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SECURITIES AND EXCHANGE
 COMMISSION

WASHINGTON, D.C. 20549



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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                          |  | COMMISSION FILE NUMBER
|------------------------------------------------------- |  | ----------------------
|SEPTEMBER 28, 2002                                      |  | 0-27826               
|                                                        |  |                       
|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:þ
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 November 2, 2002, there
 were outstanding 17,040,940 shares ofCommon 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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 5. OTHER INFORMATION                                                                    
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|EXHIBIT INDEX                
|SIGNATURES                   



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PARTY CITY CORPORATION AND SUBSIDIARY

INDEX

|              |                                                                                                                   | Page No.
|------------- | ----------------------------------------------------------------------------------------------------------------- | --------
|Part I.       | Financial Information                                                                                             |         
|Item 1.       | Condensed Consolidated Financial Statements (Unaudited)                                                           |         
|              | Condensed Consolidated Balance Sheets  September 28, 2002
 September 29, 2001 and June 29, 2002                  | 3       
|              | Condensed Consolidated Statements of Operations For the quarters ended September
 28, 2002 and September 29, 2001 | 4       
|              | Condensed Consolidated Statements of Cash Flows For the quarters ended
 September 28, 2002 and September 29, 2001 | 5       
|              | Notes to Condensed Consolidated Financial Statements                                                              | 6       
|Item 2.       | Managements Discussion and Analysis of Financial Condition
 and Results of Operations                            | 10      
|Item 3.       | Quantitative and Qualitative Disclosures About Market Risk                                                        | 15      
|Part II.      | Other Information                                                                                                 | 15      
|Item 1.       | Legal Proceedings                                                                                                 | 15      
|Item 2.       | Changes in Securities and Use
of Proceeds                                                                         | 16      
|Item 3.       | Defaults Under Senior Securities                                                                                  | 16      
|Item 4.       | Submission of Matters to a Vote of Security Holders                                                               | 16      
|Item 5.       | Other Information                                                                                                 | 16      
|Item 6.       | Exhibits and Reports on Form 8-K                                                                                  | 16      
|Exhibit Index | 16                                                                                                               

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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)



|                                                                                                                              | September 28, 2002 |         | September 29, 2001 |  | June 29, 2002
|----------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ------------------ |  | -------------
|                                                                                                                              |                    |         |                    |  |              
|                                                                                                                              | (Unaudited)        |         | (Unaudited)        |  | (1)          
|ASSETS                                                                                                                        |                    |         |                    |  |              
|Current assets:                                                                                                               |                    |         |                    |  |              
|Cash and cash equivalents                                                                                                     | $                  | 5,241   |                    |  | $            
|Merchandise inventory                                                                                                         |                    | 94,760  |                    |  |              
|Deferred income taxes                                                                                                         |                    | 6,410   |                    |  |              
|Other current assets                                                                                                          |                    | 14,992  |                    |  |              
|                                                                                                                              |                    |         |                    |  |              
|Total current assets                                                                                                          |                    | 121,403 |                    |  |              
|Property and equipment, net                                                                                                   |                    | 54,941  |                    |  |              
|Goodwill                                                                                                                      |                    | 19,062  |                    |  |              
|Other assets                                                                                                                  |                    | 4,392   |                    |  |              
|                                                                                                                              |                    |         |                    |  |              
|Total assets                                                                                                                  | $                  | 199,798 |                    |  | $            
|                                                                                                                              |                    |         |                    |  |              
|LIABILITIES
 AND STOCKHOLDERS EQUITY                                                                                         |                    |         |                    |  |              
|Current liabilities:                                                                                                          |                    |         |                    |  |              
|Accounts payable                                                                                                              | $                  | 73,255  |                    |  | $            
|Accrued expenses and other current liabilities                                                                                |                    | 23,893  |                    |  |              
|Advances under Loan Agreement                                                                                                 |                    | 16,136  |                    |  |              
|Senior Notes, current portion                                                                                                 |                    |        |                    |  |              
|                                                                                                                              |                    |         |                    |  |              
|Total current liabilities                                                                                                     |                    | 113,284 |                    |  |              
|Long-term liabilities:                                                                                                        |                    |         |                    |  |              
|Deferred rent and other long-term liabilities                                                                                 |                    | 10,310  |                    |  |              
|Senior Notes                                                                                                                  |                    | 9,083   |                    |  |              
|Commitments and contingencies                                                                                                 |                    |         |                    |  |              
|Stockholders equity:                                                                                                         |                    |         |                    |  |              
|Common stock $.01 par value, authorized 25,000,000 shares; issued
 17,010,465, 13,255,017 and 16,239,081 shares, respectively |                    | 170     |                    |  |              
|Additional paid-in capital                                                                                                    |                    | 40,597  |                    |  |              
|Retained earnings                                                                                                             |                    | 28,183  |                    |  |              
|Treasury stock, at cost (284,000, 100,000 and
 284,000 shares, respectively)                                                  |                    | (1,829  | )                  |  |              
|                                                                                                                              |                    |         |                    |  |              
|Total stockholders equity                                                                                                    |                    | 67,121  |                    |  |              
|                                                                                                                              |                    |         |                    |  |              
|Total liabilities and stockholders equity                                                                                    | $                  | 199,798 |                    |  | $            
|                                                                                                                              |                    |         |                    |  |              

