UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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





For
the Quarterly Period Ended March 28, 2009





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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o 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 oNon-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
April 30, 2009 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
                                
                                
                                12Item 3.
                                Quantitative and Qualitative Disclosures about Market
      Risk
                                
                                
                                22Item 4.
                                Controls and Procedures
                                
                                
                                22PART II - OTHER INFORMATIONItem 1.
                                Legal Proceedings
                                
                                
                                23Item 1A.
                                Risk Factors
                                
                                
                                23Item 2.
                                Unregistered Sales of Equity Securities and Use of
      Proceeds
                                
                                
                                23Item 3.
                                Defaults upon Senior Securities
                                
                                
                                23Item 4.
                                Submission of Matters to a Vote of Security
      Holders
                                
                                
                                23Item 5.
                                Other Information
                                
                                
                                23Item 6.
                                Exhibits
                                
                                
                                23SIGNATURES
                                
                                
                                
                                24EXHIBIT INDEX
                                
                                
                                
                                25


-1-


PART I - FINANCIAL INFORMATION


Item 1.  Financial Statements




iPARTY
      CORP.CONSOLIDATED BALANCE SHEETS
    (unaudited)Mar 28, 2009
                                                                  
                                                                  
                                                                  Dec 27, 2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                                                                  
                                                                  $
                                                                  59,750
                                                                  
                                                                  
                                                                  $
                                                                  60,250Restricted
      cash
                                                                  
                                                                  
                                                                  465,633
                                                                  
                                                                  
                                                                  
                                                                  775,357Accounts
      receivable
                                                                  
                                                                  
                                                                  892,231
                                                                  
                                                                  
                                                                  
                                                                  730,392Inventories,
      net
                                                                  
                                                                  
                                                                  13,255,570
                                                                  
                                                                  
                                                                  
                                                                  13,022,142Prepaid
      expenses and other assets
                                                                  
                                                                  
                                                                  266,700
                                                                  
                                                                  
                                                                  
                                                                  279,185Total
      current assets
                                                                  
                                                                  
                                                                  14,939,884
                                                                  
                                                                  
                                                                  
                                                                  14,867,326Property
      and equipment, net
                                                                  
                                                                  
                                                                  3,497,164
                                                                  
                                                                  
                                                                  
                                                                  3,646,481Intangible
      assets, net
                                                                  
                                                                  
                                                                  2,129,416
                                                                  
                                                                  
                                                                  
                                                                  2,303,692Other
      assets
                                                                  
                                                                  
                                                                  163,444
                                                                  
                                                                  
                                                                  
                                                                  177,774Total
      assets
                                                                  
                                                                  $
                                                                  20,729,908
                                                                  
                                                                  
                                                                  $
                                                                  20,995,273LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and book overdrafts
                                                                  
                                                                  $
                                                                  5,047,244
                                                                  
                                                                  
                                                                  $
                                                                  4,048,833Accrued
      expenses
                                                                  
                                                                  
                                                                  2,004,792
                                                                  
                                                                  
                                                                  
                                                                  2,495,955Current
      portion of capital lease obligations
                                                                  
                                                                  
                                                                  452
                                                                  
                                                                  
                                                                  
                                                                  6,444Current
      notes payable, net of discount $85,229
                                                                  
                                                                  
                                                                  2,816,792
                                                                  
                                                                  
                                                                  
                                                                  2,876,182Borrowings
      under line of credit
                                                                  
                                                                  
                                                                  2,681,782
                                                                  
                                                                  
                                                                  
                                                                  1,950,019Total
      current liabilities
                                                                  
                                                                  
                                                                  12,551,062
                                                                  
                                                                  
                                                                  
                                                                  11,377,433Long-term
      liabilities:Notes
      payable
                                                                  
                                                                  
                                                                  600,000
                                                                  
                                                                  
                                                                  
                                                                  600,000Other
      liabilities
                                                                  
                                                                  
                                                                  1,447,632
                                                                  
                                                                  
                                                                  
                                                                  1,200,174Total
      long-term liabilities
                                                                  
                                                                  
                                                                  2,047,632
                                                                  
                                                                  
                                                                  
                                                                  1,800,174Commitments
      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
      shares issued and outstanding(aggregate
      liquidation value of $9,261,724 at March 28, 2009)
                                                                  
                                                                  
                                                                  6,890,723
                                                                  
                                                                  
                                                                  
                                                                  6,890,723Series
      C convertible preferred stock - 100,000 shares authorized, issued and
      outstanding(aggregate
      liquidation value of $2,000,000 at March 28, 2009)
                                                                  
                                                                  
                                                                  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 March 28, 2009)
                                                                  
                                                                  
                                                                  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 March 28, 2009)
                                                                  
                                                                  
                                                                  1,112,497
                                                                  
                                                                  
                                                                  
                                                                  1,112,497Series
      F convertible preferred stock - 114,286 shares authorized, issued and
      outstanding(aggregate
      liquidation value of $500,000 at March 28, 2009)
                                                                  
                                                                  
                                                                  500,000
                                                                  
                                                                  
                                                                  
                                                                  500,000Total
      convertible preferred stock
                                                                  
                                                                  
                                                                  13,647,720
                                                                  
                                                                  
                                                                  
                                                                  13,647,720Common
      stock - $.001 par value; 150,000,000 shares
      authorized; 22,731,667shares
      issued and outstanding
                                                                  
                                                                  
                                                                  22,732
                                                                  
                                                                  
                                                                  
