UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q





þ QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For
the Quarterly Period Ended June 28, 2008





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 1-15611




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, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
accelerated filer o                                                                                                                                                                 
        Accelerated filer o





Non-accelerated
filer o (Do not
check if smaller reporting
company)                                                                                                      Smaller
reporting company  þ





Indicate
by check mark whether the registrant is a shell company as defined in
Rule 12b-2 of the Exchange Act. Yes o No þ





As of
August 6, 2008 there were 22,731,667 shares of common stock, $.001 par value,
outstanding.











iPARTY
CORP.


QUARTERLY
REPORT ON FORM 10-Q


TABLE
OF CONTENTS







PART I - FINANCIAL INFORMATIONPageItem
      1.
              Financial Statements (Unaudited)Consolidated Balance Sheets
              2Consolidated Statements of
    Operations
              3Consolidated Statements of Cash
Flows
              4Notes to Consolidated Financial
      Statements
              5Item
      2.
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              13Item
      3.
              Quantitative and Qualitative Disclosures about Market
      Risk
              25Item
      4.
              Controls and Procedures
              25PART II - OTHER INFORMATIONItem
      1.
              Legal Proceedings
              26Item
      1A.
              Risk Factors
              26Item
      2.
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              26Item
      3.
              Defaults upon Senior Securities
              26Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              26Item
      5.
              Other Information
              27Item
      6.
              Exhibits
              27SIGNATURES
              
              28EXHIBIT INDEX
              
              29






-1-




PART I - FINANCIAL INFORMATION
 Item
1.  Financial
Statements


iPARTY
      CORP.CONSOLIDATED BALANCE SHEETS
    (unaudited)Jun 28, 2008
              
              
              Dec 29, 2007ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              64,792
              
              
              $
              71,532Restricted
      cash
              
              
              657,079
              
              
              
              862,536Accounts
      receivable
              
              
              891,285
              
              
              
              1,105,807Inventory,
      net
              
              
              14,045,935
              
              
              
              13,639,531Prepaid
      expenses and other assets
              
              
              680,115
              
              
              
              996,779Total
      current assets
              
              
              16,339,206
              
              
              
              16,676,185Property
      and equipment, net
              
              
              4,243,183
              
              
              
              4,360,123Intangible
      assets, net
              
              
              2,582,646
              
              
              
              1,756,800Other
      assets
              
              
              207,465
              
              
              
              183,978Total
      assets
              
              $
              23,372,500
              
              
              $
              22,977,086LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              6,458,549
              
              
              $
              4,723,370Accrued
      expenses
              
              
              2,960,151
              
              
              
              2,503,752Current
      portion of capital lease obligations
              
              
              23,065
              
              
              
              30,473Current
      notes payable
              
              
              655,701
              
              
              
              620,706Borrowings
      under line of credit
              
              
              2,590,988
              
              
              
              2,613,511Total
      current liabilities
              
              
              12,688,454
              
              
              
              10,491,812Long-term
      liabilities:Capital
      lease obligations, net of current portion
              
              
              -
              
              
              
              9,213Notes
      payable, net of discount $238,642
              
              
              3,036,793
              
              
              
              3,271,632Other
      liabilities
              
              
              1,152,187
              
              
              
              1,113,522Total
      long-term liabilities
              
              
              4,188,980
              
              
              
              4,394,367Commitments
      and contingenciesStockholders'
      equity:Convertible
      preferred stock - $.001 par value; 10,000,000 shares
      authorized,Series
      B convertible preferred stock - 1,150,000 shares authorized; 463,086 and
      465,401shares
      issued and outstanding at June 28, 2008 and December 29, 2007,
      respectively(aggregate
      liquidation value of $9,261,724 at June 28, 2008)
              
              
              6,890,723
              
              
              
              6,925,170Series
      C convertible preferred stock - 100,000 shares authorized, issued and
      outstanding(aggregate
      liquidation value of $2,000,000 at June 28, 2008)
              
              
              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 June 28, 2008)
              
              
              3,652,500
              
              
              
              3,652,500Series
      E convertible preferred stock - 296,666 shares authorized, issued and
      outstanding(aggregate
      liquidation value of $1,112,497 at June 28, 2008)
              
              
              1,112,497
              
              
              
              1,112,497Series
      F convertible preferred stock - 114,286 shares authorized, issued and
      outstanding(aggregate
      liquidation value of $500,000 at June 28, 2008)
              
              
              500,000
              
              
              
              500,000Total
      convertible preferred stock
              
              
              13,647,720
              
              
              
              13,682,167Common
      stock - $.001 par value; 150,000,000 shares authorized; 22,731,667
      and 22,700,655shares
      issued and outstanding at June 28, 2008 and December 29, 2007,
      respectively
              
              
              22,732
              
              
              
              22,701Additional
      paid-in capital
              
              
              52,013,978
              
              
              
              51,894,481Accumulated
      deficit
              
              
              (59,189,364
              )
              
              
              (57,508,442
              )Total
      stockholders' equity
              
              
              6,495,066
              
              
              
              8,090,907Total
      liabilities and stockholders' equity
              
              $
              23,372,500
              
              
              $
              22,977,086






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






-2-




iPARTY
      CORP.CONSOLIDATED STATEMENTS OF OPERATIONS
      (unaudited)For the three months ended
              
              
              For the six months endedJun 28, 2008
              
              
              Jun 30, 2007
              
              
              Jun 28, 2008
              
              
              Jun 30, 2007Revenues
              
              $
              20,103,668
              
              
              $
              20,411,919
              
              
              $
              36,247,756
              
              
              $
              36,011,078Operating
      costs:Cost
      of products sold and occupancy costs
              
              
              11,612,587
              
              
              
              11,600,874
              
              
              
              21,595,934
              
              
              
              21,007,648Marketing
      and sales
              
              
              6,176,460
              
              
              
              6,079,698
              
              
              
              12,026,212
              
              
              
              11,665,772General
      and administrative
              
              
              1,946,634
              
              
              
              1,989,197
              
              
              
              3,909,799
              
              
              
              3,872,054Operating
      income (loss)
              
              
              367,987
              
              
              
              742,150
              
              
              
              (1,284,189
              )
              
              
              (534,396
              )Interest
      income
              
              
              244
              
              
              
              1,747
              
              
              
              1,920
              
              
              
              3,481Interest
      expense
              
              
              (184,625
              )
              
              
              (231,759
              )
              
              
              (398,653
              )
              
              
              (459,803
              )Net
      income (loss)
              
