<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                                -----------------
                                  FORM 10-Q/A

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                -----------------

FOR THE QUARTERLY PERIOD ENDED                            COMMISSION FILE NUMBER
        JANUARY 1, 2000                                           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)

                                -----------------

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 / / No: /X/

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 28, 2000, there were outstanding 12,722,205 shares of
                         Common Stock, $.01 par value.

<PAGE>   2
                             PARTY CITY CORPORATION

The Company hereby amends Part I of its quarterly report on Form 10-Q for the
period January 1, 2000 to reflect the restatement of its financial statements
for the quarter ended and six months ended December 31, 1998.

                                      INDEX


<TABLE>
<CAPTION>
Part I.      Financial Information                                                                  Page No.
                                                                                                    --------
<S>                                                                                                 <C>
       Item 1.  Consolidated Financial Statements
             Consolidated Balance Sheets - January 1, 2000 (Unaudited) and July 3, 1999                    3
             Consolidated Statements of Operations (Unaudited) - For the Quarter and Six                   4
                      Months Ended January 1, 2000 and December 31, 1998
             Consolidated Statements of Cash Flows (Unaudited) - For the Six Months Ended                  5
                      January 1, 2000 and December 31, 1998
             Notes to Consolidated Financial Statements                                                    6
       Item 2.  Management's Discussion and Analysis of Financial Condition and Results of                12
       Operations

Part II.     Other Information
       Item 2.  Changes in Securities                                                                     17
       Item 3.  Defaults Under Senior Securities                                                          17
       Item 4.  Submission of Matters to a Vote of Security Holders                                       17
       Item 6.  Exhibits and Reports on Form 8-K                                                          18
       Exhibit Index
</TABLE>
<PAGE>   3
PART 1.  FINANCIAL INFORMATION

Item 1. Financial Statements

                      PARTY CITY CORPORATION AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                         JANUARY 1, 2000    JULY 3, 1999*
                                                         ---------------    -------------
                                                           (UNAUDITED)
                     ASSETS
<S>                                                      <C>                <C>
Current assets:
   Cash and cash equivalents                                $ 11,145          $ 11,470
   Merchandise inventory                                      42,281            47,016
   Refundable income taxes                                     1,919             6,848
   Advance merchandise payments                                  812             9,439
   Other current assets                                       23,364            16,600
                                                            --------          --------
      Total current assets                                    79,521            91,373
Property and equipment, net                                   45,188            50,557
Goodwill, net                                                 15,455            18,483
Other assets                                                   1,308               906
                                                            --------          --------
      Total assets                                          $141,472          $161,319
                                                            ========          ========

      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts and notes payable - trade                       $ 32,589          $ 48,386
   Accrued expenses                                           13,761            10,145
   Credit Agreement                                            8,144            58,550
   Other current liabilities                                   3,398               986
                                                            --------          --------
      Total current liabilities                               57,892           118,067

   Deferred rent                                               7,020             6,527
   Senior Notes                                               28,181                --
   Other long-term liabilities                                   711               791

Commitments and contingencies

Stockholders' equity:
   Common stock, 12,722,205 and 12,455,538 shares
     outstanding, respectively                                   127               125
   Additional paid-in capital                                 36,777            34,024
   Retained earnings                                          10,764             1,785
                                                            --------          --------
       Total stockholders' equity                             47,668            35,934
                                                            --------          --------
       Total liabilities and stockholders' equity           $141,472          $161,319
                                                            ========          ========
</TABLE>


* Derived from audited consolidated financial statements.




          See accompanying notes to consolidated financial statements.
<PAGE>   4
                      PARTY CITY CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)


<TABLE>
<CAPTION>
                                                                  QUARTER ENDED                   SIX MONTHS ENDED
                                                           ---------------------------      ----------------------------
                                                                         (AS RESTATED)                     (AS RESTATED)
                                                                         (See Note 9)                      (See Note 9)
                                                                          ------------                      ------------
                                                           JANUARY 1,     DECEMBER 31,      JANUARY 1,      DECEMBER 31,
                                                             2000             1998            2000             1998
                                                           ----------     ------------      ----------      ------------
<S>                                                        <C>              <C>             <C>              <C>
Revenues:
  Net sales                                                $ 130,769        $ 134,199       $ 198,582        $ 190,205
  Royalty fees                                                 5,277            4,454           7,593            6,462
  Franchise fees                                                  --               35             322              395
                                                           ---------        ---------       ---------        ---------
    Total revenues                                           136,046          138,688         206,497          197,062
Expenses:
  Cost of goods sold and occupancy costs                      79,733           90,003         130,450          129,515
  Company-owned stores operating and selling expense          25,651           32,825          45,674           49,859
  Franchise expense                                            1,151            1,250           2,274            2,311
  General and administrative expense                           6,440            7,129          14,853           10,324
                                                           ---------        ---------       ---------        ---------
    Total expenses                                           112,975          131,207         193,251          192,009
                                                           ---------        ---------       ---------        ---------
Earnings before interest and income taxes                     23,071            7,481          13,246            5,053
Interest expense                                               2,070              616           4,504            1,763
                                                           ---------        ---------       ---------        ---------
Earnings before income taxes                                  21,001            6,865           8,742            3,290
Provision for income taxes (benefit)                            (237)           2,687            (237)           1,273
                                                           ---------        ---------       ---------        ---------
Net income                                                 $  21,238        $   4,178       $   8,979        $   2,017
                                                           =========        =========       =========        =========

Basic earnings per share                                   $    1.69        $    0.34       $    0.72        $    0.16
                                                           =========        =========       =========        =========
Weighted average shares outstanding - basic                   12,543           12,450          12,499           12,445
                                                           =========        =========       =========        =========
Diluted earnings per share                                 $    1.69        $    0.33       $    0.72        $    0.16
                                                           =========        =========       =========        =========
Weighted average shares outstanding - diluted                 12,543           12,603          12,499           12,615
                                                           =========        =========       =========        =========
</TABLE>




          See accompanying notes to consolidated financial statements.
<PAGE>   5
                      PARTY CITY CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (IN THOUSANDS) (UNAUDITED)

