The following discussion should be read in conjunction with our Consolidated Financial Statements and the related Notes included below.

Certain statements in this Annual Report, particularly statements contained in this Item 7, "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 Annual Report 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 Annual Report. These include, but are not limited to, those described above under Item 1A, "Risk Factors." Our forward-looking statements speak only as of the date of this document, and we do not intend to update these statements to reflect events or circumstances that occur after that date.

Overview

At the end of 2008, we operated 50 retail stores, including 45 in New England and five in Florida, and for the year we generated approximately $81.2 million in sales and had a net loss of approximately $0.4 million. Total sales for fiscal 2008 (a 52-week period) decreased 0.7% compared to fiscal 2007 (also a 52-week period). Comparable store sales in 2008 decreased 2.4% compared to sales in 2007. Comparable store sales are defined as sales from those stores open for at least one full year.

The year began with a 2.2% increase in comparable store sales in the first quarter of 2008. Total sales for the first quarter of 2008 increased 3.5% compared to the first quarter of 2007. This performance was mainly due to strong sales associated with the post-season football playoffs, especially the 2008 Super Bowl, between the New England Patriots and New York Giants football teams, and the occurrence of Easter in the first quarter of 2008. Despite the increase in sales, net loss for the quarter increased due to increased merchandise costs, increased markdowns, due in part to a weather related decline in sales in December 2007, and increased store operating expenses, as we opened two stores and closed two stores in January 2008. Our net loss for the quarter was $1.9 million, compared to a net loss of $1.5 million for the first quarter of 2007.

In the second quarter, comparable stores sales decreased 2.8% compared to the same period in 2007. Total sales decreased by 1.5%. During this quarter, our sales results suffered from the movement of Easter from the second to the first quarter of the year. Product margins stabilized in the second quarter. However, store operating costs continued to increase compared to 2007 levels, resulting in a lower profit for the quarter compared to the second quarter of 2007. Our net income was $184 thousand for the quarter compared to a net income of $512 thousand for the second quarter of 2007.

In the third quarter, our comparable stores sales decreased by 4.2% compared to the third quarter of 2007. Total sales decreased 2.6% compared to third quarter 2007. The decrease in sales for the third quarter was caused by an overall weakening of customer traffic, which we believe may have been caused in part by consumer uneasiness in response to the then soaring price levels for petroleum products. Our loss for the third quarter of 2008 was $1.3 million compared to a net loss in the third quarter of 2007 of $1.1 million.

The year ended with a 3.3% decrease in comparable store sales in the fourth quarter, which included a 1.1% increase in comparable store sales in the month of October. Total company sales decreased 1.3 % in the fourth quarter as compared to the fourth quarter of 2007. This decrease included a 3.9% increase in total company sales for the month of October. Overall, the fourth quarter was negatively affected by the deepening financial crisis in the U.S. and world economies. Falloff in consumer confidence led to a continued softening in store traffic and sales. The resultant sales shortfall was offset to a certain extent by a slightly better margin rate, and by lower expenses in certain categories, notably general and administrative expenses and interest, as compared to 2007. For the quarter, our net income was $2.6 million, compared to $2.7 million in the fourth quarter of 2007.

For the full fiscal year 2008, our comparable stores sales decrease was 2.4% which follows a 2.6% increase for 2007 and a 3.8% increase for 2006. Our net loss for 2008 was $0.4 million compared to net income of $0.6 million in 2007.

Overview Summary for 2008

In 2008, the US economy entered into a recessionary period combined with a systematic lack of liquidity. During the year, we saw the housing crisis deepen, the stock market decline dramatically, and unemployment rise steeply. All of these factors contributed to a difficult retail environment. Many economists anticipate a difficult 2009. Although we fared better than many of our competitors in 2008, we have taken significant steps in response to the economic crisis. We reviewed and revamped our headquarters and store expenses, which included reducing our headcount and decreasing our advertising and other administrative costs . We expect to save up to $3 million in expenses in 2009 from these actions. In addition, we do not expect to open any additional stores in 2009, unless we see an early recovery in the economy. For the remainder of 2009 we will focus on maintaining maximum liquidity in anticipation of continued lower sales levels associated with anticipated continued weakness in consumer confidence and overall spending levels.

Fiscal 2008 Compared to Fiscal 2007



Revenues



Our consolidated revenues for 2008 were $81,210,999, a decrease of $587,635, or
0.7% from 2007.  Revenues include the selling price of party goods sold, net of
returns and discounts, and are recognized at the point of sale.