              $
              183,606
              
              
              $
              512,138
              
              
              $
              (1,680,922
              )
              
              $
              (990,718
              )Income
      (loss) per share:Basic
              
              $
              0.00
              
              
              $
              0.01
              
              
              $
              (0.07
              )
              
              $
              (0.04
              )Diluted
              
              $
              0.00
              
              
              $
              0.01
              
              
              $
              (0.07
              )
              
              $
              (0.04
              )Weighted-average
      shares outstanding:Basic
              
              
              38,210,583
              
              
              
              38,199,738
              
              
              
              22,713,989
              
              
              
              22,618,685Diluted
              
              
              38,319,767
              
              
              
              40,054,445
              
              
              
              22,713,989
              
              
              
              22,618,685












-3-




iPARTY
      CORP.CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)For the six months endedJun 28, 2008
              
              
              Jun 30, 2007Operating
      activities:Net
      loss
              
              $
              (1,680,922
              )
              
              $
              (990,718
              )Adjustments
      to reconcile net loss to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
              
              
              1,026,102
              
              
              
              843,498Deferred
      rent
              
              
              38,665
              
              
              
              88,565Non
      cash stock based compensation expense
              
              
              80,949
              
              
              
              30,438Non
      cash warrant expense
              
              
              106,407
              
              
              
              102,275Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              214,522
              
              
              
              314,675Inventory
              
              
              (406,404
              )
              
              
              (1,705,849
              )Prepaid
      expenses and other assets
              
              
              446,752
              
              
              
              (295,837
              )Accounts
      payable
              
              
              1,735,179
              
              
              
              1,951,181Accrued
      expenses and other liabilities
              
              
              456,399
              
              
              
              (534,915
              )Net
      cash provided by (used in) operating activities
              
              
              2,017,649
              
              
              
              (196,687
              )Investing
      activities:Acquisition
      of retail stores and non-compete agreement
              
              
              (1,350,000
              )
              
              
              -Purchase
      of property and equipment
              
              
              (568,183
              )
              
              
              (305,163
              )Net
      cash used in investing activities
              
              
              (1,918,183
              )
              
              
              (305,163
              )Financing
      activities:Net
      borrowings under line of credit
              
              
              (22,523
              )
              
              
              313,444Principal
      payments on notes payable
              
              
              (302,119
              )
              
              
              (314,783
              )Decrease
      in restricted cash
              
              
              205,457
              
              
              
              113,562Principal
      payments on capital lease obligations
              
              
              (16,621
              )
              
              
              (329,910
              )Deferred
      financing costs
              
              
              29,600
              
              
              
              22,899Proceeds
      from exercise of stock options
              
              
              -
              
              
              
              1,277Net
      cash used in financing activities
              
              
              (106,206
              )
              
              
              (193,511
              )Net
      decrease in cash and cash equivalents
              
              
              (6,740
              )
              
              
              (695,361
              )Cash
      and cash equivalents, beginning of period
              
              
              71,532
              
              
              
              760,376Cash
      and cash equivalents, end of period
              
              $
              64,792
              
              
              $
              65,015Supplemental
      disclosure of non-cash financing activities:Conversion
      of Series B convertible preferred stock to common stock
              
              $
              34,447
              
              
              $
              14,800












-4-




iPARTY
CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


June
28, 2008


(Unaudited)





1.  BASIS OF PRESENTATION
AND SIGNIFICANT ACCOUNTING POLICIES:





Interim
Financial Information





The
interim consolidated financial statements as of June 28, 2008 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 29, 2007 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 29, 2007.





Principles
of Consolidation





The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary 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. Five suppliers
account for approximately 49% of the Company’s purchases of merchandise for the
six months ended June 28, 2008, 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. The Supply
Agreement had 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 $1,705,180 at June 28, 2008 and $329,756 at December
29, 2007.  The increase in outstanding checks as of June 28, 2008 is
due to the timing of payments made in June 2008 compared to the timing of
payments made in December 2007.





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
issued in 2006 was determined by using the Black-Scholes model (volatility of
108%, interest of 4.73% and expected life of five years).  The fair
value of the warrants issued in 2008 was also determined by using the
Black-Scholes model (volatility of 101%, risk free rate of 3.21% and expected
life of five years).





Inventories





Inventories
consist of party supplies and are valued at the lower of moving weighted-average
cost or market.  Inventory has been reduced by an allowance for
obsolete and excess inventory, which is based on management’s review of
inventories on hand compared to estimated future sales.  The Company
records vendor rebates, discounts and certain other adjustments to inventory,
including freight costs, and these amounts are recognized in the income
statement as the related goods are sold.





The
activity in the allowance for obsolete and excess inventory is as
follows:







Six
      months ended
              
              
              Twelve
      months endedJun 28, 2008
              
              
              Dec 29, 2007Beginning
      balance
              
              $
              969,859
              
              
              $
              1,079,814Increases
      to reserve
              
              
              190,000
              
              
              
              263,847Write-offs
      against reserve
              
              
              (27,760
              )
              
              
              (373,802
              )Ending
      balance
              
              $
              1,132,099
              
              
              $
              969,859






-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 June 28, 2008, the Company had no
material unrecognized tax benefits and no adjustments to liabilities, retained
earnings or operations were required.





Net
Income (Loss) per Share





Net income
(loss) per basic share is computed by dividing net income (loss) available to
common shareholders by the weighted-average number of common shares
outstanding.  The common share equivalents of Series B-F are required
to be included in the calculation of net income (loss) per basic share in
accordance with EITF Consensus 03-6, Participating Securities and the Two-Class Method
under SFAS No. 128, which supersedes 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 on the same basis as if the shares of Series
B-F were converted to common stock, the application of EITF 03-6 has no effect
on the amount of income (loss) per basic share of common stock.  For
periods with net losses, the Company does not allocate losses to Series B-F
preferred stock.





Net income
(loss) per diluted share under EITF 03-6 is computed by dividing net income
(loss) by the weighted average number of common shares outstanding, plus the
common share equivalents of Series B-F preferred stock on an if-converted basis,
plus the common share equivalents of the “in the money” stock options and
warrants as computed by the treasury method.  For the periods with net
losses, the Company excludes those common share equivalents since their impact
would be anti-dilutive.





