**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 September 29, 2007**





**OR**





** ̈
      TRANSITION REPORT
      PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT**


**OF
      1934**





**For
      the Transition Period from _______________ to
      _______________**





**Commission
      File Number 0-25507**







**iPARTY
      CORP.**


(Exact
      Name of Registrant as Specified in Its Charter)




**Delaware**
              **76-0547750**(State
                  or Other Jurisdiction of
              (I.R.S.
                  EmployerIncorporation
                  or Organization)
              Identification
                  No.)**270
                  Bridge Street, Suite 301,****Dedham,
                  Massachusetts**
              **02026**(Address
                  of Principal Executive Offices)
              (Zip
                  Code)




**(781)
        329-3952**
 (Registrant’s
        Telephone Number, Including Area Code)
 
 
 Indicate
        by check mark whether the registrant:  (1) has filed all reports
        required to be filed by Section 13 or 15(d) of the Securities Exchange Act
        of
        1934 during the preceding 12 months (or for such shorter period that the
        registrant was required to file such reports), and (2) has been subject to
        such
        filing requirements for the past 90 days. Yes þ No o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
        one).
 Large
        accelerated filer o     Accelerated
        filer o     
Non-accelerated
        filer þ
 
 Indicate
        by check mark whether the registrant is a shell company as defined in
        Rule 12b-2 of the Exchange Act. Yes o No þ
 
 As
        of
        October 26, 2007 there were 22,693,957 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
              12Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              22Item
                  4.
              Controls
                  and Procedures
              22PART
                  II - OTHER INFORMATIONItem
                  1.
              Legal
                  Proceedings
              23Item
                  1A.
              Risk
                  Factors
              23Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              24Item
                  3.
              Defaults
                  upon Senior Securities
              24Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              24Item
                  5.
              Other
                  Information
              24Item
                  6.
              Exhibits
              24SIGNATURES
              25EXHIBIT
                  INDEX
              26Ex.
                  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****Sep
                    29, 2007**
                
                
                **Dec
                    30, 2006****(Unaudited)****ASSETS**Current
                    assets:Cash
                    and cash equivalents
                
                $
                65,587
                
                
                $
                760,376Restricted
                    cash
                
                
                634,583
                
                
                
                706,066Accounts
                    receivable
                
                
                1,068,984
                
                
                
                1,116,042Inventory,
                    net
                
                
                17,361,748
                
                
                
                12,264,737Prepaid
                    expenses and other assets
                
                
                1,200,219
                
                
                
                752,172Total
                    current assets
                
                
                20,331,121
                
                
                
                15,599,393Property
                    and equipment, net
                
                
                4,537,609
                
                
                
                4,817,993Intangible
                    assets, net
                
                
                1,816,159
                
                
                
                2,153,482Other
                    assets
                
                
                100,871
                
                
                
                126,505Total
                    assets
                
                $
                26,785,760
                
                
                $
                22,697,373**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**Current
                    liabilities:Accounts
                    payable
                
                $
                11,002,929
                
                
                $
                5,516,406Accrued
                    expenses
                
                
                2,824,379
                
                
                
                3,070,003Current
                    portion of capital lease obligations
                
                
                30,473
                
                
                
                343,761Current
                    notes payable
                
                
                603,810
                
                
                
                551,515Borrowings
                    under line of credit
                
                
                2,544,679
                
                
                
                1,162,719Total
                    current liabilities
                
                
                17,006,270
                
                
                
                10,644,404Long-term
                    liabilities:Capital
                    lease obligations, net of current portion
                
                
                17,524
                
                
                
                42,456Notes
                    payable, net of discount
                
                
                3,381,994
                
                
                
                3,736,309Other
                    liabilities
                
                
                1,067,689
                
                
                
                929,199Total
                    long-term liabilities
                
                
                4,467,207
                
                
                
                4,707,964Commitments
                    and contingenciesStockholders'
                    equity:Convertible
                    preferred stock - $.001 par value; 10,000,000 shares
                    authorized,Series
                    B convertible preferred stock - 1,150,000 shares authorized;
                    468,401 and
                    471,401shares
                    issued and outstanding at Sep 29, 2007 and Dec 30, 2006,
                    respectively(aggregate
                    liquidation value of $9,368,024 at Sep 29, 2007)
                
                
                6,969,810
                
                
                
                7,014,450Series
                    C convertible preferred stock - 100,000 shares authorized, issued
                    and
                    outstanding(aggregate
                    liquidation value of $2,000,000 at Sep 29, 2007)
                
                
                1,492,000
                
                
                
                1,492,000Series
                    D convertible preferred stock - 250,000 shares authorized, issued
                    and
                    outstanding(aggregate
                    liquidation value of $5,000,000 at Sep 29, 2007)
                
                
                3,652,500
                
                
                
                3,652,500Series
                    E convertible preferred stock - 296,667 shares authorized, issued
                    and
                    outstanding(aggregate
                    liquidation value of $1,112,500 at Sep 29, 2007)
                
                
                1,112,500
                
                
                
                1,112,500Series
                    F convertible preferred stock - 114,286 shares authorized, issued
                    and
                    outstanding(aggregate
                    liquidation value of $500,000 at Sep 29, 2007)
                
                
                500,000
                
                
                
                500,000Total
                    convertible preferred stock
                
                
                13,726,810
                
                
                
                13,771,450Common
                    stock - $.001 par value; 150,000,000 shares authorized; 22,660,467
                    and
                    22,603,877shares
                    issued and outstanding at Sep 29, 2007 and Dec 30, 2006,
                    respectively
                
                
                22,660
                
                
                
                22,604Additional
                    paid-in capital
                
                
                51,807,322
                
                
                
                51,671,084Accumulated
                    deficit
                
                
                (60,244,509
                )
                
                
                (58,120,133
                )Total
                    stockholders' equity
                
                
                5,312,283
                
                
                
                7,345,005Total
                    liabilities and stockholders' equity
                
                $
                26,785,760
                
                
                $
                22,697,373




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 nine months ended****Sep
                  29, 2007**
              
              
              **Sep
                  30, 2006**
              
              
              **Sep
                  29, 2007**
              
              
              **Sep
                  30, 2006**Revenues
              
              $
              18,208,760
              
              
              $
              17,240,535
              
              
              $
              54,219,838
              
              
              $
              49,373,503Operating
                  costs:Cost
                  of products sold and occupancy costs
              
              
              10,679,713
              
              
              
              10,266,805
              
              
              
              31,687,361
              
              
              
              29,662,875Marketing
                  and sales
              
              
              6,620,424
              
              
              
              6,583,780
              
              
              
              18,286,196
              
              
              
              17,931,894General
                  and administrative
              
              
              1,828,865
              
              
              
              1,639,993
              
              
              
              5,700,919
              
              
              
              4,737,681Operating
                  loss
              
              
              (920,242
              )
              
              
              (1,250,043
              )
              
              
              (1,454,638
              )
              
              
              (2,958,947
              )Interest
                  income
              
              
              1,198
              
              
              
              -
              
              
              
              4,679
              
              
              
              592Interest
                  expense
              
              
              (214,614
              )
              
              
              (222,285
              )
              
              
              (674,417
              )
              
              
              (550,398
              )Loss
                  before income taxes
              
              
              (1,133,658
              )
              
              
              (1,472,328
              )
              
              
              (2,124,376
              )
              
              
              (3,508,753
              )Income
                  taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
                  loss
              
              $
              (1,133,658
              )
              
              $
              (1,472,328
              )
              
              $
              (2,124,376
              )
              
              $
              (3,508,753
              )Loss
                  per share:Basic
                  and diluted
              
              $
              (0.05
              )
              
              $
              (0.07
              )
              
              $
              (0.09
              )
              
              $
              (0.16
              )Weighted-average
                  shares outstanding:Basic
                  and diluted
              
              
              22,642,280
              
              
              
              22,555,333
              
              
              
              22,626,550
              
              
              
              22,549,026




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


-3-




**iPARTY
                  CORP.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(unaudited)****For
                  the nine months ended****Sep
                  29, 2007**
              
              
              **Sep
                  30, 2006****Operating
                  activities:**Net
                  loss
              
              $
              (2,124,376
              )
              
              $
              (3,508,753
              )Adjustments
                  to reconcile net loss to net cash (used in) provided by operating
                  activities:Depreciation
                  and amortization
              
              
              1,264,302
              
              
              
              938,038Deferred
                  rent
              
              
              138,490
              
              
              
              167,055Non
                  cash stock based compensation expense
              
              
              87,071
              
              
              
              26,439Non
                  cash warrant expense
              
              
              153,413
              
              
              
              17,046Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              47,058
              
              
              
              274,959Inventory
              
              
              (5,097,011
              )
              
              
              (3,226,634
              )Prepaid
                  expenses and other assets
              
              
              (469,127
              )
              
              
              (1,188,807
              )Accounts
                  payable
              
              
              5,486,523
              
              
              
              6,927,123Accrued
                  expenses and other liabilities
              
              
              (246,920
              )
              
              
              (146,486
              )Net
                  cash (used in) provided by operating activities
              
              
              (760,577
              )
              
              
              279,980**Investing
                  activities:**Acquisition
                  of retail store and non-compete agreement
              
              
              -
              
              
              
              (1,869,115
              )Purchase
                  of property and equipment
              
              
              (650,536
              )
              
              
              (432,045
              )Net
                  cash used in investing activities
              
              
              (650,536
              )
              
              
              (2,301,160
              )**Financing
                  activities:**Net
                  borrowings under line of credit
              
              
              1,381,960
              
              
              
              (1,329,516
              )Proceeds
                  from (principal payments on) notes payable
              
