**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 July 1, 2006****OR****o**
              **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
                Incorporation
                  or Organization)
              (I.R.S.
                  Employer
                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
      August 11, 2006 there were 22,547,487 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
              20Item
                  4.
              Controls
                  and Procedures
              20PART
                  II - OTHER INFORMATIONItem
                  1.
              Legal
                  Proceedings
              Not
                  applicableItem
                  1A.
              Risk
                  Factors
              21Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              Not
                  applicableItem
                  3.
              Defaults
                  upon Senior Securities
              Not
                  applicableItem
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              22Item
                  5.
              Other
                  Information
              Not
                  applicableItem
                  6.
              Exhibits
              22SIGNATURES
              
              23EXHIBIT
                  INDEX
              
              24Ex.
                  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****Jul
                  1, 2006**
              
              
              **Dec
                  31, 2005****(Unaudited)****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              1,835,340
              
              $
              699,194Restricted
                  cash
              
              
              549,594
              
              
              651,617Accounts
                  receivable
              
              
              665,093
              
              
              1,246,545Inventory,
                  net
              
              
              13,750,307
              
              
              13,251,307Prepaid
                  expenses and other assets
              
              
              1,209,292
              
              
              548,114Total
                  current assets
              
              
              18,009,626
              
              
              16,396,777Property
                  and equipment, net
              
              
              4,789,217
              
              
              5,187,099Other
                  assets
              
              
              194,142
              
              
              133,200Total
                  assets
              
              $
              22,992,985
              
              $
              21,717,076**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              7,524,288
              
              $
              4,695,094Accrued
                  expenses
              
              
              2,157,940
              
              
              2,532,238Current
                  portion of capital lease obligations
              
              
              475,895
              
              
              442,358Borrowings
                  under line of credit
              
              
              7,597,456
              
              
              6,635,874Total
                  current liabilities
              
              
              17,755,579
              
              
              14,305,564Long-term
                  liabilities:Capital
                  lease obligations, net of current portion
              
              
              162,631
              
              
              426,995Other
                  liabilities
              
              
              779,939
              
              
              669,003Total
                  long-term liabilities
              
              
              942,570
              
              
              1,095,998Commitments
                  and contingenciesStockholders'
                  equity:Convertible
                  preferred stock - $.001 par value; 10,000,000 shares
                  authorized,
                Series
                    B convertible preferred stock - 1,150,000 shares authorized;
                    473,901 and
                    474,402
                  shares
                      issued and outstanding at July 1, 2006 and Dec 31, 2005,
                      respectively
                    (aggregate
                        liquidation value of $9,478,024 at July 1,
                        2006)
              
              
              7,051,650
              
              
              7,059,101Series
                  C convertible preferred stock - 100,000 shares authorized, issued
                  and
                  outstanding
                (aggregate
                    liquidation value of $2,000,000 at July 1, 2006)
              
              
              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 July 1, 2006)
              
              
              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 July 1, 2006)
              
              
              1,112,500
              
              
              1,112,500Series
                  F convertible preferred stock - 114,286 shares authorized, issued
                  and
                  outstanding
                (aggregate
                    liquidation value of $500,000 at July 1, 2006)
              
              
              500,000
              
              
              500,000Total
                  convertible preferred stock
              
              
              13,808,650
              
              
              13,816,101Common
                    stock - $.001 par value; 150,000,000 shares authorized; 22,547,487
                    and
                    22,536,637shares
                  issued and outstanding at July 1, 2006 and Dec 31, 2005,
                  respectivley
              
              
              22,547
              
              
              22,537Additional
                  paid-in capital
              
              
              50,994,844
              
              
              50,971,656Accumulated
                  deficit
              
              
              (60,531,205
              )
              
              (58,494,780
              )Total
                  stockholders' equity
              
              
              4,294,836
              
              
              6,315,514Total
                  liabilities and stockholders' equity
              
              $
              22,992,985
              
              $
              21,717,076




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




-2-




**iPARTY
        CORP.** **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **(Unaudited)**




**For
                  the three months ended**
              
              **For
                  the six months ended****Jul
                  1, 2006**
              
              
              **Jun
                  25, 2005**
              
              
              **Jul
                  1, 2006**
              
              
              **Jun
                  25, 2005**Revenues
              
              $
              18,587,169
              
              $
              16,517,522
              
              $
              32,132,968
              
              $
              29,677,285Operating
                  costs:Cost
                  of products sold and occupancy costs
              
              
              10,897,816
              
              
              9,544,608
              
              
              19,396,070
              
              
              17,710,177Marketing
                  and sales
              
              
              5,993,016
              
              
              5,276,430
              
              
              11,348,114
              
              
              10,112,277General
                  and administrative
              
              
              1,404,412
              
              
              1,534,192
              
              
              3,097,688
              
              
              3,335,142Operating
                  income (loss)
              
              
              291,925
              
              
              162,292
              
              
              (1,708,904
              )
              
              (1,480,311
              )Interest
                  income
              
              
              336
              
              
              109
              
              
              592
              
              
              281Interest
                  expense
              
              
              (170,329
              )
              
              (129,513
              )
              
              (328,113
              )
              
              (231,861
              )Income
                  (loss) before income taxes
              
              
              121,932
              
              
              32,888
              
              
              (2,036,425
              )
              
              (1,711,891
              )Income
                  taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              $
              121,932
              
              $
              32,888
              
              $
              (2,036,425
              )
              $
              (1,711,891
              )Income
                  (loss) per share:Basic
              
              $
              0.00
              
              $
              0.00
              
              $
              (0.09
              )
              $
              (0.08
              )Diluted
              
              $
              0.00
              
              $
              0.00
              
              $
              (0.09
              )
              $
              (0.08
              )Weighted-average
                  shares outstanding:Basic
              
              
              37,728,932
              
              
              37,706,143
              
              
              22,545,872
              
              
              22,111,403Diluted
              
              
              39,283,126
              
              
              39,937,184
              
              
              22,545,872
              
              
              22,111,403






The
        accompanying notes are an integral part of these Consolidated Financial
        Statements.
  -3-




**iPARTY
        CORP.**


**CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(Unaudited)**


**For
                  the six months ended****Jul
                  1, 2006**
              
              
              **Jun
                  25, 2005****Operating
                  activities:**Net
                  loss
              
              $
              (2,036,425
              )
              $
              (1,711,891
              )Adjustments
                  to reconcile net loss to net cash provided by (used in) operating
                  activities:Depreciation
                  and amortization
              
