<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                -----------------

                                    FORM 10-Q
                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                                -----------------

         FOR THE QUARTER ENDED                       COMMISSION FILE NUMBER
           SEPTEMBER 30, 1996                               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)

                                  201-983-0888
              (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 11, 1996, there were outstanding 6,944,000 shares of
Common Stock, $.01 par value.
<PAGE>   2
                             PARTY CITY CORPORATION
                                      INDEX


                                                                        Page No.
                                                                        --------
Part I            Financial Information

                  Item 1.  Financial Statements:

                  Balance Sheets - September 30, 1996
                    and December 31, 1995                                    3

                  Statements of Income - For the
                    Three Months Ended September 30, 1996 and 1995           
                    and the Nine Months Ended September 30, 1996 and 1995    4

                  Statements of Cash Flows - For the
                    Nine Months Ended September 30, 1996 and 1995            5

                  Notes to Financial Statements                              6

                  Item 2.  Management's Discussion and Analysis of
                    Financial Condition and Results
                    of Operations                                            7

Part II           Other Information

                  Item 6.  Exhibits and Reports on Form 8-K                 11
<PAGE>   3
                        PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements.

                             PARTY CITY CORPORATION
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                          --------------------------------
                                                                          SEPTEMBER 30,       DECEMBER 31,
                                                                               1996             1995
                                                                          --------------------------------
<S>                                                                       <C>                  <C>
ASSETS
--------------
CURRENT ASSETS:
  Cash and cash equivalents                                               $12,352,771          $ 1,112,566
  Restricted assets for advertising fund                                      109,513              541,919
  Receivables from franchisees:
    Royalty fees-net of allowance for doubtful accounts of $82,346 at
       September 30, 1996 and $40,000 at December 31, 1995                    784,109              652,961
    Miscellaneous                                                             689,187              108,343
  Merchandise Inventory                                                    12,308,082            3,840,926
  Due from affiliates                                                          11,716                5,794
  Prepaid income taxes                                                         58,865                   --
  Deferred income taxes - current                                             150,631              150,631
  Prepaid expenses and other current assets                                   820,570              315,620
                                                                          --------------------------------

              TOTAL CURRENT ASSETS                                         27,285,444            6,728,760

Property and equipment - net                                                6,512,075            3,195,738
Deferred income taxes                                                         109,176              109,176
Other assets                                                                  311,930              273,898
                                                                          --------------------------------

              TOTAL  ASSETS                                               $34,218,625          $10,307,572
                                                                          ================================

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES:
  Accounts payable - trade                                                $ 8,342,564          $ 1,960,873
  Accrued expenses                                                          2,940,707            1,225,635
  Advertising fund                                                            109,513              541,919
  Income taxes payable                                                             --              514,458
  Current portion - long term debt                                                 --               22,725
  Due to affiliates                                                                --                1,779
  Deferred revenue                                                            397,800              462,383
                                                                          --------------------------------

              TOTAL CURRENT LIABILITIES                                    11,790,584            4,729,772
                                                                          --------------------------------

LONG TERM LIABILITIES:
  Long-term debt - net of current portion                                          --               49,565
  Other long term liabilities                                               2,107,672              946,528
                                                                          --------------------------------
              TOTAL LONG TERM LIABILITIES                                   2,107,672              996,093
                                                                          --------------------------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Common stock, $.01 par value: authorized shares -
   25,000,000 at September 30, 1996 and 10,000,000 at
   December 31, 1995; shares issued and outstanding -
   6,644,000 at September 30, 1996 and 5,224,000 at
   December 31, 1995                                                           69,440               52,240
  Additional paid-in capital                                               17,584,632            2,541,492
  Retained Earnings                                                         2,666,297            1,987,975
                                                                          --------------------------------

              TOTAL STOCKHOLDERS' EQUITY                                   20,320,369            4,581,707
                                                                          --------------------------------

              TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                  $34,218,625          $10,307,572
                                                                          ================================
</TABLE>

