**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 April 1, 2006**





**OR**





**o** **TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934**





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





**Commission
      File Number 0-25507**







**iPARTY
      CORP.**


(Exact
      Name of Registrant as Specified in Its Charter)





**Delaware**
            **76-0547750**(State
                or Other Jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or Organization)
            Identification
                No.)





**270
                Bridge Street, Suite 301,****Dedham,
                Massachusetts**
            **02026**(Address
                of Principal Executive Offices)
            (Zip
                Code)





**(781)
      329-3952**


(Registrant’s
      Telephone Number, Including Area Code)









Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes þ No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
      one).


Large
      accelerated filer o Accelerated
      filer o Non-accelerated filer þ





Indicate
      by check mark whether the registrant is a shell company as defined in
      Rule 12b-2 of the Exchange Act.


Yes o No þ





As
      of May
      8, 2006 there were 22,547,487 shares of common stock, $.001 par value,
      outstanding.







**iPARTY
      CORP.**


**QUARTERLY
      REPORT ON FORM 10-Q**


**TABLE
      OF CONTENTS**








PART
                I - FINANCIAL 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
            9Item
                3.
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            17Item
                4.
            Controls
                and Procedures
            17PART
                II - OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            Not
                applicableItem
                1A.
            Risk
                Factors
            18Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            Not
                applicableItem
                3.
            Defaults
                upon Senior Securities
            Not
                applicableItem
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            Not
                applicableItem
                5.
            Other
                Information
            Not
                applicableItem
                6.
            Exhibits
            18SIGNATURES
            
            19EXHIBIT
                INDEX
            
            20Ex.
                31.1
            Certification
                of Chief Executive Officer pursuant to Section
                302 of the Sarbanes-Oxley ActEx.
                31.2
            Certification
                of Chief Financial Officer pursuant to Section
                302 of the Sarbanes-Oxley ActEx.
                32.1
            Certification
                of Chief Executive Officer pursuant to 18
                U.S.C. Section 1350Ex.
                32.2
            Certification
                of Chief Financial Officer pursuant to 18
                U.S.C. Section 1350




1


**PART
      I - FINANCIAL INFORMATION**




**Item
      1. Financial Statements**




**iPARTY
                  CORP.****CONSOLIDATED
                  BALANCE
                  SHEETS****Apr
                  1, 2006**
              
              **Dec
                  31, 2005****(Unaudited)****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              1,394,995
              
              $
              699,194Restricted
                  cash
              
              
              362,069
              
              
              651,617Accounts
                  receivable
              
              
              578,769
              
              
              1,246,545Inventory,
                  net
              
              
              13,489,104
              
              
              13,251,307Prepaid
                  expenses and other assets
              
              
              1,469,459
              
              
              548,114Total
                  current assets
              
              
              17,294,396
              
              
              16,396,777Property
                  and equipment, net
              
              
              4,987,880
              
              
              5,187,099Other
                  assets
              
              
              140,450
              
              
              133,200Total
                  assets
              
              $
              22,422,726
              
              $
              21,717,076**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              7,109,467
              
              $
              4,695,094Accrued
                  expenses
              
              
              2,132,686
              
              
              2,532,238Current
                  portion of capital lease obligations
              
              
              459,007
              
              
              442,358Borrowings
                  under line of credit
              
              
              7,530,809
              
              
              6,635,874Total
                  current liabilities
              
              
              17,231,969
              
              
              14,305,564Long-term
                  liabilities:Capital
                  lease obligations, net of current portion
              
              
              296,202
              
              
              426,995Other
                  liabilities
              
              
              728,538
              
              
              669,003Total
                  long-term liabilities
              
              
              1,024,740
              
              
              1,095,998Commitments
                  and contingenciesStockholders'
                  equity:Convertible
                  preferred stock - $.001 par value; 10,000,000 shares
                  authorized,Series
                  B convertible preferred stock - 1,150,000 shares authorized; 473,901
                  and
                  474,402shares
                  issued and outstanding at April 1, 2006 and Dec 31, 2005,
                  respectively(aggregate
                  liquidation value of $9,478,024 at April 1, 2006)
              
              
              7,051,650
              
              
              7,059,101Series
                  C convertible preferred stock - 100,000 shares authorized, issued
                  and
                  outstanding(aggregate
                  liquidation value of $2,000,000 at April 1, 2006)
              
              
              1,492,000
              
              
              1,492,000Series
                  D convertible preferred stock - 250,000 shares authorized, issued
                  and
                  outstanding(aggregate
                  liquidation value of $5,000,000 at April 1, 2006)
              
              
              3,652,500
              
              
              3,652,500Series
                  E convertible preferred stock - 296,667 shares authorized, issued
                  and
                  outstanding(aggregate
                  liquidation value of $1,112,500 at April 1, 2006)
              
              
              1,112,500
              
              
              1,112,500Series
                  F convertible preferred stock - 114,286 shares authorized, issued
                  and
                  outstanding(aggregate
                  liquidation value of $500,000 at April 1, 2006)
              
              
              500,000
              
              
              500,000Total
                  convertible preferred stock
              
              
              13,808,650
              
              
              13,816,101Common
                  stock - $.001 par value; 150,000,000 shares authorized; 22,547,487
                  and
                  22,536,637shares
                  issued and outstanding at April 1, 2006 and Dec 31, 2005,
                  respectivley
              
              
              22,547
              
              
              22,537Additional
                  paid-in capital
              
              
              50,987,957
              
              
              50,971,656Accumulated
                  deficit
              
              
              (60,653,137
              )
              
              (58,494,780
              )Total
                  stockholders' equity
              
              
              4,166,017
              
              
              6,315,514Total
                  liabilities and stockholders' equity
              
              $
              22,422,726
              
              $
              21,717,076




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


2


**iPARTY
                  CORP.****CONSOLIDATED
                  STATEMENTS OF
                  OPERATIONS****(Unaudited)****For
                  the three months ended****Apr
                  1, 2006**
              
              **Mar
                  26, 2005**Revenues
              
              $
              13,545,799
              
              $
              13,159,763Operating
                  costs:Cost
                  of products sold and occupancy costs
              
              
              8,498,254
              
              
              8,165,569Marketing
                  and sales
              
              
              5,355,098
              
              
              4,835,847General
                  and administrative
              
              
              1,693,276
              
              
              1,800,950Operating
                  loss
              
              
              (2,000,829
              )
              