              
              577,879
              
              
              492,220Deferred
                  rent
              
              
              110,936
              
              
              54,120Non-cash
                  stock based compensation
              
              
              14,577
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              581,452
              
              
              26,141Inventory
              
              
              (499,000
              )
              
              (426,463
              )Prepaid
                  expenses and other assets
              
              
              (634,767
              )
              
              19,484Accounts
                  payable
              
              
              2,829,194
              
              
              726,281Accrued
                  expenses and other liabilities
              
              
              (374,298
              )
              
              (487,200
              )Net
                  cash provided by (used in) operating activities
              
              
              569,548
              
              
              (1,307,308
              )**Investing
                  activities:**Purchase
                  of property and equipment
              
              
              (179,997
              )
              
              (524,328
              )Net
                  cash used in investing activities
              
              
              (179,997
              )
              
              (524,328
              )**Financing
                  activities:**Net
                  borrowings under line of credit
              
              
              961,582
              
              
              1,947,741Increase
                  in restricted cash
              
              
              102,023
              
              
              89,835Principal
                  payments on capital lease obligations
              
              
              (230,827
              )
              
              (205,135
              )Deferred
                  financing costs
              
              
              (87,353
              )
              
              7,550Proceeds
                  from exercise of stock options
              
              
              1,170
              
              
              -Net
                  cash provided by financing activities
              
              
              746,595
              
              
              1,839,991**Net
                  increase in cash and cash equivalents**
              
              
              1,136,146
              
              
              8,355**Cash
                  and cash equivalents, beginning of period**
              
              
              699,194
              
              
              1,757,157**Cash
                  and cash equivalents, end of period**
              
              $
              1,835,340
              
              $
              1,765,512Supplemental
                  disclosure of non-cash financing activities:Conversion
                  of Series B convertible preferred stock to common stock
              
              $
              7,451
              
              $
              26,040Acquisition
                  of assets under capital lease
              
              $
              -
              
              $
              132,968




The
          accompanying notes are an integral part of these Consolidated Financial
          Statements.
  -4-




**iPARTY
      CORP.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**July
      1, 2006**


**(Unaudited)**





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





*Interim
      Financial Information*





The
      interim consolidated financial statements as of July
      1,
      2006 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 31, 2005 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 31, 2005.





*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 30% 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 recently entered into a supply agreement with its largest supplier
      which will require the Company to increase its purchases with that vendor by
      2008, please refer to subsequent event discussion below.





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.





*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.






-5-





*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 money market accounts and are carried at cost plus accrued
      interest, which approximates fair value.





The
      Company uses controlled disbursement banking arrangements as part of its cash
      management program. Outstanding checks, which were included in accounts payable,
      totaled $2,074,135 at July 1, 2006 and $627,269 at December 31, 2005. The
      Company had sufficient funds available to fund the outstanding checks when
      they
      were presented for payment.





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.





*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
      Company also makes adjustments to reduce the value of its inventory for an
      allowance for obsolete and excess inventory, which is based on its review of
      inventories on hand compared to estimated future sales. The activity in the
      allowance for obsolete and excess inventory is as follows:




**Six
                  months ended**
              
              
              **Twelve
                  months ended****July
                  1, 2006**
              
              
              **Dec
                  31, 2005**Beginning
                  balance
              
              $
              1,098,973
              
              $
              1,296,855Increases
                  to reserve
              
              
              240,000
              
              
              300,000Write-offs
                  against reserve
              
              
              (1,055
              )
              
              (497,881
              )Ending
                  balance
              
              $
              1,337,918
              
              $
              1,098,974





*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 the 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 the periods with net losses, the Company excludes those common
      share
      equivalents since their impact would be anti-dilutive.




-6-





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


**For
                  the three months ended**
              
              **For
                  the six months ended****Jul
                  1, 2006**
              
              June
                  25, 2005
              
              **Jul
                  1, 2006**
              
              **June
                  25, 2005**Net
                    income (loss) available to common  stockholders
              
              $
              121,932
              
              $
              32,888
              
              $
              (2,036,425
              )
              $
              (1,711,891
              )Income
                  (loss) per share available to common
                  stockholders:Basic
                    and diluted net income (loss) per share  available
                  to common stockholders
              
              $
              0.00
              
              $
              0.00
              
              $
              (0.09
              )
              $
              (0.08
              )Weighted-average
                  shares outstanding:Common
                  shares
              
              
              22,547,487
              
              
              22,115,239
              
              
              22,545,872
              
              
              22,111,403Common
                    share equivalents of Series B-F  convertible
                  preferred stock
              
              
              15,181,445
              
              
              15,590,904
              
              
              -
              
              
              -Basic
                  weighted-average shares outstanding
              
              
              37,728,932
              
              
              37,706,143
              
              
              22,545,872
              
              
              22,111,403Common
                    share equivalents of "in the money"stock
                  options
              
              
              1,554,194
              
              
              2,231,041
              
              
              -
              
              
              -Common
                  share equivalents of "in the money" warrants
              
              
              -
              
              
              -
              
              
              -
              
              
              -Diluted
                  weighted-average shares outstanding
              
              
              39,283,126
              
              
              39,937,184
              
              
              22,545,872
              
              
              22,111,403





As
      of July
      1, 2006, there were 26,079,453 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 15,181,445
      shares upon the conversion of immediately convertible preferred stock, 528,210
      shares upon the exercise of warrants with a weighted average exercise price
      of
      $3.79 and 10,369,798 shares
      upon the exercise of stock options with a weighted average exercise price of
      $0.95.





*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 this fiscal year 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 iParty 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 will 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 and
      is
      reflected in the pro forma footnote disclosure for the year ended December
      31,
      2005.




-7-





Under
      Statement No. 123(R), the Company will continue to use 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 this fiscal year 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 employee’s vesting
      period.





The
      Company recognized stock based compensation expense of $6,887 and $0 in the
      three months ended July 1, 2006 and June 25, 2005, respectively. The Company
      recognized stock based compensation expense of $14,577 and $0 for the six months
      ended July 1, 2006 and June 25, 2005, respectively. Stock based compensation
      expense is included in general and administrative expense. The adoption of
      Statement 123R had no impact on cash flow from operations and cash flow from
      financing activities for the six months ended July 1, 2006.