              
              (455,433
              )
              
              
              4,319,373Decrease
                  (increase) in restricted cash
              
              
              71,483
              
              
              
              (145,811
              )Principal
                  payments on capital lease obligations
              
              
              (338,220
              )
              
              
              (354,175
              )(Payment)
                  amortization of deferred financing costs
              
              
              51,951
              
              
              
              (126,561
              )Proceeds
                  from exercise of stock options
              
              
              4,583
              
              
              
              3,890Net
                  cash provided by financing activities
              
              
              716,324
              
              
              
              2,367,200**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              (694,789
              )
              
              
              346,020**Cash
                  and cash equivalents, beginning of period**
              
              
              760,376
              
              
              
              699,194**Cash
                  and cash equivalents, end of period**
              
              $
              65,587
              
              
              $
              1,045,214Supplemental
                  disclosure of non-cash financing activities:Conversion
                  of Series B convertible preferred stock to common stock
              
              $
              44,640
              
              
              $
              7,451




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


**iPARTY
        CORP.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **September
        29, 2007**
 **(Unaudited)**


**1.  BASIS
        OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**:
 
 *Interim
        Financial Information*
 
 The
        interim consolidated financial statements as of September 29, 2007 have been
        prepared by the Company pursuant to the rules and regulations of the Securities
        and Exchange Commission (the “SEC”) for interim financial
        reporting.  These consolidated statements are unaudited and, in the
        opinion of management, include all adjustments (consisting of normal recurring
        adjustments and accruals) necessary to present fairly the consolidated balance
        sheets, consolidated operating results, and consolidated cash flows for the
        periods presented in accordance with generally accepted accounting
        principles.  The consolidated balance sheet at December 30, 2006 has
        been derived from the audited consolidated financial statements at that
        date.  Operating results for the Company on a quarterly basis may not
        be indicative of the results for the entire year due, in part, to the
        seasonality of the party goods industry.  Historically, higher
        revenues and operating income have been experienced in the second and fourth
        fiscal quarters, while the Company has generated losses in the first and
        third
        quarters.  Certain information and footnote disclosures normally
        included in financial statements prepared in accordance with generally accepted
        accounting principles have been omitted in accordance with the rules and
        regulations of the SEC.  These consolidated financial statements
        should be read in conjunction with the audited consolidated financial
        statements, and accompanying notes, included in the Company’s Annual Report on
        Form 10-K, for the year ended December 30, 2006.
 
 *Principles
        of Consolidation*
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        wholly-owned subsidiaries after elimination of all significant intercompany
        transactions and balances.
 
 *Revenue
        Recognition*
 
 Revenues
        include the selling price of party goods sold, net of returns and discounts,
        and
        are recognized at the point of sale. The Company estimates returns based
        upon
        historical return rates and such amounts have not been significant.
 
 *Concentrations*
 
 The
        Company purchases its inventory from a diverse group of vendors.  Four
        suppliers account for approximately 37% of the Company’s purchases of
        merchandise, but the Company does not believe that it is overly dependent
        upon
        any single source for its merchandise, often using more than one vendor for
        similar kinds of products.  The Company entered into a Supply
        Agreement with its largest supplier on August 7, 2006, which obligates the
        Company to purchase increased levels of merchandise until 2012.  The
        Supply Agreement provides for a ramp-up period during 2006 and 2007 and,
        for
        five years beginning with calendar year 2008, requires the Company to purchase
        on an annual basis merchandise equal to the total number of stores open during
        such calendar year, multiplied by $180,000.  The Supply Agreement
        provides for penalties in the event the Company fails to attain the annual
        purchase commitment that would require the Company to pay the difference
        between
        the purchases for that year and the annual purchase commitment for that year.
        The Company is not aware of any reason or circumstance that would prevent
        the
        minimum purchase amount commitments under the Supply Agreement from being
        met.
 
 Accounts
        receivable primarily represent amounts due from credit card companies and
        vendors for inventory rebates.  Management does not provide for
        doubtful accounts as such amounts have not been significant to date; the
        Company
        does not require collateral.
 -5-




*Use
        of
        Estimates*
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires management to make estimates
        and assumptions that affect the reported amounts of assets and liabilities
        and
        disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period.  Actual results could differ from these
        estimates.
 
 *Cash
        and Cash Equivalents and Restricted Cash*
 
 The
        Company considers all highly liquid investments with an original maturity
        date
        of three months or less to be cash equivalents.  Cash equivalents
        consist primarily of store cash funds and daily store receipts in transit
        to our
        concentration bank and are carried at cost.
 
 The
        Company uses controlled disbursement banking arrangements as part of its
        cash
        management program.  Outstanding checks, which were included in
        accounts payable, totaled $1,119,159 at September 29, 2007 and $2,316,026
        at
        December 30, 2006.  The decrease in outstanding checks as of September
        29, 2007 is due to the timing of store lease payments.
 
 Restricted
        cash represents funds on deposit established for the benefit of and under
        the
        control of Wells Fargo Retail Finance II, LLC, the Company’s lender under its
        line of credit, and constitutes collateral for amounts outstanding under
        the
        Company’s line of credit.
 
 *Fair
        Value of Financial Instruments*
 
 The
        carrying values of cash and cash equivalents, accounts receivable and accounts
        payable approximate fair value because of the short-term nature of these
        instruments.  The fair value of borrowings under the Company’s line of
        credit approximates carrying value because the debt bears interest at a variable
        market rate.  The fair value of the capital lease obligations
        approximates the carrying value.   The fair value of the notes
        payable approximates the carrying value.   The fair value of the
        warrants was determined by using the Black-Scholes model (volatility of 108%,
        interest of 4.73% and expected life of five years).
 
 *Inventories*
 
 Inventories
        consist of party supplies and are valued at the lower of moving weighted-average
        cost or market.  Inventory has been reduced by an allowance for
        obsolete and excess inventory, which is based on management’s review of
        inventories on hand compared to estimated future sales.  The Company
        records vendor rebates, discounts and certain other adjustments to inventory,
        including freight costs, and these amounts are recognized in the income
        statement as the related goods are sold.
 
 The
        activity in the allowance for obsolete and excess inventory is as
        follows:
  **Nine
                    months ended**
                
                
                **Twelve
                    months ended****Sep
                    29, 2007**
                
                
                **Dec
                    30, 2006**Beginning
                    balance
                
                $
                1,079,814
                
                
                $
                1,098,972Increases
                    to reserve
                
                
                265,000
                
                
                
                524,550Write-offs
                    against reserve
                
                
                (331,884
                )
                
                
                (543,708
                )Ending
                    balance
                
                $
                1,012,930
                
                
                $
                1,079,814
  -6-


*Income
        Taxes*
 
 The
        Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
        Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
        interpretation of FASB Statement No. 109” (“FIN 48”) on December 31, 2006. At
        the adoption date and as of September 29, 2007, the Company had no material
        unrecognized tax benefits and no adjustments to liabilities, retained earnings
        or operations were required.
 
 The
        Company recognizes interest and penalties related to uncertain tax positions
        in
        income tax expense which were zero for the nine months ended September 29,
        2007.
 
 Tax
        years
        2004 through 2006 are subject to examination by the federal and state taxing
        authorities. There are no income tax examinations currently in
        process.
 
 *Net
        Loss per Share*
 
 Net
        loss
        per basic share is computed by dividing net loss by the weighted average
        number
        of common shares outstanding plus the common share equivalents of Series
        B-F
        preferred stock, if dilutive.  The common share equivalents of Series
        B-F are included in the calculation of net loss per basic share in accordance
        with EITF Topic D-95, *Effect of Participating Convertible Securities on the
        Computation of Basic Earnings Per Share*, since the preferred stockholders
        are entitled to participate in dividends when and if declared by the Board
        of
        Directors.  For periods with net losses, the Company excludes those
        common share equivalents since their impact would be anti-dilutive.
 
 Net
        loss
        per diluted share is computed by dividing net 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, if
        dilutive.  For periods with net losses, the Company excludes those
        common share equivalents since their impact would be anti-dilutive.
 
 As
        of
        September 29, 2007, there were 28,302,342 potential additional common share
        equivalents outstanding, which were not included in the calculation of diluted
        net loss per share for the nine months then ended because their effect would
        be
        anti-dilutive.  These included 15,550,121 shares upon the conversion
        of immediately convertible preferred stock, 2,083,334 shares upon the exercise
        of a warrant with an exercise price of $0.475 per share, 528,210 shares upon
        the
        exercise of warrants with a weighted average exercise price of $3.79 per
        share
        and 10,140,677 shares upon the exercise of stock options with a weighted
        average
        exercise price of $0.59 per share.
 
 *Stock
        Option Compensation Expense*
 
 On
        January
        1, 2006, the Company adopted the Financial Accounting Standards Board (“FASB”)
        Statement No. 123(R), *Share-Based Payments*, using the modified
        prospective method.  Under this method, stock based compensation
        expense is recognized for new grants beginning in 2006 and any unvested grants
        prior to the adoption of Statement No. 123(R).  Prior to fiscal 2006,
        the Company accounted for share-based payments to employees using the Accounting
        Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to
        Employees*, and the disclosure-only provisions of Statement No. 123,
*Accounting for Stock-Based Compensation*.  Because the Company
        granted stock options to employees at exercise prices equal to fair market
        value
        on the date of grant, no stock based compensation cost was recognized for
        option
        grants in periods prior to fiscal 2006.
 
