**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 March 31, 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 of
              (I.R.S.
                  EmployerIncorporation
                  or Organization)
              Identification
                  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 May
      5, 2007 there were 22,622,825 shares of common stock, $.001 par value,
      outstanding.







**iPARTY
      CORP.**


**QUARTERLY
      REPORT ON FORM 10-Q**


**TABLE
      OF CONTENTS**





PART
                  I - FINANCIAL INFORMATION
              PageItem
                  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
              11Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              19Item
                  4.
              Controls
                  and Procedures
              19PART
                  II - OTHER INFORMATIONItem
                  1.
              Legal
                  Proceedings
              20Item
                  1A.
              Risk
                  Factors
              20Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              20Item
                  3.
              Defaults
                  upon Senior Securities
              20Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              20Item
                  5.
              Other
                  Information
              20Item
                  6.
              Exhibits
              20SIGNATURES
              21EXHIBIT
                  INDEX
              22Ex.
                  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****Mar
                  31, 2007**
              
              **Dec
                  30, 2006****(Unaudited)****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              63,523
              
              $
              760,376Restricted
                  cash
              
              
              527,757
              
              
              706,066Accounts
                  receivable
              
              
              831,558
              
              
              1,116,042Inventory,
                  net
              
              
              13,209,006
              
              
              12,264,737Prepaid
                  expenses and other assets
              
              
              1,395,436
              
              
              752,172Total
                  current assets
              
              
              16,027,280
              
              
              15,599,393Property
                  and equipment, net
              
              
              4,629,662
              
              
              4,817,993Intangible
                  assets, net
              
              
              2,038,983
              
              
              2,153,482Other
                  assets
              
              
              126,862
              
              
              126,505Total
                  assets
              
              $
              22,822,787
              
              $
              22,697,373**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              6,646,980
              
              $
              5,516,406Accrued
                  expenses
              
              
              2,428,408
              
              
              3,070,003Current
                  portion of capital lease obligations
              
              
              262,052
              
              
              343,761Current
                  notes payable
              
              
              571,384
              
              
              551,515Borrowings
                  under line of credit
              
              
              2,458,525
              
              
              1,162,719Total
                  current liabilities
              
              
              12,367,349
              
              
              10,644,404Long-term
                  liabilities:Capital
                  lease obligations, net of current portion
              
              
              34,145
              
              
              42,456Notes
                  payable, net of discount $494,330
              
              
              3,589,616
              
              
              3,736,309Other
                  liabilities
              
              
              977,359
              
              
              929,199Total
                  long-term liabilities
              
              
              4,601,120
              
              
              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 Mar 31, 2007 and Dec 30, 2006,
                  respectively(aggregate
                  liquidation value of $9,408,024 at Mar 31, 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 Mar 31, 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 Mar 31, 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 Mar 31, 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 Mar 31, 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 Mar 31, 2007 and Dec 30, 2006,
                  respectively
              
              
              22,623
              
              
              22,604Additional
                  paid-in capital
              
              
              51,698,114
              
              
              51,671,084Accumulated
                  deficit
              
              
              (59,622,989
              )
              
              (58,120,133
              )Total
                  stockholders' equity
              
              
              5,854,318
              
              
              7,345,005Total
                  liabilities and stockholders' equity
              
              $
              22,822,787
              
              $
              22,697,373


2


**iPARTY
                    CORP.****CONSOLIDATED
                    STATEMENTS OF OPERATIONS****For
                    the three months ended****Mar
                    31, 2007**
                
                **Apr
                    1, 2006**Revenues
                
                $
                15,599,159
                
                $
                13,545,799Operating
                    costs:Cost
                    of products sold and occupancy costs
                
                
                9,406,774
                
                
                8,498,254Marketing
                    and sales
                
                
                5,586,074
                
                
                5,355,098General
                    and administrative
                
                
                1,882,857
                
                
                1,693,276Operating
                    loss
                
                
                (1,276,546
                )
                