As of June
28, 2008, there were 28,500,554 potential additional common share equivalents
outstanding, which were not included in the calculation of diluted net loss per
share for the six months then ended because their effect would be
anti-dilutive.  These included 15,478,916 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,
100,000 shares upon the exercise of warrants with a weighted average exercise
price of $1.50 per share and 10,310,094 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 six months endedJun 28, 2008
              
              
              Jun 30, 2007
              
              
              Jun 28, 2008
              
              
              Jun 30, 2007Stock
      Based Compensation Expense
              
              $
              38,843
              
              
              $
              19,546
              
              
              $
              80,949
              
              
              $
              30,438





Stock
based compensation expense is included in general and administrative expense and
had no impact on cash flow from operations and cash flow from financing
activities for the six months ended June 28, 2008.





On
September 26, 2007, the Board of Directors, acting on the recommendation of the
Compensation Committee, extended the expiration date on options to purchase
970,087 shares of the Company’s common stock held by a former officer for an
additional six months following his termination date, making the expiration date
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 an aggregate of 200,000 shares of
common stock to a key employee and each of the four independent members of the
Board of Directors on June 4, 2008 at an exercise price of $0.29 per
share.  Similarly, the Company granted options for the purchase of an
aggregate 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. The weighted-average fair market value using
the Black-Scholes option pricing model of the options granted on June 4, 2008
was $0.22 per share, and was $0.33 per share for the options granted on June 6,
2007. The fair market value of the stock options at the date of the grant was
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions:




For the three months ended
                
                
                For the six months endedJun 28, 2008
                
                
                Jun 30, 2007
                
                
                Jun 28, 2008
                
                
                Jun 30, 2007Risk-free
      interest rate
                
                
                3.21
                %
                
                
                4.94
                %
                
                
                3.21
                %
                
                
                4.94
                %Expected
      volatility
                
                
                101.2
                %
                
                
                102.6
                %
                
                
                101.2
                %
                
                
                102.6
                %Weighted
      average expected life (in years)
                
                
                5.0
                
                
                
                5.0
                
                
                
                5.0
                
                
                
                5.0Expected
      dividends
                
                
                0.00
                %
                
                
                0.00
                %
                
                
                0.00
                %
                
                
                0.00
                %




-8-





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




WeightedNumber
              
              
              Weighted
              
              
              
              
              
              
              
              
              
              
              
              Averageof
              
              
              Average
              
              
              
              
              
              
              
              
              
              
              
              Remaining
              
              
              AggregateStock
              
              
              Exercise
              
              
              Price
              
              
              Life
              
              
              IntrinsicOptions
              
              
              Price
              
              
              Range
              
              
              (Years)
              
              
              ValueOutstanding
      - December 29, 2007
              
              
              10,130,594
              
              
              $
              0.59
              
              
              $
              0.13
              
              
              
              -
              
              
              $
              4.25Granted
              
              
              200,000
              
              
              
              0.29
              
              
              
              0.29
              
              
              
              -
              
              
              
              0.29Expired/Forfeited
              
              
              (20,500
              )
              
              
              0.57
              
              
              
              0.20
              
              
              
              -
              
              
              
              0.69Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Outstanding
      - June 28, 2008
              
              
              10,310,094
              
              
              $
              0.59
              
              
              $
              0.13
              
              
              
              -
              
              
              $
              4.25
              
              
              
              4.0
              
              
              $
              10,749Exercisable
      - June 28, 2008
              
              
              9,194,392
              
              
              $
              0.61
              
              
              $
              0.13
              
              
              
              -
              
              
              $
              4.25
              
              
              
              3.4
              
              
              $
              10,749Available
      for grant - June 28, 2008
              
              
              254,645




The
following table summarizes information for options outstanding and exercisable
at June 28, 2008:






Outstanding
              
              
              ExercisableWeightedNumber
              
              
              Average
              
              
              Weighted
              
              
              Number
              
              
              Weightedof
              
              
              Remaining
              
              
              Average
              
              
              of
              
              
              AverageStock
              
              
              Life
              
              
              Exercise
              
              
              Stock
              
              
              ExercisePrice Range
              
              
              Options
              
              
              (Years)
              
              
              Price
              
              
              Options
              
              
              Price$
              0.13
              
              
              
              -
              
              
              $
              0.20
              
              
              
              137,750
              
              
              
              3.1
              
              
              $
              0.18
              
              
              
              137,750
              
              
              $
              0.180.21
              
              
              
              -
              
              
              
              0.30
              
              
              
              3,988,682
              
              
              
              2.7
              
              
              
              0.25
              
              
              
              3,788,682
              
              
              
              0.250.31
              
              
              
              -
              
              
              
              0.50
              
              
              
              2,468,027
              
              
              
              6.8
              
              
              
              0.39
              
              
              
              1,558,150
              
              
              
              0.370.51
              
              
              
              -
              
              
              
              1.00
              
              
              
              3,074,435
              
              
              
              4.2
              
              
              
              0.78
              
              
              
              3,068,610
              
              
              
              0.781.01
              
              
              
              -
              
              
              
              3.50
              
              
              
              541,200
              
              
              
              1.1
              
              
              
              2.33
              
              
              
              541,200
              
              
              
              2.333.51
              
              
              
              -
              
              
              
              4.25
              
              
              
              100,000
              
              
              
              1.5
              
              
              
              4.14
              
              
              
              100,000
              
              
              
              4.14Total
              
              
              
              
              
              
              
              
              
              
              
              10,310,094
              
              
              
              4.0
              
              
              $
              0.59
              
              
              
              9,194,392
              
              
              $
              0.61






The
remaining unrecognized stock based compensation expense related to unvested
awards at June 28, 2008, was $323,993 and the period of time over which this
expense will be recognized is 4.0 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 LifeLeasehold
      improvements
              
              Lesser
      of term of lease or 10 yearsFurniture
      and fixtures
              
              7
      yearsComputer
      hardware and software
              
              3
      yearsEquipment
              
              5
      years


-9-





Intangible
Assets





On August
15, 2007, the Company entered into an Asset Purchase Agreement to purchase two
franchised Party City Corporation retail stores in Lincoln, Rhode Island and
Warwick, Rhode Island, in exchange for aggregate consideration of $1,350,000
plus up to $400,000 for associated inventory.  On January 2, 2008, the
Company completed the purchase of the two stores. The aggregate consideration
paid was $1,350,000 plus approximately $195,000 for associated inventory.
Funding for the purchase was obtained from the Company’s existing line of credit
with Wells Fargo Retail Finance. The stores were converted into iParty stores
immediately following the closing of the transaction.





Intangible
assets consist primarily of (i) the values of two non-compete agreements
acquired in conjunction with the purchase of retail stores in 2006 and 2008, and
(ii) the values of retail store leases acquired in those transactions. These
assets have been accounted for at fair value as of their respective acquisition
dates using significant other observable inputs, or Level 2 criteria, specified
by SFAS No. 157 (see Fair Value Measurements section below).