 Under
        Statement No. 123(R), the Company uses the Black-Scholes option pricing model
        to
        determine the fair value of stock based compensation.  The
        Black-Scholes model requires the Company to make several subjective assumptions,
        including the estimated length of time employees will retain their vested
        stock
        options before exercising them (“expected term”), and the estimated volatility
        of the Company’s common stock price over the expected term, which is based on
        historical volatility of the Company’s common stock over a time period equal to
        the expected term.  The Black-Scholes model also requires a risk-free
        interest rate, which is based on the U.S. Treasury yield curve in effect
        at the
        time of the grant, and the dividend yield on the Company’s common stock, which
        is assumed to be zero since the Company does not pay dividends and has no
        current plans to do so in the future.  Changes in these assumptions
        can materially affect the estimate of fair value of stock based compensation
        and
        consequently, the related expense recognized on the consolidated statement
        of
        operations.  Under the modified prospective method, stock based
        compensation expense is recognized for new grants beginning in the fiscal
        year
        ended December 30, 2006 and any unvested grants prior to the adoption of
        Statement No. 123(R). The Company recognizes stock based compensation expense
        on
        a straight-line basis over the vesting period of each grant.
 -7-




The
        stock
        based compensation expense recognized by the Company was:
 
  **For
                    the three months ended**
                
                
                **For
                    the nine months ended****Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**
                
                
                **Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**Stock
                    Based Compensation Expense
                
                $
                56,633
                
                
                $
                11,862
                
                
                $
                87,071
                
                
                $
                26,439
  Stock
        based compensation expense is included in general and administrative
        expense.  The adoption of Statement No. 123(R) had no impact on cash
        flow from operations and cash flow from financing activities for the nine
        months
        ended on September 29, 2007.
 
 As
        previously disclosed in our Current Reports on Form 8-K filed on January
        8 and
        March 26, 2007, Patrick Farrell, who relocated from the Boston area to the
        New
        York City area for personal reasons earlier this year, has been serving as
        President of iParty Corp. under an employment agreement with the Company
        which
        expires on November 15, 2007.  At the Board of Directors meeting held
        on September 26, 2007, the Board determined not to take any action to extend
        or
        renew Mr. Farrell’s employment agreement upon its expiration.  Mr.
        Farrell holds vested options to purchase an aggregate of 970,087 shares of
        the
        Company’s common stock.  Under the terms of the option plan and
        agreements, these options expire on February 15, 2008, based upon his
        termination on November 15, 2007.  However, at the September 26
        meeting, the Board, with the approval and upon the recommendation of the
        Compensation Committee, voted to extend the expiration date of Mr. Farrell’s
        options for an additional six months, to August 15, 2008. As a result,
        additional stock based compensation of $14,569, representing the change in
        the
        fair value of these options immediately before and after this modification,
        was
        recorded as of September 26, 2007 as required by Statement No.
        123(R).
  Under
        the
        Company’s Amended and Restated 1998 Incentive and Nonqualified Stock Option Plan
        (the “1998 Plan”) options to acquire 11,000,000 shares of common stock may be
        granted to officers, directors, key employees and consultants.  The
        exercise price for qualified incentive options cannot be less than the fair
        market value of the stock on the grant date and the exercise price of
        nonqualified options can be fixed by the Board. Options to purchase the
        Company's common stock under the 1998 Plan have been granted to employees,
        directors and consultants of the Company at fair market value at the date
        of
        grant.  Generally, the options become exercisable over periods of up
        to four years, and expire ten years from the date of grant.
 
 The
        Company granted options for the purchase of 1,350,000 shares of common stock
        to
        key employees and each of the four independent members of the Board of Directors
        on June 6, 2007 at an exercise price of $0.42 per share.  Similarly,
        the Company granted options for the purchase of 25,000 shares of common stock
        to
        each of the four independent members of the Board of Directors on June 7,
        2006
        at an exercise price of $0.36 per share.  The weighted-average fair
        market value using the Black-Scholes option-pricing model of the options
        granted
        was $0.33 per share for options granted during the nine months ended September
        29, 2007, and was $0.30 per share for options granted during the nine months
        ended September 30, 2006.  The fair market value of the stock options
        at the date of the grant was estimated using the Black-Scholes option-pricing
        model with the following weighted average assumptions:
  **For
                    the three months ended**
                
                **For
                    the nine months ended****Sep
                    29, 2007**
                **Sep
                    30, 2006**
                
                **Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**Risk-free
                    interest rate
                N/A
                N/A
                
                
                4.94
                %
                
                
                5.18
                %Expected
                    volatility
                N/A
                N/A
                
                
                102.6
                %
                
                
                115.6
                %Weighted
                    average expected life (in years)
                N/A
                N/A
                
                
                5.0
                
                
                
                5.0Expected
                    dividends
                N/A
                N/A
                
                
                0.00
                %
                
                
                0.00
                %
 -8-
  A
          summary
          of the Company's stock options is as follows:
  **Weighted****Number**
                  
                  
                  **Weighted**
                  
                  
                  
                  
                  
                  **Average****of**
                  
                  
                  **Average**
                  
                  
                  
                  
                  
                  **Remaining**
                  
                  
                  **Aggregate****Stock**
                  
                  
                  **Exercise**
                  
                  
                  **Price**
                  
                  
                  **Life**
                  
                  
                  **Intrinsic****Options**
                  
                  
                  **Price**
                  
                  
                  **Range**
                  
                  
                  **(Years)**
                  
                  
                  **Value**Outstanding
                      - December 30, 2006
                  
                  
                  8,922,440
                  
                  
                  $
                  0.62
                  
                  
                  
                  $0.13-$ 4.25Granted
                  
                  
                  1,350,000
                  
                  
                  
                  0.42
                  
                  
                  
                  0.42-0.42Expired/Forfeited
                  
                  
                  (115,361
                  )
                  
                  
                  0.55
                  
                  
                  
                  0.20-0.69Exercised
                  
                  
                  (16,402
                  )
                  
                  
                  0.28
                  
                  
                  
                  0.23-0.36Outstanding
                      - September 29, 2007
                  
                  
                  10,140,677
                  
                  
                  $
                  0.59
                  
                  
                  
                  $0.13-$ 4.25
                  
                  
                  
                  5.0
                  
                  
                  $
                  663,626Exercisable
                      - September 29, 2007
                  
                  
                  8,779,365
                  
                  
                  $
                  0.62
                  
                  
                  
                  $0.13-$ 4.25
                  
                  
                  
                  4.3
                  
                  
                  $
                  663,626Available
                      for grant - September 29, 2007
                  
                  
                  424,062
  The
            following table summarizes information for options outstanding and exercisable
            at September 29, 2007:
  **Outstanding**
                    
                    
                    **Exercisable****Weighted****Number**
                    
                    
                    **Average**
                    
                    
                    **Weighted**
                    
                    
                    **Number**
                    
                    
                    **Weighted****of**
                    
                    
                    **Remaining**
                    
                    
                    **Average**
                    
                    
                    **of**
                    
                    
                    **Average****Stock**
                    
                    
                    **Life**
                    
                    
                    **Exercise**
                    
                    
                    **Stock**
                    
                    
                    **Exercise****Price
                        Range**
                    
                    
                    **Options**
                    
                    
                    **(Years)**
                    
                    
                    **Price**
                    
                    
                    **Options**
                    
                    
                    **Price**$
                        0.13-$ 0.20
                    
                    
                    
                    139,250
                    
                    
                    
                    3.9
                    
                    
                    $
                    0.18
                    
                    
                    
                    139,250
                    
                    
                    $
                    0.180.21-0.30
                    
                    
                    
                    3,792,682
                    
                    
                    
                    3.5
                    
                    
                    
                    0.25
                    
                    
                    
                    3,792,682
                    
                    
                    
                    0.250.31-0.50
                    
                    
                    
                    2,474,527
                    
                    
                    
                    7.5
                    
                    
                    
                    0.39
                    
                    
                    
                    1,123,726
                    
                    
                    
                    0.350.51-1.00
                    
                    
                    
                    3,093,018
                    
                    
                    
                    5.5
                    
                    
                    
                    0.77
                    
                    
                    
                    3,082,507
                    
                    
                    
                    0.781.01-3.50
                    
                    
                    
                    541,200
                    
                    
                    
                    1.8
                    
                    
                    
                    2.33
                    
                    
                    
                    541,200
                    
                    
                    
                    2.333.51-4.25
                    
                    
                    
                    100,000
                    
                    
                    
                    2.2
                    
                    
                    
                    4.14
                    
                    
                    
                    100,000
                    
                    
                    
                    4.14Total
                    
                    
                    
                    10,140,677
                    
                    
                    
                    5.0
                    
                    
                    $
                    0.59
                    
                    
                    
                    8,779,365
                    
                    
                    $
                    0.62
  The
              total
              fair value of shares vested and recognized as expense during the nine
              months
              ended September 29, 2007 was $3,491. The remaining unrecognized stock
              based compensation expense related to unvested awards at September
              29, 2007, was
              $403,255 and the period of time over which this expense will be recognized
              is
              4.25 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:
  **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






-9-




*Intangible
        Assets*
 
 Intangible
        assets consist primarily of the value of a five-year non-compete agreement
        from
        Party City Corporation and its affiliates that covers Massachusetts, Maine,
        New
        Hampshire, Vermont, Rhode Island, and Windsor and New London counties in
        Connecticut which expires in 2011.  This asset has an estimated life
        of 60 months.  Also included is the value related to the retail store
        lease that the Company acquired from Party City in Peabody,
        Massachusetts.  This asset has an estimated life of 90
        months.   The other intangible assets consist of legal and other
        transaction fees related to the three-year note payable due on September
        15,
        2009.  These assets are being amortized over the life of the note
        payable.
 