See accompanying notes to
 condensed consolidated financial statements.

(1) The June 29, 2002 consolidated
 balance sheet was derived from the Companys audited 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
|------------------------------------------------------- | -------------
|                                                        |              
|                                                        | September 28,
|                                                        |              
|                                                        |              
|Revenues:                                               |              
|Net sales                                               | $            
|Royalty fees                                            |              
|Franchise fees                                          |              
|                                                        |              
|Total revenues                                          |              
|Expenses:                                               |              
|Cost of goods sold and occupancy costs                  |              
|Company-owned stores operating and selling expense      |              
|Franchise expense                                       |              
|General and administrative expense                      |              
|                                                        |              
|Total expenses                                          |              
|                                                        |              
|Loss before interest and income taxes                   |              
|Interest expense, net                                   |              
|                                                        |              
|Loss before income taxes                                |              
|Provision for income tax benefit                        |              
|                                                        |              
|Net loss                                                | $            
|                                                        |              
|Basic and diluted loss per share                        | $            
|Weighted average shares outstanding  basic and diluted |              
|                                                        |              

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)(Unaudited)



|                                                                             | Quarter ended
|---------------------------------------------------------------------------- | -------------
|                                                                             |              
|                                                                             | September 28,
|                                                                             |              
|                                                                             |              
|Cash flow from operating activities:                                         |              
|Net loss                                                                     | $            
|Adjustments to reconcile net loss to net cash
 used in operating activities: |              
|Depreciation and amortization                                                |              
|Deferred taxes                                                               |              
|Non-cash interest                                                            |              
|Deferred rent and other long-term liabilities                                |              
|Equity based compensation                                                    |              
|Provision for doubtful accounts                                              |              
|Changes in assets and liabilities:                                           |              
|Merchandise inventory                                                        |              
|Other current assets and other assets                                        |              
|Accounts payable and other current liabilities                               |              
|                                                                             |              
|Net cash used in operating activities                                        |              
|Cash flow from investment activities:                                        |              
|Purchases of property and equipment                                          |              
|Stores acquired from franchisees                                             |              
|                                                                             |              
|Net cash used in investment activities                                       |              
|Cash flow from financing activities:                                         |              
|Net proceeds from Loan Agreement                                             |              
|Proceeds from exercise of stock options and warrants                         |              
|Payments of Senior Notes                                                     |              
|Purchases of treasury stock                                                  |              
|                                                                             |              
|Net cash provided from financing activities                                  |              
|                                                                             |              
|Net increase (decrease) in cash and cash equivalents                         |              
|Cash and cash equivalents, beginning of period                               |              
|                                                                             |              
|Cash and cash
 equivalents, end of period                                    | $            
|                                                                             |              
|Supplemental disclosure of cash flow information:                            |              
|Income taxes paid                                                            | $            
|Interest paid                                                                |              
|Supplemental disclosure of non-cash financing activity:                      |              
|Issuance of shares under management stock plan                               |              
|Issuance of warrants                                                         |              

See accompanying notes to
 condensed consolidated financial statements.

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PARTY CITY CORPORATION
 AND SUBSIDIARY




NOTES TO CONDENSED CONSOLIDATED
 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
 September 28, 2002 and September 29, 2001 and the results of operations and cash
 flows for the quarters ended September 28, 2002 and September 29, 2001. 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 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 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 issued Statement of Financial Accounting
 Standards (SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal
 Activities. SFAS No. 146 addresses financial accounting and reporting for costs
 associated with exit or disposal activities and nullifies 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.
 This statement also established that fair value is the objective for initial measurement
 of the liability. The provisions of SFAS No. 146 are effective for exit or disposal
 activities that are initiated after December 31, 2002. The Company is currently
 evaluating the impact of SFAS No. 146 on its consolidated financial statements.




