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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-Q

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




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|                                                 |  |                               
|------------------------------------------------ |  | ------------------------------
|For the quarterly period ended
December 27, 2003 |  | Commission file number
0-27826

Party City Corporation

(Exact name of registrant as specified in its charter)


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

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



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

Yes [x] No:
[   ]

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

Yes [x] No:
[   ]

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

As of
February 2, 2004, there were outstanding 17,726,849 shares of
Common Stock, $.01 par value.



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TABLE OF CONTENTS



|                                          |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION            
|                                          | Item 1. Financial Statements                                                                 
|                                          |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME         
|                                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                          |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                          | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                          | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                          | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION               
|                                          | Item 1. Legal Proceedings                                                                    
|                                          | Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities     
|                                          | Item 3. Defaults Upon Senior Securities                                                      
|                                          | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                          | Item 5. Other Information                                                                    
|                                          | Item 6. Exhibits and Reports on Form 8-K                                                     
|EXHIBIT INDEX                            
|SIGNATURES                               
|EMPLOYMENT AGREEMENT OF RICHARD H. GRINER
|SUBSIDIARIES                             
|INDEPENDENT ACCOUNTANTS' REPORT          
|SECTION 302 CERTIFICATION OF THE CEO     
|SECTION 302 CERTIFICATION OF THE CFO     
|SECTION 906 CERTIFICATION OF THE CEO     
|SECTION 906 CERTIFICATION OF THE CFO     



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##### Table of Contents



TABLE OF CONTENTS

PARTY CITY CORPORATION AND SUBSIDIARY

INDEX

|        |  |                                                                                       |  |                                                                                                                                       |    |          |   | 
|------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------- | -- | -------- | - | 
|        |  |                                                                                       |  |                                                                                                                                       |    | Page No.
|        |  |                                                                                       |  |                                                                                                                                       |    |         
|Part I  |  | Financial Information                                                                 |  |                                                                                                                                       |    |         
|Item 1. |  | Financial Statements                                                                  |  |                                                                                                                                       |    |         
|        |  |                                                                                       |  | Condensed Consolidated Balance Sheets - December 27, 2003 (Unaudited)
December 28, 2002 (Unaudited) and June 28, 2003                 |    |          | 3 | 
|        |  |                                                                                       |  | Condensed Consolidated Statements of Income (Unaudited) for the quarters
and six months ended December 27, 2003 and December 28, 2002 |    |          | 4 | 
|        |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows (Unaudited) for the
six months ended December 27, 2003 and December 28, 2002          |    |          | 5 | 
|        |  |                                                                                       |  | Notes to Condensed Consolidated (Unaudited) Financial Statements                                                                      |    |          | 6 | 
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results
of Operations |  |                                                                                                                                       | 11 |         
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                                                       | 19 |         
|Item 4. |  | Controls and Procedures                                                               |  |                                                                                                                                       | 19 |         
|Part II |  | Other Information                                                                     |  |                                                                                                                                       |    |         
|Item 1. |  | Legal Proceedings                                                                     |  |                                                                                                                                       | 20 |         
|Item 2. |  | Changes
in Securities, Use of Proceeds, and Issuer Purchases of Equity
Securities     |  |                                                                                                                                       | 20 |         
|Item 3. |  | Defaults Upon Senior Securities                                                       |  |                                                                                                                                       | 21 |         
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                                                                                       | 21 |         
|Item 5. |  | Other Information                                                                     |  |                                                                                                                                       | 21 |         
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                                       |    |         
|        |  |                                                                                       |  | Exhibit Index                                                                                                                         |    |          |   | 
|        |  |                                                                                       |  | Signatures                                                                                                                            |    |          |   | 

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1.Financial Statements




PARTY CITY CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)

|                                     |                                                                                                                               |                                            |   |              |         |              |   |          |         |  |   |        |         | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------ | ------- | ------------ | - | -------- | ------- |  | - | ------ | ------- | 
|                                     |                                                                                                                               |                                            |   | December 27, |         | December 28, |   | June 28,
|                                     |                                                                                                                               |                                            |   | 2003         |         | 2002         |   | 2003(1) 
|                                     |                                                                                                                               |                                            |   |              |         |              |   |         
|                                     |                                                                                                                               |                                            |   | (Unaudited)  |         | (Unaudited)  |   |          |         | 
|ASSETS                               |                                                                                                                               |                                            |   |              |         |              |   |          |         |  |   |       
|                                     | Current assets:                                                                                                               |                                            |   |              |         |              |   |          |         |  |   |        |        
|                                     | Cash and cash equivalents                                                                                                     |                                            | $ | 20,550       |         |              | $ | 3,273    |         |  | $ | 3,372  |        
|                                     | Merchandise inventory                                                                                                         |                                            |   | 60,281       |         |              |   | 69,189   |         |  |   | 65,908 |        
|                                     | Other current assets, net                                                                                                     |                                            |   | 25,263       |         |              |   | 26,339   |         |  |   | 21,900 |        
|                                     |                                                                                                                               |                                            |   |              |         |              |   |          |         |  |   |       
|                                     |                                                                                                                               | Total current assets                       |   |              | 106,094 |              |   |          | 98,801  |  |   |        | 91,180  | 
|                                     | Property and equipment, net                                                                                                   |                                            |   | 48,715       |         |              |   | 55,878   |         |  |   | 52,819 |        
|                                     | Goodwill                                                                                                                      |                                            |   | 18,614       |         |              |   | 19,172   |         |  |   | 18,614 |        
|                                     | Other assets                                                                                                                  |                                            |   | 5,201        |         |              |   | 4,087    |         |  |   | 5,386  |        
|                                     |                                                                                                                               |                                            |   |              |         |              |   |          |         |  |   |       
|                                     |                                                                                                                               | Total assets                               |   | $            | 178,624 |              |   | $        | 177,938 |  |   | $      | 167,999 | 
|                                     |                                                                                                                               |                                            |   |              |         |              |   |          |         |  |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                               |                                            |   |              |         |              |   |          |         |  |   |       
|                                     | Current liabilities:                                                                                                          |                                            |   |              |         |              |   |          |         |  |   |        |        
|                                     | Accounts payable                                                                                                              |                                            | $ | 34,458       |         |              | $ | 44,890   |         |  | $ | 37,960 |        
|                                     | Accrued expenses and other current liabilities                                                                                |                                            |   | 36,062       |         |              |   | 28,656   |         |  |   | 24,998 |        
|                                     | Book overdraft                                                                                                                |                                            |   |             |         |              |   | 6,654    |         |  |   | 4,126  |        
|                                     | Advances under Loan Agreement                                                                                                 |                                            |   |             |         |              |   | 4,114    |         |  |   | 11,229 |        
|                                     |                                                                                                                               |                                            |   |              |         |              |   |          |         |  |   |       
|                                     |                                                                                                                               | Total current liabilities                  |   |              | 70,520  |              |   |          | 84,314  |  |   |        | 78,313  | 
|                                     | Long-term liabilities:                                                                                                        |                                            |   |              |         |              |   |          |         |  |   |        |        
|                                     | Deferred rent and other long-term liabilities                                                                                 |                                            |   | 9,905        |         |              |   | 10,683   |         |  |   | 10,264 |        
|                                     | Commitments and contingencies                                                                                                 |                                            |   |              |         |              |   |          |         |  |   |        |        
|                                     | Stockholders equity:                                                                                                         |                                            |   |              |         |              |   |          |         |  |   |        |        
|                                     | Common stock, $.01 par value, authorized
40,000,000 shares; issued 17,721,850,
17,113,873 and 17,296,807 shares, respectively |                                            |   | 177          |         |              |   | 171      |         |  |   | 173    |        
|                                     | Additional paid-in capital                                                                                                    |                                            |   | 44,611       |         |              |   | 41,366   |         |  |   | 43,178 |        
|                                     | Retained earnings                                                                                                             |                                            |   | 59,351       |         |              |   | 43,233   |         |  |   | 42,011 |        
|                                     | Treasury stock, at cost (747,012, 284,000 and
747,012 shares, respectively)                                                   |                                            |   | (5,940       | )       |              |   | (1,829   | )       |  |   | (5,940 | )      
|                                     |                                                                                                                               |                                            |   |              |         |              |   |          |         |  |   |       
|                                     |                                                                                                                               | Total stockholders equity                 |   |              | 98,199  |              |   |          | 82,941  |  |   |        | 79,422  | 
|                                     |                                                                                                                               |                                            |   |              |         |              |   |          |         |  |   |       
|                                     |                                                                                                                               | Total liabilities and stockholders equity |   | $            | 178,624 |              |   | $        | 177,938 |  |   | $      | 167,999 | 
|                                     |                                                                                                                               |                                            |   |              |         |              |   |          |         |  |   |       



|(1) |  | The June 28, 2003 condensed consolidated balance sheet was derived from
the Companys audited consolidated financial statements.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------

See accompanying notes to condensed consolidated financial statements.

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PARTY CITY CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)