                                            For the year ended
                                       Dec 27, 2008    Dec 29, 2007
Revenues                               $  81,210,999   $  81,798,634

Increase in revenues from prior year            -0.7 %           4.3 %

Sales for 2008 included a decrease of 2.4% in comparable store sales, and sales from two stores that we acquired in the first quarter of 2008, but were not included in the comparable stores sales calculation until the first quarter of 2009, the stores' one year anniversary.

Cost of goods sold and occupancy costs

Our cost of products sold and occupancy costs for 2008 was $46,885,215, or 57.7% of revenues, an increase of $419,774 and an increase of 0.9 percentage points, as a percentage of revenues, from 2007. Cost of products sold and occupancy costs consist of the cost of merchandise sold to customers and the occupancy costs for our stores.

                                              For the year ended
                                         Dec 27, 2008    Dec 29, 2007
Cost of goods sold and occupancy costs   $  46,885,215   $  46,465,441

Percentage of revenues                            57.7 %          56.8 %

As a percentage of revenues, the increase in cost of products sold was primarily attributable to increased occupancy costs due to scheduled rent escalations and other occupancy related costs.

Marketing and sales expense

Our consolidated marketing and sales expense for 2008 was $26,793,885 or 33.0% of revenues, an increase of $612,381 and an increase of 1.0 percentage point, as a percentage of revenues, from 2007. Marketing and sales expenses consist 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.

                              For the year ended
                         Dec 27, 2008    Dec 29, 2007
Marketing and sales      $  26,793,885   $  26,181,504

Percentage of revenues            33.0 %          32.0 %

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

General and administrative expense

Our consolidated general and administrative ("G&A") expenses for 2008 were $7,205,067, or 8.9% of revenues, a decrease of $348,802, or 0.3 percentage point as a percentage of revenues, from 2007. G&A expenses consist of payroll and related expenses for executive, merchandising, finance and administrative personnel, as well as information technology, professional fees and other general corporate expenses.

                                   For the year ended
                              Dec 27, 2008     Dec 29, 2007
General and administrative   $    7,205,067   $    7,553,869

Percentage of revenues                  8.9 %            9.2 %

As a percentage of revenues, the decrease in general and administrative expense was primarily attributable to the reduction in executive payroll expense and incentive based compensation.

Operating income

Our operating income for 2008 was $326,832, or 0.4% of revenues, compared to an operating income of $1,597,820, or 2.0% of revenues in 2007.

Interest expense

Our interest expense in 2008 was $720,891, a decrease of $136,721 from 2007. The decrease during 2008 was due primarily to interest expense related to the decrease in prime rate during the year. The effective interest rate on our borrowings under our line of credit decreased to 4.7% during 2008 compared to 8.2% in 2007, which

decreased interest expense by approximately $126,664. The interest rate was based on the bank's base rate. Our average revolving loan balance was approximately $3,656,861 during 2008 compared to $2,071,953 in 2007, which increased interest expense by approximately $129,983. Interest expense related to notes payable in 2008 was $338,630, compared to interest expense in 2007 of $463,862. These decreases were due to lower interest rates on the Highbridge note and the decreasing principal on the Amscan note. Our average notes payable balance was approximately $3,689,225 during 2008, compared to $4,079,132 in 2007, which decreased interest by approximately $63,891. The effective interest rate on our notes payable decreased to 14.7% in 2008, compared to 16.3% in 2007, which decreased interest expense by $61,341. Additionally, interest expense from capital leases and other sources in 2008 decreased by $14,809 from 2007. Interest expense in 2008 was also slightly offset by interest income of $4,609.

Income taxes

In 2008, our provision for income taxes was $50,605, which included $16,485 for federal alternative minimum taxes and $34,120 for state income taxes. Our provision for state taxes exceeds the average statutory rate net of federal tax benefit because of permanent and temporary differences, for which we provide a valuation allowance, between taxable and book income, including amounts associated with stock based compensation expense, depreciation, and amortization of intangibles and common stock warrants. We were able to utilize approximately $1,012,902 of net operating loss carryforwards for federal income tax purposes in 2008, which were fully reserved for in the prior year due to the uncertainty of future taxable income.