<TABLE>
<CAPTION>
                                                                            SIX MONTHS ENDED
                                                                      ----------------------------
                                                                                     (AS RESTATED
                                                                                     (See Note 9))
                                                                                     -------------
                                                                      JANUARY 1,     DECEMBER 31,
                                                                         2000            1998
                                                                      ----------     -------------
<S>                                                                   <C>            <C>
Cash flow from operating activities:
Net income                                                             $  8,979        $  2,017
Adjustments to reconcile net income to net cash provided by
operating activities:
     Depreciation and amortization                                        5,329           3,868
     Non-cash interest                                                      701              --
     Deferred rent                                                          493           1,435
     Provision for doubtful accounts                                        477             127
     Loss on sale of stores to franchisees                                1,042              --
     Deferred tax asset                                                    (915)           (927)
     Changes in assets and liabilities:
       Merchandise inventory                                                203          (3,621)
       Refundable income taxes                                            4,929             230
       Advance merchandise payments                                       8,627              --
       Other current assets                                              (6,736)          3,374
       Other assets                                                        (385)            (12)
       Accounts and notes payable                                       (15,797)         12,115
       Accrued expenses                                                   3,617             978
       Other current liabilities                                          1,312             103
       Other long-term liabilities                                          (81)           (630)
                                                                       --------        --------
         Net cash provided by operating activities                       11,795          19,057
Cash flow from investing activities
     Purchases of property and equipment                                 (1,789)        (20,040)
     Proceeds from sales of stores to franchisees                         9,877              --
     Stores acquired from franchisees                                        --          (6,222)
     Disposals of property and equipment                                     81              --
                                                                       --------        --------
          Net cash provided by (used in) investing activities             8,169         (26,262)
Cash flow provided by financing activities
     Proceeds from issuance of stock in exchange for services               800              --
     Proceeds from issuance of Senior Notes and warrants                 30,000              --
     Senior Note issuance costs                                            (673)             --
     Tax effect of non-qualified stock options                              (10)          1,074
     Net proceeds from (payments on) Credit Agreement                   (50,406)          7,759
     Proceeds from exercise of stock options                                 --             175
                                                                       --------        --------
           Net cash provided from (used in) financing activities        (20,289)          9,008
                                                                       --------        --------
Net increase (decrease) in cash and cash equivalents                       (325)          1,803
Cash and cash equivalents, beginning of period                           11,470           5,089
                                                                       --------        --------
Cash and cash equivalents, end of period                               $ 11,145        $  6,892
                                                                       ========        ========

Supplemental disclosure of cash flow information:
     Income taxes paid                                                      250             226
     Interest paid                                                        2,443           1,933
</TABLE>


          See accompanying notes to consolidated financial statements.
<PAGE>   6
                      PARTY CITY CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  BASIS OF PRESENTATION

     The consolidated financial statements presented in this Form 10-Q are
unaudited. The July 3, 1999 consolidated balance sheet has been derived from
audited financial statements. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the financial position of
the Company as of January 1, 2000 and the results of operations for the interim
periods presented and cash flows for six months ended January 1, 2000 and
December 31, 1998. 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 year.

     These consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements for the year ended July
3, 1999.

      Effective July 3, 1999, the Company changed its fiscal year end for
financial reporting from December 31 to the Saturday nearest to June 30. The
Company continues to use December 31 as its tax year end. The change to a 52-53
week calendar was made to facilitate comparable store sales computations. The
term "Fiscal Year" refers to the 52-53 weeks ending the Saturday nearest June
30, unless otherwise noted.

      Certain reclassifications of prior period amounts have been made to
conform to current period presentation.

2.  FINANCING AGREEMENTS

      On April 24, 1998, the Company refinanced and replaced its then existing
$20 million loan facility with a $60 million secured revolving line of credit
agreement with a group of banks maturing April 24, 2001 (as amended, the "Credit
Agreement"). Advances under the Credit Agreement originally bore interest, at
the Company's option, at the agent bank's base rate (the higher of the bank's
prime rate or the federal funds rate plus 1/2% per annum) or LIBOR plus an
applicable margin. The Company did not meet certain of its financial and
reporting covenants, including those relating to timely filing of consolidated
financial statements, minimum levels of profitability, net worth, liquidity,
fixed charge coverage and others. Consequently, the Company's debt under the
Credit Agreement was subject to acceleration and is classified as a current
liability in the consolidated balance sheets at December 31, 1998 and July 3,
1999. The Credit Agreement was secured by all the assets of the Company.
Additionally, the Credit Agreement restricted the payment of dividends.

3.   FINANCING ACTIVITIES, INCLUDING SUBSEQUENT EVENTS

      On August 16, 1999, the Company entered into agreements with its existing
bank lenders under the Credit Agreement (the "Banks"), a new group of investors
(the "Investors") and its trade vendors. The Banks and the Company entered into
a Standstill and Forbearance Agreement (the "Bank Forbearance Agreement"). Under
the Bank Forbearance Agreement, the Banks agreed not to exercise rights and
remedies based upon any existing defaults until June 30, 2000, unless a further
event of default occurred. The Company also agreed to reduce its outstanding
borrowings from $58.6 million to $15 million by October 30, 1999. The interest
rate on its bank debt was increased to 2% over the bank's prime interest rate,
and the Company paid a forbearance fee of $580,000.

      On August 17, 1999, the Company received $30 million in financing from the
Investors. The Investors purchased senior secured notes and warrants pursuant to
separate securities purchase agreements (the "Securities Purchase Agreements")
each dated as of August 16, 1999. Under these Securities Purchase Agreements,
the Company issued (i) $10 million of its 12.5% Secured Notes due 2003 (the "A
Notes"); (ii) $5 million of its 13.0% Secured Notes due 2003 (the "B Notes");
(iii) $5 million of its 13.0% Secured Notes due 2002 (the "C Notes"); (iv) $10
million of its 14.0% Secured Notes due 2004 (the "D Notes", and

<PAGE>   7
together with the A Notes, the B Notes and the C Notes, the "Notes"); and (v)
warrants (the "Warrants") to purchase 6,880,000 shares of the Company's common
stock at an initial exercise price of $3.00 per share. The Warrants were valued
at $1,965,000 based on management's estimate using certain fair value
methodologies and represent an original issue discount to the C Notes and D
Notes. Up to $15 million of the Notes were secured by a first lien that was pari
pasu with the liens under the Credit Agreement. The Notes are also secured by a
junior lien on all of the Company's assets. The Company issued the Warrants in
connection with the sale of the C Notes and the D Notes. The Warrants may be
exercised before the close of business on August 16, 2006. The shares of Common
Stock reserved for issuance under the Warrants represent approximately 35% of
the shares of common stock outstanding after giving effect to the exercise of
the Warrants. The proceeds from the $30 million in new financing were used for
the purchase of seasonal inventory, payment of amounts due under the Credit
Agreement, transaction fees and working capital.