|                           |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |         |         | 
|-------------------------- | -------------------------------------------------- | --------------------------------------------- | ------ | ------------- | ------- | ---------------- | ------ | ------------ | ------- | ------------ | ------ | ------- | ------- | - | ------ | ------- | ------- | 
|                           |                                                    |                                               |        | Quarter ended |         | Six months ended
|                           |                                                    |                                               |        |               |         |                 
|                           |                                                    |                                               |        | December 27,  |         | December 28,     |        | December 27, |         | December 28,
|                           |                                                    |                                               |        | 2003          |         | 2002             |        | 2003         |         | 2002        
|                           |                                                    |                                               |        |               |         |                  |        |              |         |             
|Revenues:                  |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |        
|                           | Net sales                                          |                                               | $      | 175,304       |         |                  | $      | 161,648      |         |              | $      | 277,924 |         |   | $      | 252,772 |        
|                           | Royalty fees                                       |                                               |        | 7,216         |         |                  |        | 6,503        |         |              |        | 11,123  |         |   |        | 10,150  |        
|                           | Franchise fees                                     |                                               |        | 40            |         |                  |        | 40           |         |              |        | 488     |         |   |        | 275     |        
|                           |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |         |        
|                           |                                                    | Total revenues                                |        |               | 182,560 |                  |        |              | 168,191 |              |        |         | 289,535 |   |        |         | 263,197 | 
|Expenses:                  |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |        
|                           | Cost of goods sold and occupancy costs             |                                               |        | 104,705       |         |                  |        | 95,974       |         |              |        | 179,033 |         |   |        | 160,399 |        
|                           | Company-owned stores operating and selling expense |                                               |        | 36,290        |         |                  |        | 34,288       |         |              |        | 62,169  |         |   |        | 57,986  |        
|                           | Franchise expense                                  |                                               |        | 1,562         |         |                  |        | 1,646        |         |              |        | 3,221   |         |   |        | 3,208   |        
|                           | General and administrative expense                 |                                               |        | 7,498         |         |                  |        | 8,403        |         |              |        | 15,657  |         |   |        | 15,705  |        
|                           |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |         |        
|                           |                                                    | Total expenses                                |        |               | 150,055 |                  |        |              | 140,311 |              |        |         | 260,080 |   |        |         | 237,298 | 
|                           |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |         |        
|Operating income           |                                                    |                                               | 32,505 |               |         |                  | 27,880 |              |         |              | 29,455 |         |         |   | 25,899 |        
|                           |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |         |        
|                           | Interest income                                    |                                               |        | (26           | )       |                  |        | (17          | )       |              |        | (30     | )       |   |        | (24     | )      
|                           | Interest expense                                   |                                               |        | 138           |         |                  |        | 2,841        |         |              |        | 342     |         |   |        | 3,733   |        
|                           |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |         |        
|                           | Interest expense, net                              |                                               |        | 112           |         |                  |        | 2,824        |         |              |        | 312     |         |   |        | 3,709   |        
|                           |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |         |        
|Income before income taxes |                                                    |                                               | 32,393 |               |         |                  | 25,056 |              |         |              | 29,143 |         |         |   | 22,190 |        
|                           | Provision for income taxes                         |                                               |        | 13,103        |         |                  |        | 10,006       |         |              |        | 11,803  |         |   |        | 8,876   |        
|                           |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |         |        
|Net income                 |                                                    | $                                             | 19,290 |               |         | $                | 15,050 |              |         | $            | 17,340 |         |         | $ | 13,314 |        
|                           |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |         |        
|                           | Basic earnings per share                           |                                               | $      | 1.14          |         |                  | $      | 0.90         |         |              | $      | 1.03    |         |   | $      | 0.80    |        
|                           |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |         |        
|                           |                                                    | Weighted
average shares outstanding  basic   |        |               | 16,867  |                  |        |              | 16,803  |              |        |         | 16,856  |   |        |         | 16,600  | 
|                           |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |         |        
|                           | Diluted earnings per share                         |                                               | $      | 0.98          |         |                  | $      | 0.76         |         |              | $      | 0.88    |         |   | $      | 0.67    |        
|                           |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |         |        
|                           |                                                    | Weighted
average shares outstanding  diluted |        |               | 19,624  |                  |        |              | 19,896  |              |        |         | 19,620  |   |        |         | 19,904  | 
|                           |                                                    |                                               |        |               |         |                  |        |              |         |              |        |         |         |   |        |         |        

See accompanying notes to condensed consolidated financial statements.

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PARTY CITY CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                                                  |                                                                  |                                           |        |                  |        |              |        |         |         |  
|--------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ----------------------------------------- | ------ | ---------------- | ------ | ------------ | ------ | ------- | ------- | -
|                                                                                  |                                                                  |                                           |        | Six Months Ended
|                                                                                  |                                                                  |                                           |        | December 27,     |        | December 28,
|                                                                                  |                                                                  |                                           |        | 2003             |        | 2002        
|                                                                                  |                                                                  |                                           |        |                  |        |             
|                                                                                  |                                                                  |                                           |        | (Unaudited)     
|Cash flow from operating activities:                                              |                                                                  |                                           |        |                  |        |              |        |        
|Net income                                                                        |                                                                  | $                                         | 17,340 |                  |        | $            | 13,314 |        
|Adjustments to reconcile net income to net cash
provided by
operating activities: |                                                                  |                                           |        |                  |        |              |        |        
|Depreciation and amortization                                                     |                                                                  |                                           | 7,692  |                  |        |              | 7,133  |        
|Non-cash interest and financing costs                                             |                                                                  |                                           | 80     |                  |        |              | 1,554  |        
|Deferred rent                                                                     |                                                                  |                                           | (240   | )                |        |              | 387    |        
|Equity based compensation                                                         |                                                                  |                                           | 148    |                  |        |              | 752    |        
|Provision for doubtful accounts                                                   |                                                                  |                                           | (140   | )                |        |              | (602   | )      
|Other                                                                             |                                                                  |                                           | 10     |                  |        |              | 44     |        
|Changes in assets and liabilities:                                                |                                                                  |                                           |        |                  |        |              |        |        
|                                                                                  | Merchandise inventory                                            |                                           |        | 5,627            |        |              |        | (12,915 | )      
|                                                                                  | Accounts payable, accrued expenses and other current
liabilities |                                           |        | 3,437            |        |              |        | 17,956  |        
|                                                                                  | Other long-term liabilities                                      |                                           |        | (119             | )      |              |        |        |        
|                                                                                  | Other current assets and other assets                            |                                           |        | (3,188           | )      |              |        | (7,708  | )      
|                                                                                  |                                                                  |                                           |        |                  |        |              |        |        
|                                                                                  |                                                                  | Net cash provided by operating activities |        |                  | 30,647 |              |        |         | 19,915  |  
|Cash flow from investment activities:                                             |                                                                  |                                           |        |                  |        |              |        |        
|                                                                                  | Purchases of property and equipment                              |                                           |        | (3,529           | )      |              |        | (13,444 | )      
|                                                                                  | Stores acquired                                                  |                                           |        |                 |        |              |        | (1,758  | )      
|                                                                                  |                                                                  |                                           |        |                  |        |              |        |        
|                                                                                  |                                                                  | Net cash used in investment activities    |        |                  | (3,529 | )            |        |         | (15,202 | )
|Cash flow from financing activities:                                              |                                                                  |                                           |        |                  |        |              |        |        
|                                                                                  | Net (payments on) proceeds from Loan Agreement                   |                                           |        | (11,229          | )      |              |        | 4,114   |        
|                                                                                  | Proceeds from exercise of stock options and warrants             |                                           |        | 1,289            |        |              |        | 1,276   |        
|                                                                                  | Payments of Senior Notes                                         |                                           |        |                 |        |              |        | (10,207 | )      
|                                                                                  | Payments of financing costs                                      |                                           |        |                 |        |              |        | (90     | )      
|                                                                                  |                                                                  |                                           |        |                  |        |              |        |        
|                                                                                  |                                                                  | Net cash used in financing activities     |        |                  | (9,940 | )            |        |         | (4,907  | )
|Net increase (decrease) in cash and cash equivalents                              |                                                                  |                                           | 17,178 |                  |        |              | (194   | )      
|Cash and cash equivalents, beginning of period                                    |                                                                  |                                           | 3,372  |                  |        |              | 3,467  |        
|                                                                                  |                                                                  |                                           |        |                  |        |              |        |        
|Cash and cash equivalents, end of period                                          |                                                                  | $                                         | 20,550 |                  |        | $            | 3,273  |        
|                                                                                  |                                                                  |                                           |        |                  |        |              |        |        
|Supplemental disclosure of cash flow information:                                 |                                                                  |                                           |        |                  |        |              |        |        
|                                                                                  | Income taxes paid                                                |                                           | $      | 1,047            |        |              | $      | 2,414   |        
|                                                                                  | Interest paid                                                    |                                           |        | 262              |        |              |        | 2,651   |        
|Supplemental disclosure of non-cash financing activity:                           |                                                                  |                                           |        |                  |        |              |        |        
|                                                                                  | Issuance of shares under employment stock plan                   |                                           | $      | 244              |        |              | $      | 265     |        
|                                                                                  | Issuance of shares under management stock plan                   |                                           |        | 99               |        |              |        | 282     |        
|                                                                                  | Issuance of warrants                                             |                                           |        |                 |        |              |        | 245     |        

See accompanying notes to condensed consolidated financial statements.

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PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The condensed consolidated financial statements are unaudited. In the
opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position of the Company as
of December 27, 2003 and December 28, 2002 and the results of operations for
the quarters and six months ended December 27, 2003 and December 28, 2002 and
cash flows for the six months ended December 27, 2003 and December 28, 2002.
Because of the seasonality of the party goods industry, operating results of
the Company on a quarterly or six month basis may not be indicative of operating results for the full fiscal year.

These condensed consolidated financial statements should be read in
conjunction with the Companys audited consolidated financial statements for
the year ended June 28, 2003, which are included in the Companys Annual Report
on Form 10-K with respect to such period filed with the Securities and Exchange
Commission on September 26, 2003. All significant intercompany accounts and
transactions have been eliminated. The June 28, 2003 condensed consolidated balance sheet
amounts are derived from the Companys audited condensed consolidated financial
statements.

Our Fiscal Year (Fiscal Year) refers to the 52 or 53 weeks, as
applicable, ending the Saturday nearest to June 30. The
year ended July 3, 2004 (Fiscal 2004) is a 53 week year as compared to the
years ended June 28, 2003 (Fiscal 2003) and June 29, 2002 (Fiscal 2002),
which were each 52 week years.

Certain reclassifications have been made to the condensed consolidated
financial statements in prior periods to conform to the current period
presentation.