                (2,000,829
                )Interest
                    income
                
                
                1,734
                
                
                256Interest
                    expense
                
                
                (228,044
                )
                
                (157,784
                )Loss
                    before income taxes
                
                
                (1,502,856
                )
                
                (2,158,357
                )Income
                    taxes
                
                
                -
                
                
                -Net
                    loss
                
                $
                (1,502,856
                )
                $
                (2,158,357
                )Loss
                    per share:Basic
                    and diluted
                
                $
                (0.07
                )
                $
                (0.10
                )Weighted-average
                    shares outstanding:Basic
                    and diluted
                
                
                22,614,544
                
                
                22,544,257




3


**iPARTY
                  CORP.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****For
                  the three months ended****Mar
                  31, 2007**
              
              **Apr
                  1, 2006****Operating
                  activities:**Net
                  loss
              
              $
              (1,502,856
              )
              $
              (2,158,357
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              414,875
              
              
              292,570Deferred
                  rent
              
              
              48,160
              
              
              59,535Non
                  cash stock based compensation expense
              
              
              10,892
              
              
              7,690Non
                  cash warrant expense
              
              
              51,138
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              284,484
              
              
              667,776Inventory
              
              
              (944,269
              )
              
              (237,797
              )Prepaid
                  expenses and other assets
              
              
              (524,621
              )
              
              (854,256
              )Accounts
                  payable
              
              
              1,130,574
              
              
              2,414,373Accrued
                  expenses and other liabilities
              
              
              (771,530
              )
              
              (483,206
              )Net
                  cash used in operating activities
              
              
              (1,803,153
              )
              
              (291,672
              )**Investing
                  activities:**Purchase
                  of property and equipment
              
              
              (112,046
              )
              
              (93,351
              )Net
                  cash used in investing activities
              
              
              (112,046
              )
              
              (93,351
              )**Financing
                  activities:**Net
                  borrowings under line of credit
              
              
              1,295,806
              
              
              894,935Principal
                  payments on notes payable
              
              
              (177,962
              )
              
              -Decrease
                  in restricted cash
              
              
              178,308
              
              
              274,221Principal
                  payments on capital lease obligations
              
              
              (90,020
              )
              
              (114,144
              )Deferred
                  financing costs
              
              
              10,937
              
              
              9,315Proceeds
                  from exercise of stock options
              
              
              1,277
              
              
              1,170Net
                  cash provided by financing activities
              
              
              1,218,346
              
              
              1,065,497**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              (696,853
              )
              
              680,474**Cash
                  and cash equivalents, beginning of period**
              
              
              760,376
              
              
              699,194**Cash
                  and cash equivalents, end of period**
              
              $
              63,523
              
              $
              1,379,668Supplemental
                  disclosure of non-cash financing activities:Conversion
                  of Series B convertible preferred stock to common stock
              
              $
              14,880
              
              $
              7,451


4


**iPARTY
      CORP.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**March
      31, 2007**


**(Unaudited)**





**1.  
      BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES** :





*Interim
      Financial Information*





The
      interim consolidated financial statements as of March
      31,
      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 38% 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 $1,194,928 at March 31, 2007 and $2,316,026 at December 30, 2006. The
      decrease in outstanding checks as of March 31, 2007 is due to the timing of
      store lease payments.





Restricted
      cash represents money deposited in blocked accounts 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 its 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:




**Three
                  months ended**
              
              **Twelve
                  months ended****Mar
                  31, 2007**
              
              **Dec
                  30, 2006**Beginning
                  balance
              
              $
              1,079,814
              
              $
              1,098,972Increases
                  to reserve
              
              
              115,000
              
              
              524,550Write-offs
                  against reserve
              
              
              (2,232
              )
              
              (543,708
              )Ending
                  balance
              
              $
              1,192,582
              
              $
              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 March 31, 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 three months ended March 31,
      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 warrant 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
      March 31, 2007, there were 27,095,341 potential additional common share
      equivalents outstanding, which were not included in the calculation of diluted
      net loss per share 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 8,906,884 shares
      upon the exercise of stock options with a weighted average exercise price of
      $0.62 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
      Company recognized stock based compensation expense of $10,892 and $7,690 in
      the
      three months ended March 31, 2007 and April 1, 2006, respectively. 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 three months ended March 31,
      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.