              (1,642,603
              )Interest
                  income
              
              
              256
              
              
              172Interest
                  expense
              
              
              (157,784
              )
              
              (102,348
              )Loss
                  before income taxes
              
              
              (2,158,357
              )
              
              (1,744,779
              )Income
                  taxes
              
              
              —
              
              
              —Net
                  loss
              
              $
              (2,158,357
              )
              $
              (1,744,779
              )Loss
                  per share:Basic
                  and diluted
              
              $
              (0.10
              )
              $
              (0.08
              )Weighted-average
                  shares outstanding:Basic
                  and diluted
              
              
              22,544,257
              
              
              22,107,567




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




3


**iPARTY
                  CORP.****CONSOLIDATED
                  STATEMENTS OF CASH
                  FLOWS****(Unaudited)****For
                  the three months ended****Apr
                  1, 2006**
              
              **Mar
                  26, 2005****Operating
                  activities:**Net
                  loss
              
              $
              (2,158,357
              )
              $
              (1,744,779
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              292,570
              
              
              233,151Deferred
                  rent
              
              
              59,535
              
              
              42,448Non-cash
                  stock based compensation
              
              
              7,690
              
              
              —Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              667,776
              
              
              97,769Inventory
              
              
              (237,797
              )
              
              (142,209
              )Prepaid
                  expenses and other assets
              
              
              (854,256
              )
              
              193,672Accounts
                  payable
              
              
              2,414,373
              
              
              695,864Accrued
                  expenses and other liabilities
              
              
              (483,206
              )
              
              (644,833
              )Net
                  cash used in operating activities
              
              
              (291,672
              )
              
              (1,268,917
              )**Investing
                  activities:**Purchase
                  of property and equipment
              
              
              (93,351
              )
              
              (348,350
              )Net
                  cash used in investing activities
              
              
              (93,351
              )
              
              (348,350
              )**Financing
                  activities:**Net
                  borrowings under line of credit
              
              
              894,935
              
              
              1,239,524Increase
                  (decrease) in restricted cash
              
              
              289,548
              
              
              (19,694
              )Principal
                  payments on capital lease obligations
              
              
              (114,144
              )
              
              (96,448
              )Deferred
                  financing costs
              
              
              9,315
              
              
              7,047Proceeds
                  from exercise of stock options
              
              
              1,170
              
              
              —Net
                  cash provided by financing activities
              
              
              1,080,824
              
              
              1,130,429**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              695,801
              
              
              (486,838
              )**Cash
                  and cash equivalents, beginning of period**
              
              
              699,194
              
              
              1,757,157**Cash
                  and cash equivalents, end of period**
              
              $
              1,394,995
              
              $
              1,270,319Supplemental
                  disclosure of non-cash financing activities:Conversion
                  of Series B convertible preferred stock to common stock
              
              $
              7,451
              
              $
              26,040
  The
        accompanying notes are an integral part of these Consolidated Financial
        Statements.
  4




**iPARTY
      CORP.**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS**


**April
      1, 2006**


**(Unaudited)**





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





*Interim
      Financial Information*





The
      interim consolidated financial statements as of April 1, 2006 have been prepared
      by the Company pursuant to the rules and regulations of the Securities and
      Exchange Commission (the “SEC”) for interim financial reporting. These
      consolidated statements are unaudited and, in the opinion of management, include
      all adjustments (consisting of normal recurring adjustments and accruals)
      necessary to present fairly the consolidated balance sheets, consolidated
      operating results, and consolidated cash flows for the periods presented in
      accordance with generally accepted accounting principles. The consolidated
      balance sheet at December 31, 2005 has been derived from the audited
      consolidated financial statements at that date. Operating results for the
      Company on a quarterly basis may not be indicative of the results for the entire
      year due, in part, to the seasonality of the party goods industry. Historically,
      higher revenues and operating income have been experienced in the second and
      fourth fiscal quarters. Certain information and footnote disclosures normally
      included in financial statements prepared in accordance with generally accepted
      accounting principles have been omitted in accordance with the rules and
      regulations of the SEC. These consolidated financial statements should be read
      in conjunction with the audited consolidated financial statements, and
      accompanying notes, included in the Company’s Annual Report on Form 10-K, for
      the year ended December 31, 2005.





*Principles
      of Consolidation*





The
      consolidated financial statements include the accounts of the Company and its
      wholly-owned subsidiaries after elimination of all significant intercompany
      transactions and balances.





*Revenues
      Recognition*





Revenues
      include the selling price of party goods sold, net of returns and discounts,
      and
      are recognized at the point of sale. The Company estimates returns based upon
      historical return rates and such amounts have not been significant.





*Concentrations*





The
      Company purchases its inventory from a diverse group of vendors. Three suppliers
      account for approximately 30% of the Company’s purchase of merchandise, but the
      Company does not believe that it is overly dependent upon any single source
      for
      its merchandise, often using more than one vendor for similar kinds of
      products.





Accounts
      receivable primarily represent amounts due from credit card companies and
      vendors for inventory rebates. Management does not provide for doubtful accounts
      as such amounts have not been significant to date; the Company does not require
      collateral.





*Use
      of
      Estimates*





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from these estimates.





5




*Cash
      and Cash Equivalents and Restricted Cash*





The
      Company considers all highly liquid investments with an original maturity date
      of three months or less to be cash equivalents. Cash equivalents consist
      primarily of money market accounts and are carried at cost plus accrued
      interest, which approximates fair value.





The
      Company uses controlled disbursement banking arrangements as part of its cash
      management program. Outstanding checks, which were included in accounts payable,
      totaled $1,377,644 at April 1, 2006 and $627,269 at December 31, 2005. The
      Company had sufficient funds available to fund the outstanding checks when
      they
      were presented for payment.





Restricted
      cash represents money deposited in blocked accounts established for the benefit
      of and under the control of Wells Fargo Retail Finance II, LLC, the Company’s
      lender under its line of credit, and constitutes collateral for amounts
      outstanding under the Company’s line of credit.





*Fair
      Value of Financial Instruments*





The
      carrying values of cash and cash equivalents, accounts receivable and accounts
      payable approximate fair value because of the short-term nature of these
      instruments. The fair value of borrowings under its line of credit approximates
      carrying value because the debt bears interest at a variable market rate. The
      fair value of the capital lease obligations approximates the carrying value.