The first
non-compete agreement, from Party City Corporation and its
affiliates,  covers Massachusetts, Maine, New Hampshire, Vermont,
Rhode Island, and Windsor and New London counties in Connecticut, and expires in
2011.  The second non-compete agreement was acquired in connection
with the Company’s purchase in January 2008 of the two party supply stores in
Lincoln and Warwick, Rhode Island described above. It covers Rhode Island for
five years from the date of closing and the rest of New England for three years.
Both non-compete agreements have an estimated life of 60 months and are subject
to certain terms and conditions in their respective acquisition
agreements.





The
occupancy valuations relate to acquired retail store leases for stores in
Peabody, Massachusetts (estimated life of 90 months), Lincoln, Rhode Island
(estimated life of 79 months) and Warwick, Rhode Island (estimated life of 96
months). Intangible assets also include legal and other transaction costs
incurred related to the purchase of the Peabody, Lincoln and Warwick
stores.





Intangible
assets as of June 28, 2008 and December 29, 2007 were:






Jun 28, 2008
              
              
              Dec 29, 2007Non-compete
      agreements
              
              $
              2,358,540
              
              
              
              1,688,346Occupancy
      valuations
              
              
              944,716
              
              
              
              449,716Other
              
              
              157,855
              
              
              
              182,048Intangible
      assets
              
              
              3,461,111
              
              
              
              2,320,110Less:
      accumulated amortization
              
              
              (878,465
              )
              
              
              (563,310
              )Intangible
      assets, net
              
              $
              2,582,646
              
              
              $
              1,756,800




Amortization
expense for these intangible assets was:




For the three months ended
              
              
              For the six months endedJun 28, 2008
              
              
              Jun 30, 2007
              
              
              Jun 28, 2008
              
              
              Jun 30, 2007Amortization
      expense
              
              $
              162,394
              
              
              $
              114,498
              
              
              $
              315,154
              
              
              $
              228,996





The
amortization expense for the non-compete agreement and other intangible assets
is 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 in the Consolidated
Statement of Operations.






-10-




Future
amortization expense related to these intangible assets as of June 28, 2008
is:






Year
              
              Amount2008
              
              $
              315,1542009
              
              
              630,3082010
              
              
              630,3082011
              
              
              489,6122012
              
              
              292,638Thereafter
              
              
              224,626Total
              
              $
              2,582,646





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 third quarter of 2007,
the Company decided to close its stores in North Providence, Rhode Island and
Auburn, Massachusettsat the end of their
lease terms, which expired on January 31, 2008.  No material
impairment costs were incurred as a result of that decision.  As of
June 28, 2008, the Company does not believe that any of its assets are
impaired.





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 the warrant 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 $2,261,358 as of June 28, 2008 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 June 28, 2008 of $831,136. 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.





On August
7, 2006, the Company entered into a Supply Agreement with Amscan Inc.
(“Amscan”), the largest supplier in the party goods industry.  The
Supply Agreement with Amscan gives the Company the right to receive certain
additional rebates and more favorable pricing terms over the term of the
agreement than generally were available to the Company under its previous terms
with Amscan.  The right to receive additional rebates, and the amount
of such rebates, are subject to the Company’s achievement of increased levels of
purchases and other factors provided for in the Supply Agreement.  In
exchange, the Supply Agreement obligates the Company to purchase increased
levels of merchandise from Amscan until 2012.  The Supply Agreement
provided for an initial ramp-up period during 2006 and 2007 and, beginning with
calendar year 2008, requires the Company to purchase on an annual basis
merchandise equal to the total number of its stores open during such calendar
year, multiplied by $180,000 until 2012.  The Supply Agreement
provides for penalties in the event the Company fails to attain the annual
purchase commitment.




The Supply
Agreement also provided for Amscan to extend, until October 31, 2006,
approximately $1,150,000 of certain currently due Amscan payables owed by the
Company to Amscan which would otherwise have been payable on August 8, 2006 (the
“extended payables”) and gave the Company the right, at its option, to convert
the extended payables into a subordinated promissory note. On October 24, 2006,
the Company 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, which is the Amscan Note defined
above.






-11-




On August
7, 2006, the Company also entered into and simultaneously closed an Asset
Purchase Agreement with Party City, an affiliate of Amscan, pursuant to which
the Company 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 is the Party City Note defined above, and
$1,850,000 in cash.





Stockholders’
Equity





During the
six months ended June 28, 2008, there were no exercises of stock options; 31,012
shares of common stock were issued upon conversion of 2,315 shares of Series B
convertible preferred stock.





Fair
Value Measurements





Effective
December 30, 2007, the Company adopted SFAS No. 157, Fair Value Measurements.SFAS
No. 157 defines fair value as the price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS No. 157 also describes three
levels of inputs that may be used to measure the fair value:





Level 1 –
quoted prices in active markets for identical assets or liabilities





Level 2 –
observable inputs other than quoted prices in active markets for identical
assets or liabilities





Level 3 –
unobservable inputs in which there is little or no market data available, which
require the reporting entity to develop its own assumptions





The
adoption of SFAS No. 157 had no effect on the Company's financial statements and
related disclosures since the Company does not have financial assets or
liabilities on a recurring basis that are subject to the provisions of SFAS No.
157.





Reclassifications





Certain prior year balances have been
reclassified to conform to current year presentation.






-12-




Item 2.  Management’s Discussion and Analysis of
Financial Condition and Results of Operations





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





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





Overview





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





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





The
following table shows the number of stores in operation:




For the six months endedJun 28, 2008
              
              
              Jun 30, 2007Beginning
      of period
              
              
              50
              
              
              
              50Openings
      / Acquisitions
              
              
              2
              
              
              
              -Closings
              
              
              (2
              )
              
              
              -End
      of period
              
              
              50
              
              
              
              50




Our stores feature over 20,000 products
ranging from paper party goods, Halloween costumes, greeting cards and balloons
to more unique merchandise such as 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, Hanukkah and professional
sports playoff events.  We also focus our business closely on lifetime
events such as anniversaries, graduations, birthdays, and bridal or baby
showers.






