock based
        compensation expense is recognized for new grants beginning in the fiscal
        year
        ended December 30, 2006 and any unvested grants prior to the adoption of
        Statement No. 123(R). The Company recognizes stock based compensation expense
        on
        a straight-line basis over the vesting period of each grant.
  -
            7 -
  The
        stock
        based compensation expense recognized by the Company was:
  **For
                    the three months ended**
                
                
                **For
                    the six months ended****Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**
                
                
                **Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**Stock
                    Based Compensation Expense
                
                $
                19,546
                
                
                $
                6,887
                
                
                $
                30,438
                
                
                $
                14,577
  Stock
        based compensation expense is included in general and administrative
        expense.  The adoption of Statement No. 123(R) had no impact on cash
        flow from operations and cash flow from financing activities for the six
        months
        ended  June 30, 2007.
 
 Under
        the
        Company’s Amended and Restated 1998 Incentive and Nonqualified Stock Option Plan
        (the “1998 Plan”) options to acquire 11,000,000 shares of common stock may be
        granted to officers, directors, key employees and consultants.  The
        exercise price for qualified incentive options cannot be less than the fair
        market value of the stock on the grant date and the exercise price of
        nonqualified options can be fixed by the Board. Options to purchase the
        Company's common stock under the 1998 Plan have been granted to employees,
        directors and consultants of the Company at fair market value at the date
        of
        grant.  Generally, the options become exercisable over periods of up
        to four years, and expire ten years from the date of grant.
 
 The
        Company granted options for the purchase of 1,350,000 shares of common stock
        to
        key employees and each of the four independent members of the Board of Directors
        on June 6, 2007 at an exercise price of $0.42 per share.  Similarly,
        the Company granted options for the purchase of 25,000 shares of common stock
        to
        each of the four independent members of the Board of Directors on June 7,
        2006
        at an exercise price of $0.36 per share.  The weighted-average fair
        market value using the Black-Scholes option-pricing model of the options
        granted
        was $0.33 per share for the three and six months ended June 30, 2007, and
        was
        $0.30 per share for the three and six months ended July 1, 2006.  The
        fair market value of the stock options at the date of the grant was estimated
        using the Black-Scholes option-pricing model with the following weighted
        average
        assumptions:
 
  **For
                    the three months ended**
                
                
                **For
                    the six months ended****Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**
                
                
                **Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**Risk-free
                    interest rate
                
                
                4.94
                %
                
                
                5.18
                %
                
                
                4.94
                %
                
                
                5.18
                %Expected
                    volatility
                
                
                102.6
                %
                
                
                115.6
                %
                
                
                102.6
                %
                
                
                115.6
                %Weighted
                    average expected life (in years)
                
                
                5.0
                
                
                
                5.0
                
                
                
                5.0
                
                
                
                5.0Expected
                    dividends
                
                
                0.00
                %
                
                
                0.00
                %
                
                
                0.00
                %
                
                
                0.00
                %
  -
            8 -
 
 A
        summary
        of the Company's stock options is as follows:
  **Number**
                  **of**
                  **Stock**
                  **Options**
                
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**
                
                
                **Price******
                  **Range**
                
                
                **Weighted**
                  ****Average****
                  ******Remaining******
                  ********Life********
                  **********(Years)**********
                
                
                **Aggregate**
                  **Intrinsic**
                    **Value**Outstanding
                    - December 30, 2006
                
                
                8,922,440
                
                
                $
                0.62
                
                
                $
                0.13-$ 4.25Granted
                
                
                1,350,000
                
                
                
                0.42
                
                
                
                0.42-0.42Expired/Forfeited
                
                
                (22,150
                )
                
                
                0.38
                
                
                
                0.20-0.69Exercised
                
                
                (5,552
                )
                
                
                0.23
                
                
                
                0.23-0.23Outstanding
                    - June 30, 2007
                
                
                10,244,738
                
                
                $
                0.59
                
                
                $
                0.13-$ 4.25
                
                
                
                5.2
                
                
                $
                823,743Exercisable
                    - June 30, 2007
                
                
                8,848,844
                
                
                $
                0.62
                
                
                $
                0.13-$ 4.25
                
                
                
                4.5
                
                
                $
                810,192Available
                    for grant - June 30, 2007
                
                
                330,851
  The
        following table summarizes information for options outstanding and exercisable
        at June 30, 2007:
  **Outstanding**
                
                **Exercisable****Weighted****Number**
                
                **Average**
                
                **Weighted**
                
                **Number**
                
                **Weighted****of**
                
                **Remaining**
                
                **Average**
                
                **of**
                
                **Average****Stock**
                
                **Life**
                
                **Exercise**
                
                **Stock**
                
                **Exercise****Price
                    Range**
                
                **Options**
                
                **(Years)**
                
                **Price**
                
                **Options**
                
                **Price**$ 
                    0.13-$
                     0.20
                
                139,250
                
                4.1
                
                $              0.18
                
                139,250
                
                $              0.180.21-0.30
                
                3,798,132
                
                3.7
                
                0.25
                
                3,797,233
                
                0.250.31-0.50
                
                2,511,805
                
                7.7
                
                0.39
                
                1,130,888
                
                0.350.51-1.00
                
                3,154,351
                
                5.7
                
                0.77
                
                3,140,273
                
                0.771.01-3.50
                
                541,200
                
                2.1
                
                2.33
                
                541,200
                
                2.333.51-4.25
                
                100,000
                
                2.5
                
                4.14
                
                100,000
                
                4.14Total
                
                10,244,738
                
                5.2
                
                $              0.59
                
                8,848,844
                
                $              0.62
  The
        total
        fair value of shares vested during the six months ended June 30, 2007 was
        $4,707. The remaining unrecognized stock based compensation expense related
        to unvested awards at June 30, 2007, was $447,070 and the period of time
        over
        which this expense will be recognized is 4.5 years.
  -
            9 -
  *Property
        and Equipment*
 