In
      accordance with FAS 123R, the results for the six months ended June 25, 2005
      have not been restated. If the stock based compensation expenses for the
      Company’s stock option plan had been determined based upon the fair value at the
      grant date for awards made prior to fiscal 2006 under the plan consistent with
      the methodology prescribed under Statement No. 123, the Company’s net income
      (loss) and net loss per share would have been reduced by $94,938 for the three
      months ended June 25, 2005 and $209,651 for the six months ended June 25, 2005.
      Basic and diluted earnings per share would have remained the same for the three
      months ended June 25, 2005 but would have been reduced by $0.01 for the six
      months ended June 25, 2005.





**Three
                  months ended**
              
              
              **Six
                  months ended****Jun
                  25, 2005**
              
              
              **Jun
                  25, 2005**Net
                  income (loss):Reported
              
              $
              32,888
              
              $
              (1,711,891
              )Deduct:
                  Total stock based compensation expense
                determined
                  under fair value based method for all awards
              
              
              (94,938
              )
              
              (209,651
              )Pro
                  forma
              
              $
              (62,050
              )
              $
              (1,921,542
              )Net
                  loss per share:ReportedBasic
                  and diluted:
              
              $
              0.00
              
              $
              (0.08
              )Pro
                  formaBasic
                  and diluted:
              
              $
              0.00
              
              $
              (0.09
              )





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. Qualified incentive options to purchase the Company's
      common stock under the 1998 Plan have been granted to employees, directors
      and
      consultants of the Company at fair market value at the date of grant. Generally,
      the options become exercisable over periods of up to four years, and expire
      ten
      years from the date of grant.





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 $0.30
      per share for the three and six months ended July 1, 2006, and $0.42 and $0.44
      per share for the three months and six months ended June 25, 2005, respectively.
      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:




-8-




**For
                  the three months ended**
              
              **For
                  the six months ended****Jul
                  1, 2006**
              
              
              **Jun
                  25, 2005**
              
              
              **Jul
                  1, 2006**
              
              
              **Jun
                  25, 2005**Risk-free
                  interest rate
              
              
              5.18
              %
              
              3.69
              %
              
              5.18
              %
              
              3.72
              %Expected
                  volatility
              
              
              115.6
              %
              
              111.0
              %
              
              115.6
              %
              
              111.8
              %Weighted
                  average expected life (in years)
              
              
              5.0
              
              
              5.0
              
              
              5.0
              
              
              5.0Expected
                  dividends
              
              
              0.00
              %
              
              0.00
              %
              
              0.00
              %
              
              0.00
              %




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 31, 2005
              
              
              10,340,841
              
              $
              0.95
              
              $
              0.13-5.38Granted
              
              
              100,000
              
              
              0.36
              
              
              0.36-0.36Expired/Forfeited
              
              
              (70,628
              )
              
              0.57
              
              
              0.20-1.33Exercised
              
              
              (4,415
              )
              
              0.25
              
              
              0.20-0.33Outstanding
                  - July 1, 2006
              
              
              10,365,798
              
              
              0.95
              
              
              0.13-5.38
              
              
              5.2
              
              $
              431,695Exercisable
                  - July 1, 2006
              
              
              10,147,214
              
              $
              0.96
              
              $
              0.13-5.38
              
              
              5.1
              
              $
              429,802Available
                  for grant - July 1, 2006
              
              
              238,243




The
      following table summarizes information for options outstanding and exercisable
      at July 1, 2006:




**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
              
              
              166,200
              
              
              4.5
              
              $
              0.18
              
              
              160,933
              
              $
              0.180.21-0.30
              
              
              3,811,563
              
              
              4.7
              
              
              0.25
              
              
              3,800,084
              
              
              0.250.31-0.50
              
              
              1,191,846
              
              
              6.1
              
              
              0.36
              
              
              1,026,080
              
              
              0.350.51-1.00
              
              
              3,227,559
              
              
              6.7
              
              
              0.77
              
              
              3,191,487
              
              
              0.771.01-3.50
              
              
              978,630
              
              
              3.1
              
              
              2.18
              
              
              978,630
              
              
              2.183.51-5.38
              
              
              990,000
              
              
              2.9
              
              
              3.82
              
              
              990,000
              
              
              3.82Total
              
              
              10,365,798
              
              
              5.2
              
              $
              0.95
              
              
              10,147,214
              
              $
              0.96





The
      total
      fair value of shares vested during the three months ended July 1, 2006 was
      $579. The
      remaining unrecognized stock based compensation expense related to unvested
      awards at July 1, 2006, was $66,334 and the period of time over which this
      expense will be recognized is 3.25 years.





*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:






-9-




**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





*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.





**Subsequent
      Events**





On
      August
      7, 2006, the Company entered into a Supply Agreement with Amscan Inc.
      (“Amscan”), the largest supplier in the party goods industry. The Company
      purchased 17.4% of its merchandise from Amscan in each of fiscal 2004 and fiscal
      2005, making Amscan its largest supplier.





The
      Supply
      Agreement gives the Company the right to receive certain additional rebates
      and
      more favorable pricing terms over the term of the Agreement than generally
      available to it under its current terms with Amscan. The right to receive
      additional rebates, and the amount of such rebates, are subject to the Company’s
      achievement of increased levels of purchases and other factors provided for
      in
      the Supply Agreement.





In
      exchange, the Supply Agreement obligates the Company to purchase increased
      levels of merchandise from Amscan until 2012. The Supply Agreement provides
      for
      a ramp-up period during 2006 and 2007 and, beginning with calendar year 2008,
      requires the Company to purchase on an annual basis merchandise equal to the
      total number of iParty stores open during such calendar year, multiplied by
      $180,000. The Supply Agreement provides for penalties in the event the Company
      fails to attain its annual purchase commitment.





The
      Supply
      Agreement also provides for Amscan to extend, until October 31, 2006,
      approximately $1,150,000 of certain currently due Amscan payables owed by the
      Company to Amscan (the “extended payables”) and gives the Company the right, at
      its option, to convert the extended payables into a promissory note (the “Amscan
      Note”), which will bear interest at the rate of 11.0% per annum. The Amscan Note
      would be payable in thirty-six (36) equal monthly installments of principal
      and
      interest commencing on November 1, 2006, and on the first day of each month
      thereafter until October 1, 2009. The form of note provides that it shall be
      subordinated to certain senior indebtedness of the Company. The Company
      currently intends to exercise its option to convert the extended payables into
      a
      note in October 2006.





