##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





|                               |  |                       
|------------------------------ |  | ----------------------
|For the quarterly period ended |  | Commission file number
|April 2, 2005                  |  | 0-27826               

Party City Corporation


(Exact Name of Registrant as Specified in Its Charter)


|                                                                                 |  |                                         
|-------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                         |  | 22-3033692                              
|(State or Other Jurisdiction of
    Incorporation or Organization)               |  | (I.R.S. Employer
    Identification No.)
|                                                                                
|400 Commons Way
    Rockaway, New Jersey(Address of Principal Executive Offices) |  | 07866(Zip Code)                         

(Registrants Telephone Number, Including Area Code)


973-983-0888





þ o


þ o














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TABLE OF CONTENTS


|                                                   |  |                                                                                           |    |                                                                                                                                       |    |  |   | 
|-------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ------------------------------------------------------------------------------------------------------------------------------------- | -- |  | - | 
|                                                   |  |                                                                                           |    | Page No.                                                                                                                              |   
|                                                   |  |                                                                                           |    |                                                                                                                                       |   
|PART I. FINANCIAL
    INFORMATION                 
|Item 1.                                            |  | Financial Statements (Unaudited)                                                          |    |                                                                                                                                       |    | 
|                                                   |  |                                                                                           |    | Condensed Consolidated Balance Sheets as of
    April 2, 2005, July 3, 2004 and March 27, 2004                                        |    |  | 4 | 
|                                                   |  |                                                                                           |    | Condensed Consolidated Statements of
    Operations for the fiscal quarter and nine months ended
    April 2, 2005 and March 27, 2004 |    |  | 5 | 
|                                                   |  |                                                                                           |    | Condensed Consolidated Statements of Cash
    Flows for the nine months ended April 2, 2005 and
    March 27, 2004                    |    |  | 6 | 
|                                                   |  |                                                                                           |    | Notes to Condensed Consolidated Financial
    Statements                                                                              |    |  | 7 | 
|Item 2.                                            |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations |    |                                                                                                                                       | 18 | 
|Item 3.                                            |  | Quantitative and Qualitative Disclosures
    About Market Risk                            |    |                                                                                                                                       | 36 | 
|Item 4.                                            |  | Controls and Procedures                                                                   |    |                                                                                                                                       | 36 | 
|PART II. OTHER INFORMATION                        
|Item 1.                                            |  | Legal Proceedings                                                                         |    |                                                                                                                                       | 38 | 
|Item 2.                                            |  | Unregistered Sales of Equity Securities and
    Use of Proceeds                           |    |                                                                                                                                       | 38 | 
|Item 3.                                            |  | Defaults Upon Senior Securities                                                           |    |                                                                                                                                       | 38 | 
|Item 4.                                            |  | Submission of Matters to a Vote of Security
    Holders                                   |    |                                                                                                                                       | 38 | 
|Item 5.                                            |  | Other Information                                                                         |    |                                                                                                                                       | 38 | 
|Item 6.                                            |  | Exhibits                                                                                  |    |                                                                                                                                       | 38 | 
|Signatures                                         |  |                                                                                           | 39 |                                                                                                                                      
|Exhibit Index                                      |  |                                                                                           | 40 |                                                                                                                                      
|Consulting Agreement                              
|EX-15.1: AWARENESS LETTER OF DELOITTE & TOUCHE LLP
|EX-31.1: CERTIFICATION                            
|EX-31.2: CERTIFICATION                            
|EX-32.1: CERTIFICATION                            
|EX-32.2: CERTIFICATION                            





 www.partycity.com


http://www.sec.gov.


Forward-Looking Statements




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3



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##### Table of Contents






PART I.


FINANCIAL INFORMATION







|        |                     
|------- | --------------------
|Item 1. | Financial Statements

