** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

**xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

**For The Fiscal Year EndedDecember 30, 2006**

**OR**

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

**Forthe Transition Period from                           to                        **

**CommissionFile Number 0-25507**

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**iPARTY CORP.**

(Exact Name ofRegistrant as Specified in Its Charter)

| **DELAWARE**                              |   | **76-0547750**       |
|-------------------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of          |   | (IRS Employer        |
| Incorporation or  Organization)           |   | Identification  No.) |
|                                      |   |                 |
| **270  BRIDGE STREET, SUITE 301**         |   | **02026**            |
| **DEDHAM,  MASSACHUSETTS**                |   | (Zip Code)           |
| (Address of  Principal Executive Offices) |   |                 |

 

**(781) 329-3952**

(Registrant’s Telephone Number, Including Area Code)

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Securities Registered pursuant to Section 12(b) of theAct:

| Title of Each Class                |   | Name of Each  Exchange on Which Registered |
|------------------------------------|--------|--------------------------------------------|
| **COMMON  STOCK, $.001 PAR VALUE** |   | **AMERICAN  STOCK EXCHANGE**               |

 

SecuritiesRegistered pursuant to Section 12(g) of the Act:  None

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes oNo x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act. Yes oNo x

Indicate by checkmark whether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes xNo o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o     Accelerated filer o      Non-accelerated filer x

Indicate by check markwhether the registrant is a shell company as defined in Rule 12b-2 of theExchange Act. Yes o No x

On July 1, 2006, theaggregate market value of the voting common equity of the registrant(consisting of common stock, $.001 par value (the “common stock”)) held bynonaffiliates of the registrant was approximately $7,891,620 based on theclosing price for such common stock on said date as reported by the AmericanStock Exchange.  On March 16, 2007 therewere 22,622,825 shares of common stock, $.001 par value, issued andoutstanding.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of theproxy statement for the annual stockholders’ meeting scheduled to be held June 6,2007, which we plan to file with the SEC no later than 120 days after the endof our fiscal year ended December 30, 2006, are incorporated by reference intoPart III.

 

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**PART I**

**ITEM 1. BUSINESS**

**General**

We believe we are a leading brand in the party industry in the marketswe serve and a leading resource in those markets for consumers seeking partygoods, party planning advice and relevant information.  We are a party goods retailer operatingstores throughout New England, where 45 of our 50 retail stores arelocated.  We also license the nameiParty.com (at www.iparty.com) to a third party in exchange for royalties,which to date have not been significant. We generated $78.5 million in total revenues and $0.4 million of netincome in fiscal 2006.

Our 50 retailstores are located predominantly in New England with 26 stores inMassachusetts, 7 in Connecticut, 6 in New Hampshire, 2 in Rhode Island, 3 inMaine and 1 in Vermont.  We also operate5 stores in Florida.  Our stores range insize from approximately 8,000 square feet to 20,300 square feet and averageapproximately 9,800 square feet in size. We lease our properties, typically for 10 years and usually with optionsfrom our landlords to renew our leases for an additional 5 or 10 years.

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

Our business has aseasonal pattern.  In the past threeyears, we have realized an average of approximately 37.5% of our annualrevenues in our fourth quarter, which includes Halloween and Christmas, and anaverage of approximately 23.4% of our revenues in the second quarter, whichincludes school graduations.  Also,during these past three years, we have had net income in our second and fourthquarters and generated losses in our first and third quarters.

Our executiveoffices are located at 270 Bridge Street, Suite 301, Dedham, Massachusetts,02026.  Our phone number is (781)329-3952.  Our licensed website islocated at www.iparty.com.  Theinformation contained on our licensed website does not constitute a part ofthis Annual Report.

Where a referenceis made in this Annual Report to a particular year or years, it is a referenceto our fiscal year, unless the context indicates otherwise.  For example, “2006” refers to our 52-weekfiscal year ended December 30, 2006, “2005” refers to our 53-week fiscal yearended December 31, 2005 and “2004” refers to our 52-week fiscal year endedDecember 25, 2004.

**Organization**

We are currently a party goods retail chain operating 50 stores. Wewere first incorporated as iParty Corp. (“iParty”) on March 12, 1998.  On January 2, 2000, iParty Corp. was listedon the American Stock Exchange under ticker symbol “IPT”.

On August 3, 2000,iParty Retail Stores Corp. (“iParty Retail”) was incorporated as a wholly-ownedsubsidiary of iParty Corp. to operate a chain of retail stores selling partygoods.  On August 15, 2000, iParty Retailacquired inventory, fixed assets and the leases of 33 retail stores from TheBig Party Corporation (“The Big Party”), a privately-held company which wasoperating under bankruptcy protection, in exchange for cash and the assumptionof certain liabilities.  This acquisitionwas approved on August 16, 2000 by the United States Bankruptcy Court for theDistrict of Delaware.  We havesubsequently opened an additional 17 stores, acquired one store, and closed onestore.

**CapitalStructure**

Our capitalstructure currently consists of common stock and five outstanding series ofconvertible preferred stock.  We havealso issued warrants and have a stock option plan.

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Our common stockhas a par value of $0.001 per share.  Wehave 150,000,000 shares of common stock authorized, 22,603,877 of which wereissued and outstanding as of December 30, 2006. These shares are listed on the American Stock Exchange and trade underthe symbol “IPT”.

We currently havefive outstanding series of convertible preferred stock, Series B-F.  On January 13, 2004, all 1,000,000 shares ofour Series A convertible preferred stock were converted into 1,000,000 sharesof common stock.  Each share of Series Bconvertible preferred stock is presently convertible into 13.396 shares ofcommon stock.  Each share of Series Cconvertible preferred stock is presently convertible into 13.652 shares of commonstock.  Each share of Series Dconvertible preferred stock is presently convertible into 14.609 shares ofcommon stock.  Each share of Series Econvertible preferred stock is presently convertible into 10.359 shares ofcommon stock.  Each share of Series Fconvertible preferred stock is presently convertible into 10.367 shares ofcommon stock.  We had a total of1,232,354 shares of convertible preferred stock outstanding as of December 30,2006, which were convertible into 15,590,309 shares of common stock at thatdate.  Our convertible preferred stock ispresented on our balance sheet at its carrying value, which was $13,771,450 atDecember 30, 2006.

We also have astockholder rights plan (the “rights plan”). The rights plan associates rights to our capital stock, such that eachshare of our common stock is entitled to one right and each share of ourpreferred stock is entitled to such number of rights equal to the number ofcommon shares into which it is convertible. The rights will become exercisable only in the event that, with certainexceptions, an acquiring party accumulates 10 percent or more of our votingstock or if a party announces an offer to acquire 15 percent or more of ourvoting stock.  When exercisable, eachright entitles the holder to purchase from us one one-hundredth of a share of anew series of Series G junior preferred stock at an initial purchase price of$2.00, subject to adjustment.  Inaddition, upon the occurrence of certain events, holders of the rights would beentitled to purchase either iParty Corp. stock or shares in an “acquiringentity” at half of market value.

The holders of ourconvertible preferred stock have a liquidation preference senior to the holdersof our common stock.  In the event ofliquidation, which is defined to include a merger, acquisition, or similartransaction involving the acquisition of our company, our convertible preferredstockholders would be entitled to a liquidation value, which was $18,040,524 atDecember 30, 2006.  This amount is inexcess of the carrying value of the preferred stock due to amounts allocated towarrants, which were issued in connection with certain issuances of ourconvertible preferred stock.  Thedifference of approximately $4.3 million will be accreted when and if a liquidationevent occurs.  The holders of our SeriesB-F convertible preferred stock are also entitled to anti-dilution protectionin the event we issue common stock, or certain rights, including optionactivity in excess of certain amounts, to purchase or convert into commonstock, at a price below their conversion prices.

The Series B-Fpreferred stockholders are entitled to participate in dividends when and ifdeclared by our Board of Directors.

We have alsoissued warrants in connection with the issuance of certain convertiblepreferred stock and certain licensing, marketing and financing arrangements,including the warrant issued to an accredited institutional investor onSeptember 15, 2006.  At December 30,2006, we had a warrant outstanding with a weighted average exercise price of$0.475, which was exercisable for 2,083,334 shares of our common stock andwarrants outstanding with a weighted average exercise price of $3.79, whichwere exercisable for 528,210 shares of our common stock.  During 2005, warrants exercisable for12,483,005 shares of our common stock that had been granted in conjunction withvarious series of our convertible preferred stock expired without beingexercised.

Under our stockoption plan, we are authorized to grant options to purchase up to 11,000,000shares of our common stock.  At December30, 2006, we had options outstanding that were exercisable for the purchase of8,801,479 shares of common stock.  OnSeptember 21, 2005, our board of directors approved the full accelerationof the vesting of each otherwise unvested stock option that had an exerciseprice of $0.69 or greater that was currently held by any of our employees andofficers.  As a result, options topurchase approximately 1.0 million shares, including approximately 615,000options held by our executive officers, became immediately exercisable.  On December 8, 2006, we entered into optioncancellation agreements with three of our executive officers pursuant to whichoptions that had been exercisable for a combined aggregate of 1,324,730 sharesof our common stock at exercise prices of $2.00 per share or greater werecancelled effective as of such date.

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Thefollowing chart summarizes our capital structure at December 30, 2006.

 
| ** **                            | ** ** | ** **         | ** ** | ** **      | ** ** | ** **            | ** ** | **Weighted**       | ** ** | ** **      | ** ** |
|---------------------------------------|------------|--------------------|------------|-----------------|------------|-----------------------|------------|--------------------|------------|-----------------|------------|
| ** **                            | ** ** | ** **         | ** ** | ** **      | ** ** | **Total**             | ** ** | **Average**        | ** ** | ** **      | ** ** |
| ** **                            | ** ** | **Number of** | ** ** | ** **      | ** ** | **Common**            | ** ** | **Exercise**       | ** ** | ** **      | ** ** |
| ** **                            | ** ** | **Shares/**        | ** ** | ** **      | ** ** | **Shares**            | ** ** | **Price per** | ** ** | ** **      | ** ** |
| ** **                            | ** ** | **Warrants/**      | ** ** | **Conversion/** | ** ** | **Issued**            | ** ** | **Common**         | ** ** | ** **      | ** ** |
| ** **                            | ** ** | **Options**        | ** ** | **Exercise**    | ** ** | **and**               | ** ** | **Share**          | ** ** | **Liquidation** | ** ** |
| ** **                            | ** ** | **Outstanding**    | ** ** | **Ratios**      | ** ** | **Issuable (1)** | ** ** | **Issuable**       | ** ** | **Value**       | ** ** |
| Common stock                          |       | 22,603,877         |       |            |       | 22,603,877            |       |               |       | $               | —     |   |
|                                  |       |               |       |            |       |                  |       |               |       |            |       |
| Series B  convertible preferred stock |       | 471,401            |       | 13.396          |       | 6,314,888             |       |               |       | 9,428,024       |       |
| Series C  convertible preferred stock |       | 100,000            |       | 13.652          |       | 1,365,200             |       |               |       | 2,000,000       |       |
| Series D  convertible preferred stock |       | 250,000            |       | 14.609          |       | 3,652,250             |       |               |       | 5,000,000       |       |
| Series E  convertible preferred stock |       | 296,667            |       | 10.359          |       | 3,073,168             |       |               |       | 1,112,500       |       |
| Series F  convertible preferred stock |       | 114,286            |       | 10.367          |       | 1,184,803             |       |               |       | 500,000         |       |
| Total  convertible preferred stock    |       | 1,232,354          |       |            |       | 15,590,309            |       |               |       | 18,040,524      |       |
|                                  |       |               |       |            |       |                  |       |               |       |            |       |
| Warrants                              |       | 2,083,334          |       | 1.000           |       | 2,083,334             |       | $                  | 0.475      |            | —     |   |
| Warrants                              |       | 528,210            |       | 1.000           |       | 528,210               |       | $                  | 3.790      |            | —     |   |
|                                  |       |               |       |            |       |                  |       |               |       |            |       |
| Stock options                         |       | 8,922,440          |       | 1.000           |       | 8,922,440             |       | $                  | 0.620      |            | —     |   |
|                                  |       |               |       |            |       |                  |       |               |       |            |       |
| Total                                 |       |               |       |            |       | 49,728,170            |       |               |       | $               | 18,040,524 |   |

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(1)  Includes common stock outstandingand common stock issuable upon conversion of convertible preferred

stock and exercise ofoutstanding warrants and stock options.

**Competition**

The party supplies retailingbusiness is highly competitive.  Wecompete with a variety of smaller and larger retailers, including singleowner-operated party supplies stores, specialty party supplies retailers,discount department stores, general mass merchants and supermarkets, as well ascatalog and Internet merchants.

Barriers to entry are minimal. New competitors can open new stores and/or launch new Internet sites ata relatively low cost.  However, webelieve that the costs to remain competitive in the party supplies retailingbusiness can be significant.  These costsinclude the hiring of human resources with industry knowledge and the marketingcosts associated with building a widely recognized brand.

**Suppliers and Inventory**

Thefollowing represents suppliers from whom we purchased at least 5% of ourmerchandise:

| Supplier                       | ** ** | **Products supplied** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------------------------|------------|----------|------------|----------|------------|
| Amscan, Inc.                   |       | Paper  party goods         |       | 16.0     | %          | 17.4     | %          |
| Fun World                      |       | Halloween  costumes        |       | 6.0      | %          | 7.1      | %          |
| Unique  Industries, Inc.       |       | Paper  party goods         |       | 6.0      | %          | 5.6      | %          |
| Hallmark  Marketing Corp.      |       | Paper  party goods         |       | 5.6      | %          | 4.7      | %          |
| Kendall  Confectionery Company |       | Candy                      |       | 5.3      | %          | 4.7      | %          |
| Lagasse Inc.                   |       | Paper  party goods         |       | 5.2      | %          | 5.4      | %          |
| Total                          |       |                       |       | 44.1     | %          | 44.9     | %          |

 

In August 2006, weentered into a Supply Agreement with Amscan, Inc. (“Amscan”) which extends to2012 and obligates us to purchase increased levels of merchandise from Amscan,our largest supplier, in exchange for, 

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among other things, theright to receive certain additional rebates and more favorable pricing termsover the life of the agreement than were generally available to us under ourprevious terms with Amscan.

The loss of any ofthese suppliers could materially adversely affect our business, results ofoperations, financial condition and cash flow. We consider numerous factors in supplier selection, including, but notlimited to, price, credit terms, product offerings and quality.  As is customary in our industry, apart fromour agreement with Amscan, we generally do not have long-term contracts withany supplier, and any supplier may discontinue selling to us at any time.

**IntellectualProperty**

We hold trademarksfor “iParty” and “iParty.com” issued by the U.S. Patent and TrademarkOffice.  Trademark registrations for “iParty”were issued on February 19, 2002 and August 26, 2003 under U.S. registrationNo. 2,541,025 and No. 2,756,735.  Thetrademark registration for “iParty.com” was issued on November 12, 2002 underU.S. registration No. 2,649,801.

**Employees**

As of March 1,2007, we had 278 full-time employees and 629 part-time employees.  None of these employees are represented by alabor union, and we consider our relationship with our employees to be good.

**AvailableInformation**

Our licensedInternet website address is www.iparty.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K and amendments to those reports filed or furnished pursuantto Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are availablethrough our licensed Internet website as soon as reasonably practicable afterwe electronically file such material with, or furnish it to, the SEC.  Our licensed Internet website and theinformation contained therein or connected thereto are not intended to beincorporated into this Annual Report on Form 10-K.

The public mayread and copy any materials that we file with the SEC at the SEC’s website,www.sec.gov, which contains reports, proxy and information statements and otherinformation that public companies are required to file with the SEC.  In addition, the public may read and copy anymaterials we file with the SEC at the SEC’s Public Reference Room at 100 FStreet, N.E., Washington, D.C., 20549. The public may obtain information about the SEC’s Public Reference Roomby calling 1-800-SEC-0330.

**ITEM 1A.       RISK FACTORS**

Our business issubject 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 below.  Additionalrisks and uncertainties that we are unaware of, or that we may currently deemimmaterial, may become important factors that harm our business, financialcondition, results of operations, or the value of our common stock.

***Our success dependson economic and other external factors, particularly in the New England regionand during the Halloween season, that affect consumer decisions about whetherand when to purchase party goods and supplies.***

Our business success depends in large measure on consumer decisions tobuy party goods and supplies and seek party planning advice, particularly inthe New England region, where 45 of our 50 stores are located, and particularlyduring the Halloween season, which is our single most important season. Demandfor our products and our business results are sensitive to external factorsthat, directly or indirectly, affect consumer confidence, consumer spendingpatterns, levels of disposable consumer income, or otherwise lead consumers tohost or not host parties or purchase party goods and supplies.  Examples of such external factors include:unseasonable weather, especially in New England; the timing, duration andeffects of adverse changes in overall economic conditions, including rates ofjob loss or growth, energy prices, and increases or decreases in interestrates, nationally or more locally in the markets we serve; and the competitivesuccess or failure of local sports teams, such as the New England Patriots orBoston Red Sox, particularly in post-season play.  The precise impact of any of these external 

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factors onconsumer spending patterns for party goods and supplies is difficult to predictin advance, but one or more of these factors could adversely affect ourbusiness or our operating results, particularly with respect to any givenfiscal period, to the extent they adversely impacted the consumer spendingpatterns most important to our business success.

***We face intensecompetition from many sources.***

The industry we serve is highly competitive and fragmented.  We face intense competition from other partysupply stores and stores that merchandise and market party supplies, includingbig discount retailers, such as Wal-Mart, retail drug store chains, like CVSand Walgreen, dollar store chains, and temporary Halloween stores.  Our success thus depends on our ability to becompetitive against many different competitors in each local market area weserve.  If we fail to anticipate evolvinginnovations and product offerings from our competitors and fail to offerproducts that appeal to the changing needs and preferences of our customers inthe various markets we serve, demand for our products could decline and ouroperating results would be adversely affected. While the competitive importance of product quality, price, service andinnovation varies from product to product, price is a factor, and we experiencepricing pressures from competitors in our markets.

***We face newcompetitive threats as a result of consolidation in our industry followingAmscan Holdings, Inc.’s recent acquisitions of Party City Corporation and PartyAmerica.***

The industry in which we operate faces the prospect of increasedcompetition as a result of consolidation. Party City Corporation (“Party City”), which operates approximately 500stores nationwide, is the largest party store chain in the nation, followed byParty America, which operates approximately 280 stores nationwide.  Neither Party City nor Party Americacurrently have any significant store presence in the New England area.  In December 2005, Amscan Holdings, Inc. (“AHI”)acquired Party City.  AHI is the parentcompany of Amscan, Inc. (“Amscan”), our largest supplier and the largestsupplier in our industry.  In September2006, AHI acquired Party America.  AHI’sacquisitions of Party City and Party America means that AHI now has a total ofmore than 780 corporate and franchise party supply stores nationwide.

In August 2006, we announced that we had entered into a SupplyAgreement with Amscan which extends to 2012 and obligates us to purchaseincreased levels of merchandise from Amscan, in exchange for, among other things,the right to receive certain additional rebates and more favorable pricingterms over the life of the agreement than were generally available to us underour previous terms with Amscan.  On thatsame date, we announced that we had entered into a $2.45 million agreement withParty City pursuant to which we acquired Party City’s retail store in Peabody,Massachusetts and received a five-year non-competition agreement from PartyCity and its affiliates that covers Massachusetts, Maine, New Hampshire, Vermont,Rhode Island, and Windsor and New London counties in Connecticut.

Any further geographic expansion by us outside of the New Englandmarket could result in greater direct competition with one or both of PartyCity and Party America.  If so, AHI’s acquisitionsof Party City and Party America and its status as our largest supplier and thelargest supplier in our industry could adversely affect our ability to competefavorably or operate successfully in a changed marketplace.  Price pressures from such new sources ofcompetition, particularly in the event of a strain or rupture in ourrelationship with Amscan, could erode our margins and cause our financialresults of operations to suffer.  Oursuccess depends on our ability to evaluate and respond to the threats arisingfrom growing consolidation and changing marketplaces and identify ways in whichwe can competitively operate and strategically grow our store base.

***A major failure ofour information systems would harm our business.***

The failure of any of our systems, including, without limitation, thepoint-of-sale system that we installed beginning in 2004, and our existingmerchandise management system, the latter of which was developed by a vendorwho is no longer in business and is thus currently unsupported by athird-party, would have a material adverse effect on our business and financialresults of operations.  We depend onthese information systems to operate our retail stores, process transactions,respond to customer inquiries, manage inventory, purchase and sell goods on atimely basis, and maintain cost-efficient operations.

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We currently are considering whether to replace our existingmerchandising system.  We can provide noassurance that we will do so in 2007. If we do not do so, we can provide noassurance that our existing system will be able to successfully meet ouroperational and financial requirements. We may experience operational problems with our information systems as aresult of system failures or any inability on our part to find qualifiedpersonnel to monitor, maintain, and upgrade these systems, particularly withrespect to our merchandise management system, or other causes.  Conversely, if we do proceed with replacingour existing merchandising system, we can provide no assurance that the newsystem we are considering to install will successfully meet our operational andfinancial requirements or that the transition from our existing system to thenew one will be timely or will occur without any material disruptions in ourbusiness or financial results of operations.

We cannot assure you that our systems will be adequate to supportfuture growth, either as currently configured or as we plan to possibly updatethem.  Any material disruption orslowdown of our systems, as currently existing or as proposed to be possiblyreplaced, would severely interfere with the normal operation of our retailstore operations and could have a materially negative impact on our businessoperations and financial results.  Inparticular, our total borrowing base under our line of credit depends, amongother things, on our inventory levels, credit card receivables, customerdeposits, and merchandise credits. Accordingly, any material disruption or problem affecting ourpoint-of-sale or merchandise management systems could materially and adverselyaffect our borrowing level, our compliance with various covenants under ourbank agreement, and our liquidity and cash resources.

***Our quarterlyoperating results are subject to significant fluctuation.***

Our operating results have fluctuated from quarter to quarter in thepast, and we expect that they will continue to do so in the future.  Factors that could cause these quarterlyfluctuations, both sequentially and on a year-over-year basis, include thefollowing: extreme weather-related disruptions, particularly in New England;the timing of movable holidays, such as Easter, which typically falls in thesecond quarter but on occasion falls in the first quarter; the competitivesuccess or failure of local sports teams, such as the New England Patriots orBoston Red Sox, particularly in post-season play, which may result influctuations from one year to the next in our sales in the first and fourthquarters; the extent to which sales in new stores result in the loss of salesin existing stores; the mix of products sold; pricing and marketing actions ofcompetitors; the level of advertising and promotional expenses; andseasonality, primarily because the sales and profitability of our stores aretypically lower in the first and third quarters, when we have often operated ata loss, and are typically higher in the second quarter, which includes schoolgraduations, and the fourth quarter, which includes Halloween, our single mostimportant selling season, as well as the Christmas holiday season.  Most of our operating expenses, such as rentexpense, advertising expense and employee salaries, do not vary directly withthe amount of sales and are difficult to adjust in the short term.  As a result, if sales in a particular quarterare below expectations for that quarter, we may not be able to proportionatelyreduce operating expenses for that quarter, and therefore such a salesshortfall would have a disproportionate effect on our net income (or loss) forthe quarter.