*Inventories*





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





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




**April
                  1, 2006**
              
              **Dec
                  31, 2005**Beginning
                  balance
              
              $
              1,098,972
              
              $
              1,296,855Increases
                  to reserve
              
              
              75,000
              
              
              300,000Write-offs
                  against reserve
              
              
              —
              
              
              (497,883
              )Ending
                  balance
              
              $
              1,173,972
              
              $
              1,098,972




*Net
      Income (Loss) per Share*





Net
      income
      (loss) per basic share is computed by dividing net income (loss) by the weighted
      average number of common shares outstanding plus the common share equivalents
      of
      Series B-F preferred stock. The common share equivalents of Series B-F are
      included in the calculation of net income (loss) per basic share in accordance
      with EITF Topic D-95, *Effect
      of Participating Convertible Securities on the Computation of Basic Earnings
      Per
      Share* ,
      since
      the preferred stockholders are entitled to participate in dividends when and
      if
      declared by the Board of Directors. For the periods with net losses, the Company
      excludes those common share equivalents since their impact would be
      anti-dilutive.





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





6




As
      of
      April 1, 2006, there were 25,993,297 potential additional common share
      equivalents outstanding, which were not included in the calculation of basic
      and
      diluted net loss per share because their effect would be anti-dilutive. These
      included 15,181,445 shares upon the conversion of immediately convertible
      preferred stock, 528,210 shares upon the exercise of warrants with a weighted
      average exercise price of $3.79 and 10,283,642 shares
      upon the exercise of stock options with a weighted average exercise price of
      $0.95.





*Stock
      Option Compensation Expense*





On
      January
      1, 2006, the Company adopted the Financial Accounting Standards Board (“FASB”)
      Statement No. 123(R), *Share-Based
      Payments* ,
      using
      the modified prospective method. Under this method, stock based compensation
      expense is recognized for new grants beginning this fiscal year and any unvested
      grants prior to the adoption of Statement No. 123(R). Prior to fiscal 2006,
      the
      Company accounted for share-based payments to employees using the Accounting
      Principles Board (“APB”) Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and the
      disclosure-only provisions of Statement No. 123, *Accounting
      for Stock-Based Compensation* .
      Because
      the Company granted stock options to employees at exercise prices equal to
      fair
      market value on the date of grant, no stock based compensation cost was
      recognized for option grants in periods prior to fiscal 2006.





In
      response to Statement No. 123(R), on September 21, 2005, the Company’s Board of
      Directors approved an acceleration of the vesting of certain unvested and
“out-of-the-money” stock options previously awarded to employees and officers
      with exercise prices equal to or greater than $0.69 per share. Options held
      by
      non-employee directors were excluded from the vesting acceleration. As a result,
      options to purchase approximately 1.0 million shares of iParty stock became
      exercisable immediately. Based upon the Company’s closing stock price of $0.46
      on September 21, 2005, none of these options had economic value on the date
      of
      acceleration.





In
      making
      the decision to accelerate these options, the Company’s Board of Directors
      considered the interest of the stockholders as it will reduce the Company’s
      reported stock based compensation expense in future periods following the
      effectiveness of Statement No. 123(R). The future stock based compensation
      expense that was eliminated was approximately $508,000 on a pre-tax basis and
      is
      reflected in the pro forma footnote disclosure for the year ended December
      31,
      2005.





Under
      Statement No. 123(R), the Company will continue to use the Black-Scholes option
      pricing model to determine the fair value of stock based compensation. The
      Black-Scholes model requires the Company to make several subjective assumptions,
      including the estimated length of time employees will retain their vested stock
      options before exercising them (“expected term”), and the estimated volatility
      of the Company’s common stock price over the expected term, which is based on
      historical volatility of the Company’s common stock over a time period equal to
      the expected term. The Black-Scholes model also requires a risk-free interest
      rate, which is based on the U.S. Treasury yield curve in effect at the time
      of
      the grant, and the dividend yield on the Company’s common stock, which is
      assumed to be zero since the Company does not pay dividends and has no current
      plans to do so in the future. Changes in these assumptions can materially affect
      the estimate of fair value of stock based compensation and consequently, the
      related expense recognized on the consolidated statement of operations. Under
      the modified prospective method, stock based compensation expense is recognized
      for new grants beginning this fiscal year and any unvested grants prior to
      the
      adoption of Statement No. 123(R). The Company recognizes stock based
      compensation expense on a straight-line basis over the employee’s vesting
      period.





The
      Company recognized stock based compensation expense of $7,690 and $0 in the
      first quarter of fiscal 2006 and 2005, respectively, which is included in
      general and administrative expense. The adoption of Statement 123R had no impact
      on cash flow from operations and cash flow from financing activities for the
      three months ended April 1, 2006.





The
      results for the three months ended March 26, 2005 have not been restated. If
      the
      stock based compensation expenses for the Company’s stock option plan had been
      determined based upon the fair value at the grant date for awards made prior
      to
      fiscal 2006 under the plan consistent with the methodology prescribed under
      Statement No. 123, the Company’s net loss and net loss per share would have been
      reduced to the following pro forma amounts:





7




**Mar
                  26, 2005**Net
                  loss:Reported
              
              $
              (1,744,779
              )Deduct:
                  Total stock based compensation expense determined underfair
                  value based method for all awards
              
              
              (115,063
              )Pro
                  forma
              
              $
              (1,859,842
              )Net
                  loss per share:ReportedBasic
                  and diluted:
              
              $
              (0.08
              )Pro
                  formaBasic
                  and diluted:
              
              $
              (0.08
              )




Under
      the
      Company’s Amended and Restated 1998 Incentive and Nonqualified Stock Option Plan
      (the “1998 Plan”) options to acquire 11,000,000 shares of common stock may be
      granted to officers, directors, key employees and consultants. The exercise
      price for qualified incentive options cannot be less than the fair market value
      of the stock on the grant date and the exercise price of nonqualified options
      can be fixed by the Board. Qualified incentive options to purchase the Company's
      common stock under the 1998 Plan have been granted to employees, directors
      and
      consultants of the Company at fair market value at the date of grant. Generally,
      the options become exercisable over periods of up to four years, and expire
      ten
      years from the date of grant.