 Intangible
        assets as of September 29, 2007 and December 30, 2006 were:
  **Sep
                    29, 2007**
                
                
                **Dec
                    30, 2006**Non-compete
                    agreement
                
                $
                1,688,609
                
                
                
                1,725,069Occupancy
                    valuation
                
                
                449,716
                
                
                
                460,000Other
                
                
                197,752
                
                
                
                154,949Intangible
                    assets
                
                
                2,336,077
                
                
                
                2,340,018Less:
                    accumulated amortization
                
                
                (519,918
                )
                
                
                (186,536
                )Intangible
                    assets, net
                
                $
                1,816,159
                
                
                $
                2,153,482
  Amortization
          expense for these intangible assets was:
  **For
                    the three months ended**
                
                
                **For
                    the nine months ended****Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**
                
                
                **Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**Amortization
                    expense
                
                $
                104,392
                
                
                $
                72,032
                
                
                $
                333,382
                
                
                $
                72,032
  The
          amortization expense for the non-compete agreement and other intangible
          assets
          are included in general and administrative expense in the Consolidated
          Statement
          of Operations.  The amortization expense for occupancy valuation is
          included in cost of products sold and occupancy costs.
 
 Future
          amortization expense related to these intangible assets as of September
          29, 2007
          is:
  **Year**
                
                **Amount**2007
                
                $
                112,3332008
                
                
                457,8942009
                
                
                440,6782010
                
                
                406,2452011
                
                
                265,527Thereafter
                
                
                133,482Total
                
                $
                1,816,159
  *Accounting
          for the Impairment of Long-Lived Assets*
 
 In
          accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of
          Long-Lived Assets*, the Company reviews each store for impairment indicators
          whenever events and changes in circumstances suggest that the carrying
          amounts
          may not be recoverable from estimated future store cash flows.  The
          Company’s review considers store operating results, future sales growth and cash
          flows. During the fourth quarter of 2006, the Company decided to close
          its store
          in East Providence, Rhode Island effective November 4, 2006 due to
          underperforming sales.  As a result of this closing, the Company
          incurred a charge in the fourth quarter of 2006 of approximately $120,000
          related to remaining lease payments and other closing costs.  In
          addition, during the third quarter of 2007, the Company decided to close
          its
          stores in North Providence, Rhode Island and Auburn, Massachusetts at the
          end of
          their lease terms which expire on January 31, 2008.  No material
          impairment costs were incurred as a result of that decision.
  -10-




*Notes
        Payable*
 
 Notes
        payable consist of three notes entered into in fiscal 2006.
 
 The
        “Highbridge Note” is a subordinated note in the stated principal amount of
        $2,500,000 that bears interest at the rate of prime plus one
        percent.  The note matures on September 15, 2009.  Interest
        only is payable quarterly in arrears and the entire principal balance is
        due at
        the maturity date. The original discount associated with warrants issued
        in
        conjunction with the Highbridge Note (original discount amount $613,651)
        is
        being amortized using the effective interest method over the life of the
        note
        payable. The note payable balance of $2,107,945 as of September 29, 2007
        is
        presented net of the remaining unamortized discount.
 
 The
        “Amscan Note” is a subordinated promissory note in the original principal amount
        of $1,819,373, with a balance as of September 29, 2007 of $1,277,859. The
        note
        bears interest at the rate of 11.0% per annum and is payable in thirty-six
        (36)
        equal monthly installments of principal and interest of $59,562 beginning
        on
        November 1, 2006, and on the first day of each month thereafter until October
        1,
        2009, when the entire remaining principal balance and all accrued interest
        are
        due and payable.
 
 The
“Party
        City Note” is a subordinated promissory note in the principal amount of
        $600,000.   The note bears interest at the rate of 12.25% per
        annum and is payable by quarterly interest-only payments over four years,
        with
        the full principal amount due at the note’s maturity on August 7,
        2010.
 
 *Stockholders’
        Equity*
 
 During
        the
        nine months ended September 29, 2007, 16,402 shares of common stock were
        issued
        upon the exercise of stock options and 40,188 shares of common stock were
        issued
        upon conversion of Series B convertible preferred stock.
 
 *Reclassifications*
 
 Certain
        prior year balances have been
        reclassified to conform with current year presentation.






-11-




**Item
        2.  Management’s Discussionand
        Analysis of Financial Condition and Results of Operations**
 
 *The
        following discussion should be read in conjunction with the unaudited
        Consolidated Financial Statements and related Notes included in Item 1 of
        this
        Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements
        and related Notes and Item 7, “Management’s Discussion and Analysis of Financial
        Condition and Results of Operations”, contained in our Annual Report on Form
        10-K for the fiscal year ended December 30, 2006.*
 
 *Certain
        statements in this Quarterly Report on Form 10-Q, particularly statements
        contained in this Item 2, “Management’s Discussion and Analysis of Financial
        Condition and Results of Operations” constitute “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended,
        and
        Section 21E of  the Securities Exchange Act of 1934, as
        amended.  The words “anticipate”, “believe”, “estimate”, “expect”,
“plan”, “intend” and other similar expressions are intended to identify these
        forward-looking statements, but are not the exclusive means of identifying
        them.  Forward-looking statements included in this Quarterly Report on
        Form 10-Q or hereafter included in other publicly available documents filed
        with
        the Securities and Exchange Commission (“SEC”), reports to our stockholders and
        other publicly available statements issued or released by us involve known
        and
        unknown risks, uncertainties, and other factors which could cause our actual
        results, performance (financial or operating) or achievements to differ from
        the
        future results, performance (financial or operating) or achievements expressed
        or implied by such forward looking statements.  Such future results
        are based upon our best estimates based upon current conditions and the most
        recent results of operations.  Various risks, uncertainties and
        contingencies could cause our actual results, performance or achievements
        to
        differ materially from those expressed in, or implied by, the forward-looking
        statements contained in this Quarterly Report on Form 10-Q.  These
        include, but are not limited to, those described below under the heading
        “Factors That May Affect Future Results” and in Part II, Item 1A, “Risk Factors”
as well as under Item 1A, “Risk Factors” of our most recently filed Annual
        Report on Form 10-K for the year ended December 30, 2006.*
 
 **Overview**
 
 We
        believe
        we are a leading brand in the party industry in the markets we serve and
        a
        leading resource in those markets for consumers seeking party goods, party
        planning advice and relevant information.  We are a party goods
        retailer operating stores throughout New England, where 45 of our 50 retail
        stores are located.  We also license the name “iparty.com” (at
        www.iparty.com) to a third party in exchange for royalties, which to date
        have
        not been significant.
 
 Our
        50
        retail stores are located predominantly in New England with 26 stores in
        Massachusetts, 7 in Connecticut, 6 in New Hampshire, 2 in Rhode Island, 3
        in
        Maine and 1 in Vermont.  We also operate 5 stores in
        Florida.  Our stores range in size from approximately 8,000 square
        feet to 20,300 square feet and average approximately 9,800 square feet in
        size.  We lease our properties, typically for 10 years and usually
        with options from our landlords to renew our leases for an additional 5 or
        10
        years.
 
 The
        following table shows the number of stores in operation:
  **For
                    the nine months ended****Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**Beginning
                    of period
                
                
                50
                
                
                
                50Openings
                    / Acquisitions
                
                
                -
                
                
                
                1Closings
                
                
                -
                
                
                
                -End
                    of period
                
                
                50
                
                
                
                51


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.
  -12-




Our
        business has a seasonal
        pattern.  In the past three years, we have realized approximately
        37.5% of our annual revenues in our fourth quarter, which includes Halloween
        and
        Christmas, and approximately 23.4% of our revenues in the second quarter,
        which
        includes school graduations.  Also, during the past three years, we
        have had net income in our second and fourth quarters and generated losses
        in
        our first and third quarters.
 
 For
        the remainder of 2007, our plan
        continues to be to increase our comparable store sales growth, increase our
        gross profit margin percentage and leverage our occupancy costs, marketing
        and
        sales expense and general and administrative expense. From time to time,
        we have
        been and expect to continue to be presented with opportunities to open new
        party
        supplies stores or acquire existing ones.  We intend to continue to
        evaluate such opportunities on a case-by-case basis as they may arise to
        ascertain if they would be a good strategic fit for our business and would
        help
        us increase shareholder value.
 
 On
        August 15, 2007, we entered into an
        Asset Purchase Agreement to purchase two franchised Party City Corporation
        retail stores in Lincoln, Rhode Island and Warwick, Rhode Island, in exchange
        for aggregate consideration of $1,350,000, plus up to $400,000 for associated
        inventory.   Both locations will be converted into iParty stores
        immediately following the closing.  The Asset Purchase Agreement
        contemplates a closing on or about January 3, 2008.
 
 The
        Asset Purchase Agreement also
        provides that the selling Party City franchisees and their affiliates will
        not
        compete with us in Rhode Island for a period of five years from closing,
        and
        will not compete with us within a three-and-one-half (3-1/2) mile radius
        anywhere in Massachusetts, Rhode Island, New Hampshire, Vermont, Maine, or
        Connecticut for a three-year period from closing, subject to certain terms
        specified in the Asset Purchase Agreement.
 
 **Results
        of Operations**
 
 Fiscal
        year 2007 has 52 weeks and ends on December 29, 2007.  Fiscal year
        2006 had 52 weeks and ended on December 30, 2006.
 
 The
        third
        quarter of fiscal year 2007 had 13 weeks and ended on September 29,
        2007.  The third quarter of fiscal year 2006 had 13 weeks and ended on
        September 30, 2006.
 