In 2007, our provision for income taxes was $146,323, which included $19,215 for federal alternative minimum taxes and $127,108 for state income taxes. Our provision for state taxes exceeds the average statutory rate net of federal tax benefit because of permanent and temporary differences, for which we provided a valuation allowance, between taxable and book income, including amounts associated with stock based compensation expense, depreciation, and note payable amortization. We were able to utilize approximately $1,436,844 of net operating loss carryforwards for federal income tax purposes in 2007, which were fully reserved for in the prior year due to the uncertainty of future taxable income.

At the end of 2008, we had estimated net operating loss carryforwards of approximately $20.3 million, which begin to expire in 2019. In accordance with
Section 382 of the Internal Revenue Code, the use of these carryforwards may be subject to annual limitations based upon certain ownership changes of our stock that may have occurred or that may occur.

Net income (loss)

Our net loss in 2008 was $440,055 or $0.02 net loss per basic and diluted share, compared to net income of $611,691, or $0.02 net income per basic and diluted share, in 2007.

Fiscal 2007 Compared to Fiscal 2006



Revenues



Our consolidated revenues for 2007 were $81,798,634, an increase of $3,340,305,
or 4.3% from 2006.  Revenues include the selling price of party goods sold, net
of returns and discounts, and are recognized at the point of sale.



                                            For the year ended
                                       Dec 29, 2007    Dec 30, 2006
Revenues                               $  81,798,634   $  78,458,329

Increase in revenues from prior year             4.3 %           8.2 %

Sales for 2007 included an increase of 2.6% in comparable store sales, and sales from one store that we acquired in the third quarter of 2006, but was not included in the comparable stores sales calculation until the third quarter of 2007, the store's one year anniversary.

Cost of goods sold and occupancy costs

Our cost of products sold and occupancy costs for 2007 was $46,465,441, or 56.8% of revenues, an increase of $1,522,899 and a decrease of 0.5 percentage points, as a percentage of revenues, from 2006. Cost of products sold and occupancy costs consist of the cost of merchandise sold to customers and the occupancy costs for our stores.

                                              For the year ended
                                         Dec 29, 2007    Dec 30, 2006
Cost of goods sold and occupancy costs   $  46,465,441   $  44,942,542

Percentage of revenues                            56.8 %          57.3 %

As a percentage of revenues, the decrease in cost of products sold was primarily attributable to improved leveraging of occupancy costs and increased sales in our comparable stores.

Marketing and sales expense

Our consolidated marketing and sales expense for 2007 was $26,181,504 or 32.0% of revenues, an increase of $555,957 and a decrease of 0.7 percentage points, as a percentage of revenues, from 2006. Marketing and sales expenses consist 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.

                              For the year ended
                         Dec 29, 2007    Dec 30, 2006
Marketing and sales      $  26,181,504   $  25,625,547

Percentage of revenues            32.0 %          32.7 %

As a percentage of revenues, the decrease in marketing expenses was primarily due to improved leveraging of advertising and store operating costs from increased sales in our comparable stores.

General and administrative expense

Our consolidated general and administrative ("G&A") expenses for 2007 were $7,553,869, or 9.2% of revenues, an increase of $817,672, or 0.6 percentage points as a percentage of revenues, from 2006. G&A expenses consist of payroll and related expenses for executive, merchandising, finance and administrative personnel, as well as information technology, professional fees and other general corporate expenses.

                                   For the year ended
                              Dec 29, 2007     Dec 30, 2006
General and administrative   $    7,553,869   $    6,736,197

Percentage of revenues                  9.2 %            8.6 %

The increase in general and administrative expenses was primarily due to increases in executive payroll and recruitment costs, and to increases in professional fees associated with our compliance activities related to the Sarbanes-Oxley Act.

Operating income

Our operating income for 2007 was $1,597,820, or 2.0% of revenues, compared to an operating income of $1,154,043, or 1.5% of revenues in 2006.

Interest expense

Our interest expense in 2007 was $857,612, an increase of $85,278 from 2006. The increase during 2007 was due primarily to interest expense and warrant expense related to notes payable. The effective interest rate on our borrowings under our line of credit decreased to 8.2% during 2007 compared to 8.6% in 2006, which decreased interest expense by approximately $7,201. The interest rate was based on the bank's base rate. Our average revolving loan balance was approximately $2,071,953 during 2007 compared to $5,385,117 in 2006, which decreased interest expense by approximately $318,988. Interest expense and warrant expense related to notes payable in 2007 were $463,862 and $204,550, respectively, compared to interest and warrant expense in 2006 of $129,498 and $68,184, respectively. These increases were due to the Amscan, Party City and Highbridge notes being outstanding the full fiscal year 2007, while being outstanding only part of the fiscal year 2006. Our average notes payable balance was approximately $4,079,132 during 2007, compared to $1,367,544 in 2006, which increased interest by approximately $391,967. The effective interest rate on our notes payable increased to 16.3% in 2007, compared to 14.5% in 2006, which increased interest expense by $78,763. Additionally, interest expense from capital leases and other sources in 2007 decreased by $59,263 from 2006. Interest expense in 2007 was also slightly offset by interest income of $17,806.