                                                                  22,732Additional
      paid-in capital
                                                                  
                                                                  
                                                                  52,124,530
                                                                  
                                                                  
                                                                  
                                                                  52,095,711Accumulated
      deficit
                                                                  
                                                                  
                                                                  (59,663,768
                                                                  )
                                                                  
                                                                  
                                                                  (57,948,497
                                                                  )Total
      stockholders' equity
                                                                  
                                                                  
                                                                  6,131,214
                                                                  
                                                                  
                                                                  
                                                                  7,817,666Total
      liabilities and stockholders' equity
                                                                  
                                                                  $
                                                                  20,729,908
                                                                  
                                                                  
                                                                  $
                                                                  20,995,273




The
accompanying notes are an integral part of these Consolidated Financial
Statements.
 -2-


iPARTY
      CORP.CONSOLIDATED STATEMENTS OF OPERATIONS
      (unaudited)For the three months endedMar 28, 2009
                                    
                                    
                                    Mar 29, 2008Revenues
                                    
                                    $
                                    14,568,407
                                    
                                    
                                    $
                                    16,144,088Operating
      costs:Cost
      of products sold and occupancy costs
                                    
                                    
                                    9,382,066
                                    
                                    
                                    
                                    9,983,347Marketing
      and sales
                                    
                                    
                                    4,979,318
                                    
                                    
                                    
                                    5,849,752General
      and administrative
                                    
                                    
                                    1,785,770
                                    
                                    
                                    
                                    1,963,165Operating
      loss
                                    
                                    
                                    (1,578,747
                                    )
                                    
                                    
                                    (1,652,176
                                    )Interest
      income
                                    
                                    
                                    28
                                    
                                    
                                    
                                    1,676Interest
      expense
                                    
                                    
                                    (136,552
                                    )
                                    
                                    
                                    (214,028
                                    )Net
      loss
                                    
                                    $
                                    (1,715,271
                                    )
                                    
                                    $
                                    (1,864,528
                                    )Income
      loss per share:Basic
      and diluted
                                    
                                    $
                                    (0.08
                                    )
                                    
                                    $
                                    (0.08
                                    )Weighted-average
      shares outstanding:Basic
      and diluted
                                    
                                    
                                    22,731,667
                                    
                                    
                                    
                                    22,708,383




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 endedMar 28, 2009
                      
                      
                      Mar 29, 2008Operating
      activities:Net
      loss
                      
                      $
                      (1,715,271
                      )
                      
                      $
                      (1,864,528
                      )Adjustments
      to reconcile net loss to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
                      
                      
                      535,957
                      
                      
                      
                      501,724Deferred
      rent
                      
                      
                      3,732
                      
                      
                      
                      22,740Non
      cash stock based compensation expense
                      
                      
                      37,994
                      
                      
                      
                      42,106Loss
      on disposal of asset
                      
                      
                      1,430
                      
                      
                      
                      -Non
      cash warrant expense
                      
                      
                      41,963
                      
                      
                      
                      51,138Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      81,887
                      
                      
                      
                      247,023Inventory
                      
                      
                      (233,428
                      )
                      
                      
                      (928,982
                      )Prepaid
      expenses and other assets
                      
                      
                      13,902
                      
                      
                      
                      (131,973
                      )Accounts
      payable
                      
                      
                      998,411
                      
                      
                      
                      1,976,874Accrued
      expenses and other liabilities
                      
                      
                      (491,163
                      )
                      
                      
                      64,324Net
      cash used in operating activities
                      
                      
                      (724,586
                      )
                      
                      
                      (19,554
                      )Investing
      activities:Acquisition
      of retail stores and non-compete agreement
                      
                      
                      -
                      
                      
                      
                      (1,350,000
                      )Purchase
      of property and equipment
                      
                      
                      (200,881
                      )
                      
                      
                      (307,523
                      )Net
      cash used in investing activities
                      
                      
                      (200,881
                      )
                      
                      
                      (1,657,523
                      )Financing
      activities:Net
      borrowings under line of credit
                      
                      
                      731,763
                      
                      
                      
                      1,508,036Principal
      payments on notes payable
                      
                      
                      (110,528
                      )
                      
                      
                      (149,310
                      )Decrease
      in restricted cash
                      
                      
                      309,724
                      
                      
                      
                      321,346Principal
      payments on capital lease obligations
                      
                      
                      (5,992
                      )
                      
                      
                      (8,311
                      )Net
      cash provided by financing activities
                      
                      
                      924,967
                      
                      
                      
                      1,671,761Net
      decrease in cash and cash equivalents
                      
                      
                      (500
                      )
                      
                      
                      (5,316
                      )Cash
      and cash equivalents, beginning of period
                      
                      
                      60,250
                      
                      
                      
                      71,532Cash
      and cash equivalents, end of period
                      
                      $
                      59,750
                      
                      
                      $
                      66,216Supplemental
      disclosure of non-cash financing activities:Conversion
      of Series B convertible preferred stock to common stock
                      
                      $
                      -
                      
                      
                      $
                      18,600Disposal
      of assets
                      
                      $
                      28,168
                      
                      
                      $
                      -




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


iPARTY
CORP.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


March
28, 2009


(Unaudited)





1.  BASIS OF PRESENTATION
AND SIGNIFICANT ACCOUNTING POLICIES:





Interim
Financial Information





The
interim consolidated financial statements as of March 28, 2009 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 U.S. generally accepted accounting
principles.  The consolidated balance sheet at December 27, 2008 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 U.S. 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 27, 2008.