EITF Issue
 No. 02-16, Accounting by a Reseller for Cash Consideration Received from a
 Vendor, addresses how a reseller of a vendors products should account
 for cash consideration received from a vendor and how to measure that consideration
 in its income statement. The EITF has not yet reached a final consensus on this
 issue. The Company will continue to monitor, until consensus is reached, the impact
 EITF No. 02-16 will have on its consolidated financial statements.


3.   EARNINGS PER SHARE



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




|                                                        | Quarter Ended
|------------------------------------------------------- | -------------
|                                                        |              
|                                                        | September 28,
|                                                        |              
|                                                        |              
|                                                        | (Unaudited)  
|Net loss                                                | $            
|Loss per share  basic                                  |              
|Loss per share  diluted                                |              
|Average common shares outstanding                       |              
|Dilutive effect of warrants                             |              
|Dilutive effect of stock options                        |              
|Restricted stock units                                  |              
|                                                        |              
|Average common and common equivalent shares outstanding |              
|                                                        |              

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| |  | (a)  Options to
 purchase 2,320,586 shares of common stock at prices ranging from $1.71 to $32.50
 per share were outstanding at September 28, 2002 and warrants to purchase 2,496,000
 shares of common stock at $1.07 per share were outstanding at September 28, 2002
 but were not included in the computation of earnings per share because to do so
 would have been antidilutive.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                         
| |  | (b)  Options
 to purchase 1,795,078 shares of common stock at prices ranging from $1.95 to $31.13
 per share were outstanding at September 29, 2001 and warrants to purchase 6,280,000
 shares of common stock at $1.07 per share were outstanding at September 29, 2001
 but were not included in the computation of earnings per share because to do so
 would have been antidilutive.
| |  |                                                                                                                                                                                                                                                                                                                                                                                         
| |  | (c)  Restricted
 shares of 97,398 shares of common stock were outstanding at September 28, 2002 related
 to the Management Stock Purchase Plan. No restricted shares of common stock were
 outstanding at September 29, 2001.                                                                                                                                                           

4.   FINANCING AGREEMENTS



As of
 September 28, 2002, the Company had $16.1 million outstanding under the Loan and
 Security Agreement dated January 14, 2000 (the Loan Agreement), with
 Congress Financial Corporation. Pursuant to the Loan Agreement, the Company has
 a standby letter of credit of $1.4 million at September 28, 2002. Under the terms
 of the Loan Agreement, the Company may from time to time borrow, based on a percentage
 of eligible inventory, up to a maximum of $40 million at any time outstanding. Advances
 bear interest, at the Companys option, (i) at the adjusted Eurodollar rate
 plus the applicable margin, which was 2.25% per annum at September 28, 2002, or
 (ii) at the rate of 3/4% per annum above the prime rate, totaling 5.50% at September
 28, 2002. The term of the Loan Agreement is three years with renewals at the Companys
 discretion thereafter and is secured by a lien on substantially all
assets. The Company feels that financing through the renewal of this
Loan Agreement or through other sources is available.
 At November 2, 2002 the Company had no borrowings outstanding.




At September
 28, 2002 the Company had $9.1 million outstanding of Series D 14.0%
 Notes due 2004 which reflected a $1.1 million discount. The Notes are secured by a junior lien on substantially all of the
 Companys assets.


5.   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. As of September 28, 2002, the Company had repurchased
 284,000 shares for $1,829,000 or 12.2% of the total amount authorized to be repurchased.
 As of September 29, 2001, the Company had repurchased 100,000 shares for $646,000
 or 4.3% of the total amount authorized to be repurchased. No stock repurchases
 were made during the quarter ended September 28, 2002 or subsequent
thereto.




Warrants




In the
 quarter ended September 28, 2002, there were 688,000 warrants exercised. This included
 an exercise of 458,667 warrants for which proceeds of $490,774 was received. In
 addition, there was a cashless exercise, in which the warrant holders received
 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.


6.   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 the 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


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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 course 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.