On
      August
      7, 2006, the Company also entered into and simultaneously closed an Asset
      Purchase Agreement with Party City Corporation (“Party City”), an affiliate of
      Amscan, that provides for, among other things, the acquisition of a Party City
      retail party goods store in Peabody, Massachusetts, for aggregate consideration
      of $2,450,000, payable by a note in the principal amount of $600,000, which
      will
      bear interest at the rate of 12.25% per annum (the “Party City Note”) and
      $1,850,000 in cash. The Party City Note shall be subordinated to certain senior
      indebtedness of the Company and will be payable by quarterly interest-only
      payments over four years, with the full principal amount due at the note’s
      maturity on August 7, 2010. The Asset Purchase Agreement also provides that
      Party City and its affiliates will not compete with the Company in
      Massachusetts, Rhode Island, Maine, New Hampshire, Vermont, and Windham and
      New
      London counties in Connecticut for a period of five years, subject to certain
      terms and conditions outlined in the Asset Purchase Agreement.





On
      August
      7, 2006, the Company and Wells Fargo Retail Finance II, LLC, as lender (the
      “Bank”), entered into a Consent and Fifth Amendment (the “Fifth Amendment”) to
      that certain Loan and Security Agreement by and among the parties dated August
      23, 2000, as previously amended as of May 23, 2002, January 2, 2004, April
      27,
      2005 and January 17, 2006 (the “Loan Agreement”).




-10-




The
      Fifth
      Amendment amends the Loan Agreement to permit the Company to enter into the
      Supply Agreement and the Asset Purchase Agreement and to incur the indebtedness
      represented by the Amscan Note, the Party City Note, and to incur other
      unsecured subordinated indebtedness consented to by the Bank.





**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 31, 2005.*





*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 the Company’s most
      recently filed Annual Report on Form 10-K for the year ended December 31,
      2005.*





**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 46 of our 51 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
      51
      retail stores are located predominantly in New England with 26 stores in
      Massachusetts, 7 in Connecticut, 6 in New Hampshire, 3 in Rhode Island, 3 in
      Maine and 1 in Vermont. We also operate 5 stores in Florida. Our stores range
      in
      size from approximately 8,000 square feet to 20,300 square feet and average
      approximately 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**
              
              **For
                  the six months ended****Jul
                  1, 2006**
              
              
              **Jun
                  25, 2005**
              
              
              **Jul
                  1, 2006**
              
              
              **Jun
                  25, 2005**Beginning
                  of period
              
              
              50
              
              
              45
              
              
              50
              
              
              44Openings
              
              
              -
              
              
              -
              
              
              -
              
              
              1Closings
              
              
              -
              
              
              -
              
              
              -
              
              
              -End
                  of period
              
              
              50
              
              
              45
              
              
              50
              
              
              45





Subsequent
      to the end of our second quarter, on August 7, 2006, we acquired one store
      in
      Peabody, Massachusetts.






-11-





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.





The
      following table shows a summary of our revenues and the increase in revenues
      from the prior year period:


**For
                  the three months ended**
              
              **For
                  the six months ended****Jul
                  1, 2006**
              
              
              **Jun
                  25, 2005**
              
              
              **Jul
                  1, 2006**
              
              
              **Jun
                  25, 2005**Revenues
              
              $
              18,587,169
              
              $
              16,517,522
              
              $
              32,132,968
              
              $
              29,677,285Increase
                  in revenues
              
              
              12.5
              %
              
              7.5
              %
              
              8.3
              %
              
              8.3
              %


Our
      business has a seasonal pattern. In the past three years, we have realized
      approximately 37.4% of our annual revenues in our fourth quarter, which includes
      Halloween and Christmas, and approximately 23.6% 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. In fiscal 2005, the Easter holiday fell in the
      first quarter, as opposed to the second quarter in fiscal 2006.





Among
      our
      primary goals in 2006 are to increase our comparable store sales, increase
      our
      gross profit margin percentage and leverage our occupancy costs, marketing
      and
      sales expense and general and administrative expense as the 12 stores we opened
      over the past two years reach maturity. We do not currently plan to open any
      new
      stores in 2006 although we did acquire one store in August 2006.





**Results
      of Operations**





Fiscal
      year 2006 has 52 weeks and ends on December 30, 2006. Fiscal year 2005 had
      53
      weeks and ended on December 31, 2005.





The
      second
      quarter of fiscal year 2006 had 13 weeks and ended on July 1, 2006. The second
      quarter of fiscal year 2005 had 13 weeks and ended on June 25,
      2005.





**Three
      Months Ended** **July
      1, 2006 Compared to Three Months Ended June 25, 2005**





*Revenues*





Our
      consolidated revenues for the second quarter of fiscal 2006 were $18,587,169,
      an
      increase of $2,069,647, or 12.5% from the second quarter of the prior fiscal
      year. Revenues include the selling price of party goods sold, net of returns
      and
      discounts, and are recognized at the point of sale.





Sales
      for
      the second quarter of fiscal 2006 included sales from 45 comparable stores
      (defined as stores open for at least one full year) and sales from five new
      stores that opened subsequent to the second quarter of 2005. Comparable store
      sales for the quarter increased by 1.6%, mostly because Easter fell in the
      second quarter of 2006 as opposed to the first quarter in 2005.





*Cost
      of goods sold and occupancy costs*





Our
      cost
      of goods sold and occupancy costs for the second quarter of fiscal 2006 was
      $10,897,816, or 58.6% of revenues, an increase of $1,353,208 and an increase
      of
      0.8 percentage points, as a percentage of revenues, from the second quarter
      of
      the prior fiscal year. Cost of goods sold and occupancy costs consists of the
      cost of merchandise sold to customers and the occupancy costs for our stores.





As
      a
      percentage of revenues, the increase was primarily attributable to our new
      stores, which operate at a higher occupancy to sales ratio until they reach
      maturity.