                 See accompanying notes to financial statements

                                       3
<PAGE>   4
                             PARTY CITY CORPORATION
                              STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED                      NINE MONTHS ENDED
                                                            ---------------------------------------------------------------------
                                                            SEPTEMBER 30,     SEPTEMBER 30,       SEPTEMBER 30,     SEPTEMBER 30,
                                                                 1996              1995                1996             1995
                                                            ---------------------------------------------------------------------

<S>                                                         <C>                <C>                 <C>                <C>
REVENUES:
  Net sales                                                 $ 7,507,165        $ 3,051,352         $18,408,121        $ 7,493,408
  Royalty fees                                                1,785,601          1,303,851           4,887,075          3,473,560
  Franchise fees                                                615,000            370,000             880,000            775,000
                                                            ------------------------------         ------------------------------

      TOTAL REVENUES                                          9,907,766          4,725,203          24,175,196         11,741,968

EXPENSES:

  Cost of goods sold                                          3,678,514          1,573,398           9,382,995          3,870,394
  Company owned stores operating and selling expense          4,088,554          1,630,179           8,964,010          3,541,761
  Franchise expense                                             969,622            734,862           2,741,571          2,033,164
  General and administrative expense                            767,246            956,934           2,288,728          2,103,687
                                                            ------------------------------         ------------------------------

      TOTAL EXPENSES                                          9,503,936          4,895,373          23,377,304         11,549,006
                                                            ------------------------------         ------------------------------

      INCOME/(LOSS) BEFORE INTEREST AND INCOME TAXES            403,830           (170,170)            797,892            192,962

  Interest Income, Net                                          171,830              1,310             331,530             13,225
                                                            ------------------------------         ------------------------------

INCOME/(LOSS) BEFORE INCOME TAXES                               575,660           (168,860)          1,129,422            206,187

Provision For Income Taxes                                      230,000            (67,000)            451,100             83,000
                                                            ------------------------------         ------------------------------

NET INCOME/(LOSS)                                           $   345,660        $  (101,860)        $   678,322        $   123,187
                                                            ==============================         ==============================

NET INCOME/LOSS) PER SHARE                                  $      0.05        $     (0.02)        $      0.10        $      0.02
                                                            ==============================         ==============================

Weighted average shares outstanding                           7,132,980          5,322,333           6,561,348          5,322,333
                                                            ==============================         ==============================
</TABLE>

                 See accompanying notes to financial statements

                                       4
<PAGE>   5
                             PARTY CITY CORPORATION
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                    NINE MONTHS ENDED
                                                            ----------------------------------
                                                            SEPTEMBER 30,        SEPTEMBER 30,
                                                                 1996                 1995
                                                            ----------------------------------

<S>                                                         <C>                  <C>
Cash Flow from Operating Activities:
Net income                                                  $    678,322         $    123,187
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation and amortization                                468,381              166,822

  Changes in assets and liabilities:
     Sale (purchase) of marketable securities                         --               20,558
     Royalty fees receivable                                    (131,148)            (224,550)
     MIscellaneous receivable                                   (580,844)             (57,026)
     Merchandise inventory                                    (8,467,156)          (3,110,544)
     Due to/from affiliates                                       (7,701)             (39,304)
     Prepaid income taxes                                        (58,865)            (347,190)
     Prepaid expenses and other current assets                  (504,950)            (359,140)
     Other assets                                                (38,032)             (45,291)
     Accounts payable                                          6,381,691            3,030,907
     Accrued expenses                                          1,715,072            1,166,848
     Income taxes payable                                       (514,458)            (117,240)
     Deferred revenue                                            (64,583)             140,709
     Long term liabilities                                     1,161,144              (10,982)
                                                            ----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                         36,873              337,764
                                                            ----------------------------------

Cash Flow from Investment Activities:
  Purchases of Property and Equipment                         (3,784,718)          (1,391,420)
                                                            ----------------------------------
NET CASH USED IN INVESTING ACTIVITIES                         (3,784,718)          (1,391,420)
                                                            ----------------------------------

Cash Flow from Financing Activities:
  Net proceeds from Sale of Stock                             15,010,340                   --
  Proceeds from exercise of Stock Options                         50,000                   --
  Proceeds from long term debt                                        --              288,128
  Repayments of long term debt                                   (72,290)             (28,954)