 Property
        and equipment are stated at cost less accumulated depreciation and are
        depreciated on the straight-line method over the estimated useful lives of
        the
        assets.  Expenditures for maintenance and repairs are charged to
        operations as incurred.  A listing of the estimated useful life of the
        various categories of property and equipment is as follows:
  **Asset
                    Classification**
                
                **Estimated
                    Useful Life**Leasehold
                    improvements
                
                Lesser
                    of term of lease or 10 yearsFurniture
                    and fixtures
                
                7
                    yearsComputer
                    hardware and software
                
                3
                    yearsEquipment
                
                5
                    years
  *Intangible
        Assets*
 
 Intangible
        assets consist primarily of the value of a five-year non-compete agreement
        from
        Party City Corporation and its affiliates that covers Massachusetts, Maine,
        New
        Hampshire, Vermont, Rhode Island, and Windsor and New London counties in
        Connecticut which expires in 2011.  This asset has an estimated life
        of 60 months.  Also included is the value related to the retail store
        lease that the Company acquired from Party City in Peabody,
        Massachusetts.  This asset has an estimated life of 90
        months.   The other intangible assets consist of legal and other
        transaction fees related to the three-year note payable due on September
        15,
        2009.  These assets are being amortized over the life of the note
        payable.
 
 Intangible
        assets as of June 30, 2007 and December 30, 2006 were:
  **Jun
                    30, 2007**
                
                
                **Dec
                    30, 2006**Non-compete
                    agreement
                
                $
                1,725,069
                
                
                
                1,725,069Occupancy
                    valuation
                
                
                460,000
                
                
                
                460,000Other
                
                
                169,848
                
                
                
                154,949Intangible
                    assets
                
                
                2,354,917
                
                
                
                2,340,018Less:
                    accumulated amortization
                
                
                (415,527
                )
                
                
                (186,536
                )Intangible
                    assets, net
                
                $
                1,939,390
                
                
                $
                2,153,482
  Amortization
        expense for these intangible assets was:
  **For
                    the three months ended**
                
                
                **For
                    the six months ended****Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**
                
                
                **Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**Amortization
                    expense
                
                $
                114,498
                
                
                $
                -
                
                
                $
                228,996
                
                
                $
                -
  The
        amortization expense for the non-compete agreement and other intangible assets
        are included in general and administrative expense on the Consolidated Statement
        of Operations.  The amortization expense for occupancy valuation is
        included in cost of products sold and occupancy costs.
 
 -
            10 -
 
 Future
        amortization expense related to these intangible assets as of June 30,
        2007:
  **Year**
                
                **Amount**2007
                
                $
                228,9982008
                
                
                460,9762009
                
                
                443,7602010
                
                
                409,3272011
                
                
                265,571Thereafter
                
                
                130,758Total
                
                $
                1,939,390
  *Accounting
        for the Impairment of Long-Lived Assets*
 
 In
        accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of
        Long-Lived Assets*, the Company reviews each store for impairment indicators
        whenever events and changes in circumstances suggest that the carrying amounts
        may not be recoverable from estimated future store cash flows.  The
        Company’s review considers store operating results, future sales growth and cash
        flows. During the fourth quarter of 2006, the Company decided to close its
        store
        in East Providence, Rhode Island effective November 4, 2006 due to
        underperforming sales.  As a result of this closing, the Company
        incurred a charge in the fourth quarter of 2006 of approximately $120,000
        related to remaining lease payments and other closing costs. The initial
        term of
        the lease is due to expire on August 31, 2007.  The Company is not
        aware of any impairment indicators in any of its remaining stores at June
        30,
        2007.
 
 *Notes
        Payable*
 
 Notes
        payable consist of three notes entered into in fiscal 2006.
 
 The
        “Highbridge Note” is a three year subordinated note that bears interest at the
        rate of prime plus one percent.  The note matures on September 15,
        2009.  The original discount associated with warrants issued in
        conjunction with the Highbridge Note (original discount amount $613,651)
        is
        being amortized using the effective interest method over the life of the
        note
        payable.   The note payable is presented net of the remaining
        unamortized discount.
 
 The
        “Amscan Note” is a subordinated promissory note in the total principal amount of
        $1,819,373.  The 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 beginning 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 are due and payable.
 
 The
“Party
        City Note” is a subordinated promissory note in the principal amount of
        $600,000.   The note bears interest at the rate of 12.25% per
        annum and 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.
 
 *Stockholder’s
        Equity*
 
 During
        the
        six months ended June 30, 2007, 5,552 shares of common stock were issued
        upon
        the exercise of stock options and 13,396 shares of common stock were issued
        upon
        conversion of Series B convertible preferred stock.
 
 *Reclassifications*
 
 Certain
        prior year balances have been reclassified to conform with current year
        presentation.
 
 -
            11 -
  **Item
        2.  Management’s Discussion and Analysis of Financial
        Condition and Results of Operations**
 
 *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 30, 2006.*
 
 *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 30, 2006.*
 
 **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 26 stores in
        Massachusetts, 7 in Connecticut, 6 in New Hampshire, 2 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 9,800 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.
 
 -
            12 -
 
 The
        following table shows the number of stores in operation:
  **For
                    the six months ended****Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**Beginning
                    of period
                
                
                50
                
                
                
                50Openings
                    / Acquisitions
                
                
                -
                
                
                
                -Closings
                
                
                -
                
                
                
                -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 piñatas, 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
        and Hanukkah.  We also focus our business closely on lifetime events
        such as anniversaries, graduations, birthdays, and bridal or baby
        showers.
 
 Our
        business has a seasonal pattern.  In the past three years, we have
        realized approximately 37.5% of our annual revenues in our fourth quarter,
        which
        includes Halloween and Christmas, and approximately 23.4% 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
        remainder of 2007, our plan continues to be to increase our comparable store
        sales growth, increase our gross profit margin percentage and leverage our
        occupancy costs, marketing and sales expense and general and administrative
        expense. From time to time, we have been and expect to continue to be presented
        with opportunities to open new party supplies stores or acquire existing
        ones.  We intend to continue to evaluate such opportunities on a
        case-by-case basis as they may arise to ascertain if they would be a good
        strategic fit for our business and would help us increase shareholder
        value.
 