2. Stock-Based Compensation

The Company periodically grants stock options to employees. Pursuant to
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, the Company accounts for stock-based employee compensation
arrangements using the intrinsic value method. The Company has adopted the
disclosure only provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock Based Compensation, as amended by SFAS
No. 148, Accounting for Stock Based Compensation - Transition and Disclosure,
an Amendment of SFAS No. 123. If compensation cost for the Companys stock
option plans had been determined in accordance with the fair value method
prescribed by SFAS No. 123 the Companys net income would have been (in
thousands, except per share data):

|                                      |                                                                                                                 |   |        |               |  |                  |        |              |     |              |        |        |  |   |        |        |  | 
|------------------------------------- | --------------------------------------------------------------------------------------------------------------- | - | ------ | ------------- |  | ---------------- | ------ | ------------ | --- | ------------ | ------ | ------ |  | - | ------ | ------ |  | 
|                                      |                                                                                                                 |   |        | Quarter Ended |  | Six Months Ended
|                                      |                                                                                                                 |   |        |               |  |                 
|                                      |                                                                                                                 |   |        | December 27,  |  | December 28,     |        | December 27, |     | December 28,
|                                      |                                                                                                                 |   |        | 2003          |  | 2002             |        | 2003         |     | 2002        
|                                      |                                                                                                                 |   |        |               |  |                  |        |              |     |             
|Net income as reported                |                                                                                                                 | $ | 19,290 |               |  | $                | 15,050 |              |     | $            | 17,340 |        |  | $ | 13,314 |       
|                                      | Deduct:
Total equity based employee compensation
expense determined under fair value based method, net of taxes |   |        | 507           |  |                  | 626    |              | 514 |              | 701   
|                                      |                                                                                                                 |   |        |               |  |                  |        |              |     |              |        |        | 
|                                      | Pro-forma net income                                                                                            |   | $      | 18,783        |  |                  | $      | 14,424       |     |              | $      | 16,826 |  |   | $      | 12,613 | 
|Basic and diluted earnings per share: |                                                                                                                 |   |        |               |  |                  |        |              |     |              |        |        |  |   |        |       
|                                      | Basic earnings per share as reported                                                                            |   | $      | 1.14          |  |                  | $      | 0.90         |     |              | $      | 1.03   |  |   | $      | 0.80   | 
|                                      | Basic earnings per share pro forma                                                                              |   | $      | 1.11          |  |                  | $      | 0.86         |     |              | $      | 1.00   |  |   | $      | 0.76   |  | 
|                                      | Diluted earnings per share as reported                                                                          |   | $      | 0.98          |  |                  | $      | 0.76         |     |              | $      | 0.88   |  |   | $      | 0.67   | 
|                                      | Diluted earnings per share pro forma                                                                            |   | $      | 0.96          |  |                  | $      | 0.72         |     |              | $      | 0.86   |  |   | $      | 0.63   |  | 

The weighted average fair value of options granted during the second
quarter of Fiscal 2004 and 2003 was $6.48 and $6.25, respectively.

The weighted average fair value of
options granted during the six months ended Fiscal 2004 and 2003 was
$5.15 and $7.53, respectively.

6



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3. Earnings Per Share

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

|                                                                        |  |               |        |                  |  |              |        |              |  |   |        |     |  |   |        |    
|----------------------------------------------------------------------- |  | ------------- | ------ | ---------------- |  | ------------ | ------ | ------------ |  | - | ------ | --- |  | - | ------ | ---
|                                                                        |  | Quarter Ended |        | Six Months Ended
|                                                                        |  |               |        |                 
|                                                                        |  | December 27,  |        | December 28,     |  | December 27, |        | December 28,
|                                                                        |  | 2003          |        | 2002             |  | 2003         |        | 2002        
|                                                                        |  |               |        |                  |  |              |        |             
|Net income                                                              |  | $             | 19,290 |                  |  | $            | 15,050 |              |  | $ | 17,340 |     |  | $ | 13,314 |    
|Earnings per share - basic                                              |  | $             | 1.14   |                  |  | $            | 0.90   |              |  | $ | 1.03   |     |  | $ | 0.80   |    
|Earnings per share - diluted                                            |  | $             | 0.98   |                  |  | $            | 0.76   |              |  | $ | 0.88   |     |  | $ | 0.67   |    
|Weighted average common
shares outstanding                              |  |               | 16,867 |                  |  |              | 16,803 |              |  |   | 16,856 |     |  |   | 16,600 |    
|Dilutive effect of warrants                                             |  |               | 2,301  |                  |  |              | 2,284  |              |  |   | 2,278  |     |  |   | 2,424  |    
|Dilutive effect of stock options                                        |  |               | 439    | (a)              |  |              | 724    | (b)          |  |   | 464    | (a) |  |   | 789    | (b)
|Restricted stock units                                                  |  |               | 17     |                  |  |              | 85     |              |  |   | 22     |     |  |   | 91     |    
|                                                                        |  |               |        |                  |  |              |        |              |  |   |        |     |  |   |        |    
|Weighted average common shares
and common equivalent shares
outstanding |  |               | 19,624 |                  |  |              | 19,896 |              |  |   | 19,620 |     |  |   | 19,904 |    
|                                                                        |  |               |        |                  |  |              |        |              |  |   |        |     |  |   |        |    



|(a) |  | Options to purchase 577,908 and
703,391 shares of common stock at prices ranging
from $13.80 to $30.88 per share were outstanding for the quarter and six
months ended December 27, 2003 but were not included in the computation of
earnings per share because to do so would have been antidilutive.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Options to purchase 701,069 and 534,358 shares of common stock at prices
ranging from $13.83 to $32.50 per share were outstanding for the quarter
and six months ended December 28, 2002 but were not included in the computation
of earnings per share because to do so would have been antidilutive.

4. Financing Agreements

In January 2003, the Company entered into a $65 million revolving credit
facility (Loan Agreement) with Wells Fargo Retail Finance, LLC, as the
arranger, collateral agent and administrative agent, and Fleet Retail Finance,
Inc., as the documentation agent. Under the terms of the Loan Agreement, the
Company may borrow amounts based on a percentage of its eligible inventory and
credit card receivables, subject to certain borrowing conditions and customary
sub-limits, reserves and other limitations. Interest on advances is charged, at
the Companys option, (i) at the adjusted Eurodollar rate plus the applicable
margin, which was set initially at 1.50%, and is currently at 1.25%, per annum
or (ii) at the prime rate less the applicable margin, which was initially set
at and is currently 0.25% per annum, totaling 3.75% at December 27,
2003. The term of the Loan Agreement is through
April 30, 2006 and is secured by a lien on substantially all of the Companys
assets. The Company had a standby letter of credit of $3.7 million outstanding
at December 27, 2003. At December 27, 2003 and February 2, 2004, the Company
had no borrowings outstanding under the Loan Agreement. Based on a percentage
of current eligible inventory and credit card receivables, the Company had
$19.2 million available to be borrowed under the Loan Agreement at February 2,
2004.

5. Stockholders Equity

Shares Outstanding

The Companys authorized capital stock was increased from 25,000,000
shares to 40,000,000 shares of its common stock, $0.01 par value per
share, at the annual
shareholders
meeting on November 12, 2003. At December 27, 2003 and
December 28, 2002 there were 17,721,850 shares and 17,113,873
shares, respectively, of the Companys common stock issued and
outstanding.

7



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Stock Repurchase

In September 2001, the Board of Directors authorized the Company to
repurchase up to $15 million of its outstanding common stock. Stock
repurchases are made at the discretion of management. There was no stock
repurchase activity during the first six months of Fiscal 2004 and
during the first six months of Fiscal 2003. As
of December 27, 2003, the Company had purchased 747,012 shares for an aggregate
amount of $5.9 million or 39.6% of the total amount to be purchased.

Warrants

There were no warrant exercises in the first six months of Fiscal 2004. In
the first six months of Fiscal 2003, 688,000 warrants to purchase the Companys
common stock were exercised. This included an exercise of 458,667 warrants for
which proceeds of $490,774 were received and a cashless exercise of the
remaining 229,333 warrants for which the warrant holders received 213,792
shares of common stock. The remaining 15,541 shares were surrendered in
connection with this exercise. These 15,541 shares of the Companys common
stock had a market value of $245,386 at the time of surrender.

6. Legal Proceedings

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

In addition to the foregoing, from time to time the Company is involved in
routine litigation incidental to the conduct of the business, which
is not, individually or in the aggregate, material to the Company.

8



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##### Table of Contents



7. Segment Information

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

|                           |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|-------------------------- |  | ------------- | ------- | ---------------- |  | ------------ | ------- | ------------ |  | - | ------- | - |  | - | ------- | -
|                           |  | Quarter Ended |         | Six Months Ended
|                           |  |               |         |                 
|                           |  | December 27,  |         | December 28,     |  | December 27, |         | December 28,
|                           |  | 2003          |         | 2002             |  | 2003         |         | 2002        
|                           |  |               |         |                  |  |              |         |             
|                           |  | (Unaudited)   |         | (Unaudited)     
|RETAIL                     |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Net revenue                |  | $             | 175,304 |                  |  | $            | 161,648 |              |  | $ | 277,924 |   |  | $ | 252,772 |  
|Operating income           |  |               | 34,309  |                  |  |              | 31,386  |              |  |   | 36,722  |   |  |   | 34,387  |  
|Identifiable assets        |  |               | 160,245 |                  |  |              | 157,390 |              |  |   | 160,245 |   |  |   | 157,390 |  
|Depreciation/amortization  |  |               | 2,558   |                  |  |              | 2,333   |              |  |   | 4,976   |   |  |   | 4,367   |  
|Capital expenditures       |  |               | 526     |                  |  |              | 3,994   |              |  |   | 986     |   |  |   | 13,824  |  
|FRANCHISING                |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Net revenue                |  | $             | 7,256   |                  |  | $            | 6,543   |              |  | $ | 11,611  |   |  | $ | 10,425  |  
|Operating income           |  |               | 5,694   |                  |  |              | 4,897   |              |  |   | 8,390   |   |  |   | 7,217   |  
|Identifiable assets        |  |               | 3,079   |                  |  |              | 3,998   |              |  |   | 3,079   |   |  |   | 3,998   |  
|Depreciation/amortization  |  |               |        |                  |  |              |        |              |  |   |        |   |  |   |        |  
|Capital expenditures       |  |               |        |                  |  |              |        |              |  |   |        |   |  |   |        |  
|CORPORATE/OTHER            |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Net revenue                |  | $             |        |                  |  | $            |        |              |  | $ |        |   |  | $ |        |  
|Operating loss             |  |               | (7,498  | )                |  |              | (8,403  | )            |  |   | (15,657 | ) |  |   | (15,705 | )
|Identifiable assets        |  |               | 15,300  |                  |  |              | 16,550  |              |  |   | 15,300  |   |  |   | 16,550  |  
|Depreciation/amortization  |  |               | 1,332   |                  |  |              | 1,428   |              |  |   | 2,716   |   |  |   | 2,766   |  
|Capital expenditures       |  |               | 1,555   |                  |  |              | 823     |              |  |   | 2,543   |   |  |   | 1,378   |  
|CONSOLIDATED TOTALS        |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Net revenue                |  | $             | 182,560 |                  |  | $            | 168,191 |              |  | $ | 289,535 |   |  | $ | 263,197 |  
|Operating income           |  |               | 32,505  |                  |  |              | 27,880  |              |  |   | 29,455  |   |  |   | 25,899  |  
|Interest expense, net      |  |               | 112     |                  |  |              | 2,824   |              |  |   | 312     |   |  |   | 3,709   |  
|                           |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Income before income taxes |  |               | 32,393  |                  |  |              | 25,056  |              |  |   | 29,143  |   |  |   | 22,190  |  
|Provision for income taxes |  |               | 13,103  |                  |  |              | 10,006  |              |  |   | 11,803  |   |  |   | 8,876   |  
|                           |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Net income                 |  | $             | 19,290  |                  |  | $            | 15,050  |              |  | $ | 17,340  |   |  | $ | 13,314  |  
|                           |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Identifiable assets        |  | $             | 178,624 |                  |  | $            | 177,938 |              |  | $ | 178,624 |   |  | $ | 177,938 |  
|Depreciation/amortization  |  |               | 3,890   |                  |  |              | 3,761   |              |  |   | 7,692   |   |  |   | 7,133   |  
|Capital expenditures       |  |               | 2,081   |                  |  |              | 4,817   |              |  |   | 3,529   |   |  |   | 15,202  |  

8. Acquisitions and Dispositions of Stores

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

In Fiscal 2002, the Company completed the acquisition of thirteen stores
in the Seattle, Washington market from Paper Warehouse, Inc. The conversion of
these locations to the Party City store format was completed and all stores
were opened by the first quarter of Fiscal 2003. Additional goodwill of
$155,000 was recorded in Fiscal 2003 related to the completion of the
conversion of these locations.

