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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934



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|                                              |  |                               
|--------------------------------------------- |  | ------------------------------
|For The Quarterly Period Ended
March 29, 2003 |  | Commission File Number
0-27826



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PARTY CITY CORPORATION

(Exact name of registrant as specified in its charter)


|                                         |  |                    
|---------------------------------------- |  | -------------------
|Delaware                                 |  | 22-3033692         
|(State or other jurisdiction of          |  | (I.R.S. Employer   
|incorporation or organization)           |  | Identification No.)
|                                         |  |                    
|400 Commons Way                          |  | 07866              
|Rockaway, New Jersey                     |  | (Zip Code)         
|(Address of Principal Executive Offices) |  |                    

973-983-0888
(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes x No: o


Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes x No: o


Indicate the number of shares outstanding of each of the issuers classes
of common stock as of the latest practicable date:

As of May 9, 2003, there were
outstanding 16,432,086 shares of
Common Stock, $.01 par value.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                                |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART 1. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                         
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS               
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II OTHER INFORMATION    
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 3. Defaults upon Senior Securities                                                      
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|EXHIBIT INDEX                
|SIGNATURES                   
|CERTIFICATIONS               
|EX-99.1: CERTIFICATIONS      



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PARTY CITY CORPORATION AND SUBSIDIARY

INDEX

|         |  |                                                                                                                                        |  |          |       | 
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ----- | 
|         |  |                                                                                                                                        |  | Page No.
|         |  |                                                                                                                                        |  |         
|Part I.  |  | Financial
Information                                                                                                                  | 
|Item 1.  |  | Financial Statements                                                                                                                   |  |          |       | 
|         |  | Condensed Consolidated Balance Sheets  March 29, 2003 (Unaudited),
March 30, 2002 (Unaudited) and June 29, 2002                       |  |          | 3     | 
|         |  | Condensed Consolidated Statements of Operations (Unaudited)  For the
quarters and nine months ended March 29, 2003 and March 30, 2002 |  |          | 4     | 
|         |  | Condensed Consolidated Statements of Cash Flows (Unaudited)  For the
nine months ended March 29, 2003 and March 30, 2002              |  |          | 5     | 
|         |  | Notes to Condensed Consolidated Unaudited Financial Statements                                                                         |  |          | 6-12  | 
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations                                                  |  |          | 13-21 | 
|Item 3.  |  | Quantitative and Qualitative Disclosures about Market Risk                                                                             |  |          | 22    | 
|Item 4.  |  | Controls and Procedures                                                                                                                |  |          | 22    | 
|Part II. |  | Other
Information                                                                                                                      |  |          |      
|Item 1.  |  | Legal Proceedings                                                                                                                      |  |          | 23    | 
|Item 2.  |  | Changes in Securities and Use of Proceeds                                                                                              |  |          | 23    | 
|Item 3.  |  | Defaults upon Senior Securities                                                                                                        |  |          | 23    | 
|Item 5.  |  | Other Information                                                                                                                      |  |          | 23    | 
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                                       |  |          | 23    | 
|         |  | Exhibit Index                                                                                                                          |  |          | 24-25 | 
|         |  | Signatures                                                                                                                             |  |          | 26    | 
|         |  | Certifications                                                                                                                         |  |          | 27-28 | 

2



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##### Table of Contents






PART 1. FINANCIAL INFORMATION




Item 1.        Financial Statements




PARTY CITY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)

|                                              |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |        |        |         | 
|--------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------ | ----------- | ------- | ----------- | ------ | -------- | ------- | ------ | ------ | ------ | ------- | 
|                                              |                                                                                                                                 |                            |                                            |        | March 29,   |         | March 30,   |        | June 29,
|                                              |                                                                                                                                 |                            |                                            |        | 2003        |         | 2002        |        | 2002    
|                                              |                                                                                                                                 |                            |                                            |        |             |         |             |        |         
|                                              |                                                                                                                                 |                            |                                            |        | (Unaudited) |         | (Unaudited) |        | (1)     
|ASSETS                                        |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |       
|Current assets:                               |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |       
|                                              | Cash and cash equivalents                                                                                                       |                            | $                                          | 3,036  |             |         | $           | 7,455  |          |         | $      | 3,467  |       
|                                              | Merchandise inventory                                                                                                           |                            |                                            | 76,156 |             |         |             | 60,952 |          |         |        | 55,867 |       
|                                              | Deferred income taxes                                                                                                           |                            |                                            | 6,957  |             |         |             | 5,031  |          |         |        | 5,827  |       
|                                              | Other current assets, net                                                                                                       |                            |                                            | 13,862 |             |         |             | 13,349 |          |         |        | 11,789 |       
|                                              |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |       
|                                              |                                                                                                                                 | Total current assets       |                                            |        | 100,011     |         |             |        | 86,787   |         |        |        | 76,950 |        
|Property and equipment, net                   |                                                                                                                                 |                            | 53,432                                     |        |             |         | 46,024      |        |          |         | 49,356 |       
|Goodwill                                      |                                                                                                                                 |                            | 19,172                                     |        |             |         | 14,206      |        |          |         | 18,016 |       
|Other assets                                  |                                                                                                                                 |                            | 4,152                                      |        |             |         | 5,901       |        |          |         | 4,732  |       
|                                              |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |       
|                                              |                                                                                                                                 |                            | Total assets                               |        | $           | 176,767 |             |        | $        | 152,918 |        |        | $      | 149,054 | 
|                                              |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY          |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |       
|Current liabilities:                          |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |       
|                                              | Accounts payable                                                                                                                |                            | $                                          | 48,913 |             |         | $           | 40,846 |          |         | $      | 35,499 |       
|                                              | Accrued expenses and other current liabilities                                                                                  |                            |                                            | 21,139 |             |         |             | 23,191 |          |         |        | 26,744 |       
|                                              | Advances under Loan Agreement                                                                                                   |                            |                                            | 18,637 |             |         |             |       |          |         |        |       |       
|                                              | Senior Notes, current portion                                                                                                   |                            |                                            |       |             |         |             | 7,655  |          |         |        |       |       
|                                              |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |       
|                                              |                                                                                                                                 | Total current liabilities  |                                            |        | 88,689      |         |             |        | 71,692   |         |        |        | 62,243 |        
|Deferred rent and other long-term liabilities |                                                                                                                                 |                            | 10,759                                     |        |             |         | 9,725       |        |          |         | 10,297 |       
|Senior Notes                                  |                                                                                                                                 |                            |                                           |        |             |         | 8,759       |        |          |         | 8,915  |       
|Commitments and contingencies                 |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |       
|Stockholders equity:                         |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |       
|                                              | Common stock $0.01 par value; 25,000,000 shares authorized;
17,177,151, 13,289,767 and 16,239,081 shares issued,
respectively   |                            |                                            | 172    |             |         |             | 133    |          |         |        | 162    |       
|                                              | Additional paid-in capital                                                                                                      |                            |                                            | 41,662 |             |         |             | 38,654 |          |         |        | 39,347 |       
|                                              | Retained earnings                                                                                                               |                            |                                            | 41,425 |             |         |             | 25,784 |          |         |        | 29,919 |       
|                                              | Treasury stock, at cost (747,012 shares at March 29, 2003 and
284,000 shares at March 30, 2002 and June 29, 2002,
respectively) |                            |                                            | (5,940 | )           |         |             | (1,829 | )        |         |        | (1,829 | )     
|                                              |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |       
|                                              |                                                                                                                                 | Total stockholders equity |                                            |        | 77,319      |         |             |        | 62,742   |         |        |        | 67,599 |        
|                                              |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |       
|                                              |                                                                                                                                 |                            | Total liabilities and stockholders equity |        | $           | 176,767 |             |        | $        | 152,918 |        |        | $      | 149,054 | 
|                                              |                                                                                                                                 |                            |                                            |        |             |         |             |        |          |         |        |       



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|(1) |  | The June 29, 2002 condensed consolidated balance sheet was derived from the
Companys audited condensed consolidated financial statements.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes to condensed consolidated financial statements.

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PARTY CITY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

|                                  |                                                    |   |                                               |        |               |         |                   |        |           |        |           |         |  |         |        |         |  |         | 
|--------------------------------- | -------------------------------------------------- | - | --------------------------------------------- | ------ | ------------- | ------- | ----------------- | ------ | --------- | ------ | --------- | ------- |  | ------- | ------ | ------- |  | ------- | 
|                                  |                                                    |   |                                               |        | Quarter ended |         | Nine months ended
|                                  |                                                    |   |                                               |        |               |         |                  
|                                  |                                                    |   |                                               |        | March 29,     |         | March 30,         |        | March 29, |        | March 30,
|                                  |                                                    |   |                                               |        | 2003          |         | 2002              |        | 2003      |        | 2002     
|                                  |                                                    |   |                                               |        |               |         |                   |        |           |        |          
|Revenues:                         |                                                    |   |                                               |        |               |         |                   |        |           |        |           |         |  |         |        |        
|                                  | Net sales                                          |   | $                                             | 95,846 |               |         | $                 | 86,252 |           |        | $         | 348,618 |  |         | $      | 309,026 | 
|                                  | Royalty fees                                       |   |                                               | 3,607  |               |         |                   | 3,652  |           |        |           | 13,757  |  |         |        | 13,031  | 
|                                  | Franchise fees                                     |   |                                               | 80     |               |         |                   | 200    |           |        |           | 355     |  |         |        | 543     | 
|                                  |                                                    |   |                                               |        |               |         |                   |        |           |        |           |         |  |         |        |        
|                                  |                                                    |   | Total revenues                                |        |               | 99,533  |                   |        |           | 90,104 |           |         |  | 362,730 |        |         |  | 322,600 | 
|Expenses:                         |                                                    |   |                                               |        |               |         |                   |        |           |        |           |         |  |         |        |        
|                                  | Cost of goods sold and occupancy costs             |   |                                               | 70,164 |               |         |                   | 60,816 |           |        |           | 230,563 |  |         |        | 202,411 | 
|                                  | Company-owned stores operating and
selling expense |   |                                               | 23,196 |               |         |                   | 20,031 |           |        |           | 81,182  |  |         |        | 69,724  | 
|                                  | Franchise expense                                  |   |                                               | 1,755  |               |         |                   | 1,612  |           |        |           | 4,963   |  |         |        | 4,826   | 
|                                  | General and administrative expense                 |   |                                               | 7,223  |               |         |                   | 6,707  |           |        |           | 22,928  |  |         |        | 19,409  | 
|                                  |                                                    |   |                                               |        |               |         |                   |        |           |        |           |         |  |         |        |        
|                                  |                                                    |   | Total expenses                                |        |               | 102,338 |                   |        |           | 89,166 |           |         |  | 339,636 |        |         |  | 296,370 | 
|                                  |                                                    |   |                                               |        |               |         |                   |        |           |        |           |         |  |         |        |        
|Operating (loss) income           |                                                    |   | (2,805                                        | )      |               |         | 938               |        |           |        | 23,094    |         |  |         | 26,230 |        
|                                  | Interest expense, net                              |   |                                               | 208    |               |         |                   | 1,099  |           |        |           | 3,917   |  |         |        | 4,508   | 
|                                  |                                                    |   |                                               |        |               |         |                   |        |           |        |           |         |  |         |        |        
|(Loss) income before income taxes |                                                    |   | (3,013                                        | )      |               |         | (161              | )      |           |        | 19,177    |         |  |         | 21,722 |        
|                                  | (Benefit) provision for income taxes               |   |                                               | (1,205 | )             |         |                   | (65    | )         |        |           | 7,671   |  |         |        | 8,665   | 
|                                  |                                                    |   |                                               |        |               |         |                   |        |           |        |           |         |  |         |        |        
|Net (loss) income                 |                                                    | $ | (1,808                                        | )      |               | $       | (96               | )      |           | $      | 11,506    |         |  | $       | 13,057 |        
|                                  |                                                    |   |                                               |        |               |         |                   |        |           |        |           |         |  |         |        |        
|Basic (loss) earnings per share   |                                                    | $ | (0.11                                         | )      |               | $       | (0.01             | )      |           | $      | 0.69      |         |  | $       | 1.01   |        
|                                  |                                                    |   |                                               |        |               |         |                   |        |           |        |           |         |  |         |        |        
|                                  |                                                    |   | Weighted average shares outstanding  basic   |        |               | 16,653  |                   |        |           | 12,982 |           |         |  | 16,617  |        |         |  | 12,909  | 
|                                  |                                                    |   |                                               |        |               |         |                   |        |           |        |           |         |  |         |        |        
|Diluted (loss) earnings per share |                                                    | $ | (0.11                                         | )      |               | $       | (0.01             | )      |           | $      | 0.58      |         |  | $       | 0.69   |        
|                                  |                                                    |   |                                               |        |               |         |                   |        |           |        |           |         |  |         |        |        
|                                  |                                                    |   | Weighted average shares outstanding  diluted |        |               | 16,653  |                   |        |           | 12,982 |           |         |  | 19,757  |        |         |  | 18,972  | 
|                                  |                                                    |   |                                               |        |               |         |                   |        |           |        |           |         |  |         |        |        

See accompanying notes to condensed consolidated financial statements.