There
      were
      no options granted in the first quarter of fiscal 2007 or 2006.




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


**Weighted****Number**
              
              **Weighted**
              
              
              
              **Average****of**
              
              **Average**
              
              
              
              **Remaining**
              
              **Aggregate****Stock**
              
              **Exercise**
              
              **Price**
              
              **Life**
              
              **Intrinsic****Options**
              
              **Price**
              
              **Range**
              
              **(Years)**
              
              **Value**Outstanding
                  - December 30, 2006
              
              
              8,922,440
              
              $
              0.62
              
              $
              0.13
                    -4.25Granted
              
              
              -
              
              
              -
              
              
              -    --Expired/Forfeited
              
              
              (10,004
              )
              
              0.38
              
              
              0.20
                  -0.50Exercised
              
              
              (5,552
              )
              
              0.23
              
              
              0.23-0.23Outstanding
                  - March 31, 2007
              
              
              8,906,884
              
              $
              0.62
              
              $
              0.13
                    -
                    4.25
              
              
              4.8
              
              $
              911,896Exercisable
                  - March 31, 2007
              
              
              8,824,485
              
              $
              0.62
              
              $
              0.13
                    -4.25
              
              
              4.7
              
              $
              908,937Available
                  for grant - March 31, 2007
              
              
              1,668,705




The
      total
      fair value of shares vested during the three months ended March 31, 2007 was
      $ 3,094 . The
      remaining unrecognized stock based compensation expense related to unvested
      awards at March 31, 2007, was $25,936 and the period of time over which this
      expense will be recognized is 2.5 years.




8




*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 March 31, 2007 and December 30, 2006 were:


**Mar
                  31, 2007**
              
              **Dec
                  30, 2006**Non-compete
                  agreement
              
              $
              1,725,069
              
              
              1,725,069Occupancy
                  valuation
              
              
              460,000
              
              
              460,000Other
              
              
              154,949
              
              
              154,949Intangible
                  assets
              
              
              2,340,018
              
              
              2,340,018Less:
                  accumulated amortization
              
              
              (301,035
              )
              
              (186,536
              )Intangible
                  assets, net
              
              $
              2,038,983
              
              $
              2,153,482





Amortization
      expense for these intangible assets was $114,498 and $0 for the three months
      ended March 31, 2007 and April 1, 2006 respectively. 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 occupancy valuation amortization expense is included in cost of goods sold
      and occupancy costs.





Future
      amortization expense related to these intangible assets as of March 31,
      2007:




**Year**
              
              **Amount**2007
              
              $
              343,4902008
              
              
              457,9972009
              
              
              440,7802010
              
              
              406,3472011
              
              
              262,592Thereafter
              
              
              127,777Total
              
              $
              2,038,983


9




*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 March 31, 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 is 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
      quarter ended March 31, 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.






10


**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.








The
      following table shows the number of stores in operation:




**For
                  the three months ended****Mar
                  31, 2007**
              
              **Apr
                  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.





11


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
      2007,
      our plan is to continue 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. At this time, we
      have
      no plans to open or acquire any new stores in 2007, unless we become aware
      of or
      are presented with strategic opportunities.





**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
      first
      quarter of fiscal year 2007 had 13 weeks and ended on March 31, 2007. The first
      quarter of fiscal year 2006 had 13 weeks and ended on April 1,
      2006.





**Three
      Months Ended** **March
      31, 2007 Compared to Three Months Ended April 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
      quarter of fiscal 2007 were $15,599,159, an increase of $2,053,360, or 15.2%
      from the first quarter of the prior fiscal year.