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

The were no changes in the carrying amount of goodwill of $18.6 million
for the six months ended December 27, 2003.

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##### Table of Contents



Assuming the stores acquired during the six months ended December 28, 2002
were acquired on June 30, 2002, the beginning of Fiscal 2003, the pro forma
results would have been as follows (in thousands, except per share amounts):

|                             |  |               |         |                  |  |              |         |              |  |   |         |  |  |   |         | 
|---------------------------- |  | ------------- | ------- | ---------------- |  | ------------ | ------- | ------------ |  | - | ------- |  |  | - | ------- | 
|                             |  | Quarter Ended |         | Six months Ended
|                             |  |               |         |                 
|                             |  | December 27,  |         | December 28,     |  | December 27, |         | December 28,
|                             |  | 2003          |         | 2002             |  | 2003         |         | 2002        
|                             |  |               |         |                  |  |              |         |             
|Net sales                    |  | $             | 175,304 |                  |  | $            | 161,648 |              |  | $ | 277,924 |  |  | $ | 254,221 | 
|Net income                   |  | $             | 19,290  |                  |  | $            | 15,050  |              |  | $ | 17,340  |  |  | $ | 13,391  | 
|Earnings per share - basic   |  | $             | 1.14    |                  |  | $            | 0.90    |              |  | $ | 1.03    |  |  | $ | 0.81    | 
|Earnings per share - diluted |  | $             | 0.98    |                  |  | $            | 0.76    |              |  | $ | 0.88    |  |  | $ | 0.67    | 

9. Guarantees

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

The Company has unconditionally guaranteed the lease payments of 24 leases
associated with franchise stores and locations sublet. The majority of the
guarantees were given when the Company sold stores in 1999 as part of its
restructuring. The guarantees continue until the expiration date of
the leases, which range from 2004
through 2011. The maximum amount of the guarantees may vary, but is
limited to the sum of the total amount due under the lease. As of December 27,
2003, the maximum aggregate amount of the guarantees was approximately $18.5 million.

10. Recent Accounting Standards

In January 2003, the FASB issued FASB Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities. FIN 46 addresses how to identify
variable interest entities and provides guidance as to how a company may assess
its interests in a variable interest entity for purposes of deciding whether
consolidation of that entity is required. FIN 46 is effective for all variable
interest entities created after January 31, 2003. The Company is required to
adopt the provisions of FIN 46 for any variable interest entity created prior
to February 1, 2003 by the end of the current fiscal year. The Company is
reviewing the provisions of this interpretation and currently does not expect
its implementation to have a material effect on its financial position, results
of operations or cash flows.

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##### Table of Contents






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

Critical Accounting Policies and Estimates

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

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

Our accounting policies are more fully described in Note 1 to the
consolidated financial statements contained in our Annual Report on Form 10-K
filed with the Securities and Exchange Commission (SEC) on September 26,
2003. We have identified certain critical accounting policies that are
described below.

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

Finite long-lived assets.In the evaluation of the fair value and future
benefits of finite long-lived assets, we perform an analysis of the anticipated
undiscounted future net cash flows of the related finite long-lived assets. Various factors including
future sales growth and profit margins are included in this analysis. To the
extent these future projections or strategies change, the conclusion regarding
impairment may differ from the current estimates.

Insurance accruals.Our consolidated balance sheets include liabilities
with respect to self-insured workers compensation and general liability
claims. We estimate the required liability of such claims utilizing an actuarial method, based upon various assumptions, which
include, but are not limited to, our historical loss experience, projected loss
development factors, actual payroll and other data. The required liability is
also subject to adjustment in the future based upon changes in claims
experience, including changes in the number of incidents (frequency) and
changes in the ultimate cost per incident (severity).

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

Sales Returns.We estimate future sales returns and, when material, record
a provision in the period that the related sales are recorded based on
historical information. Should actual returns differ from our estimates, we
would be required to revise estimated sales returns.

Store
Closure Costs.We record estimated store closure costs, such as estimated lease commitment costs net of estimated
sublease income and other miscellaneous store closing costs, when the liability
is incurred. Such estimates may be subject to change should actual costs
differ.

11



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##### Table of Contents



Results of Operations

|                                              |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |         |        | 
|--------------------------------------------- | ---------------------------------------------- | ------------------------------------------- | ------- | ------------- | ------ | ---------------- | ------- | ------------ | ------ | ------------ | ------- | ------- | ------ | - | ------- | ------- | ------ | 
|                                              |                                                |                                             |         | Quarter Ended |        | Six Months Ended
|                                              |                                                |                                             |         | December 27,  |        | December 28,     |         | December 27, |        | December 28,
|                                              |                                                |                                             |         | 2003          |        | 2002             |         | 2003         |        | 2002        
|                                              |                                                |                                             |         |               |        |                  |         |              |        |             
|Statement of Operations Data:                 |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|Total revenues                                |                                                | $                                           | 182,560 |               |        | $                | 168,191 |              |        | $            | 289,535 |         |        | $ | 263,197 |        
|                                              |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|Company-owned stores:                         |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|                                              | Net sales                                      |                                             | $       | 175,304       |        |                  | $       | 161,648      |        |              | $       | 277,924 |        |   | $       | 252,772 |       
|                                              | Cost of goods sold and occupancy costs         |                                             |         | 104,705       |        |                  |         | 95,974       |        |              |         | 179,033 |        |   |         | 160,399 |       
|                                              |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|                                              | Gross profit                                   |                                             |         | 70,599        |        |                  |         | 65,674       |        |              |         | 98,891  |        |   |         | 92,373  |       
|                                              | Store operating and selling expense            |                                             |         | 36,290        |        |                  |         | 34,288       |        |              |         | 62,169  |        |   |         | 57,986  |       
|                                              |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|                                              | Company-owned stores profit contribution       |                                             |         | 34,309        |        |                  |         | 31,386       |        |              |         | 36,722  |        |   |         | 34,387  |       
|                                              | General and administrative expense             |                                             |         | 7,498         |        |                  |         | 8,403        |        |              |         | 15,657  |        |   |         | 15,705  |       
|                                              |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|Company-owned profit contribution             |                                                |                                             | 26,811  |               |        |                  | 22,983  |              |        |              | 21,065  |         |        |   | 18,682  |        
|Franchise stores:                             |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|                                              | Royalty fees                                   |                                             |         | 7,216         |        |                  |         | 6,503        |        |              |         | 11,123  |        |   |         | 10,150  |       
|                                              | Franchise fees                                 |                                             |         | 40            |        |                  |         | 40           |        |              |         | 488     |        |   |         | 275     |       
|                                              |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|                                              | Total franchise revenues                       |                                             |         | 7,256         |        |                  |         | 6,543        |        |              |         | 11,611  |        |   |         | 10,425  |       
|                                              | Total franchise expense                        |                                             |         | 1,562         |        |                  |         | 1,646        |        |              |         | 3,221   |        |   |         | 3,208   |       
|                                              |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|                                              | Franchise profit contribution                  |                                             |         | 5,694         |        |                  |         | 4,897        |        |              |         | 8,390   |        |   |         | 7,217   |       
|                                              |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|Operating income                              |                                                |                                             | 32,505  |               |        |                  | 27,880  |              |        |              | 29,455  |         |        |   | 25,899  |        
|Interest expense, net                         |                                                |                                             | 112     |               |        |                  | 2,824   |              |        |              | 312     |         |        |   | 3,709   |        
|                                              |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|Income before income taxes                    |                                                |                                             | 32,393  |               |        |                  | 25,056  |              |        |              | 29,143  |         |        |   | 22,190  |        
|Provision for income taxes                    |                                                |                                             | 13,103  |               |        |                  | 10,006  |              |        |              | 11,803  |         |        |   | 8,876   |        
|                                              |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|Net income                                    |                                                | $                                           | 19,290  |               |        | $                | 15,050  |              |        | $            | 17,340  |         |        | $ | 13,314  |        
|                                              |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|Basic earnings per share                      |                                                | $                                           | 1.14    |               |        | $                | 0.90    |              |        | $            | 1.03    |         |        | $ | 0.80    |        
|                                              |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|Diluted earnings per share                    |                                                | $                                           | 0.98    |               |        | $                | 0.76    |              |        | $            | 0.88    |         |        | $ | 0.67    |        
|                                              |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|Weighted average shares outstanding -  basic  |                                                |                                             | 16,867  |               |        |                  | 16,803  |              |        |              | 16,856  |         |        |   | 16,600  |        
|Weighted average shares outstanding - diluted |                                                |                                             | 19,624  |               |        |                  | 19,896  |              |        |              | 19,620  |         |        |   | 19,904  |        
|Operating Data:                               |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|                                              | Number of Company-owned stores (end of
period) |                                             |         | 247           |        |                  |         | 239          |        |              |         | 247     |        |   |         | 239     |       
|                                              | Increase in Company-owned same store sales     |                                             |         | 3.7           | %      |                  |         | 1.9          | %      |              |         | 3.8     | %      |   |         | 2.5     | %     
|                                              | Number of franchise stores (end of period)     |                                             |         | 254           |        |                  |         | 240          |        |              |         | 254     |        |   |         | 240     |       
|                                              | Increase in franchise same store sales         |                                             |         | 7.0           | %      |                  |         | 2.9          | %      |              |         | 5.7     | %      |   |         | 4.0     | %     
|Other Information:                            |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|                                              | Depreciation and amortization                  |                                             | $       | 3,890         |        |                  | $       | 3,761        |        |              | $       | 7,692   |        |   | $       | 7,133   |       
|Cash flow used in:                            |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|                                              | Investing activities                           |                                             |         | (2,081        | )      |                  |         | (4,817       | )      |              |         | (3,529  | )      |   |         | (15,202 | )     
|                                              | Financing activities                           |                                             |         | (14,402       | )      |                  |         | (21,880      | )      |              |         | (9,940  | )      |   |         | (4,907  | )     
|Balance Sheet Data:                           |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|                                              | Working capital                                |                                             | $       | 35,574        |        |                  | $       | 14,487       |        |              | $       | 35,574  |        |   | $       | 14,487  |       
|                                              | Total assets                                   |                                             |         | 178,624       |        |                  |         | 177,938      |        |              |         | 178,624 |        |   |         | 177,938 |       
|                                              | Borrowings                                     |                                             |         |              |        |                  |         | 4,114        |        |              |         |        |        |   |         | 4,114   |       
|                                              | Stockholders equity                           |                                             |         | 98,199        |        |                  |         | 82,941       |        |              |         | 98,199  |        |   |         | 82,941  |       
|EBITDA(a)                                     |                                                |                                             | 36,395  |               |        |                  | 31,641  |              |        |              | 37,147  |         |        |   | 33,032  |        
|Most directly comparable GAAP measures:       |                                                |                                             |         |               |        |                  |         |              |        |              |         |         |        |   |         |        
|                                              | Net income                                     |                                             |         | 19,290        |        |                  |         | 15,050       |        |              |         | 17,340  |        |   |         | 13,314  |       
|                                              |                                                | Cash flows provided by Operating activities |         |               | 32,430 |                  |         |              | 24,729 |              |         |         | 30,647 |   |         |         | 19,915 | 