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 to
date.





Concentrations





The
Company purchases its inventory from a diverse group of vendors. Five suppliers
account for approximately 55% of the Company’s purchases of merchandise for the
three months ended March 28, 2009, 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.  Under the terms of the Supply Agreement, the annual purchase
commitment for any individual year can be reduced for orders placed by the
Company but not filled within a specified time period by the
supplier.  During 2008, the supplier experienced difficulty in filling
completely certain orders sourced out of China.  Accordingly, the
supplier agreed to reduce the Company’s purchase commitment for 2008 to 90% of
the contractual minimum for that year. The Company met the contractual minimum
purchase requirement, as amended, for 2008.  The Company is not aware
of any reason or circumstance that would prevent the full minimum purchase
amount commitments, for 2009, under the Supply Agreement from being
met.


-5-


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 to secure the payment obligations for these
accounts.





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, which approximates market
value.





The
Company uses controlled disbursement banking arrangements as part of its cash
management program.  Outstanding checks, which were included in
accounts payable and book overdrafts, totaled $632,570 at March 28, 2009 and
$194,381 at December 27, 2008.  The increase in outstanding checks as
of March 28, 2009 is due to the timing of payments made in March 2009 compared
to the timing of payments made in December 2008.





Restricted
cash represents funds on deposit established for the benefit of and under the
control of Wells Fargo Retail Finance, 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 notes payable approximates the
carrying value based on the principal bearing interest at a variable market rate
or due to their short term maturity.  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 1.51% and expected
life of five years).





As
permitted by FASB Staff Position ("FSP") SFAS No. 157-2, Effective Date of FASB Statement
No. 157 ("FSP SFAS 157-2"), the Company elected to defer the
adoption of SFAS No. 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, until December 28, 2008. The adoption
of FSP SFAS 157-2 did not have a material impact on the Company's financial
position, results of operations or cash flows.





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.


-6-


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




Three
      months ended
                      
                      
                      Twelve
      months endedMar 28, 2009
                      
                      
                      Dec 27, 2008Beginning
      balance
                      
                      $
                      942,587
                      
                      
                      $
                      969,859Increases
      to reserve
                      
                      
                      100,000
                      
                      
                      
                      405,000Write-offs
      against reserve
                      
                      
                      -
                      
                      
                      
                      (432,272
                      )Ending
      balance
                      
                      $
                      1,042,587
                      
                      
                      $
                      942,587




Income
Taxes
 
 The
Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”) on December
31, 2006. At the adoption date and as of March 28, 2009, the Company had no
material unrecognized tax benefits and upon adoption on December 31, 2006 no
adjustments to liabilities, retained earnings or operations were
required.
 
 Net
Loss per Share
 
 Net loss
per basic share is computed by dividing net loss available to common
shareholders by the weighted-average number of common shares
outstanding.  The common share equivalents of Series B-F preferred
stock are required to be included in the calculation of net 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 preferred stock were converted to common stock, the application of EITF 03-6
has no effect on the amount of 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 loss
per diluted share under EITF 03-6 is computed by dividing net loss by the
weighted average number of common shares outstanding, plus the common share
equivalents of Series B-F preferred stock on an as 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
March 28, 2009, there were 27,457,044 potential additional common share
equivalents outstanding, which were not included in the calculation of diluted
net loss per share for the three 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 9,266,584 shares upon the exercise of stock options
with a weighted average exercise price of $0.54 per share.
 
 Stock
option compensation expense
 
 The
Company accounts for stock based compensation under Statement No. 123(R) and
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 endedMar 28, 2009
                      
                      
                      Mar 29, 2008Stock
      Based Compensation Expense
                      
                      $
                      37,994
                      
                      
                      $
                      42,106




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 three months ended March 28, 2009.
 
 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 on March 4, 2009 at an exercise price of $0.07
per share.  Similarly, 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. The weighted-average fair market value using
the Black-Scholes option pricing model of the options granted on March 4, 2009
was $0.06 per share, and was $0.22 per share for the options granted on June 4,
2008. 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 endedMar 28, 2009
                    
                    
                    Mar 29, 2008Risk-free
      interest rate
                    
                    
                    1.87%
                    
                    
                    
                    N/AExpected
      volatility
                    
                    
                    106.5%
                    
                    
                    
                    N/AWeighted
      average expected life (in years)
                    
                    
                    6.25
                    
                    
                    
                    N/AExpected
      dividends
                    
                    
                    0.00%
                    
                    
                    
                    N/A




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 27, 2008
                                                            
                                                            
                                                            9,082,198
                                                            
                                                            
                                                            $
                                                            0.55
                                                            
                                                            
                                                            $
                                                            0.13
                                                            -
                                                            
                                                            $
                                                            4.25Granted
                                                            
                                                            
                                                            200,000
                                                            
                                                            
                                                            
                                                            0.07
                                                            
                                                            
                                                            
                                                            0.07
                                                            -
                                                            
                                                            
                                                            0.07Expired/Forfeited
                                                            
                                                            
                                                            (15,614
                                                            )
                                                            
                                                            
                                                            0.36
                                                            
                                                            
                                                            
                                                            0.20
                                                            -
                                                            
                                                            
                                                            0.65Exercised
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -
                                                            -
                                                            
                                                            
                                                            -Outstanding
      - March 28, 2009
                                                            
                                                            
                                                            9,266,584
                                                            
                                                            
                                                            $
                                                            0.54
                                                            
                                                            
                                                            $
                                                            0.07
                                                            -
                                                            
