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

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

Overview

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

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

The following table shows the number of stores in operation (not including temporary stores):

                                           For the nine months ended
                                     Sep 27, 2008            Sep 29, 2007
           Beginning of period                  50                      50
           Openings / Acquisitions               2                       -
           Closings                             (2 )                     -
           End of period                        50                      50

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

In addition to the stores discussed in the paragraphs above, we opened two temporary Halloween stores in the greater Boston area in September of 2008. These stores feature a strategically selected assortment of Halloween related merchandise and are expected to remain open only through early November.

Trends and Quarterly Summary

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

For the third quarter of 2008, our consolidated revenues were $17.7 million, compared to $18.2 million for the third quarter in 2007. The decrease in third quarter revenues from the year-ago period included a 4.2% decrease in comparable store sales from stores open more than one year. The decrease in consolidated revenue was primarily due to decreased customer traffic during the quarter partly offset by an improvement in the average transaction size. Consolidated gross profit margin was 40.1% for the third quarter of 2008 compared to a margin of 41.3% for the same period in 2007. The decline in gross margins was substantially due to increases in occupancy costs as well as the decreased leveraging of those costs related to lower sales. The consolidated net loss for the third quarter of 2008 was $1,322,630, or $0.06 per share, compared to a consolidated net loss of $1,133,658, or $0.05 per share, for the third quarter in 2007.

Acquisition and Growth Strategy

We operate in a largely un-branded market that has many small businesses. As a result, we have considered, and may continue to consider, growing our business through acquisitions of other entities, expanding or relocating existing stores, and opening new stores, including temporary stores. Any determination to make an acquisition, or open or expand a store will be based upon a variety of factors, including, without limitation, the purchase price or required investment , other financial terms of the transaction, and the extent to which any such acquisition, expansion, relocation or store opening would enhance our operating results and financial position.

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

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

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

Results of Operations

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

The third quarter of fiscal year 2008 had 13 weeks and ended on September 27, 2008. The third quarter of fiscal year 2007 had 13 weeks and ended on September 29, 2007.

Three Months Ended September 27, 2008 Compared to Three Months Ended September 29, 2007

Revenues

Revenues include the selling price of party goods sold, net of returns and
discounts, and are recognized at the point of sale. Our consolidated revenues
for the third quarter of fiscal 2008 were $17,742,315, a decrease of $466,445,
or 2.6% from the third quarter of the prior fiscal year.

                                               For the three months ended
                                             Sep 27, 2008      Sep 29, 2007
          Revenues                          $   17,742,315     $  18,208,760

          Increase (decrease) in revenues             -2.6 %             5.6 %

Sales for the third quarter of fiscal 2008 included sales from 48 comparable stores (defined as stores open for at least one full year), two stores that were acquired in January 2008 and two temporary Halloween stores opened in mid-September 2008. Comparable store sales for the quarter decreased by 4.2%.

Cost of products sold and occupancy costs

Cost of products sold and occupancy costs consist of the cost of merchandise sold to customers and the occupancy costs for our stores. Our cost of products sold and occupancy costs for the third quarter of fiscal 2008 were $10,629,144, or 59.9% of revenues, a decrease of $50,569 and an increase of 1.2 percentage points, as a percentage of revenues, from the third quarter of the prior fiscal year.

                                                    For the three months ended
                                                  Sep 27, 2008      Sep 29, 2007
     Cost of products sold and occupancy costs   $   10,629,144     $  10,679,713

     Percentage of revenues                                59.9 %            58.7 %

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

Marketing and sales expense

Marketing and sales expense consists primarily of advertising and promotional expenditures, all store payroll and related expenses for personnel engaged in marketing and selling activities and other non-payroll expenses associated with operating our stores. Our consolidated marketing and sales expense for the third quarter of fiscal 2008 was $6,677,703, or 37.6% of revenues, an increase of $57,279 or an increase of 1.2 percentage points, as a percentage of revenues, from the third quarter of the prior fiscal year.

                                          For the three months ended
                                       Sep 27, 2008        Sep 29, 2007
             Marketing and sales      $    6,677,703      $    6,620,424

             Percentage of revenues             37.6 %              36.4 %

As a percentage of revenues, the increase in marketing and sales expense was primarily attributable to decreased leveraging of store payroll and fringe benefit costs related to lower sales in the third quarter of 2008 compared to the third quarter of the prior year.

General and administrative expense

General and administrative ("G&A") expense consists of payroll and related expenses for executive, merchandising, finance and administrative personnel, as well as information technology, professional fees and other general corporate expenses. Our consolidated G&A expense for the third quarter of fiscal 2008 was $1,580,277, or 8.9% of revenues, a decrease of $248,588 or a decrease of 1.1 percentage points, as a percentage of revenues, from the third quarter of the prior fiscal year.