***Our failure toattract, retain, and motivate qualified personnel would adversely affect ourbusiness.***

Our success depends in large part on the efforts and abilities of oursenior management team.  Their skills,experience and industry contacts significantly benefit our operations andadministration.  The failure to attract,retain, and properly motivate the members of our senior management team andother key employees, or to find suitable replacements for them in the event ofdeath, ill health, or their desire to pursue other professional opportunities,could have a negative effect on our operating results.  At the present time we are looking to hire anew chief financial officer and a new chief operating officer in part as the resultof the decision of our President and CFO, Patrick Farrell, to relocate fromBoston to New York for personal reasons. While Mr. Farrell will continue to be employed by us on a full-timebasis through May 15, 2007 and on a part-time basis through November 15, 2007,our business performance and operating results will in large part depend on ourability to locate, hire and retain one or more suitable candidates to replaceMr. Farrell.

Our performance is also largely dependent on attracting and retainingquality associates that are able to make the consumer shopping experience atour stores a fun and informative experience. We face intense competition for qualified associates, and many of ourassociates are in entry-level or part-time positions with historically highrates of turnover.  Our ability to meetour labor needs generally while controlling our labor costs is subject tonumerous external factors, including the availability of a sufficient number ofqualified persons in the work force, 

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unemploymentlevels, prevailing wage rates, changing demographics, health and otherinsurance costs and changes in employment legislation, particularly in the NewEngland region.  If we are unable toattract and retain qualified associates or our labor costs increasesignificantly, our business and financial performance may be adverselyaffected.

***Risks associatedwith recent and possible future new store openings could adversely affect ourbusiness.***

An important part of our long-range business plan is to increase ournumber of stores and, over time, enter new geographic markets.  We have opened 15 new stores, acquired onestore and closed one store over the past four years, bringing our total numberof stores from 35 at the beginning of 2003 to 50 at the end of 2006.  While we have no current plans for new storeopenings, our growth goals envision a return to opening or acquiring additionalstores beginning in 2008.  For our growthstrategy to be successful, we must identify and lease favorable store sites,hire and train associates and store managers, and adapt management andoperational systems to meet the needs of our expanded operations.  These tasks may be difficult to accomplishsuccessfully.  If we are unable to opennew stores in locations and on terms acceptable to us as quickly as planned,our future sales and profits may be adversely affected.  Even if we succeed in opening or acquiringnew stores, these new stores may not achieve the same sales or profit levels asour existing stores.  Also, our expansionstrategy includes opening new stores in markets where we already have apresence so we can take advantage of economies of scale in marketing,distribution and supervision costs. However, these new stores may result in the loss of sales in existingstores in nearby areas, which could adversely affect our business and financialperformance.  In addition, future storeopenings could cause us, among other things, to incur additional debt,increased interest expense, as well as experience dilution in earnings, if any,per share.  Impairment losses could alsooccur as a result of new store openings in the event that new store openingsprove unsuccessful.

***Our business may beadversely affected by the actions of and risks associated with our third-partyvendors.***

The products we sell are sourced from a wide variety of third-partyvendors.  We cannot control the supply,design, function or cost of most of the products that we offer for sale and aredependent on the availability and pricing of various products, including,without limitation, paper-based party goods, Halloween masks, and costumes,many of which are manufactured overseas in foreign countries such asChina.  Global sourcing of many of theproducts we sell is thus an important factor in our financial performance.  Our ability to find qualified vendors andaccess products in a timely and efficient manner is a significant challenge,especially with respect to goods sourced outside the United States.  Disruptions in the availability of rawmaterials used in production of these products may adversely affect our salesand result in customer dissatisfaction. Political instability, the financial instability of suppliers,merchandise quality issues, trade restrictions, tariffs, currency exchangerates, transport capacity and costs, inflation and other factors relating toforeign trade are beyond our control.  Inparticular, volatile oil and gasoline prices impact prices ofpetroleum-based/plastic products, which are a key raw material in much of ourmerchandise, affect our freight costs, and affect consumer confidence andspending patterns.  These and otherissues directly or indirectly affecting our vendors could adversely affect ourbusiness and financial performance.

***Our failure to generate sufficient cash to meet ourliquidity needs may affect our ability to service our indebtedness and grow ourbusiness.***

Our business requires access to capital to supportgrowth, improve our infrastructure, respond to economic conditions, and meetcontractual commitments.  In the eventthat our operating plan changes or proves inaccurate due to lower-than-expectedrevenues, unanticipated expenses, increased competition, unfavorable economicconditions, other risk factors discussed in this prospectus, or otherunforeseen circumstances, our liquidity may be negatively impacted.  Our ability to make payments on and torefinance our indebtedness, principally the amounts borrowed under our line ofcredit and notes payable, and to fund planned capital expenditures for systemsupgrades and new store openings, if any, we may make in the future will dependin large part on our current and future ability to generate cash.  This, to a certain extent, is subject togeneral economic, financial, competitive and other factors that are beyond ourcontrol.  We cannot assure you that ourbusiness will generate sufficient cash flow from operations in the future, thatour currently anticipated growth in revenues and cash flow will be realized onschedule, or that future borrowings will be available to us under our line ofcredit in an amount sufficient to enable us to service indebtedness, undertakestore openings and replace and upgrade our technology systems to grow ourbusiness, or to fund other liquidity needs. If we need to refinance all or a portion of our indebtedness, we cannotassure you that we will be able to do so on commercially reasonable terms or atall.  In addition, there can be no 

7

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assurance, that, should we seek or require additionalfinancing in the form of debt, subordinated debt, equity, convertiblesecurities, or some combination of the above, such financing will be available,if at all, on terms and conditions acceptable to us.  If so, our ability, among other things, toproceed with our store expansion plans for 2008 and beyond would be negativelyaffected.

Our existing line of credit with Wells Fargo consists of $12,500,000(including a $500,000 term loan) and matures on January 2, 2010.  Our agreement with Wells Fargo includes anoption whereby we may increase our line of credit up to a maximum level of$15,000,000.

***Our ownershipstructure includes large investors who own preferred stock and whose interestsand rights in our company differ in important respects from those of our commonstock investors.***

Our capital structure includes various series of convertible preferred stockand a number of investors who own large concentrations of our shares on anas-converted-into-common basis.  Theownership rights of these holders of our preferred stock impacts the tradingliquidity of our common shares, our corporate governance, and the relativeeconomic stake that our common stock and preferred stock investors have in theenterprise value of our business.

The large concentration of share ownership that some of our investorshave generally has the effect of making our shares more illiquid than if ourownership structure was more widely distributed.  Our corporate governance is affected by ourownership structure to the extent that certain of our preferred stock investorscurrently enjoy, among other things, contractual rights to nominate and electtwo of the members of our board of directors. These rights and the concentration of share ownership enjoyed by certainof our preferred stock investors means that our largest investors can influenceour strategic direction and that of our senior management in ways that aredifferent than most of our common stock investors.  Our preferred stock investors also enjoycertain economic rights that differentiate their ownership rights and interestsfrom those of our common stock investors. For instance, upon the occurrence of merger, acquisition or similartransaction involving the acquisition of our company, the holders of ourpreferred stock would generally be entitled to a “liquidation preference” thatwould entitle them, collectively, to the first $18.0 million of net proceeds,unless they decide to convert their shares of preferred stock into commonstock.  This feature of our preferredstock investors’ rights could make the attractiveness of our company as anacquisition target differ materially from what it would be without it.  In addition, our preferred stock investorsenjoy certain “anti-dilution” protections not afforded to our common stockinvestors, which generally means that investors in shares of our common stockcould be adversely affected by subsequent dilutive financings, if any, in waysthat are different from some or all of our preferred stock investors.

****Sharesthat may be offered for sale pursuant to a prospectus on Form S-3 filed withthe SEC but not yet declared effective or eligible for sale in the future couldnegatively affect our stock price.****

The market price of our common stock could decline asa result of sales of a large number of shares of our common stock or theperception that these sales could occur. This may also make it more difficult for us to raise funds through theissuance of debt or the sale of equity securities.

As of December 30, 2006, there were 27,124,293 potential additionalcommon share equivalents outstanding. These included 15,590,309 shares issuable upon the conversion ofimmediately convertible preferred stock, 2,083,334 shares issuable upon theexercise of a warrant with an exercise price of $0.475, 528,210 shares issuableupon the exercise of warrants with a weighted average exercise price of $3.79and 8,922,440 shares issuable upon the exercise of stock options with aweighted average exercise price of $0.62.

Our unregistered securities may be sold in the future pursuant toregistration statements filed with the SEC or without registration under theSecurities Act, to the extent permitted by Rule 144 or other exemptions underthe Securities Act.  We may issueadditional shares in the future in connection with acquisitions, compensationor otherwise.  We have not entered intoany agreements or understanding regarding any future acquisitions not describedherein and cannot ensure that we will be able to identify or complete anyacquisition in the future.

***Our common stock isthinly traded, may fluctuate based on relatively small levels of tradingactivity, and may be adversely affected by our capital structure, which makesit more difficult for investors to value our business.***

8

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Investing in shares of our common stock entails a high degree ofrisk.  Public trading of our common stockon the American Stock Exchange typically occurs at relatively low sales volumesand very few, if any, security analysts regularly follow our stock.  Moreover, our common stock price has tradedbelow $1.00 for significant periods of time. In addition, our capital structure, which includes various series ofconvertible preferred stock with various contractual rights, generally makes itmore difficult for investors, or prospective acquirers of our company, to valueour business on an aggregate basis or to value our shares of common stock on atrading basis.  As a result of thesefactors, speculative investors may have a greater effect on our common stockprice than would be the case for a company with a simpler ownership structure,a larger market capitalization, or common shares that are more diffusely heldor heavily traded.  Accordingly, ourcommon stock price could be subject to considerable speculative volatility andmay not necessarily follow market expectations regarding our business prospectsor financial performance.  In particular,our common stock price may be sensitive to non-financial developments involvingour company as well as market rumors disseminated on the Internet or otherforms of media regarding our company or our industry.  If our quarterly financial performance doesnot meet the expectations of investors that trade in shares of our commonstock, our stock price would likely decline. If so, the decrease in the stock price may be disproportionate to theshortfall, real or perceived, in our financial performance.

***Compliance withchanging regulation of corporate governance, public disclosure, and accountingstandards may result in additional expenses and risks.***

Changing laws, regulations and standards relating to corporategovernance, public disclosure and changes to accounting standards andpractices, including the Sarbanes-Oxley Act of 2002, new SEC regulations,corporate law developments in Delaware, and evolving rules applicable topublicly-traded companies on the American Stock Exchange, are creatinguncertainty, and hence risks, for companies such as ours.  These new or changed laws, regulations andstandards are subject to varying interpretations due to the fact that they arenew and there has not yet emerged a well-developed body of interpretation.  As a result, their application in practicemay evolve over time as new guidance is provided by regulatory and governingbodies.  This development could result incontinuing uncertainty regarding compliance matters and higher costs necessitatedby ongoing revisions to disclosure, governance and accounting practices.

Our efforts to comply with evolving laws, regulations and standardshave resulted in, and are likely to continue to result in, increased generaland administrative expenses and a diversion of management time and attentionfrom revenue-generating activities to compliance activities.  In particular, we are applying significantmanagement and financial resources to document, test, monitor and enhance ourinternal control over financial reporting in order to meet the various currentrequirements of the Sarbanes-Oxley Act of 2002. Under current rules and regulations, we are not required to comply withthese requirements until 2007.  We cannotbe certain that these measures will ensure that our controls will be adequateor effective in preventing fraud or human error.  Any failure in the effectiveness of ourinternal control over financial reporting could have a material effect on ourfinancial reporting or cause us to fail to meet reporting obligations, whichupon disclosure, could negatively impact the market price of our commonstock.  Our efforts to comply with thesetypes of new regulatory requirements regarding our required assessment of ourinternal controls over financial reporting and our external auditors’ audit ofour financial statements has required the commitment of increasing levels offinancial and managerial resources.  Ifour efforts to comply with new or changed laws, regulations and standardsdiffer from the activities intended by regulatory or governing bodies, we couldface various material and adverse consequences, including, a decline in ourcommon stock price or a possible delisting of our common stock.

**Forward Looking Statements**

Certain statements in this Annual Report, particularly statementscontained in Item 7, “Management’s Discussion and Analysis of FinancialCondition 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 toidentify these forward-looking statements, but are not the exclusive means ofidentifying them.  Forward-lookingstatements included in this Annual Report or hereafter included in otherpublicly available documents filed with the SEC, reports to our stockholdersand other publicly available statements issued or released by us involve knownand unknown risks, uncertainties, and other factors which could cause ouractual results, performance (financial or operating) or achievements to differfrom the future results, performance 

9

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(financial oroperating) or achievements expressed or implied by such forward lookingstatements.  Such future results arebased upon our best estimates based upon current conditions and the most recentresults of operations.

Various risks,uncertainties and contingencies could cause our actual results, performance orachievements to differ materially from those expressed in, or implied by, theforward-looking statements contained in this Annual Report.  These include, but are not limited to, thoselisted above in this Item 1A, “Risk Factors.”

**ITEM 1B. UNRESOLVED STAFFCOMMENTS**

Not applicable.

**ITEM 2.  PROPERTIES**

The following tableidentifies the number of our stores operating as of December 30, 2006, December31, 2005 and December 25, 2004, by state:
| ** **    | ** ** | **Number of Stores, for the fiscal year ended** | ** ** |
|---------------|------------|------------------------------------------------------------------------------------|------------|
| ** **    | ** ** | **Dec 30, 2006**                                                         | ** ** | **Dec 31, 2005** | ** ** | **Dec 25, 2004** | ** ** |
| ** **    | ** ** | **End**                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **End** | ** ** | ** ** | ** ** | ** ** | ** ** | **End** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **    | ** ** | **of**                                                                             | ** ** | ** ** | ** ** | **Acquired/** | ** ** | **of** | ** ** | ** ** | ** ** | ** ** | ** ** | **of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **States**    | ** ** | **Period**                                                                         | ** ** | **Closings** | ** ** | **Openings** | ** ** | **Period** | ** ** | **Closings** | ** ** | **Openings** | ** ** | **Period** | ** ** | **Closings** | ** ** | **Openings** | ** ** |
| Connecticut   |       | 7                                                                                  |       | — |   | — |   | 7 |   | — |   | 1 |   | 6 |   | — |   | — |   |
| Florida       |       | 5                                                                                  |       | — |   | — |   | 5 |   | — |   | 1 |   | 4 |   | — |   | 1 |   |
| Maine         |       | 3                                                                                  |       | — |   | — |   | 3 |   | — |   | 1 |   | 2 |   | — |   | 1 |   |
| Massachusetts |       | 26                                                                                 |       | — |   | 1 |   | 25 |   | — |   | 2 |   | 23 |   | — |   | 2 |   |
| New Hampshire |       | 6                                                                                  |       | — |   | — |   | 6 |   | — |   | 1 |   | 5 |   | — |   | 1 |   |
| Rhode Island  |       | 2                                                                                  |       | 1 |   | — |   | 3 |   | — |   | — |   | 3 |   | — |   | — |   |
| Vermont       |       | 1                                                                                  |       | — |   | — |   | 1 |   | — |   | — |   | 1 |   | — |   | 1 |   |
| Total         |       | 50                                                                                 |       | 1 |   | 1 |   | 50 |   | — |   | 6 |   | 44 |   | — |   | 6 |   |

 

Our stores rangein size from approximately 8,000 square feet to approximately 20,300 squarefeet and average approximately 9,800 square feet.  We lease all of our retail stores.  The leases generally provide for fixedminimum rentals, which typically increase periodically during the life of thelease, and, in some instances, contingent rentals based on a percentage ofsales in excess of specified minimum sales levels, as well as related occupancycosts, such as property taxes and common area maintenance.  We lease our properties, typically for 10years and usually with options from our landlords to renew our leases for anadditional 5 or 10 years.

In addition to our50 stores, we lease office space at 270 Bridge Street, Suite 301, Dedham, Massachusetts,02026.  The lease, which expires November30, 2011, is for 10,600 square feet of space and the monthly rent is$17,083.  We also lease office and retailspace at 1457 VFW Parkway, West Roxbury, Massachusetts, 02132.  This lease, which expires December 31, 2012,is for 20,000 square feet of space.  Theretail store at our West Roxbury location uses 10,688 square feet and theremainder is used primarily for our corporate training center.  The total monthly rent for the retail storeand corporate training center space is $17,100, subject to certain ConsumerPrice Index escalation clauses.  Webelieve that these spaces are adequate for our immediate needs.

We believe thatall properties are adequately covered by insurance.

**ITEM 3.  LEGAL PROCEEDINGS**

We are not a party to anymaterial pending legal proceedings other than ordinary routine mattersincidental to our business.

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

No matters weresubmitted to a vote of our security holders during the fourth quarter of fiscal2006.

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**PART II**

**ITEM5.  MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

**MarketInformation**

The American StockExchange is the principal market for our common stock, where our shares aretraded under the symbol “IPT”.  Ourcommon stock began trading on the American Stock Exchange under the name iPartyCorp., symbol “IPT”, on January 2, 2000. Our common stock was quoted previously on the OTC Electronic BulletinBoard under the name iParty Corp., symbol “IPTY”, commencing July 1998.  Prior to that time, from February 1998 untilJuly 1998, our common stock was quoted on the OTC Bulletin Board under the nameof WSI Acquisitions, Inc., symbol “WSIA”.

The following table sets forth the range of high andlow sales prices on the American Stock Exchange for our common stock for eachof the fiscal quarters of 2006 and 2005:

**MARKET PRICE OF COMMON STOCK**

| Period                | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------|------------|----------|------------|---------|------------|
| **2006**              |       |     |       |    |       |
| Fourth fiscal quarter |       | $        | 0.88       |    | $          | 0.33 |   |
| Third fiscal quarter  |       | 0.47     |       | 0.27    |       |
| Second fiscal quarter |       | 0.49     |       | 0.30    |       |
| First fiscal quarter  |       | 0.60     |       | 0.37    |       |
| **2005**              |       |     |       |    |       |
| Fourth fiscal quarter |       | $        | 0.54       |    | $          | 0.37 |   |
| Third fiscal quarter  |       | 0.59     |       | 0.41    |       |
| Second fiscal quarter |       | 0.83     |       | 0.45    |       |
| First fiscal  quarter |       | 1.00     |       | 0.63    |       |

 

**Holders**

Theapproximate number of record holders of our common stock as of March 16, 2007was 117.  The number of record owners wasdetermined from our stockholder records, and does not include beneficial ownersof our common stock whose shares are held in the names of various securityholders, dealers and clearing agencies. We believe that the number of beneficial owners of our common stock heldby others as or in nominee names exceeds 500 in number.

**Dividends**

We have never paid a cash dividend on ourshares of common stock and have no expectation of doing so for the foreseeablefuture.  Our existing line of creditagreement with Wells Fargo Retail Finance II, LLC generally prohibits thepayment of any dividends or other distributions to any of our classes of capitalstock.

**RecentSales of Unregistered Securities**

We filed a CurrentReport of Form 8-K on September 18, 2006 with respect to the unregistered saleof certain securities to Highbridge International LLC, an institutionalaccredited investor, that would otherwise be required to be reported under thisItem 5.

**Purchasesof Equity Securities by the Issuer and Affiliated Purchasers**

There were no stockrepurchases made during the year ended December 30, 2006.

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**Equity Compensation Plan Information**

See Item 12 “SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters” below.

**Stock Performance Graph**

The followinggraph compares the cumulative total stockholder return of our common stockduring the five fiscal years ended December 30, 2006 with the cumulative returnof the Russell 2000 Index and the Standard & Poor’s Retail Index.

**COMPARISON OF CUMULATIVE TOTAL RETURN AMONG iPARTY(“IPT”), RUSSELL 2000 INDEX (“RUSSELL 2000”) AND S&P RETAIL INDEX**
| ** **               | ** ** | **12/29/01** | ** ** | **12/28/02** | ** ** | **12/27/03** | ** ** | **12/25/04** | ** ** | **12/31/05** | ** ** | **12/30/06** | ** ** |
|--------------------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|
| IPT                      |       | $            | 100.00     |         | $          | 33.93        |       | $            | 158.93     |         | $          | 123.21       |       | $ | 69.64 |   | $ | 71.43 |   |
| Russell 2000             |       | $            | 100.00     |         | $          | 77.83        |       | $            | 112.41     |         | $          | 131.55       |       | $ | 136.38 |   | $ | 159.57 |   |
| S&P Retail Index-Rlx |       | $            | 100.00     |         | $          | 73.71        |       | $            | 105.34     |         | $          | 128.28       |       | $ | 128.85 |   | $ | 140.91 |   |

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1)                          Assumes$100 invested on December 29, 2001 in our common stock, the Russell 2000 Indexand the S&P Retail Index, including reinvestment of any dividends paid onthe investment.  The Russell 2000 Indexis an index of 2,000 “small cap” domestic equities that rank in capitalizationbelow the 1,000 largest public companies in terms of marketcapitalization.  The S&P Retail Indexis a capitalization-weighted index of domestic equities that consist of theretail sector stocks contained in the S&P 500 Index.