-12-





*Marketing
      and sales expense*





Our
      consolidated marketing and sales expense for the second quarter of fiscal 2006
      was $5,993,016, or 32.2% of revenues, an increase of $716,586 and an increase
      of
      0.3 percentage points, as a percentage of revenues, from the second quarter
      of
      the prior fiscal year. 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.





As
      a
      percentage of revenues, the increase in marketing and sales expense was
      primarily attributable to our new stores, which operate at a higher store
      payroll expense to sales ratio until they reach maturity, increased utility
      rates, and higher advertising expenses due to a shift in marketing
      strategy.





*General
      and administrative expense*





Our
      consolidated general and administrative (“G&A”) expense for the second
      quarter of fiscal 2006 was $1,404,412, or 7.6% of revenues, a decrease of
      $129,780 and 1.7 percentage points, as a percentage of revenues, from the second
      quarter of the prior fiscal year. 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.





The
      decrease in G&A expense is largely attributable to reductions in
      professional fees related to our compliance work for Section 404 of
      Sarbanes-Oxley Act, support of our point-of-sale system and information
      technology consulting fees, compared to the second quarter of fiscal
      2005.





*Operating
      income*





Our
      operating income for the second quarter of fiscal 2006 was $291,925, or 1.6%
      of
      revenues, compared to an operating income of $162,292, or 1.0% of revenues
      for
      the second quarter of the prior fiscal year.





*Interest
      expense*





Our
      interest expense in the second quarter of fiscal 2006 was $170,329, an increase
      of $40,816 from the second quarter of the prior fiscal year. The increase in
      the
      second quarter of fiscal 2006 was due to an increase in interest rates and
      a
      higher average loan balance. Our average loan balance was approximately
      $6,832,198 during the second quarter of fiscal 2006 compared to $6,361,774
      in
      the second quarter of fiscal 2005, which increased interest expense by
      approximately $10,418. The effective interest rate on our borrowings under
      our
      line of credit was 8.9% during the second quarter of fiscal 2006 compared to
      6.5% in the second quarter of fiscal 2005, which increased interest expense
      by
      approximately $37,418. The interest rate in the second quarter is based on
      the
      bank’s base rate plus 75 basis points.





*Income
      taxes*





We
      have
      not provided for income taxes for the second quarter of fiscal 2006 or fiscal
      2005 due to the uncertainty of future taxable income.





At
      the end
      of fiscal 2005 we had estimated net operating loss carryforwards of
      approximately $23.7 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 2006 was $121,932, or $0.00 per basic
      and
      diluted share, compared to a net income of $32,888, or $0.00 per basic and
      diluted share, in the second quarter of the prior fiscal year.







-13-




**Six
      months ended** **July 1, 2006 Compared to Six months ended June 25, 2005**





*Revenues*





Our
      consolidated revenues for the first six months of fiscal 2006 were $32,132,968,
      an increase of $2,455,683, or 8.3% from the first six months of the prior fiscal
      year. Revenues include the selling price of party goods sold, net of returns
      and
      discounts, and are recognized at the point of sale.





Sales
      for
      the first six months of fiscal 2006 included sales from 44 comparable stores
      (defined as stores open for at least one full year), sales from five new stores
      that opened subsequent to the second quarter of 2005, and sales from one new
      store that opened in the first six months of 2005 and which was not included
      in
      comparable store sales for the first quarter 2006 until it had been open for
      one
      full year. Our comparable store sales for the six month year-to-date period
      increased by 0.3%. In the first quarter of 2006, comparable stores sales were
      negatively affected by lower sales of Super Bowl party items and New England
      Patriot related merchandise due to the early elimination of the Patriots in
      the
      NFL playoffs this year, as opposed to the same period in 2005 when the New
      England Patriots won the Super Bowl.





*Cost
      of goods sold and occupancy costs*





Our
      cost
      of goods sold and occupancy costs for the first six months of fiscal 2006 was
      $19,396,070, or 60.4% of revenues, an increase of $1,685,893 and an increase
      of
      0.7 percentage points, as a percentage of revenues, from the first six months
      of
      the prior fiscal year. Cost of goods sold and occupancy costs consists of the
      cost of merchandise sold to customers and the occupancy costs for our stores.





As
      a
      percentage of revenues, the increase was primarily attributable to our new
      stores, which operate at a higher occupancy to sales ratio until they reach
      maturity.





*Marketing
      and sales expense*





Our
      consolidated marketing and sales expense for the first six months of fiscal
      2006
      was $11,348,114, or 35.3% of revenues, an increase of $1,235,837 and an increase
      of 1.2 percentage points, as a percentage of revenues, from the first six months
      of the prior fiscal year. 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.





As
      a
      percentage of revenues, the increase in marketing and sales expense was
      primarily attributable to our new stores, which operate at a higher store
      payroll expense to sales ratio until they reach maturity, increased utility
      rates, and higher depreciation expenses related to the acquisition of fixed
      assets for new stores.





*General
      and administrative expense*





Our
      consolidated general and administrative (“G&A”) expense for the first six
      months of fiscal 2006 was $3,097,688, or 9.6% of revenues, a decrease of
      $237,454 and 1.6 percentage points, as a percentage of revenues, from the first
      six months of the prior fiscal year. 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.





The
      decrease in G&A expense is largely attributable to reductions in
      professional fees related to our compliance work for Section 404 of
      Sarbanes-Oxley Act, support of our point-of-sale system and information
      technology consulting fees, compared to the first six months of fiscal
      2005.





*Operating
      loss*





Our
      operating loss for the first six months of fiscal 2006 was $1,708,904, or 5.3%
      of revenues, compared to an operating loss of $1,480,311, or 5.0% of revenues
      for the first six months of the prior fiscal year.






-14-





*Interest
      expense*





Our
      interest expense in the first six months of fiscal 2006 was $328,113, an
      increase of $96,252 from the first six months of the prior fiscal year. The
      increase in the first six months of fiscal 2006 was due to an increase in
      interest rates and a higher average loan balance. Our average loan balance
      was
      approximately $6,582,259 during the first six months of fiscal 2006 compared
      to
      $5,919,326 in the first six months of fiscal 2005, which increased interest
      expense by approximately $29,347. The effective interest rate on our borrowings
      under our line of credit was 8.9% during the first six months of fiscal 2006
      compared to 6.0% in the first six months of fiscal 2005, which increased
      interest expense by approximately $84,344. The interest rate in the first six
      months is based on the bank’s base rate plus 75 basis points.