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

Because we also consider EBITDA
useful as an operating measure, a reconciliation of EBITDA to net income follows for the periods
indicated:

|                              |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |        |  
|----------------------------- |  | ------------- | ------- | ---------------- |  | ------------ | ------- | ------------ |  | - | ------- | - |  | - | ------ | -
|                              |  | Quarter Ended |         | Six Months Ended
|                              |  | December 27,  |         | December 28,     |  | December 27, |         | December 28,
|                              |  | 2003          |         | 2002             |  | 2003         |         | 2002        
|                              |  |               |         |                  |  |              |         |             
|EBITDA(a)                     |  | $             | 36,395  |                  |  | $            | 31,641  |              |  | $ | 37,147  |   |  | $ | 33,032 |  
|Depreciation and amortization |  |               | (3,890  | )                |  |              | (3,761  | )            |  |   | (7,692  | ) |  |   | (7,133 | )
|Interest expense, net         |  |               | (112    | )                |  |              | (2,824  | )            |  |   | (312    | ) |  |   | (3,709 | )
|Provision for income taxes    |  |               | (13,103 | )                |  |              | (10,006 | )            |  |   | (11,803 | ) |  |   | (8,876 | )
|                              |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |        |  
|Net income                    |  | $             | 19,290  |                  |  | $            | 15,050  |              |  | $ | 17,340  |   |  | $ | 13,314 |  
|                              |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |        |  

Because we also consider EBITDA useful as a liquidity measure, we present
the following reconciliation of EBITDA to our net cash provided by operating
activities:

|                                   |                                                                  |                                           |         |               |        |                  |         |              |        |              |         |        |        |   |        |         |        | 
|---------------------------------- | ---------------------------------------------------------------- | ----------------------------------------- | ------- | ------------- | ------ | ---------------- | ------- | ------------ | ------ | ------------ | ------- | ------ | ------ | - | ------ | ------- | ------ | 
|                                   |                                                                  |                                           |         | Quarter Ended |        | Six Months Ended
|                                   |                                                                  |                                           |         | December 27,  |        | December 28,     |         | December 27, |        | December 28,
|                                   |                                                                  |                                           |         | 2003          |        | 2002             |         | 2003         |        | 2002        
|                                   |                                                                  |                                           |         |               |        |                  |         |              |        |             
|EBITDA(a)                          |                                                                  | $                                         | 36,395  |               |        | $                | 31,641  |              |        | $            | 37,147  |        |        | $ | 33,032 |        
|Interest expense, net              |                                                                  |                                           | (112    | )             |        |                  | (2,824  | )            |        |              | (312    | )      |        |   | (3,709 | )      
|Provision for income taxes         |                                                                  |                                           | (13,103 | )             |        |                  | (10,006 | )            |        |              | (11,803 | )      |        |   | (8,876 | )      
|Non-cash interest                  |                                                                  |                                           | 40      |               |        |                  | 1,304   |              |        |              | 80      |        |        |   | 1,554  |        
|Deferred rent                      |                                                                  |                                           | (117    | )             |        |                  | 128     |              |        |              | (240    | )      |        |   | 387    |        
|Equity based compensation          |                                                                  |                                           | 24      |               |        |                  | 614     |              |        |              | 148     |        |        |   | 752    |        
|Provision for doubtful accounts    |                                                                  |                                           | (77     | )             |        |                  | (301    | )            |        |              | (140    | )      |        |   | (602   | )      
|Other                              |                                                                  |                                           | 6       |               |        |                  | 356     |              |        |              | 10      |        |        |   | 44     |        
|Changes in assets and liabilities: |                                                                  |                                           |         |               |        |                  |         |              |        |              |         |        |        |   |        |        
|                                   | Accounts payable, accrued expenses
and
other current liabilities |                                           |         | (20,691       | )      |                  |         | (16,949      | )      |              |         | 3,437  |        |   |        | 17,956  |       
|                                   | Merchandise inventory                                            |                                           |         | 32,946        |        |                  |         | 25,572       |        |              |         | 5,627  |        |   |        | (12,915 | )     
|                                   | Other long-term liabilities                                      |                                           |         | (12           | )      |                  |         | (37          | )      |              |         | (119   | )      |   |        |        |       
|                                   | Other current assets and other assets                            |                                           |         | (2,869        | )      |                  |         | (4,769       | )      |              |         | (3,188 | )      |   |        | (7,708  | )     
|                                   |                                                                  |                                           |         |               |        |                  |         |              |        |              |         |        |        |   |        |        
|                                   |                                                                  | Net cash provided by operating
activities |         | $             | 32,430 |                  |         | $            | 24,729 |              |         | $      | 30,647 |   |        | $       | 19,915 | 
|                                   |                                                                  |                                           |         |               |        |                  |         |              |        |              |         |        |        |   |        |        

We use EBITDA to determine our executive compensation which bases
incentive compensation payments on our EBITDA performance measured against
budget. EBITDA is also widely used by us and others in our industry to evaluate
and price potential acquisitions.

EBITDA has limitations as an analytical tool, and you should not consider
it in isolation, or as a substitute for analysis of our results as reported
under GAAP. Some of these limitations are:



| |  |  | EBITDA does not reflect our current or future requirements for
capital expenditures or contractual commitments;
| | - |  | ---------------------------------------------------------------------------------------------------------------
|
| |  |  | EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;                       

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| |  |  | EBITDA does not reflect the interest expense, or the cash
requirements necessary to service interest or principal payments, on our debts;                                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized will often have to be replaced in the
future, and EBITDA does not reflect any cash requirements for such
replacements; and
|
| |  |  | Other companies in our industry may calculate EBITDA differently
than we do, limiting its usefulness as a comparative measure.                                                                                                    

Because of these limitations, EBITDA should not be considered as a measure
of discretionary cash available to us to invest in the growth of our business.
We compensate for these limitations by relying primarily on our GAAP results
and using EBITDA only supplementally. See the Statements of Cash Flows included
in our financial statements.

|                                            |                |                                    |                                  |  |               |     |                  |  |              |     |              |  |     |     |     |  |     |     |  
|------------------------------------------- | -------------- | ---------------------------------- | -------------------------------- |  | ------------- | --- | ---------------- |  | ------------ | --- | ------------ |  | --- | --- | --- |  | --- | --- | -
|                                            |                |                                    |                                  |  | Quarter ended |     | Six months ended
|                                            |                |                                    |                                  |  |               |     |                 
|                                            |                |                                    |                                  |  | December 27,  |     | December 28,     |  | December 27, |     | December 28,
|                                            |                |                                    |                                  |  | 2003          |     | 2002             |  | 2003         |     | 2002        
|                                            |                |                                    |                                  |  |               |     |                  |  |              |     |             
|Store Data:                                 |                |                                    |                                  |  |               |     |                  |  |              |     |              |  |     |     |     | 
|                                            | Company-owned: |                                    |                                  |  |               |     |                  |  |              |     |              |  |     |     |     |  |    
|                                            |                | Stores open at beginning of period |                                  |  | 247           |     |                  |  | 234          |     |              |  | 242 |     |     |  | 209 |    
|                                            |                |                                    | Stores opened                    |  |               |    |                  |  |              | 5   |              |  |     | 6   |     |  |     | 28  |  
|                                            |                |                                    | Stores closed                    |  |               |    |                  |  |              |    |              |  |     | (1  | )   |  |     |    |  
|                                            |                |                                    | Stores acquired from franchisees |  |               |    |                  |  |              |    |              |  |     |    |     |  |     | 2   |  
|                                            |                |                                    |                                  |  |               |     |                  |  |              |     |              |  |     |     |     |  |     |    
|                                            |                | Stores open at end of period       |                                  |  | 247           |     |                  |  | 239          |     |              |  | 247 |     |     |  | 239 |    
|                                            |                |                                    |                                  |  |               |     |                  |  |              |     |              |  |     |     |     |  |     |    
|Average Company-owned stores open in period |                |                                    | 247                              |  |               |     | 236              |  |              |     | 245          |  |     |     | 230 | 
|                                            |                |                                    |                                  |  |               |     |                  |  |              |     |              |  |     |     |     |  |     |    
|                                            | Franchise:     |                                    |                                  |  |               |     |                  |  |              |     |              |  |     |     |     |  |    
|                                            |                | Stores open at beginning of period |                                  |  | 253           |     |                  |  | 247          |     |              |  | 241 |     |     |  | 242 |    
|                                            |                |                                    | Stores opened                    |  |               | 1   |                  |  |              | 1   |              |  |     | 13  |     |  |     | 8   |  
|                                            |                |                                    | Stores closed                    |  |               |    |                  |  |              | (8  | )            |  |     |    |     |  |     | (8  | )
|                                            |                |                                    | Stores sold to Company           |  |               |    |                  |  |              |    |              |  |     |    |     |  |     | (2  | )
|                                            |                |                                    |                                  |  |               |     |                  |  |              |     |              |  |     |     |     |  |     |    
|                                            |                |                                    | Stores open at end of period     |  |               | 254 |                  |  |              | 240 |              |  |     | 254 |     |  |     | 240 |  
|                                            |                |                                    |                                  |  |               |     |                  |  |              |     |              |  |     |     |     |  |     |    
|Average franchise stores open in period     |                |                                    | 253                              |  |               |     | 247              |  |              |     | 251          |  |     |     | 245 | 
|                                            |                |                                    |                                  |  |               |     |                  |  |              |     |              |  |     |     |     |  |     |    
|Total stores chainwide                      |                |                                    | 501                              |  |               |     | 479              |  |              |     | 501          |  |     |     | 479 | 
|                                            |                |                                    |                                  |  |               |     |                  |  |              |     |              |  |     |     |     |  |     |    

General

Net Sales.Net sales include same store sales and new store sales. Same
store sales include sales for those stores that were in operation for a full
period in both the current month and the corresponding month for the prior
year. New store sales include sales in the current fiscal year from stores
opened during the previous fiscal year before they are considered same stores,
and new stores opened in the current fiscal year.