PARTY CITY CORPORATION AND SUBSIDIARY





CONDENSED CONSOLIDATED BALANCE SHEETS


|                                                  |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |         |  |   |        |         | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | - | ------ | ------- |  | - | --------- | ------- |  | - | ------ | ------- | 
|                                                  |                                                                                                                                                                                                                                                                                                                                | April 2,                                   |   |        | July 3, |  |   | March 27, |        
|                                                  |                                                                                                                                                                                                                                                                                                                                | 2005                                       |   |        | 2004    |  |   | 2004      |        
|                                                  |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |        
|                                                  |                                                                                                                                                                                                                                                                                                                                | (In thousands, except share amounts)       |  
|                                                  |                                                                                                                                                                                                                                                                                                                                | (Unaudited)                                |  
|ASSETS                                           
|Current assets:                                   |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |         |  |   |       
|                                                  | Cash and cash equivalents                                                                                                                                                                                                                                                                                                      |                                            | $ | 14,253 |         |  | $ | 27,845    |         |  | $ | 15,773 |        
|                                                  | Merchandise inventory                                                                                                                                                                                                                                                                                                          |                                            |   | 86,966 |         |  |   | 57,357    |         |  |   | 61,104 |        
|                                                  | Deferred income taxes                                                                                                                                                                                                                                                                                                          |                                            |   | 10,570 |         |  |   | 9,298     |         |  |   | 7,428  |        
|                                                  | Due from franchisees                                                                                                                                                                                                                                                                                                           |                                            |   | 7,533  |         |  |   | 2,206     |         |  |   | 2,137  |        
|                                                  | Other current assets, net                                                                                                                                                                                                                                                                                                      |                                            |   | 9,325  |         |  |   | 9,165     |         |  |   | 10,005 |        
|                                                  |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |        
|                                                  |                                                                                                                                                                                                                                                                                                                                | Total current assets                       |   |        | 128,647 |  |   |           | 105,871 |  |   |        | 96,447  | 
|                                                  | Property and equipment, net                                                                                                                                                                                                                                                                                                    |                                            |   | 45,359 |         |  |   | 48,762    |         |  |   | 49,242 |        
|                                                  | Goodwill                                                                                                                                                                                                                                                                                                                       |                                            |   | 18,499 |         |  |   | 18,614    |         |  |   | 18,614 |        
|                                                  | Other assets                                                                                                                                                                                                                                                                                                                   |                                            |   | 5,935  |         |  |   | 4,170     |         |  |   | 5,117  |        
|                                                  |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |        
|                                                  |                                                                                                                                                                                                                                                                                                                                | Total assets                               |   | $      | 198,440 |  |   | $         | 177,417 |  |   | $      | 169,420 | 
|                                                  |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |        
|                                                 
|LIABILITIES AND STOCKHOLDERS EQUITY             
|Current liabilities:                              |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |         |  |   |       
|                                                  | Accounts payable                                                                                                                                                                                                                                                                                                               |                                            | $ | 57,201 |         |  | $ | 38,364    |         |  | $ | 35,796 |        
|                                                  | Accrued expenses and other current liabilities                                                                                                                                                                                                                                                                                 |                                            |   | 28,850 |         |  |   | 32,689    |         |  |   | 30,705 |        
|                                                  |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |        
|                                                  |                                                                                                                                                                                                                                                                                                                                | Total current liabilities                  |   |        | 86,051  |  |   |           | 71,053  |  |   |        | 66,501  | 
|Long-term liabilities:                            |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |         |  |   |       
|                                                  | Deferred rent and other long-term liabilities                                                                                                                                                                                                                                                                                  |                                            |   | 9,779  |         |  |   | 9,526     |         |  |   | 9,818  |        
|Commitments and contingencies (see Notes 7 and 9) |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |         |  |   |       
|Stockholders equity:                             |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |         |  |   |       
|                                                  | Common stock, $0.01 par value; 40,000,000 shares
    authorized; 17,986,354 shares issued and
    17,239,342 shares outstanding at April 2, 2005;
    17,835,778 shares issued and 17,088,766 shares
    outstanding at July 3, 2004; and 17,760,444 shares
    issued and 17,013,432 shares outstanding at March 27,
    2004 |                                            |   | 180    |         |  |   | 178       |         |  |   | 178    |        
|                                                  | Additional paid-in capital                                                                                                                                                                                                                                                                                                     |                                            |   | 48,067 |         |  |   | 46,683    |         |  |   | 45,073 |        
|                                                  | Retained earnings                                                                                                                                                                                                                                                                                                              |                                            |   | 60,303 |         |  |   | 55,917    |         |  |   | 53,790 |        
|                                                  | Treasury stock, at cost (747,012 shares)                                                                                                                                                                                                                                                                                       |                                            |   | (5,940 | )       |  |   | (5,940    | )       |  |   | (5,940 | )      
|                                                  |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |        
|                                                  |                                                                                                                                                                                                                                                                                                                                | Total stockholders equity                 |   |        | 102,610 |  |   |           | 96,838  |  |   |        | 93,101  | 
|                                                  |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |        
|                                                  |                                                                                                                                                                                                                                                                                                                                | Total liabilities and stockholders equity |   | $      | 198,440 |  |   | $         | 177,417 |  |   | $      | 169,420 | 
|                                                  |                                                                                                                                                                                                                                                                                                                                |                                            |   |        |         |  |   |           |        