 **Three
        Months Ended September 29, 2007 Compared to Three Months Ended September
        30,
        2006**
 
 *Revenues*
 
 Revenues
        include the selling price of party goods sold, net of returns and discounts,
        and
        are recognized at the point of sale.  Our consolidated revenues for
        the third quarter of fiscal 2007 were $18,208,760, an increase of $968,225,
        or
        5.6% from the third quarter of the prior fiscal year.
  **For
                    the three months ended****Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**Revenues
                
                $
                18,208,760
                
                
                $
                17,240,535Increase
                    in revenues
                
                
                5.6
                %
                
                
                16.2
                %
  Sales
          for
          the third quarter of fiscal 2007 included sales from 49 comparable stores
          (defined as stores open for at least one full year) and one store that
          was
          acquired in August 2006. Comparable store sales for the quarter increased
          by
          4.5%.
 
 *Cost
          of products sold and occupancy costs*
 
 Cost
          of
          products sold and occupancy costs consist of the cost of merchandise sold
          to
          customers and the occupancy costs for our stores.  Our cost of
          products sold and occupancy costs for the third quarter of fiscal 2007
          were
          $10,679,713, or 58.7% of revenues, an increase of $412,908 and a decrease
          of 0.9
          percentage points, as a percentage of revenues, from the third quarter
          of the
          prior fiscal year.
  -13-




**For
                    the three months ended****Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**Cost
                    of products sold and occupancy costs
                
                $
                10,679,713
                
                
                $
                10,266,805Percentage
                    of revenues
                
                
                58.7
                %
                
                
                59.6
                %
  
 As
        a
        percentage of revenues, the decrease in cost of products sold and occupancy
        costs was primarily attributable to improved leveraging of occupancy costs
        resulting from the increased sales in our comparable stores and better pricing
        negotiated from vendors.
 
 *Marketing
        and sales expense*
 
 Marketing
        and sales expense consists primarily of advertising and promotional
        expenditures, all store payroll and related expenses for personnel engaged
        in
        marketing and selling activities and other non-payroll expenses associated
        with
        operating our stores.  Our consolidated marketing and sales expense
        for the third quarter of fiscal 2007 was $6,620,424, or 36.4% of revenues,
        an
        increase of $36,644 and a decrease of 1.8 percentage points, as a percentage
        of
        revenues, from the third quarter of the prior fiscal year.
  **For
                    the three months ended****Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**Marketing
                    and sales
                
                $
                6,620,424
                
                
                $
                6,583,780Percentage
                    of revenues
                
                
                36.4
                %
                
                
                38.2
                %
  As
        a
        percentage of revenues, the decrease in marketing and sales expense was
        primarily attributable to better leveraging of store payroll and other store
        selling related expenses resulting from the increased sales in our comparable
        stores.
 
 *General
        and administrative expense*
 
 General
        and administrative (“G&A”) expense consists of payroll and related expenses
        for executive, merchandising, finance and administrative personnel, as well
        as
        information technology, professional fees and other general corporate
        expenses.  Our consolidated G&A expense for the third quarter of
        fiscal 2007 was $1,828,865, or 10.0% of revenues, an increase of $188,872
        and an
        increase of 0.5 percentage points, as a percentage of revenues, from the
        third
        quarter of the prior fiscal year.
  **For
                    the three months ended****Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**General
                    and administrative
                
                $
                1,828,865
                
                
                $
                1,639,993Percentage
                    of revenues
                
                
                10.0
                %
                
                
                9.5
                %
 As
        a
        percentage of revenues, the increase in G&A expense is largely attributable
        to executive recruitment costs and professional fees associated with our
        compliance activities related to Section 404 of the Sarbanes-Oxley
        Act.
 
 *Operating
        loss*
 
 Our
        operating loss for the third quarter of fiscal 2007 was $920,242, or 5.1%
        of
        revenues, compared to an operating loss of $1,250,043, or 7.3% of revenues
        for
        the third quarter of the prior fiscal year.
 
 -14-
 *Interest
        expense*
 
 Our
        interest expense in the third quarter of fiscal 2007 was $214,614, a decrease
        of
        $7,671 from the third quarter of the prior fiscal year.  The decrease
        in the third quarter of fiscal 2007 was primarily due to lower borrowings
        under
        our line of credit in the third quarter of 2007 versus the third quarter
        of
        2006.
 
 *Income
        taxes*
 
 We
        have
        not provided for income taxes for the third quarter of fiscal 2007 or fiscal
        2006 due to the availability of net operating loss (NOL) carryforwards to
        eliminate taxable income during those periods. No benefit has been recognized
        with respect to NOL carryforwards due to the uncertainty of future taxable
        income.
 
 At
        the end
        of fiscal 2006, we had estimated net operating loss carryforwards of
        approximately $23.0 million, which begin to expire in 2018.  In
        accordance with Section 382 of the Internal Revenue Code, the use of these
        carryforwards will be subject to annual limitations based upon certain ownership
        changes of our stock that have occurred or that may occur.
 
 *Net
        Loss*
 
 Our
        net
        loss in the third quarter of fiscal 2007 was $1,133,658, or $0.05 per basic
        and
        diluted share, compared to a net loss of $1,472,328, or $0.07 per basic and
        diluted share, in the third quarter of the prior fiscal year.
 
 **Nine
        Months Ended September 29, 2007 Compared to Nine Months Ended September 30,
        2006**
 
 *Revenues*
 
 Revenues
        include the selling price of party goods sold, net of returns and discounts,
        and
        are recognized at the point of sale.  Our consolidated revenues for
        the first nine months of fiscal 2007 were $54,219,838, an increase of
        $4,846,335, or 9.8% from the first nine months of the prior fiscal
        year.
 
  **For
                    the nine months ended****Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**Revenues
                
                $
                54,219,838
                
                
                $
                49,373,503Increase
                    in revenues
                
                
                9.8
                %
                
                
                10.9
                %
 
 Sales
        for
        the first nine months of fiscal 2007 included sales from 49 comparable stores
        (defined as stores open for at least one full year) and one store that was
        acquired in August 2006. Comparable store sales for the first nine months
        increased by 6.9%.
 
 *Cost
        of products sold and occupancy costs*
 
 Cost
        of
        products sold and occupancy costs consist of the cost of merchandise sold
        to
        customers and the occupancy costs for our stores.  Our cost of
        products sold and occupancy costs for the first nine months of fiscal 2007
        were
        $31,687,361, or 58.4% of revenues, an increase of $2,024,486 and a decrease
        of
        1.7 percentage points, as a percentage of revenues, from the first nine months
        of the prior fiscal year.
  **For
                    the nine months ended****Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**Cost
                    of products sold and occupancy costs
                
                $
                31,687,361
                
                
                $
                29,662,875Percentage
                    of revenues
                
                
                58.4
                %
                
                
                60.1
                %
  -15-
  
 As
        a
        percentage of revenues, the decrease in cost of products sold and occupancy
        costs was primarily attributable to improved leveraging of occupancy costs
        resulting from the increased sales in our comparable stores and better pricing
        negotiated from vendors.
 
 *Marketing
        and sales expense*
 
 Marketing
        and sales expense consists primarily of advertising and promotional
        expenditures, all store payroll and related expenses for personnel engaged
        in
        marketing and selling activities and other non-payroll expenses associated
        with
        operating our stores.  Our consolidated marketing and sales expense
        for the first nine months of fiscal 2007 was $18,286,196, or 33.7% of revenues,
        an increase of $354,302 and a decrease of 2.6 percentage points, as a percentage
        of revenues, from the first nine months of the prior fiscal year.
  **For
                    the nine months ended****Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**Marketing
                    and sales
                
                $
                18,286,196
                
                
                $
                17,931,894Percentage
                    of revenues
                
                
                33.7
                %
                
                
                36.3
                %
  
 As
        a
        percentage of revenues, the decrease in marketing and sales expense was
        primarily attributable to better leveraging of store payroll and other store
        selling related expenses resulting from the increased sales in our comparable
        stores.
 
 *General
        and administrative expense*
 
 General
        and administrative (“G&A”) expense consists of payroll and related expenses
        for executive, merchandising, finance and administrative personnel, as well
        as
        information technology, professional fees and other general corporate
        expenses.  Our consolidated G&A expense for the first nine months
        of fiscal 2007 was $5,700,919, or 10.5% of revenues, an increase of $963,238
        and
        an increase of 0.9 percentage points, as a percentage of revenues, from the
        first nine months of the prior fiscal year.
  **For
                    the nine months ended****Sep
                    29, 2007**
                
                
                **Sep
                    30, 2006**General
                    and administrative
                
                $
                5,700,919
                
                
                $
                4,737,681Percentage
                    of revenues
                
                
                10.5
                %
                
                
                9.6
                %
  
 As
        a
        percentage of revenues, the increase in G&A expense is largely attributable
        to executive recruitment costs and professional fees associated with our
        compliance activities related to Section 404 of the Sarbanes-Oxley
        Act.
 
 *Operating
        loss*
 
 Our
        operating loss for the first nine months of fiscal 2007 was $1,454,638, or
        2.7%
        of revenues, compared to an operating loss of $2,958,947, or 6.0% of revenues
        for the first nine months of the prior fiscal year.
 
 *Interest
        expense*
 
 Our
        interest expense for the first nine months of fiscal 2007 was $674,417, an
        increase of $124,019 from the first nine months of the prior fiscal
        year.  The increase in the first nine months of fiscal 2007 was
        primarily due to the interest, including amortization of discount, related
        to
        notes payable that we entered into in fiscal 2006, offset by the interest
        related to lower borrowings under our line of credit in the third quarter
        of
        2007 versus the third quarter of 2006.
 