7.   SEGMENT INFORMATION



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




|                                 | Quarter Ended
|-------------------------------- | -------------
|                                 |              
|                                 | September 28,
|                                 |              
|                                 |              
|                                 | (Unaudited)  
|RETAIL                           |              
|Net revenue                      | $            
|Operating earnings               |              
|Identifiable assets              |              
|Depreciation/amortization        |              
|Capital expenditures             |              
|FRANCHISING                      |              
|Net revenue                      | $            
|Operating earnings               |              
|Identifiable assets              |              
|Depreciation/amortization        |              
|Capital expenditures             |              
|CORPORATE/OTHER                  |              
|Net revenue                      | $            
|Operating loss                   |              
|Identifiable assets              |              
|Depreciation/amortization        |              
|Capital expenditures             |              
|CONSOLIDATED TOTALS              |              
|Net revenue                      | $            
|Operating loss                   |              
|Interest expense, net            |              
|                                 |              
|Loss before income tax benefit   |              
|Provision for income tax benefit |              
|                                 |              
|Net loss                         | $            
|                                 |              
|Identifiable assets              | $            
|Depreciation/amortization        |              
|Capital expenditures             |              

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8.   ACQUISITIONS AND DISPOSITIONS OF STORES



During
 the quarter ended September 28, 2002, the Company acquired two
stores from a franchisee.
 The aggregate consideration paid in connection with this acquisition was $1,493,000.
 The consolidated balance sheets include allocations of the purchase price related
 to this transaction of approximately $892,000 in goodwill, $195,000 in fixed assets
 and $406,000 in inventory.




In 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 in the first quarter
 of fiscal 2003. Additional goodwill of $154,000 was recorded in the quarter ended
 September 28, 2002 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 are opened.




The changes
 in the carrying amount of goodwill for the quarter ended September 28, 2002, by
 operating segment, are as follows (in thousands):




|Retail:                             |   |       
|----------------------------------- | - | ------
|Balance as of June 29, 2002         | $ | 18,016
|Goodwill acquired during the period |   | 1,046 
|                                    |   |       
|Balance as of September 28, 2002    | $ | 19,062
|                                    |   |       

Assuming the stores acquired during the
 quarter ended September 28, 2002 and September 29, 2001 were acquired on July 1,
 2001, the pro forma results would have been as follows (in thousands, except per
 share amounts) (unaudited):



|               | Quarter Ended
|-------------- | -------------
|               |              
|               | September 28,
|               |              
|               |              
|Total Revenues | $            
|Net Loss       | $            
|Loss per share | $            

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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 our 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 whenever events and changes in circumstances
 suggest that the carrying amount may not be recoverable from its estimated future
 cash flows. To the extent these future projections or our strategies change, the
 conclusion regarding impairment may differ from the current estimates.


10



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##### Table of Contents



Results of Operations

SELECTED FINANCIAL DATA

(in thousands, except
 per share and store data)



|                                                      | Quarter Ended     
|----------------------------------------------------- | ------------------
|                                                      |                   
|                                                      | September 28, 2002
|                                                      |                   
|                                                      | (Unaudited)       
|Statement of Operations Data                          |                   
|Total revenue                                         | $                 
|                                                      |                   
|Company-owned stores:                                 |                   
|Net sales                                             | $                 
|Cost of goods sold and occupancy costs                |                   
|                                                      |                   
|Gross profit                                          |                   
|Store operating and selling expense                   |                   
|                                                      |                   
|Company-owned stores profit contribution              |                   
|General and administrative expenses                   |                   
|                                                      |                   
|Retail profit loss                                    |                   
|Franchise stores:                                     |                   
|Royalty fees                                          |                   
|Franchise fees                                        |                   
|                                                      |                   
|Total franchise revenues                              |                   
|Total franchise expense                               |                   
|                                                      |                   
|Franchise profit contribution                         |                   
|Loss before interest and income tax benefit           |                   
|Interest expense, net                                 |                   
|                                                      |                   
|Loss before income tax benefit                        |                   
|Provision for income tax benefit                      |                   
|                                                      |                   
|Net loss                                              | $                 
|                                                      |                   
|Basic and diluted loss per share(a)                   |                   
|                                                      |                   
|Weighted average shares outstandingBasic and Diluted |                   
|                                                      |                   
|EBITDA(b)                                             | $                 
|                                                      |                   
|Cash flows provided from (used in):                   |                   
|Operating activities                                  | $                 
|Investing activities                                  |                   
|Financing activities                                  |                   
|Other information:                                    |                   
|Depreciation and amortization                         | $                 
|                                                      |                   