     The Company also entered into an Investor Rights Agreement (the "Investor
Rights Agreement") with the Investors and Jack Futterman, then the chief
executive officer of the Company. In this agreement, the Company granted
registration rights with respect to shares of common stock. Under the Investor
Rights Agreement, the Investors agree that they will not, without the prior
written consent of the Board of Directors, (i) to acquire or agree to acquire,
publicly offer or make any public proposal with respect to the possible
acquisition of (a) beneficial ownership of any securities of the Company, (b)
any substantial part of the Company's assets, or (c) any rights or options to
acquire any of the foregoing from any person; (ii) make or in any way
participate in any "solicitation" of "proxies" (as such terms are defined in the
rules of the Securities Exchange Act of 1934, as amended) to vote, or seek to
advise or influence any person with respect to the voting of any voting
securities of the Company; or (iii) make any public announcement with respect to
any transaction between the Company or any of its securities holders and the
Investors, including without limitation, any tender or exchange offer, merger or
other business combination of a material portion of the assets of the Company.
These standstill provisions terminate if the Company's consolidated earnings
before interest, taxes, depreciation and amortization and exclusive of special
charges ("EBITDA"), does not meet specified targets. The Company achieved its
target EBITDA for the calendar year 1999. Also, in connection with these
transactions, one outside director of the Company resigned and two
representatives of the Investors joined the Board of Directors. The Company has
amended the restriction that prohibited the Investors from purchasing the
Company's stock to permit purchase up to an aggregate amount of 1.5 million
shares of the Company's common stock.

     Party City's trade vendors representing approximately $36.4 million of
trade debt also entered into an agreement with the Company. Pursuant to a Vendor
Standstill and Forbearance Agreement ("Vendor Forbearance Agreement"), these
trade vendors agreed to forbear from taking any action against Party City until
January 15, 2000. The trade vendors received promissory notes from Party City
totaling approximately $12.2 million representing one-third of their unpaid
balances as of May 1, 1999 (the "Trade Notes"). The Trade Notes bore interest at
a rate of 10% per year and were scheduled to mature on November 15, 1999.
Interest on the Trade Notes was due on January 15, 2000, unless the bank debt
was refinanced before such date. Separately, certain seasonal trade vendors
agreed to provide trade credit to the Company for 30% of purchases for the
Halloween, Thanksgiving and year-end holiday seasons. These vendors received a
shared lien on the Company's inventory for the amount of the credit.

     In order to meet the cash flow requirements of the Halloween seasonal
purchase of inventory and to meet the requirements of the Bank Forbearance
Agreement, the Company identified stores for sale to existing franchisees to
generate working capital. Eighteen stores with a net book value of approximately
$9.8 million were sold to franchisees. In order to facilitate the sale of these
stores, the Company agreed to waive royalty fees in respect of such stores for
negotiated periods up to five years. The total proceeds from the sales of these
stores was approximately $9.9 million. The net proceeds from the sale of stores
was required under the Bank Forbearance Agreement to be used to pay down the
outstanding borrowings under the Credit Agreement.

On January 14, 2000, the Company replaced the Credit Agreement with a new Loan
and Security Agreement (the "Loan Agreement") with Congress Financial
Corporation ("Congress"), as lender. Under
<PAGE>   8
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 initially 2.75% per annum (subject to possible reduction to an interest rate
as low as 2.25% from and after June 30, 2001, based on the Company's pre-tax
income and excess availability) or (ii) at the rate of 3/4% per annum above the
prime rate. 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 September 15, 2000,
there was $15.8 million outstanding and approximately $24.2 million was
available for borrowing under this revolving credit facility.

     On January 14, 2000, Party City also received $7 million in cash proceeds
from the sale to certain of its existing Investors (the "Investor Group") of a
new series of senior secured notes pursuant to a First Amendment (the "First
Amendment") to the Securities Purchase Agreements. Pursuant to the First
Amendment, the Company issued $7 million in aggregate principal amount of its
14.0% Secured Notes due 2002 (the "E Notes"). The E Notes are secured by a lien
on substantially all of the Company's assets. The Investor Group, together with
other existing Investors and Congress, have entered into an intercreditor
agreement. In consideration for waivers and forbearances granted by the
Investors to various defaults under the terms of the Company's A Notes, B Notes,
C Notes and D Notes, the Company also agreed to amend and restate the terms of
the Warrants held by the Investors to acquire 6,880,000 shares of the Company's
Common Stock. The amended and restated warrants (the "Amended Warrants") provide
for an exercise price of $1.07 per share and were issued upon surrender of the
Warrants which had an exercise price of $3.00 per share. The Amended Warrants
were valued at $3,156,000 based on management's estimate using certain fair
value methodologies and represent an original issue discount to the C Notes and
D Notes. This discount is being amortized using the effective interest method.
The effective yield is 28.6% and 28.9% on the C Notes and D Notes, respectively.

     The Company used the proceeds from the sale of the E Notes and initial
amounts borrowed under the Loan Agreement (i) to pay off all amounts owed under
the Credit Agreement, (ii) to pay all amounts owed on the Trade Notes and (iii)
to pay the remaining amounts owed to various seasonal trade vendors for credit
extended for inventory purchased by the Company for the 1999 Halloween,
Thanksgiving and year-end holiday seasons. All the remaining unpaid vendor
balances that were originally due May 1, 1999, were satisfied by individual
arrangements with such vendors.
<PAGE>   9
4.   RELATED PARTY TRANSACTION

      On November 2, 1999, the Company's Non-Executive Chairman of the Board
purchased $166,667 of the Company's 13.0% Secured Notes due 2002 and $333,333 of
the Company's 14.0% Secured Notes due 2004 from an Investor for a total purchase
price of $498,184. In connection with that purchase, the Non-Executive Chairman
acquired warrants to purchase 229,333 shares of the Company's common stock at an
exercise price of $3.00. In connection with the negotiations discussed in Note 3
above, on January 14, 2000, the exercise price for the warrants was reduced to
$1.07.