Cost of goods sold and occupancy costs.Cost of goods sold and occupancy
costs includes the cost of merchandise, freight to the stores and store
occupancy costs. Store occupancy costs include rent, common area maintenance,
real estate taxes, repairs and maintenance, depreciation, insurance and
utilities.

Store operating and selling expenses.Store operating and selling expenses
consist of selling and store management payroll, employee benefits, medical
insurance, employment taxes, advertising, pre-opening expenses which are
expensed when incurred and other store level expenses.

General and administrative expenses.General and administrative expenses
include payroll and employee benefits, employment

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taxes, management information
systems, marketing, insurance, legal and other corporate level expenses.
Corporate level expenses are primarily attributable to our corporate office in
Rockaway, New Jersey, and district and regional offices throughout the country.

Franchising.Franchising revenue is composed of the initial franchise
fees, which are recorded as revenue when a franchise store opens, plus ongoing
royalty fees, which are generally 4.0% of the stores net sales. Franchise
expenses include direct and indirect expenses. The direct expenses include
salaries, travel and other direct expenses of the franchise operations
department in addition to legal fees, bad debt expense, insurance expense and
other miscellaneous charges. The indirect expenses include pro-rata allocations
of corporate expenses for salaries, including bonuses, occupancy and
depreciation, based on time spent on franchise support.

Interest expense.Interest and debt expense includes interest relating to
our senior notes and credit facility. Interest also includes amortization of
financing intangibles, bank service charges and interest on capital lease
obligations.

Quarter Ended December 27, 2003 Compared to Quarter Ended December 28, 2002

Retail.Net sales from Company-owned stores increased 8.4% to $175.3
million for the second quarter of Fiscal 2004 from $161.6 million for the
second quarter of the prior fiscal year. Of the 8.4% increase in net sales,
3.7% resulted from a same store sales increase and the remaining 4.7% related
to the stores that have not been open for one year. The customer
count in company-owned stores, on a same store basis, increased 1.5%,
and the average sale increased 2.2%. With nine stores joining the same
store sales group during this quarter of Fiscal 2004, same store
sales increased 4.9% in the western region, 4.0% in the eastern
region and 2.6% in the central region. Same store sales for
Company-owned stores increased 1.9% for the second quarter of Fiscal 2003. The
Company opened no new stores during the second quarter of Fiscal 2004 and five
in the same period last year.

Gross profit, which is net sales minus cost of goods sold and occupancy
costs, increased 7.5% to $70.6 million in the second quarter of Fiscal 2004
from $65.7 million in the same period last year. The increase was primarily due
to increased sales volume. Gross margin as a percent of sales was 40.3% for the
second quarter of Fiscal 2004 compared with 40.6% for the same period last
year.

Store operating and selling expenses increased 5.8% to $36.3 million for
the second quarter of Fiscal 2004 from $34.3 million in the same period last
year. The increase in store operating expenses is attributable to same store
sales increases and the increase in the number of stores. Store operating and
selling expenses were 20.7% and 21.2% of sales for the second quarter of Fiscal
2004 and Fiscal 2003, respectively. The decrease as a percent of sales is due
mainly to a decrease in store opening expenses.

The pre-opening expenses incurred in the second quarter of Fiscal 2004 for
the new stores and stores to be opened later in the fiscal year amounted to
$20,000 compared with $314,000 incurred during the same period last year.

Company-owned store profit contribution, which is gross profit minus store
operating and selling expenses, was $34.3 million for the second quarter of
Fiscal 2004 compared with $31.4 million for the same period last year. The
improvement over the prior year is primarily the result of same store sales
increases and the increase in the number of stores. Store profit contribution
as a percent of sales was 19.6% for the second quarter of Fiscal 2004 compared
with 19.4% in the same period last year. New stores in their first or
second Halloween season reported store contribution of
$3.3 million, an increase of $2.9 million over the
comparable period last year. Of this $2.9 million increase,
$400,000 was attributable to the 12 stores in the Seattle market
acquired in 2002.

General and administrative expenses decreased 10.8% to $7.5 million in the
second quarter of Fiscal 2004 from $8.4 million in the same period last year.
General and administrative expenses were 4.3% and 5.2% of sales for the second
quarter of Fiscal 2004 and Fiscal 2003, respectively. This decrease is
primarily due to unusual expenses associated with the Companys new logistics
initiative and professional fees related to the implementation of a new
information system incurred in the second quarter of Fiscal 2003 which were not
incurred in Fiscal 2004.

Franchising.Franchise fees recognized on one store opening was $40,000 in
the second quarter of Fiscal 2004 and $40,000 for one store opening
in the same period last year. Royalty fees increased 10.9% to $7.2 million in
the second quarter of Fiscal 2004 from $6.5 million in the same period last
year. This was primarily due to an increased franchise store base and a same store sales increase of 7.0% for the
franchise stores in the second quarter of Fiscal 2004, as compared with 2.9%
for the same period last year.

Expenses
attributable to franchise revenue decreased 5.1% to $1.6
million for the second quarter of Fiscal 2004 from $1.6 million for the second
quarter of the prior fiscal year. As a percentage of franchise revenue,
franchise expenses were 21.5% and 25.2% for the second quarter of Fiscal 2004
and Fiscal 2003, respectively.

Franchise profit contribution, which is franchise revenue minus expenses
related to franchise revenue, increased 16.3% to $5.7

15



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##### Table of Contents



million in second quarter of Fiscal 2004 from $4.9 million in the same
period last year. The increase in franchise profit contribution is due to the
increase in royalty fees combined with a decrease in franchise expenses.

Interest Expense. Interest expense decreased to $112,000 for the second
quarter of Fiscal 2004 from $2.8 million in the same period last year. This
decrease in interest expense is due to the repurchase of outstanding senior
notes in the second quarter of Fiscal 2003. The repurchase of
these notes was completed using working capital and borrowings under the
Companys asset-based revolving credit agreement.

Income Taxes.An income tax expense of $13.1 million or 40.5% of pre-tax
income, and $10.0 million or 39.9% of pre-tax income was recorded in the second
quarter of Fiscal 2004 and Fiscal 2003, respectively. The change in tax rate
from 39.9% to 40.5% is due to an increase in the overall state tax rate.

Net Income. As a result of the above factors, net income increased to
$19.3 million, or $0.98 per diluted share, in the second quarter of Fiscal 2004,
as compared to net income of $15.1 million, or $0.76 per diluted share in
Fiscal 2003. Weighted average diluted shares outstanding decreased to 19.6
million in the second quarter of Fiscal 2004 from 19.9 million in the same
period last year. This decrease is mainly due to the
463,000 shares of company stock that were purchased by the
Company during the
third quarter of Fiscal 2003, the warrant and stock option
exercises during the twelve months ending December 27,
2003.

Six Months Ended December 27, 2003 Compared with Six Months Ended December 28,
2002

Retail.Net sales from Company-owned stores increased 10.0% to $277.9
million for the six-months ended December 27, 2003 from $252.8 million for the
same period last year. Of the 10.0% increase in net sales, 3.8% resulted from
a same store sales increase and the remaining 6.2% related to the stores that
have not been open for one year. The customer count in company-owned
stores, on a same store basis, increased 1.4%, and the average sale
increased 2.2%. With 31 stores
joining the same store sales group during the six months ended
December 27, 2003, same store sales increased 4.6% in the western
region, 4.3% in the eastern region and 2.8% in the central region. Same store sales for Company-owned stores
increased 2.5% for the same period last year. The Company opened six new stores
and closed one store during the six-months ended December 27,
2003 and opened 28 stores, acquired two stores from
franchises and closed no stores
during the same period last
year.

Gross profit, which is net sales minus cost of goods sold and occupancy
costs, increased 7.1% to $98.9 million in the six-months ended December 27,
2003 from $92.4 million in the same period last year. The increase was
primarily due to increased sales volume. Gross margin as a percent of sales was
35.6% for the six-months ended December 27, 2003 compared with 36.5% for the
same period last year. The decrease in gross margin percent was related
primarily to a high level of promotional activity in July and August, the
continued emphasis on the clearance of discontinued merchandise as part of the
Companys strategic focus.

Store operating and selling expenses increased 7.2% to $62.2 million for
the six-months ended December 27, 2003 from $58.0 million in the same period
last year. The increase in store operating expenses is attributable to
increased expenses related to the additional stores opened since the same
period last year. Store operating and selling expenses were 22.4% and 22.9% of
sales for the six-months ended December 27, 2003 and
December 28, 2002, respectively.
The decrease as a percent of sales is due mainly to a decrease in store opening
expenses.

The pre-opening expenses incurred in the six-months ended December 27,
2003 for the new stores and stores to be opened later in the fiscal year
amounted to $323,000 compared with $796,000 incurred during the same time
period last year.

Company-owned store profit contribution, which is gross profit minus store
operating and selling expenses, was $36.7 million for the six-months ended
December 27, 2003 compared with $34.4 million for the same period last year.
The improvement over the prior year is primarily the result of same store sales
increases and the increase in the number of stores. Store profit contribution
as a percent of sales was 13.2% for the six-months ended December 27, 2003
compared with 13.6% of sales in the same period last year due to the decrease
in gross margin as described above. New stores in their first or
second Halloween season reported store contribution of
$1.3 million, an increase of $3.7 million over the
comparable period last year. Of this $3.7 million increase, approximately
$900,000 was attributable to our Seattle stores.