11



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##### Table of Contents





|                                            |                    | Quarter Ended
|------------------------------------------- | ------------------ | -------------
|                                            |                   
|                                            | September 28, 2002 |              
|                                            |                    |              
|                                            | (Unaudited)       
|Store Data:                                 |                    |              
|Company-owned:                              |                    |              
|Stores open at beginning of period          |                    | 209          
|Stores opened                               |                    | 23           
|Stores acquired from franchisees            |                    | 2            
|                                            |                    |              
|Stores open at end of period                |                    | 234          
|Average Company-owned stores open in period |                    | 224          
|Franchise:                                  |                    |              
|Stores open at beginning of period          |                    | 242          
|Stores opened                               |                    | 7            
|Stores sold to Company                      |                    | (2           
|                                            |                    |              
|Stores open at end of period                |                    | 247          
|                                            |                    |              
|Average Franchise stores open
in period(c)  |                    | 244          
|Total stores chainwide                      |                    | 481          
|Chainwide sales                             |                    |              
|Same store sales increase(d)                |                    |              
|Company-owned stores                        |                    | 3.4          
|Franchise stores                            |                    | 5.9          
|Average sales per Company-owned store       | $                  | 427          
|Balance Sheet Data:                         |                    |              
|Working capital                             | $                  | 8,119        
|Total assets                                |                    | 199,798      
|Bank borrowings and other debt(e)           |                    | 25,219       
|Stockholders equity                        |                    | 67,121       



|(a) | Options, warrants
 and restricted stock units related to the Management Stock Purchase Plan were not
 included in the computation of diluted earnings per share for the quarter ended
 September 28, 2002 and September 29, 2001 because to do so would have been antidilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(b) | The Companys
 definition of EBITDA is earnings before interest, taxes, depreciation, amortization
 and impairment charge and exclusive of special charges. The Company believes EBITDA
 provides additional information for determining its 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 the Companys 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.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(c) | The
Canadian master franchisee filed for bankruptcy protection under
Canadian law, closing 28 stores in fiscal 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(d) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(e) | The bank borrowings
 and other debt at September 28, 2002 and September 29, 2001 is net of an unamortized
 debt discount of $1.1 million and $1.9 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

12



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##### Table of Contents



Quarter Ended September 28, 2002 Compared
 to Quarter Ended September 29, 2001

Retail. Net sales from Company-owned
 stores increased 12.8% to $91.1 million for the first quarter of fiscal 2003 from
 $80.8 million for the first quarter of the last fiscal year. Same store sales increased
 3.4% in the first quarter of fiscal 2003. The Company opened twenty-three new stores
 and acquired two stores from a franchisee during the first quarter of fiscal 2003.
 Four new stores opened during the first quarter of the prior fiscal year.



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 first quarter of fiscal 2003 increased 15.4% to $26.7 million
 from $23.1 million for the first quarter of the last fiscal year. Gross margin
 was 29.3% for the first quarter of fiscal 2003 compared with 28.6% for the first
 quarter of the last fiscal year. The increase was primarily due to stronger controls over
inventory and improved buying.




Store operating
 and selling expenses increased 17.2% to $23.7 million for the first quarter of fiscal
 2003 from $20.2 million in the first quarter of the last fiscal year. Store operating
 and selling expenses were 26.0% and 25.0% of sales for the first quarter of fiscal
 2003 and fiscal 2002, respectively. The increase is primarily due to expenses related
 to 23 new store openings in the first quarter of fiscal 2003, including grand opening advertising.
Pre-opening expenses
 incurred in the first quarter of fiscal 2003 for these stores and stores to be opened
 during the second quarter of fiscal 2003 were $409,000 compared with
 $205,000 in pre-opening expenses incurred during the first quarter of the prior
 fiscal year. Company-owned stores recorded a contribution of $3.0 million for the
 first quarter of fiscal 2003 compared to $2.9 million for the first quarter of the
 last fiscal year. The Company believes that the improvement over the prior year
 is primarily the result of improved gross margin as well as increased sales.