5.   SECURITIES LITIGATION

     The Company has been named as a defendant in twelve class
action complaints. The
<PAGE>   10
Company's former Chief Executive Officer and former Chief Financial Officer and
Executive Vice President of Operations have also been named as defendants. The
complaints have all been filed in the United States District Court for the
District of New Jersey. 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 1998 and March 19, 1999. In October 1999, plaintiffs
filed an amended class action complaint and in February 2000, plaintiffs filed a
second amended complaint.

     The second amended complaint alleges, among other things, violations of
sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, and seek unspecified damages. The plaintiffs allege that
defendants issued a series of false and misleading statements and failed to
disclose material facts concerning, among other things, the Company's financial
condition, adequacy of internal controls and compliance with certain loan
covenants. The plaintiffs further allege that because of the issuance of a
series of false and misleading statements and/or failure to disclose material
facts, the price of Party City common stock was artificially inflated.

          Defendants have moved to dismiss the second amended complaint on the
ground that it fails to state a cause of action. The Court has not yet issued a
decision with respect to the motion to dismiss. Because this case is in its
early stages, no opinion can be expressed as to its likely outcome.

  Other

     The Company was named as a defendant in a complaint filed with the Supreme
Court of the State of New York, County of New York, on January 16, 1998 (the
"Complaint"), by each of Party City of Greenbrook, Inc., Party City of Watchung,
Inc., Party City of 22, Inc., Party City of Ralph Avenue and Party City of
Jersey City, Inc., each a franchisee of the Company. Four of the plaintiffs in
the suit have existing Party City franchise stores, with the remaining plaintiff
possessing a right of first refusal to develop a Party City store in Watchung,
New Jersey.

     The Complaint stated various causes of action, including unjust enrichment,
unfair competition, fraud and misrepresentation, breach of contract,
misappropriation of information and violations of the New Jersey Franchise
Practices Act and the New York State Franchise Sales Act. The crux of the
Complaint was that the Company undertook a course of conduct intentionally
designed to adversely impact the value of the Plaintiffs' franchise stores in
order to permit the Company to purchase such stores at a substantially reduced
value. The Company settled the lawsuit on June 30, 1999, at no cost to the
Company. In connection with the settlement, the Company agreed to sell the
plaintiff one store at its fair value.

     On April 23, 1999, plaintiff Emil Asch, Inc. filed a Complaint in the
United States District Court for the Eastern District of New York against the
Company and co-defendants Amscan, Inc., Hallmark, Inc., and Rubie's Costume. The
Complaint alleges five claims, which pertain to price discrimination under the
Robinson-Patman Act, unfair competition, tortious interference with contractual
relations, and false and deceptive advertising.

     Plaintiff seeks damages of $2 million, as well as treble and punitive
damages for certain counts. The Company has answered the Complaint, and
discovery should proceed shortly.

     Although the Company's management is unable to express a view on the likely
outcome of these litigations because they are in their early stages, they could
have a material adverse effect on the Company's business and results of
operations.

     In addition to the foregoing, the Company is from time to time involved in
routine litigation incidental to the conduct of its business. The Company is
aware of no other material existing or threatened litigation to which it is or
may be a party.
<PAGE>   11
6.   STOCKHOLDERS' EQUITY

     The Company entered into an agreement with a crisis management firm in
April 1999 to assist the Company in restructuring its operations as well as with
negotiations with its vendors and banks. Based on the attainment of certain
goals in the first quarter of fiscal 2000, the crisis management firm earned a
success fee, which at the option of the crisis management firm was to be paid
either in cash or a combination of cash and stock. The Company recorded a
liability for the success fee in the first quarter of fiscal 2000. In the second
quarter, the crisis management firm agreed to accept 80% of its success fee in
stock and as such the Company issued 266,667 shares of common stock in the
second quarter of fiscal 2000.

7.   SEGMENT INFORMATION

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


<TABLE>
<CAPTION>
                                                  QUARTER ENDED                   SIX MONTHS ENDED
                                                          (AS RESTATED                     (AS RESTATED
                                                          (See Note 9))                    (See Note 9))
                                                      ---------------------         ---------------------
                                           JANUARY 1,      DECEMBER 31,     JANUARY 1,      DECEMBER 31,
                                             2000             1998            2000             1998
                                             ----             ----            ----             ----
<S>                                        <C>             <C>              <C>             <C>
RETAIL:
Net revenue                                $ 130,769        $ 134,199       $ 198,582        $ 190,205
Operating earnings                            25,385           11,371          22,458           10,831
Identifiable assets                          130,058          133,435         130,058          133,435
Depreciation/amortization                      2,077            1,755           4,233            3,376
Capital expenditures                             429            1,536             786           21,936

FRANCHISING:
Net revenue                                $   5,277        $   4,489       $   7,915        $   6,857
Operating earnings                             4,126            3,239           5,641            4,546
Identifiable assets                            2,400            1,996           2,400            1,996
Depreciation/amortization                         --               --              --               --
Capital expenditures                              --               --              --               --

CORPORATE/OTHER:
Net revenue                                $      --        $      --       $      --        $      --
Operating expenses                             6,440            7,129          14,853           10,324
Identifiable assets                            9,014            8,601           9,014            8,601
Depreciation/amortization                        557              228           1,096              514
Capital expenditures                             553            1,885           1,003            4,326

CONSOLIDATED TOTALS:
Net revenue                                $ 136,046        $ 138,688       $ 206,497        $ 197,062
Operating earnings                            23,071            7,481          13,246            5,053
Interest expense                               2,070              616           4,504            1,763
                                           ---------        ---------       ---------        ---------
Earnings before income taxes                  21,001            6,865           8,742            3,290
Provision for income taxes (benefit)            (237)           2,687            (237)           1,273
                                           ---------        ---------       ---------        ---------
Net income                                 $  21,238        $   4,178       $   8,979        $   2,017
                                           =========        =========       =========        =========