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**ITEM 6.  SELECTED FINANCIAL DATA**
| ** **                                                    | ** ** | **2006**          | ** ** | **2005 (1)** | ** ** | **2004**          | ** ** | **2003**          | ** ** | **2002**          | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                    | ** ** | **52 weeks** | ** ** | **53 weeks** | ** ** | **52 weeks** | ** ** | **52 weeks** | ** ** | **52 weeks** | ** ** |
| **Statement of Operations Data:**                             |       |              |       |              |       |              |       |              |       |              |       |
| Revenues                                                      |       | $                 | 78,458,329 |              | $          | 72,537,998        |       | $                 | 64,276,225 |              | $          | 56,697,246 |   | $ | 52,177,923 |   |
| Operating costs:                                              |       |              |       |              |       |              |       |              |       |              |       |
| Cost of products  sold                                        |       | 44,942,542        |       | 41,395,193        |       | 35,826,820        |       | 31,758,625        |       | 30,420,475        |       |
| Marketing and  sales                                          |       | 25,625,547        |       | 24,116,050        |       | 21,176,925        |       | 18,363,193        |       | 16,527,832        |       |
| General and  administrative                                   |       | 6,736,197         |       | 6,762,583         |       | 6,335,067         |       | 5,516,273         |       | 5,245,867         |       |
| Special charge                                                |       | —            |       | —            |       | —            |       | —            |       | 396,465           |       |
|                                                          |       |              |       |              |       |              |       |              |       |              |       |
| Operating income (loss)                                       |       | 1,154,043         |       | 264,172           |       | 937,413           |       | 1,059,155         |       | (412,716          | )          |
|                                                          |       |              |       |              |       |              |       |              |       |              |       |
| Other income                                                  |       | —            |       | —            |       | 382,500           |       | —            |       | —            |       |
|                                                          |       |              |       |              |       |              |       |              |       |              |       |
| Income (loss) before  interest and taxes                      |       | 1,154,043         |       | 264,172           |       | 1,319,913         |       | 1,059,155         |       | (412,716          | )          |
|                                                          |       |              |       |              |       |              |       |              |       |              |       |
| Interest income                                               |       | 10,217            |       | 801               |       | 1,354             |       | 1,262             |       | 9,045             |       |
| Interest expense                                              |       | (772,334          | )          | (532,649          | )          | (225,074          | )          | (212,227          | )          | (280,898          | )          |
|                                                          |       |              |       |              |       |              |       |              |       |              |       |
| Income (loss) before  taxes                                   |       | 391,926           |       | (267,676          | )          | 1,096,193         |       | 848,190           |       | (684,569          | )          |
|                                                          |       |              |       |              |       |              |       |              |       |              |       |
| Income taxes                                                  |       | 17,279            |       | —            |       | 105,000           |       | 97,233            |       | —            |       |
|                                                          |       |              |       |              |       |              |       |              |       |              |       |
| Net income (loss)                                             |       | $                 | 374,647    |              | $          | (267,676          | )          | $                 | 991,193    |              | $          | 750,957 |   | $ | (684,569 | ) |
|                                                          |       |              |       |              |       |              |       |              |       |              |       |
| Net income (loss)  available to common stockholders           |       | $                 | 374,647    |              | $          | (267,676          | )          | $                 | 991,193    |              | $          | 750,957 |   | $ | (774,719 | ) |
|                                                          |       |              |       |              |       |              |       |              |       |              |       |
| Income (loss) per  share:                                     |       |              |       |              |       |              |       |              |       |              |       |
| Basic                                                         |       | $                 | 0.01       |              | $          | (0.01             | )          | $                 | 0.03       |              | $          | 0.02 |   | $ | (0.04 | ) |
| Diluted                                                       |       | $                 | 0.01       |              | $          | (0.01             | )          | $                 | 0.02       |              | $          | 0.02 |   | $ | (0.04 | ) |
|                                                          |       |              |       |              |       |              |       |              |       |              |       |
| Net income (loss) per  share available to common stockholders |       |              |       |              |       |              |       |              |       |              |       |
| Basic                                                         |       | $                 | 0.01       |              | $          | (0.01             | )          | $                 | 0.03       |              | $          | 0.02 |   | $ | (0.05 | ) |
| Diluted                                                       |       | $                 | 0.01       |              | $          | (0.01             | )          | $                 | 0.02       |              | $          | 0.02 |   | $ | (0.05 | ) |
|                                                          |       |              |       |              |       |              |       |              |       |              |       |
| Weighted-average shares  outstanding:                         |       |              |       |              |       |              |       |              |       |              |       |
| Basic                                                         |       | 37,862,928        |       | 22,186,581        |       | 37,649,400        |       | 36,683,142        |       | 16,219,436        |       |
| Diluted                                                       |       | 39,535,874        |       | 22,186,581        |       | 41,517,036        |       | 38,868,484        |       | 16,219,436        |       |
|                                                          |       |              |       |              |       |              |       |              |       |              |       |
| **Other Data:**                                               |       |              |       |              |       |              |       |              |       |              |       |
| Net cash provided by  (used in) operating activities          |       | $                 | 4,412,036  |              | $          | (259,907          | )          | $                 | 129,690    |              | $          | 1,368,798 |   | $ | 581,930 |   |
| Net cash used in  investing activities                        |       | (2,579,007        | )          | (1,663,647        | )          | (2,121,134        | )          | (1,166,258        | )          | (775,147          | )          |
| Net cash provided by  (used in) financing activities          |       | (1,771,847        | )          | 865,591           |       | 1,306,130         |       | (86,412           | )          | 120,476           |       |
| Capital expenditures (2)                                      |       | 709,892           |       | 1,663,647         |       | 2,121,134         |       | 1,166,258         |       | 775,147           |       |

 
| ** **                                                       | ** ** | **Dec 30, 2006** | ** ** | **Dec 31, 2005** | ** ** | **Dec 25, 2004** | ** ** | **Dec 27, 2003** | ** ** | **Dec 28, 2002** | ** ** |
|------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Balance Sheet Data:**                                          |       |                       |       |                       |       |                       |       |                       |       |                       |       |
| Working capital                                                  |       | $                          | 4,954,989  |                       | $          | 2,091,213                  |       | $                          | 3,236,148  |                       | $          | 4,178,436 |   | $ | 4,021,692 |   |
| Total assets                                                     |       | 22,697,373                 |       | 21,717,076                 |       | 19,479,937                 |       | 15,151,980                 |       | 13,815,883                 |       |
| Total long-term  liabilities and convertible preferred stock (3) |       | 4,707,964                  |       | 1,095,998                  |       | 1,268,452                  |       | 406,469                    |       | 19,266,414                 |       |
|                                                             |       |                       |       |                       |       |                       |       |                       |       |                       |       |
|                                                                  |            |                            |            |                            |            |                            |            |                            |            |                            |            |  |  |  |  |  |

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(1)  Fiscal year2005 refers to a 53-week fiscal year, while fiscal years 2006, 2004, 2003 and2002 refer to 52-week fiscal years.

(2)  Capitalexpenditures exclude assets acquired under capital leases.

(3)  The holders of our Series A-F convertiblepreferred stock have the right to a liquidation preference, which was notconsidered under our control in 2002. Therefore their carrying values have been excluded from stockholders’equity for these periods.  Their carryingvalues are included in stockholders’ equity in 2006, 2005, 2004 and 2003 asredemption is deemed to be solely within our control.

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**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*Thefollowing discussion should be read in conjunction with our ConsolidatedFinancial Statements and the related Notes included below.*

*Certainstatements in this Annual Report, particularly statements contained in thisItem 7, “Management’s Discussion and Analysis of Financial Condition andResults of Operations” constitute “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section21E of the Securities Exchange Act of 1934, as amended.  The words “anticipate”, “believe”, “estimate”,“expect”, “plan”, “intend” and other similar expressions are intended toidentify these forward-looking statements, but are not the exclusive means ofidentifying them.  Forward-lookingstatements included in this Annual Report or hereafter included in otherpublicly available documents filed with the Securities and Exchange Commission(“SEC”), reports to our stockholders and other publicly available statementsissued or released by us involve known and unknown risks, uncertainties, andother factors which could cause our actual results, performance (financial oroperating) or achievements to differ from the future results, performance(financial or operating) or achievements expressed or implied by such forwardlooking statements.  Such future resultsare based upon our best estimates based upon current conditions and the mostrecent results of operations.  Variousrisks, uncertainties and contingencies could cause our actual results,performance or achievements to differ materially from those expressed in, orimplied by, the forward-looking statements contained in this AnnualReport.  These include, but are not limitedto, those described above under Item 1A, “Risk Factors.”*

**Overview**

At the end of2006, we operated 50 retail stores, including 45 in New England and five inFlorida, and for the year we generated approximately $78.5 million in sales andhad net income of approximately $0.4 million. Total sales for fiscal 2006 (a 52-week period) increased 8.2% overfiscal 2005 (a 53-week period).  Totalsales for the comparable 52-week period in 2006 increased 10.3% over 2005.  In 2006, we also achieved a 3.8% increase incomparable stores sales for the comparable 52-week period.  Comparable store sales are defined as salesfrom those stores open for at least one full year.  This marks our fifth consecutive year ofcomparable store sales growth.

The year beganwith a 1.4% decrease in comparable store sales in the first quarter of 2006mostly because Easter shifted into the second quarter of 2006 from the firstquarter in 2005.  Our comparable storesales were also negatively affected by the fact that the New England Patriotsdid not participate in the Super Bowl in 2006 as they had in two previousyears.  The decrease in comparable storesales put pressure on our occupancy costs and payroll expense as a percentageto sales resulting in a higher loss in the first quarter of 2006 compared toour loss in the first quarter of 2005.

In the secondquarter, comparable stores sales increased 1.8% largely related the Eastershift that affected our first quarter sales. While our gross profit margin was lower and marketing and sales expenseas a percentage to sales were higher, we lowered our general and administrativeexpense to end the second quarter of 2006 with net income of $122,000 comparedto net income of $33,000 in the second quarter of 2005.

In the thirdquarter, our comparable stores sales increased by 7.0% mostly driven byincreased traffic to our stores.  Afterexperiencing relatively flat comparable store sales in the first half of theyear, we adjusted our advertising spending to drive more traffic into ourstores.  We believe that theseadjustments helped comparable store sales in the third quarter as well as thefourth quarter.  This sales increase ledto a higher gross profit margin and lower marketing and sales expense as apercentage to sales.  We also lowered ourgeneral and administrative expense in the third quarter of 2006 compared to thethird quarter of 2005.  The result ofthese improvements was a lower net loss in the quarter.  Our loss for the third quarter of 2006 was $1.5million compared to a net loss in the third quarter of 2005 of $2.4 million.

The year ended,with a 5.8% increase in comparable store sales in the fourth quarter whichincluded a 4.1% increase in comparable store sales for the Halloweenseason.  In the fourth quarter, our grossprofit margin and our marketing and sales expenses as a percentage to saleswere slightly lower than the fourth quarter of 2006.  However, our general and administrativeexpenses in the fourth quarter of 2006 were higher than the fourth quarter of2005

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mostly related to a bonusaccrual for the employees in our support office.  For the quarter, our net income was $3.9million which was in line with our net income in the fourth quarter of 2005.

Overall, ourcomparable stores sales increase for 2006 was 3.8% which follows a 0.6%increase for 2005 and a 4.6% increase in 2004. Our net income for 2006 was $0.4 million compared to a net loss of $0.3million in 2005.

For 2007, our planis to continue to increase our comparable store sales growth, increase ourgross profit margin percentage and leverage our occupancy costs, marketing andsales expense and general and administrative expense.  At this time, we have no plans to open oracquire any new stores in 2007, unless we come across or are presented withstrategic opportunities.

**Fiscal2006 Compared to Fiscal 2005**

*Revenues*

Our consolidatedrevenues for 2006, a 52 week year, were $78,458,329, an increase of $5,920,331,or 8.2% from 2005, a 53 week year. Revenues include the selling price of party goods sold, net of returnsand discounts, and are recognized at the point of sale.

|                                      | ** ** | **For the year ended** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | **Dec 30, 2006**            | ** ** | **Dec 31, 2005** | ** ** |
| Revenues                             |       | $                                     | 78,458,329 |   | $ | 72,537,998 |   |
|                                 |       |                                  |       |   |   |
| Increase in revenues from prior year |       | 8.2                                   | %          | 12.9 | % |
|                                      |            |                                       |            |  |  |  |  |

 

Sales for 2006included an increase of 3.8% in comparable store sales, sales from six newstores that opened in 2005 which were not included in comparable stores salesin 2006 until they had been open for one full year and sales from one storethat we acquired in the third quarter of 2006.

*Costof goods sold and occupancy costs*

Our cost ofproducts sold and occupancy costs for 2006 was $44,942,542, or 57.3% ofrevenues, an increase of $3,547,349 and an increase of 0.2 percentage points,as a percentage of revenues, from 2005. Cost of products sold and occupancy costs consists of the cost ofmerchandise sold to customers and the occupancy costs for our stores.

|                                         | ** ** | **For the year ended** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **Dec 30, 2006**            | ** ** | **Dec 31, 2005** | ** ** |
| Cost of goods sold and  occupancy costs |       | $                                     | 44,942,542 |   | $ | 41,395,193 |   |
|                                    |       |                                  |       |   |   |
| Percentage of revenues                  |       | 57.3                                  | %          | 57.1 | % |
|                                         |            |                                       |            |  |  |  |  |

 

As a percentage ofrevenues, the increase in cost of products sold was primarily attributable toincreases in common area maintenance expenses and real estate tax expensescharged to us by our landlords.

*Marketingand sales expense*

Our consolidatedmarketing and sales expense for 2006 was $25,625,547, or 32.7% of revenues, anincrease of $1,509,497 and a decrease of 0.5 percentage points, as a percentageof revenues, from 2005.  Marketing and salesexpense consists primarily of advertising and promotional expenditures, allstore payroll and related expenses for personnel engaged in marketing andselling activities and other non-payroll expenses associated with operating ourstores.

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|                        | ** ** | **For the year ended** | ** ** |
|------------------------|------------|---------------------------------------|------------|
| ** **             | ** ** | **Dec 30, 2006**            | ** ** | **Dec 31, 2005** | ** ** |
| Marketing and sales    |       | $                                     | 25,625,547 |   | $ | 24,116,050 |   |
|                   |       |                                  |       |   |   |
| Percentage of revenues |       | 32.7                                  | %          | 33.2 | % |
|                        |            |                                       |            |  |  |  |  |

 

As a percentage ofrevenues, the decrease in marketing expense was primarily due to reduction inpre-opening expenses associated with the six new stores the opened in 2005.

*Generaland administrative expense*

Our consolidatedgeneral and administrative (“G&A”) expense for 2006 was $6,736,197, or 8.6%of revenues, a decrease of $26,386 and a decrease of 0.7 percentage points, asa percentage of revenues, from 2005. G&A expense consists of payroll and related expenses for executive,merchandising, finance and administrative personnel, as well as informationtechnology, professional fees and other general corporate expenses.

|                             | ** ** | **For the year ended** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | **Dec 30, 2006**            | ** ** | **Dec 31, 2005** | ** ** |
| General and  administrative |       | $                                     | 6,736,197  |   | $ | 6,762,583 |   |
|                        |       |                                  |       |   |   |
| Percentage of revenues      |       | 8.6                                   | %          | 9.3 | % |
|                             |            |                                       |            |  |  |  |  |

 

*Operatingincome*

Our operatingincome for 2006 was $1,154,043, or 1.5% of revenues, compared to an operatingincome of $264,172, or 0.4% of revenues in 2005.

*Interestexpense*

Our interest expense in2006 was $772,334, an increase of $239,685 from 2005.  The increase during 2006 was due to anincrease in interest rates, interest expense and warrant expense related tonotes payable.  The effective interestrate on our borrowings under our line of credit increased to 9.9% during 2006compared to 6.8% in 2005, which increased interest expense by approximately$190,302.  The interest rate was based onthe bank’s base rate plus 75 basis points. Interest expense and warrant expense related to notes payable in 2006was $129,498 and $68,184, respectively. These increases were partially offset by a reduction in interest expenserelated to a lower average loan balance and a reduction in interest expenserelated to capital leases associated with our point-of-sale system.  Our average loan balance was approximately$5,385,117 during 2006 compared to $6,208,700 in 2005, which decreased interestexpense by approximately $116,737. Additionally, interest expense from capital leases in 2006 decreased by$39,167 from 2005.  Interest expense in2006 was also slightly offset by interest income of $10,217.

*Incometaxes*

In 2006, ourprovision for income taxes was $17,279, which included $5,717 for federalalternative minimum taxes and $11,562 for state income taxes.  We were able to utilize approximately$628,562 of net operating loss carryforwards for federal income tax purposes in2006, which were fully reserved for in the prior year due to the uncertainty offuture taxable income.

In 2005, due toour net loss for the year, we did not provide for federal or state incometaxes.  Additionally, we did not utilize any net operating losscarryforwards for federal income tax purposes in 2005.

At the end of2006, we had estimated net operating loss carryforwards of approximately $23.0million, which begin to expire in 2018. In accordance with Section 382 of the Internal Revenue Code, the use ofthese carryforwards may be subject to annual limitations based upon certainownership changes of our stock that may have occurred or that may occur.

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*Net income (loss)*

Our net income in 2006was $374,647 or $0.01 per basic and diluted share, compared to a net loss of$267,676, or $0.01 per basic and diluted share, in 2005.

**Fiscal2005 Compared to Fiscal 2004**

*Revenues*

Our consolidatedrevenues for 2005, a 53 week year, were $72,537,998, an increase of $8,261,773,or 12.9% from 2004, a 52 week year. Revenues include the selling price of party goods sold, net of returnsand discounts, and are recognized at the point of sale.

|                                      | ** ** | **For the year ended** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | **Dec 31, 2005**            | ** ** | **Dec 25, 2004** | ** ** |
| Revenues                             |       | $                                     | 72,537,998 |   | $ | 64,276,225 |   |
|                                 |       |                                  |       |   |   |
| Increase in revenues from prior year |       | 12.9                                  | %          | 13.4 | % |
|                                      |            |                                       |            |  |  |  |  |

 

Sales for 2005included an increase of 0.6% in comparable store sales, sales from six newstores that opened in 2005 and sales from six new stores that opened in 2004which were not included in comparable stores sales in 2005 until they had beenopen for one full year.  Comparable storesales for 2005 were negatively affected by the severe weather that impacted ourNew England region stores during the first quarter and lower than anticipatedcomparable store sales during the Halloween season in the fourth quarter.  This shortfall was partially offset bypositive comparable sales in the third quarter mostly driven by higher sales ofBoston Red Sox related merchandise which we believe was due to increasedexposure for our brand through our Red Sox sponsorship program as well asbetter inventory levels.

*Costof goods sold and occupancy costs*

Our cost ofproducts sold and occupancy costs for 2005 was $41,395,193, or 57.1% ofrevenues, an increase of $5,568,373 and an increase of 1.4 percentage points,as a percentage of revenues, from 2004. Cost of products sold and occupancy costs consists of the cost ofmerchandise sold to customers and the occupancy costs for our stores.

|                                         | ** ** | **For the year ended** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **Dec 31, 2005**            | ** ** | **Dec 25, 2004** | ** ** |
| Cost of goods sold and  occupancy costs |       | $                                     | 41,395,193 |   | $ | 35,826,820 |   |
|                                    |       |                                  |       |   |   |
| Percentage of revenues                  |       | 57.1                                  | %          | 55.7 | % |
|                                         |            |                                       |            |  |  |  |  |

 

As a percentage ofrevenues, the increase in cost of products sold was primarily attributable toincreases in our product costs charged to us by certain key vendors primarilydue to rising oil and gasoline prices. We adjusted our prices to reflect most of theses increases, but givencompetitive pressure we were not able to pass on all of the increases to ourcustomers.  We also experienced certaindelays in implementing our price increases from the time that we were firstnotified of cost increases from our vendors due to the sheer number of theseincreases and certain technology limitations in our merchandising system.  By the fourth quarter, our gross profitmargin had stabilized and was only slightly lower than the same period in2004.  Additionally, occupancy costs, asa percentage to revenue, was negatively affected by our new stores, whichoperate at a higher occupancy to sales ratio until they reach maturity.

*Marketingand sales expense*

Our consolidatedmarketing and sales expense for 2005 was $24,116,050, or 33.2% of revenues, anincrease of $2,939,125 and an increase of 0.3 percentage points, as apercentage of revenues, from 2004. Marketing and sales expense consists primarily of advertising andpromotional expenditures, all store payroll and related expenses

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for personnel engaged inmarketing and selling activities and other non-payroll expenses associated withoperating our stores.

|                        | ** ** | **For the year ended** | ** ** |
|------------------------|------------|---------------------------------------|------------|
| ** **             | ** ** | **Dec 31, 2005**            | ** ** | **Dec 25, 2004** | ** ** |
| Marketing and sales    |       | $                                     | 24,116,050 |   | $ | 21,176,925 |   |
|                   |       |                                  |       |   |   |
| Percentage of revenues |       | 33.2                                  | %          | 32.9 | % |
|                        |            |                                       |            |  |  |  |  |

 

As a percentage ofrevenues, the increase in marketing expense was primarily due to increasedadvertising, which included our sponsorship program with the Boston Red Sox andthe costs associated with supporting our new stores.  Additionally, the increase in sales expense,as a percentage of revenues, was negatively affected by our new stores, whichoperate at a higher store payroll to sales ratio until they reach maturity aswell as higher depreciation expenses related to the acquisition of fixed assetsfor new stores.

*Generaland administrative expense*

Our consolidatedgeneral and administrative (“G&A”) expense for 2005 was $6,762,583, or 9.3%of revenues, an increase of $427,516 and a decrease of 0.6 percentage points,as a percentage of revenues, from 2004. G&A expense consists of payroll and related expenses for executive,merchandising, finance and administrative personnel, as well as informationtechnology, professional fees and other general corporate expenses.

|                            | ** ** | **For the year ended** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **Dec 31, 2005**            | ** ** | **Dec 25, 2004** | ** ** |
| General and administrative |       | $                                     | 6,762,583  |   | $ | 6,335,067 |   |
|                       |       |                                  |       |   |   |
| Percentage of revenues     |       | 9.3                                   | %          | 9.9 | % |
|                            |            |                                       |            |  |  |  |  |

 

The increase inG&A expense was largely attributable to professional fees related to ourcompliance work for Section 404 of Sarbanes-Oxley Act and consultant costsassociated with the selection of a new merchandise system that we were thenconsidering installing in 2007.

*Operatingincome*

Our operatingincome for 2005 was $264,172, or 0.4% of revenues, compared to an operatingincome of $937,413, or 1.5% of revenues in 2004.

*Other income*

In 2004 we reacheda settlement with a third party in connection with the special chargepertaining to our preferred stock previously recorded in fiscal 2002.  We recorded the net settlement of $382,500 asother income during 2004.

*Interestexpense*

Our interest expense in2005 was $532,649, an increase of $307,575 from 2004.  The increase during 2005 was due to anincrease in interest rates, a higher average loan balance and additionalinterest expense resulting from capital leases associated with our newpoint-of-sale system.  Our average loanbalance was approximately $6,208,700 during 2005 compared to $3,435,578 in2004, which increased interest expense by approximately $186,233.  The effective interest rate on our borrowingsunder our line of credit increased to 6.8% during 2005 compared to 5.1% in2004, which increased interest expense by approximately $60,680.  The interest rate was based on the bank’sbase rate plus 50 basis points. Additionally, interest expense from capital leases in 2005 increased by$51,983 over 2004.

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*Income taxes*

In2005, due to our net loss for the year, we did not provide for federal or stateincome taxes.  Additionally, we did notutilize any net operating loss carryforwards for federal income tax purposes in2005.

In 2004, ourprovision for income taxes was $105,000, which included $20,000 for federalalternative minimum taxes and $85,000 for state income taxes.  We were able to utilize approximately$900,000 of net operating loss carryforwards for federal income tax purposes in2004, which were fully reserved for in the prior year due to the uncertainty offuture taxable income.

At the end of2005, we had estimated net operating loss carryforwards of approximately $23.7million, which begin to expire in 2018. In accordance with Section 382 of the Internal Revenue Code, the use ofthese carryforwards may be subject to annual limitations based upon certainownership changes of our stock that may have occurred or that may occur.

*NetLoss*

Ournet loss in 2005 was $267,676 or $0.01 per basic and diluted share, compared tonet income of $991,193, or $0.03 per basic and $0.02 per diluted share, in2004.

**CriticalAccounting Policies**

Our financialstatements are based on the application of significant accounting policies,many of which require our management to make significant estimates andassumptions (see Note 2 to our consolidated financial statements).  We believe the following accounting policiesto be those most important to the portrayal of our financial condition andthose that require the most subjective judgment.  If actual results differ significantly frommanagement’s estimates and projections, there could be a material effect on ourfinancial statements.

*Inventory and Related Allowancefor Obsolete and Excess Inventory*

Our inventory consistsof party supplies and is valued at the lower of moving weighted-average cost ormarket.  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 aresold.

During each interimreporting period, we estimate the impact on cost of products sold associatedwith inventory shortage.  The actualinventory shortage is determined upon reconciliation of the annual physicalinventory, which occurs shortly before and after our year end, and anadjustment to cost of products sold is recorded at the end of the fourthquarter to recognize the difference between the estimated and actual inventoryshortage for the full year.  Theadjustment in the fourth quarter of 2006 included an estimated reduction of$251,806 to the cost of products sold during the previous three quarters.  The adjustment in the fourth quarter of 2005included an estimated reduction of $175,884 to the cost of products sold duringthe previous three quarters.  Theadjustment in the fourth quarter of 2004 included an estimated reduction of$149,316 to the cost of products sold during the previous three quarters.

We also make adjustmentsto reduce the value of our inventory for an allowance for obsolete and excessinventory, which is based on our review of inventories on hand compared toestimated future sales.  We conductreviews 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 weadjust our allowance accordingly.  Thus,actual results could differ from our estimates.

*RevenueRecognition*

Revenues includethe selling price of party goods sold, net of returns and discounts, and arerecognized at the point of sale.  Weestimate returns based upon historical return rates and such amounts have notbeen significant.

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*Propertyand Equipment*

Propertyand equipment are stated at cost less accumulated depreciation and aredepreciated on the straight-line method over the estimated useful lives of theassets.  At the beginning of 2004 weadopted a new policy for estimating the useful life of fixed assets whichextended the useful life of equipment and furniture and fixtures.  Changing the estimated life of the assets inthese categories as of the beginning of 2004 reduced depreciation expense byapproximately $130,885 in 2004.  Netincome in 2004 would have been $0.02 per basic and diluted share (as opposed to$0.03 per basic and $0.02 per diluted share) if this change in estimating theuseful life of fixed assets had not been adopted.  Expenditures for maintenance and repairs arecharged to operations as incurred.