                                                            $
                                                            4.25
                                                            
                                                            
                                                            
                                                            3.9
                                                            
                                                            
                                                            $
                                                            -Exercisable
      - March 28, 2009
                                                            
                                                            
                                                            8,176,864
                                                            
                                                            
                                                            $
                                                            0.57
                                                            
                                                            
                                                            $
                                                            0.13
                                                            -
                                                            
                                                            $
                                                            4.25
                                                            
                                                            
                                                            
                                                            3.3
                                                            
                                                            
                                                            $
                                                            -Available
      for grant - March 28, 2009
                                                            
                                                            
                                                            1,298,155


-8-


The
following table summarizes information for options outstanding and exercisable
at March 28, 2009:




Outstanding
                            
                            
                            ExercisableWeightedNumber
                            
                            
                            Average
                            
                            
                            Weighted
                            
                            
                            Number
                            
                            
                            Weightedof
                            
                            
                            Remaining
                            
                            
                            Average
                            
                            
                            of
                            
                            
                            AverageStock
                            
                            
                            Life
                            
                            
                            Exercise
                            
                            
                            Stock
                            
                            
                            ExercisePrice Range
                            
                            
                            Options
                            
                            
                            (Years)
                            
                            
                            Price
                            
                            
                            Options
                            
                            
                            Price$
                            0.07
                            
                            
                            
                            -
                            
                            
                            $
                            0.20
                            
                            
                            
                            332,250
                            
                            
                            
                            6.9
                            
                            
                            $
                            0.11
                            
                            
                            
                            132,250
                            
                            
                            $
                            0.180.21
                            
                            
                            
                            -
                            
                            
                            
                            0.30
                            
                            
                            
                            3,414,252
                            
                            
                            
                            2.4
                            
                            
                            
                            0.25
                            
                            
                            
                            3,289,252
                            
                            
                            
                            0.250.31
                            
                            
                            
                            -
                            
                            
                            
                            0.50
                            
                            
                            
                            2,455,598
                            
                            
                            
                            6.0
                            
                            
                            
                            0.39
                            
                            
                            
                            1,692,008
                            
                            
                            
                            0.380.51
                            
                            
                            
                            -
                            
                            
                            
                            1.00
                            
                            
                            
                            2,676,184
                            
                            
                            
                            4.1
                            
                            
                            
                            0.77
                            
                            
                            
                            2,675,054
                            
                            
                            
                            0.771.01
                            
                            
                            
                            -
                            
                            
                            
                            3.50
                            
                            
                            
                            288,300
                            
                            
                            
                            1.1
                            
                            
                            
                            2.51
                            
                            
                            
                            288,300
                            
                            
                            
                            2.513.51
                            
                            
                            
                            -
                            
                            
                            
                            4.25
                            
                            
                            
                            100,000
                            
                            
                            
                            0.7
                            
                            
                            
                            4.14
                            
                            
                            
                            100,000
                            
                            
                            
                            4.14Total
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            9,266,584
                            
                            
                            
                            3.9
                            
                            
                            $
                            0.54
                            
                            
                            
                            8,176,864
                            
                            
                            $
                            0.57




The
remaining unrecognized stock based compensation expense related to unvested
awards at March 28, 2009 was $222,485 and the period of time over which this
expense will be recognized is 3.94 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




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 Well Fargo Retail Finance, LLC. 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 within a certain distance from the Company’s stores in 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.
 -9-
 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 March 28, 2009 and December 27, 2008 were:
  Mar 28, 2009
                        
                        
                        Dec 27, 2008Non-compete
      agreements
                        
                        $
                        2,358,540
                        
                        
                        $
                        2,358,540Occupancy
      valuations
                        
                        
                        944,716
                        
                        
                        
                        944,716Other
                        
                        
                        157,855
                        
                        
                        
                        157,855Intangible
      assets
                        
                        
                        3,461,111
                        
                        
                        
                        3,461,111Less:
      accumulated amortization
                        
                        
                        (1,331,695
                        )
                        
                        
                        (1,157,419
                        )Intangible
      assets, net
                        
                        $
                        2,129,416
                        
                        
                        $
                        2,303,692




Amortization
expense for these intangible assets was:
  For the three months endedMar 28, 2009
                                      
                                      
                                      Mar 29, 2008Amortization
      expense
                                      
                                      $
                                      174,277
                                      
                                      
                                      $
                                      152,760




The
amortization expense for the non-compete agreements and other intangible assets
is included in general and administrative expense in the Consolidated Statements
of Operations.  The amortization expense for occupancy valuation is
included in cost of products sold and occupancy costs in the Consolidated
Statements of Operations.
 
 Future
amortization expense related to these intangible assets as of March 28, 2009
is:
  Year
                        
                        Amount2009
                        
                        $
                        522,8312010
                        
                        
                        672,1082011
                        
                        
                        467,4122012
                        
                        
                        242,4382013
                        
                        
                        127,029Thereafter
                        
                        
                        97,598Total
                        
                        $
                        2,129,416




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
March 28, 2009, the Company does not believe that any of its assets are
impaired.


-10-


Notes
Payable





Notes
payable consist of three notes entered into in fiscal 2006.