 -16-
 *Income
        taxes*
 
 We
        have
        not provided for income taxes for the first nine months of fiscal 2007 or
        fiscal
        2006 due to availability of net operating loss (NOL) carryforwards to eliminate
        taxable income during those periods. No benefit has been recognized with
        respect
        to NOL carryforwards due to the uncertainty of future taxable
        income.
 
 At
        the end
        of fiscal 2006, we had estimated net operating loss carryforwards of
        approximately $23.0 million, which begin to expire in 2018.  In
        accordance with Section 382 of the Internal Revenue Code, the use of these
        carryforwards will be subject to annual limitations based upon certain ownership
        changes of our stock that have occurred or that may occur.
 
 *Net
        Loss*
 
 Our
        net
        loss for the first nine months of fiscal 2007 was $2,124,376, or $0.09 per
        basic
        and diluted share, compared to a net loss of $3,508,753, or $0.16 per basic
        and
        diluted share, for the first nine months of the prior fiscal year.
 
 **Liquidity
        and Capital Resources**
 
 Our
        operating activities used $760,577 in the first nine months of fiscal 2007
        compared to $279,980 in cash provided in the first nine months of the prior
        fiscal year, a decrease of $1,040,557.  The increase in cash used in
        operating activities was primarily due to higher purchases of inventory and
        to
        lower accounts payable growth.  The lower accounts payable growth is
        primarily related to less extended dating from vendors in the first half
        of 2007
        than in 2006.
 
 We
        used
        $650,536 in investing activities in the first nine months of fiscal 2007
        compared to $2,301,160 in the first nine months of the prior fiscal
        year.  The cash invested in the first nine months of fiscal 2007 was
        primarily due to fixture and equipment improvements in our existing retail
        stores, plus the implementation of a new human resource information and payroll
        system.  The cash invested in the first nine months of fiscal 2006 was
        primarily due to the acquisition in August 2006 of a retail store located
        in
        Peabody, Massachusetts and a five-year non-compete agreement from Party
        City.
 
 Our
        financing activities provided $716,324 in the first nine months of fiscal
        2007
        compared to providing $2,367,200 in the first nine months of the prior fiscal
        year, a decrease of $1,650,876.  The decrease was primarily related to
        the borrowings in 2006 to finance the acquisition of the Peabody retail store
        and the Party City non-compete agreement.
 
 On
        December 21, 2006, we amended and restated our existing line of credit (the
        “line”) with Wells Fargo Retail Finance II, LLC.  The amendment
        continues the line of credit with Wells Fargo at $12,500,000 and extends it
        for three additional years to January 2, 2010. In addition, the new
        agreement with Wells Fargo includes an option whereby we may increase our
        line
        of credit up to a maximum level of $15,000,000, upon 15 days written notice,
        as
        long as we are in compliance with all debt covenants and the other provisions
        of
        the loan agreement. Borrowings under the new line bear interest at Wells
        Fargo’s
        base rate or, at our option, at London Interbank Offered Rate (“LIBOR”) plus
        1.75%. Beginning March 30, 2007, these rates can increase by no more than
        0.25%
        if average availability under the line falls below $3,000,000. Borrowings
        under
        the line are based on inventory and accounts receivable levels. The line
        is
        secured by a lien on substantially all of our assets.
 
 The
        amended and restated agreement includes a financial covenant requiring us
        to
        maintain a minimum availability under the line of 5% of the credit
        limit.  At the current credit limit of $12,500,000, the minimum
        availability is $625,000.  The amended agreement also has a covenant
        that requires us to limit our capital expenditures to within 110% of those
        amounts included in our business plan, which may be updated from time to
        time.
        At September 29, 2007, we were in compliance with these financial
        covenants.  The line generally prohibits the payment of any dividends
        or other distributions to any of our classes of capital stock.
 
 On
        January
        17, 2006, we had amended our then-existing agreement with Wells Fargo to
        allow
        for a $500,000 term loan which increased our borrowing base, but did not
        increase the $12.5 million credit limit.  We borrowed the full
        $500,000 on that date. On October 30, 2006, we further amended our agreement
        to
        extend the maturity date of our outstanding term loan in the amount of $500,000
        from October 31, 2006 to January 2, 2007.  On December 21, 2006, in
        connection with the amendment described in the preceding paragraphs, we extended
        the maturity date of this $500,000 term loan to October 31, 2007. We repaid
        the
        term loan on March 2, 2007.
 
 -17-
 The
        amount
        outstanding under the line was $2,544,679 as of September 29, 2007 and
        $1,162,719 as of December 30, 2006. The interest rate on these borrowings
        was
        7.8% at September 29, 2007 and 8.6% at December 30, 2006. The outstanding
        balances under the line are classified as current liabilities in the
        accompanying consolidated balance sheets since we are required to apply daily
        lock box receipts to reduce the amount outstanding.
 
 Our
        inventory consists of party supplies which are valued at the lower of moving
        weighted-average cost or market and are reduced by an allowance for obsolete
        and
        excess inventory and other adjustments, including vendor rebates, discounts
        and
        freight costs.  Our line of credit availability calculation allows us
        to borrow against “acceptable inventory at cost,” which is based on our
        inventory at cost and applies adjustments that our lender has approved which
        may
        be different from adjustments we use for valuing our inventory in our financial
        statements, such as the adjustment to reserve for inventory
        shortage.  The amount of “acceptable inventory at cost” was
        $19,037,895 at September 29, 2007.
 
 Our
        accounts receivable consist primarily of vendor rebate receivables and credit
        card receivables.  Our line of credit availability calculation allows
        us to borrow against “eligible credit card receivables,” which are the credit
        card receivables for the previous two to three days of business.  The
        amount of “eligible credit card receivables” was $317,415 at September 29,
        2007.
 
 Our
        total
        borrowing base is determined by adding the “acceptable inventory at cost” times
        an agreed upon advance rate plus the “eligible credit card receivables” times an
        agreed upon advance rate but not to exceed our established credit limit,
        which
        was $12,500,000 at September 29, 2007.  Under the terms of our line of
        credit, our $12,500,000 credit limit was further reduced by (1) a minimum
        availability block, (2) customer deposits, (3) gift certificates, (4)
        merchandise credits and (5) outstanding letters of credit.  Therefore,
        our availability was $9,115,830 at September 29, 2007 and $5,657,200 at December
        30, 2006.
 
 On
        August
        7, 2006, we entered into and simultaneously closed an asset purchase agreement
        with Party City, an affiliate of Amscan Holdings, Inc., pursuant to which
        we
        acquired a Party City retail party goods store in Peabody, Massachusetts
        and
        received a five-year non-competition covenant from Party City, for aggregate
        consideration of $2,450,000, payable by a subordinated note in the principal
        amount of $600,000, which bears interest at the rate of 12.25% per annum
        (the
“Party City Note”) and $1,850,000 in cash.  The Party City Note is
        payable by quarterly interest-only payments over four years, with the full
        principal amount due at the note’s maturity on August 7, 2010.
 
 On
        September 15, 2006, we entered into a securities purchase agreement pursuant
        to
        which we raised $2.5 million through a combination of subordinated debt and
        warrant issued on September 15, 2006 to Highbridge International LLC
        (“Highbridge”), an institutional accredited investor. Under the terms of the
        financing, we issued Highbridge a three-year subordinated note (the “Highbridge
        Note”) that bears interest at an interest rate of prime plus one
        percent.  The note matures on September 15, 2009.  In
        addition, we issued Highbridge a warrant (the “Highbridge Warrant”) exercisable
        for 2,083,334 shares of our common stock at an exercise price of $0.475 per
        share, or 125% of the closing price of our common stock on the day immediately
        prior to the closing of the transaction.  We allocated approximately
        $613,651 of value to the warrants using the Black-Scholes model (volatility
        of
        108%, interest of 4.73% and expected life of five years).  The note
        discount associated with the warrants is being amortized using the effective
        interest method over the life of the note payable.
 
 On
        October
        24, 2006, we converted $1,143,896 of extended payables originally due to
        Amscan
        as of August 8, 2006 as well as an additional $675,477 of payables due to
        Amscan
        as of September 28, 2006 into a single subordinated promissory note in the
        total
        principal amount of $1,819,373 (“the Amscan Note”). The Amscan Note bears
        interest at the rate of 11.0% per annum and is payable in thirty-six (36)
        equal
        monthly installments of principal and interest of $59,562.48 commencing on
        November 1, 2006, and on the first day of each month thereafter until October
        1,
        2009, when the entire remaining principal balance and all accrued interest
        are
        due and payable.
 
 On
        August 15, 2007, we entered into an
        Asset Purchase Agreement to purchase two franchised Party City Corporation
        retail stores in Lincoln, Rhode Island and Warwick, Rhode Island, in exchange
        for aggregate consideration of $1,350,000, plus up to $400,000 for associated
        inventory.   Both locations will be converted into iParty stores
        immediately following the closing.  The Asset Purchase Agreement
        contemplates a closing on or about January 3, 2008.
 
 -18-
 Our
        prospective cash flows are subject to certain trends, events and uncertainties,
        including our operating results for the Halloween season, which is our single
        most important season, as well as demands for working capital to improve
        our
        infrastructure, respond to economic conditions, take advantage of strategic
        opportunities, support growth, and meet our contractual
        commitments.
 
 Based
        on
        our current operating plan, we believe that anticipated revenues from operations
        and borrowings available under our line of credit will be sufficient to fund
        our
        operations, the planned acquisition of two stores in January 2008 and working
        capital requirements through at least the next twelve months.
 