There
      were
      no options granted in the first quarter of fiscal 2006. The weighted-average
      fair value of the options granted during the first quarter of fiscal 2005 was
      $0.56 per share, using the following assumptions: no dividend yield, volatility
      of 115-116%, a risk-free interest rate of 3.69-4.16% and an expected life of
      five years from the date of the grant.





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




**Weighted****Number**
              
              
              **Weighted**
              
              
              
              
              
              
              
              
              
              
              
              **Average****of**
              
              
              **Average**
              
              
              
              
              
              
              
              
              
              
              
              **Remaining**
              
              
              **Aggregate****Stock**
              
              
              **Exercise**
              
              
              **Price**
              
              
              **Life**
              
              
              **Intrinsic****Options**
              
              
              **Price**
              
              
              **Range**
              
              
              **(Years)**
              
              
              **Value**Outstanding
                  - December 31, 2005
              
              
              10,340,841
              
              $
              0.95
              
              $
              0.13
              
              
              —
              
              $
              5.38Granted
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Expired/Forfeited
              
              
              (52,784
              )
              
              0.58
              
              
              0.24
              
              
              —
              
              
              1.33Exercised
              
              
              (4,415
              )
              
              0.25
              
              
              0.20
              
              
              —
              
              
              0.33Outstanding -
                  April 1, 2006
              
              
              10,283,642
              
              
              0.95
              
              
              0.13
              
              
              —
              
              
              5.38
              
              
              5.4
              
              $
              915,213Exercisable
                  - April 1, 2006
              
              
              10,138,905
              
              $
              0.96
              
              $
              0.13
              
              
              —
              
              $
              5.38
              
              
              5.4
              
              $
              909,758Available
                  for grant - April 1, 2006
              
              
              320,399


The
      aggregate intrinsic value of stock options exercised during the three months
      ended April 1, 2006 was approximately $700.





8




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




**Outstanding**
              
              **Exercisable****Weighted****Number**
              
              **Average**
              
              **Weighted**
              
              **Number**
              
              **Weighted****of**
              
              **Remaining**
              
              **Average**
              
              **of**
              
              **Average****Stock**
              
              **Life**
              
              **Exercise**
              
              **Stock**
              
              **Exercise****Price
                  Range**
              
              **Options**
              
              **(Years)**
              
              **Price**
              
              **Options**
              
              **Price**$
              0.11
              —
              $
              0.20
              
              167,700
              
              5.2
              $
              0.18
              
              160,666
              $
              0.180.21
              —
              
              0.30
              
              3,816,031
              
              5.0
              
              0.25
              
              3,801,181
              
              0.250.31
              —
              
              0.50
              
              1,095,846
              
              6.1
              
              0.36
              
              1,022,751
              
              0.350.51
              —
              
              1.00
              
              3,235,435
              
              7.0
              
              0.77
              
              3,185,677
              
              0.771.01
              —
              
              3.50
              
              978,630
              
              3.4
              
              2.18
              
              978,630
              
              2.183.51
              —
              
              5.38
              
              990,000
              
              3.1
              
              3.82
              
              990,000
              
              3.82Total
              
              
              
              
              10,283,642
              
              5.4
              $
              0.95
              
              10,138,905
              $
              0.96


The
      total
      fair value of shares vested during the three months ended April 1, 2006 was
      $2,323. The
      remaining unrecognized stock based compensation expense related to unvested
      awards at April 1, 2006, was $52,565 and the period of time over which this
      expense will be recognized is 3.5 years.





*Property
      and Equipment*





Property
      and equipment are stated at cost less accumulated depreciation and are
      depreciated on the straight-line method over the estimated useful lives of
      the
      assets. Expenditures for maintenance and repairs are charged to operations
      as
      incurred. A listing of the estimated useful life of the various categories
      of
      property and equipment is as follows:




**Asset
                  Classification**
              
              **Estimated
                  Useful Life**Leasehold
                  improvements
              
              Lesser
                  of term of lease or 10 yearsFurniture
                  and fixtures
              
              7
                  yearsComputer
                  hardware and software
              
              3
                  yearsEquipment
              
              5
                  years




*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.





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





*The
      following discussion should be read in conjunction with the unaudited
      Consolidated Financial Statements and related Notes included in Item 1 of this
      Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements
      and related Notes and Item 7, “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations”, contained in our Annual Report on Form
      10-K for the fiscal year ended December 31, 2005.*





*Certain
      statements in this Quarterly Report on Form 10-Q, particularly statements
      contained in this Item 2, “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations” constitute “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended,
      and
      Section 21E of the Securities Exchange Act of 1934, as amended. The words
“anticipate”, “believe”, “estimate”, “expect”, “plan”, “intend” and other
      similar expressions are intended to identify these forward-looking statements,
      but are not the exclusive means of identifying them. Forward-looking statements
      included in this Quarterly Report on Form 10-Q or hereafter included in other
      publicly available documents filed with the Securities and Exchange Commission
      (“SEC”), reports to our stockholders and other publicly available statements
      issued or released by us*




9




*involve
      known and unknown risks, uncertainties, and other factors which could cause
      our
      actual results, performance (financial or operating) or achievements to differ
      from the future results, performance (financial or operating) or achievements
      expressed or implied by such forward looking statements. Such future results
      are
      based upon our best estimates based upon current conditions and the most recent
      results of operations. Various risks, uncertainties and contingencies could
      cause our actual results, performance or achievements to differ materially
      from
      those expressed in, or implied by, the forward-looking statements contained
      in
      this Quarterly Report on Form 10-Q. These include, but are not limited to,
      those
      described below under the heading “Factors That May Affect Future Results” and
      in Part II, Item 1A, “Risk Factors” as well as under Item 1A, “Risk Factors” of
      the Company’s most recently filed Annual Report on Form 10-K for the year ended
      December 31, 2005.*





**Overview**





We
      believe
      we are a leading brand in the party industry in the markets we serve and a
      leading resource in those markets for consumers seeking party goods, party
      planning advice and relevant information. We are a party goods retailer
      operating stores throughout New England, where 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 9,800 square feet in size. We lease our properties, typically
      for
      10 years and usually with options from our landlords to renew our leases for
      an
      additional 5 or 10 years.





