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 31, 2011.

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 our 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 our most recently filed Annual Report on Form 10-K for the fiscal year ended December 31, 2011 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 party goods retailer operating stores throughout New England, where 47 of our 52 retail stores are located, and in Florida in addition to an online e-commerce site. We believe we are a leading brand in the party industry in the retail markets we serve and a leading resource in those markets for consumers seeking party goods, party planning advice and information.

Our 52 retail stores are located predominantly in New England with 7 stores in Connecticut, 6 in New Hampshire, 3 in Rhode Island, 3 in Maine, 1 in Vermont, and 27 in Massachusetts. We also operate 5 stores in Florida. In July 2011, we re-launched our newly redesigned e-commerce site with a full assortment of costume and related merchandise for purchase and shipping via the internet. In the first quarter of 2012, we added kids' birthday, graduation and certain seasonal assortments to the e-commerce site. We plan to continue to expand our e-commerce offerings during the remainder of 2012. We also use our internet site to highlight the changing store product assortment and feature sales flyers, promotions and coupons to increase customer visits to our retail stores.

During the 2011 Halloween season, we operated eleven temporary stores, the same number of temporary stores operated during the 2010 Halloween season. In December 2010, we opened a new store in the South Bay Center, Boston, Massachusetts and entered into an agreement to take over an additional store from a competitor in Manchester, Connecticut in the first quarter of 2011, which opened in March 2011. In January 2012, we reopened our store in West Lebanon, New Hampshire, which had been closed due to flood damage since August 2011, and we closed our older store in Manchester, Connecticut.

Our stores range in size from approximately 7,000 square feet to 20,295 square feet and average approximately 10,299 square feet in size.

We lease our properties, typically for 10 years and usually with options from our landlords to renew our leases for an additional 5 or 10 years.

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

                                          For the three months ended
                                     Mar 31, 2012            Mar 26, 2011
           Beginning of period                  52                      52
           Openings / Acquisitions               1                       1
           Closings                             (1 )                     -
           End of period                        52                      53

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 primarily driven by the following holiday and party events: Halloween, Christmas, Easter, Valentine's Day, New Year's, Independence Day, St. Patrick's Day, Thanksgiving, Chanukah and sports championships. We also focus our business closely on lifetime events such as anniversaries, graduations, birthdays, and bridal and baby showers.

Trends and Quarterly Summary

Our business has a seasonal pattern. In the past three years, we have realized an average of approximately 36.2% of our annual revenues in our fourth quarter, which includes Halloween and Christmas, and an average of approximately 24.6% of our revenues in the second quarter, which includes school graduations, and often the Easter holiday. Also, during these past three years, we have had net income in our second and fourth quarters and generated losses in our first and third quarters.

First Quarter Summary

For the first quarter of 2012, our consolidated revenues were $15.8 million, compared to $15.1 million for the first quarter of 2011. The increase in first quarter revenues from the year-ago period included an 8.6% increase in comparable store sales (sales from stores open more than one year). The increase in consolidated revenue was driven by higher comparable store sales in a number of areas, including the New England Patriots - New York Giants Super Bowl merchandise, a very strong performance in St. Patrick's Day seasonal merchandise, and by gains in some of our basic areas such as birthday, masquerade and wedding. In addition to our comparable store sales gains, we also saw improved sales in our Manchester, Connecticut market, where we replaced an older store with one acquired last year from a competitor. Consolidated gross profit margin was 36.4% for the first quarter of 2012, equal to the gross profit margin for the same period in 2011. The gross profit margin components included a decrease of 0.2% in product selling margin rate, offset by an equal improvement in occupancy rate as a result of improved leveraging of occupancy costs based on the increase in same store sales. The consolidated net loss for the first quarter of 2012 was $1.2 million, or $0.05 per share, compared to $1.5 million, or $0.06 per share, for the first quarter of 2011.

Acquisition and Growth Strategy

Our growth strategy for 2012 and beyond includes expanding and targeting the temporary Halloween store aspect of our business, opening new stores, relocating or consolidating existing stores, reviewing potential acquisition of other entities, and developing our e-commerce site. In March 2011, we took over a competitor's Manchester, Connecticut store. In addition, we opened eleven temporary Halloween stores in 2011. Any determination whether to open a new or temporary store or make an acquisition is based upon a variety of factors, including, without limitation, the purchase price and other financial terms of the transaction, our liquidity and ability to finance the transaction, the business prospects, geographical location and the extent to which any new or temporary store or acquisition would enhance our business.

Results of Operations

Fiscal year 2012 has 52 weeks and ends on December 29, 2012. Fiscal year 2011 had 53 weeks and ended on December 31, 2011.