**For
                  the three months ended****Mar
                  31, 2007**
              
              **Apr
                  1, 2006**Revenues
              
              $
              15,599,159
              
              $
              13,545,799Increase
                  in revenues
              
              
              15.2
              %
              
              2.9
              %





Sales
      for
      the first 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
      11.3%. Sales for the first quarter of fiscal 2007 included sales of
      approximately $494,000 from December 31, 2006, traditionally a strong sales
      day,
      which was not included in the first quarter of 2006, which began on January
      1.
      In addition, the increase in sales in the first quarter of fiscal 2007 was
      attributable to the focus on improving efficiencies and operations.





*Cost
      of goods sold and occupancy costs*





Cost
      of
      goods sold and occupancy costs consist of the cost of merchandise sold to
      customers and the occupancy costs for our stores. Our cost of goods sold and
      occupancy costs for the first quarter of fiscal 2007 were $9,406,774, or 60.3%
      of revenues, an increase of $908,520 and a decrease of 2.4 percentage points,
      as
      a percentage of revenues, from the first quarter of the prior fiscal year.


**For
                  the three months ended****Mar
                  31, 2007**
              
              **Apr
                  1, 2006**Cost
                  of goods sold and occupancy costs
              
              $
              9,406,774
              
              $
              8,498,254Percentage
                  of revenues
              
              
              60.3
              %
              
              62.7
              %




As
      a
      percentage of revenues, the decrease in cost of goods sold and occupancy costs
      was primarily attributable to improved leveraging of occupancy costs resulting
      from the increased sales in our comparable stores.




12





*Marketing
      and sales expense*





Marketing
      and sales expense consists primarily of advertising and promotional
      expenditures, all store payroll and related expenses for personnel engaged
      in
      marketing and selling activities and other non-payroll expenses associated
      with
      operating our stores. Our consolidated marketing and sales expense for the
      first
      quarter of fiscal 2007 was $5,586,074, or 35.8% of revenues, an increase of
      $230,976 and a decrease of 3.7 percentage points, as a percentage of revenues,
      from the first quarter of the prior fiscal year.


**For
                  the three months ended****Mar
                  31, 2007**
              
              **Apr
                  1, 2006**Marketing
                  and sales
              
              $
              5,586,074
              
              $
              5,355,098Percentage
                  of revenues
              
              
              35.8
              %
              
              39.5
              %





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 quarter of fiscal 2006 was
      $1,882,857, or 12.1% of revenues, an increase of $189,581 and a decrease of
      0.4
      percentage points, as a percentage of revenues, from the first quarter of the
      prior fiscal year.


**For
                  the three months ended****Mar
                  31, 2007**
              
              **Apr
                  1, 2006**General
                  and administrative
              
              $
              1,882,857
              
              $
              1,693,276Percentage
                  of revenues
              
              
              12.1
              %
              
              12.5
              %





As
      a
      percentage of revenues, the decrease in G&A expense is largely attributable
      to improved leveraging of payroll and other general corporate expenses resulting
      from increased sales from both comparable stores and the sales from our store
      opened in August 2006.





*Operating
      loss*





Our
      operating loss for the first quarter of fiscal 2007 was $1,276,546, or 8.2%
      of
      revenues, compared to an operating loss of $2,000,829, or 14.8% of revenues
      for
      the first quarter of the prior fiscal year.





*Interest
      expense*





Our
      interest expense in the first quarter of fiscal 2007 was $228,044, an increase
      of $70,260 from the first quarter of the prior fiscal year. The increase in
      the
      first 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 first quarter of fiscal 2007 or fiscal
      2006 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.





13


*Net
      Loss*





Our
      net
      loss in the first quarter of fiscal 2007 was $1,502,856, or $0.07 per basic
      and
      diluted share, compared to a net loss of $2,158,357, or $0.10 per basic and
      diluted share, in the first quarter of the prior fiscal year.