Income taxes

In 2007, our provision for income taxes was $146,323, which included $19,215 for federal alternative minimum taxes and $127,108 for state income taxes. Our provision for state taxes exceeds the average statutory rate net of federal tax benefit because of permanent and temporary differences, for which we have provided a valuation allowance, between taxable and book income, including amounts associated with stock based compensation expense, depreciation, and note payable amortization. We were able to utilize approximately $1,436,844 of net operating loss carryforwards for federal income tax purposes in 2007, which were fully reserved for in the prior year due to the uncertainty of future taxable income.

In 2006, our provision for income taxes was $17,279, which included $5,717 for federal alternative minimum taxes and $11,562 for state income taxes. Our provision for state taxes was less than the average statutory rate net of federal tax benefit because we were able to use state tax loss carryforwards to reduce state taxes payable. Those state tax loss carryforwards were fully exhausted in 2006 and were therefore not available to reduce state taxes payable in 2007. We were able to utilize approximately $621,692 of net operating loss carryforwards for federal income tax purposes in 2006, which were fully reserved for in the prior year due to the uncertainty of future taxable income.

At the end of 2007, we had estimated net operating loss carryforwards of approximately $21.2 million, which begin to expire in 2019. In accordance with
Section 382 of the Internal Revenue Code, the use of these carryforwards may be subject to annual limitations based upon certain ownership changes of our stock that may have occurred or that may occur.

Net income

Our net income in 2007 was $611,691 or $0.02 per basic and diluted share, compared to net income of $374,647, or $0.01 per basic and diluted share, in 2006.

Critical Accounting Policies

Our financial statements are based on the application of significant accounting policies, many of which require our management to make significant estimates and assumptions (see Note 2 to our consolidated financial statements). We believe the following accounting policies to be those most important to the portrayal of our financial condition and operating results and those that require the most subjective judgment. If actual results differ

significantly from management's estimates and projections, there could be a material effect on our financial statements.

Inventory and Related Allowance for Obsolete and Excess Inventory

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

During each interim reporting period, we estimate the impact on cost of products sold associated with inventory shortage. The actual inventory shortage is determined upon reconciliation of the annual physical inventory, which occurs shortly before and after our year end, and an adjustment to cost of products sold is recorded at the end of the fourth quarter to recognize the difference between the estimated and actual inventory shortage for the full year. The adjustment in the fourth quarter of 2008 included an estimated reduction of $261,915 to the cost of products sold during the previous three quarters. The adjustment in the fourth quarter of 2007 included an estimated reduction of $123,249 to the cost of products sold during the previous three quarters. The adjustment in the fourth quarter of 2006 included an estimated reduction of $251,806 to the cost of products sold during the previous three quarters.

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

Revenue Recognition

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

Property and Equipment

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

Intangible Assets

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

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

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

Non-compete agreements are amortized based on the pattern of their expected cash flow benefits. Occupancy valuations are amortized over the terms of the related leases.

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we perform a review of each store for impairment indicators whenever events and changes in circumstances suggest that the carrying amounts may not be recoverable from estimated future store cash flows. Our review considers store operating results, future sales growth and cash flows. The conclusion regarding impairment may differ from current estimates if underlying assumptions or business strategies change. On November 4, 2006, we closed our store in East Providence, Rhode Island due to underperforming sales. As a result of this closing, we recorded a charge of approximately $140,000 related to remaining lease payments and other closing costs during the year ended December 30, 2006. The term of the lease expired on August 31, 2007. At December 29, 2007, the accrual had been reduced to zero. We closed two stores in early January 2008, at the end of their lease terms. No impairment charges were required for these stores, as the assets related to them have been fully amortized, except for immaterial amounts, and no liability existed for future lease costs. We are not aware of any impairment indicators for any of our remaining stores at December 27, 2008.

Income Taxes

Historically, we have not recognized an income tax benefit for our losses. Accordingly, we record a valuation allowance against our deferred tax assets . . .