                                                            ----------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                     14,988,050              259,174
                                                            ----------------------------------

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS          11,240,205             (794,482)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                 1,112,566            1,493,611
                                                            ----------------------------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                    $ 12,352,771         $    699,129
                                                            ==================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Income Taxes Paid                                           $  1,080,051         $    469,713

Interest Paid                                               $     23,349         $      4,842
</TABLE>


                 See accompanying notes to financial statements

                                       5
<PAGE>   6
                             PARTY CITY CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


NOTE 1 - INITIAL PUBLIC OFFERING

         On March 27, 1996, the Company completed an initial public offering
(IPO) of 1,700,000 shares of common stock, $.01 par value, issued by the
Company, at an initial offering price of $10 per share. Proceeds to the Company,
net of offering expenses of $1,989,660, were $15,010,340.

NOTE 2 - BASIS OF PRESENTATION

         The financial statements have been prepared by the Company and are
unaudited. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 1996, and
September 30, 1995 have been made. Certain financial information and footnote
disclosures included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. The
unaudited financial statements should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements and notes thereto included in the Company's Form S-1 for
the year ended December 31, 1995 filed with the Securities and Exchange
Commission.

         The results of operations for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of the operating results to be
expected for any other interim period or for the full year.

NOTE 3 - STOCK OPTION PLAN

         In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), which was effective for the Company as of January
1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages, but does not require compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply Accounting Principles
Board ("APB") Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company will continue to
apply APB Opinion No. 25 to its stock-based compensation awards to employees and
will disclose the required pro forma effect on net income and earnings per share
in its annual financial statements.

                                       6

<PAGE>   7
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

GENERAL

         During the first four years of its operation, the Company concentrated
its efforts on building the base of its franchise stores, evaluating the
performance of product categories and suppliers, improving store merchandising
and refining its store design, procedures and systems. In late 1993, the Company
made the strategic decision to begin opening Company-owned stores due to the
successful store model developed in the franchise system. In January 1994, the
first Company-owned store was opened in Orlando, Florida. Six additional
Company-owned stores were opened in the third and fourth quarters of 1994. In
1995, the Company opened nine stores, one in the second quarter, six in the
third quarter and two in the fourth quarter. Four additional company-owned
stores were opened in the second quarter of 1996 and ten in the third quarter of
1996.

         Franchise revenues are generated from royalties received on sales and
initial franchise fees which are recognized at the time a store opens. All
stores opened after January 1, 1993 pay a royalty fee of 4.0% of net sales.
Stores opened prior to 1993 have royalty rates ranging from 2.0% to 4.0% of net
sales. Franchise fees are currently $30,000 to open a new store. Franchise
expenses are those costs directly related to the Company's management of
franchise operations and consist primarily of payroll, travel, advertising and
legal expenses as well as an allocation of home office occupancy expenses.

         The Company's business is seasonal, with its highest revenue levels
occurring in the fourth quarter. This period, which includes the Halloween,
Thanksgiving, Christmas, Hanukkah and New Year's Eve selling seasons, accounts
for a significant portion of the Company's total revenues and profitability. In
addition, the timing of new store openings, coupled with the related pre-opening
expenses, may cause the Company's quarterly results to fluctuate.

         Earnings per share is computed using the weighted average common stock
equivalent shares outstanding during each period. Stock options issued pursuant
to the Company's 1994 Amended Stock Option Plan, with exercise prices below the
IPO price of $10.00 per share, during the twelve month period preceding the IPO
("Cheap Stock Options") have been included in the calculation of common stock
equivalents using the treasury stock method, as if they had been outstanding
from January 1, 1995. Stock options that are not Cheap Stock Options have been
included in the computation using the treasury stock method only when their
effect would be dilutive.

         Same store sales increases or decreases are calculated for stores open
at least thirteen full months. Because of the small base of Company-owned
stores, comparisons of operations between periods may indicate large percentage
variations.