The first quarter of fiscal year 2012 had 13 weeks and ended on March 31, 2012. The first quarter of fiscal year 2011 had 13 weeks and ended on March 26, 2011.

Three Months Ended March 31, 2012 Compared to Three Months Ended March 26, 2011

Revenues

Revenues include the selling price of party goods sold, net of returns and discounts, and are recognized at the point of sale or at the time of shipment for internet sales. Our consolidated revenues for the first quarter of fiscal 2012 were $15,753,745, an increase of $661,617, or 4.4% from the first quarter of the prior fiscal year. The increase was primarily due to increased sales in our comparable stores of 8.6% in the first quarter of 2012 compared to the first quarter of 2011. The largest components of the increase in comparable store sales included approximately $561,000 in the fall and bulk categories, $122,000 in masquerade, and $103,000 in St. Patrick's Day merchandise. The increase in fall and bulk sales came largely from sales related to the 2012 Super Bowl event.

                                               For the three months ended
                                             Mar 31, 2012      Mar 26, 2011
          Revenues                          $   15,753,745     $  15,092,128

          Increase (decrease) in revenues              4.4 %             1.7 %

The increase in comparable store sales was partly offset in the first quarter of 2012 by the shift in timing of the New Year's holiday in relation to our fiscal calendar, which was brought about by the addition of the 53rd fiscal week in fiscal year 2011, which resulted in very low New Year's merchandise sales in the first quarter of 2012 compared to the first quarter of 2011.

Cost of products sold and occupancy costs

Cost of products sold and occupancy costs consist of the cost of merchandise sold to customers and the occupancy costs for our stores. Our cost of products sold and occupancy costs for the first quarter of fiscal 2012 were $10,026,180 or 63.6% of revenues, an increase of $425,309, and equal as a percentage of revenues, compared to the first quarter of the prior fiscal year.

                                                    For the three months ended
                                                 Mar 31, 2012        Mar 26, 2011
    Cost of products sold and occupancy costs   $    10,026,180     $    9,600,871

    Percentage of revenues                                 63.6 %             63.6 %

As a percentage of revenues, cost of products sold and occupancy costs included a decrease in product selling margins of 0.2% offset by an equal decrease in occupancy costs as a percentage of revenues from improved leveraging of those costs based on increased sales in the first quarter of 2012 compared to the same period in 2011.

Marketing and sales expense

Marketing and sales expense consists primarily of advertising and promotional expenditures, all store payroll and related expenses for personnel engaged in marketing and selling activities and other non-payroll expenses associated with operating our stores. Our consolidated marketing and sales expense for the first quarter of fiscal 2012 was $5,210,909, or 33.1% of revenues, an increase of $74,167 and a decrease of 0.9 percentage points, as a percentage of revenues, from the first quarter of the prior fiscal year. The increase in marketing and sales expense was primarily due to an increase in headquarters marketing payroll and advertising expenses, partly offset by a decrease in store payroll and depreciation costs in the first quarter of 2012 compared to the first quarter of 2011.

                                          For the three months ended
                                       Mar 31, 2012        Mar 26, 2011
             Marketing and sales      $    5,210,909      $    5,136,742

             Percentage of revenues             33.1 %              34.0 %

As a percentage of revenues, the decrease in marketing and sales expense was primarily due to higher same store sales that increased leveraging of payroll expenses in the first quarter of 2012 compared to the first quarter of 2011.

General and administrative expense

General and administrative ("G&A") expense consists of payroll and related expenses for executive, merchandising, finance and administrative personnel, as well as information technology, professional fees and other general corporate expenses. Our consolidated G&A expense for the first quarter of fiscal 2012 was $1,702,376 or 10.8% of revenues, a decrease of $83,646 or 1.0 percentage points, as a percentage of revenues, from the first quarter of the prior fiscal year. The decrease in general and administrative expense was primarily due to lower professional fees in the first quarter of 2012 compared to the first quarter of 2011.

                                            For the three months ended
                                         Mar 31, 2012        Mar 26, 2011
           General and administrative   $    1,702,376      $    1,786,022

           Percentage of revenues                 10.8 %              11.8 %

The decrease in general and administrative expense as a percentage of revenues from the first quarter of the prior fiscal year was primarily due to the reduction in the dollar amount of those expenses, as discussed above, plus increased leveraging of general and administrative expense in the first quarter of 2012 compared to the first quarter of 2011based on higher same store sales.

Operating loss

Our operating loss for the first quarter of fiscal 2012 was $1,185,720, or 7.5% of revenues, as compared to $1,431,507, or 9.5% of revenues for the first quarter of the prior fiscal year.