*Income
      taxes*





We
      have
      not provided for income taxes for the first six months of fiscal 2006 or fiscal
      2005 due to the uncertainty of future taxable income.





At
      the end
      of fiscal 2005 we had estimated net operating loss carryforwards of
      approximately $23.7 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 2006 was $2,036,425, or $0.09 per basic
      and diluted share, compared to a net loss of $1,711,891, or $0.08 per basic
      and
      diluted share, in the first six months of the prior fiscal year.





**Liquidity
      and Capital Resources**





Our
      operating activities provided $569,548 in the first six months of fiscal 2006
      compared to a use of $1,307,308 in the first six months of the prior fiscal
      year, an increase of $1,876,856. The decrease in cash used in operating
      activities was primarily due to an increase in cash provided by accounts
      payable. The increase in accounts payable was primarily due to extended payment
      terms negotiated from one of our suppliers during the first six months. The
      variance due to accounts payable was partially offset by a higher net loss
      in
      the first six months of fiscal 2006 compared to the first six months of fiscal
      2005 and an increase in prepaid expenses related to July 2006 store rents paid
      in late June 2006.





We
      used
      $179,997 in investing activities in the first six months of fiscal 2006 compared
      to $524,328 in the first six months of the prior fiscal year. The cash invested
      in the first six months of fiscal 2006 was primarily for fixed assets associated
      with existing store improvements and computer replacements. The cash invested
      in
      the first six months of fiscal 2005 was primarily for fixed assets associated
      with new store openings in that period and point-of-sale system enhancements.





We
      provided $746,595 by financing activities in the first six months of fiscal
      2006
      compared to $1,839,991 in the first six months of the prior fiscal year, a
      decrease of $1,093,396. We increased our borrowings under our line of credit
      by
      $961,582 in the first six months of fiscal 2006 (to $7.6 million) compared
      to an
      increase of $1,947,741 in the first six months of fiscal 2005 (to $7.2 million).
      The borrowings under our line of credit in the first six months of fiscal 2005
      were higher than the first six months of fiscal 2006 primarily due to capital
      expenditures related to the 2005 new store openings, enhancements to our
      point-of-sale system, and to support our net loss.





At
      July 1,
      2006 we had a line of credit (the “line of credit”) with Wells Fargo Retail
      Finance II, LLC (“Wells Fargo”), which, as amended, has a maturity date of
      January 2, 2007, has a current credit limit of $12,500,000, and bears interest
      at the bank’s base rate plus 50 basis points. Our inventory and accounts
      receivable secure our line of credit. We borrow against these assets at agreed
      upon advance rates, which may vary at different times of the year.





Our
      inventory consists of party supplies which are valued at the lower of
      weighted-average cost or market and are reduced by an allowance for obsolete
      and
      excess inventory and other adjustments, including vendor rebates, discounts
      and
      freight costs. Our line of credit availability calculation allows us to borrow
      against “acceptable inventory at cost,” which takes our inventory at cost and
      reflects adjustments that our lender has approved which may be different than
      adjustments we use for valuing our inventory in our financial statements, such
      as the adjustment to reserve for inventory shortage. The amount of “acceptable
      inventory at cost” was $14,691,337 at July 1, 2006.




-15-





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 $275,311 at July 1, 2006.





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 July 1, 2006. 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
      $579,131 at July 1, 2006 and $386,681 at December 31, 2005.





The
      amount
      outstanding under our line was $7,597,456 as of July 1, 2006 and $6,635,874
      as
      of December 31, 2005. The outstanding balances under our line are classified
      as
      current liabilities in the accompanying consolidated balance sheets since we
      are
      required to apply daily lock-box receipts to reduce the amount
      outstanding.





On
      January
      17, 2006, we amended our agreement with Wells Fargo to allow for a $500,000
      term
      loan which increases our borrowing base, but does not increase our $12.5 million
      credit limit. We borrowed the full $500,000 on that date. The interest rate
      on
      the term loan is the bank’s base rate plus 125 basis points. During the time the
      term loan remains outstanding, the interest rate on our line of credit is the
      bank’s base rate plus 75 basis points. The term loan is currently outstanding
      and is due and payable in full on October 31, 2006. The amendment also waived
      a
      default as a consequence of the fact that the principal balance of the line
      of
      credit exceeded our availability on January 12, 2006. As of August 10, 2006,
      we
      are in compliance with the covenants under the line of credit.





Subsequent
      to the end of our second quarter, on August 7, 2006, we further amended our
      agreement with Wells Fargo to permit us to enter into a Supply Agreement with
      Amscan Inc. (“Amscan”) and an Asset Purchase Agreement with Party City
      Corporation (“Party City”). The amendment also allows for us to incur the
      indebtedness represented by the Amscan Note and the Party City Note (each as
      defined below), and to incur other unsecured subordinated indebtedness consented
      to by Wells Fargo.





The
      Supply
      Agreement gives us the right to receive certain additional rebates and more
      favorable pricing terms over the term of the Agreement than generally available
      to us under our current terms with Amscan. The right to receive additional
      rebates, and the amount of such rebates, are subject to our achievement of
      increased levels of purchases and other factors provided for in the Supply
      Agreement. In exchange, the Supply Agreement obligates us to purchase increased
      levels of merchandise from Amscan until 2012. The Supply Agreement provides
      for
      a ramp-up period during 2006 and 2007 and, beginning with calendar year 2008,
      requires us to purchase on an annual basis merchandise equal to the total number
      of our stores open during such calendar year, multiplied by $180,000. The Supply
      Agreement provides for penalties in the event we fail to attain the annual
      purchase commitment.





The
      Supply
      Agreement also provides for Amscan to extend, until October 31, 2006,
      approximately $1,150,000 of certain currently due Amscan payables owed by us
      to
      Amscan which would otherwise now be payable (the “extended payables”) and gives
      us the right, at our option, to convert the extended payables into a
      subordinated promissory note (the “Amscan Note”), which will bear interest at
      the rate of 11.0% per annum. The Amscan Note would be payable in thirty-six
      (36)
      equal monthly installments of principal and interest commencing on November
      1,
      2006, and on the first day of each month thereafter until October 1, 2009.
      We
      currently intend to exercise our option to convert the extended payables into
      a
      note in October 2006.