-13-


Trends
and Quarterly Summary




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





For the
second quarter of 2008, our consolidated revenues were $20.1 million, compared
to $20.4 million for the second quarter in 2007. The decrease in second quarter
revenues from the year-ago period included a 2.8% decrease in comparable store
sales from stores open more than one year. The decrease in consolidated revenue
was primarily due to an early Easter holiday, which occurred in the first
quarter rather than the second quarter, shifting sales that normally occur in
the second quarter to the first quarter. Consolidated gross profit margin was
42.2% for the second quarter of 2008 compared to a margin of 43.2% for the same
period in 2007. The decline in gross margins was substantially due to decreased
leveraging of occupancy costs related to lower sales.  Consolidated
net income for the second quarter of 2008 was $0.2 million, or $0.00 per share,
compared to consolidated net income of $0.5 million, or $0.01 per share, for the
second quarter in 2007.





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





Acquisitions





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





On August
15, 2007, we entered into an Asset Purchase Agreement to purchase two franchised
Party City Corporation retail stores in Lincoln, Rhode Island and Warwick, Rhode
Island, in exchange for aggregate consideration of $1,350,000 plus up to
$400,000 for associated inventory. On January 2, 2008, we completed the purchase
of the two stores. The aggregate consideration paid was $1,350,000 plus
approximately $195,000 for associated inventory. The consideration paid for the
assets acquired in the transaction was allocated based upon an independent
appraisal to the following, based on their fair values on the date of
purchase:






Fair Value at
                Jan 2, 2008Non-compete
      agreement
              
              $
              781,000Occupancy
      valuation
              
              
              495,000Equipment
      and other
              
              
              74,000$
              1,350,000








Funding
for the purchase was obtained from our existing line of credit with Wells Fargo
Retail Finance. The stores were converted into iParty stores immediately
following the closing of the transaction.





Results
of Operations





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





The second
quarter of fiscal year 2008 had 13 weeks and ended on June 28,
2008.  The second quarter of fiscal year 2007 had 13 weeks and ended
on June 30, 2007.






-14-




Three
Months Ended June 28, 2008 Compared to Three Months Ended June 30,
2007





Revenues





Revenues
include the selling price of party goods sold, net of returns and discounts, and
are recognized at the point of sale.  Our consolidated revenues for
the second quarter of fiscal 2008 were $20,103,668, a decrease of $308,251, or
1.5% from the second quarter of the prior fiscal year, mainly due to an early
Easter holiday, which occurred in the first quarter of 2008 and in the second
quarter of 2007.




For the three months endedJun 28, 2008
              
              
              Jun 30, 2007Revenues
              
              $
              20,103,668
              
              
              $
              20,411,919Increase
      (decrease) in revenues
              
              
              -1.5
              %
              
              
              9.8
              %




Sales for
the second quarter of fiscal 2008 included sales from 48 comparable stores
(defined as stores open for at least one full year) and two stores that were
acquired in January 2008. Comparable store sales for the quarter decreased by
2.8%.





Cost
of products sold and occupancy costs





Cost of
products sold and occupancy costs consist of the cost of merchandise sold to
customers and the occupancy costs for our stores.  Our cost of
products sold and occupancy costs for the second quarter of fiscal 2008 were
$11,612,587, or 57.8% of revenues, an increase of $11,713 and an increase of 1.0
percentage point, as a percentage of revenues, from the second quarter of the
prior fiscal year.






For the three months endedJun 28, 2008
              
              
              Jun 30, 2007Cost
      of products sold and occupancy costs
              
              $
              11,612,587
              
              
              $
              11,600,874Percentage
      of revenues
              
              
              57.8
              %
              
              
              56.8
              %


As a
percentage of revenues, the increase in cost of products sold and occupancy
costs was primarily attributable to increases in occupancy costs as well as the
decreased leveraging of those costs related to the lower sales in the second
quarter of 2008 compared to the second quarter of the prior fiscal
year.





Marketing and sales
expense





Marketing
and sales expense consists primarily of advertising and promotional
expenditures, all store payroll and related expenses for personnel engaged in
marketing and selling activities and other non-payroll expenses associated with
operating our stores.  Our consolidated marketing and sales expense
for the second quarter of fiscal 2008 was $6,176,460, or 30.7% of revenues, an
increase of $96,762 or an increase of 0.9 percentage point, as a percentage of
revenues, from the second quarter of the prior fiscal year.







For the three months endedJun 28, 2008
              
              
              Jun 30, 2007Marketing
      and sales
              
              $
              6,176,460
              
              
              $
              6,079,698Percentage
      of revenues
              
              
              30.7
              %
              
              
              29.8
              %





As a
percentage of revenues, the increase in marketing and sales expense was
primarily attributable to the shift of some advertising expenses from the first
quarter to the second quarter of 2008 compared to the same periods in the prior
fiscal year.








-15-




General
and administrative expense




General
and administrative (“G&A”) expense consists of payroll and related expenses
for executive, merchandising, finance and administrative personnel, as well as
information technology, professional fees and other general corporate
expenses.  Our consolidated G&A expense for the second quarter of
fiscal 2008 was $1,946,634, or 9.7% of revenues, a decrease of $42,563 from the
second quarter of the prior fiscal year.




For the three months endedJun 28, 2008
              
              
              Jun 30, 2007General
      and administrative
              
              $
              1,946,634
              
              
              $
              1,989,197Percentage
      of revenues
              
              
              9.7
              %
              
              
              9.7
              %




The
decrease in general and administrative expense from the second quarter of the
prior fiscal year was primarily attributable to lower recruitment expenses and
computer maintenance costs.





Operating
income





Our
operating income for the second quarter of fiscal 2008 was $367,987, or 1.8% of
revenues, compared to an operating income of $742,150, or 3.6% of revenues for
the second quarter of the prior fiscal year.





Interest
expense





Our
interest expense in the second quarter of fiscal 2008 was $184,625, a decrease
of $47,134 from the second quarter of the prior fiscal year.  The
decrease in the second quarter of fiscal 2008 was primarily due to a lower
effective rate on our Highbridge Note and lower interest expense on our Amscan
Note due to amortization of that indebtedness.





Income
taxes





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





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





Net
Income





Our net
income in the second quarter of fiscal 2008 was $183,606, or $0.00 per basic and
diluted share, compared to a net income of $512,138, or $0.01 per basic and
diluted share, in the second quarter of the prior fiscal year. The decrease in
net income was mainly attributable to the decrease in sales and increase in
occupancy costs discussed above.





-16-





Six
Months Ended June 28, 2008 Compared to Six Months Ended June 30,
2007





Revenues





Revenues
include the selling price of party goods sold, net of returns and discounts, and
are recognized at the point of sale.  Our consolidated revenues for
the first six months of fiscal 2008 were $36,247,756, an increase of $236,678 or
0.7% from the first six months of the prior fiscal year.