*IntangibleAssets*

Intangible assetsconsist primarily of the value of a five-year non-compete agreement from PartyCity Corporation (“Party City”) and its affiliates that covers Massachusetts,Maine, New Hampshire, Vermont, Rhode Island, and Windsor and New Londoncounties in Connecticut which expires in 2011. This asset has an estimated life of 60 months.  Also included is the value related to theretail store lease that we acquired from Party City in Peabody, Massachusetts.  This asset has an estimated life of 90months, which includes 30 months on the initial term of the store lease plus 60months on an existing lease renewal option. The other intangible assets consist of legal and other transaction feesrelated to the three-year note payable due on September 15, 2009.  These assets are being amortized over thelife of the note payable.

*Impairmentof Long-Lived Assets*

In accordance withSFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, we perform a review of each store for impairmentindicators whenever events and changes in circumstances suggest that thecarrying amounts may not be recoverable from estimated future store cashflows.  Our review considers storeoperating results, future sales growth and cash flows.  The conclusion regarding impairment maydiffer from current estimates if underlying assumptions or business strategieschange.  On November 4, 2006, we closedour store in East Providence, Rhode Island due to underperforming sales.  As a result of this closing, we recorded acharge of approximately $140,000 related to remaining lease payments and otherclosing costs.  The term of the lease isdue to expire on August 31, 2007.  AtDecember 30, 2006, approximately $76,770 remains in the accrual.  We are not aware of any impairment indicatorsfor any of our remaining stores at December 30, 2006.

*Income Taxes*

Historically, we havenot recognized an income tax benefit for our losses.  Accordingly we record a valuation allowanceagainst our deferred tax assets because of the uncertainty of future taxableincome and the realizability of the deferred tax assets.  In determining if a valuation allowanceagainst our deferred tax asset is appropriate, we consider both positive andnegative evidence.  The positive evidencethat we considered included (1) we were profitable in 2006 and 2004 due to thesuccess of our Halloween seasons, (2) we have achieved positive comparablestore sales growth for the last three years and (3) improved merchandisemargins in 2004.  The negative evidencethat we considered included (1) we realized a net loss in 2005, (2) ourmerchandise margins decreased in 2006 and 2005, (3) our future profitability isvulnerable to certain risks, including (a) the risk that we may not be able togenerate significant taxable income to fully utilize our net operating loss carryforwardsof approximately $23.0 million, (b) the risk of unseasonable weather and otherfactors in a single geographic region, New England, where our stores areconcentrated, (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 rawmaterial for much of our merchandise and which affect our freight costs andthose of our suppliers and affect our customers’ spending levels and patterns,(4) the costs that opening new stores will put pressure on our profit marginsuntil these stores reach maturity, and (5) the expected costs of increasedregulatory compliance, including, without limitation, those associated withSection 404 of the Sarbanes-Oxley Act, will likely have a negative impact onour profitability.

The negative evidence isstrong enough for us to conclude that the level of our future profitability isuncertain at this time. We believe that it is prudent for us to maintain avaluation allowance until we have a longer track record of profitability and wecan reduce our exposure to the risks described above.  Should we determine that we will be

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ableto realize our deferred tax assets in the future, an adjustment to our deferredtax assets would increase income in the period we made such a determination.

*StockOption Compensation Expense*

On January 1, 2006, we adopted Statement No. 123(R) using the modified prospective method inwhich 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 afterthe effective date and (b) based on the requirements of Statement No.123 for all awards granted toemployees prior to the effective date of Statement No. 123(R) that remain unvested on the effectivedate.  Prior to January 1, 2006, we accountedfor our stock option compensation agreements with employees under theprovisions of Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees* and thedisclosure-only provisions of Statement No. 123, *Accountingfor Stock-Based Compensation*, as amended by SFAS No. 148, *Accounting for Stock-Based Compensation — Transition and Disclosure, anamendment of Financial Accounting Standards Board (“FASB”) Statement No. 123*.

*Useof Estimates*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires us to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the reporting period.  Our actual results could differ from ourestimates.

**New Accounting Pronouncements**

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*, which is a clarification of FASBStatement No. 109, *Accounting for IncomeTaxes*.  Interpretation of FASBInterpretation No. 48 (“FIN 48”) is effective for fiscal years beginning afterDecember 15, 2006.

FIN 48 prescribes a minimum recognition thresholdthat a tax position must meet before it can be recognized in the financialstatements.  This Interpretation alsoprovides guidance of derecognition, measurement, classification, interest andpenalties, accounting in interim periods, disclosure and transition.

FIN 48 evaluates tax positions by utilizing a twostep approach (recognition and measurement).

·                  Recognition occurs when an enterprise determineswhether it is more likely than not that a tax position will be sustained uponexamination.  Once the enterprise hasdetermined that the tax position will be recognized, the measurement step (steptwo) needs to be evaluated.

·                  A tax position that meets the criteria in step oneis measured to determine the amount of benefit to recognize in the financialstatements.  The tax position is measuredat the largest amount of benefit that has a greater than 50% likelihood ofbeing realized upon ultimate settlement.

We adopted FIN 48effective January 1, 2007 and do not feel that there is a material impact ofadoption on our financial position or results of operations.

InSeptember 2006, the FASB issued SFAS No. 157, *FairValue Measurements*, which defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements.  SFAS No. 157 does not require any new fairvalue measurements, but its provisions apply to all other accountingpronouncements that require or permit fair value measurement.  SFAS No. 157 will be effective for fiscalyears beginning after November 15, 2007, or December 30, 2007 for us.  Adoption of SFAS No. 157 is not expected tohave a material impact on our financial position or results of operations.

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**Liquidityand Capital Resources**

Our operating activities provided $4,412,036 in 2006compared to using $259,907 in 2005, an improvement of $4,671,943.  The additional cash provided by operatingactivities was primarily due to lower purchases of inventory and an increase tonet income compared to a net loss in 2005.

We used $2,579,007 in investing activities in 2006 compared to$1,663,647 in 2005.  The cash invested in2006 was primarily due to the acquisition in August 2006 of one retail storeand a five-year non-compete agreement with Party City.  Additional cash invested in 2006 was used forfixed assets associated with improvements of exiting stores.  The cash invested in 2005 was primarily forfixed assets associated with new stores, an existing store expansion andpoint-of-sale system enhancements.

We used $1,771,847in financing activities in 2006 compared to providing $865,591 by financingactivities in 2005, a decrease of $2,637,438. We decreased our borrowings under our line of credit by $5,473,155 in2006 (to $1.2 million) compared to an increase of $1,378,184 in 2005 (to $6.6million).  The borrowings under our lineof credit in 2006 were lower than 2005 primarily due to paying the line ofcredit down with funds received from a $2.5 million note payable that weentered into during the third quarter of 2006 with Highbridge InternationalLLC, an institutional accredited investor. Other factors contributing to higher borrowings in 2005 were capitalexpenditures related to the six 2005 new store openings, enhancements to ourpoint-of-sale system, and to support our net loss.  In 2006, pursuant to our Supply Agreementwith Amscan, we elected to convert $1,143,896 of extended payables originallydue to Amscan as of August 8, 2006 as well as an additional $675,477 ofpayables due to Amscan as of September 28, 2006 into a single subordinatedpromissory note in the total principal amount of $1,819,373.

During 2006, we did not acquire any assets under capital leases.  During 2005, we acquired assets under capitalleases totaling $132,968 for new copiers for our support office.  The capital lease obligations outstanding atDecember 30, 2006 were $386,217.

At December 30, 2006, wehad a line of credit (the “line”) with Wells Fargo Retail Finance II, LLC,which had been amended on December 21, 2006. The amendment continues our line of credit with Wells Fargo at$12,500,000 (including a $500,000 term loan) and extends it for threeadditional years to January 2, 2010.  Inaddition, our new agreement with Wells Fargo includes an option whereby we mayincrease our line of credit up to a maximum level of $15,000,000, upon 15 dayswritten notice, as long as we were in compliance with all debt covenants andthe other provisions of the loan agreement.  The new agreement also adjusts the interest rate applicable to ourborrowings and permits us at our option, to use the London Interbank OfferedRate (“LIBOR”) for certain of our borrowings. Our inventory and accounts receivable secure our line of credit. Weborrow against these assets at agreed upon advance rates, which may vary atdifferent times of the year.

The amended agreementincludes a financial covenant requiring us to maintain a minimum availabilityunder the line of 5% of the credit limit. The amended agreement also has a covenant that requires us to limit ourcapital expenditures to within 110% of those amounts included in our businessplan, which may be updated from time to time. At December 30, 2006, we were in compliance with these financialcovenants.

On August 7, 2006, weamended our agreement with Wells Fargo to permit us to enter into a SupplyAgreement with Amscan and an Asset Purchase Agreement with Party City.  The amendment also allowed us to incur theindebtedness represented by the Amscan Note, defined below, and the Party CityNote, defined below, and to incur other unsecured subordinated indebtednessconsented to by Wells Fargo.

Our inventoryconsists of party supplies which are valued at the lower of weighted-averagecost or market and are reduced by an allowance for obsolete and excessinventory and other adjustments, including vendor rebates, discounts and freightcosts.  Our line of credit availabilitycalculation allows us to borrow against “acceptable inventory at cost,” whichtakes our inventory at cost and reflects adjustments that our lender hasapproved which may be different than adjustments we use for valuing ourinventory in our financial statements, such as the adjustment to reserve forinventory shortage.  The amount of “acceptableinventory at cost” was approximately $12,765,405 at December 30, 2006.

Our accountsreceivable consists primarily of vendor rebates receivables and credit cardreceivables.  Our line of creditavailability calculation allows us to borrow against “eligible credit cardreceivables,” which are the credit

22

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card receivables for theprevious two to three days of business. The amount of “eligible credit card receivables” was approximately$262,287 at December 30, 2006.

Our totalborrowing base is determined by adding the “acceptable inventory at cost” timesan agreed upon advance rate plus the “eligible credit card receivables” timesan agreed upon advance rate but not to exceed our established credit limit,which was $12.5 million at December 30, 2006. Under the terms of our line of credit, our $12,500,000 credit limit wasfurther reduced by (1) a minimum availability block, (2) customer deposits, (3)gift certificates, (4) merchandise credits and (5) outstanding letters ofcredit.  Therefore, our additionalavailability was $5,657,200 at December 30, 2006 and $386,681 at December 31,2005.

The amounts outstandingunder our line were $1,162,719 at December 30, 2006 and $6,635,874 as ofDecember 31, 2005.  The outstandingbalances under our line are classified as current liabilities in theaccompanying consolidated balance sheets since we are required to apply dailylock-box receipts to reduce the amount outstanding.

On January 17, 2006, weamended our agreement to allow for a $500,000 term loan which increased ourborrowing base, but did not increase the $12.5 million credit limit.  We borrowed the full $500,000 on that date.  The interest rate on the term loan is thebank’s base rate plus 125 basis points. During the time the term loan remains outstanding, the interest rate onthe line of credit will be the bank’s base rate plus 75 basis points.  The amendment also waived a default as aconsequence of the fact that the principal balance of the line of creditexceeded our availability on January 12, 2006. On October 30, 2006, we further amended our agreement to extend the maturity date of our outstandingterm loan in the amount of $500,000 from October 31, 2006 to January 2,2007.  On December 21, 2006, we furtheramended our agreement to extend the maturity date of our outstanding term loanin the amount of $500,000 to October 31, 2007. The term loan is currently outstanding and is due and payable infull on October 31, 2007.

Our Supply Agreement withAmscan gives us the right to receive certain additional rebates and morefavorable pricing terms over the term of the agreement than generally wereavailable to us under our previous terms with Amscan.  The right to receive additionalrebates, and the amount of such rebates, are subject to our achievementof increased levels of purchases and other factors provided for in the SupplyAgreement.  In exchange, the Supply Agreement obligates us to purchase increasedlevels of merchandise from Amscan until 2012.  The Supply Agreement provides for a ramp-upperiod during 2006 and 2007 and, for five years beginning with calendar year2008, requires us to purchase on an annual basis merchandise equal to the totalnumber of our stores open during such calendar year, multiplied by$180,000.  The Supply Agreement providesfor penalties in the event we fail to attain the annual purchase commitmentthat would require us to pay to Amscan the difference between the purchases forthat year and the annual purchase commitment for that year.

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

On October 24,2006, we elected to convert $1,143,896 of extended payables originally due toAmscan as of August 8, 2006 as well as an additional $675,477 of payables dueto Amscan as of September 28, 2006 into a single subordinated promissory notein the total principal amount of $1,819,373 (“the Amscan Note”). The AmscanNote 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 $59,562.48commencing on November 1, 2006, and on the first day of each month thereafteruntil October 1, 2009, when the entire remaining principal balance and allaccrued interest is due and payable.

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

23

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

Under the terms of thefinancing, we issued Highbridge a three-year $2.5 million subordinated note(the “Highbridge Note”) that bears interest at an interest rate of prime plusone percent.  The Highbridge Note matureson September 15, 2009.  In addition, weissued Highbridge a warrant (the “Highbridge Warrant”) exercisable for2,083,334 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 priorto the closing of the transaction.  Weallocated approximately $613,651 of value to the Highbridge Warrant using theBlack-Scholes model with volatility of 108%, interest of 4.73% and expectedlife of five years.  The HighbridgeWarrant is being amortized using the effective interest method over the life ofthe Highbridge Note.  The agreementsentered into in connection with the financing provide for certain restrictionsand covenants consistent with Highbridge’s status as a subordinated lender, andalso grant Highbridge resale registration rights with respect to the shares ofcommon stock underlying the Highbridge Warrant.

The issuance of theHighbridge Warrant triggered certain anti-dilution provisions of our Series B,C, and D convertible preferred stock.  Asa result, the outstanding shares of these three series of preferred stock arenow convertible into an aggregate of 442,354 additional shares of commonstock.  The issuance of the HighbridgeWarrant, however, did not trigger the anti-dilution provisions of our Series Eor F convertible preferred stock or any of our other outstanding warrants.

Our prospective cashflows are subject to certain trends, events and uncertainties, includingdemands for capital to support growth, improve our infrastructure, respond toeconomic conditions, and meet contractual commitments.  We expect our capital expenditures for 2007to be primarily related to existing store improvements.  We believe, based on our current operatingplan, that anticipated revenues from operations and borrowings available underthe existing line of credit, will be sufficient to fund our operations andworking capital requirements through the next twelve months.  In the event that our operating plan changesor proves inaccurate due to lower-than-expected revenues, unanticipatedexpenses, increased competition, unfavorable economic conditions or otherunforeseen circumstances, our liquidity may be negatively impacted.  If so, we would be required to adjust ourexpenditures in 2007 to conserve working capital or raise additional capital tofund operations.  There can be noassurance, that, should we seek or require additional financing, such financingwill be available, if at all, on terms and conditions acceptable to us.  At this time, we have no plans to open oracquire any new stores in 2007, unless we come across or are presented withstrategic opportunities.

Contractualobligations at December 30, 2006 were as follows:
| ** **                                        | ** ** | **Payments Due By Period** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                        | ** ** | **Within  1 Year**                   | ** ** | **Within  2 - 3  Years** | ** ** | **Within  4 - 5  Years** | ** ** | **After  5 Years** | ** ** | **Total** | ** ** |
| Line of credit                                    |       | $                                         | 1,162,719  |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,162,719 |   |
| Capital lease  obligations                        |       | 343,761                                   |       | 42,456 |   | — |   | — |   | 386,217 |   |
| Notes payable                                     |       | 551,515                                   |       | 3,681,777 |   | 600,000 |   | — |   | 4,833,292 |   |
| Supply agreement                                  |       | —                                    |       | 18,000,000 |   | 18,000,000 |   | 9,000,000 |   | 45,000,000 |   |
| Operating leases  (including retail space leases) |       | 8,506,575                                 |       | 14,800,989 |   | 11,820,705 |   | 11,806,902 |   | 46,935,171 |   |
| Total  contractual obligations                    |       | $                                         | 10,564,570 |   | $ | 36,525,222 |   | $ | 30,420,705 |   | $ | 20,806,902 |   | $ | 98,317,399 |   |

 

In addition, atDecember 30, 2006, we had outstanding purchase orders totaling approximately$2,009,208 for the acquisition of inventory and non-inventory items that werescheduled for delivery after December 30, 2006.

**Acquisitions**

We operate in alargely un-branded market that has many small businesses.  As a result, we may consider growing ourbusiness through acquisitions of other entities.  Any determination to make an acquisition willbe based upon a variety of factors, including, without limitation, the purchaseprice and other financial terms of the transaction, the business prospects,geographical location and the extent to which any acquisition would enhance our

24

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prospects.  We presently have no plans, agreements,understandings, or arrangements with respect to any acquisitions.

**StockholderRights Plan**

On November 9,2001, we announced that our board of directors adopted a stockholder rightsplan (the “rights plan”).  Under therights plan each share of our capital stock outstanding at the close ofbusiness on November 9, 2001 and each share of our capital stock issuedsubsequent to that date has a right associated with it, such that each share ofour common stock is entitled to one right and each share of our preferred stockis entitled to such number of rights equal to the number of common shares intowhich it is convertible.  The rights willbecome exercisable only in the event that, with certain exceptions, anacquiring party accumulates 10 percent or more of our voting stock or if aparty announces an offer to acquire 15 percent or more of our votingstock.  The rights expire on November 9,2011.  When exercisable, each rightentitles the holder to purchase from us one one-hundredth of a share of a newseries of Series G junior preferred stock at an initial purchase price of$2.00, subject to adjustment.  Inaddition, upon the occurrence of certain events, holders of the rights will beentitled to purchase either iParty Corp. stock or shares in an “acquiringentity” at half of market value.  Wegenerally will be entitled to redeem the rights at $0.001 per right at any timeuntil the date on which a 10 percent position in our voting stock is acquiredby any person or group.  Until a right isexercised, the holder of a right will have no rights as a stockholder of iPartysolely by virtue of being a rights holder, including, without limitation, theright to vote or receive dividends.

On September 15,2006, we amended the rights plan to clarify that the issuance of the HighbridgeWarrant did not constitute a triggering event under the rights plan.

**Seasonality**

**Due tothe seasonality of our business, sales and operating income are typicallyhigher in our second and fourth quarters. Our business is highly dependent upon sales of Easter, graduation andsummer merchandise in the second quarter and sales of Halloween and Christmasmerchandise in the fourth quarter.  Wehave typically operated at a loss during the first and third quarters.**

**Geographic Concentration**

**As of December 30, 2006 we operated a total of 50stores, 45 of which are located in New England. As a result, a severe or prolonged regional recession or regionalchanges in demographics, employment levels, population, weather patterns, realestate market conditions or other factors specific to the New England regionmay adversely affect us more than a company that is more geographicallydiverse.**

**Effectsof Inflation**

While we do not view theeffects of inflation as having a direct material effect upon our business, webelieve that volatility in oil and gasoline prices impact the cost of producingpetroleum-based/plastic products, which are a key raw material in much of ourmerchandise, and also impact prices of shipping products made overseas inforeign countries, such as China, which includes much of our merchandise.  Volatile oil and gasoline prices also impactour freight costs, consumer confidence and spending patterns.  These and other issues directly or indirectlyaffecting our vendors and us could adversely affect our business and financialperformance.

**Off-BalanceSheet Arrangements**

We do not have any off-balance sheet arrangements that have or arereasonably likely to have a current or future effect on our financialcondition, changes in financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources that ismaterial to investors.

**ITEM7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

We are exposed to market risk from changes in interest rates and,indirectly, foreign exchange rates and commodity price risk with respect to fluctuatingoil prices as more fully described in Item 1A, “Risk Factors.”  In general, however, we do not believe wehave the various market or price risks that require the quantitative and

25

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qualitativedisclosures set forth in Item 305 of Regulation S-K.  We have interest rate risk on our line ofcredit debt obligation to the extent that if interest rates were to rise ourrate of interest under our line of credit would also increase.  We do not believe that this interest raterisk is material and we have not entered into any hedging or similarcontractual arrangements with respect to such risk or with respect to theindirect market risks we face from changes in foreign exchange rates and oilprices.  We do not enter into contractsfor trading purposes.

**ITEM8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

The response to this item is included in a separate section of thisreport. See “Index to Consolidated Financial Statements” on page F-1.

**ITEM9.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

None.

**ITEM9A.  CONTROLS AND PROCEDURES**

(a)           *Evaluationof Disclosure Controls and Procedures.*  The Chief Executive Officer and the ChiefFinancial Officer of iParty (its principal executive officer and principalfinancial officer, respectively) have concluded, based on their evaluation asof December 30, 2006, the end of the fiscal year to which this reportrelates, that iParty’s disclosure controls and procedures: are effectiveto ensure that information required to be disclosed by iParty in thereports filed or submitted by it under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms; and include controls andprocedures designed to ensure that information required to be disclosedby iParty in such reports is accumulated and communicated to iParty’smanagement, including the Chief Executive Officer and the Chief FinancialOfficer, to allow timely decisions regarding required disclosure.  iParty’sdisclosure controls and procedures are designed to provide a reasonable levelof assurance of reaching iParty’s disclosure requirements and areeffective in reaching that level of reasonable assurance.

(b)   *Attestation Report of the Registered Public Accounting Firm*.  We are not an accelerated filer, as such termis defined in Rule 12b-2 under the Securities Exchange Act.  Accordingly, the attestation report of our independentregistered public accounting firm on our management’s assessment of ourinternal control over financial reporting is not required to be included inthis Annual Report on Form 10-K.

(c)   *Changes in Internal Controls.*  No change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act of 1934, as amended) occurred during the fiscal quarterended December 30, 2006 that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

**ITEM9B.  OTHER INFORMATION**

None.

**PART III**

**ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATEGOVERNANCE**

The information required bythis Item is contained in our proxy statement for the annual meeting ofstockholders scheduled to be held on June 6, 2007, which we plan to file withthe SEC no later than 120 days after the end of our fiscal year ended December30, 2006.  Such information is herebyincorporated by reference.

We have adopted awritten code of business conduct and ethics that applies to all our directors,officers and employees, a copy of which is located on the Investor Relationspage of our website which is located at www.iparty.com.  We intend to disclose any amendments to, orwaivers from, our code of business conduct and ethics on that same page of ourwebsite*.*

26

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**ITEM 11.  EXECUTIVE COMPENSATION**

The information required bythis Item is contained in our proxy statement for the annual meeting ofstockholders scheduled to be held on June 6, 2007, which we plan to file withthe SEC no later than 120 days after the end of our fiscal year ended December30, 2006.  Such information is herebyincorporated by reference.

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND**

**RELATED STOCKHOLDER MATTERS**

Certain of the informationrequired by this Item is contained in our proxy statement for the annualmeeting of stockholders scheduled to be held on June 6, 2007, which we plan tofile with the SEC no later than 120 days after the end of our fiscal year endedDecember 30, 2006.  Such information ishereby incorporated by reference.

