The following discussion should be read in conjunction with the unaudited Consolidated Financial Statements and related Notes included in Item 1 of this Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements and related Notes and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", contained in our Annual Report on Form 10-K for the fiscal year ended December 27, 2008.

Certain statements in this Quarterly Report on Form 10-Q, particularly statements contained in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "anticipate", "believe", "estimate", "expect", "plan", "intend" and other similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. Forward-looking statements included in this Quarterly Report on Form 10-Q or hereafter included in other publicly available documents filed with the Securities and Exchange Commission ("SEC"), reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties, and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward looking statements. Such future results are based upon our best estimates based upon current conditions and the most recent results of operations. Various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this Quarterly Report on Form 10-Q. These include, but are not limited to, those described below under the heading "Factors That May Affect Future Results" and in Part II, Item 1A, "Risk Factors" as well as under Item 1A, "Risk Factors" of our most recently filed Annual Report on Form 10-K for the year ended December 27, 2008 and our other periodic reports filed with the SEC. We assume no obligation to update these forward looking statements contained in this report, whether as a result of new information, future events or otherwise.

Overview

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 20,500 square feet and average approximately 10,300 square feet in size. We lease our properties, typically for 10 years and usually with options from our landlords to renew our leases for an additional 5 or 10 years.

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

                                           For the nine months ended
                                     Sep 26, 2009            Sep 27, 2008
           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 2008. Those stores were closed in early November 2008. In September 2009, we opened four temporary Halloween stores. Three of the stores were in the greater Boston area and one of the stores was in New Hampshire. These stores feature a strategically selected assortment of Halloween related merchandise and were closed in early November 2009.

Trends and Quarterly Summary

Third Quarter Summary

Our business has a seasonal pattern. In the past three years, we have realized approximately 34.7% of our annual revenues in our fourth quarter, which includes Halloween and Christmas, and approximately 24.5% of our revenues in the second quarter, which includes school graduations and usually includes Easter. Also, during the past three years, we have had net income in our second and fourth quarters and generated losses in our first and third quarters.

For the third quarter of 2009, our consolidated revenues were $16.4 million, compared to $17.7 million for the third quarter of 2008. The decrease in third quarter revenues from the year-ago period included a 7.7% decrease in comparable store sales. The decrease in consolidated revenue was primarily due to a decrease in customer traffic and an increase in promotional markdowns, both of which are related to the effects of the recession in the U.S. and world economies. Consolidated gross profit margin was 37.3% for the third quarter of 2009 compared to a margin of 40.1% for the same period in 2008. The decline in gross profit margin 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 2009 was $1,396,982 or $0.06 per share, compared to a consolidated net loss of $1,322,630, or $0.06 per share, for the third quarter in 2008, an increase of $74,352. We have mitigated the decline in revenues year over year primarily through the cost cutting initiatives we undertook at the end of 2008, resulting in a flat net loss in the third quarter of 2009 compared to the third quarter of 2008.

October Summary

On November 4, 2009, we reported sales results for the calendar month and year, and for the fiscal month and year, ended October, 2009, to provide information regarding our Halloween season which is our most important selling season. For the thirty-one day calendar month of October 2009, sales at comparable stores increased 0.1% compared to the same period in 2008. Consolidated revenues for the calendar month were approximately $18.42 million, a 5.4% increase compared to $17.48 million for the same period in 2008. For the five week fiscal month of October, which ended on October 31st, sales at comparable stores decreased 1.8% compared to fiscal October 2008. Consolidated revenues increased by 3.3% for the October fiscal month compared to the same fiscal month period in 2008. The increase in consolidated revenues for the calendar and fiscal months of October 2009 included the impact of four temporary Halloween stores opened in mid-September 2009, compared to two such stores opened in mid-September 2008.

For the calendar year 2009 through October, sales at comparable stores decreased 5.4% compared to the same period in 2008. Consolidated revenues were approximately $68.31 million, a 4.1% decrease compared to $71.20 million for the same period in 2008. For the forty-four week period through fiscal October 2009, which ended on October 31st, sales at comparable stores decreased 5.3% compared to the same period in 2008. Consolidated revenues decreased by 3.9% for the fiscal year-to-date period through October compared to the same period in 2008. The decrease in consolidated revenues for the calendar and fiscal year-to-date periods through October included the impact of four temporary Halloween stores opened in mid-September 2009, compared to two such stores opened in mid-September 2008.