For the six months endedJun 28, 2008
              
              
              Jun 30, 2007Revenues
              
              $
              36,247,756
              
              
              $
              36,011,078Increase
      in revenues
              
              
              0.7
              %
              
              
              12.1
              %


Sales for
the first six months of fiscal 2008 included sales from 48 comparable stores
(defined as stores open for at least one full year) and two stores that were
acquired in January 2008. Comparable store sales for the first six months
decreased by 0.7%.





Cost
of products sold and occupancy costs





Cost of
products sold and occupancy costs consist of the cost of merchandise sold to
customers and the occupancy costs for our stores.  Our cost of
products sold and occupancy costs for the first six months of fiscal 2008 were
$21,595,934, or 59.6% of revenues, an increase of $588,286 or an increase of 1.3
percentage points, as a percentage of revenues, from the first six months of the
prior fiscal year.




For the six months endedJun 28, 2008
              
              
              Jun 30, 2007Cost
      of products sold and occupancy costs
              
              $
              21,595,934
              
              
              $
              21,007,648Percentage
      of revenues
              
              
              59.6
              %
              
              
              58.3
              %




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





Marketing and sales
expense





Marketing
and sales expense consists primarily of advertising and promotional
expenditures, all store payroll and related expenses for personnel engaged in
marketing and selling activities and other non-payroll expenses associated with
operating our stores.  Our consolidated marketing and sales expense
for the first six months of fiscal 2008 was $12,026,212, or 33.2% of revenues,
an increase of $360,440 or an increase of 0.8 percentage points, as a percentage
of revenues, from the first six months of the prior fiscal year.





For the six months endedJun 28, 2008
              
              
              Jun 30, 2007Marketing
      and sales
              
              $
              12,026,212
              
              
              $
              11,665,772Percentage
      of revenues
              
              
              33.2
              %
              
              
              32.4
              %




As a
percentage of revenues, the increase in marketing and sales expense was
primarily attributable to increased store payroll expenses, plus store opening
costs associated with the two Rhode Island stores acquired on January 2,
2008.






-17-




General
and administrative expense





General
and administrative (“G&A”) expense consists of payroll and related expenses
for executive, merchandising, finance and administrative personnel, as well as
information technology, professional fees and other general corporate
expenses.  Our consolidated G&A expense for the first six months
of fiscal 2008 was $3,909,799, or 10.8% of revenues, an increase of $37,745 from
the first six months of the prior fiscal year.





For the six months endedJun 28, 2008
              
              
              Jun 30, 2007General
      and administrative
              
              $
              3,909,799
              
              
              $
              3,872,054Percentage
      of revenues
              
              
              10.8
              %
              
              
              10.8
              %




The
increase in general and administrative expense from the first six months of the
prior fiscal year was primarily attributable to amortization of the intangible
assets associated with the two Rhode Island stores that were acquired on January
2, 2008.





Operating
loss





Our
operating loss for the first six months of fiscal 2008 was $1,284,189, or 3.5%
of revenues, compared to an operating loss of $534,396, or 1.5% of revenues for
the first six months of the prior fiscal year.





Interest
expense





Our
interest expense in the first six months of fiscal 2008 was $398,653, a decrease
of $61,150 from the first six months of the prior fiscal year.  The
decrease in the first six months of fiscal 2008 was primarily due to a lower
effective rate on our Highbridge Note and lower interest expense on our Amscan
Note, due to amortization of that indebtedness.





Income
taxes





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





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





Net
Loss





Our net
loss in the first six months of fiscal 2008 was $1,680,922, or $0.07 per basic
and diluted share, compared to a net loss of $990,718, or $0.04 per basic and
diluted share, in the first six months of the prior fiscal year. The increase in
net loss was mainly attributable to the decrease in sales and increase in
occupancy costs and store opening costs discussed above.






-18-




Liquidity
and Capital Resources





Our
primary uses of cash are:





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


·
            occupancy
      expenses of our stores;


·
            employee
      salaries; and


·
            new
      store openings, including
acquisitions.





Our primary sources of cash
are:





·
            cash
      from operating activities; and


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





Our
prospective cash flows are subject to certain trends, events and uncertainties,
including demands for capital to support growth, improve our infrastructure,
respond to economic conditions, and meet contractual commitments.  We
expect our capital expenditures for 2008 to include amounts related to improving
existing stores and possibly amounts related to asset purchases for new stores
and other expenditures related to opening new stores.  We believe,
based on our current operating plan, that anticipated revenues from operations
and borrowings available under our existing line of credit will be sufficient to
fund our operations, working capital requirements and capital expenditures
through the next twelve months.  In the event that our operating plan
changes due to changes in our strategic plans, lower-than-expected revenues,
unanticipated expenses, increased competition, unfavorable economic conditions
or other unforeseen circumstances, our liquidity may be negatively
impacted.  If so, we would be required to adjust our expenditures in
2008 to conserve working capital or raise additional capital, possibly including
debt or equity financing, to fund operations and our growth
strategy.  There can be no assurance, that, should we seek or require
additional financing, such financing will be available, if at all, on terms and
conditions acceptable to us, affecting our ability to effectuate our acquisition
strategy. In September 2009, the Highbridge Note in the principal amount of
$2,500,000, as defined below, is due and payable in full. In January 2010, our
line of credit with Wells Fargo, as discussed more fully below, expires by its
terms. We expect to extend our line of credit prior to its expiration date and
to pay off with new indebtedness or refinance out of our existing line of credit
the Highbridge Note. However, if we are unable to do so, for the reasons
discussed above and in our risk factors, we would need to secure additional
financing, which may not be available on commercially reasonable terms or at
all, and could result in a materially adverse effect on our results of
operations and financial position.





Our
operating activities provided $2,017,649 in the first six months of fiscal 2008
compared to $196,687 used in the first six months of the prior fiscal year, an
increase of $2,214,336.  The increase in cash provided in operating
activities was primarily due to lower inventory purchases during the first six
months of 2008 as compared to the first six months of 2007.





We used
$1,918,183 in investing activities in the first six months of fiscal 2008
compared to $305,163 in the first six months of the prior fiscal year, an
increase of $1,613,020.  The cash invested in the first six months of
fiscal 2008 was primarily due to the acquisition in January 2008 of two retail
stores located in Rhode Island and the related non-compete agreement (see
discussion below).  The cash invested in the first six months of
fiscal 2007 was primarily due to fixture and equipment improvements in our
existing retail stores, plus the implementation of a new human resource
information and payroll system.