The
“Highbridge Note” is a subordinated note in the stated principal amount of
$2,500,000 that bears interest at the rate of prime plus one
percent.  The note matures on September 15, 2009.  Interest
only is payable quarterly in arrears and the entire principal balance is due at
the maturity date. The Highbridge Note was part of a financing transaction that
raised $2.5 million through a combination of the issuance of the Highbridge Note
and a warrant exercisable for 2,083,334 shares of common stock at an exercise
price of $0.475 per share. 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 $2,414,771 as of March 28, 2009
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 March 28, 2009 of $402,022. 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.  Under the terms of the Supply Agreement, the
annual purchase commitment for any individual year can be reduced for orders
placed by the Company but not filled by the supplier within a specified time
period.  During 2008, the supplier experienced difficulty in filling
completely certain orders sourced out of China.  Accordingly, the
supplier agreed to reduce the Company’s purchase commitment for 2008 to 90% of
the contractual minimum for that year.





The Supply
Agreement also provided for Amscan to extend, until October 31, 2006,
approximately $1,150,000 of certain currently due amounts 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.





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.


-11-


Stockholders’
Equity





During the
three months ended March 28, 2009, there were no exercises of stock options or
warrants, and no conversions of 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 only
assets and liabilities subject to SFAS No. 157 at March 28, 2009 and December
27, 2008 are cash equivalents and restricted cash which are based on Level 1
inputs.





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 27, 2008.





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 27, 2008.





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.


-12-


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 20,500 square feet and average approximately 10,300 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 (not including temporary
stores):




For the three months endedMar 28, 2009
                      
                      
                      Mar 29, 2008Beginning
      of period
                      
                      
                      50
                      
                      
                      
                      50Openings
      / Acquisitions
                      
                      
                      -
                      
                      
                      
                      2Closings
                      
                      
                      -
                      
                      
                      
                      (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.
 
 In
addition to the stores discussed in the paragraphs above, we opened two
temporary Halloween stores in the greater Boston area in September of
2008.  These stores featured a strategically selected assortment of
Halloween related merchandise and were closed in early November
2008.
 
 Trends
and Quarterly Summary
 
 Our
business has a seasonal pattern.  In the past three years, we have
realized approximately 34.7% of our annual revenues in our fourth quarter, which
includes Halloween and Christmas, and approximately 24.5% of our revenues in the
second quarter, which includes school graduations and usually includes
Easter.  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
first quarter of 2009, our consolidated revenues were $14.6 million, compared to
$16.1 million for the first quarter in 2008. The decrease in first quarter
revenues from the year-ago period included a 9.9% decrease in comparable store
sales from stores open more than one year. The decrease in consolidated revenue
was primarily due to decreased customer traffic, which, we believe, is mostly
attributable to a falloff in general consumer confidence due to the deepening
recession in the U.S. and world economies. Consolidated gross profit margin
was 35.6% for the first quarter of 2009 compared to a margin of 38.2% for the
same period in 2008. The decline in gross margins was substantially due to
increases in occupancy costs as well as the decreased leveraging of those costs
related to lower sales. The consolidated net loss for the first
quarter of 2009 was $1,715,271, or $0.08 per share, compared to a consolidated
net loss of $1,864,528, or $0.08 per share, for the first quarter in 2008, an
improvement of $149,257. Despite the difficult economic conditions in the first
quarter and the decline in revenues as compared to the first quarter of 2008, we
were able to report an improvement in our net loss as compared to the first
quarter of 2008, due primarily to the cost cutting initiatives we undertook at
the end of 2008. As a result of those initiatives, we estimate that we
eliminated $3 million in annualized expenses throughout the company for
2009.
 Acquisition
and Growth Strategy
 
 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
business prospects, geographical location and the extent to which any
acquisition would enhance our prospects.  Given the current state of the economy and our focus on
maintaining liquidity,we do not expect to
acquire any new stores in 2009 unless we see an early recovery in the
economy.
 -13-




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. Funding for the purchase was obtained from our existing line of
credit with Wells Fargo Retail Finance, LLC.  The stores were
converted into iParty stores immediately following the closing of the
transaction.  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 atJan 2, 2008Non-compete
      agreement
                                                  
                                                  $
                                                  781,000Occupancy
      valuation
                                                  
                                                  
                                                  495,000Equipment
      and other
                                                  
                                                  
                                                  74,000$
                                                  1,350,000
  Results
of Operations
 
 Fiscal
year 2009 has 52 weeks and ends on December 26, 2009.  Fiscal year
2008 had 52 weeks and ended on December 27, 2008.
 
 The first
quarter of fiscal year 2009 had 13 weeks and ended on March 28,
2009.  The first quarter of fiscal year 2008 had 13 weeks and ended on
March 29, 2008.
 
 Expense
Management Actions for Fiscal 2009
 
 In 2008,
the US economy entered into a recessionary period combined with a systematic
lack of financial liquidity.  During that year, the housing crisis
deepened, the stock market declined dramatically, and unemployment rose
steeply.  All of these factors contributed to a difficult retail
environment.   Many economists anticipate a difficult 2009.
Although we fared better than many of our competitors in 2008, we have taken
significant steps in response to the economic crisis.  We reviewed and
revamped our headquarters and store expenses, which included reducing our
headcount and decreasing our advertising and other administrative costs. We
expect to save up to $3 million through reduced operating expenses in 2009 from
these actions.  In addition, we do not expect to open any additional
stores in 2009, unless we see an early recovery in the economy. We continue to
monitor sales performance, customer buying patterns and consumer confidence, and
we are prepared to make further adjustments to our cost structure as needed to
manage our way through this recession.
 