 Contractual
        obligations at September 29, 2007 were as follows:
  **Payments
                    Due By Period****Within**
                
                
                **Within****Within**
                
                
                ******2
                    - 3**
                
                
                ******4
                    - 5**
                
                
                **After****1
                    Year**
                
                
                **Years**
                
                
                **Years**
                
                
                **5
                    Years**
                
                
                **Total**Line
                    of credit
                
                $
                2,544,679
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                2,544,679Capital
                    lease obligations
                
                
                30,473
                
                
                
                17,524
                
                
                
                -
                
                
                
                -
                
                
                
                47,997Notes
                    payable
                
                
                603,810
                
                
                
                3,174,049
                
                
                
                600,000
                
                
                
                -
                
                
                
                4,377,859Supply
                    agreement
                
                
                
                
                
                
                18,000,000
                
                
                
                18,000,000
                
                
                
                9,000,000
                
                
                
                45,000,000Asset
                    purchase agreement
                
                
                1,750,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,750,000Operating
                    leases (including retail space leases)
                
                
                8,516,342
                
                
                
                15,801,576
                
                
                
                11,748,477
                
                
                
                10,305,719
                
                
                
                46,372,114Total
                    contractual obligations
                
                $
                13,445,304
                
                
                $
                36,993,149
                
                
                $
                30,348,477
                
                
                $
                19,305,719
                
                
                $
                100,092,649
  In
        addition, at September 29, 2007, we had outstanding purchase orders totaling
        approximately $4,243,478 for the acquisition of inventory and non-inventory
        items that are scheduled for delivery after September 29, 2007.
 
 **Seasonality**
 
 Due
        to the
        seasonality of our business, sales and operating income are typically higher
        in
        our second and fourth quarters.  Our business is highly dependent upon
        sales of Easter, graduation and summer merchandise in the second quarter
        and
        sales of Halloween and Christmas merchandise in the fourth
        quarter.  We have historically operated at a loss during the first and
        third quarters.
 
 **Geographic
        Concentration**
 
 As
        of
        September 29, 2007, we operated a total of 50 stores, 45 of which are located
        in
        New England.  As a result, a severe or prolonged regional recession or
        regional changes in demographics, employment levels, population, weather
        patterns, real estate market conditions, consumer confidence and spending
        patterns or other factors specific to the New England region may adversely
        affect us more than a company that is more geographically diverse.
 
 **Effects
        of Inflation**
 
 While
        we
        do not view the effects of inflation as having a direct material effect upon
        our
        business, we believe that volatility in oil and gasoline prices impacts the
        cost
        of producing petroleum-based/plastic products, which are a key raw material
        in
        much of our merchandise, and also impacts prices to ship products made overseas
        in foreign countries, such as China, which includes much of our
        merchandise.  Volatile oil and gasoline prices also impact our freight
        costs, and consumer confidence and spending patterns.  These and other
        issues directly or indirectly affecting our vendors, our customers and us
        could
        adversely affect our business and financial performance.
 
 -19-
 **Factors
        That May Affect Future Results**
 
 Our
        business is subject to certain risks that could materially affect our financial
        condition, results of operations, and the value of our common stock. These
        risks
        include, but are not limited to, the ones described under Item 1A, “Risk
        Factors” of our Annual Report on Form 10-K for the fiscal year ended December
        30, 2006 and Part II, Item 1A, “Risk Factors” of subsequent Quarterly Reports on
        Form 10-Q, including this one.  Additional risks and uncertainties
        that we are unaware of, or that we may currently deem immaterial, may become
        important factors that harm our business, financial condition, results of
        operations, or the value of our common stock.
 
 **Critical
        Accounting Policies and Estimates**
 
 Our
        financial statements are based on the application of significant accounting
        policies, many of which require management to make significant estimates
        and
        assumptions (see Note 1 to the Consolidated Financial Statements).  We
        believe the following accounting policies to be those most important to the
        portrayal of our financial condition and those that require the most subjective
        judgment. If actual results differ significantly from management’s estimates and
        projections, there could be a material effect on our financial
        statements.
 
 *Inventory
        and Related Allowance for Obsolete and Excess Inventory*
 
 Our
        inventory consists of party supplies and is valued at the lower of moving
        weighted-average cost or market.  We record vendor rebates, discounts
        and certain other adjustments to inventory, including freight costs, and
        we
        recognize these amounts in the income statement as the related goods are
        sold.
 
 During
        each interim reporting period, we estimate the impact on cost of products
        sold
        associated with inventory shortage.  The actual inventory shortage is
        determined upon reconciliation of the annual physical inventory, which occurs
        shortly before and after our year end, and an adjustment to cost of products
        sold is recorded at the end of the fourth quarter to recognize the difference
        between the estimated and actual inventory shortage for the full
        year.
 
 We
        also
        make adjustments to reduce the value of our inventory for an allowance for
        obsolete and excess inventory, which is based on our review of inventories
        on
        hand compared to estimated future sales.  We conduct reviews
        periodically throughout the year on each stock keeping unit
        (“SKU”).  As we identify obsolete and excess inventory, we take
        immediate measures to reduce our inventory risk on these items and we adjust
        our
        allowance accordingly. Thus, actual results could differ from our
        estimates.
 
 *Revenue
        Recognition*
 
 Revenues
        include the selling price of party goods sold, net of returns and discounts,
        and
        are recognized at the point of sale. We estimate returns based upon historical
        return rates and such amounts have not been significant.
 
 *Property
        and Equipment*
 
 Property
        and equipment are stated at cost less accumulated depreciation and are
        depreciated on the straight-line method over the estimated useful lives of
        the
        assets. Expenditures for maintenance and repairs are charged to operations
        as
        incurred.
 
 *Impairment
        of Long-Lived Assets*
 
 In
        accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of
        Long-Lived Assets*, we perform a review of each store for impairment
        indicators whenever events and changes in circumstances suggest that the
        carrying amounts may not be recoverable from estimated future store cash
        flows.  Our review considers store operating results, future sales
        growth and cash flows.  The conclusion regarding impairment may differ
        from current estimates if underlying assumptions or business strategies
        change.  During the fourth quarter of 2006, we decided to close our
        store in East Providence, Rhode Island effective November 4, 2006 due to
        underperforming sales.  As a result of this closing, we incurred a
        charge in the fourth quarter of 2006 of approximately $120,000 related to
        remaining lease payments and other closing costs.  In addition, during
        the third quarter of 2007, we decided to close our stores in North Providence,
        Rhode Island and Auburn, Massachusetts at the end of their lease terms which
        expire on January 31, 2008.  No material impairment costs were
        incurred as a result of that decision.
 
 -20-
 *Income
        Taxes*
 
 Historically,
        we have not recognized an income tax benefit for our
        losses.  Accordingly, we record a valuation allowance against our
        deferred tax assets because of the uncertainty of future taxable income and
        the
        realizability of the deferred tax assets.  In determining if a
        valuation allowance against our deferred tax asset is appropriate, we consider
        both positive and negative evidence.  The positive evidence that we
        considered included (1) we were profitable in 2006, 2004 and 2003 due to
        the
        success of our Halloween seasons, (2) we have achieved positive comparable
        store
        sales growth for the last three full years and (3) improved merchandise margins
        in 2006, 2004 and 2003.  The negative evidence that we considered
        included (1) after two years of profitability we realized a net loss in 2005,
        (2) our merchandise margins decreased in 2005, (3) our future profitability
        is
        vulnerable to certain risks, including (a) the risk that we may not be able
        to
        generate significant taxable income to fully utilize our net operating loss
        carryforwards of approximately $23.0 million, (b) the risk of unseasonable
        weather and other factors in a single geographic region, New England, where
        our
        stores are concentrated, (c) the risk of being so dependent upon a single
        season, Halloween, for a significant amount of annual sales and profitability
        and (d) the risk of rising prices for petroleum products, which are a key
        raw
        material for much of our merchandise and which affect our freight costs and
        those of our suppliers and affect our customers’ spending levels and patterns,
        (4) the risk that costs of opening new stores will put pressure on our profit
        margins until these stores reach maturity, (5) the risk that investment in
        infrastructure will increase our costs and (6) the expected costs of increased
        regulatory compliance, including, without limitation, those associated with
        Section 404 of the Sarbanes-Oxley Act, will likely have a negative impact
        on our
        profitability.
 
 The
        negative evidence is strong enough for us to conclude that the level of our
        future profitability is uncertain at this time. We believe that it is prudent
        for us to maintain a valuation allowance until we have a longer history of
        sustained profitability and we can reduce our exposure to the risks described
        above.  Should we determine that we will be able to realize our
        deferred tax assets in the future, an adjustment to reduce our deferred tax
        asset valuation allowance would increase income in the period we made such
        a
        determination.
 
 We
        adopted
        the provisions of Financial Accounting Standards Board (“FASB”) Interpretation
        No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB
        Statement No. 109” (“FIN 48”) on December 31, 2006. At the adoption date and as
        of September 29, 2007, we had no material unrecognized tax benefits and no
        adjustments to liabilities, retained earnings or operations were
        required.
 
 We
        recognize interest and penalties related to uncertain tax positions in income
        tax expense which were zero for the nine months ended September 29,
        2007.
 
 Tax
        years
        2004 through 2006 are subject to examination by the federal and state taxing
        authorities. There are no income tax examinations currently in
        process.
 
 *Stock
        Option Compensation Expense*
 
 On
        January
        1, 2006, we adopted Statement No. 123(R) using the modified prospective method
        in which compensation cost is recognized beginning with the effective date
        (a)
        based on the requirements of Statement No. 123(R) for all share-based payments
        granted after the effective date and (b) based on the requirements of Statement
        No. 123 for all awards granted to employees prior to the effective date of
        Statement No. 123(R) that remain unvested on the effective
        date.  Prior to January 1, 2006, we accounted for our stock option
        compensation agreements with employees under the provisions of Accounting
        Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to
        Employees* and the disclosure-only provisions of Statement No. 123,
*Accounting for Stock-Based Compensation*, as amended by SFAS No. 148,
*Accounting for Stock-Based Compensation – Transition and Disclosure, an
        amendment of Financial Accounting Standards Board (“FASB”) Statement No.
        123*.
 