Identifiable assets                        $ 141,472        $ 144,032       $ 141,472        $ 144,032
Depreciation/amortization                      2,634            1,983           5,329            3,890
Capital expenditures                             982            3,421           1,789           26,262
</TABLE>

8.   EARNINGS PER SHARE

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

<TABLE>
<CAPTION>

                                                  QUARTER ENDED                   SIX MONTHS ENDED
                                                         (AS RESTATED                   (AS RESTATED
                                                         (See Note 9))                  (See Note 9))
                                                      ---------------------         ---------------------
                                           JANUARY 1,      DECEMBER 31,     JANUARY 1,      DECEMBER 31,
                                             2000             1998            2000             1998
                                             ----             ----            ----             ----
<S>                                        <C>             <C>              <C>             <C>
Net income                                  $21,238         $ 4,178          $ 8,979         $ 2,017
Average shares outstanding                   12,543          12,450           12,499          12,445
Earnings per share                          $  1.69         $  0.34          $  0.72         $  0.16
Dilutive effect of stock options                 (a)            153               (a)            170
Average common and common
  equivalents outstanding                    12,543          12,603           12,499          12,615
Earnings per share -- diluted               $  1.69         $  0.33          $  0.72         $  0.16
</TABLE>

(a) Options to purchase 1,273,876 common shares at prices ranging from $2.00
to $32.50 per share were outstanding at January 1, 2000 but were not included
in the computation of dilutive earnings per share because to do so would have
been anti-dilutive for the periods presented.


9.   RESTATEMENTS

Subsequent to the issuance of the Company's unaudited consolidated financial
statements in its Form 10-Q for the quarter ended January 1, 2000, management
determined that certain adjustments were necessary related primarily to
merchandise inventory and cost of goods sold previously reported for the quarter
and six-month periods ended December 31, 1998. As a result, the accompanying
financial statements for those periods have been restated from amounts
previously reported to properly reflect these items. A summary of the
significant effects of the restatement is as follows:


<TABLE>
<CAPTION>
                                           QUARTER ENDED DECEMBER 31, 1998
                                           -------------------------------
                                        AS PREVIOUSLY           AS
                                           REPORTED           RESTATED
                                        -------------        -----------
<S>                                    <C>                  <C>

Revenues                               $138,693             $138,688
                                       --------             --------
Cost of goods sold and
 occupancy costs                         90,920               90,003
Company-owned stores operating and
 selling expenses                        33,274               32,825
Other expenses                            8,538                8,995
                                       --------             --------
Total expenses                          132,732              131,823
                                        -------              -------
Earnings before income taxes              5,961                6,865
Provision for income tax                  2,607                2,687
                                        -------              -------
Net income                               $3,354               $4,178
                                        =======              =======
Basic earnings per share                  $0.27                $0.34
Diluted earnings per share                $0.27                $0.33

</TABLE>


<TABLE>
<CAPTION>
                                           SIX MONTHS ENDED DECEMBER 31, 1998
                                           ----------------------------------
                                        AS PREVIOUSLY           AS
                                           REPORTED           RESTATED
                                        -------------        -----------
<S>                                    <C>                  <C>
Revenues                                $197,067             $197,062
                                        --------             --------
Cost of goods sold and occupancy costs   130,433              129,515
Company-owned stores operating and
 selling expenses                         50,308               49,859
Other expenses                            13,941               14,398
                                         -------              -------
Total expenses                           194,682              193,772
                                         -------              -------

Earnings before income taxes               2,385                3,290
Provision for income tax                   1,192                1,273
                                         -------              -------
Net income                                $1,193               $2,017
                                         =======              =======
Basic earnings per share                   $0.10                $0.16
Diluted earnings per share                 $0.10                $0.16

</TABLE>

<TABLE>
<CAPTION>
                                            December 31, 1998
                                            -----------------
                                        AS PREVIOUSLY          AS
                                           REPORTED         RESTATED
                                        -------------      ---------
<S>                                    <C>                  <C>
Total current assets                     $79,605               $73,299
Total other assets                        70,354                70,733
                                        --------              --------
Total assets                            $149,959              $144,032
                                        ========              ========
Total current liabilities                $95,001               $88,338
Total other liabilities                    6,465                 6,326
Total stockholders equity                 48,493                49,368
                                        --------              --------
Total liabilities and stockholders'
 equity                                 $149,959              $144,032
                                        ========              ========
</TABLE>


<PAGE>   12
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

Subsequent to the issuance of the Company's unaudited consolidated financial
statements in its form 10-Q for the quarter ended January 1, 2000, management
determined that certain adjustments were necessary related primarily to
merchandise inventory and cost of goods sold previously reported for the
quarter and six month periods ended December 31, 1998. As a result, the
accompanying financial statements for those periods have been restated from
amounts previously reported to properly reflect these items.

                             SELECTED FINANCIAL DATA
                 (IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)


<TABLE>
<CAPTION>
                                                            QUARTER ENDED                   SIX MONTHS ENDED
                                                            -------------                   ----------------
                                                                    (AS  RESTATED                    (AS RESTATED
                                                                    (See Note 9))                    (See Note 9))
                                                                     -----------                      -----------
                                                     JANUARY 1,      DECEMBER 31,     JANUARY 1,      DECEMBER 31,
                                                        2000             1998            2000             1998
                                                        ----             ----            ----             ----
<S>                                                  <C>             <C>              <C>             <C>
STATEMENT OF OPERATIONS DATA:
Total revenue                                        $ 136,046        $ 138,688       $ 206,497        $ 197,062
                                                     =========        =========       =========        =========
Company-owned stores
   Net sales                                         $ 130,769        $ 134,199       $ 198,582        $ 190,205
   Cost of goods sold and occupancy costs               79,733           90,003         130,450          129,515
                                                     ---------        ---------       ---------        ---------
   Gross profit                                         51,036           44,196          68,132           60,690
   Store operating and selling expense                  25,651           32,825          45,674           49,859
                                                     ---------        ---------       ---------        ---------
   Company-owned stores profit contribution             25,385           11,371          22,458           10,831

Franchise stores:
   Royalty fees                                          5,277            4,454           7,593            6,462
   Franchise fees                                           --               35             322              395
                                                     ---------        ---------       ---------        ---------
   Total franchise revenues                              5,277            4,489           7,915            6,857
   Total franchise expense                               1,151            1,250           2,274            2,311
                                                     ---------        ---------       ---------        ---------
   Franchise profit contribution                         4,126            3,239           5,641            4,546