Interest expense

Our interest expense in the first quarter of fiscal 2012 was $49,330, a decrease of $23,875 from the first quarter of the prior fiscal year. The decrease in the first quarter of fiscal 2012 as compared to the prior period was primarily due to lower effective interest rates in the first quarter of 2012 compared to the same period in 2011.

Income taxes

We have not provided for income taxes for the first quarter of fiscal 2012 or fiscal 2011 due to the availability of net operating loss (NOL) carryforwards to eliminate federal taxable income on an annual basis, and uncertainty of state taxable income based on the extent of our operating loss through March 31, 2012. No benefit has been recognized with respect to current losses or NOL carryforwards in these periods due to the uncertainty of future taxable income beyond 2012, the assessment of which depends largely on our operating results during our fourth quarter. We continue to believe we will be able to realize the deferred tax asset of $587,603 based on estimated 2012 taxable income.

At the end of 2011, we had estimated net operating loss carryforwards of approximately $16.6 million, which begin to expire in 2020. 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 loss

Due to the foregoing, our net loss in the first quarter of fiscal 2012 improved to $1,235,266, or $0.05 per basic and diluted share, compared to $1,510,911, or $0.06 per basic and diluted share, in the first quarter of the prior fiscal year.

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 and temporary store openings, including acquisitions.

Our primary sources of cash are:

· cash from operating activities; and

· debt, including our Facility.

Our prospective cash flows are subject to certain trends, events and uncertainties, including demands for capital to support growth, including store acquisitions and openings and our e-commerce site, finance inventory purchases, 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 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, declines in consumer confidence and spending, or other unforeseen circumstances, our liquidity may be negatively impacted. If so, we could be required to adjust our expenditures for the remainder of 2012 to conserve working capital or raise additional capital, possibly including debt or equity financing to fund operations and our business strategy. Given the current state of the debt and equity markets and our existing capital structure, this could be difficult and expensive, and we might not be able to do so on terms acceptable to us.

Line of Credit

On October 14, 2011, we entered into the First Amendment ("Amendment") to the Second Amended and Restated Credit Agreement (the "Facility") with Wells Fargo. The Facility continues the previous revolving line of credit in the amount of up to $12,500,000 and extends the maturity date for five years to October 14, 2016. The Facility includes an option whereby we may increase the revolving line of credit up to a maximum level of $15,000,000. The amount of credit that is available from time to time under the Facility is determined as a percentage of the value of eligible inventory plus a percentage of the value of eligible credit card receivables, as reduced by certain reserve amounts that may be required by Wells Fargo.

Borrowings under the Facility will generally accrue interest at a margin of 0.25% over a base rate determined by Wells Fargo from time to time, or, at our election, 2.00% over the London Interbank Offered Rate ("LIBOR"). The Facility provides for letters of credit for up to a sublimit of $2 million to be used in connection with inventory purchases and includes an unused line fee on the unused portion of the Facility. Our obligations under the Facility are secured by a lien on substantially all of our personal property.

The outstanding balances under the Facility are classified as current liabilities in the accompanying consolidated balance sheets because we are required to apply daily lock-box receipts to reduce the amount outstanding.

The Facility contains events of default customary for credit facilities of this type. Upon an event of default that is not cured or waived within any applicable cure periods, in addition to other remedies that may be available to Wells Fargo, the obligations under the line may be accelerated, outstanding letters of credit may be required to be cash collateralized and the lenders may exercise remedies to collect the balance due, including to foreclose on the collateral.

Our inventory consists of party supplies which are valued at the lower of weighted-average cost or market, which approximates FIFO (first-in, first-out) and are reduced or increased by adjustments including vendor rebates and discounts and freight costs. Our Facility availability calculation allows us to borrow against "acceptable inventory at cost", which is based on our inventory at cost and applies adjustments that Wells Fargo has approved, which may be different than adjustments we use for valuing our inventory in our financial statements, such as the adjustment to reserve for inventory shortage. The amount of "acceptable inventory at cost" was approximately $17,169,404 at March 31, 2012.

Our accounts receivable consist primarily of credit card receivables and vendor rebates receivable. Our Facility availability calculation allows us to borrow against "eligible credit card receivables", which are the credit card receivables for the previous two to three days of business. The amount of "eligible credit card receivables" was approximately $249,199 at March 31, 2012.

Our total borrowing base is determined by adding the "acceptable inventory at cost" times an agreed upon advance rate plus the "eligible credit card receivables" times an agreed upon advance rate but not to exceed our established credit limit, which was $12,500,000 at March 31, 2012. Under the terms of the Facility, our $12,500,000 credit limit was further reduced by (1) a minimum availability block, (2) customer deposits, (3) gift certificates, (4) merchandise credits and (5) outstanding letters of credit. The amounts outstanding under the Facility were $5,577,293 at March 31, 2012 and $5,366,512 at December 31, 2011, an increase of $210,781. Our additional availability was $4,509,213 at March 31, 2012 and $3,129,457 at December 31, 2011.