 Three
Months Ended March 28, 2009 Compared to Three Months Ended March 29,
2008
 
 Revenues
 
 Revenues
include the selling price of party goods sold, net of returns and discounts, and
are recognized at the point of sale.  Our consolidated revenues for
the first quarter of fiscal 2009 were $14,568,407, a decrease of $1,575,681, or
9.8% from the first quarter of the prior fiscal year. The decline was primarily
due, we believe, to the U.S. recession, but was also substantially affected by
two retail events, namely the shift in Easter from fiscal March 2008 to fiscal
April 2009 and the reduction in revenue in January related to the football
playoffs and Super Bowl, due to the absence of the New England Patriots from
those events in 2009.
 For the three months endedMar 28, 2009
                          
                          
                          Mar 29, 2008Revenues
                          
                          $
                          14,568,407
                          
                          
                          $
                          16,144,088Increase
      (decrease) in revenues
                          
                          
                          -9.8
                          %
                          
                          
                          3.5
                          %




-14-




Sales for the first quarter
of fiscal 2009 included sales from 50 comparable stores (defined as stores open
for at least one full year) as well as six additional days revenue in 2009 from
the Lincoln and Warwick, RI stores, which were opened on January 5, 2008.
Comparable store sales for the quarter decreased by
9.9%.
  Cost of products sold and
occupancy costs
  Cost of products
sold and occupancy costs consist of the cost of merchandise sold to customers
and the occupancy costs for our stores.  Our cost of products sold and
occupancy costs for the first quarter of fiscal 2009 were $9,382,066, or 64.4%
of revenues, a decrease of $601,281 and an increase of 2.6 percentage points, as
a percentage of revenues, from the first quarter of the prior fiscal
year.
  For the three months endedMar 28, 2009
                        
                        
                        Mar 29, 2008Cost
      of products sold and occupancy costs
                        
                        $
                        9,382,066
                        
                        
                        $
                        9,983,347Percentage
      of revenues
                        
                        
                        64.4
                        %
                        
                        
                        61.8
                        %




As a percentage of
revenues, the increase in cost of products sold and occupancy costs was
primarily attributable to decreased leveraging of occupancy costs related to
lower sales in the first quarter of 2009 compared to the first 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 first quarter
of fiscal 2009 was $4,979,318, or 34.2% of revenues, a decrease of $870,434 or a
decrease of 2.0 percentage points, as a percentage of revenues, from the first
quarter of the prior fiscal year.
  For the three months endedMar 28, 2009
                      
                      
                      Mar 29, 2008Marketing
      and sales
                      
                      $
                      4,979,318
                      
                      
                      $
                      5,849,752Percentage
      of revenues
                      
                      
                      34.2
                      %
                      
                      
                      36.2
                      %




As a percentage of
revenues, the decrease in marketing and sales expense was primarily the result
of our cost reduction actions related to store payroll and advertising expenses,
as described above.
  General and administrative
expense
  General and
administrative (“G&A”) expense consists of payroll and related expenses for
executive, merchandising, finance and administrative personnel, as well as
information technology, professional fees and other general corporate
expenses.  Our consolidated G&A expense for the first quarter of fiscal
2009 was $1,785,770, or 12.3% of revenues, a decrease of $177,395 or an increase
of 0.1 percentage points, as a percentage of revenues, from the first quarter of
the prior fiscal year.
  For the three months endedMar 28, 2009
                      
                      
                      Mar 29, 2008General
      and administrative
                      
                      $
                      1,785,770
                      
                      
                      $
                      1,963,165Percentage
      of revenues
                      
                      
                      12.3
                      %
                      
                      
                      12.2
                      %




-15-




As a result of the cost
reduction initiatives implemented in the first quarter of 2009, our general and
administrative costs remained approximately flat to the first quarter of 2008,
as a percentage of revenues, despite the significant decrease in
sales.
  Operating
loss
  Our operating loss for the
first quarter of fiscal 2009 was $1,578,747, or 10.8% of revenues, compared to
an operating loss of $1,652,176, or 10.2% of revenues for the first quarter of
the prior fiscal year.
  Interestexpense
  Our interest expense in the
first quarter of fiscal 2009 was $136,552, a decrease of $77,476 from the first
quarter of the prior fiscal year.  The decrease in the first quarter of
fiscal 2009 was primarily due to a  lower
effective rate on our Highbridge Note and lower interest expense on our Amscan
Note due to principal amortization of that indebtedness.
  Income
taxes
  We have not provided for
income taxes for the first quarter of fiscal 2009 or fiscal 2008 due to losses
in those periods and the availability of net operating loss (NOL) carryforwards
to eliminate federal taxable income on an annual basis. No benefit has been
recognized with respect to current losses or NOL carryforwards due to the
uncertainty of future taxable income.
  At the end of fiscal 2008,
we had estimated federal net operating loss carryforwards of approximately $20.3
million, which begin to expire in 2019.  In accordance with Section 382 of
the Internal Revenue Code of 1986, as amended, 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 2009 was $1,715,271, or $0.08 per basic and diluted share,
compared to a net loss of $1,864,528, or $0.08 per basic and diluted share, in
the first quarter of the prior fiscal year. The decrease in net loss was mainly
attributable to the reduced cost of goods sold, lower advertising expenditures,
and decreased general and administrative costs, all of which combined to more
than offset the effect of the significant decrease in sales.
  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. Based
on our current operating plan, we believe that anticipated revenues from
operations and borrowings available under our existing line of credit, which
expires on January 2, 2010, 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, including the
continued uncertainty in the credit markets, and further weakening of consumer
confidence and spending, our liquidity may be negatively impacted.  If so,
we could be required to further adjust
our expenditures for 2009 to conserve working capital or raise additional
capital, possibly including debt or equity financing, to fund operations and our
business strategy and to refinance our outstanding debt.  Given the current
state of the debt and equity markets, this could be more difficult and
expensive. We are in the process of negotiating financing to extend or replace
our existing line of credit, which expires on January 2, 2010. While we expect
to extend the bank line of credit with Wells Fargo or another lender, given the
state of the economy, we expect that the borrowing margins will increase and the
terms of the loan will be more stringent.  If the terms are less favorable
than the existing line, our results of operations and liquidity may be adversely
affected.
  -16-