The
      following table shows the number of stores in operation:




**For
                  the three months ended****Apr
                  1, 2006**
              
              **Mar
                  26, 2005**Beginning
                  of period
              
              
              50
              
              
              44Openings
              
              
              —
              
              
              1Closings
              
              
              —
              
              
              —End
                  of period
              
              
              50
              
              
              45


Our
      stores
      feature over 20,000 products ranging from paper party goods, Halloween costumes,
      greeting cards and balloons to more unique merchandise such as piñatas, tiny
      toys, masquerade and Hawaiian Luau items. Our sales are driven by the following
      holiday and party events: Halloween, Christmas, Easter, Valentine’s Day, New
      Year’s, Independence Day, St. Patrick’s Day, Thanksgiving and Chanukah. We also
      focus our business closely on lifetime events such as anniversaries,
      graduations, birthdays, and bridal or baby showers.





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




**For
                  the three months ended****Apr
                  1, 2006**
              
              **Mar
                  26, 2005**Revenues
              
              $
              13,545,799
              
              $
              13,159,763Increase
                  in revenues
              
              
              2.9
              %
              
              9.3
              %


Our
      business has a seasonal pattern. In the past three years, we have realized
      approximately 37.4% of our annual revenues in our fourth quarter, which includes
      Halloween and Christmas, and approximately 23.6% of our revenues in the second
      quarter, which includes school graduations. Also, during the past three years,
      we have had net income in our second and fourth quarters and generated losses
      in
      our first and third quarters. In fiscal 2005, the Easter holiday fell in the
      first quarter, as opposed to the second quarter in fiscal 2006.





10




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





**Results
      of Operations**





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





The
      first
      quarter of fiscal year 2006 had 13 weeks and ended on April 1, 2006. The first
      quarter of fiscal year 2005 had 13 weeks and ended on March 26,
      2005.





**Three
      Months Ended April 1, 2006 Compared to Three Months Ended March 26,
      2005**





*Revenues*





Our
      consolidated revenues for the first quarter of fiscal 2006 were $13,545,799,
      an
      increase of $386,036, or 2.9% from the first quarter of the prior fiscal year.
      Revenues include the selling price of party goods sold, net of returns and
      discounts, and are recognized at the point of sale.





Sales
      for
      the first quarter of fiscal 2006 included sales from 44 comparable stores
      (defined as stores open for at least one full year), sales from five new stores
      that opened subsequent to the first quarter of 2005, and sales from one new
      store that opened in the first quarter of 2005 and which was not included in
      comparable store sales for the first quarter 2006 until it had been open for
      one
      full year. Comparable store sales for the quarter decreased by 1.4%, mostly
      because Easter fell in the second quarter of 2006 as opposed to the first
      quarter in 2005. Comparable stores sales were also negatively affected by lower
      sales of Super Bowl party items and New England Patriot related merchandise
      due
      to the early elimination of the Patriots in the NFL playoffs this year, as
      opposed to 2005 when the New England Patriots won the Super Bowl.





*Cost
      of goods sold and occupancy costs*





Our
      cost
      of goods sold and occupancy costs for the first quarter of fiscal 2006 was
      $8,498,254, or 62.7% of revenues, an increase of $332,685 and an increase of
      0.7
      percentage points, as a percentage of revenues, from the first quarter of the
      prior fiscal year. Cost of goods sold and occupancy costs consists of the cost
      of merchandise sold to customers and the occupancy costs for our stores.





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





*Marketing
      and sales expense*





Our
      consolidated marketing and sales expense for the first quarter of fiscal 2006
      was $5,355,098, or 39.5% of revenues, an increase of $519,251 and an increase
      of
      2.8 percentage points, as a percentage of revenues, from the first quarter
      of
      the prior fiscal year. Marketing and sales expense consists primarily of
      advertising and promotional expenditures, all store payroll and related expenses
      for personnel engaged in marketing and selling activities and other non-payroll
      expenses associated with operating our stores.





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





*General
      and administrative expense*





Our
      consolidated general and administrative (“G&A”) expense for the first
      quarter of fiscal 2006 was $1,693,276, or 12.5% of revenues, a decrease of
      $107,674 and 1.2 percentage points, as a percentage of revenues, from the first
      quarter of the prior fiscal year. G&A expense consists of payroll and
      related expenses for executive,




11




merchandising,
      finance and administrative personnel, as well as information technology,
      professional fees and other general corporate expenses.





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





*Operating
      loss*





Our
      operating loss for the first quarter of fiscal 2006 was $2,000,829, or 14.8%
      of
      revenues, compared to an operating loss of $1,642,603, or 12.5% of revenues
      for
      the first quarter of the prior fiscal year.





*Interest
      expense*





Our
      interest expense in the first quarter of fiscal 2006 was $157,784, an increase
      of $55,436 from the first quarter of the prior fiscal year. The increase in
      the
      first quarter of fiscal 2006 was due to an increase in interest rates and a
      higher average loan balance. Our average loan balance was approximately
      $6,332,321 during the first quarter of fiscal 2006 compared to $5,476,878 in
      the
      first quarter of fiscal 2005, which increased interest expense by approximately
      $18,929. The effective interest rate on our borrowings under our line of credit
      increased to 8.9% during the first quarter of fiscal 2006 compared to 5.4%
      in
      the first quarter of fiscal 2005, which increased interest expense by
      approximately $46,925. The interest rate in the first quarter is based on the
      bank’s base rate plus 75 basis points.





*Income
      taxes*





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





At
      the end
      of fiscal 2005 we had estimated net operating loss carryforwards of
      approximately $23.7 million, which begin to expire in 2018. In accordance with
      Section 382 of the Internal Revenue Code, the use of these carryforwards will
      be
      subject to annual limitations based upon certain ownership changes of our stock
      that have occurred or that may occur.





*Net
      Loss*





Our
      net
      loss in the first quarter of fiscal 2006 was $2,158,357, or $0.10 per basic
      and
      diluted share, compared to a net loss of $1,744,779, or $0.08 per basic and
      diluted share, in the first quarter of the prior fiscal year.





**Liquidity
      and Capital Resources**





Our
      operating activities used $291,672 in the first quarter of fiscal 2006 compared
      to $1,268,917 in the first quarter of the prior fiscal year, a decrease of
      $977,245. The decrease in cash used in operating activities was primarily due
      to
      an increase in cash provided by accounts payable. The increase in accounts
      payable was primarily due to extended payment terms related to the inventory
      purchased for the five new stores we opened in the third quarter of 2005 and
      a
      negotiated advance purchase of inventory from one of our suppliers in December
      2005. These payables, totaling approximately $1.4 million, become due on June
      1,
      2006. The variance due to accounts payable was partially offset by a higher
      net
      loss in the first quarter of fiscal 2006 compared to the first quarter of fiscal
      2005 and an increase in prepaid expenses related to April store rents paid
      in
      late March 2006.