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 or through opening new iParty stores. Any determination to make an acquisition or open a new store will be based upon a variety of factors, including, without limitation, the purchase price and other financial terms of the acquisition , the business prospects and geographical location of the potential acquisition or store opening, and the extent to which any acquisition or store opening would enhance our prospects. Given the current state of the economy and our focus on maintaining liquidity, we do not expect to acquire or open any new stores in the remainder of 2009, except for the temporary Halloween stores, and we are currently reviewing our strategy with respect to 2010. However, in view of the operating results from the four temporary Halloween stores opened in 2009, we currently expect to open additional temporary Halloween stores in 2010.

On January 2, 2008, we completed the purchase of two stores in Rhode Island. The aggregate consideration paid was $1,350,000 plus approximately $195,000 for associated inventory. Funding for the purchase was obtained from our line of credit with Wells Fargo Retail Finance, LLC ("Wells Fargo"). The stores were converted into iParty stores immediately following the closing of the transaction. The consideration paid for the assets acquired in the transaction was allocated based upon an independent appraisal to the following, based on their fair values on the date of purchase:

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

Results of Operations

Fiscal year 2009 has 52 weeks and ends on December 26, 2009. Fiscal year 2008 had 52 weeks and ended on December 27, 2008.

The third quarter of fiscal year 2009 had 13 weeks and ended on September 26, 2009. The third quarter of fiscal year 2008 had 13 weeks and ended on September 27, 2008.

Expense Management Actions for Fiscal 2009

In 2008, the US economy entered into a recessionary period combined with a systematic lack of financial liquidity. During that year, the housing crisis deepened, the stock market declined dramatically, and unemployment rose steeply. All of these factors contributed to a difficult retail environment. Many economists anticipated a difficult 2009. Although we fared better than many of our competitors in 2008, we have taken significant steps in response to the economic crisis. We reviewed and revamped our headquarters and store expenses, which included reducing our headcount and decreasing our advertising and other administrative costs. We expect to save up to $3 million through reduced operating expenses in 2009 from these actions. We continue to monitor sales performance, customer buying patterns and consumer confidence, and we are prepared to make further adjustments to our cost structure as needed to manage our way through this recession.

Three Months Ended September 26, 2009 Compared to Three Months Ended September 27, 2008

Revenues

Revenues include the selling price of party goods sold, net of returns and
discounts, and are recognized at the point of sale. Our consolidated revenues
for the third quarter of fiscal 2009 were $16,404,046, a decrease of $1,338,269,
or 7.5% from the third quarter of the prior fiscal year. The decline was
primarily due to the decreased level of consumer demand and increased level of
promotional markdowns, both of which are related to the U.S. recession.

                                         For the three months ended
                                       Sep 26, 2009      Sep 27, 2008
               Revenues               $   16,404,046     $  17,742,315

               Decrease in revenues             -7.5 %            -2.6 %

Comparable store sales for the quarter decreased by 7.7%.

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 2009 were $10,282,326, or 62.7% of revenues, a decrease of $346,818 and an increase of 2.8 percentage points, as a percentage of revenues, from the third quarter of the prior fiscal year.

                                                    For the three months ended
                                                  Sep 26, 2009      Sep 27, 2008
     Cost of products sold and occupancy costs   $   10,282,326     $  10,629,144

     Percentage of revenues                                62.7 %            59.9 %

As a percentage of revenues, the increase in cost of products sold and occupancy costs was primarily attributable to increased occupancy costs and the decreased leveraging of these occupancy costs related to lower sales in the third quarter of 2009 compared to the third quarter of 2008.

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 2009 was $5,810,227, or 35.4% of revenues, a decrease of $867,476 or 2.2 percentage points, as a percentage of revenues, from the third quarter of the prior fiscal year.