Notes Payable
  We
currently have three notes payable outstanding with principal balances totaling
$3,416,792 at March 28, 2009.  We refer to these notes as the Highbridge
Note, the Amscan Note and the Party City Note.  For a full description of
these notes, we refer you to the section titled “Notes Payable”  in the
Notes to Consolidated Financial Statements for the quarter ended March 28, 2009
included in Item 1 of this Quarterly Report on Form 10-Q.  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.  The Party City Note, which has a principal amount of $600,000, is
payable by quar terly interest-only
payments over four years, with the full principal amount due at the note’s
maturity on August 7, 2010.
  In
September 2006, we closed a financing transaction with an institutional
accredited investor whereby we issued a three-year $2.5 million subordinated
note, the Highbridge Note, that bears interest at an interest rate of prime plus
one percent and 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.  The Highbridge Note matures on September 15,
2009.  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. We
expect to pay off the Highbridge Note from the availability under our bank line of credit and
available cash flow . If we are unable to use
our bank line of credit or available cash flow to pay off the Highbridge note
when due, or if there is a material increase in the cost to do so, we would need
to secure alternative 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.
  Line of
Credit
  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
million, 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 $14,068,236 at March 28,
2009.
  -17-
  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 $196,669 at March 28,
2009.
  Our
total borrowing base is determined by adding the “acceptable inventory at cost”
times an agreed upon advance rate plus the “eligible credit card receivables”
times an agreed upon advance rate but not to exceed our established credit
limit, which was $12,500,000 at March 28, 2009.  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 $2,681,782 at March 28, 2009 and $1,950,019 as
of December 27, 2008, an increase of $731,763. Our additional availability was
$4,389,401 at March 28, 2009 and $4,694,603 at December 27, 2008.
  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 March 28, 2009,
we were in compliance with these financial
covenants.
  Supply
Agreement with Amscan
  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. Under the terms of the
Supply Agreement, the annual purchase commitment for any individual year can be
reduced for orders placed by us but not filled by the supplier.  During
2008, the supplier experienced difficulty in fulfilling certain of our orders
sourced out of China.  Accordingly, the supplier agreed to reduce our
purchase commitment for 2008 to 90% of the contractual minimum for that year.
Our purchases for 2008 exceeded the minimum purchase amount commitments, as
adjusted, under the Supply Agreement. We are not aware of any reason or
circumstance that would prevent us from meeting the full minimum purchase
commitments for 2009. 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.
  Operating,
Investing and Financing Activities
  Our
operating activities used $724,586 during the first quarter of 2009 compared to
a use of $19,554 during the first quarter of 2008, an increase of
$705,032.  The
increase in cash used by operating activities was primarily due to lower
accounts payable and book overdrafts for the first quarter of 2009 compared to
the first quarter of 2008.
  We
used $200,881 in investing activities during the first quarter of 2009 compared
to $1,657,523 during the first quarter of 2008 a decrease of $1,456,642. 
The cash invested in the first quarter of 2009 was primarily due to the
relocation of our Walpole store to a
new, larger location and the modification of our internal systems to improve our
compliance with payment card industry data security standards. The cash invested in 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).
  Our
financing activities provided $924,967 during the first quarter of 2009 compared
to providing $1,671,761 during the first quarter of 2008, a decrease of
$746,794.  The decrease was primarily related to decreased borrowings on
our line of credit during the first quarter of 2009 as compared to the first
quarter of 2008.As mentioned above, on
January 2, 2008, we completed the purchase of two franchised Party City
Corporation retail stores inLincoln, Rhode Island and
Warwick, Rhode Island.   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 particular asset purchase agreement. 
Funding for the purchase was obtained from our existing line of credit with
Wells Fargo.
  -18-




Contractual
Obligations
  Contractual
obligations at March 28, 2009 were as follows:
  Payments Due By PeriodWithin
                      
                      
                      WithinWithin
                      
                      
                      2
      - 3
                      
                      
                      4
      - 5
                      
                      
                      After1 Year
                      
                      
                      Years
                      
                      
                      Years
                      
                      
                      5 Years
                      
                      
                      TotalLine
      of credit
                      
                      $
                      2,683,748
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      2,683,748Capital
      lease obligations
                      
                      
                      511
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      511Notes
      payable
                      
                      
                      3,083,663
                      
                      
                      
                      625,977
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,709,640Supply
      agreement
                      
                      
                      9,050,451
                      
                      
                      
                      18,000,000
                      
                      
                      
                      9,000,000
                      
                      
                      
                      -
                      
                      
                      
                      36,050,451Operating
      leases (including retail space leases)
                      
                      
                      6,868,489
                      
                      
                      
                      16,034,549
                      
                      
                      