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PARTY CITY CORPORATION AND SUBSIDIARY





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


|                                     |                                                     |                                          |         |        |                   |   |        |          |         |   |           |         |         |   |        |         |         | 
|------------------------------------ | --------------------------------------------------- | ---------------------------------------- | ------- | ------ | ----------------- | - | ------ | -------- | ------- | - | --------- | ------- | ------- | - | ------ | ------- | ------- | 
|                                     |                                                     | Fiscal Quarter Ended                     |         |        | Nine Months Ended |  
|                                     |                                                     |                                          |         |        |                   |  
|                                     |                                                     | April 2,                                 |         |        | March 27,         |   |        | April 2, |         |   | March 27, |        
|                                     |                                                     | 2005                                     |         |        | 2004              |   |        | 2005     |         |   | 2004      |        
|                                     |                                                     |                                          |         |        |                   |   |        |          |         |   |           |        
|                                     |                                                     | (In thousands, except per share amounts) |        
|                                     |                                                     | (Unaudited)                              |        
|Revenues:                            |                                                     |                                          |         |        |                   |   |        |          |         |   |           |         |         |   |        |        
|                                     | Net sales                                           |                                          | $       | 90,980 |                   |   | $      | 97,662   |         |   | $         | 356,361 |         |   | $      | 375,586 |        
|                                     | Royalty fees                                        |                                          |         | 3,763  |                   |   |        | 3,806    |         |   |           | 15,101  |         |   |        | 14,929  |        
|                                     | Net sales to franchisees                            |                                          |         | 6,677  |                   |   |        |         |         |   |           | 6,677   |         |   |        |        |        
|                                     | Franchise fees                                      |                                          |         |       |                   |   |        | 80       |         |   |           | 120     |         |   |        | 568     |        
|                                     |                                                     |                                          |         |        |                   |   |        |          |         |   |           |        
|                                     |                                                     | Total revenues                           |         |        | 101,420           |   |        |          | 101,548 |   |           |         | 378,259 |   |        |         | 391,083 | 
|Expenses:                            |                                                     |                                          |         |        |                   |   |        |          |         |   |           |         |         |   |        |        
|                                     | Cost of goods sold and occupancy costs              |                                          |         | 70,062 |                   |   |        | 71,432   |         |   |           | 242,803 |         |   |        | 250,465 |        
|                                     | Cost of goods sold to franchisees                   |                                          |         | 5,608  |                   |   |        |         |         |   |           | 5,608   |         |   |        |        |        
|                                     | Company-owned store operating and selling expense   |                                          |         | 24,407 |                   |   |        | 24,754   |         |   |           | 84,943  |         |   |        | 86,923  |        
|                                     | Franchise transportation and other selling expenses |                                          |         | 931    |                   |   |        |         |         |   |           | 931     |         |   |        |        |        
|                                     | Other franchise expense                             |                                          |         | 2,335  |                   |   |        | 2,024    |         |   |           | 5,955   |         |   |        | 5,245   |        
|                                     | General and administrative expense                  |                                          |         | 10,283 |                   |   |        | 8,506    |         |   |           | 30,666  |         |   |        | 24,163  |        
|                                     | Litigation charge                                   |                                          |         |       |                   |   |        | 4,100    |         |   |           |        |         |   |        | 4,100   |        
|                                     |                                                     |                                          |         |        |                   |   |        |          |         |   |           |        
|                                     |                                                     | Total expenses                           |         |        | 113,626           |   |        |          | 110,816 |   |           |         | 370,906 |   |        |         | 370,896 | 
|                                     |                                                     |                                          |         |        |                   |   |        |          |         |   |           |        
|Operating (loss) income              |                                                     |                                          | (12,206 | )      |                   |   | (9,268 | )        |         |   | 7,353     |         |         |   | 20,187 |        
|                                     | Interest income                                     |                                          |         | (166   | )                 |   |        | (29      | )       |   |           | (385    | )       |   |        | (59     | )      
|                                     | Interest expense                                    |                                          |         | 122    |                   |   |        | 108      |         |   |           | 373     |         |   |        | 450     |        
|                                     |                                                     |                                          |         |        |                   |   |        |          |         |   |           |        
|                                     | Interest (income) expense, net                      |                                          |         | (44    | )                 |   |        | 79       |         |   |           | (12     | )       |   |        | 391     |        
|                                     |                                                     |                                          |         |        |                   |   |        |          |         |   |           |        
|(Loss) income before income taxes    |                                                     |                                          | (12,162 | )      |                   |   | (9,347 | )        |         |   | 7,365     |         |         |   | 19,796 |        
|(Benefit) provision for income taxes |                                                     |                                          | (4,929  | )      |                   |   | (3,786 | )        |         |   | 2,979     |         |         |   | 8,017  |        
|                                     |                                                     |                                          |         |        |                   |   |        |          |         |   |           |        
|Net (loss) income                    |                                                     | $                                        | (7,233  | )      |                   | $ | (5,561 | )        |         | $ | 4,386     |         |         | $ | 11,779 |        
|                                     |                                                     |                                          |         |        |                   |   |        |          |         |   |           |        
|                                     | Basic (loss) earnings per share                     |                                          | $       | (0.42  | )                 |   | $      | (0.33    | )       |   | $         | 0.26    |         |   | $      | 0.70    |        
|                                     |                                                     |                                          |         |        |                   |   |        |          |         |   |           |        
|                                     | Weighted average shares outstanding  basic         |                                          |         | 17,231 |                   |   |        | 16,992   |         |   |           | 17,171  |         |   |        | 16,871  |        
|                                     |                                                     |                                          |         |        |                   |   |        |          |         |   |           |        
|                                     | Diluted (loss) earnings per share                   |                                          | $       | (0.42  | )                 |   | $      | (0.33    | )       |   | $         | 0.22    |         |   | $      | 0.60    |        
|                                     |                                                     |                                          |         |        |                   |   |        |          |         |   |           |        
|                                     | Weighted average shares outstanding  diluted       |                                          |         | 17,231 |                   |   |        | 16,992   |         |   |           | 19,827  |         |   |        | 19,630  |        
|                                     |                                                     |                                          |         |        |                   |   |        |          |         |   |           |        