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PARTY CITY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                                                  |                                                      |                                                                  |                                           |         |                   |        |           |         |         |        | 
|--------------------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------------------- | ----------------------------------------- | ------- | ----------------- | ------ | --------- | ------- | ------- | ------ | 
|                                                                                  |                                                      |                                                                  |                                           |         | Nine months ended
|                                                                                  |                                                      |                                                                  |                                           |         |                  
|                                                                                  |                                                      |                                                                  |                                           |         | March 29,         |        | March 30,
|                                                                                  |                                                      |                                                                  |                                           |         | 2003              |        | 2002     
|                                                                                  |                                                      |                                                                  |                                           |         |                   |        |          
|                                                                                  |                                                      |                                                                  |                                           |         | (Unaudited)      
|Cash flow from operating activities:                                              |                                                      |                                                                  |                                           |         |                   |        |           |        
|Net income                                                                        |                                                      | $                                                                | 11,506                                    |         |                   | $      | 13,057    |        
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                      |                                                                  |                                           |         |                   |        |           |        
|                                                                                  | Depreciation and amortization                        |                                                                  |                                           | 11,092  |                   |        |           | 8,944   |        
|                                                                                  | Deferred taxes                                       |                                                                  |                                           | (349    | )                 |        |           | 462     |        
|                                                                                  | Non-cash interest                                    |                                                                  |                                           | 1,584   |                   |        |           | 1,128   |        
|                                                                                  | Deferred rent and other long-term liabilities        |                                                                  |                                           | 463     |                   |        |           | 1,024   |        
|                                                                                  | Equity based compensation                            |                                                                  |                                           | 799     |                   |        |           | 257     |        
|                                                                                  | Provision for doubtful accounts                      |                                                                  |                                           | (460    | )                 |        |           | 59      |        
|                                                                                  | Changes in assets and liabilities:                   |                                                                  |                                           |         |                   |        |           |         |        
|                                                                                  |                                                      | Merchandise inventory                                            |                                           |         | (19,882           | )      |           |         | (12,620 | )     
|                                                                                  |                                                      | Other current assets and other assets                            |                                           |         | (1,677            | )      |           |         | (1,242  | )     
|                                                                                  |                                                      | Accounts payable, accrued expenses and other current liabilities |                                           |         | 7,810             |        |           |         | 9,858   |       
|                                                                                  |                                                      |                                                                  |                                           |         |                   |        |           |        
|                                                                                  |                                                      |                                                                  | Net cash provided by operating activities |         |                   | 10,886 |           |         |         | 20,927 | 
|Cash flow from investment activities:                                             |                                                      |                                                                  |                                           |         |                   |        |           |        
|                                                                                  | Purchases of property and equipment                  |                                                                  |                                           | (15,023 | )                 |        |           | (8,493  | )      
|                                                                                  | Stores acquired                                      |                                                                  |                                           | (1,758  | )                 |        |           | (1,504  | )      
|                                                                                  | Proceeds from disposals of property and equipment    |                                                                  |                                           | 144     |                   |        |           |        |        
|                                                                                  |                                                      |                                                                  |                                           |         |                   |        |           |        
|                                                                                  |                                                      | Net cash used in investment activities                           |                                           |         | (16,637           | )      |           |         | (9,997  | )     
|Cash flow from financing activities:                                              |                                                      |                                                                  |                                           |         |                   |        |           |        
|                                                                                  | Payments of Senior Notes                             |                                                                  |                                           | (10,207 | )                 |        |           | (11,655 | )      
|                                                                                  | Net proceeds from Loan Agreement                     |                                                                  |                                           | 18,637  |                   |        |           |        |        
|                                                                                  | Proceeds from exercise of stock options and warrants |                                                                  |                                           | 1,525   |                   |        |           | 167     |        
|                                                                                  | Payment of financing costs                           |                                                                  |                                           | (524    | )                 |        |           |        |        
|                                                                                  | Purchase of treasury stock                           |                                                                  |                                           | (4,111  | )                 |        |           | (1,829  | )      
|                                                                                  |                                                      |                                                                  |                                           |         |                   |        |           |        
|                                                                                  |                                                      | Net cash provided by (used in) financing activities              |                                           |         | 5,320             |        |           |         | (13,317 | )     
|                                                                                  |                                                      |                                                                  |                                           |         |                   |        |           |        
|Net decrease in cash and cash equivalents                                         |                                                      |                                                                  | (431                                      | )       |                   |        | (2,387    | )      
|Cash and cash equivalents, beginning of period                                    |                                                      |                                                                  | 3,467                                     |         |                   |        | 9,842     |        
|                                                                                  |                                                      |                                                                  |                                           |         |                   |        |           |        
|Cash and cash equivalents, end of period                                          |                                                      | $                                                                | 3,036                                     |         |                   | $      | 7,455     |        
|                                                                                  |                                                      |                                                                  |                                           |         |                   |        |           |        
|Supplemental disclosure of cash flow information:                                 |                                                      |                                                                  |                                           |         |                   |        |           |        
|                                                                                  | Income taxes paid                                    |                                                                  | $                                         | 9,476   |                   |        | $         | 9,785   |        
|                                                                                  | Interest paid                                        |                                                                  | $                                         | 2,758   |                   |        | $         | 4,098   |        
|Supplemental disclosure of non-cash financing activity:                           |                                                      |                                                                  |                                           |         |                   |        |           |        
|                                                                                  | Issuance of shares under management stock plan       |                                                                  | $                                         | 288     |                   |        | $         |        |        
|                                                                                  | Issuance of warrants                                 |                                                                  | $                                         | 245     |                   |        | $         | 642     |        

See accompanying notes to condensed consolidated financial statements.

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PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS



|1. |  | BASIS OF PRESENTATION
|-- |  | ---------------------

The condensed consolidated financial statements, except for the June 29,
2002 consolidated balance sheet, are unaudited. In the opinion of management,
the accompanying condensed consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position of the Company as of March 29, 2003 and March 30,
2002 and the results of operations for the respective three and nine
months then ended and cash flows for nine
months then ended. Because of the seasonality of
the party goods industry, operating results of the Company on a quarterly basis
may not be indicative of operating results for the full fiscal year.

These condensed consolidated financial statements should be read in
conjunction with the Companys audited consolidated financial statements for
the fiscal year ended June 29, 2002, which are included in the Companys Annual
Report on Form 10-K with respect to such period filed with the Securities and
Exchange Commission on September 27, 2002. All significant intercompany
accounts and transactions have been eliminated. The June 29,
2002 condensed consolidated
balance sheet amounts are derived from the Companys audited consolidated
financial statements.



|2. |  | RECENT ACCOUNTING STANDARDS
|-- |  | ---------------------------

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 146, Accounting for
Costs Associated with Exit or Disposal Activities (SFAS No. 146), replacing
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred instead of at the date an entity
commits to an exit plan. This statement also established that fair value is
the objective for the initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company has adopted this statement and it did not have a material
impact on its financial position or the results of operations.

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that
upon issuance of a guarantee, a guarantor must recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The disclosure requirement is
effective for the Companys current quarter (see Note 10). The Company has
adopted this statement and it did not have a material impact on its financial
position or the results of operations.

In November 2002, the EITF reached a consensus on issues raised in EITF
02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor
(EITF 02-16). This EITF issue addresses the timing of recognition for
rebates that are earned by resellers based on specified levels of purchases or
over specified periods. This guidance, related to timing of recognition, is to
be applied prospectively to new rebate arrangements entered into in fiscal
periods beginning after January 1, 2003. This EITF issue also addresses the
classification of cash consideration received from vendors in a resellers
statement of operations. The guidance related to income statement
classification is to be applied in annual and interim financial statements for
periods beginning after January 1, 2003. The Company has adopted this
application and it did not have a material impact on its financial position or
the results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation (SFAS No. 148). SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of FASB Statement No. 123, Accounting For
Stock-Based Compensation (SFAS 123) to require more prominent
and more frequent disclosures in financial statements about the effects of
stock-based compensation. The Company has adopted the disclosure provisions of SFAS 148
as of December 31, 2002 (see Note 4).

6



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED
UNAUDITED FINANCIAL STATEMENTS(Continued)



|3. |  | EARNINGS PER SHARE
|-- |  | ------------------

The following table sets forth the computations of basic and diluted
earnings per share (in thousands, except per share amounts):

|                                                                 |  |               |        |                   |  |    |        |   |  |           |    |   |  |   |        |           |  |  |    |   |  |   |        | 
|---------------------------------------------------------------- |  | ------------- | ------ | ----------------- |  | -- | ------ | - |  | --------- | -- | - |  | - | ------ | --------- |  |  | -- | - |  | - | ------ | 
|                                                                 |  | Quarter ended |        | Nine months ended
|                                                                 |  |               |        |                  
|                                                                 |  | March 29,     |        | March 30,         |  |    |        |   |  | March 29, |    |   |  |   |        | March 30,
|                                                                 |  | 2003          |        | 2002              |  |    |        |   |  | 2003      |    |   |  |   |        | 2002     
|                                                                 |  |               |        |                   |  |    |        |   |  |           |    |   |  |   |        |          
|Net (loss) income                                                |  | ($            | 1,808  | )                 |  | ($ | 96     | ) |  |           |    |   |  | $ | 11,506 |           |  |  |    |   |  | $ | 13,057 | 
|Earnings
(loss) per share  basic                                |  | ($            | 0.11   | )                 |  | ($ | 0.01   | ) |  |           |    |   |  | $ | 0.69   |           |  |  |    |   |  | $ | 1.01   | 
|Earnings
(loss) per share  diluted                              |  | ($            | 0.11   | )                 |  | ($ | 0.01   | ) |  |           |    |   |  | $ | 0.58   |           |  |  |    |   |  | $ | 0.69   | 
|Weighted average common shares outstanding                       |  |               | 16,653 |                   |  |    | 12,982 |   |  |           |    |   |  |   | 16,617 |           |  |  |    |   |  |   | 12,909 | 
|Dilutive effect of warrants                                      |  |               | (a     | )                 |  |    | (b     | ) |  |           | (c | ) |  |   | 2,359  |           |  |  | (c | ) |  |   | 5,461  | 
|Dilutive effect of stock options                                 |  |               | (a     | )                 |  |    | (b     | ) |  |           |    |   |  |   | 692    |           |  |  |    |   |  |   | 532    | 
|Restricted stock units                                           |  |               | (d     | )                 |  |    | (d     | ) |  |           |    |   |  |   | 89     |           |  |  |    |   |  |   | 70     | 
|                                                                 |  |               |        |                   |  |    |        |   |  |           |    |   |  |   |        |           |  |  |    |   |  |   |        | 
|Weighted
average common and common
equivalent shares
outstanding |  |               | 16,653 |                   |  |    | 12,982 |   |  |           |    |   |  |   | 19,757 |           |  |  |    |   |  |   | 18,972 | 
|                                                                 |  |               |        |                   |  |    |        |   |  |           |    |   |  |   |        |           |  |  |    |   |  |   |        | 