                                          For the three months ended
                                       Sep 26, 2009        Sep 27, 2008
             Marketing and sales      $    5,810,227      $    6,677,703

             Percentage of revenues             35.4 %              37.6 %

As a percentage of revenues, the decrease in marketing and sales expense was primarily the result of our cost reduction actions related to store payroll and advertising expenses, as described above.

General and administrative expense

General and administrative ("G&A") expense consists of payroll and related expenses for executive, merchandising, finance and administrative personnel, as well as information technology, professional fees and other general corporate expenses. Our consolidated G&A expense for the third quarter of fiscal 2009 was $1,582,751, or 9.6% of revenues, an increase of $2,474 or 0.7 percentage points, as a percentage of revenues, from the third quarter of the prior fiscal year.

                                            For the three months ended
                                         Sep 26, 2009        Sep 27, 2008
           General and administrative   $    1,582,751      $    1,580,277

           Percentage of revenues                  9.6 %               8.9 %

The flat level of general and administrative expense in the third quarter of 2009 compared to the third quarter of the prior fiscal year was the result of offsetting factors. Expense savings in 2009 related to reduced payroll and other costs were offset by the absence in the third quarter of 2009 of an expense reversal included in the third quarter of 2008 related to the cancellation of 2008 management bonuses.

The increase in general and administrative expense as a percentage of revenues from the third quarter of the prior fiscal year was due to the decreased leveraging of these costs related to lower sales in the third quarter of 2009 compared to the third quarter of 2008.

Operating income

Our operating loss for the third quarter of fiscal 2009 was $1,271,258, or 7.7% of revenues, compared to an operating loss of $1,144,809, or 6.5% of revenues for the third quarter of the prior fiscal year.

Interest expense

Our interest expense in the third quarter of fiscal 2009 was $125,769, a decrease of $52,292 from the third quarter of the prior fiscal year. The decrease in the third quarter of fiscal 2009 was primarily due to a lower effective rate on our Highbridge Note which was paid in full on September 15, 2009 and lower interest expense on our Amscan Note due to principal amortization of that indebtedness, which was paid in full on September 24, 2009.

Income taxes

We have not provided for income taxes for the third quarter of fiscal 2009 or fiscal 2008 due to losses in the nine month period ended September 26, 2009 and for fiscal 2008 and the availability of net operating loss (NOL) carryforwards to eliminate federal taxable income on an annual basis. No benefit has been recognized with respect to current losses or NOL carryforwards due to the uncertainty of future taxable income.

At the end of fiscal 2008, we had estimated federal net operating loss carryforwards of approximately $20.3 million, which begin to expire in 2019. In accordance with Section 382 of the Internal Revenue Code of 1986, as amended, the use of these carryforwards will be subject to annual limitations based upon certain ownership changes of our stock that have occurred or that may occur.

Net loss

Our net loss in the third quarter of fiscal 2009 was $1,396,982, or $0.06 per basic and diluted share, compared to a net loss of $1,322,630, or $0.06 per basic and diluted share, in the third quarter of the prior fiscal year.

Nine Months Ended September 26, 2009 Compared to Nine Months Ended September 27, 2008

Revenues

Revenues include the selling price of party goods sold, net of returns and
discounts, and are recognized at the point of sale. Our consolidated revenues
for the first nine months of fiscal 2009 were $50,541,462, a decrease of
$3,448,609 or 6.4% from the first nine months of the prior fiscal year.

                                          For the nine months ended
                                       Sep 26, 2009      Sep 27, 2008
                Revenues               $  50,541,462     $  53,990,071

                Decrease in revenues            -6.4 %            -0.4 %

Comparable store sales for the first nine months decreased by 6.5%.

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 2009 were $31,356,342, or 62.0% of revenues, a decrease of $868,736 and an increase of 2.3 percentage points, as a percentage of revenues, from the first nine months of the prior fiscal year.

                                                    For the nine months ended
                                                 Sep 26, 2009      Sep 27, 2008
     Cost of products sold and occupancy costs   $  31,356,342     $  32,225,078

     Percentage of revenues                               62.0 %            59.7 %

As a percentage of revenues, the increase in cost of products sold and occupancy costs was primarily attributable to increased occupancy costs and the decreased leveraging of these occupancy costs related to lower sales in the first nine months of 2009 compared to the first nine months of the prior fiscal year.