Securities authorized under equity compensation plansas of December 30, 2006, were as follows:

**EQUITY COMPENSATION PLAN INFORMATION**
| **Plan Category**                                      | ** ** | **Number of Securities  to be Issued  upon Exercise of  Outstanding Options** | ** ** | **Weighted Average  Exercise Price of  Outstanding Options** | ** ** | **Number of Securities  Remaining Available  for Future Issuances  under Equity  Compensation Plans  (Excluding Securities  Reflected in Column a)** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       | 8,922,440                                                                                                        |       | $                                                                                | 0.62       |                                                                                                                                                                                                        | 1,658,701  |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                                           |       | -                                                                                |       | —                                                                                                                                                                                                      |       |
| Total                                                       |       | 8,922,440                                                                                                        |       | $                                                                                | 0.62       |                                                                                                                                                                                                        | 1,658,701  |   |

 

Under the iPartyCorp. Amended and Restated 1998 Incentive and Nonqualified Stock Option Plan weare authorized to grant options for the purchase of up to 11,000,000 shares ofour common stock.  As of December 30,2006, 418,859 shares had been issued pursuant to the exercise of previouslyissued stock options.  As of December 30,2006, there were options outstanding to purchase 8,922,440 shares of our commonstock.  Consequently, as of December 30,2006, options for the purchase of up to 1,658,701 common shares remainavailable for future grants.

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

The information required bythis Item is contained in our proxy statement for the annual meeting ofstockholders scheduled to be held on June 6, 2007, which we plan to file withthe SEC no later than 120 days after the end of our fiscal year ended December30, 2006.  Such information is herebyincorporated by reference.

**ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES**

The information required bythis Item is contained in our proxy statement for the annual meeting ofstockholders scheduled to be held on June 6, 2007, which we plan to file withthe SEC no later than 120 days after the end of our fiscal year ended December30, 2006.  Such information is herebyincorporated by reference.

**PART IV**

**ITEM 15. EXHIBITS AND FINANCIALSTATEMENT SCHEDULES**

(a)                      1.Financial statements:

For a listing of consolidated financial statementswhich are included in this document, see page F-1.

2. Financial Statement Schedules:

All schedules for which provision is made under Item 15(a)(2) areinapplicable and, therefore, have been omitted.

27

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3. Exhibits:

The exhibits listed in the Exhibit Index immediately preceding theexhibits are filed as part of this Annual Report on Form 10-K and areincorporated herein by reference.

(b)                     Exhibits:

The exhibits listed in the Exhibit Index immediately preceding theexhibits are filed as part of this Annual Report on Form 10-K and areincorporated herein by reference.

(c)                      FinancialStatement Schedules:

Included in Item 15(a)(2) above.

28

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|          | iPARTY CORP. |
|----------|--------------|
|     |         |
|     | By:          | /s/ SAL PERISANO |
|     |         | Sal Perisano |
| * * |         | *Chairman of the Board and* |
| * * |         | *Chief Executive Officer* |

 

Dated:  March 19, 2007

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.
| SIGNATURE              | ** ** | **TITLE**                                  | ** ** | **DATE**       |
|------------------------|------------|--------------------------------------------|------------|----------------|
| ** **             | ** ** | ** **                                 | ** ** | ** **     |
| /s/ SAL PERISANO       |       | Chairman of the Board and                  |       | March 19, 2007 |
| Sal Perisano           |       | Chief Executive Officer                    |       |           |
|                   |       | (Principal Executive Officer)              |       |           |
|                   |       |                                       |       |           |
| /s/ PATRICK FARRELL    |       | President and Chief Financial Officer      |       | March 19, 2007 |
| Patrick Farrell        |       | (Principal Financial Officer and Principal |       |           |
|                   |       | Accounting Officer)                        |       |           |
|                   |       |                                       |       |           |
| /s/ DANIEL DE WOLF     |       | Director                                   |       | March 19, 2007 |
| Daniel De Wolf         |       |                                       |       |           |
|                   |       |                                       |       |           |
| /s/ FRANK HAYDU        |       | Director                                   |       | March 19, 2007 |
| Frank Haydu            |       |                                       |       |           |
|                   |       |                                       |       |           |
| /s/ ROBERT JEVON       |       | Director                                   |       | March 19, 2007 |
| Robert Jevon           |       |                                       |       |           |
|                   |       |                                       |       |           |
| /s/ ERIC SCHINDLER     |       | Director                                   |       | March 19, 2007 |
| Eric Schindler         |       |                                       |       |           |
|                   |       |                                       |       |           |
| /s/ JOSEPH VASSALLUZZO |       | Director                                   |       | March 19, 2007 |
| Joseph Vassalluzzo     |       |                                       |       |           |
|                   |       |                                       |       |           |
| /s/ CHRISTINA W. VEST  |       | Director                                   |       | March 19, 2007 |
| Christina W. Vest      |       |                                       |       |           |

 

29

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**i****PARTY CORP.**

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**
|                                                                                                 | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------|------------|
| Report of Independent  Registered Public Accounting Firm                                        |       |       |       |
|                                                                                            |       |       |       |
| Consolidated Balance Sheets                                                                     |       |       |       |
|                                                                                            |       |       |       |
| Consolidated Statements of  Operations                                                          |       |       |       |
|                                                                                            |       |       |       |
| Consolidated Statements of  Convertible Preferred Stock and Stockholders’ Equity (Deficit) |       |       |       |
|                                                                                            |       |       |       |
| Consolidated Statements of  Cash Flows                                                          |       |       |       |
|                                                                                            |       |       |       |
| Notes  to Consolidated Financial Statements                                                     |       |       |       |

 

The accompanyingnotes are an integral part of these Consolidated Financial Statements.

F-1

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**Reportof Independent Registered Public Accounting Firm**

Boardof Directors and StockholdersiParty Corp.

We have audited the accompanying consolidated balancesheets of iParty Corp. and subsidiaries as of December 30, 2006 and December31, 2005, and the related consolidated statements of operations, convertiblepreferred stock and stockholders’ equity (deficit), and cash flows for each ofthe three years in the period ended December 30, 2006.  These financialstatements are the responsibility of the Company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  We were not engaged to perform an audit of the Company’sinternal control over financial reporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of iParty Corp. and subsidiaries at December 30, 2006 and December 31,2005, and the consolidated results of their operations and their cash flows foreach of the three years in the period ended December 30, 2006, in conformitywith U.S. generally accepted accounting principles.

      /s/ Ernst& Young LLP

Boston,MassachusettsFebruary 24, 2007

The accompanyingnotes are an integral part of these Consolidated Financial Statements.

F-2

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** **

**iPARTY CORP.**

**CONSOLIDATED BALANCE SHEETS**

 

 
| ** **                                                                                                                                                                                                                                                                                                                              | ** ** | **Dec 30, 2006** | ** ** | **Dec 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                                                              |       |                       |       |                       |       |
| Current assets:                                                                                                                                                                                                                                                                                                                         |       |                       |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                                              |       | $                          | 760,376    |                       | $          | 699,194 |   |
| Restricted cash                                                                                                                                                                                                                                                                                                                         |       | 706,066                    |       | 651,617                    |       |
| Accounts  receivable                                                                                                                                                                                                                                                                                                                    |       | 1,116,042                  |       | 1,246,545                  |       |
| Inventory, net                                                                                                                                                                                                                                                                                                                          |       | 12,264,737                 |       | 13,251,307                 |       |
| Prepaid expenses  and other assets                                                                                                                                                                                                                                                                                                      |       | 752,172                    |       | 548,114                    |       |
| Total current  assets                                                                                                                                                                                                                                                                                                                   |       | 15,599,393                 |       | 16,396,777                 |       |
| Property and equipment,  net                                                                                                                                                                                                                                                                                                            |       | 4,817,993                  |       | 5,187,099                  |       |
| Intangible assets, net                                                                                                                                                                                                                                                                                                                  |       | 2,153,482                  |       | —                     |       |
| Other assets                                                                                                                                                                                                                                                                                                                            |       | 126,505                    |       | 133,200                    |       |
| Total assets                                                                                                                                                                                                                                                                                                                            |       | $                          | 22,697,373 |                       | $          | 21,717,076 |   |
|                                                                                                                                                                                                                                                                                                                                    |       |                       |       |                       |       |
| **LIABILITIES  AND STOCK AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                |       |                       |       |                       |       |
| Current liabilities:                                                                                                                                                                                                                                                                                                                    |       |                       |       |                       |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                        |       | $                          | 5,516,406  |                       | $          | 4,695,094 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                                        |       | 3,070,003                  |       | 2,532,238                  |       |
| Current portion  of capital lease obligations                                                                                                                                                                                                                                                                                           |       | 343,761                    |       | 442,358                    |       |
| Current notes  payable                                                                                                                                                                                                                                                                                                                  |       | 551,515                    |       | —                     |       |
| Borrowings under  line of credit                                                                                                                                                                                                                                                                                                        |       | 1,162,719                  |       | 6,635,874                  |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                                              |       | 10,644,404                 |       | 14,305,564                 |       |
|                                                                                                                                                                                                                                                                                                                                    |       |                       |       |                       |       |
| Long-term liabilities:                                                                                                                                                                                                                                                                                                                  |       |                       |       |                       |       |
| Capital lease  obligations, net of current portion                                                                                                                                                                                                                                                                                      |       | 42,456                     |       | 426,995                    |       |
| Notes payable,  net of discount of $545,468                                                                                                                                                                                                                                                                                             |       | 3,736,309                  |       | —                     |       |
| Other  liabilities                                                                                                                                                                                                                                                                                                                      |       | 929,199                    |       | 669,003                    |       |
| Total long-term  liabilities                                                                                                                                                                                                                                                                                                            |       | 4,707,964                  |       | 1,095,998                  |       |
|                                                                                                                                                                                                                                                                                                                                    |       |                       |       |                       |       |
| Commitments and  contingencies                                                                                                                                                                                                                                                                                                          |       |                       |       |                       |       |
|                                                                                                                                                                                                                                                                                                                                    |       |                       |       |                       |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                                                              |       |                       |       |                       |       |
| Convertible  preferred stock - $.001 par value; 10,000,000 shares authorized, Series B  convertible preferred stock - 1,150,000 shares authorized; 471,401 and  474,402 shares  issued and outstanding  at December 30, 2006 and December 31, 2005, respectively (aggregate  liquidation value of $9,428,024 at December 30, 2006) |       | 7,014,450                  |       | 7,059,101                  |       |
| Series C  convertible preferred stock - 100,000 shares authorized, issued and outstanding  (aggregate liquidation value of $2,000,000 at December 30, 2006)                                                                                                                                                                             |       | 1,492,000                  |       | 1,492,000                  |       |
| Series D  convertible preferred stock - 250,000 shares authorized, issued and  outstanding (aggregate liquidation value of $5,000,000 at December 30, 2006)                                                                                                                                                                             |       | 3,652,500                  |       | 3,652,500                  |       |
| Series E  convertible preferred stock - 533,333 shares authorized; 296,667 shares  issued and outstanding (aggregate liquidation value of $1,112,500 at December  30, 2006)                                                                                                                                                             |       | 1,112,500                  |       | 1,112,500                  |       |
| Series F  convertible preferred stock - 114,286 shares authorized, issued and  outstanding (aggregate liquidation value of $500,000 at December 30, 2006)                                                                                                                                                                               |       | 500,000                    |       | 500,000                    |       |
| Total  convertible preferred stock                                                                                                                                                                                                                                                                                                      |       | 13,771,450                 |       | 13,816,101                 |       |
|                                                                                                                                                                                                                                                                                                                                    |       |                       |       |                       |       |
| Common stock -  $.001 par value; 150,000,000 shares authorized; 22,603,877 and 22,536,637 shares  issued and outstanding at December 30, 2006 and December 31, 2005,  respectively                                                                                                                                                      |       | 22,604                     |       | 22,537                     |       |
|                                                                                                                                                                                                                                                                                                                                    |       |                       |       |                       |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                             |       | 51,671,084                 |       | 50,971,656                 |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                    |       | (58,120,133                | )          | (58,494,780                | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                                                        |       | 7,345,005                  |       | 6,315,514                  |       |
|                                                                                                                                                                                                                                                                                                                                    |       |                       |       |                       |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                                                         |       | $                          | 22,697,373 |                       | $          | 21,717,076 |   |

 

The accompanyingnotes are an integral part of these Consolidated Financial Statements.

F-3

----

 

**iPARTY CORP.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
| ** **                            | ** ** | **For the periods ended** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **Dec 30, 2006**               | ** ** | **Dec 31, 2005** | ** ** | **Dec 25, 2004** | ** ** |
| ** **                            | ** ** | **(52 weeks)**                      | ** ** | **(53 weeks)** | ** ** | **(52 weeks)** | ** ** |
| Revenues                              |       | $                                        | 78,458,329 |   | $ | 72,537,998 |   | $ | 64,276,225 |   |
| Operating costs:                      |       |                                     |       |   |   |   |   |
| Cost of products  sold                |       | 44,942,542                               |       | 41,395,193 |   | 35,826,820 |   |
| Marketing and  sales                  |       | 25,625,547                               |       | 24,116,050 |   | 21,176,925 |   |
| General and  administrative           |       | 6,736,197                                |       | 6,762,583 |   | 6,335,067 |   |
|                                  |       |                                     |       |   |   |   |   |
| Operating income                      |       | 1,154,043                                |       | 264,172 |   | 937,413 |   |
|                                  |       |                                     |       |   |   |   |   |
| Other income                          |       | —                                   |       | — |   | 382,500 |   |
|                                  |       |                                     |       |   |   |   |   |
| Income before income  taxes           |       | 1,154,043                                |       | 264,172 |   | 1,319,913 |   |
|                                  |       |                                     |       |   |   |   |   |
| Interest income                       |       | 10,217                                   |       | 801 |   | 1,354 |   |
| Interest expense                      |       | (772,334                                 | )          | (532,649 | ) | (225,074 | ) |
|                                  |       |                                     |       |   |   |   |   |
| Income (loss) before  income taxes    |       | 391,926                                  |       | (267,676 | ) | 1,096,193 |   |
|                                  |       |                                     |       |   |   |   |   |
| Income taxes                          |       | 17,279                                   |       | — |   | 105,000 |   |
|                                  |       |                                     |       |   |   |   |   |
| Net income (loss)                     |       | $                                        | 374,647    |   | $ | (267,676 | ) | $ | 991,193 |   |
|                                  |       |                                     |       |   |   |   |   |
| Income (loss) per  share:             |       |                                     |       |   |   |   |   |
| Basic                                 |       | $                                        | 0.01       |   | $ | (0.01 | ) | $ | 0.03 |   |
| Diluted                               |       | $                                        | 0.01       |   | $ | (0.01 | ) | $ | 0.02 |   |
|                                  |       |                                     |       |   |   |   |   |
| Weighted-average shares  outstanding: |       |                                     |       |   |   |   |   |
| Basic                                 |       | 37,862,928                               |       | 22,186,581 |   | 37,649,400 |   |
| Diluted                               |       | 39,535,874                               |       | 22,186,581 |   | 41,517,036 |   |

 

The accompanyingnotes are an integral part of these Consolidated Financial Statements.

F-4

----

 

**IPARTY CORP.**

**CONSOLIDATEDSTATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)**

 
| ** **                                                                        | ** ** | **Stockholders’ Equity (Deficit)** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                        | ** ** | **Convertible**                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** ** | ** ** | **Total** | ** ** |
| ** **                                                                        | ** ** | **Preferred Stock**                          | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                        | ** ** | **Shares**                                        | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Deficit** | ** ** | **Equity (Deficit)** | ** ** |
| Balance December 27,  2003                                                        |       | 2,464,805                                         |       | $ | 17,197,766 |   | 18,780,204 |   | $ | 18,780 |   | $ | 47,554,621 |   | $ | (59,218,297 | ) | $ | 5,552,870 |   |
|                                                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance  of common stock upon conversion of Series A convertible preferred stock |       | (1,000,000                                        | )          | (1,000,000 | ) | 1,000,000 |   | 1,000 |   | 999,000 |   |   |   | — |   |
| Issuance  of common stock upon conversion of Series B convertible preferred stock |       | (103,620                                          | )          | (1,541,869 | ) | 1,333,693 |   | 1,333 |   | 1,540,536 |   |   |   | — |   |
| Issuance  of common stock upon conversion of Series E convertible preferred stock |       | (92,772                                           | )          | (347,895 | ) | 961,025 |   | 961 |   | 346,934 |   |   |   | — |   |
| Exercise  of stock options                                                        |       | —                                            |       | — |   | 17,795 |   | 19 |   | 7,009 |   |   |   | 7,028 |   |
| Net  income                                                                       |       | —                                            |       | — |   | — |   | — |   | — |   | 991,193 |   | 991,193 |   |
| Balance December 25,  2004                                                        |       | 1,268,413                                         |       | 14,308,002 |   | 22,092,717 |   | 22,093 |   | 50,448,100 |   | (58,227,104 | ) | 6,551,091 |   |
|                                                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance  of common stock upon conversion of Series B convertible preferred stock |       | (33,058                                           | )          | (491,901 | ) | 425,546 |   | 426 |   | 491,475 |   |   |   | — |   |
| Stock  based compensation                                                         |       | —                                            |       | — |   | — |   | — |   | 28,500 |   | — |   | 28,500 |   |
| Exercise  of stock options                                                        |       | —                                            |       | — |   | 18,374 |   | 18 |   | 3,581 |   | — |   | 3,599 |   |
| Net  loss                                                                         |       | —                                            |       | — |   | — |   | — |   | — |   | (267,676 | ) | (267,676 | ) |
| Balance December 31,  2005                                                        |       | 1,235,355                                         |       | 13,816,101 |   | 22,536,637 |   | 22,537 |   | 50,971,656 |   | (58,494,780 | ) | 6,315,514 |   |
|                                                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance  of common stock upon conversion of Series B convertible preferred stock |       | (3,000                                            | )          | (44,651 | ) | 39,925 |   | 40 |   | 44,611 |   |   |   | — |   |
| Stock  based compensation                                                         |       | —                                            |       | — |   | — |   | — |   | 35,592 |   | — |   | 35,592 |   |
| Exercise  of stock options                                                        |       | —                                            |       | — |   | 27,315 |   | 27 |   | 5,574 |   | — |   | 5,601 |   |
| Issuance  of warrants                                                             |       | —                                            |       | — |   | — |   | — |   | 613,651 |   | — |   | 613,651 |   |
| Net  income                                                                       |       | —                                            |       | — |   | — |   | — |   | — |   | 374,647 |   | 374,647 |   |
| Balance December 30, 2006                                                         |       | 1,232,355                                         |       | $ | 13,771,450 |   | 22,603,877 |   | $ | 22,604 |   | $ | 51,671,084 |   | $ | (58,120,133 | ) | $ | 7,345,005 |   |

 

The accompanyingnotes are an integral part of these Consolidated Financial Statements.

F-5

----

 

**iPARTY CORP.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 
|                                                                                                 | ** ** | **For the periods ended** |       |
|------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|
|                                                                                                 | ** ** | **Dec 30, 2006**          | ** ** | **Dec 31, 2005** | ** ** | **Dec 25, 2004** |   |
|                                                                                                 | ** ** | **(52 weeks)**            | ** ** | **(53 weeks)** | ** ** | **(52 weeks)** | ** ** |
| **Operating activities:**                                                                            |       |                      |       |   |   |   |   |
|                                                                                                 |       |                      |       |   |   |   |   |
| Net income (loss)                                                                                    |       | $                         | 374,647    |   | $ | (267,676 | ) | $ | 991,193 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                      |       |   |   |   |   |
| Depreciation and  amortization                                                                       |       | 1,343,857                 |       | 1,093,221 |   | 634,250 |   |
| Deferred rent                                                                                        |       | 260,196                   |       | 197,244 |   | 65,550 |   |
| Non cash stock  base compensation expense                                                            |       | 35,592                    |       | — |   | — |   |
| Non cash warrant  expense                                                                            |       | 68,183                    |       | — |   | — |   |
| Changes in  operating assets and liabilities:                                                        |       |                      |       |   |   |   |   |
| Accounts  receivable                                                                                 |       | 130,503                   |       | (545,584 | ) | (213,027 | ) |
| Inventory                                                                                            |       | 1,283,983                 |       | (1,850,336 | ) | (1,977,508 | ) |
| Prepaid expenses  and other assets                                                                   |       | (149,766                  | )          | 120,637 |   | 191,345 |   |
| Accounts payable                                                                                     |       | 821,312                   |       | 1,273,899 |   | 325,347 |   |
| Accrued expenses  and other liabilities                                                              |       | 243,529                   |       | (281,312 | ) | 112,540 |   |
| Net cash  provided by (used in) operating activities                                                 |       | 4,412,036                 |       | (259,907 | ) | 129,690 |   |
|                                                                                                 |       |                      |       |   |   |   |   |
| **Investing activities:**                                                                            | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                 |       |                      |       |   |   |   |   |
| Acquisition of retail  store and non-compete agreement                                               |       | (1,869,115                | )          | — |   | — |   |
| Purchase of property  and equipment                                                                  |       | (709,892                  | )          | (1,663,647 | ) | (2,121,134 | ) |
| Net cash used in  investing activities                                                               |       | (2,579,007                | )          | (1,663,647 | ) | (2,121,134 | ) |
|                                                                                                 |       |                      |       |   |   |   |   |
| **Financing activities:**                                                                            | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                 |       |                      |       |   |   |   |   |
| Net borrowings  (repayments) under line of credit                                                    |       | (5,473,155                | )          | 1,378,184 |   | 1,497,019 |   |
| Proceeds from notes  payable                                                                         |       | 4,319,373                 |       | — |   | — |   |
| Principal payments on  notes payable                                                                 |       | (86,081                   | )          | — |   | — |   |
| Increase in restricted  cash                                                                         |       | (54,449                   | )          | (90,210 | ) | (28,123 | ) |
| Principal payments on  capital lease obligations                                                     |       | (483,136                  | )          | (425,982 | ) | (169,794 | ) |
| Proceeds from exercise  of stock options                                                             |       | 5,601                     |       | 3,599 |   | 7,028 |   |
| Net cash  provided by (used in) financing activities                                                 |       | (1,771,847                | )          | 865,591 |   | 1,306,130 |   |
|                                                                                                 |       |                      |       |   |   |   |   |
| **Net increase (decrease) in cash  and cash equivalents**                                            |       | 61,182                    |       | (1,057,963 | ) | (685,314 | ) |
|                                                                                                 |       |                      |       |   |   |   |   |
| **Cash and cash equivalents,  beginning of year**                                                    |       | 699,194                   |       | 1,757,157 |   | 2,442,471 |   |
|                                                                                                 |       |                      |       |   |   |   |   |
| **Cash and cash equivalents, end  of year**                                                          |       | $                         | 760,376    |   | $ | 699,194 |   | $ | 1,757,157 |   |
|                                                                                                 |       |                      |       |   |   |   |   |
| Supplemental disclosure  of non-cash financing activities:                                           |       |                      |       |   |   |   |   |
|                                                                                                 |       |                      |       |   |   |   |   |
| Conversion of  Series A convertible preferred stock to common stock                                  |       | $                         | —     |   | $ | — |   | $ | 1,000,000 |   |
| Conversion of  Series B convertible preferred stock to common stock                                  |       | 44,651                    |       | 491,901 |   | 1,541,869 |   |
| Conversion of  Series E convertible preferred stock to common stock                                  |       | —                    |       | — |   | 347,895 |   |
| Total conversion  of convertible preferred stock to common stock                                     |       | $                         | 44,651     |   | $ | 491,901 |   | $ | 2,889,764 |   |
|                                                                                                 |       |                      |       |   |   |   |   |
| Conversion of  accounts payable to notes payable                                                     |       | $                         | 1,819,373  |   | $ | — |   | $ | — |   |
|                                                                                                 |       |                      |       |   |   |   |   |
| Acquisition of  assets under capital lease                                                           |       | $                         | —     |   | $ | 132,968 |   | $ | 1,302,681 |   |

 

The Accompanying notes are an integral part of theseConsolidated Financial Statements.