Our
financing activities used $106,206 in the first six months of fiscal 2008
compared to $193,511 in the first six months of the prior fiscal year, a
decrease of $87,305.  The decrease was primarily related to lower
principal payments in 2008 on capital lease obligations.





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






-19-




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





Our
inventory consists of party supplies which are valued at the lower of
weighted-average cost or market and are reduced by an allowance for obsolete and
excess inventory and are further reduced or increased by other adjustments,
including vendor rebates and discounts and freight costs.  Our line of
credit availability calculation allows us to borrow against “acceptable
inventory at cost”, which is based on our inventory at cost and applies
adjustments that our lender has approved, which may be different than
adjustments we use for valuing our inventory in our financial statements, such
as the adjustment to reserve for inventory shortage.  The amount of
“acceptable inventory at cost” was approximately $14,999,093 at June 28,
2008.





Our
accounts receivable consist primarily of credit card receivables and vendor
rebate receivables.  Our line of credit availability calculation
allows us to borrow against “eligible credit card receivables”, which are the
credit card receivables for the previous two to three days of
business.  The amount of “eligible credit card receivables” was
approximately $325,751 at June 28, 2008.





Our total
borrowing base is determined by adding the “acceptable inventory at cost” times
an agreed upon advance rate plus the “eligible credit card receivables” times an
agreed upon advance rate but not to exceed our established credit limit, which
was $12,500,000 at June 28, 2008.  Under the terms of our line of
credit, our $12,500,000 credit limit was further reduced by (1) a minimum
availability block, (2) customer deposits, (3) gift certificates, (4)
merchandise credits and (5) outstanding letters of credit. The amounts
outstanding under our line were $2,590,988 at June 28, 2008 and $1,476,163 as of
June 30, 2007.  Therefore, our additional availability was $5,682,749
at June 28, 2008 and $6,441,972 at June 30, 2007.





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





Our line
of credit includes a number of covenants, including a financial covenant
requiring us to maintain a minimum availability under the line of 5% of the
credit limit.  The agreement also has a covenant that requires us to
limit our capital expenditures to within 110% of those amounts included in our
business plan, which may be updated from time to time.  At June 28,
2008, we were in compliance with these financial covenants.





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





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






-20-




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





On October
24, 2006, we elected to convert $1,143,896 of extended payables originally due
to Amscan as of August 8, 2006 as well as an additional $675,477 of payables due
to Amscan as of September 28, 2006 into a single subordinated promissory note in
the total principal amount of $1,819,373 (“the Amscan Note”).  The
Amscan Note  bears interest at the rate of 11.0% per annum and is
payable in thirty-six (36) equal monthly installments of principal and interest
of $59,562 commencing on November 1, 2006, and on the first day of each month
thereafter until October 1, 2009, when the entire remaining principal balance
and all accrued interest is due and payable.





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





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





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





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






-21-




Contractual
obligations at June 28, 2008 were as follows:




Payments Due By PeriodWithin
              
              
              WithinWithin
              
              
              2
      - 3
              
              
              4
      - 5
              
              
              After1 Year
              
              
              Years
              
              
              Years
              
              
              5 Years
              
              
              TotalLine
      of credit
              
              $
              2,593,408
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              2,593,408Capital
      lease obligations
              
              
              26,114
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              26,114Notes
      payable
              
              
              938,284
              
              
              
              3,393,841
              
              
              
              -
              
              
              
              -
              
              
              
              4,332,125Supply
      agreement
              
              
              9,100,728
              
              
              
              18,000,000
              
              
              
              13,500,000
              
              
              
              -
              
              
              
              40,600,728Operating
      leases (including retail space leases)
              
              
              8,733,410
              
              
              
              15,373,251
              
              
              
              10,046,077
              
              
              
              7,584,706
              
              
              
              41,737,444Total
      contractual obligations
              
              $
              21,391,944
              
              
              $
              36,767,092
              
              
              $
              23,546,077
              
              
              $
              7,584,706
              
              
              $
              89,289,819




In
addition, at June 28, 2008, we had outstanding purchase orders, exclusive of the
amounts to which the company is obligated under the Amscan supply agreement,
totaling approximately $8,586,444 for the acquisition of inventory and
non-inventory items that are scheduled for delivery after June 28,
2008.


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 graduation and summer merchandise in the second quarter and sales of
Halloween and Christmas merchandise in the fourth quarter.  We have
historically operated at a loss during the first and third
quarters.





Geographic
Concentration





As of June
28, 2008, 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.





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 herein under Item 1A, “Risk
Factors” of our Annual Report on Form 10-K for the fiscal year ended December
29, 2007, and Part II, Item 1A, “Risk Factors” contained in our Quarterly
Reports on Form 10-Q, including this one, and in our periodic reports filed with
the Commission.  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 our management to make significant estimates and
assumptions (see Note 2 to our 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.





-22-




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.  The adjustment in the fourth quarter of 2007 included an
estimated reduction of $123,249 to the cost of products sold during the previous
three quarters.





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 to date.





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.





Intangible
Assets





Intangible assets consist primarily
of the values of two non-compete agreements acquired in conjunction with the
purchase of retail stores in 2006 and 2008, and the values of retail store
leases acquired in those transactions.





The first
non-compete agreement, from Party City Corporation and its affiliates, covers
Massachusetts, Maine, New Hampshire, Vermont, Rhode Island, and Windsor and New
London counties in Connecticut, and expires in 2011.  The second
non-compete agreement was acquired in connection with the Company’s purchase in
January 2008 of two franchised party supply stores in Lincoln and Warwick, Rhode
Island.  The acquired Rhode Island stores had been operated as Party
City franchise stores, and were converted to iParty stores immediately following
the closing. The second non-compete agreement covers Rhode Island for five years
from the date of closing and the rest of New England for three years. Both
non-compete agreements have an estimated life of 60 months and are subject to
certain terms and conditions in their respective acquisition
agreements.





The
occupancy valuations related to acquired retail store leases are for stores in
Peabody, Massachusetts (estimated life of 90 months), Lincoln, Rhode Island
(estimated life of 79 months) and Warwick, Rhode Island (estimated life of 96
months). Intangible assets also include legal and other transaction costs
incurred related to the purchase of the Peabody, Lincoln and Warwick
stores.






-23-




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.  As of December 29, 2007, we planned to close two stores in
early January 2008, at the end of their lease terms.  These two stores
were closed as planned. No impairment charges were required for these stores, as
the assets related to them have been fully amortized, except for immaterial
amounts, and no liability existed for future lease costs. We are not aware of
any impairment indicators for any of our remaining stores at June 28,
2008.