|(a) |  | Options to purchase 1,652,825 common shares at prices ranging from $2.00
to $32.50 per share and warrants to purchase 2,496,000 common shares at
$1.07 per share were outstanding at March 29, 2003 but were not included
in the computation of dilutive loss per share for the quarter ended March
29, 2003 because to do so would have been anti-dilutive.                              
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Options to purchase 1,009,888 common shares at prices ranging from $2.00
to $32.50 per share and warrants to purchase 6,280,000 common shares at
$1.07 per share were outstanding at March 30, 2002 but were not included
in the computation of dilutive loss per share for the quarter ended March
30, 2002 because to do so would have been anti-dilutive.                              
|   
|(c) |  | Options to purchase 649,879 common shares at prices ranging from $12.53
to $32.50 and options to purchase 578,541 common shares at prices ranging
from $7.00 to $32.50 were outstanding but were not included in the
computation of dilutive earnings per share for the nine months ended March
29, 2003 and March 30, 2002, respectively, because to do so would have
been anti-dilutive.
|   
|(d) |  | Restricted stock units of 84,052 and 85,028 shares of common stock were
outstanding at March 29, 2003 and March 30, 2002, respectively, related to
the Management Stock Purchase Plan.                                                                                                                                                                                                    



|4. |  | STOCK-BASED COMPENSATION
|-- |  | ------------------------

The Companys Board of Directors and stockholders adopted the Companys
1999 Stock Incentive Plan pursuant to which all full-time employees
and Directors of the
Company are eligible to receive stock
options. Options granted under the Stock Option Plan have a ten-year life and
typically vest over four to seven years from the date of grant. As of March 29,
2003, the aggregate number of shares of Common Stock for which stock options
may be granted under the Stock Incentive Plan is 2,000,000. As of March 29,
2003, 227,525 shares of Common Stock were available for the grant of options under
the Stock Incentive Plan.

Pursuant
to Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, the Company accounts for stock-based employee
compensation arrangements using the intrinsic value method. Accordingly, no
compensation expense has been recorded in the condensed consolidated financial statements
with respect to option grants. The Company has adopted the disclosure only
provisions of SFAS No. 123,
Accounting for Stock Based Compensation, as amended by SFAS
No. 148, Accounting for Stock Based Compensation 
Transition and Disclosure.

7



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED
UNAUDITED FINANCIAL STATEMENTS(Continued)

Had the Company elected to recognize compensation expense for stock-based
compensation using the fair value method, net (loss) income, basic
(loss)
earnings per share and diluted (loss) earnings per share would have been as
follows:

|                                                                                            |  |                    |        |                   |  |           |       |           |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | --------- | ----- | --------- |  | - | ------ | - |  | - | ------ | -
|                                                                                            |  | Three months ended |        | Nine months ended
|                                                                                            |  | March 29,          |        | March 30,         |  | March 29, |       | March 30,
|                                                                                            |  | 2003               |        | 2002              |  | 2003      |       | 2002     
|                                                                                            |  |                    |        |                   |  |           |       |          
|Net (loss) income                                                                           |  | $                  | (1,808 | )                 |  | $         | (96   | )         |  | $ | 11,506 |   |  | $ | 13,057 |  
|Fair value method compensation expense attributable to
stock-based compensation, net of tax |  | $                  | (214   | )                 |  | $         | (201  | )         |  | $ | (894   | ) |  | $ | (503   | )
|Pro
forma net (loss) income                                                                 |  | $                  | (2,022 | )                 |  | $         | (297  | )         |  | $ | 10,612 |   |  | $ | 12,554 |  
|Basic (loss) earnings per share                                                             |  | $                  | (0.11  | )                 |  | $         | (0.01 | )         |  | $ | 0.69   |   |  | $ | 1.01   |  
|Pro forma basic (loss) earnings per share                                                   |  | $                  | (0.12  | )                 |  | $         | (0.02 | )         |  | $ | 0.64   |   |  | $ | 0.97   |  
|Diluted (loss) earnings per share                                                           |  | $                  | (0.11  | )                 |  | $         | (0.01 | )         |  | $ | 0.58   |   |  | $ | 0.69   |  
|Pro forma diluted (loss) earnings per share                                                 |  | $                  | (0.12  | )                 |  | $         | (0.02 | )         |  | $ | 0.54   |   |  | $ | 0.66   |  

The weighted average fair value of the Companys stock options was
calculated using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2002: no dividend yield;
expected volatility of 55%; risk-free interest rate of 2.3%; and
expected life of
5.41 years. There were 626,000 option grants during the nine
month period ended March 29, 2003. The
weighted average fair value of options granted during the nine month
period ended March 29, 2003 was $3.7 million.



|5. |  | FINANCING AGREEMENTS
|-- |  | --------------------

In January 2003, the Company entered into a $65 million revolving credit
facility (Loan Agreement) with Wells Fargo Retail Finance, LLC, as the
arranger, collateral agent and administrative agent, and Fleet Retail Finance,
Inc., as the documentation agent. Under the terms of the Loan Agreement, the
Company may borrow amounts based on a percentage of its eligible inventory and
credit card receivables, subject to certain borrowing conditions and customary
sub-limits, reserves and other limitations. Interest on advances is charged,
at the Companys option, (i) at the adjusted Eurodollar rate plus the
applicable margin, which was set initially at 1.50% per annum or (ii) at the
prime rate plus the applicable margin, which was initially set at (0.25)% per
annum. The term of the Loan Agreement is through April 30, 2006 and is secured
by a lien on substantially all of the Companys assets. Pursuant
to the Loan Agreement, we have a standby letter of credit of
$3,130,000 at May 9, 2003. At
March 29, 2003 and May 9, 2003, the
Company had $18.6 million and $13.8 million in borrowings
outstanding under the Loan Agreement, respectively.

During
the second quarter of 2003, the Company repaid the
remainder of the $9.1 million, net of $1.1 million discount, Series D 14.0%
Notes due 2004. The Notes were secured by a junior lien on substantially all
of the Companys assets. The repurchase resulted in a payment for interest and
prepayment incentives of $2.8 million and resulted in an after-tax charge of
$1.3 million.



|6. |  | STOCKHOLDERS EQUITY
|-- |  | -------------------
|  
|   |  | Stock Repurchase   

On September 19, 2001, the Board of Directors authorized the Company to
repurchase up to $15 million of the Companys outstanding common stock. The
stock repurchases are made at the discretion of management. During the three
months ended March 29, 2003, the Company repurchased approximately 463,000
shares for an aggregate amount of $4.1 million. As of March 29, 2003, the
Company had repurchased approximately 747,000 shares for an aggregate amount of
$5.9 million, or 39.6% of the total amount authorized to be repurchased.

8



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED
UNAUDITED FINANCIAL STATEMENTS(Continued)



| |  | Warrants
| |  | --------

There were no warrants exercised in the third quarter. In the nine months
ended March 29, 2003, there were 688,000 warrants exercised. This included an
exercise of 458,667 warrants for which cash proceeds of $490,774 were received
by the Company. In addition, there was a cashless exercise of warrants, in
which the warrant holders received in the aggregate 213,792 shares of common
stock. The remaining 15,541 shares with a market value of $245,386 were
surrendered in connection with this exercise.



|7. |  | LEGAL PROCEEDING     
|-- |  | ---------------------
|  
|   |  | Securities Litigation

The Company was named as a defendant in twelve class action complaints in
the United States District Court for the District of New Jersey. The former
Chief Executive Officer and a former Chief Financial Officer and Executive Vice
President of Operations were also named as defendants in these complaints. The
complaints were filed as class actions on behalf of persons who purchased or
acquired Party City common stock during various time periods between February
26, 1998 and March 18, 1999 (the Class Period). In October 1999, plaintiffs
filed an amended class action complaint and, in February 2000, plaintiffs filed
a second amended complaint, which alleged, among other things, violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5 promulgated thereunder, and sought unspecified damages. The
plaintiffs alleged that defendants issued a series of false and misleading
statements and failed to disclose material facts concerning, among other
things, Party Citys financial condition, adequacy of internal controls and
compliance with certain loan covenants during the Class period. The plaintiffs
further alleged that because of the issuance of a series of false and
misleading statements and/or the failure to disclose material facts, the price
of Party Citys common stock was artificially inflated.

In early 2000, defendants moved to dismiss the second amended complaint on
the ground that it failed to state a cause of action. On May 29, 2001, the
District Court issued an Opinion and Order dismissing the Complaint against all
defendants with prejudice. On June 27, 2001, plaintiffs filed a Notice of
Appeal to the United States Court of Appeals for the Third Circuit. In April
2002, the parties reached an agreement in principle to settle the action, and
the Court of Appeals has remanded the case to the District Court to supervise
the implementation of the settlement. The terms of the settlement are contained
in the agreement in principle, and include the settlement amount, which is not
material to the results of operations or financial condition. The settlement
provided for in the agreement in principle is subject to certain conditions,
including the negotiation of a definitive settlement agreement and the approval
of the terms of the settlement agreement by the District Court after notice to
the members of the class who have the right to object. There can be no
assurance that all these conditions will be satisfied.



| |  | Other
| |  | -----

A lawsuit was filed on September 25, 2001 against Party City in Los
Angeles Superior Court by an assistant manager in one of the Companys
California stores for himself and on behalf of other members of an alleged
class of Party City store managers (the Class) who claim the Company
misclassified the Class members as exempt from California overtime wage and
hour laws. The Class members seek the disgorgement of overtime wages allegedly
owed by the Company to them but not paid and they also seek punitive damages
and statutory penalties. If a class is certified, liability is found and a
judgment is entered, such a judgment may adversely affect the Company.

In addition to the foregoing, from time to time the Company is involved in
routine litigation incidental to the conduct of the business. The Company is
aware of no other material existing or threatened litigation to which the
Company is or may be a party.