General and
 administrative expenses increased 18.5% to $7.3 million in the first quarter of
 fiscal 2003 from $6.2 million in the first quarter of the last fiscal year. General and administrative expenses
 were 8.0% and 7.6% of sales for the first quarter of fiscal 2003 and fiscal 2002,
 respectively, reflecting investments in management and systems. The
 increase is primarily attributable to an increase of $400,000 in payroll to $3.5 million from
 $3.1 million in the prior fiscal year related to salary increases and increased
 staffing; an increase of $250,000 in depreciation related to new systems to $1.05
 million from $800,000 in the prior fiscal year; and a $60,000 increase in expense
 due to expenses related to equity compensation.


Franchising. Franchise revenue is
 comprised 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 seven store openings were $235,000 for the first quarter of fiscal
 2003 compared to $343,000 for the first quarter of the last fiscal year, relating
 to 13 store openings. Royalty fees increased 12.4% to $3.6 million in the first
 quarter of fiscal 2003 from $3.2 million in the first quarter of the last fiscal
 year which is primarily due to an increase in the number of stores and a same store
 sales increase of 5.9% for the franchise stores in the first quarter of fiscal 2003.



Expenses directly
 related to franchise revenue increased 1.0% to $1.6 million for the first quarter
 of fiscal 2003 from $1.5 million for the first quarter of the last fiscal year.
 As a percentage of franchise revenue, franchise expenses were 40.2% and 43.1% for
 the first quarter of fiscal 2003 and fiscal 2002, respectively.




Franchise
 profit contribution increased 13.6% to $2.3 million for the first quarter of fiscal
 2003. The increase in franchise profit contribution is due to higher revenues and
 the increased number of franchise stores.


Interest Expense. Interest expense
 decreased 50.0% to $885,000 for the first quarter of fiscal 2003 from $1.8 million
 in the first quarter of the last fiscal year. This decreased expense is primarily
 attributable to lower average borrowings outstanding under the Loan Agreement and
 reduced principal balances on Senior Notes outstanding due to payments made over
 the last twelve months.

Income Tax Benefit. The effective
 income tax rate was 39.4% in the first quarter of fiscal 2003 compared to 40.0%
 in the first quarter of the last fiscal year.

Net Loss. As a result of the above
 factors, net loss for the first quarter of fiscal 2003 was $1.7 million, or $(0.11)
 loss per basic and diluted share, as compared to a net loss of $1.8 million, or
 $(0.14) loss per basic and diluted share in first quarter of the last fiscal year.

13



---



##### Table of Contents



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 the credit facilities. At September 28, 2002, working
 capital was $8.1 million compared to $6.8 million in the prior period.




For the quarter
 ended September 28, 2002, cash used in operating activities was $4.8 million, compared
 to $4.1 million for the same period of the last fiscal year. The increase in cash
 used in operating activities was primarily attributable to an increase in inventory
 offset by an increase in accounts payable and other current liabilities related to the
 store growth. The increase in average inventory level per store of
3.3% was a deliberate decision by management to enable the Company to sustain strong
in-stock levels throughout the Halloween selling season.




Cash used
 in investment activities for the quarter ended September 28, 2002 was $10.4 million
 compared to $4.5 million in the same period in the last fiscal year. The increase
 in cash used in investing activities was primarily attributable to the opening of
 twenty-three Company-owned stores and the acquisition of two stores
from a franchisee during the period.




Cash provided
 by financing activities was $17.0 million for the quarter ended
September 28, 2002 compared with $3.9 million for the first
quarter of fiscal 2002.
 This relates to increased borrowings under the Loan Agreement and proceeds from
 the exercise of stock options.




At September
 28, 2002, the Company had a $16.1 million balance outstanding under the Loan Agreement.
 Under the terms of the Loan Agreement, the Company may from time to time borrow
 amounts based on a percentage of its eligible inventory, up to a maximum of $40
 million at any time outstanding. Advances bear interest, at the Companys option,
 (i) at the adjusted Eurodollar rate plus the applicable margin, which was 2.25%
 per annum at September 28, 2002 or (ii) at the rate of 3/4% per annum above the
 prime rate, totaling 5.5% at September 28, 2002. The term of the Loan Agreement
 is three years, and is secured by a lien on substantially all of the assets of the
 Company. At November 2, 2002, the Company had no balance outstanding
and $38.9 million
 was available to be borrowed under the Loan Agreement.




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, including planned new store openings.