On
      August
      7, 2006, we entered into and simultaneously closed an Asset Purchase Agreement
      with Party City, an affiliate of Amscan, that provides for, among other things,
      the acquisition of a Party City retail party goods store in Peabody,
      Massachusetts, for aggregate consideration of $2,450,000, payable by a
      subordinated note in the principal amount of $600,000, which will bear interest
      at the rate of 12.25% per annum (the “Party City Note”) and $1,850,000 in cash.
      The Party City Note will be payable by quarterly interest-only payments over
      four years, with the full principal amount due at the note’s maturity on August
      7, 2010.




-16-
 
  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 2006 to be primarily related
        to one
        store we acquired in August 2006 , general
        store improvements and continued enhancement of our point of sale
        system and have
        deferred a final decision regarding when to replace our
        merchandising system, which we had
        planned to
        begin
        in late 2006 with an installation in fiscal 2007. Our current operating plan
        includes opening no additional new stores in 2006.


Our
        existing line of credit with Wells Fargo matures on January 2, 2007. We
        anticipate extending and possibly increasing our line of credit and have
        entered
        into discussions with Wells Fargo in this regard. At the present time there
        can
        be no assurance that Wells Fargo will extend or increase our line of credit,
        or
        that if they decline to do so that we will be able to find a replacement
        for our
        existing line of credit with another bank or institutional lender on terms
        acceptable to us. In addition, we continue to evaluate and assess the amount
        and
        timing of any additional capital that may be required to fund our operations
        in
        2007 and beyond, and have been exploring various financing alternatives and
        strategic opportunities. In February 2006, we executed a non-binding term
        sheet
        to enter discussions and negotiations with an institutional accredited investor
        regarding a proposed financing that would raise approximately $2.5 million
        through a combination of subordinated debt and warrants. These discussions
        and
        negotiations have been ongoing, although they have been delayed while we
        were
        focused on negotiating and closing our recent transactions with Amscan and
        Party
        City. If we are unable to reach a definitive agreement with this third party
        on
        terms that are acceptable to us, we expect to explore other financing
        alternatives. There can be no assurance that should we seek or require
        additional financing, such financing will be available, if at all, on terms
        and
        conditions acceptable to us.
  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 the end of the year.
        With
        respect to 2007, we will need to extend our line of credit since it matures
        on
        January 2, 2007. Depending on our operating results over the second half
        of
        2006, and whether and on what terms we are able to conclude our proposed
        $2.5
        million subordinated debt and warrant financing, we may also need to increase
        our line of credit, or raise additional cash through debt, equity, or a
        combination of both, to continue to fund our operations for the balance of
        2007,
        particularly in the first ,
        second and
        third
        fiscal quarters when we have historically experienced tighter liquidity owing
        to
        the seasonal nature of our business which is heavily dependent on sales in
        the
        fourth quarter .
 
 In
        the
        event that we are unable to extend or increase our line of credit with Wells
        Fargo, are unable to close our proposed financing on terms acceptable to
        us, or
        our operating plan changes or proves inaccurate due to lower-than-budgeted
        revenues, unanticipated expenses, increased competition, unfavorable economic
        conditions or other unfavorable circumstances, our liquidity may be negatively
        impacted. If so, we could be required to seek a replacement for our line
        of
        credit from another bank or institutional lender, adjust our expenditures
        to
        conserve working capital, seek ‘bridge’ financing, or raise additional capital
        to fund operations, and there can be no assurance that we would be able to
        do
        so.


-17-




Contractual
        obligations at July 1, 2006 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
                
                $
                7,597,456
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                7,597,456Capital
                    lease obligations
                
                
                475,895
                
                
                162,631
                
                
                -
                
                
                -
                
                
                638,526Operating
                    leases (including retail space leases)
                
                
                8,099,668
                
                
                13,833,280
                
                
                11,487,246
                
                
                12,941,613
                
                
                46,361,807Total
                    contractual obligations
                
                $
                16,173,019
                
                $
                13,995,911
                
                $
                11,487,246
                
                $
                12,941,613
                
                $
                54,597,789
  In
          addition, at July 1, 2006, we had outstanding purchase orders totaling
          approximately $6,328,303 for the acquisition of inventory that was scheduled
          for
          delivery after July 1, 2006.
 
 **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 typically
          operated at a loss during the first and third quarters.
 
 **Geographic
          Concentration**
 
 As
          of July
          1, 2006, 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 rising oil and gas 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 of shipping products made overseas
          in
          foreign countries, such as China, which includes much of our merchandise.
          Rising
          oil and gas prices also impact our freight costs, consumer confidence and
          spending patterns. These and other issues directly or indirectly affecting
          our
          vendors 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
          31, 2005 and Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form
          10-Q. 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.
 
 -18-
  *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. We are not aware of any impairment indicators
          for
          any of our stores at July 1, 2006.
 
 *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 2004 and
          2003 due
          to the success of our Halloween seasons, (2) we have achieved positive
          comparable store sales growth for the last three years and (3) improved
          merchandise margins in 2004 and 2003. The negative evidence that we considered
          included (1) our net loss for the six month year-to-date period of 2006
          was
          higher than the loss for the six month year-to-date period of 2005, (2)
          after
          two years of profitability we realized a net loss in 2005, (3) our merchandise
          margins decreased in 2005, (4) 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 $23.7 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, (5) the costs
          that opening new stores will put pressure on our profit margins until these
          stores reach maturity, (6) the investment in infrastructure required in
          fiscal
          2006 will increase our costs and (7) 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.
  -19-
  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 track record
          of
          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.
 
 *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.
 
 **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.*  ** Our
          management, with the participation of our Chief Executive Officer, or CEO,
          and
          Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure
          controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
          the
          Securities Exchange Act of 1934, as amended) as of July 1, 2006. In designing
          and evaluating our disclosure controls and procedures, our management recognized
          that any controls and procedures, no matter how well designed and operated,
          can
          provide only reasonable assurance of achieving their objectives, and our
          management necessarily applied its judgment in evaluating the cost-benefit
          relationship of possible controls and procedures. Based on this evaluation,
          our
          CEO and CFO concluded that, as of July 1, 2006, our disclosure controls
          and
          procedures were (1) designed to ensure that material information relating
          to us,
          including our consolidated subsidiaries, is made known to our CEO and CFO
          by
          others within those entities, particularly during the period in which this
          report was being prepared and (2) effective, in that they provide reasonable
          assurance that information required to be disclosed by us in the reports
          that we
          file or submit under the Securities Exchange Act is recorded, processed,
          summarized, communicated to management, including our CEO and CFO, and
          reported
          within the time periods specified in the SEC’s rules and forms.
  (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 July 1, 2006 that has materially affected,
          or is
          reasonably likely to materially affect, our internal controls over financial
          reporting.
  -20-
  **PART
          II - OTHER INFORMATION**
 **Item
          1.** **Legal
          Proceedings**
 
 Not
          applicable.
 