We
      used
      $93,351 in investing activities in the first quarter of fiscal 2006 compared
      to
      $348,350 in the first quarter of the prior fiscal year. The cash invested in
      the
      first quarter of fiscal 2006 was primarily for fixed assets associated with
      existing store improvements and computer replacements. The cash invested in
      the
      first quarter of fiscal 2005 was primarily for fixed assets associated with
      a
      new store opened in that period and point-of-sale system enhancements.





We
      provided $1,080,824 by financing activities in the first quarter of fiscal
      2006
      compared to $1,130,429 in the first quarter of the prior fiscal year, a decrease
      of $49,605. We increased our borrowings under our line of credit




12




by
      $894,935 in the first quarter of fiscal 2006 (to $7.5 million) compared to
      an
      increase of $1,239,524 in the first quarter of fiscal 2005 (to $6.6 million).
      The borrowings under our line of credit in the first quarter of fiscal 2006
      was
      higher than the first quarter of fiscal 2005 primarily due to capital
      expenditures related to new store openings, enhancements to our point-of-sale
      system, and to support our net loss.





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





Our
      inventory consists of party supplies which are valued at the lower of
      weighted-average cost or market and are reduced by an allowance for obsolete
      and
      excess inventory and other adjustments, including vendor rebates, discounts
      and
      freight costs. Our line of credit availability calculation allows us to borrow
      against “acceptable inventory at cost,” which takes our inventory at cost and
      reflects adjustments that our lender has approved which may be different than
      adjustments we use for valuing our inventory in our financial statements, such
      as the adjustment to reserve for inventory shortage. The amount of “acceptable
      inventory at cost” was $14,808,994 at April 1, 2006.





Our
      accounts receivable consists primarily of vendor rebate receivables and credit
      card receivables. Our line of credit availability calculation allows us to
      borrow against “eligible credit card receivables,” which are the credit card
      receivables for the previous three days of business. The amount of “eligible
      credit card receivables” was $207,521 at April 1, 2006.





The
      total
      borrowing base is then 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. The total borrowing base at April 1, 2006 was limited to our credit
      limit
      of $12,500,000. Under the terms of our line of credit, the credit limit amount
      of $12,500,000 was then further reduced by (1) a minimum availability block,
      (2)
      customer deposits, (3) gift certificates, (4) merchandise credits and (5)
      outstanding letters of credit. Therefore, our additional availability at April
      1, 2006 was $410,858.





The
      amounts outstanding under our line were $7,530,809 as of April 1, 2006 and
      $6,635,874 as of December 31, 2005. The outstanding balances under our line
      are
      classified as current liabilities in the accompanying consolidated balance
      sheets since we are required to apply daily lock-box receipts to reduce the
      amount outstanding.





On
      January
      17, 2006, we amended our agreement to allow for a $500,000 term loan which
      increases our borrowing base, but does not increase the $12.5 million credit
      limit. We borrowed the full $500,000 on that date. The interest rate on the
      term
      loan is the bank’s base rate plus 125 basis points. During the time the term
      loan remains outstanding, the interest rate on the line of credit will be the
      bank’s base rate plus 75 basis points. The term loan is currently outstanding
      and is due and payable in full on October 31, 2006. The amendment also waived
      a
      default as a consequence of the fact that the principal balance of the line
      of
      credit exceeded availability on January 12, 2006. As of May 11, 2006, we are
      in
      compliance with the covenants under the line of credit.





Our
      prospective cash flows are subject to certain trends, events and uncertainties,
      including demands for capital to support growth, improvements in our
      infrastructure, responding to economic conditions, and meeting contractual
      commitments. We expect our capital expenditures for 2006 to be primarily related
      to store improvements, enhancement of our point-of-sale system, and the
      replacement of our merchandising system which we plan to begin in 2006 with
      an
      installation in fiscal 2007. We believe, based on our current operating plan,
      that anticipated revenues from operations and borrowings available under the
      existing line of credit, which we anticipate extending, will be sufficient
      to
      fund our operations and working capital requirements through the next twelve
      months, but that we will need to raise additional cash through debt, equity,
      or
      a combination of both to continue to fund our growth goals in 2007 and
      beyond . In
      the
      event that our operating plan changes or proves inaccurate due to
      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 2006 to conserve working capital or raise additional capital
      to
      fund operations. Our current operating plan includes opening no additional
      new
      stores in 2006.





13




We
      continue to evaluate and assess the amount and timing of any additional capital
      that may be required to fund our growth in 2007 and beyond, and have been
      exploring various financing alternatives and strategic opportunities. In
      February 2006, we executed a non-binding term sheet to enter discussions and
      negotiations with an institutional accredited investor regarding a proposed
      financing that would raise approximately $2.5 million through a combination
      of
      subordinated debt and warrants. In the event that we are unable to reach a
      definitive agreement with this third party on terms that are acceptable to
      us,
      we expect to continue to explore other financing alternatives. There can be
      no
      assurance, that, should we seek or require additional financing, such financing
      will be available, if at all, on terms and conditions acceptable to us, in
      which
      case we would reconsider our current growth goals for 2007 and beyond.





Contractual
      obligations at April 1, 2006 were as follows:


**Payments
                  Due By Period****Within**
              
              **Within****Within**
              
              **2
                  - 3**
              
              **4
                  - 5**
              
              **After****1
                  Year**
              
              **Years**
              
              **Years**
              
              **5
                  Years**
              
              **Total**Line
                  of credit
              
              $
              7,530,809
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              7,530,809Capital
                  lease obligations
              
              
              459,007
              
              
              296,202
              
              
              —
              
              
              —
              
              
              755,209Operating
                  leases (including retail space leases)
              
              
              8,156,375
              
              
              14,187,211
              
              
              11,916,368
              
              
              14,144,570
              
              
              48,404,524Total
                  contractual obligations
              
              $
              16,146,191
              
              $
              14,483,413
              
              $
              11,916,368
              
              $
              14,144,570
              
              $
              56,690,542




In
      addition, at April 1, 2006, we had outstanding purchase orders totaling
      approximately $2,185,000 for the acquisition of inventory that was scheduled
      for
      delivery after April 1, 2006.