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 2007 and 2006, (2) we have achieved positive comparable store
sales growth for the last six years and (3) we had improved merchandise margins
in 2007.  The negative evidence that we considered included: (1) we
realized a net loss in 2005, (2) our merchandise margins decreased in 2006 and
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 $21.2 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 fluctuating 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, (e) the costs of opening or acquiring new stores
will put pressure on our profit margins until these stores reach maturity, (f)
the expected costs of increased regulatory compliance, including, without
limitation, those associated with Section 404 of the Sarbanes-Oxley Act, will
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 track record of
profitability and we can reduce our exposure to the risks described
above.  Should we determine that we will be able to realize our
deferred tax assets in the future, an adjustment to our deferred tax assets
would increase income in the period we made such a determination.





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
(“FIN48”) on December 31, 2006.  At the adoption date and as of June
28, 2008, we had no material unrecognized tax benefits and no adjustments to
liabilities, retained earnings or operations were required.





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.






-24-




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 revenue and expenses during the reporting
period.  Our actual results could differ from our
estimates.





New
Accounting Pronouncements





No new
accounting pronouncements were issued during the quarter ended June 28, 2008
that are expected to have a material impact on our financial position or results
of operations.





Item 3.  Quantitative and Qualitative Disclosures
about Market Risk





There has
been no material change in our market risk exposure since the filing of our
Annual Report on Form 10-K.





Item 4.  Controls and Procedures





(a)         Evaluation of Disclosure Controls
and Procedures.  The Chief Executive Officer and the Chief
Financial Officer of iParty (its principal executive officer and principal
financial officer, respectively) have concluded, based on their evaluation as of
June 28, 2008, 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 were designed to provide a reasonable level of assurance
of reaching iParty’s disclosure requirements and are effective in reaching that
level of assurance.





(b)         Changes in Internal
Controls.  No change in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended) occurred during the fiscal quarter ended June
28, 2008 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.






-25-




PART II – OTHER INFORMATION





Item 1. Legal Proceedings





The
Company is not a party to any material pending legal proceedings, other than
ordinary routine matters incidental to its business, which we do not expect,
individually or in the aggregate, to have a material effect on its financial
position or results of operations.





Item 1A.  Risk Factors





There have
been no material changes to the risk factors previously disclosed in Item 1A,
“Risk Factors” in our Annual Report on Form 10K for the fiscal year ended
December 29, 2007, as filed with the SEC on March 13, 2008.





Item 2. Unregistered Sales of Equity and Securities and
Use of Proceeds







On
February 28, 2008, the Company entered into an agreement with Booke &
Company, Inc. (“Booke”) to provide investor relations services to the
Company.  The agreement with Booke is for a term of one year. In connection
with Booke providing services to the Company, on June 19, 2008, the Company
issued warrants to purchase up to an aggregate of 100,000 shares of common stock
at an exercise price of $1.50 per share to two employees of Booke.  The
warrants are five year warrants that vest periodically over the first year of
the warrant.  The warrants and the shares of common stock underlying the
warrants have not been registered under the Securities Act of 1933.  The
issuance of the warrants is exempt from the registration provisions of the
Securities Act of 1933, pursuant to Section 4(2) and Rule 506 of Regulation D
promulgated thereunder.  The issuance of the warrants did not trigger any
anti-dilution provisions under the Company’s certificate of
incorporation.




Item 3. Defaults upon Senior Securities





Not
applicable.





Item 4. Submission of Matters to a Vote of Security
Holders





On June 4,
2008 and, at a reconvened meeting on June 27, 2008, we held our Annual Meeting
of Stockholders.  At the Annual Meeting, our stockholders elected six
(6) directors to our Board of Directors, including the designee of the holders
of the Series C convertible preferred stock, and approved the proposal to ratify
the appointment of Ernst & Young LLP as our independent registered public
accountants for the fiscal year ended December 27, 2008.  Our
stockholders did not cast the requisite number of votes to approve the proposal
to amend the terms of the Series B convertible preferred stock to change the
requisite number of shares or holders necessary to amend or waive certain
provisions therein.  Each director nominee, other than the Series C
director nominee, was approved by a plurality of the votes cast.  The
Series C director nominee was approved by a majority of the votes cast by the
holders of the Series C convertible preferred stock.  The ratification
of the appointment of our independent registered public accountants was approved
by the requisite affirmative vote of a majority of the total votes cast by
stockholders.





Proposal
1. Election of the Board of Directors, including Series C director
nominee





Directors
            
            Votes
      For
            
            WithheldSal
      Perisano
            
            29,601,218
            
            732,625Daniel
      DeWolf
            
            30,147,618
            
            186,225Frank
      Haydu
            
            30,147,618
            
            186,225Eric
      Schindler
            
            30,147,868
            
            185,975Joseph
      Vassalluzzo
            
            29,601,218
            
            732,625Robert
      Jevon*
            
            1,300,000
            
            -


* Series C
Director








-26-





Proposal
2.  To amend the Certificate of Designations – Series B





Votes
      For
            
            Against
            
            Abstain
            
            Not
      VotedCommon
      Shares
            
            15,870,305
            
            991,554
            
            76,760
            
            14,688,301Shares
      voted – B Preferred
            
            2,274,005
            
            198,705
            
            16,250
            
            3,544,873Stockholders
      – B Preferred
            
            22
            
            6
            
            1
            
            71




Proposal 3. Ratification of
appointment of Ernst & Young LLP as our independent public
auditor




Votes
      For
            
            Against
            
            Abstain30,130,028
            
            164,555
            
            39,260




Abstentions
and broker non votes counted as “Against” votes for purposes of counting the
votes on Proposal 2, but had no effect on the other proposals.





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.






-27-




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 PERISANO


Sal Perisano


Chairman of the Board and Chief
Executive Officer


(Principal Executive
Officer)





By:               /s/ DAVID
ROBERTSON


David Robertson


Chief Financial
Officer


(Principal Financial and Accounting
Officer)








Dated:
August 11, 2008






-28-




EXHIBIT INDEX











EXHIBIT

              NUMBER
            DESCRIPTIONEx.
      10.1
            Compensation
      Arrangements with Messrs. De Wolf, Haydu, Schindler, and
      Vassalluzzo


Ex.
      10.2
            Written
      Summary of Renewed One-Year Part-time Consulting Arrangement with Mr.
      Vassalluzzo


Ex.
      31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act


Ex.
      31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act


Ex.
      32.1
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section
    1350


Ex.
      32.2
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section
    1350







-29-