General and administrative expense:
   Special charges (a)                                   1,394               --           6,262               --
   Other general and administrative expenses             5,046            7,129           8,591           10,324
                                                     ---------        ---------       ---------        ---------
                                                         6,440            7,129          14,853           10,324
                                                     ---------        ---------       ---------        ---------
Earnings before interest and income taxes               23,071            7,481          13,246            5,053
Interest expense, net                                    2,070              616           4,504            1,763
                                                     ---------        ---------       ---------        ---------
Earnings before income taxes                            21,001            6,865           8,742            3,290
Provision for income taxes (benefit)                      (237)           2,687            (237)           1,273
                                                     ---------        ---------       ---------        ---------
Net income                                           $  21,238        $   4,178       $   8,979        $   2,017
                                                     =========        =========       =========        =========

Basic earnings per share                             $    1.69        $    0.34       $    0.72        $    0.16
                                                     =========        =========       =========        =========
Diluted earnings per share                           $    1.69        $    0.33       $    0.72        $    0.16
                                                     =========        =========       =========        =========
Weighted average shares outstanding -- Basic            12,543           12,450          12,499           12,445
                                                     =========        =========       =========        =========
Weighted average shares outstanding -- Diluted          12,543           12,603          12,499           12,615
                                                     =========        =========       =========        =========
EBITDA (b)                                           $  27,100        $   9,464       $  24,838        $   8,943
                                                     =========        =========       =========        =========
</TABLE>

     (a) Special charges relate to consulting services, accounting fees, bank
fees, legal fees and other expenses related to the Company's default on its
Credit Agreement and related financial and refinancing transactions. The Company
engaged the services of a crisis management consulting firm and various other
professionals and consultants to advise management during the complex
negotiations with the bank, vendors and potential investors.

     (b) Earnings before interest, taxes, depreciation and amortization, and
exclusive of special charges, as defined above.

<PAGE>   13
<TABLE>
<CAPTION>
                                                      QUARTER ENDED                SIX MONTHS ENDED
                                                      -------------                ----------------
                                               JANUARY 1,     DECEMBER 31,    JANUARY 1,     DECEMBER 31,
                                                  2000            1998           2000            1998
                                                 ------          ------         ------          ------
<S>                                            <C>            <C>             <C>            <C>
STORE DATA:
   COMPANY-OWNED:
     Stores open at beginning of period             199             193            215             148
     Stores opened                                   --              14              1              54
     Stores closed                                   (1)             --             (1)             --
     Stores acquired from franchisees                --              --             --               5
     Stores sold to franchisees                      --              --            (17)             --
                                                 ------          ------         ------          ------
     Stores open at end of period                   198             207            198             207
   FRANCHISE:
     Stores open at beginning of period             207             167            178             161
     Stores opened                                   --              --             12              11
     Stores closed                                   (1)             --             (1)             --
     Stores acquired from corporate                  --              --             17              --
     Stores sold to corporate                        --              --             --              (5)
                                                 ------          ------         ------          ------
     Stores open at end of period                   206             167            206             167
                                                 ------          ------         ------          ------
                                                    404             374            404             374
                                                 ======          ======         ======          ======

   Increase in company-owned same store
   sales                                            3.9%           11.9%           1.3%           11.3%
   Increase in franchise same store sales          12.1%            7.9%          10.3%            6.0%
   Average sales per Company-owned store
   (in thousands)                                $661.8          $660.1         $985.0          $988.3
</TABLE>

<TABLE>
<CAPTION>
BALANCE SHEET DATA:
                                                                                             (As Restated)
                                                                                              -----------
                                                                               January 1,     December 31,
                                                                                 2000            1998
                                                                                 ----            ----
<S>                                                                           <C>           <C>
Working capital (deficiency)                                                  $ 21,629        $(15,039)
Total assets                                                                   141,472         144,032
Bank borrowings and other debt                                                  36,325          46,800
Capital lease obligation                                                           880             994
Stockholders' equity                                                            47,668          48,368
</TABLE>


QUARTER ENDED JANUARY 1, 2000 ("SECOND QUARTER") COMPARED TO QUARTER ENDED
DECEMBER 31, 1998 ("1998 QUARTER")

     Retail. Net sales from Company-owned stores decreased 2.6% to $130.8
million for Second Quarter, from $134.2 million for the comparable 1998 Quarter.
The decrease in sales is the result of the decreased number of stores offset in
part by same store sales increases. Same store sales increased 3.9% in the
Second Quarter. 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 Second Quarter
increased 15.5% to $51.0 million from $44.2 million for the comparable 1998
Quarter. The increase in gross profit in the Second Quarter was primarily due to
a charge of $2.8 million recorded in the 1998 quarter for slow moving inventory,
and decreased inventory losses of $4.8 million in 1999 as compared to the loss
experience in 1998. Additionally, gross profit was effected by increased store
occupancy costs of $383,000 without a corresponding increase in sales. Gross
margin was 39.0% for the Second Quarter compared with 32.9% for the comparable
1998 Quarter.

     Store operating and selling expenses decreased 21.9% to $25.7 million for
the Second Quarter from $32.8 million in the comparable 1998 Quarter. The
decrease in store operating expenses is primarily attributable to decreased
store payroll and bonuses of $2.6 million and reduced advertising of $2.6
million during the Second Quarter. Store operating and selling expenses were
19.6% and 24.5% of sales for the Second Quarter and 1998 Quarter, respectively.
Pre-opening expenses of $38,000 were incurred in the
<PAGE>   14
quarter related to one third quarter opening (no Company-owned stores were
opened in the second quarter compared to pre-opening expenses of $169,000
incurred in the 1998 Quarter in connection with the opening of 14 stores.
Company-owned stores recorded a profit contribution of $25.4 million for the
Second Quarter, compared to a contribution of $11.4 million for the 1998
Quarter.