                      10,649,134
                      
                      
                      
                      8,870,535
                      
                      
                      
                      42,422,707Total
      contractual obligations
                      
                      $
                      21,686,862
                      
                      
                      $
                      34,660,526
                      
                      
                      $
                      19,649,134
                      
                      
                      $
                      8,870,535
                      
                      
                      $
                      84,867,057




In addition, at March
28, 2009, we had outstanding purchase orders totaling approximately $7,469,065
for the acquisition of inventory and non-inventory items that were scheduled for
delivery after March 28, 2009.
  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 March 28, 2009, we operated a total of 50 stores, 45 of which are located in
New England and 5 of which are located in Florida . 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 or in Florida 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 impact prices of shipping products made
overseas in foreign countries, such as China, which includes much of our
merchandise.  Volatile oil and gasoline prices also impact freight costs,
consumer confidence and spending patterns.  These and other issues directly
or indirectly affecting our vendors and us could adversely affect our business
and financial
performance.
  Off-Balance
Sheet Arrangements
  We
do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to
investors.
 -19-




Factors That May Affect
Future Results
  Our
business is subject to certain risks that could materially affect our financial
condition, results of operations, and the value of our common stock. These risks
include, but are not limited to, the ones described under Item 1A, “Risk
Factors” of our Annual Report on Form 10-K for the fiscal year ended December
27, 2008, 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
  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 for the fiscal year ended December 27,
2008 included in Item 8 of our Annual Report on Form 10-K, as filed with the SEC
on March 23, 2009).  We believe the following accounting policies to be
those most important to the portrayal of our financial condition and operating
results 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.
  Inventories and Related
Allowance for Obsolete and Excess
Inventory
  Inventories consist of
party supplies and are 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 2008 included an estimated reduction of $261,915 to the cost
of products sold during the previous three quarters.  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.  The adjustment in the
fourth quarter of 2006 included an estimated reduction of $251,806 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.
  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.
  -20-




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 our 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 within a certain distance from our stores in
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.
  Non-compete
agreements are amortized based on the pattern of their expected cash flow
benefits. Occupancy valuations are amortized over the terms of the related
leases.
  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 closed two stores in early
January 2008, at the end of their lease terms.  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 March 28,
2009.
  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, and were able to use a portion of our net operating loss carryforwards in
those years and expect to do so in connection with filing our 2008 return, (2)
we have achieved positive comparable store sales growth for six out of the last
seven 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
and 2008, (2) our merchandise margins decreased in 2008, 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 $20.3 million at December 27,
2008, (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, (4) the risk that opening or acquiring
new stores will put pressure on our profit margins until these stores reach
maturity, (5) the expected costs of increased regulatory compliance, including,
without limitation, professional fees in 2009 associated with Section 404 of the
Sarbanes-Oxley Act, will likely have a negative impact on our profitability, (6)
the risk that a general or perceived slowdown in the U.S. economy, or
uncertainty as to the economic outlook, which the U.S. and world economies are
experiencing, could reduce discretionary spending or cause a shift in consumer discretionary spending to other products.
  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 against our deferred tax assets 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.
  -21-




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 revenue and expenses during the reporting period.  Our actual
results could differ from our
estimates.
  New Accounting
Pronouncements
  In April 2008, the
FASB issued a FASB Staff Position on SFAS No. 142-3, “Determination
of the Useful Life of Intangible Assets”(“FSP SFAS 142-3”). FSP SFAS
142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill
and Other Intangible Assets”. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141 (revised 2007), “Business
Combinations”,and other U.S. generally accepted accounting
principles.  The Company adopted the provisions of FSP SFAS 142-3 on
December 28, 2008, and the adoption did not have a material impact on its
financial position, results of operations or cash
flows.
  As permitted by
FASB Staff Position ("FSP") SFAS No. 157-2, Effective
Date of FASB Statement No. 157 ("FSP SFAS 157-2"), the Company
elected to defer the adoption of SFAS No. 157 for all non-financial assets
and non-financial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis, until December 28,
2008. The adoption of FSP SFAS 157-2 did not have a material impact on the
Company's financial position, results of operations or cash flows.
  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 for the period ended December 27, 2008, which was filed with the SEC on
March 23, 2009.
  Item 4.  Controls and Procedures
  (a)      
Evaluation
of Disclosure Controls and Procedures.  The Chief Executive Officer
and the Chief Financial Officer of iParty (its principal executive officer and
principal financial officer, respectively) have concluded, based on their
evaluation as of March 28, 2009, 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.
  -22-




(b)    
Changesin 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 March 28, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
   PART II – OTHER
INFORMATION
 
  Item 1. Legal
Proceedings
  We are 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 our financial position or results of
operations.
  Item 1A.   Risk
Factors
  There have been no material
changes to the risk factors disclosed in the “Risk Factors” section of our
Annual Report on Form 10-K for the year ended December 27, 2008, as filed
with the SEC on March 23, 2009.
  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.
  -23-




SIGNATURES
  Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  iPARTY
      CORP.By:
                        /s/ SAL
      PERISANOSal
      PerisanoChairman
      of the Board and Chief Executive Officer(Principal
      Executive Officer)






By:
                            /s/ DAVID
      ROBERTSONDavid
      RobertsonChief
      Financial Officer(Principal
      Financial and Accounting Officer)


Dated: May 7,
2009












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EXHIBIT INDEX
   EXHIBITNUMBER
                              
                              DESCRIPTIONEx.
      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








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