RESULTS OF OPERATIONS

THREE MONTHS SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS SEPTEMBER 30, 1995

Company-owned Stores

         Net sales from Company-owned stores were $7,507,165 for the three
months ended September 30, 1996 compared to $3,051,352 for the three months
ended September 30, 1995. The 1996 results include six stores which opened
during the third quarter of 1995, two stores which opened during the last
quarter of 1995, four stores which opened during the second quarter of 1996 and
ten stores which opened during the current quarter of 1996. The 1995 amount
represents sales from 14 stores, including six stores which opened during that
quarter. Stores open in the third quarter 1995 had a 17.4% same store sales
increase for the third quarter 1996. Gross profit for the three months ended
September 30, 1996 was $3,828,651 compared to $1,477,954 for the three months
ended September 30, 1995. The increase in 1996 was mainly due to the additional
stores as well as increased sales volume. Gross margin was 51.0% and 48.4% for
the three months ended September 30, 1996 and 1995, respectively.


                                       7
<PAGE>   8
         As a result of the increased number of stores operated by the Company
during the third quarter 1996, store operating and selling expenses were
$4,088,554 compared to $1,630,179 in the comparable 1995 period. The 1996
expenses included pre-opening expenses for the ten stores opened during the
quarter plus six stores opened in early October, while the comparable 1995
period included pre-opening expenses for the six stores opened during the
quarter plus two stores opened in early October. Company-owned stores showed a
loss of $259,903 for the three months ended September 30, 1996, compared to a
loss of $152,225 for the comparable 1995 period.

Franchise Operations

         Franchise revenue is composed of the initial franchise fees (currently
$30,000 per store) which is recorded as revenue when the store opens, and
ongoing royalty fees, generally 4.0% of the store's net sales. Franchise fees,
recognized on the 21 store openings during the three months ended September 30,
1996 were $615,000 compared to $370,000 during the three months ended September
30, 1995, which represents 13 store openings. The increase in franchise fees is
caused by more store openings in addition to the increase in such fees to
$30,000 from $25,000 per store with respect to franchise agreements signed after
January 1, 1995. Royalty fees increased 36.9% to $1,785,601 in the three months
ended September 30, 1996 from $1,303,851 in the three months ended September 30,
1995. Franchise same store sales increases for the three months ended September
30, 1996 were 10.8%.

         Expenses directly related to franchise revenue increased $234,760 to
$969,622 for the three months ended September 30, 1996 from $734,862 for the
three months ended September 30, 1995. This increase is attributable to
additional franchise personnel required to operate this portion of the Company's
business and the necessary infrastructure to support such employees. As a
percentage of franchise revenue, franchise expenses were 40.4% and 43.9% for the
quarters ended September 30, 1996 and 1995, respectively.

         Franchise profit contribution increased 52.4% to $1,430,979 for the
three months ended September 30, 1996 from $938,989 for the three months ended
September 30, 1995. The increase in franchise profit contribution is due to the
increase in royalty fees attributable to both the opening of new franchises and
increases in existing franchise store sales, an increase in franchise fees and a
decrease in franchise expenses as a percentage of revenues, as discussed above.

General and Administrative

         General and administrative expenses decreased to $767,246 from $956,934
in the third quarter 1996 from the third quarter 1995. The 19.8% decrease is
primarily attributable to an accrual for a severance agreement with a former
employee of $275,000 in the third quarter of 1995, offset by an increase in
payroll and related benefits and increased travel as a result of establishing
the necessary organizational infrastructure to allow the Company to build the
Company-owned store base.

Net Income

         For the third quarter 1996, the Company reported net income of $345,660
and earnings per share of $0.05 as compared to a net loss of $101,860 and a loss
per share of $0.02 for the third quarter 1995.

NINE MONTHS SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS SEPTEMBER 30, 1995

Company-owned Stores

         Net sales from Company-owned stores increased to $18,408,121 in the
nine months ended September 30, 1996 from $7,493,408 in the nine months ended
September 30, 1995. Same store sales for the nine months 1996 increased 18.6%
over the same nine month period last year. Gross profit for the nine months
ended September 30, 1996 was $9,025,126 compared to $3,623,014 for the
comparable period in 1995. The increase in 1996 was due to increased sales
volume. Gross margin was 49.0% and 48.3% for the nine months ended September 30,
1996 and 1995, respectively.