     Franchising. Franchise revenue is composed of the initial franchise fees
that are recorded as revenue when the store opens, and ongoing royalty fees,
generally 4% of the store's net sales. Royalty fees increased 18.5% to $5.3
million in the Second Quarter from $4.5 million in the comparable 1998 Quarter
due primarily to an increase in the number of stores and same-store sales
increases of 12.1%. No franchise fee income was recognized in the second
quarter, compared to $ 35,000 recognized in the comparable period in 1998.

     Expenses directly related to franchise revenue decreased 7.9% to $1.2
million for the Second Quarter from $1.3 million for the comparable 1998 period.
As a percentage of franchise revenue, franchise expenses were 21.8% and 27.8%
for the Second Quarter and 1998 Quarter, respectively.

     Franchise profit contribution increased 27.4% to $4.1 million for the
Second Quarter from $3.2 million for the comparable 1998 Quarter. The increase
in franchise profit contribution is due to higher revenues from the increased
number of franchise stores and same-store sales increases.

     General and Administrative. General and administrative expenses decreased
9.7% to $6.4 million in the Second Quarter from $7.1 million in the comparable
1998 Quarter. This decrease includes $1.4 in special charges relating to
consulting accounting, banking and other expense resulting from the Company's
refinancing arrangements in the second Quarter. Exclusive of the $1.4 million in
special charges, general and administrative expenses were 3.7% and 5.1% of
revenue for the Second Quarter and 1998 Quarter, respectively. This decrease
primarily results from lower payroll expenses due to reduced corporate staffing
and from reduced recurring professional fees.

     Interest Expense. Interest expense increased 236% to $2.1 million for the
Second Quarter from $616,000 in the comparable 1998 Quarter. The increased
expense is primarily attributable to increased interest rates, new borrowings
and increased average borrowings outstanding.

     Income Taxes (Benefit). There was a tax benefit of $237,000 for the Second
Quarter as compared to the $2.7 million expense reported in the 1998 Quarter.
The tax benefit in the Second Quarter was the result primarily of reduced
valuation allowances against deferred tax assets and previous federal and state
net operating losses.

     Net Income. As a result of the above factors, net income for the Second
Quarter was $21.2 million, or $1.69 per basic and diluted share, in the Second
Quarter, as compared to a net income of $4.2 million, or $0.34 per basic and
$0.33 diluted share in the 1998 Quarter.


SIX MONTHS ENDED JANUARY 1, 2000 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1998

     Retail. Net sales from Company-owned stores increased 4.4% to $198.6
million for the six months ended January 1, 2000, from $190.2 million for the
comparable six month period ended December 31, 1998. This increase is the result
of the maturing of stores opened in the 1998 period plus same-store sales
increases, offset by the effects of the 17 stores sold in the first quarter.
Same store sales increased 1.3% in the 1999 period. 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 1999 period increased 12.3% to $68.1 million
from $60.7 million for the comparable 1998 period. The increase in gross profit
in the 1999 period was primarily due to a charge of $2.8 million recorded in the
1998 period for slow moving inventory and decreased inventory losses of $4.8
million in 1999 as compared to the loss experience in 1998. Additionally, gross
profit was effected by increased store occupancy costs of $2.0 million without a
corresponding increase in sales. Gross margin was 34.3% for the 1999 period
compared with 31.9% for the comparable 1998 period.
<PAGE>   15
     Store operating and selling expenses decreased 8.4% to $45.7 million for
the 1999 period from $49.9 million in the comparable 1998 period. The decrease
in store operating expenses is attributable primarily to reduced advertising
expense of $1.8 million, reduced supplies expense of $804,000 and reduced other
operating expenses of $2.0 million. Store operating and selling expenses were
23.0% and 26.2% of sales for the 1999 period and 1998 period, respectively.
Pre-opening expenses in the 1999 period were $86,000 for the one Company-owned
store opened in the period plus one store planned to be opened in the third
quarter compared to pre-opening expenses of $604,000 for 54 stores opened in the
1998 period. Company-owned stores recorded a profit contribution of $22.5
million for the 1999 period, compared to a contribution of $10.8 million for the
1998 period. The increased contribution was primarily the result of reduced cost
of sales and lower operating expenses, including the decrease in pre-opening
expenses, and the increased profitability of mature stores.

     Franchising. Franchise revenue is composed of the initial franchise fees
that are recorded as revenue when the store opens, and ongoing royalty fees,
generally 4% of the store's net sales. Franchise fees, recognized on 12 store
openings were $322,000 for the 1999 period compared to $395,000 for the
comparable 1998 period, which represents 11 store openings. Royalty fees
increased 17.5% to $7.6 million in the 1999 period from $6.5 million in the
comparable 1998 period due primarily to an increase in the number of franchise
stores and same-store sales increases of 10.3%.

     Expenses directly related to franchise revenue decreased 1.6% to $2.3
million for the 1999 period from $2.3 million for the comparable 1998 quarter.
As a percentage of franchise revenue, franchise expenses were 28.7% and 33.7%
for the 1999 period and 1998 period, respectively. Franchise expenses declined
primarily as a result of reduced system development costs and administrative
expenses incurred.

     Franchise profit contribution increased 24.1% to $5.6 million for the 1999
period from $4.5 million for the comparable 1998 period. The increase in
franchise profit contribution is due to higher revenues from the increased
number of franchise stores and same-store sales increases.

     General and Administrative. General and administrative expenses increased
43.9% to $14.9 million in the 1999 period from $10.3 million in the comparable
1998 period. This increase is primarily attributable to $6.3 million in special
charges relating to consulting accounting, banking and other expense resulting
from the Company's refinancing arrangements. During the 1999 period there was a
decrease in corporate expenses primarily attributable to decreased travel,
professional fees and other costs. Exclusive of the $6.3 million in special
charges discussed above, general and administrative expenses were 4.3% and 5.2%
of revenue for the 1999 period and 1998 period, respectively.

     Interest Expense. Interest expense increased 155.5% to $4.5 million for the
1999 period from $1.8 million in the comparable 1998 period. The increased
expense is primarily attributable to increased interest rates, new borrowings
and average borrowings outstanding.

     Income Taxes (Benefit). There was a tax benefit of $237,000 for the 1999
period as compared to the $1.3 million expense reported in the 1998 period. The
tax benefit in 1999 was primarily due to reduced valuation allowances against
deferred tax assets and the use of previous federal and state net operating
losses.