**Seasonality**





Due
      to the
      seasonality of our business, sales and operating income are typically higher
      in
      our second and fourth quarters. Our business is highly dependent upon sales
      of
      Easter, graduation and summer merchandise in the second quarter and sales of
      Halloween and Christmas merchandise in the fourth quarter. We have typically
      operated at a loss during the first and third quarters.





**Geographic
      Concentration**





As
      of May
      11, 2006, we operated a total of 50 stores, 45 of which are located in New
      England. As a result, a severe or prolonged regional recession or regional
      changes in demographics, employment levels, population, weather patterns, real
      estate market conditions or other factors specific to the New England region
      may
      adversely affect us more than a company that is more geographically
      diverse.





**Effects
      of Inflation**





While
      we
      do not view the effects of inflation as having a direct material effect upon
      our
      business, we believe that rising oil and gas prices impact the cost of producing
      petroleum-based/plastic products, which are a key raw material in much of our
      merchandise, and also impact prices of shipping products made overseas in
      foreign countries, such as China, which includes much of our merchandise, our
      freight costs, and consumer confidence and spending patterns. These and other
      issues directly or indirectly affecting our vendors and us could adversely
      affect our business and financial performance.





**Factors
      That May Affect Future Results**





Our
      business is subject to certain risks that could materially affect our financial
      condition, results of operations, and the value of our common stock. These
      risks
      include, but are not limited to, the ones described under Item 1A, “Risk
      Factors” of our Annual Report on Form 10-K for the fiscal year ended December
      31, 2005 and Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form
      10-Q. Additional risks and uncertainties that we are unaware of, or that we
      may
      currently deem immaterial, may become important factors that harm our business,
      financial condition, results of operations, or the value of our common stock.





**Critical
      Accounting Policies and Estimates**





14




Our
      financial statements are based on the application of significant accounting
      policies, many of which require management to make significant estimates and
      assumptions (see Note 1 to the Consolidated Financial Statements). We believe
      the following accounting policies to be those most important to the portrayal
      of
      our financial condition and those that require the most subjective judgment.
      If
      actual results differ significantly from management’s estimates and projections,
      there could be a material effect on our financial statements.





*Inventory
      and Related Allowance for Obsolete and Excess Inventory*





Our
      inventory consists of party supplies and is valued at the lower of moving
      weighted-average cost or market. We record vendor rebates, discounts and certain
      other adjustments to inventory, including freight costs, and we recognize these
      amounts in the income statement as the related goods are sold.





During
      each interim reporting period, we estimate the impact on cost of products sold
      associated with inventory shortage. The actual inventory shortage is determined
      upon reconciliation of the annual physical inventory, which occurs shortly
      before and after our year end, and an adjustment to cost of products sold is
      recorded at the end of the fourth quarter to recognize the difference between
      the estimated and actual inventory shortage for the full year.





We
      also
      make adjustments to reduce the value of our inventory for an allowance for
      obsolete and excess inventory, which is based on our review of inventories
      on
      hand compared to estimated future sales. We conduct reviews periodically
      throughout the year on each stock keeping unit (“SKU”). As we identify obsolete
      and excess inventory, we take immediate measures to reduce our inventory risk
      on
      these items and we adjust our allowance accordingly. Thus, actual results could
      differ from our estimates.





*Revenue
      Recognition*





Revenues
      include the selling price of party goods sold, net of returns and discounts,
      and
      are recognized at the point of sale. We estimate returns based upon historical
      return rates and such amounts have not been significant.





*Property
      and Equipment*





Property
      and equipment are stated at cost less accumulated depreciation and are
      depreciated on the straight-line method over the estimated useful lives of
      the
      assets. Expenditures for maintenance and repairs are charged to operations
      as
      incurred.





*Impairment
      of Long-Lived Assets*





In
      accordance with SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,
      we
      perform a review of each store for impairment indicators whenever events and
      changes in circumstances suggest that the carrying amounts may not be
      recoverable from estimated future store cash flows. Our review considers store
      operating results, future sales growth and cash flows. The conclusion regarding
      impairment may differ from current estimates if underlying assumptions or
      business strategies change. We are not aware of any impairment indicators for
      any of our stores at April 1, 2006.





*Income
      Taxes*





Historically,
      we have not recognized an income tax benefit for our losses. Accordingly, we
      record a valuation allowance against our deferred tax assets because of the
      uncertainty of future taxable income and the realizability of the deferred
      tax
      assets. In determining if a valuation allowance against our deferred tax asset
      is appropriate, we consider both positive and negative evidence. The positive
      evidence that we considered included (1) we were profitable in 2004 and 2003
      due
      to the success of our Halloween seasons, (2) we have achieved positive
      comparable store sales growth for the last three years and (3) improved
      merchandise margins in 2004 and 2003. The negative evidence that we considered
      included (1) our net loss for the first quarter of 2006 was higher than the
      loss
      for the first quarter of 2005, (2) after two years of profitability we realized
      a net loss in 2005, (3) our merchandise margins decreased in 2005, (4) our
      future profitability is vulnerable to certain risks, including (a) the risk
      that
      we may not be able to generate significant taxable income to fully utilize
      our
      net operating loss carryforwards of
      approximately




15




$23.7
      million, (b) the risk of unseasonable weather and other factors in a single
      geographic region, New England, where our stores are concentrated, (c) the
      risk
      of being so dependent upon a single season, Halloween, for a significant amount
      of annual sales and profitability and (d) the risk of rising prices for
      petroleum products, which are a key raw material for much of our merchandise
      and
      which affect our freight costs and those of our suppliers, (5) the costs that
      opening new stores will put pressure on our profit margins until these stores
      reach maturity, (6) the investment in infrastructure required in fiscal 2006
      to
      support our store expansion plan in fiscal 2007 will increase our costs and
      (7)
      the expected costs of increased regulatory compliance, including, without
      limitation, those associated with Section 404 of the Sarbanes-Oxley Act, will
      likely have a negative impact on our profitability.





The
      negative evidence is strong enough for us to conclude that the level of our
      future profitability is uncertain at this time. We believe that it is prudent
      for us to maintain a valuation allowance until we have a longer track record
      of
      profitability and we can reduce our exposure to the risks described above.
      Should we determine that we will be able to realize our deferred tax assets
      in
      the future, an adjustment to our deferred tax assets would increase income
      in
      the period we made such a determination.