 **Results
        of Operations**
 
 Fiscal
        year 2007 has 52 weeks and ends on December 29, 2007.  Fiscal year
        2006 had 52 weeks and ended on December 30, 2006.
 
 The
        second
        quarter of fiscal year 2007 had 13 weeks and ended on June 30,
        2007.  The second quarter of fiscal year 2006 had 13 weeks and ended
        on July 1, 2006.
 
 **Three
        Months Ended June 30, 2007 Compared to Three Months Ended July 1,
        2006**
 
 *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 second quarter of fiscal 2007 were $20,411,919, an increase of $1,824,750,
        or 9.8% from the second quarter of the prior fiscal year.
  **For
                    the three months ended****Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**Revenues
                
                $
                20,411,919
                
                
                $
                18,587,169Increase
                    in revenues
                
                
                9.8
                %
                
                
                12.5
                %
  Sales
        for
        the second quarter of fiscal 2007 included sales from 49 comparable stores
        (defined as stores open for at least one full year) and one store that was
        acquired in August 2006. Comparable store sales for the quarter increased
        by
        5.9%.
  -
            13 -
  *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 second quarter of fiscal 2007 were
        $11,600,874, or 56.8% of revenues, an increase of $703,058 and a decrease
        of 1.8
        percentage points, as a percentage of revenues, from the second quarter of
        the
        prior fiscal year.
  **For
                    the three months ended****Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**Cost
                    of products sold and occupancy costs
                
                $
                11,600,874
                
                
                $
                10,897,816Percentage
                    of revenues
                
                
                56.8
                %
                
                
                58.6
                %
  As
        a
        percentage of revenues, the decrease in cost of products sold and occupancy
        costs was primarily attributable to improved leveraging of occupancy costs
        resulting from the increased sales in our comparable stores and better pricing
        negotiated from vendors.
 
 *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 second quarter of fiscal 2007 was $6,079,698, or 29.8% of revenues,
        an
        increase of $86,682 and a decrease of 2.4 percentage points, as a percentage
        of
        revenues, from the second quarter of the prior fiscal year.
  **For
                    the three months ended****Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**Marketing
                    and sales
                
                $
                6,079,698
                
                
                $
                5,993,016Percentage
                    of revenues
                
                
                29.8
                %
                
                
                32.2
                %
 As
        a
        percentage of revenues, the decrease in marketing and sales expense was
        primarily attributable to better leveraging of store payroll and other store
        selling related expenses resulting from the increased sales in our comparable
        stores.
 
 *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 second quarter of
        fiscal 2007 was $1,989,197, or 9.7% of revenues, an increase of $584,785
        and an
        increase of 2.1 percentage points, as a percentage of revenues, from the
        second
        quarter of the prior fiscal year.
  **For
                    the three months ended****Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**General
                    and administrative
                
                $
                1,989,197
                
                
                $
                1,404,412Percentage
                    of revenues
                
                
                9.7
                %
                
                
                7.6
                %
  As
        a
        percentage of revenues, the increase in G&A expense is largely attributable
        to executive recruitment costs and professional fees associated with our
        compliance activities related to Section 404 of the Sarbanes-Oxley
        Act.
 
 -
            14 -
  *Operating
        income*
 
 Our
        operating income for the second quarter of fiscal 2007 was $742,150, or 3.6%
        of
        revenues, compared to an operating income of $291,925, or 1.6% of revenues
        for
        the second quarter of the prior fiscal year.
 
 *Interest
        expense*
 
 Our
        interest expense in the second quarter of fiscal 2007 was $231,759, an increase
        of $61,430 from the second quarter of the prior fiscal year.  The
        increase in the second quarter of fiscal 2007 was primarily due to interest,
        including amortization of discount, related to notes payable that we entered
        into in fiscal 2006.
 
 *Income
        taxes*
 
 We
        have
        not provided for income taxes for the second quarter of fiscal 2007 or fiscal
        2006 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 2006, we had estimated net operating loss carryforwards of
        approximately $23.0 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
        Income*
 
 Our
        net
        income in the second quarter of fiscal 2007 was $512,138, or $0.01 per basic
        and
        diluted share, compared to a net income of $121,932, or $0.00 per basic and
        diluted share, in the second quarter of the prior fiscal year.
 
 **Six
        Months Ended June 30, 2007 Compared to Six Months Ended July 1,
        2006**
 
 *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 six months of fiscal 2007 were $36,011,078, an increase of $3,878,110,
        or 12.1% from the first six months of the prior fiscal year.
  **For
                    the six months ended****Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**Revenues
                
                $
                36,011,078
                
                
                $
                32,132,968Increase
                    in revenues
                
                
                12.1
                %
                
                
                8.3
                %
  Sales
        for
        the first six months of fiscal 2007 included sales from 49 comparable stores
        (defined as stores open for at least one full year) and one store that was
        acquired in August 2006. Comparable store sales for the first six months
        increased by 8.1%.
  -
            15 -
  *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 six months of fiscal 2007
        were
        $21,007,648, or 58.3% of revenues, an increase of $1,611,578 and a decrease
        of
        2.1 percentage points, as a percentage of revenues, from the first six months
        of
        the prior fiscal year.
  **For
                    the six months ended****Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**Cost
                    of products sold and occupancy costs
                
                $
                21,007,648
                
                
                $
                19,396,070Percentage
                    of revenues
                
                
                58.3
                %
                
                
                60.4
                %
 As
        a
        percentage of revenues, the decrease in cost of products sold and occupancy
        costs was primarily attributable to improved leveraging of occupancy costs
        resulting from the increased sales in our comparable stores and better pricing
        negotiated from vendors.
 