                                            For the three months ended
                                         Sep 27, 2008        Sep 29, 2007
           General and administrative   $    1,580,277      $    1,828,865

           Percentage of revenues                  8.9 %              10.0 %

As a percentage of revenues, the decrease in general and administrative expense from the third quarter of the prior fiscal year was primarily attributable to lower incentive based compensation.

Operating loss

Our operating loss for the third quarter of fiscal 2008 was $1,144,809, or 6.5% of revenues, compared to an operating loss of $920,242, or 5.1% of revenues for the third quarter of the prior fiscal year.

Interest expense

Our interest expense in the third quarter of fiscal 2008 was $178,061, a decrease of $36,553 from the third quarter of the prior fiscal year. The decrease in the third quarter of fiscal 2008 was primarily due to a lower effective rate on our Highbridge Note and lower interest expense on our Amscan Note due to amortization of that indebtedness.

Income taxes

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

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

Net loss

Our net loss in the third quarter of fiscal 2008 was $1,322,630, or $0.06 per basic and diluted share, compared to a net loss of $1,133,658, or $0.05 per basic and diluted share, in the third quarter of the prior fiscal year. The increase in net loss was mainly attributable to the decrease in sales and increase in occupancy costs discussed above.

Nine Months Ended September 27, 2008 Compared to Nine Months Ended September 29, 2007

Revenues

Revenues include the selling price of party goods sold, net of returns and
discounts, and are recognized at the point of sale. Our consolidated revenues
for the first nine months of fiscal 2008 were $53,990,071, a decrease of
$229,767 or 0.4% from the first nine months of the prior fiscal year.

                                               For the nine months ended
                                            Sep 27, 2008      Sep 29, 2007
          Revenues                          $  53,990,071     $  54,219,838

          Increase (decrease) in revenues            -0.4 %             9.8 %

Sales for the first nine months of fiscal 2008 included sales from 48 comparable stores (defined as stores open for at least one full year) two stores that were acquired in January 2008 and two temporary Halloween stores opened in mid-September 2008. Comparable store sales for the first nine months decreased by 1.9%.

Cost of products sold and occupancy costs

Cost of products sold and occupancy costs consist of the cost of merchandise sold to customers and the occupancy costs for our stores. Our cost of products sold and occupancy costs for the first nine months of fiscal 2008 were $32,225,078, or 59.7% of revenues, an increase of $537,717 or an increase of 1.3 percentage points, as a percentage of revenues, from the first nine months of the prior fiscal year.

                                                    For the nine months ended
                                                 Sep 27, 2008      Sep 29, 2007
     Cost of products sold and occupancy costs   $  32,225,078     $  31,687,361

     Percentage of revenues                               59.7 %            58.4 %

As a percentage of revenues, the increase in cost of products sold and occupancy costs was primarily attributable to clearance markdowns of seasonal product in the first quarter of 2008, taken to clear out excess holiday inventories, and to increases in rent and other store occupancy costs. The excess holiday inventories were caused by sluggish sales in December 2007, due in part to unusually inclement weather in New England.

Marketing and sales expense

Marketing and sales expense consists primarily of advertising and promotional expenditures, all store payroll and related expenses for personnel engaged in marketing and selling activities and other non-payroll expenses associated with operating our stores. Our consolidated marketing and sales expense for the first nine months of fiscal 2008 was $18,703,915, or 34.6% of revenues, an increase of $417,719 or an increase of 0.9 percentage points, as a percentage of revenues, from the first nine months of the prior fiscal year.

                                           For the nine months ended
                                        Sep 27, 2008      Sep 29, 2007
               Marketing and sales      $  18,703,915     $  18,286,196

               Percentage of revenues            34.6 %            33.7 %

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

General and administrative expense

General and administrative ("G&A") expense consists of payroll and related expenses for executive, merchandising, finance and administrative personnel, as well as information technology, professional fees and other general corporate expenses. Our consolidated G&A expense for the first nine months of fiscal 2008 was $5,490,076, or 10.2% of revenues, a decrease of $210,843 or a decrease of 0.3 percentage points, as a percentage of revenues, from the first nine months of the prior fiscal year.

                                             For the nine months ended
                                          Sep 27, 2008       Sep 29, 2007
            General and administrative   $    5,490,076     $    5,700,919

            Percentage of revenues                 10.2 %             10.5 %

As a percentage of revenues, the decrease in general and administrative expense from the first nine months of the prior fiscal year was primarily attributable to the reduction in recruitment fees and incentive based compensation.