General and administrative expenses decreased 0.3% to $15.7 million in the
six-months ended December 27, 2003 from $15.7 million in the same period last
year. General and administrative expenses were 5.6% and 6.2% of sales for the
six-months ended December 27, 2003 and December 28, 2002, respectively. This decrease
is primarily due to unusual expenses associated with the Companys new
logistics initiative and professional fees related to the implementation of a
new information system incurred during the six months ended December 27, 2002
which were not incurred during the same time period this year.

Franchising.Franchising fees recognized on 13 store openings was $488,000
in the six-months ended December 27, 2003 as compared with $275,000 recognized
for eight store openings in the same period last year. Royalty fees increased
9.6% to $11.1 million in the six-months ended December 27, 2003 from $10.2
million in the same period last year. This was primarily due to an
increased franchise store base and a same store

16



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##### Table of Contents



sales increase of 5.7% for the franchise stores in the six-months ended
December 27, 2003, as compared with 4.0% for the same period last year.

Expenses
attributable to franchise revenue for the six-months ended
December 27, 2003 remained relatively flat
with last year at $3.2 million. As
a percentage of franchise revenue, franchise expenses were 27.7% and 30.8% for
the six-months ended December 27, 2003 and December 28, 2002, respectively.

Franchise profit contribution, which is franchise revenue minus expenses
related to franchise revenue, increased 16.3% to $8.4 million for the six
months ended December 27, 2003 from $7.2 million in the same period last year.
The increase in franchise profit contribution is due to the increase in royalty
fees as well as a decrease in franchise expenses.

Interest Expense. Interest expense decreased to $312,000 for the
six-months ended December 27, 2003 from $3.7 million in the same period last
year. This decrease in interest expense is due to the repurchase of
outstanding senior notes. The repurchase of these notes
was completed using working capital and borrowings under the Companys
asset-based revolving credit agreement.

Income
Taxes.An income tax expense of $11.8 million or 40.5% of pre-tax
income, and $8.9 million or 40.0% of pre-tax income, was recorded in the
six-months ended December 27, 2003 and December 28, 2002, respectively.The change in
tax rate from 40.0% to 40.5% is due to an increase in the overall state tax
rate.

Net Income. As a result of the above factors, net income increased to
$17.3 million or $0.88 per diluted share in the six-months ended December 27,
2003, as compared to net income of $13.3 million, or $0.67 per diluted share in
the same period last year. Weighted average diluted shares outstanding decreased to 19.6
million in the six-months ended December 27, 2003 from 19.9 million in the same
period last year. This decrease is mainly due to the
463,000 shares of company stock that were purchased by the
Company during the
third quarter of Fiscal 2003, the warrant and stock option
exercises during the twelve months ending December 27,
2003 and a slight
decrease in average stock price for the six months ending
December 27, 2003.

Liquidity and Capital Resources

The Companys cash requirements are primarily for working capital, the
opening of new stores, the improvement and expansion of existing facilities and
the improvement of information systems. Historically, these cash requirements
have been met through cash flow from operations and borrowings under
our credit
facilities. At December 27, 2003, working capital was $35.6 million compared to
$14.5 million in the same period last year.

For the six months ended December 27, 2003, cash provided by operating
activities was $30.6 million, compared to $19.9 million for the same period
last year. The increase in cash provided by operating activities was primarily
attributable to a decrease in inventory. The decrease in average inventory
level per store of 15.7% from the same period last year was attributed to
managements efforts to control inventory and enable the Company to focus on
product assortment, merchandise presentation and identify and discontinue
slower moving SKUs. There was also an increase in net income and a decrease
in accounts payable and other current liabilities.

Cash used in investment activities for the six months ended December 27,
2003 was $3.5 million compared to $15.2 million in the same period in the last
fiscal year. The decrease in cash used in investing activities was primarily
attributable to the opening of six Company-owned stores this year as compared
with 28 new store openings and the acquisition of two stores from a franchisee
during the same period last year.

Cash used in financing activities was $9.9 million for the six months
ended December 27, 2003 compared with $4.9 million for the same period last
year. Cash generated from operations was used to pay down our
revolving credit facility.

At
December 27, 2003, the Company had no balance outstanding under the Loan
Agreement. Under the terms of the Loan Agreement, the Company may from time to
time borrow amounts based on a percentage of its eligible inventory, up to a
maximum of $65 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 set initially at 1.50% and is currently at 1.25%, per annum
or (ii) at the prime rate less the applicable margin, which was initially set
at and is currently 0.25% per annum, totaling 3.75% at December 27, 2003. 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 December 27, 2003 and
February 2, 2004, the

17



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Company had no borrowings outstanding under the Loan Agreement. Based on
a percentage of current eligible inventory and credit card receivables, the
Company had $19.2 million available to be borrowed under the Loan Agreement at
February 2, 2004.

Company management currently believes that the cash generated by
operations, together with the borrowing availability under the Loan Agreement,
will be sufficient to meet the Companys working capital needs for the next
twelve months, including planned new store openings. The Company is
currently free of debt. This permits the Company to consider a wide variety of
corporate initiatives intended to improve shareholder value, although there is
no assurance that any specific initiative will be pursued or consummated.

Contractual Obligations and Commercial Commitments

To facilitate an understanding of our contractual obligations and
commercial commitments, the following data is provided as of
December 27, 2003:

|                                         |                           |   |                                       |    |        |   |           |    |           |   |               |   |  |   |        |   |  |   |        |   | 
|---------------------------------------- | ------------------------- | - | ------------------------------------- | -- | ------ | - | --------- | -- | --------- | - | ------------- | - |  | - | ------ | - |  | - | ------ | - | 
|                                         |                           |   | Payments Due By Period (in thousands)
|                                         |                           |   |                                      
|                                         |                           |   | Total                                 |    | 1 Year |   | 2-3 Years |    | 4-5 Years |   | After 5 years
|                                         |                           |   |                                       |    |        |   |           |    |           |   |              
|Contractual Obligations
Operating leases |                           | $ | 244,830                               |    |        | $ | 46,229    |    |           | $ | 86,258        |   |  | $ | 81,701 |   |  | $ | 30,642 |  
|                                         | Severance Arrangements    |   |                                       | 13 |        |   |           | 13 |           |   |               |  |  |   |        |  |  |   |        |  | 
|                                         | Capital lease Obligations |   |                                       | 10 |        |   |           | 10 |           |   |               |  |  |   |        |  |  |   |        |  | 
|                                         |                           |   |                                       |    |        |   |           |    |           |   |               |   |  |   |        |   |  |   |        |  
|Total Contractual Obligations            |                           | $ | 244,853                               |    |        | $ | 46,252    |    |           | $ | 86,258        |   |  | $ | 81,701 |   |  | $ | 30,642 |  
|                                         |                           |   |                                       |    |        |   |           |    |           |   |               |   |  |   |        |   |  |   |        |  

As of December 27, 2003 and February 2, 2004, we had a contingent
liability related to severance payments for 14 employees. The total contingent
liability ranges from zero to approximately $2.0 million. As of December 27,
2003 and February 2, 2004, we had a standby letter of credit of $3.7 million
pursuant to the Loan Agreement.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or
off-balance sheet entities for the purpose of raising capital, incurring debt
or operating our business.

Accounting and Reporting Changes

In January 2003, the FASB issued FASB Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities. FIN 46 addresses how to identify
variable interest entities and provides guidance as to how a company may assess
its interests in a variable interest entity for purposes of deciding whether
consolidation of that entity is required. FIN 46 is effective for all variable
interest entities created after January 31, 2003. The Company is required to
adopt the provisions of FIN 46 for any variable interest entity created prior
to February 1, 2003 by the end of the current fiscal year. The Company is
reviewing the provisions of this interpretation and currently does not expect
its implementation to have a material effect on its financial position, results
of operations or cash flows.

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 are based on many assumptions that are subject to
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 and other retailers, availability
of qualified personnel, availability of suitable future store locations,
schedules of store expansion plans and other factors beyond our control. As a
result of the foregoing risks and uncertainties, actual results and performance
may differ materially from those projected or suggested herein. Additional
information concerning certain risks and uncertainties that could cause our
actual results to differ materially from those projected or suggested may be
identified from time to time in our Securities and Exchange Commission filings
and our public announcements.




Item 3.Quantitative and Qualitative Disclosures About Market Risk

We, in the normal course of doing business, are exposed to interest rate
change and market risk. As borrowing patterns are cyclical, we borrow
only during certain times of the year. Therefore, a sudden increase in
interest rates (which under the Loan Agreement is dependent on, at the
Companys option, (i) at the adjusted Eurodollar rate plus the applicable
margin, which was set

18



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initially at 1.50% per annum, and is currently at 1.25% per annum, or (ii)
at the prime rate less the applicable margin, which was set initially at and is
0.25% per annum) may, during peak borrowing, have a negative impact on
short-term results.




Item 4.Controls and Procedures

The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Companys Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms
and that such information is accumulated and communicated to the Companys
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation,
under the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and the Companys Chief
Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of the end of
the three
months covered by this report. Based on the foregoing, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective at the reasonable assurance
level.

There has been no change in the Companys internal controls over financial
reporting during the Companys most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
controls over financial reporting.

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PART II. OTHER INFORMATION




Item 1.Legal Proceedings

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

In addition to the foregoing, from time to time the Company is involved in
routine litigation incidental to the conduct of the business which is
not, individually or in the aggregate, material to the Company.