 *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 six months of fiscal 2007 was $11,665,772, or 32.4% of revenues,
        an increase of $317,658 and a decrease of 2.9 percentage points, as a percentage
        of revenues, from the first six months of the prior fiscal year.
  **For
                    the six months ended****Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**Marketing
                    and sales
                
                $
                11,665,772
                
                
                $
                11,348,114Percentage
                    of revenues
                
                
                32.4
                %
                
                
                35.3
                %
  As
        a
        percentage of revenues, the decrease in marketing and sales expense was
        primarily attributable to better leveraging of store payroll and other store
        selling related expenses resulting from the increased sales in our comparable
        stores.
 
 *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 six months
        of fiscal 2007 was $3,872,054, or 10.8% of revenues, an increase of $774,366
        and
        an increase of 1.2 percentage points, as a percentage of revenues, from the
        first six months of the prior fiscal year.
  **For
                    the six months ended****Jun
                    30, 2007**
                
                
                **Jul
                    1, 2006**General
                    and administrative
                
                $
                3,872,054
                
                
                $
                3,097,688Percentage
                    of revenues
                
                
                10.8
                %
                
                
                9.6
                %
 As
        a
        percentage of revenues, the increase in G&A expense is largely attributable
        to executive recruitment costs and professional fees associated with our
        compliance activities related to Section 404 of the Sarbanes-Oxley
        Act.
 
 -
            16 -
  *Operating
        loss*
 
 Our
        operating loss for the first six months of fiscal 2007 was $534,396, or 1.5%
        of
        revenues, compared to an operating loss of $1,708,904, or 5.3% of revenues
        for
        the first six months of the prior fiscal year.
 
 *Interest
        expense*
 
 Our
        interest expense in the first six months of fiscal 2007 was $459,803, an
        increase of $131,690 from the first six months of the prior fiscal
        year.  The increase in the first six months of fiscal 2007 was
        primarily due to interest, including amortization of discount, related to
        notes
        payable that we entered into in fiscal 2006.
 
 *Income
        taxes*
 
 We
        have
        not provided for income taxes for the first six months of fiscal 2007 or
        fiscal
        2006 due to 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 2006, we had estimated net operating loss carryforwards of
        approximately $23.0 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 six months of fiscal 2007 was $990,718, or $0.04 per basic
        and
        diluted share, compared to a net loss of $2,036,425, or $0.09 per basic and
        diluted share, in the first six months of the prior fiscal year.
 
 **Liquidity
        and Capital Resources**
 
 Our
        operating activities used $196,687 in the first six months of fiscal 2007
        compared to $569,548 in cash provided in the first six months of the prior
        fiscal year, a decrease of $766,235.  The increase in cash used in
        operating activities was primarily due to higher purchases of inventory and
        a
        decrease in accounts payable growth primarily related to extended dating
        from
        vendors in the first half of 2006.
 
 We
        used
        $305,163 in investing activities in the first six months of fiscal 2007 compared
        to $179,997 in the first six months of the prior fiscal year.  The
        cash invested in the first six months of fiscal 2007 was primarily due to
        the
        implementation of a new human resource information and payroll
        system.  The cash invested in the first six months of fiscal 2006 was
        primarily for fixed assets associated with existing store improvements and
        computer replacements.
 
 We
        used
        $193,511 in financing activities in the first six months of fiscal 2007 compared
        to providing $746,595 in the first six months of the prior fiscal year, a
        decrease of $940,106.  We increased our borrowings under our line of
        credit by $313,444 in the first six months of fiscal 2007 (to $1.5 million)
        compared to an increase of $961,582 in the first six months of fiscal 2006
        (to
        $7.6 million).  The amount outstanding under our line of credit at the
        end of the second quarter of fiscal 2007 was lower than the amount at the
        end of
        the second quarter of fiscal 2006 primarily due to paying the line of credit
        down with funds received from a $2.5 million note payable that we entered
        into
        during the third quarter of 2006 and better operating results.
 
 On
        December 21, 2006, we amended and restated our existing line of credit (the
        “line”) with Wells Fargo Retail Finance II, LLC.  The amendment
        continues the line of credit with Wells Fargo at $12,500,000 (including the
        $500,000 term loan) and extends it for three additional years to January
        2,
        2010. In addition, the new agreement with Wells Fargo includes an option
        whereby we may increase our line of credit 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. Borrowings under
        the
        new line bear interest at Wells Fargo’s base rate or, at our option, at London
        Interbank Offered Rate (“LIBOR”) plus 1.75%. Beginning March 30, 2007, these
        rates can increase by no more than 0.25% if average availability under the
        line
        falls below $3,000,000. Borrowings under the line are based on inventory
        and
        accounts receivable levels. The line is secured by a lien on substantially
        all
        of our assets.
 
 -
            17 -
  The
        amended and restated agreement includes a financial covenant requiring us
        to
        maintain a minimum availability under the line of 5% of the credit
        limit.  At the current credit limit of $12,500,000, the minimum
        availability is $625,000.  The amended 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 June 30, 2007, we were in compliance with these financial
        covenants.  The line generally prohibits the payment of any dividends
        or other distributions to any of our classes of capital stock.
 
 On
        January
        17, 2006, we had amended our then-existing agreement with Wells Fargo to
        allow
        for a $500,000 term loan which increased our borrowing base, but did not
        increase the $12.5 million credit limit.  We borrowed the full
        $500,000 on that date. On October 30, 2006, we further amended our agreement
        to
        extend the maturity date of our outstanding term loan in the amount of $500,000
        from October 31, 2006 to January 2, 2007.  On December 21, 2006, in
        connection with the amendment described in the preceding paragraph, we extended
        the maturity date of this $500,000 term loan to October 31, 2007. We repaid
        the
        term loan on March 2, 2007.
 
 The
        amount
        outstanding under the line was $1,476,163 as of June 30, 2007 and $1,162,719
        as
        of December 30, 2006. The interest rate on these borrowings was 7.9% at June
        30,
        2007 and 8.6% at December 30, 2006. The outstanding balances under the 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
        inventory consists of party supplies which are valued at the lower of moving
        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 from 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
        $14,609,900 at June 30, 2007.
 