Contractual Obligations and Commercial
 Commitments



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




|                              | Payments Due By Period (in thousands)
|----------------------------- | -------------------------------------
|                              |                                      
|                              | Total                                
|                              |                                      
|Contractual Obligations       |                                      
|Senior Notes                  | $                                    
|Capital lease obligations     |                                      
|Operating leases              |                                      
|                              |                                      
|Total Contractual Obligations | $                                    
|                              |                                      

Accounting and Reporting Changes



In June 2002,
 the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
 Activities. SFAS No. 146 addresses financial accounting and reporting for costs
 associated with exit or disposal activities and nullifies 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.
 This statement also established that fair value is the objective for initial measurement
 of the liability. The provisions of SFAS No. 146 are effective for exit or disposal
 activities that are initiated after December 31, 2002. The Company is currently
 evaluating the impact of SFAS No. 146 on its consolidated financial statements.




EITF Issue
 No. 02-16, Accounting by a Reseller for Cash Consideration Received from a
 Vendor, addresses how a reseller of a vendors products should account
 for cash consideration received from a vendor and how to measure that consideration
 in its income statement. The EITF has not yet reached a final consensus on this
 issue. The Company will continue to monitor, until consensus is reached, the impact
 EITF No. 02-16 will have on its consolidated financial statements.


14



---



##### Table of Contents



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 throughout the document and may
 be identified by forward-looking terminology as estimate, project,
 expect, believe, may, will,
 intend or similar statements or variations of such terms. Such forward-looking
 statements involve certain risks and uncertainties, and include among others, the
 following: levels of sales, store traffic, acceptance of product offerings, competitive
 pressures from other party supplies retailers, availability of qualified personnel,
 availability of suitable future store locations, schedules of store expansion plans
 and other factors. 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.





ITEM 3. QUANTITATIVE AND QUALITATIVE
 DISCLOSURES ABOUT MARKET RISK

The Company, in the normal course of doing
 business, is theoretically 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 rate (which under the Loan Agreement
 is dependent on the prime rate) may, during peak borrowing, have a negative impact
 on short-term results.




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 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 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 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 there were no corrective actions taken.





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 our 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 course 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 we
 are to pay, which is not material to our 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


15



---



##### Table of Contents



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 4. SUBMISSION OF MATTERS TO A VOTE
 OF SECURITY HOLDERS






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




None





EXHIBIT INDEX



|3.1(1)  |  Certificate of Incorporation of the Company.                                                                                           
|------- | -----------------------------------------------------------------------------------------------------------------------------------------
|       
|3.2(2)  |  Bylaws of the Company, as amended.                                                                                                     
|       
|4.1(1)  |  Specimen stock certificate evidencing the Common Stock.                                                                                
|       
|4.2(3)  |  Form of Amended and Restated Warrant.                                                                                                  
|       
|4.3(4)  |  Form of A Note.                                                                                                                        
|       
|4.4(4)  |  Form of B Note.                                                                                                                        
|       
|4.5(4)  |  Form of C Note.                                                                                                                        
|       
|4.6(4)  |  Form of D Note.                                                                                                                        
|       
|4.7(3)  |  Form of E Note.                                                                                                                        
|       
|4.8(4)  |  Form of Securities Purchase Agreement, dated as of August 16, 1999,
 by and between the Company and each of the Investors.             
|       
|4.9(3)  |  First Amendment to Securities Purchase Agreement,
 dated as of January 14, 2000, by and
 between the Company and each of the Investors.
|       
|4.10(5) |  Second Amendment to Securities Purchase Agreement, dated as
 of April 1, 2001, by and among the Company and each of the Investors.     
|       
|10.1(1) |  Form of Unit Franchise Agreement entered
 into by the Company and franchisees.                                                         
|       
|10.2(6) |  Amended and Restated 1999 Stock Incentive
 Plan of the Company.                                                                        
|       
|10.3(7) |  Option Agreement, dated
as of June 8, 1999, between Steven Mandell and Jack Futterman.                                                 
|       
|10.4(7) |  Stock Pledge Agreement,
dated as of June 8, 1999, between Steven Mandell and Jack
Futterman.                                           
|       
|10.5(7) |  Employment Agreement, dated as of June 8, 1999, between the Company
 and Jack Futterman.                                               
|       
|10.6(4) |  Investor Rights Agreement, dated as of August 16, 1999, by
 and among the Company, the Investors and Jack Futterman.                   