9



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED
UNAUDITED FINANCIAL STATEMENTS(Continued)



|8. |  | SEGMENT INFORMATION
|-- |  | -------------------

The following table contains key financial information of the Companys
business segments (in thousands):

|                                     |  |               |         |                   |  |           |         |           |  |   |         |   |  |   |         |  
|------------------------------------ |  | ------------- | ------- | ----------------- |  | --------- | ------- | --------- |  | - | ------- | - |  | - | ------- | -
|                                     |  | Quarter ended |         | Nine months ended
|                                     |  |               |         |                  
|                                     |  | March 29,     |         | March 30,         |  | March 29, |         | March 30,
|                                     |  | 2003          |         | 2002              |  | 2003      |         | 2002     
|                                     |  |               |         |                   |  |           |         |          
|RETAIL                               |  |               |         |                   |  |           |         |           |  |   |         |   |  |   |         |  
|Net revenue                          |  | $             | 95,846  |                   |  | $         | 86,252  |           |  | $ | 348,618 |   |  | $ | 309,026 |  
|Operating income                     |  |               | 2,487   |                   |  |           | 5,405   |           |  |   | 36,873  |   |  |   | 36,891  |  
|Identifiable assets                  |  |               | 159,900 |                   |  |           | 131,779 |           |  |   | 159,900 |   |  |   | 131,779 |  
|Depreciation/amortization            |  |               | 2,450   |                   |  |           | 1,829   |           |  |   | 6,817   |   |  |   | 5,439   |  
|Capital expenditures                 |  |               | 1,361   |                   |  |           | 1,663   |           |  |   | 15,185  |   |  |   | 4,024   |  
|FRANCHISING                          |  |               |         |                   |  |           |         |           |  |   |         |   |  |   |         |  
|Net revenue                          |  | $             | 3,687   |                   |  | $         | 3,852   |           |  | $ | 14,112  |   |  | $ | 13,574  |  
|Operating income                     |  |               | 1,932   |                   |  |           | 2,240   |           |  |   | 9,149   |   |  |   | 8,748   |  
|Identifiable assets                  |  |               | 1,675   |                   |  |           | 2,923   |           |  |   | 1,675   |   |  |   | 2,923   |  
|Depreciation/amortization            |  |               |        |                   |  |           |        |           |  |   |        |   |  |   |        |  
|Capital expenditures                 |  |               |        |                   |  |           |        |           |  |   |        |   |  |   |        |  
|CORPORATE/OTHER                      |  |               |         |                   |  |           |         |           |  |   |         |   |  |   |         |  
|Net revenue                          |  | $             |        |                   |  | $         |        |           |  | $ |        |   |  | $ |        |  
|Operating loss                       |  |               | (7,224  | )                 |  |           | (6,707  | )         |  |   | (22,928 | ) |  |   | (19,409 | )
|Identifiable assets                  |  |               | 15,192  |                   |  |           | 18,216  |           |  |   | 15,192  |   |  |   | 18,216  |  
|Depreciation/amortization            |  |               | 1,509   |                   |  |           | 1,244   |           |  |   | 4,275   |   |  |   | 3,505   |  
|Capital expenditures                 |  |               | 218     |                   |  |           | 1,897   |           |  |   | 1,596   |   |  |   | 4,584   |  
|CONSOLIDATED TOTALS                  |  |               |         |                   |  |           |         |           |  |   |         |   |  |   |         |  
|Net revenue                          |  | $             | 99,533  |                   |  | $         | 90,104  |           |  | $ | 362,730 |   |  | $ | 322,600 |  
|Operating (loss) income              |  |               | (2,805  | )                 |  |           | 938     |           |  |   | 23,094  |   |  |   | 26,230  |  
|Interest expense, net                |  |               | 208     |                   |  |           | 1,099   |           |  |   | 3,917   |   |  |   | 4,508   |  
|                                     |  |               |         |                   |  |           |         |           |  |   |         |   |  |   |         |  
|(Loss) income before income taxes    |  |               | (3,013  | )                 |  |           | (161    | )         |  |   | 19,177  |   |  |   | 21,722  |  
|(Benefit) provision for income taxes |  |               | (1,205  | )                 |  |           | (65     | )         |  |   | 7,671   |   |  |   | 8,665   |  
|                                     |  |               |         |                   |  |           |         |           |  |   |         |   |  |   |         |  
|Net (loss) income                    |  | $             | (1,808  | )                 |  | $         | (96     | )         |  | $ | 11,506  |   |  | $ | 13,057  |  
|                                     |  |               |         |                   |  |           |         |           |  |   |         |   |  |   |         |  
|Identifiable assets                  |  | $             | 176,767 |                   |  | $         | 152,918 |           |  | $ | 176,767 |   |  | $ | 152,918 |  
|Depreciation/amortization            |  |               | 3,959   |                   |  |           | 3,073   |           |  |   | 11,092  |   |  |   | 8,944   |  
|Capital expenditures                 |  |               | 1,579   |                   |  |           | 3,560   |           |  |   | 16,781  |   |  |   | 8,608   |  

10



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED
UNAUDITED FINANCIAL STATEMENTS(Continued)



|9. |  | ACQUISITIONS AND DISPOSITIONS OF STORES
|-- |  | ---------------------------------------

During the first nine months of fiscal 2003, the Company acquired two
stores from a franchisee. The aggregate consideration paid in connection with
this acquisition was $1,603,000. The condensed consolidated balance sheets include
allocations of the purchase price related to this transaction of approximately
$1,002,000 in goodwill, $195,000 in fixed assets and $406,000 in inventory.

In the
fourth quarter of fiscal 2002, the Company completed the acquisition of thirteen stores
in the Seattle, Washington market from Paper Warehouse, Inc. The conversion of
these locations to the Party City store format has been completed and all
stores were opened by the first quarter of fiscal 2003. Additional goodwill of
$154,000 was recorded in the first nine-months of fiscal 2003 related to the
completion of the conversion of these locations.

The acquisitions have been accounted for under the purchase method of
accounting. The results of operations of the acquired stores are included in
the financial statements from the date the stores were opened.

The changes in the carrying amount of goodwill for the nine months ended
March 29, 2003, by operating segment, are as follows (in thousands):

|                                    |  |                   |        | 
|----------------------------------- |  | ----------------- | ------ | 
|                                    |  | Nine months ended
|                                    |  | March 29, 2003   
|                                    |  |                  
|Retail:                             |  |                   |        | 
|Balance as of June 29, 2002         |  | $                 | 18,016 | 
|Goodwill acquired during the period |  |                   | 1,156  | 
|                                    |  |                   |        | 
|Balance as of March 29, 2003        |  | $                 | 19,172 | 
|                                    |  |                   |        | 

Assuming the stores acquired during the quarter and nine months ended
March 29, 2003 and March 30, 2002 were acquired at the
beginning of the respective periods, the pro forma
results would have been as follows (in thousands, except per share amounts):

|                                    |  |               |        |                   |  |           |        |           |  |   |         |  |  |   |         | 
|----------------------------------- |  | ------------- | ------ | ----------------- |  | --------- | ------ | --------- |  | - | ------- |  |  | - | ------- | 
|                                    |  | Quarter Ended |        | Nine months Ended
|                                    |  |               |        |                  
|                                    |  | March 29,     |        | March 30,         |  | March 29, |        | March 30,
|                                    |  | 2003          |        | 2002              |  | 2003      |        | 2002     
|                                    |  |               |        |                   |  |           |        |          
|Net sales                           |  | $             | 95,846 |                   |  | $         | 92,061 |           |  | $ | 350,067 |  |  | $ | 322,857 | 
|Net (loss) income                   |  | $             | (1,808 | )                 |  | $         | (200   | )         |  | $ | 11,583  |  |  | $ | 11,853  | 
|(Loss) earnings per share  basic   |  | $             | (0.11  | )                 |  | $         | (0.02  | )         |  | $ | 0.70    |  |  | $ | 0.92    | 
|(Loss) earnings per share  diluted |  | $             | (0.11  | )                 |  | $         | (0.02  | )         |  | $ | 0.59    |  |  | $ | 0.62    | 



|10. |  | GUARANTEES
|--- |  | ----------

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The Interpretation elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the
fair value, or market value, of the obligations it assumes under the guarantee
and must disclose that information in its interim and annual financial
statements. The provisions related to recognizing a liability at inception of
the guarantee for the fair value of the guarantors obligations do not apply to
product warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002.

11



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PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED
UNAUDITED FINANCIAL STATEMENTS(Continued)

The Company has unconditionally guaranteed the lease payments of 27 leases
associated with franchise stores and locations sublet. The majority of the
guarantees were given when the Company sold stores in 1999 as part of its
restructuring. The guarantees continue until the leases expire. The maximum
amount of the guarantees may vary, but is limited to the sum of the total
amount due under the lease. As of March 29, 2003, the maximum amount of the
guarantees was approximately $21.8 million.

12



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##### Table of Contents






Item 2.         Managements Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires the appropriate application of certain
accounting policies, many of which require estimates and assumptions about
future events and their impact on amounts reported in the financial statements
and related notes. Since future events and their impact cannot be determined
with certainty, the actual results will inevitably differ from our estimates.
Such differences could be material to the consolidated financial statements.

Management believes application of accounting policies, and the estimates
inherently required by the policies, are reasonable. These accounting policies
and estimates are constantly reevaluated, and adjustments are made when facts
and circumstances dictate a change. Historically, management has found the
application of accounting policies to be appropriate, and actual results
generally do not differ materially from those determined using necessary
estimates.

The Companys accounting policies are more fully described in Note 1 to
the consolidated financial statements located in the Annual Report on Form 10-K
filed with the Securities and Exchange Commission on September 27, 2002.
Management has identified certain critical accounting policies that are
described below.

Merchandise inventory.Inventory is valued using the cost method which
values inventory at the lower of the actual cost or market, at the individual
item level. Cost is determined using the weighted average method. Inventory
levels are reviewed to identify slow-moving and closeout merchandise that will
no longer be carried. Market is determined by the estimated net realizable
value, based upon the merchandise selling price.

Long-lived assets excluding goodwill.In the evaluation of the fair value
and future benefits of long-lived assets, the Company performs an analysis of
the anticipated undiscounted future net cash flows of the related long-lived
assets. If the carrying value of the related asset exceeds the undiscounted
cash flows, the carrying value is reduced to its fair value. Various factors
including future sales growth and profit margins are included in this analysis.
To the extent these future projections or strategies change, the conclusion
regarding impairment may differ from the current estimates.

Insurance accruals.The determination of insurance accruals is done using
the services of an actuary, applying certain historical experience factors.
Should a greater amount of claims occur compared to what was estimated or costs
increase beyond what was anticipated, reserves recorded may not be sufficient
and additional costs to the consolidated financial statements could be
required.

Goodwill.The Company evaluates goodwill annually or whenever events and changes in
circumstances suggest that the carrying amount may not be recoverable from its
estimated future cash flows. In making this assessment, management
relies on a
number of factors including operating results, business plans, economic
projections, anticipated future cash flows and marketplace data. A change in
these underlying assumptions may cause a change in the results of the tests and, as such, could cause fair value to be less than the carrying
value. In such event, the Company would then be required to record a charge,
which would impact earnings.

Sales Returns.The Company estimates future sales returns and, when
material, records a provision in the period that the related sales are recorded
based on historical information. Should actual returns differ from the
Companys estimates, the Company would be required to revise estimated sales
returns.

Store Closure Costs.The Company will record estimated store closure
costs, such as fixed asset write-offs, estimated lease commitment costs net of
estimated sublease income, markdowns for inventory that will be sold below
cost, and other miscellaneous store closing costs when the liability is
incurred. Such estimates may be subject to change should actual costs differ.