*Stock
      Option Compensation Expense*





On
      January
      1, 2006, we adopted Statement No. 123(R) using the modified prospective method
      in which compensation cost is recognized beginning with the effective date
      (a)
      based on the requirements of Statement No. 123(R) for all share-based payments
      granted after the effective date and (b) based on the requirements of Statement
      No. 123 for all awards granted to employees prior to the effective date of
      Statement No. 123(R) that remain unvested on the effective date. Prior to
      January 1, 2006, we accounted for our stock option compensation agreements
      with
      employees under the provisions of Accounting Principles Board (“APB”) Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* and the
      disclosure-only provisions of Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      as
      amended by SFAS No. 148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure, an amendment of
      Financial Accounting Standards Board (“FASB”) Statement No. 123* .





*Use
      of
      Estimates*





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires us to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Our actual results could differ from our
      estimates.





**New
      Accounting Pronouncements**





On
      December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement No. 123 (revised 2004), *Share-Based
      Payment* ,
      which is
      a revision of Statement No. 123, *Accounting
      for Stock-Based Compensation* .
      Statement No. 123(R) supersedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      amends SFAS No. 95, *Statement
      of Cash Flows* .
      Generally, the approach in Statement No. 123(R) is similar to the approach
      described in Statement No. 123. However, Statement No. 123(R) requires all
      share-based payments to employees, including grants of employee stock options,
      be recognized in the income statement based on their fair values. Pro forma
      disclosure is no longer an alternative.





On
      April
      14, 2005, the SEC announced that it would provide for a phased-in implementation
      process for Statement No. 123(R) for public companies. As a result, we were
      not
      required to adopt Statement No. 123(R) until January 1, 2006.





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 share-based payments to employees using
      Opinion 25’s intrinsic value method and, as such, generally recognized no
      compensation cost for employee stock options.





16




In
      February 2005, the Chief Accountant of the SEC issued a letter clarifying his
      staff’s interpretation of certain accounting issues and their application under
      generally accepted accounting principles (“GAAP”) relating to operating leases.
      In summary, their interpretation is that (1) leasehold improvements should
      be
      amortized by the lessee over the shorter of their economic lives or the lease
      term, which could include lease renewal terms when the renewals are “reasonably
      assured,” (2) free or reduced rents should be recognized by the lessee on a
      straight-line basis over the lease term (including any free or reduced rent
      period) and (3) the statement of cash flows should reflect cash received from
      the lessor that is accounted for as a lease incentive within operating
      activities and the acquisition of leasehold improvements for cash within
      investing activities. These positions are based upon existing accounting
      literature. We believe that our present accounting policies are consistent
      with
      the positions described by the Chief Accountant and his staff in this letter.
      Our policy is to amortize leasehold improvements for 10 years or the life of
      the
      lease, whichever period is shorter. Our policy is to amortize free or reduced
      rent on a straight-line basis over the lease term (including any free or reduced
      rent periods). We generally do not enter into agreements that involve receiving
      cash from lessors/landlords.





**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk**





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





**Item
      4. Controls and Procedures**




(a) *Evaluation
      of Disclosure Controls and Procedures.*  ** Our
      management, with the participation of our Chief Executive Officer, or CEO,
      and
      Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure
      controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934, as amended) as of April 1, 2006. In designing
      and evaluating our disclosure controls and procedures, our management recognized
      that any controls and procedures, no matter how well designed and operated,
      can
      provide only reasonable assurance of achieving their objectives, and our
      management necessarily applied its judgment in evaluating the cost-benefit
      relationship of possible controls and procedures. Based on this evaluation,
      our
      CEO and CFO concluded that, as of April 1, 2006, our disclosure controls and
      procedures were (1) designed to ensure that material information relating to
      us,
      including our consolidated subsidiaries, is made known to our CEO and CFO by
      others within those entities, particularly during the period in which this
      report was being prepared and (2) effective, in that they provide reasonable
      assurance that information required to be disclosed by us in the reports that
      we
      file or submit under the Securities Exchange Act is recorded, processed,
      summarized, communicated to management, including our CEO and CFO, and reported
      within the time periods specified in the SEC’s rules and forms.




(b) *Changes
      in Internal Controls.* No
      change
      in our internal controls over financial reporting (as defined in Rules 13a-15(f)
      and 15d-15(f) under the Securities Exchange Act of 1934, as amended) occurred
      during the fiscal quarter ended April 1, 2006 that has materially affected,
      or
      is reasonably likely to materially affect, our internal controls over financial
      reporting.




17


**PART
      II - OTHER INFORMATION**





**Item
                1.**
            **Legal
                Proceedings**Not
                applicable.**Item
                1A.**
            **Risk
                Factors**There
                have been no material changes to the factors disclosed in Item 1A,
“Risk
                Factors” in our Annual Report on Form 10-K for the fiscal year ended
                December 31, 2005, as filed with the SEC on March 30,
                2006.**Item
                2.**
            **Unregistered
                Sales of Equity and Securities and Use of
                Proceeds**Not
                applicable.**Item
                3.**
            **Defaults
                upon Senior Securities**Not
                applicable.**Item
                4.**
            **Submission
                of Matters to a Vote of Security Holders**Not
                applicable.**Item
                5.**
            **Other
                Information**Not
                applicable.**Item
                6.**
            **Exhibits**The
                exhibits listed in the Exhibit Index immediately preceding the exhibits
                are filed as part of this Quarterly Report on Form 10-Q and are
                incorporated herein by reference.




18


**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.




iPARTY
                CORP.By
              /s/ SAL
                PERISANOSal
                  Perisano
                Chairman
                  of the Board and Chief Executive Officer
                (Principal
                  Executive Officer)
  By
                /s/ PATRICK
                  FARRELLPatrick
                      Farrell
                    President
                      and Chief Financial Officer
                    (Principal
                      Financial and Accounting
                      Officer)


Dated:
      May
      11, 2006




19


**EXHIBIT
      INDEX**




**EXHIBIT****NUMBER**
            **DESCRIPTION**Ex.
                31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                ActEx.
                31.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                ActEx.
                32.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section
                1350Ex.
                32.2
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section
                1350




20