**Liquidity
      and Capital Resources**





Our
      operating activities used $1,803,153 in the first three months of fiscal 2007
      compared to a use of $291,672 in the first three months of the prior fiscal
      year, an increase of $1,511,481. The increase in cash used in operating
      activities was primarily due to higher purchases of inventory and a decrease
      in
      accounts payable due to extended dating from vendors in the first quarter of
      2006.





We
      used
      $112,046 in investing activities in the first three months of fiscal 2007
      compared to $93,351 in the first three months of the prior fiscal year. The
      cash
      invested in the first three 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 three months of fiscal 2006 was primarily for fixed assets
      associated with existing store improvements and computer replacements.





We
      provided $1,218,346 by financing activities in the first three months of fiscal
      2007 compared to $1,065,497 in the first three months of the prior fiscal year,
      an increase of $152,849. We increased our borrowings under our line of credit
      by
      $1,295,806 in the first three months of fiscal 2007 (to $2.5 million) compared
      to an increase of $894,935 in the first three months of fiscal 2006 (to $7.5
      million). The amount outstanding under our line of credit at the end of the
      first quarter of fiscal 2007 was lower than the amount at the end of the first
      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.





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. Inventory and accounts receivable secure our line.





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 March 31, 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 $2,458,525 as of March 31, 2007 and $7,530,809
      as
      of April 1, 2006. The interest rate on these borrowings was 8.25% at March
      31,
      2007 and 8.50% at April 1, 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.





14


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 $14,512,352 at March 31, 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 $260,299 at March 31, 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 March 31, 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
      $4,867,362 at March 31, 2007 and $410,858 at April 1, 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.





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. We expect
      our capital expenditures for the balance of 2007 to be primarily related to general
      store improvements and continued enhancements of our point of sale
      system . Our
      current operating plan includes opening or acquiring no additional new stores
      in
      fiscal year 2007, unless
      we
      become aware of or are presented with strategic opportunities.




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 .





15


Contractual
      obligations at March 31, 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
              
              $
              2,458,525
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              2,458,525Capital
                  lease obligations
              
              
              262,052
              
              
              34,145
              
              
              -
              
              
              -
              
              
              296,197Notes
                  payable
              
              
              571,384
              
              
              3,483,946
              
              
              600,000
              
              
              -
              
              
              4,655,330Supply
                  agreement
              
              
              
              
              
              18,000,000
              
              
              18,000,000
              
              
              9,000,000
              
              
              45,000,000Operating
                  leases (including retail space leases)
              
              
              8,332,764
              
              
              14,509,755
              
              
              11,279,217
              
              
              10,687,055
              
              
              44,808,791Total
                  contractual obligations
              
              $
              11,624,725
              
              $
              36,027,846
              
              $
              29,879,217
              
              $
              19,687,055
              
              $
              97,218,843




In
      addition, at March 31, 2007, we had outstanding purchase orders totaling
      approximately $4,041,097 for the acquisition of inventory and non-inventory
      items that are scheduled for delivery after March 31, 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
      March 31, 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 impact the
      cost
      of producing petroleum-based/plastic products, which are a key raw material
      in
      much of our merchandise, and also impact 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.





**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.





16


*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.





*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 March
      31, 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 costs that opening new stores will put pressure on our profit
      margins until these stores reach maturity, (5) the 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.





17


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 our deferred tax assets 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 March 31, 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 three months ended March 31,
      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.





*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.




18




**New
      Accounting Pronouncements**





No
      new
      accounting pronouncements were issued during the quarter ended March 31, 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 March 31, 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 March 31, 2007 that has materially affected,
      or
      is reasonably likely to materially affect, our internal controls over financial
      reporting.




19






**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.





**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**





Not
      applicable.





**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.




20





**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:
      May
      10, 2007




21


**EXHIBIT
      INDEX**





**EXHIBIT****NUMBER**
            **DESCRIPTION**Ex.
              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






22