**Exhibit 10.7**
**SEPARATION AGREEMENT**
     This SEPARATION AGREEMENT is dated as ofJuly 14, 2003, and is entered into between PARTY CITYCORPORATION (the “Company”), and Andrew Bailen(“Executive”).
     WHEREAS, Executive is currently employed by theCompany as Executive Vice President of Merchandising/Marketing;and
     WHEREAS, Executive and the Company discussed thetermination without cause of Executive; and
     WHEREAS, Executive and the Company desire toembody in this Agreement the terms and conditions applicable tosuch termination without cause; and
     WHEREAS, this Agreement shall supersede all priororal and written agreements, arrangements and understandingsrelating to the terms and conditions of Executive’semployment and termination from that employment.
     NOW, THEREFORE, the parties hereby agree:
     1.     *TerminationDate.* Executive’s termination without cause from theCompany will be effective as of July 14, 2003 (the“Termination Date”).
     2.     *CompanyProperty.* Executive shall return to the Company allCompany-owned property in his possession on or prior to theTermination Date.
     3.     *TerminationBenefits.* Commencing as of the Termination Date, the Companyshall continue to pay, in accordance with the Company’sprevailing payroll practices, Executive’s current Salary,as defined in Executive’s Employment Agreement with theCompany, dated August 7, 2000 (the “EmploymentAgreement”), for a period of six (6) months beginningon the Termination Date, and ending January 14, 2004. Inaddition, Executive shall, subject to the terms of theapplicable plans, be entitled to a continuation of hishealth/life benefits and car allowance ($675 per month) for thesix (6) month period commencing on the Termination Datethrough January 14, 2004, plus payment for any unusedvacation that has accrued through the Termination Date togetherwith a payment of $16,000 pursuant to Section 3(b)(iv) of theEmployment Agreement. Lastly, any stock options scheduled tovest between the Termination Date and August 6, 2003 shallvest in accordance with the vesting schedule applicable to suchstock options (see Exhibit A of Separation Agreement).
     4.     *BenefitPlans.* Except as otherwise specifically provided in thisAgreement or by law or by any applicable employee benefit plan,Executive’s participation in all employee benefit plans andexecutive compensation plans and practices of the Company shallterminate on the Termination Date, and there shall be no otherpayments or benefits payable to Executive by the Company,including, but not limited to, any other salary, bonus,commissions, fees, benefits, or other payments of any naturewhatsoever.

 