 *Use
        of
        Estimates*
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires us to make estimates and
        assumptions that affect the reported amounts of assets and liabilities and
        disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period.  Our actual results could differ from our
        estimates.
 
 -21-
 *Fair
        Value Measurements*
 
 On
        December 31, 2006, we adopted SFAS No. 157, *Fair Value Measurements*,
        which defines fair value, establishes a framework for measuring fair value
        in
        generally accepted accounting principles and expands disclosures about fair
        value measurements.  SFAS No. 157 does not require any new fair value
        measurements, but its provisions apply to all other accounting pronouncements
        that require or permit fair value measurement.  Adoption of SFAS No.
        157 does not have a material impact on our financial position or results
        of
        operations.
 
 **New
        Accounting Pronouncements**
 
 No
        new accounting pronouncements were
        issued during the quarter ended September 29, 2007 that are expected to have
        a
        material impact on our financial position or results of operations.
 
 **Item
        3.  Quantitative and QualitativeDisclosures
        about Market Risk**
 
 There
        has
        been no material change in our market risk exposure since the filing of our
        Annual Report on Form 10-K.
 
 **Item
        4.  Controls and Procedures**
 
 (a)
        *Evaluation of Disclosure Controls and Procedures.*  The Chief
        Executive Officer and the Chief Financial Officer of iParty (its principal
        executive officer and principal financial officer, respectively) have concluded,
        based on their evaluation as of September 29, 2007, the end of the
        fiscal quarter to which this report relates, that iParty's disclosure
        controls and procedures: are effective to ensure that information required
        to be
        disclosed by iParty in the reports filed or submitted by it under the
        Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
        and reported within the time periods specified in the SEC’s rules and forms; and
        include controls and procedures designed to ensure that information required
        to
        be disclosed by iParty in such reports is accumulated and communicated
        to iParty's management, including the Chief Executive Officer and the Chief
        Financial Officer, to allow timely decisions regarding required
        disclosure.  iParty's disclosure controls and procedures are designed to
        provide a reasonable level of assurance of reaching iParty's
        disclosure requirements and are effective in reaching that level of
        reasonable assurance.
 
 (b)
        *Changes in Internal Controls.*No change in our internal
        controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
        under the Securities Exchange Act of 1934, as amended) occurred during the
        fiscal quarter ended September 29, 2007 that has materially affected, or
        is
        reasonably likely to materially affect, our internal controls over financial
        reporting.
  -22-
 **PART
        II – OTHER INFORMATION**
 
 **Item
        1. Legal Proceedings**
 
 The
        Company is not a party to any legal proceedings expected to have a material
        effect on its financial position or results of operations.
 
 **Item
        1A.  Risk Factors**
 
 In
        addition to the risk factors previously disclosed in Item 1A, “Risk Factors” in
        our Annual Report on Form 10-K for the fiscal year ended December 30, 2006,
        as
        filed with the SEC on March 19, 2007, set forth below are additions and updates
        to those risk factors:
 
 ***Our
        failure to attract, retain, and motivate qualified personnel would adversely
        affect our business.***
 
 Our
        success depends in large part on the efforts and abilities of our senior
        management team.  Their skills, experience and industry contacts
        significantly benefit our operations and administration.  The failure
        to attract, retain, and properly motivate the members of our senior management
        team and other key employees, or to find suitable replacements for them in
        the
        event of death, ill health, or their desire to pursue other professional
        opportunities, could have a negative effect on our operating
        results.  At the present time our President, Patrick Farrell, is
        transitioning his duties to other members of management in connection with
        his
        relocation to New York for personal family reasons and we will not be extending
        the term of his service. As previously disclosed, his regular employment
        with us
        will terminate on November 15, 2007. Our business performance and operating
        results will depend on our ability to successfully execute this transition
        process.
 
 Our
        performance is also largely dependent on attracting and retaining quality
        associates that are able to make the consumer shopping experience at our
        stores
        a fun and informative experience. We face intense competition for qualified
        associates, and many of our associates are in entry-level or part-time positions
        with historically high rates of turnover.  Our ability to meet our
        labor needs generally while controlling our labor costs is subject to numerous
        external factors, including the availability of a sufficient number of qualified
        persons in the work force, unemployment levels, prevailing wage rates, changing
        demographics, health and other insurance costs and changes in employment
        legislation, particularly in the New England region.  If we are unable
        to attract and retain qualified associates or our labor costs increase
        significantly, our business and financial performance may be adversely
        affected.
 
 ***Risks
        associated with recent and possible future new store openings could adversely
        affect our business.***
 
 An
        important part of our long-range business plan is to increase our number
        of
        stores and, over time, enter new geographic markets.  We have opened
        15 new stores, acquired one store and closed one store over the past four
        years,
        bringing our total number of stores from 35 at the beginning of 2003 to 50
        at
        the end of 2006. We will be closing two stores when their leases expire in
        early
        2008 and have entered into an agreement to acquire two stores in January
        2008.
        While at present we have no current plans for other new store openings, our
        growth goals envision a return to opening additional stores beginning in
        2008.
        Also, from time to time, we have been and expect to continue to be presented
        with opportunities to acquire existing party supply stores.  We intend
        to continue to evaluate such opportunities on a case-by-case basis as they
        may
        arise to ascertain if they would be a good strategic fit for our business
        and
        would help us increase shareholder value. For our growth strategy to be
        successful, we must identify and lease favorable store sites, hire and train
        associates and store managers, and adapt management and operational systems
        to
        meet the needs of our expanded operations.  These tasks may be
        difficult to accomplish successfully.  If we are unable to open or
        acquire new stores in locations and on terms acceptable to us as quickly
        as
        planned, our future sales and profits may be adversely affected.  Even
        if we succeed in opening or acquiring new stores, these new stores may not
        achieve the same sales or profit levels as our existing stores.  Also,
        our expansion strategy includes opening new stores in markets where we already
        have a presence so we can take advantage of economies of scale in marketing,
        distribution and supervision costs.  However, these new stores may
        result in the loss of sales in existing stores in nearby areas, which could
        adversely affect our business and financial performance.  In addition,
        future store openings could cause us, among other things, to incur additional
        debt, increased interest expense, as well as experience dilution in earnings,
        if
        any, per share.  Impairment losses could also occur as a result of new
        store openings in the event that new store openings prove unsuccessful, or
        in
        the event that we determine to close underperforming stores.
 
 -23-
 ***Shares
        that are or may be offered for sale pursuant to a prospectus on Form S-3
        filed
        with the SEC and declared effective on April 4, 2007 or that  may
        be  eligible for sale in the future could negatively affect our stock
        price.***
 
 The
        market
        price of our common stock could decline as a result of sales of a large number
        of shares of our common stock or the perception that these sales could
        occur.  This may also make it more difficult for us to raise funds
        through the issuance of debt or the sale of equity securities.
 
 As
        of
        September 29, 2007 there were 28,302,342 potential additional common share
        equivalents outstanding.  These included 15,550,121 shares issuable
        upon the conversion of immediately convertible preferred stock, 2,083,334
        shares
        issuable upon the exercise of a warrant with an exercise price of $0.475,
        528,210 shares issuable upon the exercise of warrants with a weighted average
        exercise price of $3.79 and 10,140,667 shares issuable upon the exercise
        of
        stock options with a weighted average exercise price of $0.59.
 
 Our
        unregistered securities may be sold in the future pursuant to registration
        statements filed with the SEC or without registration under the Securities
        Act,
        to the extent permitted by Rule 144 or other exemptions under the Securities
        Act.  We may issue additional shares in the future in connection with
        acquisitions, compensation or otherwise.  We have not entered into any
        agreements or understanding regarding any future acquisitions not described
        herein and cannot ensure that we will be able to identify or complete any
        acquisition in the future.
  **Item
                    2.**
                **Unregistered
                    Sales of Equity and Securities and Use of
                    Proceeds**Not
                    applicable.**Item
                    3.**
                **Defaults
                    upon Senior
                    Securities**Not
                    applicable.**Item
                    4.**
                **Submission
                    of Matters to a Vote of Security
                    Holders**Not
                    applicable.**Item
                    5.**
                **Other
                    Information**Not
                    applicable.**Item
                    6.**
                **Exhibits**
  The
        exhibits listed in the Exhibit Index immediately preceding the exhibits are
        filed as part of this Quarterly Report on Form 10-Q and are incorporated
        herein
        by reference.
  -24-
  **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned, thereunto
        duly authorized.
  iPARTY
                CORP.By:
              /s/ SAL
                PERISANOSAL
                PERISANOChairman
                of the Board and Chief Executive Officer(Principal
                Executive Officer)
  By:
              /s/ DAVID
                ROBERTSONDAVID
                ROBERTSONChief
                  Financial Officer(Principal
                  Financial and Accounting Officer)
  Dated:
        October 31, 2007
 
  -25-
  **EXHIBIT
        INDEX**
 
  **EXHIBIT** **NUMBER**
              **DESCRIPTION** Ex.
                  31.2
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act
 Ex.
                  32.1
              Certification
                  of Chief Executive Officer pursuant to 18 U.S.C. Section
                  1350
 Ex.
                  32.2
              Certification
                  of Chief Financial Officer pursuant to 18 U.S.C. Section
                  1350
  -26-