F-6

----

**iPARTYCORP.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**December30, 2006**

**1.  THE COMPANY**

*Background*

The Company’sefforts are devoted to the sale of party goods and services through its retailstores.  At the end of fiscal 2006 theCompany had 45 retail stores located throughout New England, with fiveadditional stores located in Florida. The Company licensed its Internet business to a third party in exchangefor royalties under a license agreement, which to date have not beensignificant.

The stores featureover 20,000 products ranging from greeting cards and balloons to more uniquemerchandise such as piñatas, gag gifts, masquerade and Hawaiian Luauitems.  The Company’s sales are driven bythe following events:  Halloween,Christmas, Easter, Valentine’s Day, New Year’s, Independence Day, St. Patrick’sDay, Thanksgiving, and Chanukah.  TheCompany also focuses its business closely on lifetime events such asanniversaries, graduations, birthdays, and bridal or baby showers.  The Company’s business has a seasonal patternwith higher revenues in the second and fourth quarters, reflecting schoolgraduations and Halloween, respectively.

The Company’sfiscal year ended December 30, 2006 consisted of 52 weeks while fiscal yearDecember 31, 2005 consisted of 53 weeks and fiscal year ended December 25, 2004consisted of 52 weeks.

*Management’sPlans*

The Companybelieves, based on its current operating plan, that anticipated revenues fromoperations and borrowings available under the existing line of credit will besufficient to fund its operations and working capital requirements through thenext twelve months****.****  In the event that the Company’s operatingplan changes or proves inaccurate due to decreased revenues, unanticipatedexpenses, increased competition, unfavorable economic conditions or otherunforeseen circumstances, the Company’s liquidity may be negativelyimpacted.  Accordingly, the Company wouldbe required to adjust its expenditures in 2007 to conserve working capital orraise additional capital to fund operations. There can be no assurance, that, should the Company seek or requireadditional financing, such financing will be available, if at all, on terms andconditions acceptable to it.  At thistime, the Company has no plans to open or acquire any new stores in 2007,unless it comes across or is presented with strategic opportunities.

**2.  SIGNIFICANTACCOUNTING POLICIES:**

*Principlesof Consolidation*

The consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiaries after elimination of all significant intercompany transactions andbalances.

*RevenueRecognition*

Revenues includethe selling price of party goods sold, net of returns and discounts, and arerecognized at the point of sale.  TheCompany estimates returns based upon historical return rates and such amountshave not been significant.

*Concentrations*

The Company purchases itsinventory from a diverse group of vendors. Six suppliers account for approximately 44% of the Company’s purchase ofmerchandise, but the Company does not believe that it is overly dependent uponany single source for its merchandise, often using more than one vendor forsimilar kinds of products.  The Companyentered into a Supply Agreement with its largest supplier on August 7, 2006,which will obligate the Company topurchase increased levels of merchandise until 2012.  The Supply Agreement provides for 

F-7

----

a ramp-up periodduring 2006 and 2007 and, for five years beginning with calendar year 2008,requires the Company to purchase on an annual basis merchandise equal to thetotal number of stores open during such calendar year, multiplied by$180,000.  The Supply Agreement providesfor penalties in the event the Company fails to attain the annual purchasecommitment that would require the Company to pay the difference between the purchasesfor that year and the annual purchase commitment for that year.

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

*Useof Estimates*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the reporting period.  Actual results could differ from theseestimates.

*Cashand Cash Equivalents, Outstanding Checks and Restricted Cash*

The Companyconsiders all highly liquid investments with an original maturity date of threemonths or less to be cash equivalents. Cash equivalents consist primarily of money market accounts and arecarried at cost plus accrued interest, which approximates fair value.

TheCompany uses controlled disbursement banking arrangements as part of its cashmanagement program.  Outstanding checks,which were included in accounts payable, totaled $2,316,027 at December 30,2006 and $627,269 at December 31, 2005. The increase in outstanding checks in 2006 is due to the timing of storeoperating lease payments.  The Companyhad sufficient funds available to fund the outstanding checks when they werepresented for payment.

Restricted cash represents money deposited in blocked accountsestablished for the benefit of and under the control of Wells Fargo RetailFinance II, LLC, the Company’s lender under its line of credit, and constitutescollateral for amounts outstanding under the Company’s line of credit.

*FairValue of Financial Instruments*

The carrying values of cash and cash equivalents, accounts receivableand accounts payable approximate fair value because of the short-term nature ofthese instruments.  The fair value ofborrowings under the Company’s line of credit approximates carrying valuebecause the debt bears interest at a variable market rate.  The fair value of the capital leaseobligations approximates the carrying value.  The fair value of the notes payable approximates the carryingvalue.  The fair value of the warrantswas determined by using the Black-Scholes model.

*Inventories*

Inventoriesconsist of party supplies and are valued at the lower of moving weighted-averagecost or market.  Inventory has beenreduced by an allowance for obsolete and excess inventory, which is based onmanagement’s review of inventories on hand compared to estimated futuresales.  The Company records vendorrebates, discounts and certain other adjustments to inventory, includingfreight costs, and these amounts are recognized in the income statement as therelated goods are sold.

F-8

----

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

|                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Beginning  balance          |       | $        | 1,098,972  |     | $          | 1,296,855 |   |
| Increases to  reserve       |       | 524,550  |       | 300,000  |       |
| Write-offs  against reserve |       | (543,708 | )          | (497,883 | )          |
| Ending balance              |       | $        | 1,079,814  |     | $          | 1,098,972 |   |

 

*Advertising*

Advertisingcosts are expensed upon first showing. Advertising costs amounted to $3,659,743, $3,439,403, and $3,174,446 forthe years ended December 30, 2006, December 31, 2005 and December 25, 2004,respectively.

*DeferredRent*

Certain operatinglease agreements contain scheduled rent increases, which are being amortizedover the terms of the agreements using the straight-line method, and areincluded in other liabilities in the accompanying consolidated balancesheet.  Deferred rent was $929,199 atDecember 30, 2006 and $669,003 at December 31, 2005.

*NetIncome (Loss) per Share*

Net income (loss)per basic share is computed by dividing net income by the weighted-averagenumber of common shares outstanding plus the common share equivalents of SeriesB-F preferred stock.  The common shareequivalents of Series B-F are included in the calculation of net income (loss)per basic share in accordance with EITF Topic D-95, *Effect ofParticipating Convertible Securities on the Computation of Basic Earnings PerShare*, since the preferred stockholders are entitled to participatein dividends when and if declared by the Board of Directors.  For the periods with net losses, the Companyexcludes those common share equivalents since their impact would beanti-dilutive.

Net income (loss)per diluted share is computed by dividing net income (loss) by the weightedaverage number of common shares outstanding, plus the common share equivalentsof Series A-F preferred stock, plus the common share equivalents of the “in themoney” stock options and warrants as computed by the treasury method.  For the periods with net losses, the Companyexcludes those common share equivalents since their impact would beanti-dilutive.

F-9

----

Thefollowing table sets forth the computation of net income (loss) per basic anddiluted share available to common stockholders:
| ** **                                                          | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net income  (loss)                                                  |       | $          | 374,647    |       | $          | (267,676   | )          | $ | 991,193 |   |
|                                                                |       |       |       |       |       |       |       |
| Net income  (loss) per share                                        |       |       |       |       |       |       |       |
| Basic                                                               |       | $          | 0.01       |       | $          | (0.01      | )          | $ | 0.03 |   |
| Diluted                                                             |       | $          | 0.01       |       | $          | (0.01      | )          | $ | 0.02 |   |
|                                                                |       |       |       |       |       |       |       |
| Weighted-average  shares outstanding:                               |       |       |       |       |       |       |       |
| Common shares                                                       |       | 22,557,436 |       | 22,186,581 |       | 21,364,673 |       |
| Common share equivalents of Series B-F convertible  preferred stock |       | 15,305,492 |       | —     |       | 16,284,727 |       |
| Basic weighted-average shares outstanding                           |       | 37,862,928 |       | 22,186,581 |       | 37,649,400 |       |
|                                                                |       |       |       |       |       |       |       |
| Common share equivalents of Series A convertible  preferred stock   |       | —     |       | —     |       | 48,077     |       |
| Common share equivalents of “in the money” stock  options |       | 1,672,946  |       | —     |       | 3,819,559  |       |
| Common share equivalents of “in the money” warrants       |       | —     |       | —     |       | —     |       |
| Diluted  weighted-average shares outstanding                        |       | 39,535,874 |       | 22,186,581 |       | 41,517,036 |       |

 

The common shareequivalents of “out of the money” stock options and warrants which wereexcluded from the computation of net income (loss) per diluted share availableto common stockholders were 3,858,769 and 2,611,544 in 2006, respectively,10,340,841 and 528,210 in 2005, respectively, and 3,309,630 and 13,011,215 in2004, respectively.

*Stock Option Compensation Expense*

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

In response toStatement No. 123(R), on September 21, 2005, the Company’s Board of Directorsapproved an acceleration of the vesting of certain unvested and “out-of-the-money”stock options previously awarded to employees and officers with exercise pricesequal to or greater than $0.69 per share. Options held by non-employee directors were excluded from the vestingacceleration.  As a result, options topurchase approximately 1.0 million shares of iParty stock became exercisableimmediately.  Based upon the Company’sclosing stock price of $0.46 on September 21, 2005, none of these options hadintrinsic value on the date of acceleration.

In making thedecision to accelerate these options, the Company’s Board of Directorsconsidered the interest of the stockholders as it would reduce the Company’sreported stock based compensation expense in future periods following theeffectiveness of Statement No. 123(R). The future stock based compensationexpense that was eliminated was approximately $508,000 on a pre-tax basis andis reflected in the pro forma footnote disclosure for the year ended December31, 2005.

Under StatementNo. 123(R), the Company will continue to use the Black-Scholes option pricingmodel to determine the fair value of stock based compensation.  The Black-Scholes model requires the Companyto make several subjective assumptions, including the estimated length of timeemployees will retain their vested stock options before exercising them (“expectedterm”), and the estimated volatility of the Company’s common stock price overthe expected term, which is based on historical volatility of the Company’scommon stock over a time 

F-10

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period equal to theexpected term.  The Black-Scholes modelalso requires a risk-free interest rate, which is based on the U.S. Treasuryyield curve in effect at the time of the grant, and the dividend yield on theCompany’s common stock, which is assumed to be zero since the Company does notpay dividends and has no current plans to do so in the future.  Changes in these assumptions can materiallyaffect the estimate of fair value of stock based compensation and consequently,the related expense recognized on the consolidated statement ofoperations.  Under the modifiedprospective method, stock based compensation expense is recognized for newgrants beginning this fiscal year and any unvested grants prior to the adoptionof Statement No. 123(R).  The Companyrecognizes stock based compensation expense on a straight-line basis over theemployee’s vesting period.

The Companyrecognized stock based compensation expense of $35,592 for the year endedDecember 30, 2006.  Stock basedcompensation expense is included in general and administrative expense.  The adoption of Statement No. 123(R) had noimpact on cash flow from operations and cash flow from financing activities forthe year ended December 30, 2006.

In accordance withStatement No. 123(R), the results for the years ended December 31, 2005 andDecember 25, 2004 have not been restated. If the stock based compensation expenses for the Company’s stock optionplan had been determined based upon the fair value at the grant date for awardsmade prior to fiscal 2006 under the plan consistent with the methodologyprescribed under Statement No. 123, the Company’s net loss would have beenincreased by $1,033,342 for the year ended December 31, 2005 and its net incomewould have been reduced by $668,223 for the year ended December 25, 2004.  Basic and diluted loss per share would haveincreased by $0.05 for the year ended December 31, 2005.   Basic income per share would have decreasedby $0.02 and diluted income per share would have decreased by $0.01 for theyear ended December 25, 2004.

|                                                                                                         | ** ** | **2005**   | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Net income  (loss):                                                                                     |       |       |       |     |       |
| Reported                                                                                                |       | $          | (267,676   | )        | $          | 991,193 |   |
| Deduct: Total stock based compensation expense determined  under fair value based method for all awards |       | (1,033,342 | )          | (668,223 | )          |
| Pro forma                                                                                               |       | $          | (1,301,018 | )        | $          | 322,970 |   |
|                                                                                                    |       |       |       |     |       |
| Net income  (loss) per basic share:                                                                     |       |       |       |     |       |
| Reported                                                                                                |       | $          | (0.01      | )        | $          | 0.03 |   |
| Pro forma                                                                                               |       | $          | (0.06      | )        | $          | 0.01 |   |
|                                                                                                    |       |       |       |     |       |
| Net income  (loss) per diluted share:                                                                   |       |       |       |     |       |
| Reported                                                                                                |       | $          | (0.01      | )        | $          | 0.02 |   |
| Pro forma                                                                                               |       | $          | (0.06      | )        | $          | 0.01 |   |

 

Under the Company’s Amended and Restated 1998Incentive and Nonqualified Stock Option Plan (the “1998 Plan”) options toacquire 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 thanthe fair market value of the stock on the grant date and the exercise price ofnonqualified options can be fixed by the Board. Qualified incentive options to purchase the Company’s common stock underthe 1998 Plan have been granted to employees, directors and consultants of theCompany at fair market value at the date of grant.  Generally, the options become exercisableover periods of up to four years, and expire ten years from the date of grant.

The Companygranted options for the purchase of 25,000 shares of common stock to each ofthe four independent members of the Board of Directors on June 7, 2006 at anexercise price of $0.36 per share.  Theweighted-average fair market value, using the Black-Scholes option-pricingmodel, of the options granted was $0.30 per share in 2006, $0.43 per share in2005 and $0.73 per share in 2004.  Thefair market value of the stock options at the date of the grant was estimatedusing the Black-Scholes option-pricing model with the following weightedaverage assumptions:

F-11

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|                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free  interest rate                   |       | 5.18     | %          | 3.76     | %          | 3.68     | %          |
| Expected  volatility                       |       | 115.6    | %          | 111.5    | %          | 117.4    | %          |
| Weighted average  expected life (in years) |       | 5.0      |       | 5.0      |       | 5.0      |       |
| Expected dividends                         |       | 0.00     | %          | 0.00     | %          | 0.00     | %          |

 

The total fairvalue of shares vested during 2006 was $6,262. The remaining unrecognized stock based compensation expense related tounvested awards at December 30, 2006, was $37,669 and the period of time overwhich this expense will be recognized is 2.8 years.

*Propertyand Equipment*

Propertyand equipment are stated at cost less accumulated depreciation and aredepreciated on the straight-line method over the estimated useful lives of theassets.  At the beginning of fiscal 2004,the Company adopted a new policy for estimating the useful life of fixed assetswhich extended the useful life of equipment and furniture and fixtures.  Changing the estimated life of the assets inthese categories as of the beginning of the year reduced depreciation expenseby approximately $130,885.  Net income in2004 would have been $0.02 per basic and diluted share if this change inestimating the useful life of fixed assets had not been adopted.  Expenditures for maintenance and repairs arecharged to operations as incurred.  Alisting of the estimated useful life of the various categories of property andequipment is as follows:

| Asset Classification            | ** ** | **Estimated  Useful Life**          |
|---------------------------------|------------|-------------------------------------|
| Leasehold  improvements         |       | Lesser of term of lease or 10 years |
| Furniture and  fixtures         |       | 7 years                             |
| Equipment                       |       | 5 years                             |
| Computer  hardware and software |       | 3 years                             |

 

*IntangibleAssets*

Intangible assetsconsist primarily of the value of a five-year non-compete agreement from PartyCity Corporation (“Party City”) and its affiliates that covers Massachusetts,Maine, New Hampshire, Vermont, Rhode Island, and Windsor and New Londoncounties in Connecticut which expires in 2011. This asset has an estimated life of 60 months.  Also included is the value related to theretail store lease that the Company acquired from Party City in Peabody,Massachusetts.  This asset has anestimated life of 90 months, which includes 30 months on the initial term ofthe store lease plus 60 months on an existing lease renewal option.  The other intangible assets consist of legaland other transaction fees related to the three-year note payable due onSeptember 15, 2009.  These assets arebeing amortized over the life of the note payable.

Intangibleassets as of December 30, 2006 and December 31, 2005 were:

|                                 | ** ** | **Dec 30, 2006** | ** ** | **Dec 31, 2005** | ** ** |
|---------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Non-compete  agreement          |       | $                          | 1,725,069  |                       | —     |   |
| Lease valuation                 |       | 460,000                    |       | —                     |       |
| Other                           |       | 154,949                    |       | —                     |       |
|                            |       |                       |       |                       |       |
| Intangible  assets              |       | 2,340,018                  |       | —                     |       |
|                            |       |                       |       |                       |       |
| Less:  accumulated amortization |       | (186,536                   | )          | —                     |       |
|                            |       |                       |       |                       |       |
| Intangible assets, net          |       | $                          | 2,153,482  |                       | $          | — |   |
|                                 |            |                            |            |                            |            |  |  |

 

Amortizationexpense for these intangible assets was $186,536 and $0 for 2006 and 2005,respectively.  The non-compete agreementamortization expense is included in general and administrative expense on theConsolidated 

F-12

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Statement ofOperations.  The lease valuationamortization expense is included in cost of goods sold and occupancycosts.  The amortization expense for theother intangible assets is included in general and administrative expense.

Futureamortization expense related to these intangible assets as of December 30,2006:

| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2007       |       | $          | 458,017    |   |
| 2008       |       | 458,017    |       |
| 2009       |       | 440,800    |       |
| 2010       |       | 406,367    |       |
| Thereafter |       | 390,281    |       |
| Total      |       | $          | 2,153,482  |   |

 

*Accountingfor the Impairment of Long-Lived Assets*

The Companyadopted SFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*,**in fiscal 2002,which requires that long-lived assets be measured at the lower of carryingamount or fair value less cost to sell. The adoption of SFAS No. 144 did not have a material impact on theCompany’s consolidated results of operations. On November 4, 2006, the Company closed its store in East Providence,Rhode Island due to underperforming sales. As a result of this closing, the Company recorded a charge ofapproximately $140,000 related to remaining lease payments and other closingcosts.  The initial term of the lease isdue to expire on August 31, 2007.  AtDecember 30, 2006, approximately $76,770 remains in the accrual.  As of December 30, 2006, the Company does notbelieve that any of its remaining assets are impaired.

*NewAccounting Pronouncements*

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued Interpretation of FASB Statement No. 109, *Accounting for Uncertainty in Income Taxes*,which is a clarification of FASB Statement No. 109, *Accounting for Income Taxes*. Interpretation of FASB 48 (“FIN 48”) is effective for fiscal yearsbeginning after December 15, 2006.

FIN 48 prescribes a minimum recognition thresholdthat a tax position must meet before it can be recognized in the financialstatements.  This Interpretation alsoprovides guidance of derecognition, measurement, classification, interest andpenalties, accounting in interim periods, disclosure and transition.

FIN 48 evaluates tax positions by utilizing a twostep approach (recognition and measurement).

·                  Recognition occurs when an enterprise determineswhether it is more likely than not that a tax position will be sustained uponexamination.  Once the enterprise hasdetermined that the tax position will be recognized, the measurement step (steptwo) needs to be evaluated.

·                  A tax position that meets the criteria in step oneis measured to determine the amount of benefit to recognize in the financialstatements.  The tax position is measuredat the largest amount of benefit that has a greater than 50% likelihood ofbeing realized upon ultimate settlement.

The Companyadopted FIN 48 effective January 1, 2007 and does not feel that there is amaterial impact of adoption on its financial position or results of operations.

InSeptember 2006, the FASB issued SFAS No. 157, *FairValue Measurements*, which defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements.  SFAS No. 157 does not require any new fairvalue measurements, but its provisions apply to all other accountingpronouncements that require or permit fair value measurement.  SFAS No. 157 will be effective for fiscalyears beginning after November 15, 2007, or December 30, 2007 for the Company.  Adoption of SFAS No. 157 is not expected tohave a material impact on the Company’s financial position or results ofoperations.

F-13

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*Reclassifications*

Certainreclassifications have been made to prior year’s amounts to conform to thecurrent year presentation.

**3.  PROPERTY AND EQUIPMENT:**

Property andequipment consist of the following:

|                                 | ** ** | **Dec 30, 2006** | ** ** | **Dec 31, 2005** | ** ** |
|---------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Leasehold improvements          |       | $                          | 2,755,807  |                       | $          | 2,416,015 |   |
| Furniture and fixtures          |       | 2,531,579                  |       | 2,467,501                  |       |
| Equipment under capital  leases |       | 1,454,129                  |       | 1,454,129                  |       |
| Computer hardware and  software |       | 1,531,870                  |       | 1,224,564                  |       |
| Equipment                       |       | 612,496                    |       | 546,920                    |       |
|                            |       |                       |       |                       |       |
| Property and equipment          |       | 8,885,881                  |       | 8,109,129                  |       |
| Less accumulated  depreciation  |       | (4,067,888                 | )          | (2,922,030                 | )          |
|                            |       |                       |       |                       |       |
| Property and equipment, net     |       | $                          | 4,817,993  |                       | $          | 5,187,099 |   |

 

**4.  LEASES:**

The Company conducts itsoperations in leased facilities with certain leased equipment accounted for asoperating and capital leases.  Realestate leases generally provide for fixed minimum rentals, which typicallyincrease periodically during the life of the lease, and, in some instances,contingent rentals based on a percentage of sales in excess of specifiedminimum sales levels, as well as occupancy costs, such as property taxes andcommon area maintenance.  The leases aretypically for 10 years, usually with options from the Company’s landlords torenew the Company’s leases for an additional 5 or 10 years.

The original cost ofassets under capital leases at December 30, 2006 and December 31, 2005 was$1,454,129 and $1,454,129, respectively. The accumulated depreciation of assetsunder capital leases at December 30, 2006 and December 31, 2005 was $705,551and $411,630, respectively.  Theamortization related to those assets under capital lease is included indepreciation expense.

F-14

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At December 30, 2006 theminimum rental commitments under all non-cancelable capital and operating leaseswith initial or remaining terms of more than one year were as follows:

| Year                                                     | ** ** | **Capital** | ** ** | **Operating** | ** ** |
|----------------------------------------------------------|------------|-------------|------------|---------------|------------|
| 2007                                                     |       | $           | 394,113    |          | $          | 8,506,575 |   |
| 2008                                                     |       | 37,636      |       | 7,555,594     |       |
| 2009                                                     |       | 7,295       |       | 7,245,395     |       |
| 2010                                                     |       | —      |       | 6,296,576     |       |
| 2011                                                     |       | —      |       | 5,524,130     |       |
| Thereafter                                               |       | —      |       | 11,806,901    |       |
| Total future minimum  lease payments                     |       | 439,044     |       | $             | 46,935,171 |   |
|                                                     |       |        |       |          |       |
| Less amount  representing interest                       |       | 52,827      |       |          |       |
|                                                     |       |        |       |          |       |
| Present value of  minimum lease payments                 |       | 386,217     |       |          |       |
| Less current portion of  obligation under capital leases |       | 343,761     |       |          |       |
|                                                     |       |        |       |          |       |
| Long-term obligation under capital leases                |       | $           | 42,456     |          |       |   |

 

The Company’srental expense under operating leases amounted to $8,699,501 in 2006,$7,725,856 in 2005 and $6,492,212 in 2004. Included in these amounts are contingent rentals totaling $47,334 in2006, $30,695 in 2005 and $39,949 in 2004.