     Net Income. As a result of the above factors, net income for the 1999
period was $9.0 million, or $0.72 per basic and diluted share, in the 1999
period, as compared to a net income of $2.0 million, or $0.16 per basic and
diluted share in the 1998 period.

LIQUIDITY AND CAPITAL RESOURCES

     For the six month period ended January 1, 2000, cash provided by operating
activities was $11.8 million, compared to $19.0 million for the comparable 1998
Period. The decrease in cash provided by operating activities was primarily
attributable to increases in other current assets and other assets of $10.4
million, decreases in 1999 in accounts payable of $15.8 million, compared to an
increase in accounts
<PAGE>   16
payable of $12.1 million in the 1998 period, offset in part by a reduction of
refundable income taxes of $4.9 million and increased net income of $7.0
million.

     Cash provided by investing activities for the 1999 period was $8.2 million
compared to $26.2 million used in investing in the comparable 1998 period. The
change in cash used in investing activities was primarily attributable to
declines in new store additions and acquisitions. During the 1999 period, one
new store was opened compared to 54 stores opened in the 1998 period. No stores
were acquired in the 1999 period, compared to five stores acquired in the 1998
period.

     Cash used in financing activities was $20.3 million for the 1999 period
compared to cash provided by financing activities of $9.0 million in the
comparable 1998 period. This change is primarily attributable to the repayment
of borrowings of $50.4 million under the Credit Agreement and net proceeds of
$29.3 million from the issuance of Senior Notes.

     On January 14, 2000, the Company replaced the Credit Agreement with a new
revolving credit facility with Congress Financial Corporation ("Congress"), as
lender. Under the terms of the Loan and Security Agreement (the "Loan
Agreement") which the Company entered into with Congress, 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 initially is 2.75% per annum (subject to possible reduction to an
interest rate as low as 2.25% from and after June 30, 2001, based on the
Company's pre-tax income and excess availability) or (ii) at the rate of 3/4%
per annum above the prime rate. The term of the Loan Agreement is three years,
and the credit facility is secured by a lien on substantially all of the assets
of the Company. On February 10, 2000, $7.5 million was outstanding under the
Loan Agreement.

     Party City also received $7 million of cash proceeds from the sale to
certain of its existing investors (the "Investor Group") of a new series of
senior secured notes pursuant to a First Amendment (the "First Amendment") to
the Securities Purchase Agreement dated as of August 16, 1999. Pursuant to the
First Amendment, the Company issued $7,000,000 in aggregate principal amount of
its 14.0% Secured Notes due 2002 (the "E Notes"). The E Notes are secured by a
lien on substantially all of the Company's assets.

     The Company used the proceeds from the sale of the E Notes and initial
amounts borrowed under the Loan Agreement (i) to pay off all amounts owing under
its current credit facility, (ii) to pay all amounts owing on the trade notes
issued to certain of its vendors in August 1999 and (iii) to pay the remaining
amounts owed to various seasonal trade vendors for credit extended for inventory
purchased by the Company for the 1999 Halloween, Thanksgiving and Christmas
seasons. As of February 10, 2000, substantially all the remaining unpaid
balances that were due as of May 1, 1999, have been satisfied through individual
arrangements with the Company's vendors.

IMPACT OF YEAR 2000 ON THE COMPANY'S COMPUTER OPERATIONS

     The Company prepared for the impact of the arrival of the Year 2000 on its
business. The "Year 2000 Problem" is a term used to describe the problems
created by systems that are unable to accurately interpret dates after December
31, 1999. The Year 2000 Problem created potential risks for the Company,
including the inability to recognize and properly treat dates occurring on or
after January 1, 2000, which may have resulted in computer system failures or
miscalculations of critical financial or operations information.

     As of the date of this filing, February 14, 2000, the Company has not
incurred any significant business disruptions as a result of year 2000 issues.
However, while no such occurrence has developed as of the date of this filing,
year 2000 issues that may arise related to material Third Parties may not become
apparent immediately and therefore, there is no assurance that the Company will
not be affected by Third Party noncompliance in the future. The Company will
continue to monitor the issue vigilantly and work to remediate any issues that
may arise.
<PAGE>   17
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 year 2000 readiness issues relating to the Company's internal systems
and those of third parties, the ability of the Company to refinance its existing
debt on terms acceptable to it 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.

PART II  OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES

     None.

ITEM 3. DEFAULTS UNDER SENIOR SECURITIES

     See Note 2 to the Notes to the Consolidated Financial Statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Company's 1999 Annual Meeting of Shareholders was held on Monday,
November 15, 1999 for the following purposes:

          1.   To elect five directors to the Company's Board of Directors who
               shall serve until the 2000 Annual Meeting of Shareholders, or
               until their successors are elected and qualified. ("Proposal 1")

          2.   To adopt the Company's Stock Option Plan ("Proposal 2").


               The voting as to each Proposal was as follows:

                                   Proposal 1

<TABLE>
<CAPTION>
               Name                         For                        Withheld
               ----                         ---                        --------
<S>                                         <C>                        <C>
               Jack Futterman               11,594,632                 108,320
               Ralph Dillon                 11,573,022                 129,930
               Raymond C. Hemmig            11,590,002                 112,950
               Howard Levkowitz             11,589,572                 113,380
               Duayne Weinger               11,588,275                 114,677
</TABLE>
<PAGE>   18
                                   Proposal 2

<TABLE>
<CAPTION>
               For                 Against                   Abstain
               ---                 -------                   -------
<S>                                <C>                       <C>
               10,235,042          1,456,437                 11,473
</TABLE>

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)  The Company filed the following Current Report on Form 8-K during
               the quarter for which this report has been filed.

          Form 8-K, dated November 24, 1999 (Item 5).


SIGNATURES


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


                             PARTY CITY CORPORATION

                                By /s/ James Shea
                                -----------------
                                  (James Shea)
                             Chief Executive Officer

                             By /s/ Thomas E. Larson
                             -----------------------
                               (Thomas E. Larson)
                             Chief Financial Officer

                              By /s/ Linda M. Siluk
                              ---------------------
                                (Linda M. Siluk)
                            Chief Accounting Officer

Date:  November 28, 2000


<PAGE>   19



                                EXHIBIT INDEX



Exhibit No.              Description

   27                    Financial Data Schedule