 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 $292,815 at June 30,
        2007.
 
 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 $12,500,000 at June 30, 2007.  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.  Therefore,
        our additional availability was $6,441,972 at June 30, 2007 and $5,657,200
        at
        December 30, 2006.
 
 On
        August
        7, 2006, we entered into and simultaneously closed an asset purchase agreement
        with Party City, an affiliate of Amscan Holdings, Inc., 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 bears 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
        warrant issued on September 15, 2006 to Highbridge International LLC
        (“Highbridge”), an institutional accredited investor. Under the terms of the
        financing, we issued Highbridge a three-year subordinated note (the “Highbridge
        Note”) that bears interest at an interest rate of prime plus one
        percent.  The 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 warrants using the Black-Scholes model (volatility
        of
        108%, interest of 4.73% and expected life of five years).  The note
        discount associated with the warrants is being amortized using the effective
        interest method over the life of the note payable.
 
 -
            18 -
  Our
        prospective cash flows are subject to certain trends, events and uncertainties,
        including our operating results for the Halloween season, which is our single
        most important season, as well as demands for working capital to improve
        our
        infrastructure, respond to economic conditions, take advantage of strategic
        opportunities, support growth, and meet our contractual
        commitments.
 
 Based
        on
        our current operating plan, we believe that anticipated revenues from operations
        and borrowings available under our line of credit will be sufficient to fund
        our
        operations and working capital requirements through at least the next twelve
        months.
 
 Contractual
        obligations at June 30, 2007 were as follows:
  **Payments
                    Due By Period****Within**
                
                
                **Within****Within**
                
                
                ******2
                    - 3**
                
                
                ******4
                    - 5**
                
                
                **After****1
                    Year**
                
                
                **Years**
                
                
                **Years**
                
                
                **5
                    Years**
                
                
                **Total**Line
                    of credit
                
                $
                1,476,163
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                1,476,163Capital
                    lease obligations
                
                
                30,473
                
                
                
                25,834
                
                
                
                -
                
                
                
                -
                
                
                
                56,307Notes
                    payable
                
                
                587,373
                
                
                
                3,331,135
                
                
                
                600,000
                
                
                
                -
                
                
                
                4,518,508Supply
                    agreement
                
                
                
                
                
                
                18,000,000
                
                
                
                18,000,000
                
                
                
                9,000,000
                
                
                
                45,000,000Operating
                    leases (including retail space leases)
                
                
                8,070,949
                
                
                
                14,276,114
                
                
                
                10,680,405
                
                
                
                9,723,395
                
                
                
                42,750,863Total
                    contractual obligations
                
                $
                10,164,958
                
                
                $
                35,633,083
                
                
                $
                29,280,405
                
                
                $
                18,723,395
                
                
                $
                93,801,841
 
 In
        addition, at June 30, 2007, we had outstanding purchase orders totaling
        approximately $9,198,611 for the acquisition of inventory and non-inventory
        items that are scheduled for delivery after June 30, 2007.
 
 **Seasonality**
 
 Due
        to the
        seasonality of our business, sales and operating income are typically higher
        in
        our second and fourth quarters.  Our business is highly dependent upon
        sales of Easter, graduation and summer merchandise in the second quarter
        and
        sales of Halloween and Christmas merchandise in the fourth
        quarter.  We have historically operated at a loss during the first and
        third quarters.
 
 **Geographic
        Concentration**
 
 As
        of June
        30, 2007, we operated a total of 50 stores, 45 of which are located in New
        England.  As a result, a severe or prolonged regional recession or
        regional changes in demographics, employment levels, population, weather
        patterns, real estate market conditions, consumer confidence and spending
        patterns or other factors specific to the New England region may adversely
        affect us more than a company that is more geographically diverse.
 
 **Effects
        of Inflation**
 
 While
        we
        do not view the effects of inflation as having a direct material effect upon
        our
        business, we believe that volatility in oil and gasoline prices impacts the
        cost
        of producing petroleum-based/plastic products, which are a key raw material
        in
        much of our merchandise, and also impacts prices to ship products made overseas
        in foreign countries, such as China, which includes much of our
        merchandise.  Volatile oil and gasoline prices also impact our freight
        costs, and consumer confidence and spending patterns.  These and other
        issues directly or indirectly affecting our vendors, our customers and us
        could
        adversely affect our business and financial performance.
  -
            19 -
  **Factors
        That May Affect Future Results**
 
 Our
        business is subject to certain risks that could materially affect our financial
        condition, results of operations, and the value of our common stock. These
        risks
        include, but are not limited to, the ones described under Item 1A, “Risk
        Factors” of our Annual Report on Form 10-K for the fiscal year ended December
        30, 2006 and Part II, Item 1A, “Risk Factors” of subsequent Quarterly Reports on
        Form 10-Q, including this one.  Additional risks and uncertainties
        that we are unaware of, or that we may currently deem immaterial, may become
        important factors that harm our business, financial condition, results of
        operations, or the value of our common stock.
 
 **Critical
        Accounting Policies and Estimates**
 
 Our
        financial statements are based on the application of significant accounting
        policies, many of which require management to make significant estimates
        and
        assumptions (see Note 1 to the Consolidated Financial Statements).  We
        believe the following accounting policies to be those most important to the
        portrayal of our financial condition and those that require the most subjective
        judgment. If actual results differ significantly from management’s estimates and
        projections, there could be a material effect on our financial
        statements.
 
 *Inventory
        and Related Allowance for Obsolete and Excess Inventory*
 
 Our
        inventory consists of party supplies and is valued at the lower of moving
        weighted-average cost or market.  We record vendor rebates, discounts
        and certain other adjustments to inventory, including freight costs, and
        we
        recognize these amounts in the income statement as the related goods are
        sold.
 