13



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##### Table of Contents



Results of Operations

SELECTED FINANCIAL DATA
(in thousands, except per share and store data)

|                                              |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |         | 
|--------------------------------------------- | ---------------------------------------- | - | ------------- | ------ | ----------------- | - | --------- | ------ | --------- | - | ------- | ------- |  | - | ------- | ------- | 
|                                              |                                          |   | Quarter ended |        | Nine months ended
|                                              |                                          |   |               |        |                  
|                                              |                                          |   | March 29,     |        | March 30,         |   | March 29, |        | March 30,
|                                              |                                          |   | 2003          |        | 2002              |   | 2003      |        | 2002     
|                                              |                                          |   |               |        |                   |   |           |        |          
|Statement of Operations Data                  |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|Total revenue                                 |                                          | $ | 99,533        |        |                   | $ | 90,104    |        |           | $ | 362,730 |         |  | $ | 322,600 |        
|                                              |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|Company-owned stores:                         |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|                                              | Net sales                                |   | $             | 95,846 |                   |   | $         | 86,252 |           |   | $       | 348,618 |  |   | $       | 309,026 | 
|                                              | Cost of goods sold and occupancy costs   |   |               | 70,164 |                   |   |           | 60,816 |           |   |         | 230,563 |  |   |         | 202,411 | 
|                                              |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|                                              | Gross profit                             |   |               | 25,682 |                   |   |           | 25,436 |           |   |         | 118,055 |  |   |         | 106,615 | 
|                                              | Store operating and selling expense      |   |               | 23,196 |                   |   |           | 20,031 |           |   |         | 81,182  |  |   |         | 69,724  | 
|                                              |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|                                              | Company-owned stores profit contribution |   |               | 2,486  |                   |   |           | 5,405  |           |   |         | 36,873  |  |   |         | 36,891  | 
|                                              | General and administrative expense       |   |               | 7,223  |                   |   |           | 6,707  |           |   |         | 22,928  |  |   |         | 19,409  | 
|                                              |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|                                              | Company-owned (loss) profit contribution |   |               | (4,737 | )                 |   |           | (1,302 | )         |   |         | 13,945  |  |   |         | 17,482  | 
|                                              |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|Franchise stores:                             |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|                                              | Royalty fees                             |   |               | 3,607  |                   |   |           | 3,652  |           |   |         | 13,757  |  |   |         | 13,031  | 
|                                              | Franchise fees                           |   |               | 80     |                   |   |           | 200    |           |   |         | 355     |  |   |         | 543     | 
|                                              |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|                                              | Total franchise revenues                 |   |               | 3,687  |                   |   |           | 3,852  |           |   |         | 14,112  |  |   |         | 13,574  | 
|                                              | Total franchise expense                  |   |               | 1,755  |                   |   |           | 1,612  |           |   |         | 4,963   |  |   |         | 4,826   | 
|                                              |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|                                              | Franchise profit contribution            |   |               | 1,932  |                   |   |           | 2,240  |           |   |         | 9,149   |  |   |         | 8,748   | 
|                                              |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|Operating (loss) income                       |                                          |   | (2,805        | )      |                   |   | 938       |        |           |   | 23,094  |         |  |   | 26,230  |        
|Interest expense, net                         |                                          |   | 208           |        |                   |   | 1,099     |        |           |   | 3,917   |         |  |   | 4,508   |        
|                                              |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|(Loss) income before income taxes             |                                          |   | (3,013        | )      |                   |   | (161      | )      |           |   | 19,177  |         |  |   | 21,722  |        
|(Benefit) provision for income taxes          |                                          |   | (1,205        | )      |                   |   | (65       | )      |           |   | 7,671   |         |  |   | 8,665   |        
|                                              |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|Net (loss) income                             |                                          | $ | (1,808        | )      |                   | $ | (96       | )      |           | $ | 11,506  |         |  | $ | 13,057  |        
|                                              |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|Basic (loss) earnings per share               |                                          | $ | (0.11         | )      |                   | $ | (0.01     | )      |           | $ | 0.69    |         |  | $ | 1.01    |        
|Diluted (loss) earnings per share             |                                          | $ | (0.11         | )      |                   | $ | (0.01     | )      |           | $ | 0.58    |         |  | $ | 0.69    |        
|Weighted average shares outstanding basic    |                                          |   | 16,653        |        |                   |   | 12,982    |        |           |   | 16,617  |         |  |   | 12,909  |        
|Weighted average shares outstanding  diluted |                                          |   | 16,653        |        |                   |   | 12,982    |        |           |   | 19,757  |         |  |   | 18,972  |        
|EBITDA (a)                                    |                                          | $ | 1,154         |        |                   | $ | 4,011     |        |           | $ | 34,186  |         |  | $ | 35,174  |        
|Cash flows (used in) provided by:             |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|Operating activities                          |                                          | $ | (8,985        | )      |                   | $ | (4,958    | )      |           | $ | 10,886  |         |  | $ | 20,927  |        
|Investing activities                          |                                          |   | (1,479        | )      |                   |   | (4,103    | )      |           |   | (16,637 | )       |  |   | (9,997  | )      
|Financing activities                          |                                          |   | 10,227        |        |                   |   | (5,014    | )      |           |   | 5,320   |         |  |   | (13,317 | )      
|Other information:                            |                                          |   |               |        |                   |   |           |        |           |   |         |         |  |   |         |        
|Depreciation and amortization                 |                                          |   | 3,959         |        |                   |   | 3,073     |        |           |   | 11,092  |         |  |   | 8,944   |        

14



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|                                          |                                    |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |         |     |  |     |     
|----------------------------------------- | ---------------------------------- | ------------------------------------------- | ------- | -------------------------------- | --- | ------------- | ------- | ----------------- | --- | --------- | ------- | --------- | --- | - | ------- | ------- | --- |  | --- | ----
|                                          |                                    |                                             |         |                                  |     | Quarter ended |         | Nine months ended
|                                          |                                    |                                             |         |                                  |     |               |         |                  
|                                          |                                    |                                             |         |                                  |     | March 29,     |         | March 30,         |     | March 29, |         | March 30,
|                                          |                                    |                                             |         |                                  |     | 2003          |         | 2002              |     | 2003      |         | 2002     
|                                          |                                    |                                             |         |                                  |     |               |         |                   |     |           |         |          
|Store Data:                               |                                    |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |        
|                                          | Company-owned:                     |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |         |    
|                                          |                                    | Stores open at beginning of period          |         |                                  | 239 |               |         |                   | 198 |           |         |           | 209 |   |         |         | 193 | 
|                                          |                                    |                                             |         | Stores opened                    |     |               | 3       |                   |     |           | 2       |           |     |   | 31      |         |     |  | 6   |     
|                                          |                                    |                                             |         | Stores closed                    |     |               | (1      | )                 |     |           |        |           |     |   | (1      | )       |     |  |    |     
|                                          |                                    |                                             |         | Stores acquired from franchisees |     |               |        |                   |     |           |        |           |     |   | 2       |         |     |  | 1   |     
|                                          |                                    |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |        
|                                          |                                    | Stores open at end of period                |         |                                  | 241 |               |         |                   | 200 |           |         |           | 241 |   |         |         | 200 | 
|                                          |                                    |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |        
|                                          |                                    | Average Company-owned stores open in
period |         |                                  | 240 |               |         |                   | 199 |           |         |           | 233 |   |         |         | 195 | 
|                                          |                                    |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |        
|                                          | Franchise:                         |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |         |    
|                                          |                                    | Stores open at beginning of period          |         |                                  | 240 |               |         |                   | 272 |           |         |           | 242 |   |         |         | 261 | 
|                                          |                                    |                                             |         | Stores opened                    |     |               | 1       |                   |     |           | 5       |           |     |   | 9       |         |     |  | 19  |     
|                                          |                                    |                                             |         | Stores closed                    |     |               |        |                   |     |           | (33     | )(b)      |     |   | (8      | )       |     |  | (35 | )(b)
|                                          |                                    |                                             |         | Stores sold to Company           |     |               |        |                   |     |           |        |           |     |   | (2      | )       |     |  | (1  | )   
|                                          |                                    |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |        
|                                          |                                    |                                             |         | Stores open at end of period     |     |               | 241     |                   |     |           | 244     |           |     |   | 241     |         |     |  | 244 |     
|                                          |                                    |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |        
|                                          |                                    | Average franchise stores open in period (b) |         |                                  | 240 |               |         |                   | 267 |           |         |           | 244 |   |         |         | 270 | 
|                                          |                                    |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |        
|Total stores chainwide                    |                                    |                                             | 482     |                                  |     |               | 444     |                   |     |           | 482     |           |     |   | 444     |        
|                                          |                                    |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |        
|Chainwide sales                           |                                    | $                                           | 197,000 |                                  |     | $             | 186,000 |                   |     | $         | 720,000 |           |     | $ | 684,000 |        
|                                          |                                    |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |        
|Same
store sales (decrease) increase (c): |                                    |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |        
|Company-owned stores                      |                                    |                                             | (2.4    | %)                               |     |               | 13.5    | %                 |     |           | 1.1     | %         |     |   | 5.8     | %      
|Franchise stores                          |                                    |                                             | 1.7     | %                                |     |               | 9.7     | %                 |     |           | 3.3     | %         |     |   | 4.3     | %      
|Average sales per Company-owned store     |                                    | $                                           | 426     |                                  |     | $             | 433     |                   |     | $         | 1,584   |           |     | $ | 1,585   |        
|Balance Sheet Data:                       |                                    |                                             |         |                                  |     |               |         |                   |     |           |         |           |     |   |         |        
|                                          | Working capital                    |                                             | $       | 11,322                           |     |               | $       | 15,095            |     |           | $       | 11,322    |     |   | $       | 15,095  |    
|                                          | Total assets                       |                                             |         | 176,767                          |     |               |         | 152,918           |     |           |         | 176,767   |     |   |         | 152,918 |    
|                                          | Bank borrowings and other debt (d) |                                             |         | 18,637                           |     |               |         | 16,414            |     |           |         | 18,637    |     |   |         | 16,414  |    
|                                          | Stockholders equity               |                                             |         | 77,319                           |     |               |         | 62,742            |     |           |         | 77,319    |     |   |         | 62,742  |    



---

|(a) |  | The Companys definition of EBITDA is earnings before interest, taxes,
depreciation and amortization. The Company believes EBITDA provides
additional information for determining our ability to meet future debt
service requirements. EBITDA should not be construed as a substitute for
income from operations, net income or cash flow from operating activities
(all as determined in accordance with generally accepted accounting
principles) for the purpose of analyzing our operating performance,
financial position and cash flows as EBITDA is not defined by generally
accepted accounting principles. The Company has presented EBITDA, however,
because it is commonly used by certain investors and analysts to analyze
and compare companies on the basis of operating performance and to
determine a companys ability to service and/or incur debt. The Companys
computation of EBITDA may not be comparable to similar titled measures of
other companies.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The Canadian master franchisee filed for bankruptcy protection under
Canadian law, closing 28 stores in fiscal 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(c) |  | Same store sales for Company-owned and franchise stores are subject to
material differences based on the age of the respective stores for each
group. New stores historically have had higher same store comparable
sales. Approximately 30% of the comparable franchise stores have less than
three full years of operation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(d) |  | The bank borrowings and other debt at March 30, 2002 is net of an
unamortized debt discount of $1.6 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