Item 2.Changes in
Securities, Use of Proceeds and Issuer Purchases of Equity Securities

None




Item 3.Defaults Upon Senior Securities

None




Item 4.Submission of Matters to a Vote of Security Holders

The Companys 2003 Annual Meeting of Stockholders was held on Wednesday,
November 12, 2003 for the following purposes:



| | 1. | To elect eight directors to the Board of Directors who shall serve
until the 2004 Annual Meeting of Stockholders, or until their
successors are elected and qualified (Proposal 1).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                      
| |    | The voting as to Proposal 1 was as follows:                                                                                                                                          

|                      |  |     |            |         |  |  |           | 
|--------------------- |  | --- | ---------- | ------- |  |  | --------- | 
|Name                  |  | For |            | Against
|                      |  |     |            |        
|Ralph D. Dillon       |  |     | 13,956,159 |         |  |  | 597,819   | 
|Richard H. Griner     |  |     | 13,956,159 |         |  |  | 597,819   | 
|L.R. Jalenak, Jr.     |  |     | 13,818,261 |         |  |  | 735,717   | 
|Franklin R. Johnson   |  |     | 13,956,111 |         |  |  | 597,867   | 
|Howard Levkowitz      |  |     | 13,643,053 |         |  |  | 910,919   | 
|Nancy Pedot           |  |     | 13,888,111 |         |  |  | 665,867   | 
|Walter J. Salmon      |  |     | 13,943,059 |         |  |  | 610,919   | 
|Michael E. Tennenbaum |  |     | 13,497,361 |         |  |  | 1,056,657 | 



| | 2. | To approve an amendment to the Companys Certificate of Incorporation
increasing the number of the Companys authorized shares of Common Stock
from 25,000,000 to 40,000,000 (Proposal 2).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                             
| |    | The voting as to Proposal 2 was as follows:                                                                                                                                                 

|           |  |         |           |           |  |  |       | 
|---------- |  | ------- | --------- | --------- |  |  | ----- | 
|For        |  | Against |           | Abstained
|           |  |         |           |          
|13,512,000 |  |         | 1,035,303 |           |  |  | 6,605 | 

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| | 3. | To approve an amendment and restatement of the Companys 1999 Stock
Incentive Plan, increasing the number of shares of the Companys common
stock issuable pursuant to options and awards granted under the plan
from 2,000,000 to 7,500,000, and increasing the limit on the number of
shares of the Companys common stock which may be subject to options or
stock appreciation rights granted to a single participant in any given
year from 400,000 to 750,000 (Proposal 3).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    | The voting as to Proposal 3 was as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                        

|          |  |         |           |           |  |                 |       |  |  |  |           | 
|--------- |  | ------- | --------- | --------- |  | --------------- | ----- |  |  |  | --------- | 
|For       |  | Against |           | Abstained |  | Broker
Non-Vote
|          |  |         |           |           |  |                
|7,167,274 |  |         | 3,606,793 |           |  |                 | 7,671 |  |  |  | 3,772,240 | 




Item 5.Other Information

None




Item 6.Exhibits and Reports on Form 8-K



|(a) |  | The exhibits required to be filed as part of this report on Form 10-Q are
listed in the attached Exhibit Index.                                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Reports on Form 8-K:                                                                                                                                                                                                                                                                                
|   
|    |  | The Company furnished a Current Report on Form 8-K dated November 12, 2003 in
reference to a press release dated November 12, 2003 reporting certain
information regarding the Companys sales results for the five week period
ended November 1, 2003, which includes the Halloween selling season.
|   
|    |  | The Company furnished a Current Report on Form 8-K dated November 7, 2003 in
reference to a press release dated November 7, 2003 reporting certain
information regarding the Companys operating results for the first
quarter ended September 27, 2003.                                            
|   
|    |  | The Company furnished a Current Report on Form 8-K dated October 9, 2003 in
reference to a press release dated October 9, 2003 reporting certain
information regarding the Companys sales results for the first quarter ended
September 27, 2003.                                                  

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EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                 
|3.1         |  | Certificate of Incorporation of the Company.                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                 
|3.2         |  | Bylaws of the Company as amended, incorporated by reference from the
Companys Quarterly Report on Form 10-Q as filed with the Commission
on November 12, 2003 (the November 2003 10-Q).                                                                                      
|            |  |                                                                                                                                                                                                                                                                                 
|4.1         |  | Specimen stock certificate evidencing the Common Stock,
incorporated by reference from the Companys Registration Statement as
amended on Form S-1 Number 333-00350 as filed with the
Commission on January 18, 1996 (the S-1).                                               
|            |  |                                                                                                                                                                                                                                                                                 
|4.2         |  | Form of Amended and Restated Warrant, incorporated by
reference from the Companys Current Report on Form 8-K as
filed with the Commission on January 19, 2000 (the
January 2000 8-K).                                                                                        
|            |  |                                                                                                                                                                                                                                                                                 
|4.3         |  | Form of Securities Purchase Agreement, dated as of August
16, 1999, by and between the Company and each of the
Investors, incorporated by reference from the Companys
Current Report on Form 8-K as filed with the Commission on
August 25, 1999 (the August 1999 8-K).      
|            |  |                                                                                                                                                                                                                                                                                 
|4.4         |  | First Amendment to Securities Purchase Agreement, dated as
of January 14, 2000, by and between the Company and each
of the Investors, incorporated by reference from the
January 2000 8-K.                                                                                      
|            |  |                                                                                                                                                                                                                                                                                 
|4.5         |  | Second Amendment to Securities Purchase Agreement, dated
as of April 1, 2001, by and among the Company and each of
the Investors, incorporated by reference from the
Companys Quarterly Report on Form 10-Q as filed with the
Commission on May 15, 2001 (the May 2001 10-Q).
|            |  |                                                                                                                                                                                                                                                                                 
|10.1        |  | Form of Unit Franchise Agreement entered into by the
Company and franchisees, incorporated by reference from
the S-1.                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                 
|10.2        |  | Option Agreement, dated as of June 8, 1999, between Steven
Mandell and Jack Futterman, incorporated by reference from
Amendment No. 1 to Schedule 13D as filed by Jack Futterman
with the Commission on June 17, 1999 (Futtermans 13D).                                      
|            |  |                                                                                                                                                                                                                                                                                 
|10.3        |  | Stock Pledge Agreement, dated as of June 8, 1999, between
Steven Mandell and Jack Futterman, incorporated by
reference from Futtermans 13D.                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                 
|10.4        |  | Amended and Restated Investor Rights Agreement, dated as
of August 18, 2003, by and among the Company and the
Investors, incorporated by reference from the Companys
Annual Report on Form 10-K as filed with the Commission on
September 26, 2003 (the September 2003 10-K).
|            |  |                                                                                                                                                                                                                                                                                 
|10.5        |  | Description of oral consulting agreement between the
Company and Ralph Dillon, incorporated by reference from
the Companys Quarterly Report on Form 10-Q as filed with
the Commission on February 13, 2001.                                                                    
|            |  |                                                                                                                                                                                                                                                                                 
|10.6        |  | General Release and Severance Agreement of James Shea,
dated as of May 28, 2003, by and between the Company and
James Shea, incorporated by reference from the September
2003 10-K.                                                                                             
|            |  |                                                                                                                                                                                                                                                                                 
|10.7        |  | Separation Agreement of Andrew Bailen, dated as of July
14, 2003, by and between the Company and Andrew Bailen,
incorporated by reference from the September 2003 10-K.                                                                                                         

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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.8        |  | Separation Agreement of Thomas Larson, dated as of August
26, 2002, by and between the Company and Thomas Larson,
incorporated by reference from the September 2003 10-K.                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.9        |  | Employment Agreement of Steven Skiba, dated as of November
29, 2002, by and between the Company and Steven Skiba,
incorporated by reference from the September 2003 10-K.                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.10       |  | Employment Agreement of Linda Siluk, dated as of November
7, 2003, by and between the Company and Linda M. Siluk, incorporated
by reference from the November 2003 10-Q.                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.11       |  | Employment Agreement of Warren Jeffrey, dated as of
November 7, 2003, by and between the Company and Warren
Jeffery, incorporated by reference from the November 2003 10-Q.                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.12       |  | Employment Agreement of Richard H. Griner dated as of
January 12, 2004, by and
between the Company and Richard H. Griner.                                                                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.13       |  | Management Stock Purchase Plan of the Company, incorporated
by reference from the Registration of Form S-8 as filed
with the Commission on July 23, 2001.                                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.14       |  | Employee Stock Purchase Plan of the Company, incorporated
by reference from the Companys Definitive Proxy Statement
for the 2001 Annual Meeting of Stockholders, included
within Form 14-A as filed with the Commission on October
18, 2001.                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.15       |  | Amended and Restated 1994 Stock Option Plan, incorporated
by reference from the Registration of Form S-8 as filed
with the Commission on January 9, 1997.                                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.16       |  | 1999 Stock Incentive Plan (Amended and Restated as of
October 17, 2003), incorporated by reference from the Companys
Definitive Proxy Statement for the 2003 Annual Meeting of
Stockholders included within Form 14-A as filed with the Commission
on October 20, 2003.                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.17       |  | Loan and Security Agreement (the Loan Agreement), dated
January 9, 2003, by and between the Company and Wells
Fargo Retail Finance, LLC (WFRF), as the arranger,
collateral agent and administrative agent, and Fleet
Retail Finance, Inc., as the documentation agent,
incorporated by reference from the Companys Current
Report on Form 8-K as filed with the Commission on January
10, 2003.
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.18       |  | Stock Pledge Agreement, dated January 9, 2003, by and
among the Company, Party City Michigan, Inc. (PCMI) and
WFRF, as the arranger, collateral agent and administrative
agent for the lender group under the Loan Agreement,
incorporated by reference from the September 2003 10-K.                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.19       |  | Trademark Security Agreement, dated January 9, 2003, by
and between the Company and WFRF, as the arranger,
collateral agent and administrative agent for the lender
group under the Loan Agreement, incorporated by reference
from the September 2003 10-K.                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.20       |  | Copyright Security Agreement, dated January 9, 2003, by
and between the Company and WFRF, as the arranger,
collateral agent and administrative agent for the lender
group under the Loan Agreement, incorporated by reference
from the September 2003 10-K.                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.21       |  | Guaranty and Security Agreement, dated January 9, 2003, by
and between PCMI and WFRF, as the arranger, collateral
agent and administrative agent for the lender group under
the Loan Agreement, incorporated by reference from the
September 2003 10-K.                                                                                                                                              

23



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|            |  |                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                   
|            |  |                                                                                                                                                   
|21.1        |  | Subsidiaries.                                                                                                                                     
|            |  |                                                                                                                                                   
|23.1        |  | Consent of Deloitte & Touche LLP.                                                                                                                 
|            |  |                                                                                                                                                   
|31.1        |  | Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|            |  |                                                                                                                                                   
|31.2        |  | Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|            |  |                                                                                                                                                   
|32.1        |  | Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|            |  |                                                                                                                                                   
|32.2        |  | Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

24



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SIGNATURES

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

| |  |    |  |                        
| |  | -- |  | -----------------------
| |  |    |  | PARTY CITY CORPORATION 
| |  |    |  |                        
| |  | By |  | /s/ NANCY PEDOT        
| |  |    |  |                        
| |  |    |  | (Nancy Pedot)          
| |  |    |  | Chief Executive Officer
| |  |    |  |                        
| |  | By |  | /s/ LINDA M. SILUK     
| |  |    |  |                        
| |  |    |  | (Linda M. Siluk)       
| |  |    |  | Chief Financial Officer

Date: February 10, 2004

25