 During
        each interim reporting period, we estimate the impact on cost of products
        sold
        associated with inventory shortage.  The actual inventory shortage is
        determined upon reconciliation of the annual physical inventory, which occurs
        shortly before and after our year end, and an adjustment to cost of products
        sold is recorded at the end of the fourth quarter to recognize the difference
        between the estimated and actual inventory shortage for the full
        year.
 
 We
        also
        make adjustments to reduce the value of our inventory for an allowance for
        obsolete and excess inventory, which is based on our review of inventories
        on
        hand compared to estimated future sales.  We conduct reviews
        periodically throughout the year on each stock keeping unit
        (“SKU”).  As we identify obsolete and excess inventory, we take
        immediate measures to reduce our inventory risk on these items and we adjust
        our
        allowance accordingly. Thus, actual results could differ from our
        estimates.
 
 *Revenue
        Recognition*
 
 Revenues
        include the selling price of party goods sold, net of returns and discounts,
        and
        are recognized at the point of sale. We estimate returns based upon historical
        return rates and such amounts have not been significant.
 
 *Property
        and Equipment*
 
 Property
        and equipment are stated at cost less accumulated depreciation and are
        depreciated on the straight-line method over the estimated useful lives of
        the
        assets. Expenditures for maintenance and repairs are charged to operations
        as
        incurred.
  -
            20 -
  *Impairment
        of Long-Lived Assets*
 
 In
        accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of
        Long-Lived Assets*, we perform a review of each store for impairment
        indicators whenever events and changes in circumstances suggest that the
        carrying amounts may not be recoverable from estimated future store cash
        flows.  Our review considers store operating results, future sales
        growth and cash flows.  The conclusion regarding impairment may differ
        from current estimates if underlying assumptions or business strategies
        change.  During the fourth quarter of 2006, we decided to close our
        store in East Providence, Rhode Island effective November 4, 2006 due to
        underperforming sales.  As a result of this closing, we incurred a
        charge in the fourth quarter of 2006 of approximately $120,000 related to
        remaining lease payments and other closing costs.  The initial term of
        the lease is due to expire on August 31, 2007.  We are not aware of
        any impairment indicators in any of our remaining stores at June 30,
        2007.
 
 *Income
        Taxes*
 
 Historically,
        we have not recognized an income tax benefit for our
        losses.  Accordingly, we record a valuation allowance against our
        deferred tax assets because of the uncertainty of future taxable income and
        the
        realizability of the deferred tax assets.  In determining if a
        valuation allowance against our deferred tax asset is appropriate, we consider
        both positive and negative evidence.  The positive evidence that we
        considered included (1) we were profitable in 2006, 2004 and 2003 due to
        the
        success of our Halloween seasons, (2) we have achieved positive comparable
        store
        sales growth for the last three full years and (3) improved merchandise margins
        in 2006, 2004 and 2003.  The negative evidence that we considered
        included (1) after two years of profitability we realized a net loss in 2005,
        (2) our merchandise margins decreased in 2005, (3) our future profitability
        is
        vulnerable to certain risks, including (a) the risk that we may not be able
        to
        generate significant taxable income to fully utilize our net operating loss
        carryforwards of approximately $23.0 million, (b) the risk of unseasonable
        weather and other factors in a single geographic region, New England, where
        our
        stores are concentrated, (c) the risk of being so dependent upon a single
        season, Halloween, for a significant amount of annual sales and profitability
        and (d) the risk of rising prices for petroleum products, which are a key
        raw
        material for much of our merchandise and which affect our freight costs and
        those of our suppliers and affect our customers’ spending levels and patterns,
        (4) the risk that costs of opening new stores will put pressure on our profit
        margins until these stores reach maturity, (5) the risk that investment in
        infrastructure will increase our costs and (6) the expected costs of increased
        regulatory compliance, including, without limitation, those associated with
        Section 404 of the Sarbanes-Oxley Act, will likely have a negative impact
        on our
        profitability.
 
 The
        negative evidence is strong enough for us to conclude that the level of our
        future profitability is uncertain at this time. We believe that it is prudent
        for us to maintain a valuation allowance until we have a longer history of
        sustained profitability and we can reduce our exposure to the risks described
        above.  Should we determine that we will be able to realize our
        deferred tax assets in the future, an adjustment to reduce our deferred tax
        asset valuation allowance would increase income in the period we made such
        a
        determination.
 
 We
        adopted
        the provisions of Financial Accounting Standards Board (“FASB”) Interpretation
        No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB
        Statement No. 109” (“FIN 48”) on December 31, 2006. At the adoption date and as
        of June 30, 2007, we had no material unrecognized tax benefits and no
        adjustments to liabilities, retained earnings or operations were
        required.
 
 We
        recognize interest and penalties related to uncertain tax positions in income
        tax expense which were zero for the six months ended June 30, 2007.
 
 Tax
        years
        2003 through 2006 are subject to examination by the federal and state taxing
        authorities. There are no income tax examinations currently in
        process.
 
 -
            21 -
 
 *Stock
        Option Compensation Expense*
 
 On
        January
        1, 2006, we adopted Statement No. 123(R) using the modified prospective method
        in which compensation cost is recognized beginning with the effective date
        (a)
        based on the requirements of Statement No. 123(R) for all share-based payments
        granted after the effective date and (b) based on the requirements of Statement
        No. 123 for all awards granted to employees prior to the effective date of
        Statement No. 123(R) that remain unvested on the effective
        date.  Prior to January 1, 2006, we accounted for our stock option
        compensation agreements with employees under the provisions of Accounting
        Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to
        Employees* and the disclosure-only provisions of Statement No. 123,
*Accounting for Stock-Based Compensation*, as amended by SFAS No. 148,
*Accounting for Stock-Based Compensation – Transition and Disclosure, an
        amendment of Financial Accounting Standards Board (“FASB”) Statement No.
        123*.
 
 *Use
        of
        Estimates*
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires us to make estimates and
        assumptions that affect the reported amounts of assets and liabilities and
        disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period.  Our actual results could differ from our
        estimates.
 