     5.     *AdditionalConsideration.* Executive acknowledges that pursuant to thisAgreement he is receiving consideration in addition to anyamounts to which he would otherwise have been entitled but forthis Agreement.
     6.     *Taxes.* Thepayments due to Executive under this Agreement shall be subjectto reduction to satisfy all applicable Federal, State and localwithholding tax obligations.
     7.     *Payment UponDeath.* Executive’s rights and obligations under thisAgreement are not transferable. However, if Executive should diewhile any amounts would still be payable to him hereunder, allsuch amounts shall be payable to Executive’s estate, heirs,executors or beneficiaries in accordance with the terms hereof.
     8.     *Covenants.*The Covenants set forth in Section 8 and Section 9 of theEmployment Agreement shall continue to apply after theTermination Date in accordance with their terms.
     9.     *Release andWaiver of Claims.* Effective as of the Termination Date,subject to Section 10 hereof, in consideration of the payments,benefits, and other consideration provided to Executive underthis Agreement, Executive, for himself and his family, heirs,executors, administrators, legal representatives, and theirrespective successors and assigns, hereby releases and foreverdischarges the Company, and all of its subsidiaries, officers,directors, employees, agents, stockholders, representatives, andtheir successors and assigns (collectively, “CompanyEntities”), from all rights, claims or demands Executivemay have, including claims for attorneys’ fees and costs,arising at any time on or before the date hereof, based on hisemployment with any Company Entity or the termination of thatemployment, including without limitation any claims under theEmployment Agreement, or based on any services provided to anyCompany Entity by Executive other than pursuant to an employmentrelationship with any Company Entity. This includes a release ofany and all rights, claims or demands Executive may have,whether known or unknown, under the Age Discrimination inEmployment Act, which prohibits age discrimination inemployment; Title VII of the Civil Rights Act of 1964,which prohibits discrimination in employment based on race,color, national origin, religion or sex; the Equal Pay Act,which prohibits paying men and women unequal pay for equal work;the New Jersey Law Against Discrimination; or under any otherfederal, state or local laws or regulations regarding employmentdiscrimination or termination of employment. This also includesa release by Executive of any claims for wrongful discharge orwhistleblowing under the Sarbanes-Oxley Act, the New JerseyConscientious Employee Protection Act, or any other statute,rule, regulation or under the common law. Executive herebyagrees never individually or with any person to file, orcommence the filing of, any charges, lawsuits, complaints orproceedings with any governmental agency, or against any CompanyEntity, with respect to any of the matters released by Executivepursuant to this Section 9. Executive agrees that if therelease and waiver of claims contained in this Section 9 isheld to be invalid or unenforceable for any reason, this entireAgreement shall be considered null and void and the Companyshall have no further obligation to the Executive.
     10.     *Rights NotReleased or Waived.* Section 9 hereof notwithstanding,by signing this Agreement, Executive shall not have relinquishedhis right to (i) benefits in accordance with the provisionsof any Company retirement plans subject to the Employee
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Retirement Income Security Act of 1974, asamended, or (ii) enforce the provisions of this Agreement.
     11.     *Release andWaiver of Claims Under the Age Discrimination in EmploymentAct.* Executive acknowledges that the Company has encouragedhim to consult with an attorney of his choosing and, throughthis Agreement, encourages him to consult with his attorney withrespect to any possible claims he may have, including claimsunder the Age Discrimination in Employment Act(“ADEA”), as well as under the other Federal, Stateand local laws described in Section 9 hereof. Executiveunderstands that by signing this Agreement he is in factwaiving, releasing and forever giving up any claim under theADEA, as well as all other Federal, State and local lawsdescribed in Section 9 hereof that may have existed on orprior to the date hereof.
     12.     *ConsiderationPeriod and Revocation Period.* Executive hereby acknowledgesthat the Company has informed him that he has up to twenty-one(21) days to sign this Agreement and he may knowingly andvoluntarily waive all or any portion of the twenty-one(21) day period by signing this Agreement earlier.Executive also understands that he shall have seven(7) days following the date on which he signs thisAgreement within which to revoke it by providing a writtennotice of his revocation to the Vice President and GeneralCounsel of the Company.
     13.     *Remedies.*Executive hereby acknowledges and understands that if he revokesthis Agreement within the seven (7)-day revocation periodprovided under Section 12 above, the Company may, inaddition to any other remedies it may have, reclaim any amountspaid to Executive under this Agreement to which Executive wouldnot be otherwise entitled, and/or terminate any payments orbenefits to which Executive would not be otherwise entitled thatwould be subsequently due hereunder.
     14.     *Non-Admission.*Executive expressly acknowledges that this Agreement does notconstitute an admission by the Company of any violation of anyemployment law, regulation, ordinance, or administrativeprocedure, or any other Federal, State, or local law, commonlaw, regulation or ordinance, liability for which is expresslydenied.
     15.     *Non-Disparagement.*Executive shall not at any time after the date hereof disparagethe Company or any of its officers, directors, shareholders orany of their respective affiliates nor shall the Chief ExecutiveOfficer, other company officers or associates providingemployment verification of the Company disparage Executive. Theobligations of Executive or the Company under thisSection 15 shall not apply to disclosures required byapplicable law, regulation or order of a court or governmentalagency.
     16.     *Confidentiality.*Executive and the Company hereby agree to keep the terms of thisAgreement confidential. The obligations of Executive and theCompany under this Section 16 shall not apply todisclosures required by applicable law, regulation or order of acourt or governmental agency.
     17.     *Opportunityfor Advice.* By signing this Agreement, Executiveacknowledges that, as explained by the Company, he has had areasonable opportunity to
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consider advice from his legal counsel. Fullyunderstanding these terms, Executive is entering into thisAgreement knowingly and voluntarily.
     18.     *Acceptance.*To accept this Agreement, Executive shall execute and date thisAgreement on the spaces provided and return a copy to theCompany at any time during the twenty-one (21)-day periodcommencing on the date hereof. This Agreement shall take effecton the eighth day following Executive’s execution of thisAgreement unless Executive’s written revocation isdelivered to the Vice President and General Counsel of theCompany within seven (7) days after such execution.
     19.     *EntireAgreement.* This Agreement represents the entire agreement ofthe parties with respect to the Executive’s employment andtermination thereof. Except as specifically provided herein,this Agreement shall supersede the Employment Agreement in allrespects effective as of the Termination Date. THIS AGREEMENTSHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCEWITH THE LAWS OF THE STATE OF NEW JERSEY APPLICABLE TO CONTRACTSMADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE.
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**Exhibit A**
**OPTION SUMMARY**                         **Option****Name****ID****Number****Date****Plan/ Type****Price****Vested**Bailen, Andrew S      ###-##-####   00000778   8/7/00   94/ISO   3.4000   75,000 Bailen, Andrew S      ###-##-####   00000878   8/15/01   1999/NQ   7.3800   10,000 Bailen, Andrew S      ###-##-####   00000931   8/13/02   1999/NQ   14.8125   4,375 
     Although only 50,000 shares ofoption 778 have vested in the option system, your contractstates that the options which were scheduled to vest onAugust 7, 2003 will vest immediately bringing the totalvested in option 778 to 75,000 shares.
**DEFERRED BONUS SUMMARY**              **Dollars****Price****Shares**Deferred bonus for FY 01     $41,249.18  $5.9062   6,984 Deferred bonus for FY 02     $46,003.97  $11.8080   3,896  Total shares to be issued              10,880 
     Taxes of 35% must be remitted to Party City priorto the issuance of these shares. Based on yesterday’s closeprice of $11.00, that amount would be $41,888 (10,880?$11?35%)

 

     IN WITNESS WHEREOF, the parties have executedthis Agreement as of the date and year first above written.
 ANDREW BAILEN      /s/ ANDREW BAILEN      Name:      7/25/03      Date:      PARTY CITY CORPORATION    
 By: /s/ MELISSA WALLACE      Name:  Melissa Wallace     Title:  VP, Human Resources    
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