Operating loss

Our operating loss for the first nine months of fiscal 2008 was $2,428,998, or 4.5% of revenues, compared to an operating loss of $1,454,638, or 2.7% of revenues for the first nine months of the prior fiscal year.

Interest expense

Our interest expense in the first nine months of fiscal 2008 was $576,714, a decrease of $97,703 from the first nine months of the prior fiscal year. The decrease in the first nine months of fiscal 2008 was primarily due to a lower effective rate on our Highbridge Note and lower interest expense on our Amscan Note, due to amortization of that indebtedness.

Income taxes

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

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

Net Loss

Our net loss in the first nine months of fiscal 2008 was $3,003,552, or $0.13 per basic and diluted share, compared to a net loss of $2,124,376, or $0.09 per basic and diluted share, in the first nine months of the prior fiscal year. The increase in net loss was mainly attributable to the decrease in sales and increase in occupancy costs and store opening costs discussed above.

Liquidity and Capital Resources

Our primary uses of cash are:

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

· occupancy expenses of our stores;

· employee salaries; and

· new store openings, including acquisitions.

Our primary sources of cash are:

· cash from operating activities; and

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

Our prospective cash flows are subject to certain trends, events and uncertainties, including demands for capital to support growth, improve our infrastructure, respond to economic conditions, and meet contractual commitments. We expect our capital expenditures for the remainder of 2008 to include amounts for continued improvements of existing stores and for relocating an existing store.

Based on our current operating plan, we believe that anticipated revenues from operations and borrowings available under our existing line of credit will be sufficient to fund our operations, working capital requirements and capital expenditures through the next twelve months. In the event that our operating plan changes due to changes in our strategic plans, lower-than-expected revenues, unanticipated expenses, increased competition, unfavorable economic conditions or other unforeseen circumstances, including the continued turmoil and tightening of the credit markets, and further weakening of consumer confidence and spending, our liquidity may be negatively impacted. If so, we could be required to adjust our expenditures for the remainder of 2008 and for 2009 to conserve working capital or raise additional capital, possibly including debt or equity financing, to fund operations and our growth strategy and to refinance our outstanding debt. There can be no assurance, that, should we seek or require additional financing, such financing will be available, if at all, on terms and conditions acceptable to us, which could adversely affect our results of operations, liquidity and growth strategy.

In September 2009, the Highbridge Note in the principal amount of $2,500,000, as defined below, is due and payable in full. In January 2010, our line of credit with Wells Fargo, as discussed more fully below, expires by its terms. We expect to pay off the Highbridge Note from the availability under our existing line of credit and available cash flow. We are in preliminary discussions with Wells Fargo to extend our line of credit beyond January 2010. While we believe we have a positive and long term relationship with Wells Fargo, given the current state of the credit markets and the weak economy, we may not be able to extend our existing line of credit on terms more favorable or substantially the same as the existing line, making it more expensive to borrow money. If we are unable to use our bank line of credit or available cash to pay off the Highbridge note when due, or if there is a material increase in the cost to do so, we would need to secure alternative financing, which may not be available on commercially reasonable terms or at all, and could result in a materially adverse effect on our results of operations and financial position.

Our operating activities provided $411,870 in the first nine months of fiscal 2008 compared to use of $760,577 in the first nine months of the prior fiscal year, an increase of $1,172,447. The increase in cash provided by operating activities was primarily due to lower inventory purchases during the first nine months of 2008 as compared to the first nine months of 2007.

We used $1,993,878 in investing activities in the first nine months of fiscal 2008 compared to $650,536 in the first nine months of the prior fiscal year, an increase of $1,343,342. The cash invested in the first nine months of fiscal 2008 was primarily due to the acquisition in January 2008 of two retail stores located in Rhode Island and the related non-compete agreement (see discussion below). The cash invested in the first nine months of fiscal 2007 was primarily due to fixture and equipment improvements in our existing retail stores, plus the implementation of a new human resource information and payroll system.

Our financing activities provided $1,573,039 in the first nine months of fiscal 2008 compared to $716,324 in the first nine months of the prior fiscal year, an increase of $856,715. The increase was primarily related to increased borrowings on our line of credit and lower principal payments on capital lease obligations during the first nine months of 2008 as compared to the first nine months of 2007.

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

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

Our inventory consists of party supplies which are valued at the lower of weighted-average cost or market and are reduced by an allowance for obsolete and excess inventory and are further reduced or increased by other adjustments, including vendor rebates and discounts and freight costs. Our line of credit . . .