 *Fair
        Value Measurements*
 
 On
        December 31, 2006, we adopted SFAS No. 157, *Fair Value Measurements*,
        which defines fair value, establishes a framework for measuring fair value
        in
        generally accepted accounting principles and expands disclosures about fair
        value measurements.  SFAS No. 157 does not require any new fair value
        measurements, but its provisions apply to all other accounting pronouncements
        that require or permit fair value measurement.  Adoption of SFAS No.
        157 does not have a material impact on our financial position or results
        of
        operations.
 
 **New
        Accounting Pronouncements**
 
 No
        new
        accounting pronouncements were issued during the quarter ended June 30, 2007
        that are expected to have a material impact on our financial position or
        results
        of operations.
 
 **Item
        3.  Quantitative and Qualitative Disclosures about
        Market Risk**
 
 There
        has
        been no material change in our market risk exposure since the filing of our
        Annual Report on Form 10-K.
 
 **Item
        4.  Controls and Procedures**
 
 (a)
        *Evaluation of Disclosure Controls and Procedures.*  The Chief
        Executive Officer and the Chief Financial Officer of iParty (its principal
        executive officer and principal financial officer, respectively) have concluded,
        based on their evaluation as of June 30, 2007, the end of the
        fiscal quarter to which this report relates, that iParty's disclosure
        controls and procedures: are effective to ensure that information required
        to be
        disclosed by iParty in the reports filed or submitted by it under the
        Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
        and reported within the time periods specified in the SEC’s rules and forms; and
        include controls and procedures designed to ensure that information required
        to
        be disclosed by iParty in such reports is accumulated and communicated
        to iParty's management, including the Chief Executive Officer and the Chief
        Financial Officer, to allow timely decisions regarding required
        disclosure.  iParty's disclosure controls and procedures are designed to
        provide a reasonable level of assurance of reaching iParty's
        disclosure requirements and are effective in reaching that level of
        reasonable assurance.
 
 (b)
        *Changes in Internal Controls.*No change in our internal
        controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
        under the Securities Exchange Act of 1934, as amended) occurred during the
        fiscal quarter ended June 30, 2007 that has materially affected, or is
        reasonably likely to materially affect, our internal controls over financial
        reporting.
  -
            22 -
  **PART
        II – OTHER INFORMATION**
 
 **Item
        1. Legal Proceedings**
 
 The
        Company is not a party to any legal proceedings expected to have a material
        effect on its financial position or results of operations.
 
 **Item
        1A.  Risk Factors**
 
 There
        have
        been no material changes to the risk factors previously disclosed in Item
        1A,
“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended
        December 30, 2006, as filed with the SEC on March 19, 2007, with the exception
        of those risk factors set out below:
 
 ***Our
        failure to attract, retain, and motivate qualified personnel would adversely
        affect our business.***
 
 Our
        success depends in large part on the efforts and abilities of our senior
        management team.  Their skills, experience and industry contacts
        significantly benefit our operations and administration.  The failure
        to attract, retain, and properly motivate the members of our senior management
        team and other key employees, or to find suitable replacements for them in
        the
        event of death, ill health, or their desire to pursue other professional
        opportunities, could have a negative effect on our operating
        results.  At the present time our President, Patrick Farrell, is
        transitioning his duties to other members of management in connection with
        his
        relocation to New York for personal family reasons. As previously disclosed,
        we
        envision that his regular employment with us will terminate on November 15,
        2007. Our business performance and operating results will depend on our ability
        to successfully plan and execute this transition process.
 
 Our
        performance is also largely dependent on attracting and retaining quality
        associates that are able to make the consumer shopping experience at our
        stores
        a fun and informative experience.  We face intense competition for
        qualified associates, and many of our associates are in entry-level or part-time
        positions with historically high rates of turnover.  Our ability to
        meet our labor needs generally while controlling our labor costs is subject
        to
        numerous external factors, including the availability of a sufficient number
        of
        qualified persons in the work force, unemployment levels, prevailing wage
        rates,
        changing demographics, health and other insurance costs and changes in
        employment legislation, particularly in the New England region.  If we
        are unable to attract and retain qualified associates or our labor costs
        increase significantly, our business and financial performance may be adversely
        affected.
 
 ***Risks
        associated with recent and possible future new store openings could adversely
        affect our business.***
 
 An
        important part of our long-range business plan is to increase our number
        of
        stores and, over time, enter new geographic markets.  We have opened
        15 new stores, acquired one store and closed one store over the past four
        years,
        bringing our total number of stores from 35 at the beginning of 2003 to 50
        at
        the end of 2006.  While we have no current plans for new store
        openings, our growth goals envision a return to opening or acquiring additional
        stores beginning in 2008. Also, from time to time, we have been and expect
        to
        continue to be presented with opportunities to acquire existing party supply
        stores.  We intend to continue to evaluate such opportunities on a
        case-by-case basis as they may arise to ascertain if they would be a good
        strategic fit for our business and would help us increase shareholder value.
        For
        our growth strategy to be successful, we must identify and lease favorable
        store
        sites, hire and train associates and store managers, and adapt management
        and
        operational systems to meet the needs of our expanded
        operations.  These tasks may be difficult to accomplish
        successfully.  If we are unable to open new stores in locations and on
        terms acceptable to us as quickly as planned, our future sales and profits
        may
        be adversely affected.  Even if we succeed in opening or acquiring new
        stores, these new stores may not achieve the same sales or profit levels
        as our
        existing stores.  Also, our expansion strategy includes opening new
        stores in markets where we already have a presence so we can take advantage
        of
        economies of scale in marketing, distribution and supervision
        costs.  However, these new stores may result in the loss of sales in
        existing stores in nearby areas, which could adversely affect our business
        and
        financial performance.  In addition, future store openings could cause
        us, among other things, to incur additional debt, increased interest expense,
        as
        well as experience dilution in earnings, if any, per
        share.  Impairment losses could also occur as a result of new store
        openings in the event that new store openings prove unsuccessful.
 