 **Item
          1A. Risk Factors**
 
 Except
          as
          noted below, 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 31, 2005, as filed with the SEC on March 30,
          2006.
 
 We
          supplement the risk factor, **“We
          face new competitive threats as a result of consolidation in our industry
          following Amscan’s acquisition of Party City Corporation,”** which
          appears on page 5 of our Annual Report. On August 7, 2006 we announced
          that we
          had entered into a Supply Agreement with Amscan which extends to 2012 and
          obligates us to purchase increased levels of merchandise from Amscan, our
          largest supplier, in exchange for, among other things, the right to receive
          certain additional rebates and more favorable pricing terms over the life
          of the
          agreement than generally available to us under our current terms with Amscan.
          On
          that same date, we announced that we had entered into a $2.45 million dollar
          agreement with Party City pursuant to which we acquired Party City’s retail
          store in Peabody, Massachusetts and received a five-year non-competition
          agreement from Party City and its affiliates that covers Massachusetts,
          Maine,
          New Hampshire, Vermont, Rhode Island, and Windsor and New London counties
          in
          Connecticut. Notwithstanding these agreements with Amscan and Party City,
          Amscan’s acquisition of Party City and its status as our largest supplier and
          the largest supplier in our industry, could continue to adversely affect
          our
          ability to compete favorably or operate successfully in a changed marketplace.
          Price pressures, particularly in the event of a strain or rupture in our
          relationship with Amscan, or a decision by Party America, which is the
          nation’s
          second largest party store chain, to respond to our recent transactions
          with
          Amscan and Party City by entering our core New England market, could erode
          our
          margins and cause our financial results of operations to suffer.
 
 We
          also
          supplement the risk factor, **“Our
          failure to generate sufficient cash to meet our liquidity needs may affect
          our
          ability to service our indebtedness and grow our business,”** which
          appears on pages 6 and 7 of our Annual Report. Our existing line of credit
          with
          Wells Fargo matures on January 2, 2007. We anticipate extending and possibly
          increasing our line of credit and have entered into discussions with Wells
          Fargo
          in this regard. At the present time there can be no assurance that Wells
          Fargo
          will extend or increase our line of credit, or that if they decline to
          do so
          that we will be able to find a replacement for our existing line of credit
          with
          another bank or institutional lender on terms acceptable to us. Depending
          on our
          operating results over the second half of 2006, and whether and on what
          terms we
          are able to conclude a proposed $2.5 million subordinated debt and warrant
          financing, we may also need to increase our line of credit, or raise additional
          cash through debt, equity, or a combination of both, to continue to fund
          our operations for the balance of 2007, particularly in the first, second
          and third fiscal quarters when we have historically experienced tighter
          liquidity owing to the seasonal nature of our business which is heavily
          dependent on sales in the fourth quarter . In
          the
          event that we are unable to extend or increase our line of credit with
          Wells
          Fargo, are unable to close our proposed financing on terms acceptable to
          us, or
          our operating plan changes or proves inaccurate due to lower-than-budgeted
          revenues, unanticipated expenses, increased competition, unfavorable economic
          conditions or other unfavorable circumstances, our liquidity may be negatively
          impacted. If so, we could be required to seek a replacement for our line
          of
          credit from another bank or institutional lender, adjust our expenditures
          to
          conserve working capital, seek ‘bridge’ financing, or raise additional capital
          to fund operations, and there can be no assurance that we would be able
          to do
          so.
 
 **Item
          2.** **Unregistered
          Sales of Equity and Securities and Use of Proceeds**
 
 Not
          applicable.
 
 **Item
          3.** **Defaults
          upon Senior Securities**
 
 Not
          applicable.
  -21-
  **Item
          4.** **Submission
          of Matters to a Vote of Security Holders**
 
 On
          June 7,
          2006, iParty Corp. held its Annual Meeting of Stockholders. There were
          a total
          of 37,143,709 votes entitled to be cast at the meeting. Of this total,
          31,830,554, or approximately 85.7% 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
                  
                  
                  31,729,060
                  
                  
                  99.7
                  %
                  
                  101,494
                  
                  
                  0.3
                  %Daniel
                      DeWolf
                  
                  
                  31,728,260
                  
                  
                  99.7
                  %
                  
                  102,294
                  
                  
                  0.3
                  %Frank
                      Haydu
                  
                  
                  31,732,635
                  
                  
                  99.7
                  %
                  
                  97,919
                  
                  
                  0.3
                  %Eric
                      Schindler
                  
                  
                  31,728,960
                  
                  
                  99.7
                  %
                  
                  101,594
                  
                  
                  0.3
                  %Joseph
                      Vassalluzzo
                  
                  
                  31,728,435
                  
                  
                  99.7
                  %
                  
                  102,119
                  
                  
                  0.3
                  %Robert
                      Jevon
                  
                  
                  1,300,000
                  
                  
                  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
            30,
            2006. Set forth below is the result of that vote.
 **Votes
                      For**
                  
                  **Against**
                  
                  **Abstain**Ratification
                      of Appointment of
                  
                  **Number**
                  
                  **%
                      of Total**
                  
                  **Number**
                  
                  **%
                      of Total**
                  
                  **Number**
                  
                  **%
                      of Total**Ernst
                      & Young LLP as ourindependent
                      public auditor
                  
                  
                  31,769,991
                  
                  
                  99.8
                  %
                  
                  41,363
                  
                  
                  0.1
                  %
                  
                  19,200
                  
                  
                  0.1
                  %
 **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.
  -22-
  **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/
                      PATRICK FARRELLPatrick
                      FarrellPresident
                      and Chief Financial Officer(Principal
                      Financial and Accounting Officer)
  Dated:
          August 14, 2006
  -23-
  **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
  -24-