The Facility has financial covenants that are limited to minimum availability and capital expenditures and contains various restrictive covenants, such as incurrence, payment or entry into certain indebtedness, liens, investments, acquisitions, mergers, dispositions and dividends. Under the Facility, we are required to maintain a minimum availability of 7.5% of the credit limit, except for the period January 1, 2012 through April 30, 2012, during which time the minimum availability is zero. The Facility also requires us to limit our capital expenditures to within 110% of those amounts included in our business plan, which may be updated from time to time. At March 31, 2012, we were in compliance with these financial covenants.

Supply Agreement with Amscan

Our Supply Agreement with Amscan gives us the right to receive more favorable pricing terms over the term of the Supply Agreement than generally were available to us under our previous terms with Amscan. In exchange, the Supply Agreement obligates us to purchase increased levels of merchandise from Amscan. Beginning with calendar year 2008, the Supply Agreement requires us to purchase on an annual basis merchandise equal to the total number of our stores, excluding temporary stores, open during such calendar year, multiplied by $180,000. The Supply Agreement extends until December 31, 2013.

The Supply Agreement provides for penalties in the event we fail to attain the annual purchase commitment that would require us to pay Amscan the difference between the purchases for that year and the annual purchase commitment for that year. Under the terms of the Supply Agreement, the annual purchase commitment for any individual year can be reduced for orders placed by us but not filled by Amscan. Our purchases for 2009 fell short of the annual commitment by approximately $368,000, which unfilled commitment was rolled into 2010. Our purchases for 2010 exceeded the minimum purchase amount commitments plus the 2009 short fall of $368,000. Our purchases for 2011 also exceeded the minimum purchase amount commitments. The Company is not aware of any reason that would prevent it from meeting the minimum purchase requirements for the remainder of 2012 or for 2013. Although we do not expect to incur any penalties under this Supply Agreement, if they were to occur, there could be a material adverse effect on our uses and sources of cash.

Operating, Investing and Financing Activities

Our operating activities used cash of $293,847 during the three months ended March 31, 2012 compared to using $1,379,176 during the three months ended March 26, 2011, a decrease in cash used of $1,085,329. The decrease in cash used in operating activities was primarily due to a decrease in net loss for the three months ended March 31, 2012 compared to the net loss for the same period in 2011, plus a reduction in credit card accounts receivable from December 31, 2011 to March 31, 2012.

We used $211,796 in investing activity during the first three months of 2012 compared to $300,653 during the first three months of 2011, a decrease of $88,857. The cash invested in 2012 was primarily for replacement fixtures and equipment for our retail stores. The cash invested in 2011 was primarily for our new store opening in Boston, Massachusetts, point of sale register updates in our retail stores and other store improvements.

Financing activities provided $504,443 during the first three months of 2012 compared to providing $1,680,829 during the first three months of 2011, a decrease of $1,176,386. The decrease was primarily due to decreased net borrowings on the line of credit during the first three months of 2012 compared to the first three months of 2011.

Contractual Obligations

Contractual obligations at March 31, 2012 were as follows:

                                                      Within          Within
                                     Within           2 - 3            4 - 5           After
                                     1 Year           Years            Years          5 Years          Total
Line of credit                    $  5,583,728     $          -     $         -     $         -     $  5,583,728
Capital lease obligations                2,850                -               -               -            2,850
Supply agreement                     9,448,615        7,020,000               -               -       16,468,615
Operating leases (including
retail space leases)                 9,830,110       15,460,151       9,941,121       8,664,320       43,895,702
Total contractual obligations     $ 24,865,303     $ 22,480,151     $ 9,941,121     $ 8,664,320     $ 65,950,895

In addition, at March 31, 2012, we had outstanding purchase orders totaling approximately $9,393,620 for the acquisition of inventory and non-inventory items that were scheduled for delivery after March 31, 2012.

Seasonality

Due to the seasonality of our business, sales and operating income are typically higher in the second and fourth quarters. Our business is highly dependent upon sales of Easter, graduation and summer merchandise in the second quarter and sales of Halloween and Christmas merchandise in the fourth quarter. We have typically operated at a loss during the first and third quarters and at a profit in the second and fourth quarters.

Geographic Concentration

As of March 31, 2012, we operated a total of 52 stores, 47 of which are located in New England and 5 of which are located in Florida. As a result, a severe or . . .