 -
            23 -
 
 ***Shares
        that are or may be offered for sale pursuant to a prospectus on Form S-3
        filed
        with the SEC and declared effective on April 4, 2007 or that  may
        be  eligible for sale in the future could negatively affect our stock
        price.***
 
 The
        market
        price of our common stock could decline as a result of sales of a large number
        of shares of our common stock or the perception that these sales could
        occur.  This may also make it more difficult for us to raise funds
        through the issuance of debt or the sale of equity securities.
 
 As
        of June
        30, 2007 there were 28,433,195 potential additional common share equivalents
        outstanding.  These included 15,576,913 shares issuable upon the
        conversion of immediately convertible preferred stock, 2,083,334 shares issuable
        upon the exercise of a warrant with an exercise price of $0.475, 528,210
        shares
        issuable upon the exercise of warrants with a weighted average exercise price
        of
        $3.79 and 10,244,738 shares issuable upon the exercise of stock options with
        a
        weighted average exercise price of $0.59.
 
 Our
        unregistered securities may be sold in the future pursuant to registration
        statements filed with the SEC or without registration under the Securities
        Act,
        to the extent permitted by Rule 144 or other exemptions under the Securities
        Act.  We may issue additional shares in the future in connection with
        acquisitions, compensation or otherwise.  We have not entered into any
        agreements or understanding regarding any future acquisitions not described
        herein and cannot ensure that we will be able to identify or complete any
        acquisition in the future.
 
 **Item
        2. Unregistered Sales of Equity and Securities and Use
        of Proceeds**
 
 Not
        applicable.
 
 **Item
        3. Defaults upon Senior
        Securities**
 
 Not
        applicable.
 
 **Item
        4. Submission of Matters to a Vote of Security
        Holders**
 
 On
        June 6,
        2007, iParty Corp. held its Annual Meeting of Stockholders.  There
        were a total of 37,647,438 votes entitled to be cast at the
        meeting.  Of this total, 31,719,916 or approximately 84.3% of the
        total number of votes eligible to be cast, were represented either in person
        or
        by proxy.  At the meeting, the stockholders elected seven (7)
        Directors to our Board of Directors.  The holder of Series C
        convertible preferred stock was entitled to vote alone for the election of
        a
        Series C Director.  Robert Jevon was the designee of the holder of the
        Series C convertible preferred stock.   The holder of Series D
        convertible preferred stock was entitled to vote alone for the election of
        a
        Series D Director.  Christina W. Vest was the designee of the holder
        of the Series D convertible preferred stock.  Set forth below are (i)
        the names of the persons elected to serve on iParty Corp.’s Board of Directors
        until the next Annual Meeting of Stockholders and until their successors
        are
        duly elected and qualified and (ii) the results of the voting for the
        nominees.
  **Votes
                    For**
                
                
                **Withheld****Directors:**
                
                **Number**
                
                
                **%
                    of Total**
                
                
                **Number**
                
                
                **%
                    of Total**Sal
                    Perisano
                
                
                30,978,066
                
                
                
                97.7
                %
                
                
                741,850
                
                
                
                2.3
                %Daniel
                    DeWolf
                
                
                31,524,466
                
                
                
                99.4
                %
                
                
                195,450
                
                
                
                0.6
                %Frank
                    Haydu
                
                
                31,528,466
                
                
                
                99.4
                %
                
                
                191,450
                
                
                
                0.6
                %Eric
                    Schindler
                
                
                31,524,466
                
                
                
                99.4
                %
                
                
                195,450
                
                
                
                0.6
                %Joseph
                    Vassalluzzo
                
                
                30,971,016
                
                
                
                97.6
                %
                
                
                748,900
                
                
                
                2.4
                %Robert
                    Jevon
                
                
                1,350,000
                
                
                
                100.0
                %
                
                
                -
                
                
                
                0.0
                %Christina
                    W. Vest
                
                
                3,500,000
                
                
                
                100.0
                %
                
                
                -
                
                
                
                0.0
                %
   The
        stockholders also ratified the appointment of Ernst & Young LLP as our
        independent public auditors for the current fiscal year ending December 29,
        2007.  Set forth below is the result of that vote.
  -
            24 -
   **Votes
                    For**
                
                **Against**
                
                **Abstain**Ratification
                    of Appointment of
                **Number**
                
                **%
                    of Total**
                
                **Number**
                
                **%
                    of Total**
                
                **Number**
                
                **%
                    of Total**Ernst
                    & Young LLP as ourindependent
                    public auditor
                31,611,681
                
                99.7%
                
                108,135
                
                0.3%
                
                100
                
                0.0%
  **Item
        5. Other Information**
 
 Not
        applicable.
 
 **Item
        6.  Exhibits**
 
 The
        exhibits listed in the Exhibit Index immediately preceding the exhibits are
        filed as part of this Quarterly Report on Form 10-Q and are incorporated
        herein
        by reference.
  -
            25 -
  **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned, thereunto
        duly authorized.
  iPARTY
                CORP.By:
              /s/
                  SAL PERISANOSal
                  PerisanoChairman
                  of the Board and Chief Executive Officer(Principal
                  Executive Officer)By:
              /s/
                  DAVID ROBERTSONDavid
                  RobertsonChief
                  Financial Officer(Principal
                  Financial and Accounting Officer)Dated:
                August 2, 2007
  -
            26 -
 **EXHIBIT
        INDEX**
 ****
 **EXHIBIT**
                **NUMBER**
              **DESCRIPTION** Ex.
                  31.1
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act
 Ex.
                  31.2
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act
 Ex.
                  32.1
              Certification
                  of Chief Executive Officer pursuant to 18 U.S.C. Section
                  1350
 Ex.
                  32.2
              Certification
                  of Chief Financial Officer pursuant to 18 U.S.C. Section
                  1350
  -
        27
        -