16



---



##### Table of Contents





|10.7(4)  |  Standstill and Forbearance Agreement, dated as of August 16,1999, by
 and among the Company, PNC Bank, NationalAssociation, as Agent, and the Banks.                                                                      
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        
|10.8(4)  |  Vendor Forbearance and Standstill Agreement, dated as of August 16, 1999,
 by and among the Company and the TradeVendors.                                                                                                 
|        
|10.9(5)  |  First Amendment to Investor Rights Agreement, dated as of October 11, 2000,
 by and among the Company, the Investors and Jack Futterman.                                                                                  
|        
|10.10(5) |  Second Amendment to Investor Rights Agreement,
 dated as of November 20, 2000, by and among the Company, the Investors
and Jack Futterman.                                                                                
|        
|10.11(3) |  Loan and Security Agreement, dated January 14, 2000, by and
between the Company and Congress Financial Corporation.                                                                                                       
|        
|10.12(6) |  Description of oral consulting agreement between the
 Company and Ralph Dillon.                                                                                                                                           
|        
|10.13(6) |  Employment Agreement of James Shea, dated as of December 10,1999, by
 and between the Company and James Shea.                                                                                                             
|        
|10.14(6) |  Employment Agreement of Andrew Bailen, dated as of August 7,2000, by and
 between the Company and Andrew Bailen.                                                                                                          
|        
|10.15(6) |  Employment Agreement of Thomas Larson, dated as of June 18,1999, by and
 between the Company and Thomas Larson.                                                                                                           
|        
|10.16(8) |  Management Stock Purchase Plan of the Company                                                                                                                                                                             
|        
|10.17(9) |  Employee Stock Purchase Plan of the Company                                                                                                                                                                               
|        
|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.

Notes



|(1) | Incorporated
 by reference to our Registration Statement as amended on
Form S-1 Number 333-00350 as filed with the Commission on January 18, 1996.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                   
|(2) | Incorporated
 by reference to our Current Report on Form 8-K as filed with the
 Commission on June 8, 2000.                                       
|    |                                                                                                                                                   
|(3) | Incorporated
 by reference to our Current Report on Form 8-K as filed with the
 Commission on January 19, 2000.                                   
|    |                                                                                                                                                   
|(4) | Incorporated
 by reference to our Current Report on Form 8-K as filed with the
 Commission on August 25, 1999.                                    
|    |                                                                                                                                                   
|(5) | Incorporated
 by reference to our Quarterly Report on Form 10-Q as filed with the
 Commission on May 15, 2001.                                    
|    |                                                                                                                                                   
|(6) | Incorporated
 by reference to our Quarterly Report on Form 10-Q as filed with the
 Commission on February 13, 2001.                               
|    |                                                                                                                                                   
|(7) | Incorporated
 by reference to Amendment No. 1 to Schedule 13D as filed
by Jack Futterman with the Commission on June 17, 1999.                    
|    |                                                                                                                                                   
|(8) | Incorporated
 by reference to our Registration Statement on Form S-8 as filed
with the Commission on July 23, 2001.                               
|    |                                                                                                                                                   
|    | (b)   Reports
on Form 8-K.                                                                                                                        
|    |                                                                                                                                                   
|    | No
reports
on Form 8-K have been filed during the fourth quarter.                                                                                 
|    |                                                                                                                                                   
|(9) | Incorporated
 by reference to our Registration Statement on Form S-8 as filed
with the Commission on December 12, 2001.                           

17



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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.




| | PARTYCITY CORPORATION
| | ---------------------
| |                      
| | By /s/ James Shea    
| |                      
| |                      
| |                      
| |                      
| | By /s/ Linda M. Siluk
| |                      
| |                      
| |                      
| |                      
| | By /s/ Susan Hyde    
| |                      
| |                      
| |                      

Date: November 12, 2002

18



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##### Table of Contents



CERTIFICATIONS

I, James Shea, 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 officer 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.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                                 |  | 
|----------------------- |  | ----------------------------------------------- |  | 
|Date: November 12, 2002 |  | /s/ James Shea                                  |  | 
|                        |  |                                                 |  | 
|                        |  | Name: James Shea
Title: Chief Executive Officer |  | 

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##### Table of Contents



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 officer 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.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                                     |  | 
|----------------------- |  | --------------------------------------------------- |  | 
|Date: November 12, 2002 |  | /s/ Linda M. Siluk                                  |  | 
|                        |  |                                                     |  | 
|                        |  | Name: Linda M. Siluk
Title: Chief Financial Officer |  | 

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