15



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##### Table of Contents



PARTY CITY CORPORATION AND
SUBSIDIARY

RECONCILIATION OF EBITDA TO NET
(LOSS) INCOME ANDCASH (USED IN) PROVIDED BY OPERATING ACTIVITIES(in
thousands)(Unaudited)

|                                                                                                   |                                                                  |                                                     |        |         |        |               |        |                   |        |           |         |           |        |   |         |         |        |  |  | 
|-------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | --------------------------------------------------- | ------ | ------- | ------ | ------------- | ------ | ----------------- | ------ | --------- | ------- | --------- | ------ | - | ------- | ------- | ------ |  |  | 
|                                                                                                   |                                                                  |                                                     |        |         |        | Quarter ended |        | Nine months ended
|                                                                                                   |                                                                  |                                                     |        |         |        |               |        |                  
|                                                                                                   |                                                                  |                                                     |        |         |        | March 29,     |        | March 30,         |        | March 29, |         | March 30,
|                                                                                                   |                                                                  |                                                     |        |         |        | 2003          |        | 2002              |        | 2003      |         | 2002     
|                                                                                                   |                                                                  |                                                     |        |         |        |               |        |                   |        |           |         |          
|EBITDA(1)                                                                                          |                                                                  | $                                                   | 1,154  |         |        | $             | 4,011  |                   |        | $         | 34,186  |           |        | $ | 35,174  |        
|                                                                                                  
|Depreciation
and amortization                                                                      |                                                                  |                                                     | (3,959 | )       |        |               | (3,073 | )                 |        |           | (11,092 | )         |        |   | (8,944) |        
|Interest
expense, net                                                                              |                                                                  |                                                     | (208   | )       |        |               | (1,099 | )                 |        |           | (3,917  | )         |        |   | (4,508  | )      
|Benefit
(provision) for income taxes                                                               |                                                                  |                                                     | 1,205  |         |        |               | 65     |                   |        |           | (7,671  | )         |        |   | (8,665  | )      
|                                                                                                   |                                                                  |                                                     |        |         |        |               |        |                   |        |           |         |           |        |   |         |        
|Net
(loss) income                                                                                  |                                                                  | $                                                   | (1,808 | )       |        | $             | (96    | )                 |        | $         | 11,506  |           |        | $ | 13,057  |        
|                                                                                                   |                                                                  |                                                     |        |         |        |               |        |                   |        |           |         |           |        |   |         |        
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                  | Net
(loss) income                                   |        | $       | (1,808 | )             |        | $                 | (96    | )         |         | $         | 11,506 |   |         | $       | 13,057 | 
|Adjustments
to reconcile net (loss) income to net cash (used in) provided by
operating activities: |                                                                  |                                                     |        |         |        |               |        |                   |        |           |         |           |        |   |         |        
|Depreciation
and amortization                                                                      |                                                                  |                                                     | 3,959  |         |        |               | 3,073  |                   |        |           | 11,092  |           |        |   | 8,944   |        
|Deferred
taxes                                                                                     |                                                                  |                                                     | 92     |         |        |               | 3,403  |                   |        |           | (349    | )         |        |   | 462     |        
|Non-cash
interest                                                                                  |                                                                  |                                                     | 30     |         |        |               | 285    |                   |        |           | 1,584   |           |        |   | 1,128   |        
|Deferred
rent and other long-term liabilities                                                      |                                                                  |                                                     | 76     |         |        |               | 117    |                   |        |           | 463     |           |        |   | 1,024   |        
|Equity
based compensation                                                                          |                                                                  |                                                     | 47     |         |        |               | 36     |                   |        |           | 799     |           |        |   | 257     |        
|Provision
for doubtful accounts                                                                    |                                                                  |                                                     | 142    |         |        |               | (210   | )                 |        |           | (460    | )         |        |   | 59      |        
|Changes
in assets and liabilities:                                                                 |                                                                  |                                                     |        |         |        |               |        |                   |        |           |         |           |        |   |         |        
|                                                                                                   | Merchandise
inventory                                            |                                                     |        | (6,967  | )      |               |        | (5,377            | )      |           |         | (19,882   | )      |   |         | (12,620 | )     
|                                                                                                   | Other
current assets and other assets                            |                                                     |        | 5,590   |        |               |        | 4,203             |        |           |         | (1,677    | )      |   |         | (1,242  | )     
|                                                                                                   | Accounts
payable, accrued expenses and other current liabilities |                                                     |        | (10,146 | )      |               |        | (10,392           | )      |           |         | 7,810     |        |   |         | 9,858   |       
|                                                                                                   |                                                                  |                                                     |        |         |        |               |        |                   |        |           |         |           |        |   |         |        
|                                                                                                   |                                                                  | Net
cash (used in) provided by operating activities |        | $       | (8,985 | )             |        | $                 | (4,958 | )         |         | $         | 10,886 |   |         | $       | 20,927 | 
|                                                                                                   |                                                                  |                                                     |        |         |        |               |        |                   |        |           |         |           |        |   |         |        



---

|(1) |  | The Companys definition of
EBITDA is earnings before interest, taxes, depreciation and
amortization. The Company believes EBITDA provides additional
information for determining our ability to meet future debt service
requirements. EBITDA should not be construed as a substitute for
income from operations, net income or cash flow from operating
activities (all as determined in accordance with generally accepted
accounting principles) for the purpose of analyzing our operating
performance, financial position and cash flows as EBITDA is not
defined by generally accepted accounting principles. The Company has
presented EBITDA, however, because it is commonly used by certain
investors and analysts to analyze and compare companies on the basis
of operating performance and to determine a companys ability to
service and/or incur debt. The Companys computation of EBITDA
may not be comparable to similar titled measures of other companies.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16



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Quarter Ended March 29, 2003 Compared with Quarter Ended March 30, 2002

Retail.Net sales from Company-owned stores increased 11.1% to $95.8
million for the third quarter of fiscal 2003 from $86.3 million for the same
period last year. Same store sales for Company-owned stores decreased 2.4% in
the third quarter of fiscal 2003 compared with an increase of 13.5% for the
same period last year. The Company opened three new stores and closed one
store during the third quarter of fiscal 2003 as compared with opening two new
stores in the same period last year. The third quarter sales performance
reflects the shift of approximately $4 million in sales for the Easter selling
season into the fourth quarter of fiscal 2003 as compared with the third
quarter last year. The total number of Company-owned stores with less than one
full year of operations is 42, or 17% of the total Company-owned store base.
Same store sales for Company-owned stores and franchise stores are subject to
material differences based on the age of the respective stores. New stores
historically have had higher same store comparable sales.

Gross profit reflects the cost of goods sold and store occupancy costs
including rent, common area maintenance, real estate taxes, repair and
maintenance, depreciation and utilities. Gross profit for the third quarter of
fiscal 2003 increased 1.0% to $25.7 million from $25.4 million for the same
period last year. The increase was primarily due to increased sales volume.
Gross margin as a percent of sales was 26.8% for the third quarter of fiscal
2003 compared with 29.5% for the same period last year. This decrease in gross
margin percent is due the shift of the Easter business to the fiscal fourth
quarter 2003, increased insurance expenses related to existing stores and a
higher occupancy cost ratio for new stores.

Store operating and selling expenses increased 15.8% to $23.2 million for
the third quarter of fiscal 2003 from $20.0 million in the same period last
year. The increase in store operating expenses is attributable to the increase
in the number of stores as well as a shift in advertising from April of last
year to March of this year. Store operating and selling expenses as a percent
of sales were 24.2% and 23.2% for the third quarter of fiscal 2003 and fiscal
2002, respectively. The increase as a percent of sales is due mainly to the
shift in the Easter selling season from the third quarter of last year to the
fourth quarter of this year, as well as start-up costs and advertising expense associated with stores in their first year of operation.
The pre-opening expenses incurred in the third quarter of fiscal 2003 for the
new stores and stores to be opened later in the fiscal year amounted to $57,000
compared with $241,000 incurred during the same period last year.

Company-owned stores recorded a contribution, which is gross profit less
store operating and selling expenses, of $2.5 million for the third quarter of
fiscal 2003 compared with $5.4 million for the same period last year. Store
contribution is lower than last year primarily due to lower same store sales
than last year as well as start up costs associated with the increase in the
number of stores. Store contribution as a percent of sales was 2.6% for the
third quarter of fiscal 2003 compared with 6.3% for the same period last year.
This decrease is due to negative same store sales and the reduced contribution
rate of new stores.

General and administrative expenses increased 7.7% to $7.2 million in the
third quarter of fiscal 2003 from $6.7 million in the same period last year.
General and administrative expenses as a percent of sales was 7.5% and 7.8% for
the third quarter of fiscal 2003 and fiscal 2002, respectively. This decrease
is primarily due to leveraging of the corporate office expenses.

Franchising.Franchise revenue is composed of the initial franchise fees
that are recorded as revenue when the store opens, and ongoing royalty fees,
generally 4.0% of the stores net sales. Franchise fees, recognized for two
stores were $80,000 in the third quarter of fiscal 2003 as compared with
$200,000 in the same period last year for five store openings. Royalty fees decreased 1.2% to $3.6
million in the third quarter of fiscal 2003 from $3.7 million in the same
period last year which is primarily due to a same store sales increase of 1.7%
for the franchise stores in the third quarter of fiscal 2003 offset by fewer
franchise stores in operation compared to the same time last year.

Expenses directly related to franchise revenue increased 8.9% to $1.8
million for the third quarter of fiscal 2003 from $1.6 million for the same
period last year. As a percentage of franchise revenue, franchise expenses were
47.6% and 41.8% for the third quarter of fiscal 2003 and fiscal 2002,
respectively. The increase is due to the shift in the Easter selling season
from the third quarter of last year to the fourth quarter of this year.

Interest Expense. Interest expense decreased 81.1% to approximately
$208,000 for the third quarter of fiscal 2003 from $1.1 million in the same
period last year. This decrease in interest expense is due to the repurchase of
outstanding senior notes during the second quarter of fiscal 2003 that had an
effective interest rate of 29%.

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Income Taxes.The effective income tax rate was 40.0% in the third quarter
of fiscal 2003 and 40.4% for the same period in fiscal 2002.

Net
Loss. The Company incurred a net loss for the third quarter of $1.8
million, or $0.11 loss per share, as compared with a net loss of approximately
$96,000, or $0.01 loss per share in same period last year. The Companys
outstanding shares increased mainly due to warrants that were exercised in the
fourth quarter of fiscal 2002 as well as shares issued in conjunction with the
management and employee stock purchase plans.

Nine Months Ended March 29, 2003 Compared with Nine Months Ended March 30, 2002

Retail.Net sales from Company-owned stores increased 12.8% to $348.6
million for the nine months ended March 29, 2003 from $309.0 million for the
same period last year. Same store sales for Company-owned stores increased 1.1%
in the nine months ended March 29, 2003 as compared with 5.8% for the same
period last year. The nine months sales performance reflects the shift of
approximately $4 million in sales for the Easter selling season into the fourth
quarter of fiscal 2003 as compared with the third quarter last year. The total
number of Company-owned stores with less than one full year of operations is
42, or 17% of the total Company-owned store base. Same store sales for
Company-owned stores and franchise stores are subject to material differences
based on the age of the respective stores. New stores historically have had
higher same store comparable sales.

Gross profit reflects the cost of goods sold and store occupancy costs
including rent, common area maintenance, real estate taxes, repair and
maintenance, depreciation and utilities. Gross profit for the nine months ended
March 29, 2003 increased 10.7% to $118.1 million from $106.6 million for the
same period last year. The increase was primarily due to increased sales
volume. Gross margin as a percent of sales was 33.9% for the nine months ended
March 29, 2003 compared with 34.5% for the same period last year. This
decrease in gross margin percent is due the shift of the Easter business to the
fiscal fourth quarter 2003, increased insurance expenses related to existing
stores and a higher occupancy cost ratio for new stores.

Store operating and selling expenses increased 16.4% to $81.2 million for
the nine months ended March 29, 2003 from $69.7 million for the same period
last year. The increase in store operating expenses is attributable to same
store sales increases and the increase in the number of stores. Store
operating and selling expenses as a percent of sales were 23.3% and 22.6% for
the nine-month period ended March 29, 2003 and March 30, 2002, respectively.
This increase is mainly due to start-up costs and advertising expense
associated with the stores in their first year of operations. Pre-opening
expenses incurred in the first nine months of fiscal 2003 for the new stores
and stores to be opened later in the fiscal year amounted to $853,000 compared
with $456,000 incurred during the same period last year.

Company-owned stores recorded a contribution, which is gross profit less
store operating and selling expenses, of $36.9 million for both the nine months
ended March 29, 2003 and the same period last year. Store contribution as a
percent of sales was 10.6% compared to 11.9% for the nine-month period ended
March 29, 2003 and March 30, 2002, respectively. This decrease is due to the
reduced contribution rate of new stores as well as lower same store sales
increase.

General and administrative expenses increased 18.1% to $22.9 million for
the nine months ended March 29, 2003 from $19.4 million for the same period
last year. General and administrative expenses as a percent of sales were 6.6%
and 6.3% for the nine months ended March 29, 2003 and March 30, 2002,
respectively. This increase is primarily due $1.1 million in unusual expenses
associated with the Companys new logistics initiative and professional fees
related to the implementation of a new information system. The newly developed
systems have taken longer in testing and rollout than originally planned.
Nevertheless, the Company is committed to improving its infrastructure and
providing substantial long-term benefits to the operation of its stores and its
planned store growth.