**5.  INCOMETAXES:**

A reconciliationof the effective rate with the federal statutory rate is as follows:

|                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory rate                      |       | 34.0     | %          | -34.0    | %          | 34.0     | %          |
| State income taxes, net  of federal benefit |       | 1.9      | %          | 0.0      | %          | 5.1      | %          |
| Permanent differences                       |       | 6.4      | %          | 4.8      | %          | 1.7      | %          |
| Change in valuation  allowance              |       | -37.9    | %          | 29.2     | %          | -31.2    | %          |
| Effective tax rate                          |       | 4.4      | %          | 0.0      | %          | 9.6      | %          |

 

Deferred tax assetsconsist of the following:

|                                                     | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|
| Net operating loss  carryforwards                   |       | $          | 7,829,000  |       | $          | 8,162,000 |   |
| Inventory reserves                                  |       | 428,000    |       | 436,000    |       |
| Deferred rent                                       |       | 368,000    |       | 266,000    |       |
| Accrued vacation                                    |       | 69,000     |       | 101,000    |       |
| Accrued expenses                                    |       | 29,000     |       | —     |       |
| Intangible assets                                   |       | 43,000     |       | —     |       |
| Other                                               |       | 4,000      |       | 4,000      |       |
| Excess book over tax  depreciation and amortization |       | (26,000    | )          | (23,000    | )          |
|                                                |       | 8,744,000  |       | 8,946,000  |       |
| Less valuation  allowance                           |       | (8,744,000 | )          | (8,946,000 | )          |
| Net deferred tax asset                              |       | $          | —     |       | $          | — |   |

 

The Company hasrecorded a valuation allowance against its deferred tax assets because of theuncertainty regarding the realizability of these assets against future taxableincome.

F-15

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The Company usedapproximately $628,562 and $0 of net operating loss carryforwards in 2006 and2005, respectively.

As of December 30,2006, the Company has estimated net operating loss carryforwards ofapproximately $23.0 million, which begin to expire in 2018.  In accordance with Section 382 of theInternal Revenue Code, the use of some of these carryforwards may be subject toannual limitations based upon ownership changes of the Company’s stock whichmay have occurred or that may occur.

The Company madecash payments for state income taxes of $33,509 in 2006, $73,005 in 2005 and$157,952 in 2004.  The Company made cashpayments for federal income taxes of $0 in 2006, $0 in 2005 and $35,000 in2004.

**6.  CONTRACTUAL ARRANGEMENTS:**

*LicenseArrangement*

On July 8, 2003 the Company signed an agreement withTaymark, a direct marketer of party supplies, to license the iParty.com name toTaymark, which now operates the website at www.iparty.com.  In return, Taymark pays the Company a 15%royalty on all net sales realized through its operation of www.iparty.com.  The term of this agreement is for a period oftwo (2) years, unless sooner terminated. If this agreement is not terminated, it automatically renews forsuccessive one-year periods.  On July 8,2005 and July 8, 2006, the Company entered into one-year renewal periods.

*Earn-outagreement*

The Companypurchased from The Big Party, Debtor and Debtor-in-Possession (the “sellers”)in 2000 inventory, fixed assets and the leases of 33 retail stores inconsideration of cash and assumption of certain liabilities.  In addition, the Company agreed to pay thesellers, no later than March 31, 2004, an amount equivalent to the greater of$250,000, or a percentage of the aggregate operating results of the 33 acquiredlocations.  In connection with theCompany’s purchase accounting in 2000, the Company accrued the guaranteedamount of $250,000, which based on actual results is the minimum and finalamount due as of December 27, 2003, and paid this amount during the firstquarter of 2004.

**7.  RELATED PARTY TRANSACTIONS:**

On September 7,1999, the Company and Mr. Stuart Moldaw, who served as a Director of theCompany from 1999 to 2003, entered into a consulting agreement that had a termof three years.  Upon the expiration ofthis agreement, the Company and Mr. Moldaw entered into an oral agreement thatMr. Moldaw would continue to provide consulting services to the Company.  On November 6, 2003, the CompensationCommittee of the Company’s Board of Directors approved a stock option grant toMr. Moldaw, vesting immediately, with an exercise price set at the closingprice of the Company’s common stock on that day, to purchase 50,000 shares ofcommon stock, for consulting services performed by Mr. Moldaw in 2003.  The fair value of the options granted to Mr.Moldaw on November 6, 2003 was $25,000. On January 31, 2005, the Compensation Committee of the Company’s Boardof Directors approved a stock option grant to Mr. Moldaw, vesting immediately,with an exercise price set at the closing price of the Company’s common stockon that day, to purchase 50,000 shares of common stock, for consulting servicesperformed by Mr. Moldaw in 2004.  Thefair value of the options granted on January 31, 2005 was $28,500.

On June 8, 2005,the Company’s Board of Directors approved the payment of $10,000 to Frank Haydufor serving as the Chairman of the Company’s Audit Committee for a one-yearperiod until the next Annual Shareholder meeting.  As of December 30, 2006, this amount had beenearned and paid.  Also on June 8, 2005,the Company’s Board of Directors approved the payment of up to $60,000 toJoseph Vassalluzzo, a Director of the Company, for services as a part-timeconsultant for a one-year period.  As ofDecember 30, 2006, this amount had been earned and paid.

F-16

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On June 7, 2006,the Company’s Board of Directors approved the payment of $10,000 to Frank Haydufor serving as the Chairman of the Company’s Audit Committee for a one-yearperiod until the next Annual Shareholder meeting.  As of December 30, 2006, approximately $5,000had been earned and $2,500 had been paid. Also on June 7, 2006, the Company’s Board of Directors approved thepayment of up to $60,000 to Joseph Vassalluzzo, a Director of the Company, forservices as a part-time consultant for a one-year period.  As of December 30, 2006, fees forapproximately $30,000 had been earned and $15,000 had been paid.

**8.  LINE OF CREDIT:**

On December 21,2006, the Company amended its existing line of credit (the “line”) with WellsFargo Retail Finance II, LLC.  Theamendment continues the line of credit with Wells Fargo at $12,500,000(including a $500,000 term loan) and extends it for three additional years toJanuary 2, 2010.  In addition, the newagreement with Wells Fargo includes an option whereby the Company may increaseits line of credit up to a maximum level of $15,000,000, upon 15 days writtennotice, as long as it is in compliance with all debt covenants and the otherprovisions of the loan agreement.  Thenew agreement also adjusts the interest rate applicable to our borrowings andpermits the Company at its option, to use the London Interbank Offered Rate (“LIBOR”)rate for certain of its borrowings. Inventory and accounts receivable secure the Company’s line.

The amended agreementincludes a financial covenant requiring the Company to maintain a minimumavailability under the line of 5% of the credit limit.  At the current credit limit of $12,500,000,the minimum availability is $625,000. The amended agreement also has a covenant that requires the Company tolimit its capital expenditures to within 110% of those amounts included in itsbusiness plan, which may be updated from time to time. At December 30, 2006,the Company was in compliance with these financial covenants.  The line generally prohibits the payment ofany dividends or other distributions to any of the Company’s classes of capitalstock.

On January 17, 2006, theCompany amended its agreement to allow for a $500,000 term loan which increasesits borrowing base, but does not increase the $12.5 million credit limit.  The Company borrowed the full $500,000 on thatdate.  The interest rate on the term loanis the bank’s base rate plus 125 basis points. During the time in which the term loan remains outstanding, the interestrate on the line of credit is the bank’s base rate plus 75 basis points.  On October 30, 2006, the Company further amended its agreement to extend the maturitydate of its outstanding term loan in the amount of $500,000 from October 31,2006 to January 2, 2007.  OnDecember 21, 2006, the Company further amended its agreement to extend the maturity date of itsoutstanding term loan in the amount of $500,000 to October 31, 2007.  The term loan is currently outstanding and isdue and payable in full on October 31, 2007. The amendment entered into on January 17, 2006 also waived a default asa consequence of the fact that the principal balance of the line of creditexceeded availability on January 12, 2006.

On August 7, 2006, theCompany further amended its agreement with Wells Fargo to permit it to enterinto a Supply Agreement with Amscan and an Asset Purchase Agreement with PartyCity.  The amendment also allows for theCompany to incur the indebtedness represented by the Amscan Note and the PartyCity Note, and to incur other unsecured subordinated indebtedness consented toby Wells Fargo

The amountsoutstanding under the line as of December 30, 2006 and December 31, 2005 were$1,162,719 and $6,635,874, respectively. The interest rate on these borrowings was 9.0% at December 30, 2006 and7.75% at December 31, 2005.  Theoutstanding balances under the line are classified as current liabilities inthe accompanying consolidated balance sheets since the Company is required toapply daily lock box receipts to reduce the amount outstanding.  At December 30, 2006, the Company hadapproximately $5,657,200 of additional availability under the line.  In the third quarter of fiscal 2004, theCompany established a letter of credit for $356,000 with Wells Fargo Bank, N.A.associated with the leasing of its new point-of-sale system.  At December 30, 2006, $200,000 of this letterof credit was outstanding.

The Company madecash payments for interest of $748,656 in 2006, $501,826 in 2005 and $208,631in 2004.

F-17

----

**9.  NOTESPAYABLE:**

OnAugust 7, 2006, the Company entered into a Supply Agreement with Amscan Inc. (“Amscan”),the largest supplier in the party goods industry.  The Company purchased approximately 16.7% ofits merchandise from Amscan in each of fiscal 2006 and 2005, making Amscan itslargest supplier.

The Supply Agreement withAmscan gives the Company the right to receive certain additional rebates andmore favorable pricing terms over the term of the agreement than generally wereavailable to the Company under its previous terms with Amscan.  Theright to receive additional rebates, and the amount of such rebates, aresubject to the Company’s achievement of increased levels of purchasesand other factors provided for in the Supply Agreement.  Inexchange, the Supply Agreement obligates the Company to purchase increasedlevels of merchandise from Amscan until 2012.  The Supply Agreement provides for a ramp-upperiod during 2006 and 2007 and, beginning with calendar year 2008, requiresthe Company to purchase on an annual basis merchandise equal to the totalnumber of its stores open during such calendar year, multiplied by $180,000.  The Supply Agreement provides for penaltiesin the event the Company fails to attain the annual purchase commitment.

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

On October 24,2006, the Company elected to convert $1,143,896 of extended payables originallydue to Amscan as of August 8, 2006 as well as an additional $675,477 ofpayables due to Amscan as of September 28, 2006 into a single subordinatedpromissory note in the total principal amount of $1,819,373 (the “Amscan Note”).  In accordance with the Supply Agreement, theAmscan Note bears interest at the rate of 11.0% per annum and is payable inthirty-six (36) equal monthly installments of principal and interest of$59,562.48 commencing on November 1, 2006, and on the first day of each monththereafter until October 1, 2009, when the entire remaining principal balanceand all accrued interest shall be due and payable.  As of December 30, 2006, the remainingprincipal balance on the Amscan Note was $1,733,291.

On August 7, 2006, theCompany also entered into and simultaneously closed an Asset Purchase Agreementwith Party City, an affiliate of Amscan, pursuant to which the Company acquireda Party City retail party goods store in Peabody, Massachusetts and received afive-year non-competition covenant from Party City, for aggregate considerationof $2,450,000, payable by a subordinated note in the principal amount of$600,000, which will bear interest at the rate of 12.25% per annum (the “PartyCity Note”) and $1,850,000 in cash.  TheParty City Note is payable in quarterly interest-only payments over four years,with the full principal amount due at the note’s maturity on August 7,2010.  At December 30, 2006, theremaining principal balance on the Party City Note was $600,000.

On September 15, 2006,the Company entered into a Securities Purchase Agreement pursuant to which itraised $2.5 million through a combination of subordinated debt and warrantsissued on September 15, 2006 to Highbridge International LLC (“Highbridge”), aninstitutional accredited investor.  Underthe terms of the financing, the Company issued Highbridge a three-year $2.5million subordinated note (the “Highbridge Note”) that bears interest at aninterest rate of prime plus one percent. At December 30, 2006, the interest rate on the Highbridge Note was9.25%.  The Highbridge Note matures onSeptember 15, 2009.  At December 30,2006, the remaining principal balance on the Highbridge Note was $2,500,000.

F-18

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**10.  PREFERREDSTOCK:**

The following table summarizes the changes in the number of shares ofconvertible preferred stock during the past two years:
| ** **                            | ** ** | **Shares**                   | ** ** | ** **      | ** ** | **Shares**                   | ** ** | ** **      | ** ** | **Shares**                   | ** ** |
|---------------------------------------|------------|------------------------------|------------|-----------------|------------|------------------------------|------------|-----------------|------------|------------------------------|------------|
| ** **                            | ** ** | **Issued**                   | ** ** | **Conversions** | ** ** | **Issued**                   | ** ** | **Conversions** | ** ** | **Issued**                   | ** ** |
| ** **                            | ** ** | **and**                      | ** ** | **to**          | ** ** | **and**                      | ** ** | **to**          | ** ** | **and**                      | ** ** |
| ** **                            | ** ** | **Outstanding**              | ** ** | **Common**      | ** ** | **Outstanding**              | ** ** | **Common**      | ** ** | **Outstanding**              | ** ** |
| ** **                            | ** ** | **as of 12/30/06** | ** ** | **Stock**       | ** ** | **as of 12/31/05** | ** ** | **Stock**       | ** ** | **as of 12/25/04** | ** ** |
| Series B convertible  preferred stock |       | 471,402                      |       | (3,000          | )          | 474,402                      |       | (33,058         | )          | 507,460                      |       |
| Series C convertible  preferred stock |       | 100,000                      |       | —          |       | 100,000                      |       | —          |       | 100,000                      |       |
| Series D convertible  preferred stock |       | 250,000                      |       | —          |       | 250,000                      |       | —          |       | 250,000                      |       |
| Series E convertible  preferred stock |       | 296,667                      |       | —          |       | 296,667                      |       | —          |       | 296,667                      |       |
| Series F convertible  preferred stock |       | 114,286                      |       | —          |       | 114,286                      |       | —          |       | 114,286                      |       |
| Total                                 |       | 1,232,355                    |       | (3,000          | )          | 1,235,355                    |       | (33,058         | )          | 1,268,413                    |       |

 

*SeriesB Convertible Preferred Stock*

The shares ofSeries B convertible preferred stock are immediately convertible into 6,314,888shares of common stock on a 1.000 to 13.396 ratio at December 30, 2006, and carryan aggregate liquidation value of $9,428,024 ($1.49 per common share issuableupon conversion) at December 30, 2006. With certain exceptions, the conversion price will be adjusted on aweighted-average basis in the event the Company issues common stock or certainrights, including option activity in excess of certain amounts, to purchase orconvert into common stock as defined in the Company’s Certificate ofIncorporation as amended at a price below the conversion price.  The Series B convertible preferred stock willautomatically convert into common stock at the conversion price then in effectin the event the Company consummates a secondary public offering resulting ingross proceeds to the Company of at least $10,000,000.

On September 15, 2006,the Company entered into a Securities Purchase Agreement pursuant to which itraised $2.5 million through a combination of subordinated debt and warrantsissued on September 15, 2006 to Highbridge, an institutional accreditedinvestor.  The warrant issued to Highbridge(the “Highbridge Warrant”) is exercisable for 2,083,334 shares of the Company’scommon stock at an exercise price of $0.475 per share.  The issuance of the Highbridge Warranttriggered certain anti-dilution provisions of the Company’s Series B, C, and Dconvertible preferred stock.  As aresult, the outstanding shares of Series B preferred stock are now convertibleinto 249,254 additional shares of common stock.

In the event ofliquidation, the holders of Series B convertible preferred stock have preferenceto holders of the Company’s common stock, and are *pari passu*with the Company’s Series C, D, E and F convertible preferred stock.

Holders of SeriesB convertible preferred stock are entitled to 13 votes per share (i.e., onevote for each whole number of shares of common stock into which each such shareis presently convertible) on all matters submitted to a vote of the Company’sstockholders and are entitled to participate in dividends when and if declaredby the Board of Directors.

*SeriesC Convertible Preferred Stock*

The shares ofSeries C convertible preferred stock are immediately convertible into 1,365,200shares of common stock on a 1.000 to 13.652 ratio at December 30, 2006, andcarry an aggregate liquidation value of $2,000,000 ($1.47 per common shareissuable upon conversion) at December 30, 2006. With certain exceptions, the conversion price will be adjusted on aweighted-average basis in the event the Company issues common stock or certainrights, including option activity in excess of certain amounts, to purchase orconvert into common stock as defined in the Company’s Preferred Stock Charterat a price below the conversion price. The Series C convertible preferred stock will automatically convert intocommon stock at the conversion price then in effect in the event the

F-19

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Company consummates asecondary public offering resulting in gross proceeds to the Company of atleast $10,000,000.

On September 15, 2006,the Company entered into a Securities Purchase Agreement pursuant to which itraised $2.5 million through a combination of subordinated debt and warrantsissued on September 15, 2006 to Highbridge, an institutional accreditedinvestor.  The warrant issued toHighbridge is exercisable for 2,083,334 shares of the Company’s common stock atan exercise price of $0.475 per share. The issuance of the Highbridge Warrant triggered certain anti-dilutionprovisions of the Company’s Series B, C, and D convertible preferredstock.  As a result, the outstandingshares of Series C preferred stock are now convertible into 54,600 additionalshares of common stock.

In the event ofliquidation, the holders of Series C convertible preferred stock havepreference to holders of the Company’s common stock, and are *pari passu* with the Company’s Series B, D, E and Fconvertible preferred stock.

Holders of SeriesC convertible preferred stock are entitled to 13 votes per share (i.e., onevote for each whole number of shares of common stock into which each such shareis presently convertible) on all matters submitted to a vote of the Company’sstockholders and are entitled to participate in dividends when and if declaredby the Board of Directors.

*SeriesD Convertible Preferred Stock*

The shares ofSeries D convertible preferred stock are immediately convertible into 3,652,250shares of common stock on a 1.000 to 14.609 ratio at December 30, 2006, andcarry an aggregate liquidation value of $5,000,000 ($1.37 per common shareissuable upon conversion) at December 30, 2006. With certain exceptions, the conversion price will be adjusted on aweighted-average basis in the event the Company issues common stock or certainrights, including option activity in excess of certain amounts, to purchase orconvert into common stock as defined in the Company’s Preferred Stock Charterat a price below the conversion price. The Series D convertible preferred stock will automatically convert intocommon stock at the conversion price then in effect in the event the Companyconsummates a secondary public offering resulting in gross proceeds to theCompany of at least $10,000,000.

On September 15, 2006,the Company entered into a Securities Purchase Agreement pursuant to which itraised $2.5 million through a combination of subordinated debt and warrantsissued on September 15, 2006 to Highbridge, an institutional accreditedinvestor.  The warrant issued toHighbridge is exercisable for 2,083,334 shares of the Company’s common stock atan exercise price of $0.475 per share. The issuance of the Highbridge Warrant triggered certain anti-dilutionprovisions of the Company’s Series B, C, and D convertible preferredstock.  As a result, the outstandingshares of Series D preferred stock are now convertible into 138,500 additionalshares of common stock.

In the event ofliquidation, the holders of Series D convertible preferred stock havepreference to holders of the Company’s common stock, and are *pari passu* with the Company’s Series B, C, E and Fconvertible preferred stock.

Holders of SeriesD convertible preferred stock are entitled to 14 votes per share (i.e., onevote for each whole number of shares of common stock into which each such shareis presently convertible) on all matters submitted to a vote of the Company’sstockholders and are entitled to participate in dividends when and if declaredby the Board of Directors.

*SeriesE Convertible Preferred Stock*

The shares ofSeries E convertible preferred stock are immediately convertible into 3,073,168shares of common stock on a 1.000 to 10.359 ratio at December 30, 2006, andcarry an aggregate liquidation value of $1,112,500 ($0.36 per common shareissuable upon conversion) at December 30, 2006. With certain exceptions, the conversion price will be adjusted on aweighted-average basis in the event the Company issues common stock or certainrights, including option activity in excess of certain amounts, to purchase orconvert into common stock as

F-20

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defined in the Company’sPreferred Stock Charter at a price below the conversion price.  The Series E convertible preferred stock willautomatically convert into common stock at the conversion price then in effectin the event the average closing bid price of the common stock equals orexceeds $10.00 per share for 20 days within any 30-day period.

In the event ofliquidation, the holders of Series E convertible preferred stock havepreference to holders of the Company’s common stock, and are *pari passu* with the Company’s Series B, C, D and Fconvertible preferred stock.

Holders of SeriesE convertible preferred stock are entitled to 10 votes per share (i.e., onevote for each whole number of shares of common stock into which each such shareis presently convertible) on all matters submitted to a vote of the Company’sstockholders and are entitled to participate in dividends when and if declaredby the Board of Directors.

*SeriesF Convertible Preferred Stock*

The shares ofSeries F convertible preferred stock are immediately convertible into 1,184,803shares of common stock on a 1.000 to 10.367 ratio at December 30, 2006, andcarry an aggregate liquidation value of $500,000 ($0.42 per common shareissuable upon conversion) at December 30, 2006. With certain exceptions, the conversion price will be adjusted on aweighted-average basis in the event the Company issues common stock or certainrights, including option activity in excess of certain amounts, to purchase orconvert into common stock as defined in the Company’s Preferred Stock Charterat a price below the conversion price. The Series F convertible preferred stock will automatically convert intocommon stock at the conversion price then in effect in the event the averageclosing bid price of the common stock equals or exceeds $10.00 per share for 20days within any 30-day period.

In the event ofliquidation, the holders of Series F convertible preferred stock havepreference to holders of the Company’s common stock, and are pari passu withthe Company’s Series B, C, D and E convertible preferred stock.

Holders of SeriesF preferred stock are entitled to 10 votes per share (i.e., one vote for eachwhole number of shares of common stock into which each such share is presentlyconvertible) on all matters submitted to a vote of the Company’s stockholdersand are entitled to participate in dividends when and if declared by the Boardof Directors.

*Accretionof Dividends in the Event of Liquidation*

The carryingvalues of Series B-F convertible preferred stock have been determined based ontheir fair market values at the original dates of issuance.  In certain cases, warrants were issued, whichthe Company allocated value to and included in additional paid in capital.  Should such a liquidation event occur, thedifference between the carrying value of the convertible preferred stock andtheir liquidation value will be accreted. This amount was $4,269,074 on December 30, 2006.

**11.  WARRANTS:**

At December 30,2006, there were warrants outstanding which were exercisable for 2,611,544shares of the Company’s common stock. These warrants were issued in connection with certain preferred stockand subordinated debt financings.

On August 26, 2005, warrants issued in connection withthe issuance of Series B and Series C convertible preferred stock which wereexercisable for 9,157,619 shares of common stock expired without beingexercised.  On September 10, 2005,warrants issued in connection with the issuance of Series B and Series Cconvertible preferred stock which were exercisable for 1,487,886 shares ofcommon stock expired without being exercised.  On December 20, 2005, warrants issued in connection with the issuance ofSeries D convertible preferred stock which were exercisable for 1,837,500shares of common stock expired without being exercised.

F-21

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On September 15, 2006,the Company entered into a Securities Purchase Agreement pursuant to which itraised $2.5 million through a combination of subordinated debt and warrantsissued on September 15, 2006 to Highbridge, an institutional accreditedinvestor.  Under the terms of thefinancing, the Company issued Highbridge a warrant (the “Highbridge Warrant”)exercisable for 2,083,334 shares of its common stock at an exercise price of$0.475 per share, or 125% of the closing price of its common stock on the dayimmediately prior to the closing of the transaction.  The Company allocated approximately $613,651of value to the Highbridge Warrant using the Black-Scholes model withvolatility of 108%, interest of 4.73% and expected life of five years.  The Highbridge Warrant is being amortizedusing the effective interest method over the life of the Highbridge Note.  The agreements entered into in connectionwith the financing provide for certain restrictions and covenants consistentwith Highbridge’s status as a subordinated lender, and also grant Highbridgeresale registration rights with respect to the shares of common stockunderlying the Highbridge Warrant.