Marketing and sales expense

Marketing and sales expense consists primarily of advertising and promotional expenditures, all store payroll and related expenses for personnel engaged in marketing and selling activities and other non-payroll expenses associated with operating our stores. Our consolidated marketing and sales expense for the first nine months of fiscal 2009 was $16,231,004, or 32.1% of revenues, a decrease of $2,472,911 or 2.5 percentage points, as a percentage of revenues, from the first nine months of the prior fiscal year.

                                           For the nine months ended
                                        Sep 26, 2009      Sep 27, 2008
               Marketing and sales      $  16,231,004     $  18,703,915

               Percentage of revenues            32.1 %            34.6 %

As a percentage of revenues, the decrease in marketing and sales expense was primarily the result of our cost reduction actions related to store payroll and advertising expenses, as described above.

General and administrative expense

General and administrative ("G&A") expense consists of payroll and related expenses for executive, merchandising, finance and administrative personnel, as well as information technology, professional fees and other general corporate expenses. Our consolidated G&A expense for the first nine months of fiscal 2009 was $5,006,742, or 9.9% of revenues, a decrease of $483,334, or 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 26, 2009       Sep 27, 2008
            General and administrative   $    5,006,742     $    5,490,076

            Percentage of revenues                  9.9 %             10.2 %

General and administrative expense decreased as a percentage of revenues from the third quarter of the prior fiscal year as a result of the cost reduction initiatives implemented in 2009.

Operating loss

Our operating loss for the first nine months of fiscal 2009 was $2,052,626, or 4.1% of revenues, compared to an operating loss of $2,428,998, or 4.5% of revenues for the first nine months of the prior fiscal year.

Interest expense

Our interest expense in the first nine months of fiscal 2009 was $390,849, a decrease of $185,865 from the first nine months of the prior fiscal year. The decrease in the first nine months of fiscal 2009 was primarily due to lower average borrowing on our line of credit, a lower effective rate on our Highbridge Note which was paid in full on September 15, 2009 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 2009 or fiscal 2008 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 2008, we had estimated federal net operating loss carryforwards of approximately $20.3 million, which begin to expire in 2019. In accordance with Section 382 of the Internal Revenue Code, 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 2009 was $2,443,385, or $0.11 per basic and diluted share, compared to a net loss of $3,003,552, or $0.13 per basic and diluted share, in the first nine months of the prior fiscal year. The decrease in net loss was mainly attributable to lower store payroll expenses, lower advertising costs and decreased general and administrative expenses.

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 note payable.

Our prospective cash flows are subject to certain trends, events and uncertainties, including demands for capital to support growth, improve our infrastructure, respond to economic conditions, and meet contractual commitments. Based on our current operating plan, we believe that anticipated revenues from operations and borrowings available under our line of credit, which was amended and restated on July 1, 2009, will be sufficient to fund our operations, working capital requirements, scheduled note payment as discussed below, 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, further weakening of consumer confidence and spending, or other unforeseen circumstances, our liquidity may be negatively impacted. If so, we could be required to further adjust our expenditures for the remainder of 2009 and into 2010 to conserve working capital or raise additional capital, possibly including debt or equity financing, to fund operations and our business strategy and to refinance our outstanding debt. Given the current state of the debt and equity markets, this could be more difficult and expensive than recently refinanced debt.

Notes Payable

At the beginning of our fiscal year 2009 we had three notes payable outstanding. We refer to these notes as the Highbridge Note, the Amscan Note and the Party City Note. For a more detailed description of these notes, we refer you to the section titled "Notes Payable" in the Notes to Consolidated Financial Statements for the quarter ended September 26, 2009 included in Item 1 of this Quarterly Report on Form 10-Q. In the third quarter of 2009, we paid in full the Highbridge Note and the Amscan Note. The Highbridge Note was paid off through additional borrowings under our line of credit with Wells Fargo. At September 26, 2009 only the Party City Note, with a principal balance of $600,000 remained outstanding. The full principal amount is due at the note's maturity on August 7, 2010.

. . .