Franchising.Franchise revenue is composed of the initial franchise fees
that are recorded as revenue when the store opens, and ongoing royalty fees,
generally 4.0% of the stores net sales. Franchise fees, recognized on nine
store openings, were $355,000 for the nine months ended March 29, 2003 as
compared with $543,000 for the same period last year relating to 19 store
openings. Royalty fees increased 5.6% to $13.8 million in the nine months ended
March 29, 2003 from $13.0 million in the same period last year. This increase
is primarily due to an increase of 3.3% in same store sales for the franchise
stores in the nine month period ended March 29, 2003 compared with 4.3% for the
same period last year.

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Expenses directly related to franchise revenue were $5.0 million for the
nine months ended March 29, 2003 as compared with $4.8 million for the same
period last year. As a percentage of franchise revenue, franchise expenses were
35.2% and 35.6% for the nine months ended March 29, 2003 and March 30, 2002,
respectively. This decrease is due to better leveraging of franchise expenses
and a lower provision for bad debt in fiscal 2003. In the nine month period
ended March 30, 2002, the Company recorded a provision for the bad debt
associated with the royalty receivable of its Canadian franchises.

Interest Expense.Interest expense decreased 13.1% to $3.9 million for the
nine months ended March 29, 2003 from $4.5 million in the same period last
year. This decrease in interest expense is due to the repurchase of outstanding
senior notes during the later part of the second quarter that had an effective
interest rate of 29%. These notes had a cash interest rate of 18.5% as well as
original issue discount accounting for the high effective interest rate. The
repurchase of these notes was completed using working capital and borrowings
under the Companys asset-based revolving credit agreement. The repurchase of
the notes resulted in an after-tax charge of $1.3 million
related to interest and a pre-payment premium.

Income Taxes.The effective income tax rate was 40.0% in the nine months
ended March 29, 2003 and 39.9% in the nine months ended March 30, 2002.

Net Income. As a result of the above factors, net income for the nine
months ended March 29, 2003 was $11.5 million, or $0.69 per basic share and
$0.58 per diluted share, as compared with net income of $13.1 million, or $1.01
per basic share and $0.69 per diluted share for the same period last year. The Companys outstanding
shares increased mainly due to warrants that were exercised in the fourth
quarter of fiscal 2002, incremental shares of options that are dilutive as well
as shares issued in conjunction with the management and employee stock purchase
plans.

Liquidity and Capital Resources

The Companys cash requirements are primarily for working capital, the
opening of new stores, the improvement and expansion of existing facilities and
the improvement of information systems. Historically, these cash requirements
have been met through cash flow from operations and borrowings under credit
facilities. At March 29, 2003, working capital was $11.3 million compared with
$15.1 million at March 30, 2002.

For the nine month period ended March 29, 2003, cash provided by operating
activities was $10.9 million, compared with $20.9 million for the same period
last year. The decrease in cash provided by operating activities was primarily
attributable to an increase in inventory and a decrease in accounts payable and
other current liabilities. The increase in average inventory levels per store
of 3.6% is the result of the Companys plan to sustain strong in-stock levels.

Cash used in investment activities for the nine-month period ended March
29, 2003 was $16.6 million compared with $10.0 million in the same period last
year. The increase in cash used in investing activities was primarily
attributable to the continued investment in 31 new store openings during the
nine months ended March 29, 2003 as compared with six openings during the same
period last year.

Cash provided by financing activities was $5.3 million for the nine-month
period ended March 29, 2003 as compared to net cash used of $13.3 million in
the same period last year. The current years cash provided by financing
activities relates to increased borrowings under the new Loan Agreement offset
in part by the payment of $10.2 million in Senior Notes in advance of maturity
and the purchase of treasury stock as part of the Companys stock buy-back
plan.

In January 2003, the Company entered into a $65 million revolving credit
facility (the Loan Agreement) with Wells Fargo Retail Finance, LLC, as the
arranger, collateral agent and administrative agent, and Fleet Retail Finance,
Inc., as the documentation agent. Under the terms of the Loan Agreement, the
Company may borrow amounts based on a percentage of its eligible inventory and
credit card receivables, subject to certain borrowing conditions and customary
sub-limits, reserves and other limitations. Interest on advances is charged,
at the Companys option, (i) at the adjusted Eurodollar rate plus the
applicable margin, which was set initially at 1.50% per annum or (ii) at the
prime rate plus the applicable margin, which was initially set at (0.25)% per
annum. The term of the Loan Agreement is through April 30, 2006 and is secured
by a lien on substantially all of the Companys assets. Pursuant
to the Loan Agreement, we have a standby letter of credit of
$3,130,000 at May 9, 2003. At March 29, 2003 and May 9, 2003, the
Company had $18.6 million and $13.8 million in borrowings outstanding under the Loan Agreement, respectively.

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During the second quarter of fiscal 2003, the Company repaid the
remainder of the $9.1 million, net of $1.1 million discount, Series D 14.0%
Notes due 2004. The Notes were secured by a junior lien on substantially all
of the Companys assets. The repurchase resulted in a payment of $2.8 million,
including interest and an incentive premium, and resulted in a one-time
after-tax charge of $1.3 million, or $0.07 per diluted share.

Company management currently believes that the cash generated by
operations, together with the borrowing availability under the Loan Agreement,
will be sufficient to meet the Companys working capital needs for the next
twelve months.

Contractual Obligations and Commercial Commitments

To facilitate an understanding of contractual obligations and commercial
commitments, the following data is provided:

|                              |                               |   |                        |         |        |   |           |        |           |   |               |        |  |   |        |        |  |   |        |        | 
|----------------------------- | ----------------------------- | - | ---------------------- | ------- | ------ | - | --------- | ------ | --------- | - | ------------- | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                              |                               |   | Payments Due By Period
|                              |                               |   |                       
|                              |                               |   | Total                  |         | 1 Year |   | 2-3 Years |        | 4-5 Years |   | After 5 years
|                              |                               |   |                        |         |        |   |           |        |           |   |              
|                              |                               |   | (in thousands)        
|Contractual Obligations:      |                               |   |                        |         |        |   |           |        |           |   |               |        |  |   |        |        |  |   |        |       
|                              | Capital lease obligations     |   | $                      | 43      |        |   | $         | 42     |           |   | $             | 1      |  |   | $      |       |  |   | $      |       | 
|                              | Severance arrangements        |   |                        | 315     |        |   |           | 315    |           |   |               |       |  |   |        |       |  |   |        |       | 
|                              | Advances under Loan Agreement |   |                        | 18,637  |        |   |           | 18,637 |           |   |               |       |  |   |        |       |  |   |        |       | 
|                              | Operating leases              |   |                        | 269,990 |        |   |           | 11,579 |           |   |               | 88,898 |  |   |        | 81,080 |  |   |        | 88,433 | 
|                              |                               |   |                        |         |        |   |           |        |           |   |               |        |  |   |        |        |  |   |        |        | 
|Total Contractual Obligations |                               | $ | 288,985                |         |        | $ | 30,573    |        |           | $ | 88,899        |        |  | $ | 81,080 |        |  | $ | 88,433 |       
|                              |                               |   |                        |         |        |   |           |        |           |   |               |        |  |   |        |        |  |   |        |        | 

Pursuant to the Loan
Agreement, we have a standby letter of Credit of $3,130,000 at
May 9, 2003.

Accounting and Reporting Changes

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 146, Accounting for
Costs Associated with Exit or Disposal Activities (SFAS No. 146), replacing
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred instead of at the date an entity
commits to an exit plan. This statement also established that fair value is
the objective for the initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company has adopted this statement and it did not have a material
impact on its financial position or the results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The disclosure requirement is
effective for the Companys current quarter (see Note 10). The Company has
adopted this statement and it did not have a material impact on its financial
position or the results of operations.

In November 2002, the EITF reached a consensus on issues raised in EITF
02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor
(EITF 02-16). This EITF issue addresses the timing of recognition for
rebates that are earned by resellers based on specified levels of purchases or
over specified periods. This guidance, related to timing of recognition, is to
be applied prospectively to new rebate arrangements entered into in fiscal
periods beginning after January 1, 2003. This EITF issue also addresses the
classification of cash consideration received from vendors in a resellers
statement of operations. The guidance related to income statement
classification is to be applied in annual and interim financial statements for
periods beginning after January 1, 2003. The Company has adopted this statement
and it did not have a material impact on its financial position or the results
of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation (SFAS No. 148). SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of FASB Statement No. 123, Accounting For Stock-Based
Compensation (SFAS 123)

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to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation.
The Company has adopted the disclosure provisions of SFAS 148 as of
December 31, 2002 (see Note 4).

Inflation

The Company does not believe that its operating results have been
materially affected by inflation during the preceding three years. There can
be no assurance, however, that the Companys operating results will not be
affected by inflation in the future.

Seasonality

The Companys business is subject to substantial seasonal variations.
Historically, the Company has realized a significant portion of its net sales
and net income for the year during the second fiscal quarter. The Company
believes this is the general pattern associated with its segment of the retail
industry and expects this pattern will continue in the future. Consequently,
comparisons between quarters are not necessarily meaningful and the results for
any quarter are not necessarily indicative of future results.

The Companys quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors, including the timing
of new store openings, store closings and store sales.

Forward-Looking Statements

This Form 10-Q (including the information incorporated herein by
reference) contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. The statements are made a
number of times and may be identified by such forward-looking terminology as
estimate, project, expect, believe, may, will, could, intend,
plan, target and terms or variations of such terms. All of our information
and statements regarding our outlook for the future constitute forward-looking
statements. All our forward-looking statements are based on our current
expectations, assumptions, estimates and projections about our Company and
involve certain significant risks and uncertainties, including levels of sales,
store traffic, acceptance of product offerings and fashions, the success of our
new business concepts and seasonal concepts, the success of our new store
openings, competitive pressures from other party supplies retailers,
availability of qualified personnel, availability of suitable future store
locations, schedule of store expansion and of planned closings, the impact on
consumer spending as a result of a decrease in consumer confidence, a slowing
consumer economy and continued decreases in the stock market, a highly
promotional retail environment, the possibility of on-going hostilities in
the Middle East, and the impact of any unusual items resulting from
ongoing evaluations of the Companys business strategies could cause
actual results to differ. As a result of the foregoing risks and uncertainties, actual
results and performance may differ materially from that projected or suggested
herein. Additional information concerning certain risks and uncertainties that
could cause actual results to differ materially from that projected or
suggested may be identified from time to time in the Companys Securities and
Exchange Commission filings and the Companys public announcements. You are
urged to consider all such factors. In light of the uncertainty inherent in
such forward-looking statements, you should not consider their inclusion to be
a representation that such forward-looking matters will be achieved. The
Company assumes no obligation for updating any such forward-looking statements
to reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements.

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Item 3.        Quantitative and Qualitative Disclosures about Market Risk

The Company, in the normal course of doing business, is exposed to
interest rate change market risk. As borrowing patterns are cyclical, the
Company is not dependent on borrowing throughout the year. Therefore, a sudden
increase in interest rates (which under the Loan Agreement is dependent on the
prime rate or the adjusted Eurodollar rate) will not have a
negative impact on the Companys financial position or results of operations.

The Company continuously evaluates the market risk associated with its
financial instruments. Market risks relating to the Companys operations result
primarily from changes in interest rates. The Company does not engage in
financial transactions for trading or speculative purposes.




Item 4.         Controls and Procedures

The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Companys periodic
reports filed under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and in reaching a reasonable level of assurance, management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. The Company also established
a disclosure committee which consists of certain members of the Companys
senior management.