The following table summarizes the Company’soutstanding warrants at December 30, 2006:

| Total Common  Shares Issuable | ** ** | **Exercise  Price per  Common  Share  Issuable** | ** ** | **Expiration  Date** | ** ** |
|-------------------------------|------------|-------------------------------------------------------|------------|----------------------|------------|
| 146,341                       |       | $                                                     | 5.13       |                 | 04/16/09   |   |
| 121,212                       |       | 4.13                                                  |       | 05/13/09             |       |
| 44,444                        |       | 2.81                                                  |       | 06/15/09             |       |
| 47,619                        |       | 2.63                                                  |       | 06/22/09             |       |
| 40,816                        |       | 3.06                                                  |       | 07/15/09             |       |
| 44,444                        |       | 2.81                                                  |       | 07/22/09             |       |
| 83,334                        |       | 3.00                                                  |       | 08/15/09             |       |
| 2,083,334                     |       | 0.48                                                  |       | 09/15/11             |       |
| 2,611,544                     |       | $                                                     | 1.14       |                 |       |   |

 

**12.  STOCK OPTION PLAN:**

Under the Company’s Amended and Restated 1998Incentive and Nonqualified Stock Option Plan (the “1998 Plan”) options toacquire 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 thanthe fair market value of the stock on the grant date and the exercise price ofnonqualified options can be fixed by the Board. Qualified incentive options to purchase the Company’s common stock underthe 1998 Plan have been granted to employees, directors and consultants of theCompany at fair market value at the date of grant.  Generally, the options become exercisableover periods of up to four years, and expire ten years from the date of grant.

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

F-22

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A summary of the Company’sstock options is as follows:
| ** **                               | ** ** | **Number of**     | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------------------|------------|--------------|------------|------------|------------|
| ** **                               | ** ** | **Shares of**     | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Common Stock**  | ** ** | **Average**  | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Underlying**         | ** ** | **Exercise** | ** ** | **Price**  | ** ** |
| ** **                               | ** ** | **Stock Options** | ** ** | **Price**    | ** ** | **Range**  | ** ** |
| Outstanding -  December 27, 2003         |       | 8,517,718              |       | $            | 0.99       |       | 0.11-5.38  |   |
| Granted                                  |       | 1,801,300              |       | 0.89         |       | 0.69-1.33  |       |
| Expired/Forfeited                        |       | (286,096               | )          | 1.50         |       | 0.11-4.00  |       |
| Exercised                                |       | (17,795                | )          | 0.39         |       | 0.20-0.50  |       |
|                                     |       |                   |       |         |       |       |       |
| Outstanding -  December 25, 2004         |       | 10,015,127             |       | 0.96         |       | 0.13-5.38  |       |
| Granted                                  |       | 495,578                |       | 0.54         |       | 0.45-0.70  |       |
| Expired/Forfeited                        |       | (151,490               | )          | 0.45         |       | 0.18-1.33  |       |
| Exercised                                |       | (18,374                | )          | 0.20         |       | 0.18-0.20  |       |
|                                     |       |                   |       |         |       |       |       |
| Outstanding -  December 31, 2005         |       | 10,340,841             |       | 0.95         |       | 0.13-5.38  |       |
| Granted                                  |       | 100,000                |       | 0.36         |       | 0.36-0.36  |       |
| Expired/Forfeited                        |       | (1,491,086             | )          | 2.91         |       | 0.13-5.38  |       |
| Exercised                                |       | (27,315                | )          | 0.20         |       | 0.16-0.33  |       |
|                                     |       |                   |       |         |       |       |       |
| Outstanding -  December 30, 2006         |       | 8,922,440              |       | 0.62         |       | 0.13-4.25  |       |
|                                     |       |                   |       |         |       |       |       |
| Exercisable -  December 30, 2006         |       | 8,801,479              |       | $            | 0.62       |       | $          | 0.13-$4.2 | 5 |
|                                     |       |                   |       |         |       |       |       |
| Available for grant -  December 30, 2006 |       | 1,658,701              |       |         |       |       |       |
|                                          |            |                        |            |              |            |            |            |  |  |

 

The following table summarizes information for optionsoutstanding and exercisable at December 30, 2006:
| ** **                | ** ** | **Outstanding**        | ** ** | **Exercisable** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------|------------|
| ** **                | ** ** | **Number of**     | ** ** | **Weighted**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **Shares of**     | ** ** | **Average**     | ** ** | **Weighted** | ** ** | **Number** | ** ** | **Weighted** | ** ** |
| ** **                | ** ** | **Common Stock**  | ** ** | **Remaining**   | ** ** | **Average** | ** ** | **of** | ** ** | **Average** | ** ** |
| ** **                | ** ** | **Underlying**         | ** ** | **Life**        | ** ** | **Exercise** | ** ** | **Stock** | ** ** | **Exercise** | ** ** |
| **Price Range**      | ** ** | **Stock Options** | ** ** | **(Years)**     | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** |
| $ 0.11 - $ 0.20 |       | 146,250                |       | 4.6             |       | $ | 0.18 |   | 144,515 |   | $ | 0.18 |   |
| 0.21 - 0.30               |       | 3,803,684              |       | 4.2             |       | 0.25 |   | 3,798,567 |   | 0.25 |   |
| 0.31 - 0.50               |       | 1,173,371              |       | 5.7             |       | 0.36 |   | 1,079,463 |   | 0.35 |   |
| 0.51 - 1.00               |       | 3,157,935              |       | 6.3             |       | 0.77 |   | 3,137,734 |   | 0.77 |   |
| 1.01 - 3.50               |       | 541,200                |       | 2.6             |       | 2.33 |   | 541,200 |   | 2.33 |   |
| 3.51 - 5.38               |       | 100,000                |       | 3.0             |       | 4.14 |   | 100,000 |   | 4.41 |   |
| Total                     |       | 8,922,440              |       | 5.0             |       | $ | 0.62 |   | 8,801,479 |   | $ | 0.62 |   |

 

The Company hasreserved 27,124,293 shares of common stock for issuance in connection with theconversion of convertible preferred stock (15,590,309 shares), the exercise ofwarrants (2,611,544 shares) and the exercise of stock options (8,922,440shares).

F-23

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**13.  STOCKHOLDERRIGHTS PLAN:**

TheCompany has a Stockholder Rights Plan (the “Plan”) effective November 9,2001.  Under the Plan each share of theCompany’s capital stock outstanding at the close of business on November 9,2001 and each share of the Company’s capital stock issued subsequent to thatdate has a right associated with it, such that each share of its common stockis entitled to one right and each share of its preferred stock is entitled tosuch number of rights equal to the number of common shares into which it isconvertible.

The rights areexercisable only in the event, with certain exceptions, an acquiring partyaccumulates 10 percent or more of the Company’s voting stock, or if a partyannounces an offer to acquire 15 percent or more of the Company’s votingstock.  The rights expire on November 9,2011.

When exercisable,each right entitles the holder to purchase from the Company, one one-hundredthof a share of a new series of Series G junior preferred stock at an initialpurchase price of $2.00.  In addition,upon the occurrence of certain events, holders of the rights will be entitledto purchase either iParty Corp. stock or shares in an “acquiring entity” athalf of market value.  The Companygenerally will be entitled to redeem the rights at $0.001 per right at any timeuntil the date on which a 10 percent position in its voting stock is acquiredby any person or group.  Until a right isexercised, the holder thereof, as such, will have no rights as a stockholder ofthe Company, including, without limitation, the right to vote or receivedividends.

On September 15,2006, the Company amended the rights plan to clarify that the issuance of theHighbridge Warrant did not constitute a triggering event under the rights plan.

**14.  PROFIT SHARING 401(k) PLAN:**

The iParty 401(k) Plan is a qualified profit sharing plan coveringsubstantially all of its employees. Contributions to this plan are at the discretion of the Board ofDirectors.  The Company’s expense,including matching contributions and any discretionary amounts was $108,863 in2006, $113,127 in 2005 and $111,799 in 2004.

**15.  SEGMENT REPORTING:**

SFAS No. 131, *Disclosures about Segmentsof an Enterprise and Related Information*, establishes standards forthe way business enterprises report information about operating segments inannual financial statements and requires that those enterprises report selectedinformation about operating segments in interim financial reports issued tostockholders.  The Company reports oneoperating segment as revenues from the other segment are not material.

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**16.  QUARTERLYFINANCIAL DATA (UNAUDITED):**

**QUARTERLY FINANCIAL DATA**
| ** **                            | ** ** | **Apr 1, 2006** | ** ** | **Jul 1, 2006** | ** ** | **Sep 30, 2006** | ** ** | **Dec 30, 2006 (4)** | ** ** |
|---------------------------------------|------------|---------------------------|------------|---------------------------|------------|----------------------------|------------|-------------------------------------|------------|
| Revenues                              |       | $                         | 13,545,799 |                      | $          | 18,587,169                 |       | $                                   | 17,240,535 |   | $ | 29,084,826 |   |
| Cost of products  sold (1),(2)        |       | 8,429,170                 |       | 10,803,021                |       | 10,178,878                 |       | 15,531,473                          |       |
| Operating income  (loss)              |       | (1,931,745                | )          | 386,720                   |       | (1,162,116                 | )          | 3,861,184                           |       |
| Net income  (loss)                    |       | (2,089,273                | )          | 216,727                   |       | (1,384,401                 | )          | 3,631,594                           |       |
|                                  |       |                      |       |                      |       |                       |       |                                |       |
| Net income  (loss) per share          |       |                      |       |                      |       |                       |       |                                |       |
| Basic                                 |       | $                         | (0.09      | )                         | $          | 0.01                       |       | $                                   | (0.06      | ) | $ | 0.10 |   |
| Diluted                               |       | $                         | (0.09      | )                         | $          | 0.01                       |       | $                                   | (0.06      | ) | $ | 0.09 |   |
|                                  |       |                      |       |                      |       |                       |       |                                |       |
| Weighted-average  shares outstanding: |       |                      |       |                      |       |                       |       |                                |       |
| Basic                                 |       | 22,544,257                |       | 37,728,932                |       | 22,555,333                 |       | 38,191,009                          |       |
| Diluted                               |       | 22,544,257                |       | 39,283,126                |       | 22,555,333                 |       | 40,186,640                          |       |

 
| ** **                            | ** ** | **Mar 26, 2005** | ** ** | **Jun 25, 2005** | ** ** | **Sep 24, 2005** | ** ** | **Dec 31, 2005 (4)** | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|-------------------------------------|------------|
| Revenues                              |       | $                          | 13,159,763 |                       | $          | 16,517,522                 |       | $                                   | 14,839,051 |   | $ | 28,021,662 |   |
| Cost of products  sold (1), (3)       |       | 8,113,575                  |       | 9,479,347                  |       | 8,983,536                  |       | 14,818,735                          |       |
| Operating income  (loss)              |       | (1,590,609                 | )          | 227,553                    |       | (2,201,072                 | )          | 3,828,300                           |       |
| Net income  (loss)                    |       | (1,692,785                 | )          | 98,149                     |       | (2,352,032                 | )          | 3,678,992                           |       |
|                                  |       |                       |       |                       |       |                       |       |                                |       |
| Net income  (loss) per share          |       |                       |       |                       |       |                       |       |                                |       |
| Basic                                 |       | $                          | (0.08      | )                          | $          | 0.00                       |       | $                                   | (0.11      | ) | $ | 0.10 |   |
| Diluted                               |       | $                          | (0.08      | )                          | $          | 0.00                       |       | $                                   | (0.11      | ) | $ | 0.09 |   |
|                                  |       |                       |       |                       |       |                       |       |                                |       |
| Weighted-average  shares outstanding: |       |                       |       |                       |       |                       |       |                                |       |
| Basic                                 |       | 22,107,567                 |       | 37,706,143                 |       | 22,147,063                 |       | 37,724,517                          |       |
| Diluted                               |       | 22,107,567                 |       | 39,937,184                 |       | 22,147,063                 |       | 39,337,114                          |       |

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(1)  Cost ofproducts sold consists of the cost of merchandise sold to customers and theoccupancy costs for stores.

(2)  The fourth quarter of 2006 included anestimated reduction of $251,806 to the cost of products sold during theprevious three quarters due to the completion of physical inventories, forwhich shortage had been estimated during the year.

(3)  The fourth quarter of 2005included an estimated reduction of $175,884 to the cost of products sold duringthe previous three quarters due to the completion of physical inventories, forwhich shortage had been estimated during the year.

(4)  The fourth quarter of 2006 consisted of 13weeks compared to 14 weeks for the fourth quarter of 2005.

F-25

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**EXHIBITINDEX**
| EXHIBIT    | ** ** | ** **      |
|------------|------------|-----------------|
| **NUMBER** | ** ** | **DESCRIPTION** |
| 3.1        | (1)        |            |   | Restated Certificate of Incorporation of WSI  Acquisition Corp. and Certificate of Merger by iParty Corp. into WSI  Acquisition Corp. |
| 3.2        | (1)        |            |   | Certificate of Designation of Series A Preferred  Stock of WSI Acquisitions, Corp. |
| 3.3        | (2)        |            |   | Certificate of Designation of Series B Preferred  Stock of iParty Corp. |
| 3.4        | (2)        |            |   | Certificate of Designation of Series C Preferred  Stock of iParty Corp. |
| 3.5        | (4)        |            |   | Certificate of Designation of Series D Preferred  Stock of iParty Corp. |
| 3.6        | (5)        |            |   | Certificate of Designation of Series E Preferred  Stock of iParty Corp. |
| 3.7        | (10)       |            |   | Certificate of Correction to Certificate of  Designation of Series E Preferred Stock of iParty Corp. |
| 3.8        | (6)        |            |   | Certificate of Designation of Series F Preferred  Stock of iParty Corp. |
| 3.9        | (8)        |            |   | Certificate of Designation of Series G Junior  Preferred Stock of iParty Corp. |
| 3.10       | (1)        |            |   | By-Laws of WSI Acquisition Corp., as amended. |
| 10.1       | (1)        |            |   | Agreement and Plan of Merger between iParty Corp.  and WSI Acquisitions Corp. |
| 10.2       | (1)        | ##              |   | 1998 Incentive and Non-Qualified Stock Option Plan. |
| 10.3       | (10)       | ##              |   | Amended and Restated 1998 Incentive and  Non-Qualified Stock Option Plan. |
| 10.4       | (17)       | ##              |   | Form of Non-qualified Stock Option Agreement. |
| 10.5       | (17)       | ##              |   | Form of Incentive Stock Option Agreement. |
| 10.6       | (16)       | ##              |   | Form of Stock Option Agreement granted to Messrs.  DeWolf, Haydu, Schindler, and Vassalluzzo. |
| 10.7       | (23)       | ##              |   | Option Cancellation Agreement between Sal Perisano  and iParty Corp., dated December 8, 2006. |
| 10.8       | (23)       | ##              |   | Option Cancellation Agreement between Patrick  Farrell and iParty Corp., dated December 8, 2006. |
| 10.9       | (23)       | ##              |   | Option Cancellation Agreement between Dorice Dionne  and iParty Corp, dated December 8, 2006. |
| 10.10      | (14)       | ##              |   | Amended and Restated Employment Agreement between  iParty Corp. and Sal Perisano, dated May 14, 2004. |
| 10.11      | (14)       | ##              |   | Amended and Restated Employment Agreement between  iParty Corp. and Dorice Dionne, dated May 14, 2004. |
| 10.12      | (25)       | ##              |   | Amended and Restated Employment Agreement between  iParty Corp. and Patrick Farrell, dated January 8, 2007. |
| 10.13      | (16)       | ##              |   | Compensation Arrangements dated June 8, 2005 with  Messrs. DeWolf, Haydu, Schindler, and Vassalluzzo. |
| 10.14      | (18)       | ##              |   | Compensation Arrangements dated June 7, 2006 with  Messrs. DeWolf, Haydu, Schindler, and Vassalluzzo. |
| 10.15      | (16)       | ##              |   | Written Summary of One-Year Part-time Consulting  Arrangement with Joseph Vassalluzzo. |
| 10.16      | (18)       | ##              |   | Written Summary of Renewed One-Year Part-time  Consulting Arrangement with Joseph Vassalluzzo. |
| 10.17      | (11)       |            |   | Web Site License Agreement between iParty Corp. and  Taymark, Inc. |
| 10.18      | (7)        |            |   | Rights Agreement between iParty Corp. and  Continental Stock Transfer & Trust, as Rights Agent. |
| 10.19      | (20)       |            |   | Amendment to Rights Agreement between iParty Corp.  and Continental Stock Transfer & Trust, as Rights Agent, dated September  15, 2006. |
| 10.20      | (10)       |            |   | Loan and Security Agreement between iParty Retail  Stores Corp. and Paragon Capital LLC. |
| 10.21      | (9)        |            |   | First Amendment to Loan and Security Agreement by  and among iParty Corp., iParty Retail Stores Corp. and Wells Fargo Retail  Finance, LLC. |
| 10.22      | (12)       |            |   | Second Amendment to Loan and Security Agreement by  and among iParty Corp., iParty Retail Stores Corp. and Wells Fargo Retail  Finance II, LLC. |
| 10.23      | (13)       |            |   | Third Amendment to Loan and Security Agreement by  and among iParty Corp., iParty Retail Stores Corp. and Wells Fargo Retail  Finance II, LLC. |
| 10.24      | (15)       |            |   | Fourth Amendment to Loan and Security Agreement by  and among iParty Corp., iParty Retail Stores Corp. and Wells Fargo Retail  Finance II, LLC. |
| 10.25      | (19)       |            |   | Fifth Amendment to Loan and Security Agreement by  and among iParty Corp., iParty Retail Stores Corp. and Wells Fargo Retail  Finance II, LLC. |
| 10.26      | (22)       |            |   | Sixth Amendment to Loan and Security Agreement by  and among iParty Corp., iParty Retail Stores Corp. and Wells Fargo Retail  Finance II, LLC. |

 

----

 
| 10.27 | (24) |   |   | Amended and Restated Loan and Security Agreement by  and among iParty Corp., iParty Retail Stores Corp. and Wells Fargo Retail  Finance II, LLC dated December 21, 2006. |
|-------|------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.28 | (19) |   |   | Supply Agreement with Amscan Inc., dated August 7,  2006.                                                                                                                |
| 10.29 | (19) |   |   | Asset Purchase Agreement with Party City  Corporation, dated August 7, 2006.                                                                                             |
| 10.30 | (20) |   |   | Securities Purchase Agreement with Highbridge  International LLC, dated September 15, 2006.                                                                              |
| 10.31 | (26) |   |   | Amendment Agreement between iParty Corp. and  Highbridge International LLC, dated January 9, 2007.                                                                       |
| 10.32 | (20) |   |   | Senior Subordinated Note with Highbridge  International LLC, dated September 15, 2006.                                                                                   |
| 10.33 | (26) |   |   | Warrant to Purchase Common Stock with Highbridge  International LLC, issued September 15, 2006, as amended January 9, 2007.                                              |
| 10.34 | (20) |   |   | Registration Rights Agreement with Highbridge  International LLC, dated September 15, 2006.                                                                              |
| 10.35 | (21) |   |   | Subordinated Promissory Note of iParty Corp., dated  October 24, 2006.                                                                                                   |
| 10.36 | (10) |   |   | Trademark Security Agreement between iParty Retail  Stores Corp. and Paragon Capital LLC.                                                                                |
| 10.37 | (10) |   |   | Trademark Security Agreement between iParty Corp.  and Wells Fargo Retail Finance, LLC.                                                                                  |
| 10.38 | (5)  |   |   | Stock Purchase Agreement by and among iParty Corp.,  Ajmal Khan and Robert Lessin.                                                                                       |
| 10.39 | (6)  |   |   | Stock Purchase Agreement between iParty Corp. and  Patriot Capital Ltd.                                                                                                  |
| 10.40 | (3)  |   |   | Funding Agreement among iParty Corp., Robert Lessin  and Ajmal Khan.                                                                                                     |
| 21.1  | **   |   |   | Subsidiaries of Registrant.                                                                                                                                              |
| 23.1  | **   |   |   | Consent of Ernst & Young LLP, Independent  Registered Public Accounting Firm.                                                                                        |
| 31.1  | **   |   |   | Certification of Chief Executive Officer pursuant to  Section 302 of Sarbanes-Oxley Act.                                                                                 |
| 31.2  | **   |   |   | Certification of Chief Financial Officer pursuant to  Section 302 of Sarbanes-Oxley Act.                                                                                 |
| 32.1  | **   |   |   | Certification of Chief Executive Officer pursuant to  Section 906 of Sarbanes-Oxley Act.                                                                                 |
| 32.2  | **   |   |   | Certification of Chief Financial Officer pursuant to  Section 906 of Sarbanes-Oxley Act.                                                                                 |

----

**                      Filed herewith.

##                      Management contract or compensatory plan orarrangement.

(1)                      Filed as an exhibit to iParty’s RegistrationStatement on Form 10-SB, Registration No. 0-25507, as filed with the SEC onMarch 8, 1999 and incorporated herein by reference.

(2)                      Filed as an exhibit to Amendment No. 2 toiParty’s Registration Statement on Form 10-SB, Registration No. 0-25507, asfiled with the SEC on October 19, 1999 and incorporated herein by reference.

(3)                      Filed as an exhibit to Amendment No. 1 toiParty’s Registration Statement on Form 10-SB, Registration No. 0-25507, asfiled with the SEC on July 12, 1999 and incorporated herein by reference.

(4)                      Filed as an exhibit to iParty’s Annual Reporton Form 10-KSB for the year ended December 31, 1999, as filed with the SEC onApril 14, 2000 and incorporated herein by reference.

(5)                      Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on August 30, 2000 and incorporated herein byreference.

(6)                      Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on September 15, 2000 and incorporated hereinby reference.

(7)                      Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on November 16, 2001 and incorporated herein byreference.

(8)                      Included as an exhibit (Exhibit C) to Exhibit99.2 to iParty’s Current Report on Form 8-K, filed with the SEC on November 16,2001 and incorporated herein by reference.

(9)                      Filed as an exhibit to iParty’s Quarterly Reporton Form 10-QSB for the quarterly period ended June 29, 2002, as filed with theSEC on August 13, 2002 and incorporated herein by reference.

(10)                Filed as an exhibit to iParty’s Annual Reporton Form 10-KSB for the year ended December 28, 2002, filed with the SEC onMarch 28, 2003 and incorporated herein by reference.

(11)                Filed as an exhibit to iParty’s QuarterlyReport on Form 10-Q, filed with the SEC on August 12, 2003 and incorporatedherein by reference.

(12)                Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on January 29, 2004 and incorporated herein byreference.

(13)                Filed as an exhibit to iParty’s QuarterlyReport on Form 10-Q, filed with the SEC on May 9, 2005 and incorporated hereinby reference.

(14)                Filed as an exhibit to iParty’s QuarterlyReport on Form 10-Q, filed with the SEC on August 10, 2004 and incorporatedherein by reference.

(15)                Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on January 19, 2006 and incorporated herein byreference.

(16)                Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on March 30, 2006 and incorporated herein byreference.

(17)                Filed as an exhibit to iParty’s Annual Reporton Form 10-K, filed with the SEC on March 30, 2006 and incorporated herein byreference.

----

 

(18)                Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on June 9, 2006 and incorporated herein byreference.

(19)                Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on August 7, 2006 and incorporated herein byreference.

(20)                Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on September 18, 2006 and incorporated hereinby reference.

(21)                Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on October 25, 2006 and incorporated herein byreference.

(22)                Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on November 2, 2006 and incorporated herein byreference.

(23)                Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on December 12, 2006 and incorporated herein byreference.

(24)                Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on December 26, 2006 and incorporated herein byreference.

(25)                Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on January 8, 2007 and incorporated herein byreference.

(26)                Filed as an exhibit to iParty’s Current Reporton Form 8-K, filed with the SEC on January 10, 2007 and incorporated herein byreference.

----