                                       8
<PAGE>   9
         Store operating and selling expenses were $8,964,010 for the nine
months ended September 30, 1996 compared to $3,541,761 in the comparable 1995
period. The increase in store operating expenses is attributable to the
increased number of stores operated by the Company during each quarter of 1996.
Company-owned stores' profit contribution was $61,116 for the nine months ended
September 30, 1996, compared to a profit contribution of $81,253 for the
comparable 1995 period.

Franchise Operations

         Franchise fees, recognized on the 30 store openings during the nine
months ended September 30, 1996 were $880,000 compared to $775,000 during the
same period in 1995, which represents 29 store openings. Royalty fees increased
to $4,887,075 in the nine months ended September 30, 1996 from $3,473,560 in the
nine months ended September 30, 1995. Franchise same store sales increases for
the nine months ended September 30, 1996 were 12.8%.

         Expenses directly related to franchise revenue increased to $2,741,571
for the nine months ended September 30, 1996 from $2,033,164 for the nine months
ended September 30, 1995.

         Franchise profit contribution was $3,025,504 for the nine months ended
September 30, 1996 compared to $2,215,396 for the nine months ended September
30, 1995. The 36.6% increase in franchise profit contribution is due to the
increase in royalty fees and franchise fees offset in part by an increase in
franchise expenses, as discussed above.

General and Administrative

         General and administrative expenses increased to $2,288,728 from
$2,103,687 or 8.8% in the first nine months 1996 from the same period in 1995.
The increase is primarily attributable to an increase in payroll and related
benefits, recruitment and moving of new employees and increased travel as a
result of establishing the necessary organizational infrastructure to allow the
Company to build the Company-owned store base.

Net Income

         For the first nine months of 1996, the Company reported net income of
$678,322 and earnings per share of $0.10 as compared to net income of $123,187
and earnings per share of $0.02 for the same period of 1995.

LIQUIDITY AND CAPITAL RESOURCES

         Cash provided by operating activities for the nine months ended
September 30, 1996 was $36,873. Net income of $678,322, depreciation and
amortization expense of $468,381, increases in accounts payable of $6,381,691,
accrued expenses of $1,715,072 and long term liabilities of $1,161,144 were
offset by increases in merchandise inventory of $8,467,156 as well as other net
changes in operating assets and liabilities.

         Cash used in investing activities of $3,784,718 consisted of property
and equipment additions necessary to support the growth in Company-owned stores
and was substantially funded by the Company's existing available cash. Cash
flows from financing activities consisted of the net proceeds of the public sale
of the Company's stock of $15,010,340 and the proceeds from the exercise of
stock options of $50,000, offset by $72,290 which was used to repay all of the
Company's outstanding long-term debt.

                                       9
<PAGE>   10
         During February 1995, the Company obtained a revolving credit/term loan
facility in the amount of $2,500,000, which was amended in September 1995. Under
the amended facility, the Company has available borrowings of $5,000,000 as of
September 30, 1996 until June 30, 1998. The amended facility expires June 30,
1998. The Company has the option to convert its outstanding borrowings at June
30, 1996, 1997 and 1998 to a four-year term loan with a corresponding reduction
in the amount available under the credit facility. Both the revolving credit
facility and term loans bear interest at the bank's prime rate plus 1/4 of 1%
and are collateralized by all assets of the Company. The Company must pay a
quarterly commitment fee of 1/2 of 1% of the unused amount of the available
facility. The credit facility contains various covenants including, among
others, restriction on capital expenditures, the maintenance of a defined
minimum tangible net worth, interest coverage ratio, total liabilities to
tangible net worth ratio and current ratio. At September 30, 1996, the Company
was in compliance with such loan agreement covenants. There was no outstanding
balance of the facility at September 30, 1996.

                                       10
<PAGE>   11
                            PART II OTHER INFORMATION


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         No exhibits and reports on Form 8-K have been filed during the quarter
for which this report has been filed.


                                    SIGNATURE

         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/ STEVEN MANDELL
                                           ------------------
                                           (Steven Mandell)
                                           President & Chief Executive Officer


                                       By  /s/ DAVID LAUBER
                                           ----------------
                                           (David Lauber)
                                           Chief Financial &
                                           Principal Accounting Officer




Date:

                                       11