Within 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the
Companys management, including the Companys acting Chief Executive Officer
and the Companys Chief Financial Officer, of the effectiveness of the design
and operation of the Companys disclosure controls and procedures. Based on the
foregoing, the Companys acting Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures were
effective.

There have been no significant changes in the Companys internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation. There were no
significant deficiencies or material weaknesses, and therefore no corrective
actions were taken.

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PART II OTHER INFORMATION




Item 1.        Legal Proceedings

Securities Litigation

The Company was named as a defendant in twelve class action complaints in
the United States District Court for the District of New Jersey. The former
Chief Executive Officer and a former Chief Financial Officer and Executive Vice
President of Operations were also named as defendants in these complaints. The
complaints were filed as class actions on behalf of persons who purchased or
acquired Party City common stock during various time periods between February
26, 1998 and March 18, 1999 (the Class Period). In October 1999, plaintiffs
filed an amended class action complaint and, in February 2000, plaintiffs filed
a second amended complaint, which alleged, among other things, violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5 promulgated thereunder, and sought unspecified damages. The
plaintiffs alleged that defendants issued a series of false and misleading
statements and failed to disclose material facts concerning, among other
things, Party Citys financial condition, adequacy of internal controls and
compliance with certain loan covenants during the Class Period. The plaintiffs
further alleged that because of the issuance of a series of false and
misleading statements and/or the failure to disclose material facts, the price
of Party Citys common stock was artificially inflated.

In early 2000, defendants moved to dismiss the second amended complaint on
the ground that it failed to state a cause of action. On May 29, 2001, the
District Court issued an Opinion and Order dismissing the Complaint against all
defendants with prejudice. On June 27, 2001, plaintiffs filed a Notice of
Appeal to the United States Court of Appeals for the Third Circuit. In April
2002, the parties reached an agreement in principle to settle the action, and
the Court of Appeals has remanded the case to the District Court to supervise
the implementation of the settlement. The terms of the settlement are contained
in the agreement in principle, and include the settlement amount, which is not
material to the results of operations or financial condition. The settlement
provided for in the agreement in principle is subject to certain conditions,
including the negotiation of a definitive settlement agreement and the approval
of the terms of the settlement agreement by the District Court after notice to
the members of the class who have the right to object. There can be no
assurance that all these conditions will be satisfied.

Other

A lawsuit was filed on September 25, 2001 against Party City in Los
Angeles Superior Court by an assistant manager in one of the Companys
California stores for himself and on behalf of other members of an alleged
class of Party City store managers (the Class) who claim the Company
misclassified the Class members as exempt from California overtime wage and
hour laws. The Class members seek the disgorgement of overtime wages allegedly
owed by the Company to them but not paid and they also seek punitive damages
and statutory penalties. If a class is certified, liability is found and a
judgment is entered, such a judgment may adversely affect the Company.

In addition to the foregoing, from time to time the Company is involved in
routine litigation incidental to the conduct of the business. The Company is
aware of no other material existing or threatened litigation to which the
Company is or may be a party.




Item 2.        Changes in Securities and Use of Proceeds

None




Item 3.        Defaults upon Senior Securities

None




Item 5.         Other Information

None




Item 6.         Exhibits and Reports on Form 8-K

(a)  The
exhibits required to be filed as part of this report on Form 10-Q are
listed in the attached Exhibit Index.

(b)  Report
on Form 8-K.

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EXHIBIT INDEX

|            |      |  |                                                                                                                                                                                                                                                                                 
|----------- | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |      | 
|            |      | 
|            | 3.1  |  | Certificate of Incorporation of the Company, incorporated by reference
from the Companys Registration Statement as amended on Form S-1 Number
333-00350 as filed with the Commission on January 18, 1996 (the S-1).                                                          
|            |      |  |                                                                                                                                                                                                                                                                                 
|            | 3.2  |  | Bylaws of the Company, as amended, incorporated by reference from the
Companys Current Report on Form 8-K as filed with the Commission on
June 8, 2000.                                                                                                                        
|            |      |  |                                                                                                                                                                                                                                                                                 
|            | 4.1  |  | Specimen stock certificate evidencing the Common Stock, incorporated by
reference from the S-1.                                                                                                                                                                                 
|            |      |  |                                                                                                                                                                                                                                                                                 
|            | 4.2  |  | Form of Amended and Restated Warrant, incorporated by reference from
the Companys Current Report on Form 8-K as filed with the
Commission on January 19, 2000 (the January 2000 8-K).                                                                                        
|            |      |  |                                                                                                                                                                                                                                                                                 
|            | 4.3  |  | Form of Securities Purchase Agreement, dated as of August 16, 1999, by
and between the Company and each of the Investors, incorporated by
reference from the Companys Current Report on Form 8-K as filed with the
Commission on August 25, 1999 (the August 1999 8-K).      
|            |      |  |                                                                                                                                                                                                                                                                                 
|            | 4.4  |  | First Amendment to Securities Purchase Agreement, dated as of January 14,
2000, by and between the Company and each of the Investors, incorporated
by reference from the January 2000 8-K.                                                                                      
|            |      |  |                                                                                                                                                                                                                                                                                 
|            | 4.5  |  | Second Amendment to Securities Purchase Agreement, dated as of April 1,
2001, by and among the Company and each of the Investors, incorporated by
reference from the Companys Quarterly
Report on Form 10-Q as filed with the Commission on May 15, 2001 (the May
2001 10-Q).
|            |      |  |                                                                                                                                                                                                                                                                                 
|            | 10.1 |  | Form of Unit Franchise Agreement entered into by the Company and
franchisees, incorporated by reference from the S-1.                                                                                                                                                           
|            |      |  |                                                                                                                                                                                                                                                                                 
|            | 10.2 |  | Option Agreement, dated as of June 8, 1999, between Steven Mandell and
Jack Futterman, incorporated by reference from Amendment No. 1 to Schedule 13D as filed by Jack Futterman with the
Commission on June 17, 1999 (Futtermans 13D).                                      
|            |      |  |                                                                                                                                                                                                                                                                                 
|            | 10.3 |  | Stock Pledge Agreement, dated as of June 8, 1999, between Steven Mandell
and Jack Futterman, incorporated by reference from Futtermans
13D.                                                                                                                                    
|            |      |  |                                                                                                                                                                                                                                                                                 
|            | 10.4 |  | Investor Rights Agreement, dated as of August 16, 1999, by and among the
Company, the Investors and Jack Futterman, incorporated by reference from
the August 1999 8-K.                                                                                                         
|            |      |  |                                                                                                                                                                                                                                                                                 
|            | 10.5 |  | First Amendment to Investor Rights Agreement, dated as of October 11,
2000, by and among the Company, the Investors and Jack Futterman,
incorporated by reference from the May 2001 10-Q.                                                                                       
|            |      |  |                                                                                                                                                                                                                                                                                 
|            | 10.6 |  | Second Amendment to Investor Rights Agreement, dated as of November 20,
2000, by and among the Company, the Investors and Jack Futterman,
incorporated by reference from the May 2001 10-Q.                                                                                     
|            |      |  |                                                                                                                                                                                                                                                                                 
|            | 10.7 |  | Description of oral consulting agreement between the Company and Ralph
Dillon, incorporated by reference from the Companys Quarterly Report on
Form 10-Q as filed with the Commission on February 13, 2001 (the February
2001 10-Q).                                         

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|            |       |  |                                                                                                                                                                                                                                                                                                                                                                       
|----------- | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |       | 
|            |       | 
|            | 10.8  |  | Employment Agreement of James Shea, dated as of December 10, 1999, by and
between the Company and James Shea, incorporated by reference from the
February 2001 10-Q.                                                                                                                                                                                                  
|            |       |  |                                                                                                                                                                                                                                                                                                                                                                       
|            | 10.9  |  | Employment Agreement of Andrew Bailen, dated as of August 7, 2000, by and
between the Company and Andrew Bailen, incorporated by reference from the
February 2001 10-Q.                                                                                                                                                                                               
|            |       |  |                                                                                                                                                                                                                                                                                                                                                                       
|            | 10.10 |  | Employment Agreement of Thomas Larson, dated as of June 18, 1999, by and
between the Company and Thomas Larson, incorporated by reference from the
February 2001 10-Q.                                                                                                                                                                                                
|            |       |  |                                                                                                                                                                                                                                                                                                                                                                       
|            | 10.11 |  | Management Stock Purchase Plan of the Company, incorporated by reference
from the Registration of Form S-8 as filed with the Commission on July 23,
2001.                                                                                                                                                                                                             
|            |       |  |                                                                                                                                                                                                                                                                                                                                                                       
|            | 10.12 |  | Employee Stock Purchase Plan of the Company, incorporated by reference
from the Companys Definitive Proxy Statement for the 2001
Annual Meeting of Stockholders, included within Form 14-A as filed
with the Commission on October 18, 2001.                                                                                                                         
|            |       |  |                                                                                                                                                                                                                                                                                                                                                                       
|            | 10.13 |  | 1999 Stock Incentive Plan (Amended and Restated as of October 25, 2000),
incorporated by reference from the February 2001 10-Q.                                                                                                                                                                                                                                       
|            |       |  |                                                                                                                                                                                                                                                                                                                                                                       
|            | 10.14 |  | Loan and Security Agreement, dated January 10, 2003, by and between the
Company and Wells Fargo Retail Finance, LLC, as the arranger, collateral
agent and administrative agent, and Fleet Retail Finance, Inc., as the
documentation agent, incorporated by reference from the Companys Current
Report on Form 8-K as filed with the Commission on January 10, 2003.
|            |       |  |                                                                                                                                                                                                                                                                                                                                                                       
|            | 21.1  |  | Subsidiaries. The wholly owned subsidiary of the Company is Party City
Michigan, Inc. incorporated on October 23, 1997, in the State of Delaware.
This subsidiary does business under the name Party City Michigan, Inc.                                                                                                                                              
|            |       |  |                                                                                                                                                                                                                                                                                                                                                                       
|            | 99.1  |  | Certifications required by 18 U.S.C. § 1350, as created by Section 906 of
the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                             

25



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

| |  |                        |  |     |  |                               
| |  | ---------------------- |  | --- |  | ------------------------------
| |  | PARTY CITY CORPORATION
| |  |                        |  |     |  |                               
| |  | By                     |  | /s/ |  | NANCY PEDOT                   
| |  |                        |  |    
| |  |                        |  |     |  | Nancy Pedot                   
| |  |                        |  |     |  | Acting Chief Executive Officer
| |  |                        |  |     |  |                               
| |  | By                     |  | /s/ |  | LINDA M. SILUK                
| |  |                        |  |    
| |  |                        |  |     |  | Linda M. Siluk                
| |  |                        |  |     |  | Chief Financial Officer       
| |  |                        |  |     |  |                               
| |  | By                     |  | /s/ |  | SUSAN HYDE                    
| |  |                        |  |    
| |  |                        |  |     |  | Susan Hyde                    
| |  |                        |  |     |  | Chief Accounting Officer      

Date: May 13, 2003

26



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##### Table of Contents






CERTIFICATIONS

I, Nancy Pedot, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Party City
Corporation;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
|
| | b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|
| | b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

| |  |                                        
| |  | ---------------------------------------
| |  | /s/       NANCY PEDOT                  
| |  |                                        
| |  | Name: Nancy Pedot                      
| |  | Title:   Acting Chief Executive Officer

Date: May 13, 2003

27



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##### Table of Contents



CERTIFICATION

I, Linda M. Siluk, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Party City
Corporation;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
|
| | b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|
| | b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

| |  |                                 
| |  | --------------------------------
| |  | /s/       Linda M. Siluk        
| |  |                                 
| |  | Name: Linda M. Siluk            
| |  | Title:   Chief Financial Officer

Date: May 13, 2003

28