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PARTY CITY CORPORATION AND SUBSIDIARY





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





|                                                                                                |                                                                                         |                                                |                                                     |          |           |        |        |         |        |         |  
|----------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------------------- | -------- | --------- | ------ | ------ | ------- | ------ | ------- | -
|                                                                                                |                                                                                         | Nine Months Ended                              |                                                    
|                                                                                                |                                                                                         |                                                |                                                    
|                                                                                                |                                                                                         | April 2,                                       |                                                     |          | March 27, |       
|                                                                                                |                                                                                         | 2005                                           |                                                     |          | 2004      |       
|                                                                                                |                                                                                         |                                                |                                                     |          |           |       
|                                                                                                |                                                                                         | (In thousands)                                 |                                                    
|                                                                                                |                                                                                         | (Unaudited)                                    |                                                    
|Cash flow from operating activities:                                                            |                                                                                         |                                                |                                                     |          |           |        |        |        
|                                                                                                | Net income                                                                              |                                                | $                                                   | 4,386    |           |        | $      | 11,779  |       
|Adjustments to reconcile net income to net cash (used in)
    provided by operating activities: |                                                                                         |                                                |                                                     |          |           |        |        |        
|                                                                                                | Depreciation and amortization                                                           |                                                |                                                     | 12,963   |           |        |        | 12,306  |       
|                                                                                                | Impairment of assets                                                                    |                                                |                                                     | 161      |           |        |        |        |       
|                                                                                                | Amortization of financing costs                                                         |                                                |                                                     | 120      |           |        |        | 120     |       
|                                                                                                | Deferred rent                                                                           |                                                |                                                     | (328     | )         |        |        | (326    | )     
|                                                                                                | Deferred taxes                                                                          |                                                |                                                     | (2,074   | )         |        |        |        |       
|                                                                                                | Stock-based compensation                                                                |                                                |                                                     | 43       |           |        |        | 418     |       
|                                                                                                | Provision for doubtful accounts                                                         |                                                |                                                     | 231      |           |        |        | (82     | )     
|                                                                                                | Other                                                                                   |                                                |                                                     | (90      | )         |        |        | 13      |       
|                                                                                                | Changes in assets and liabilities:                                                      |                                                |                                                     |          |           |        |        |         |       
|                                                                                                |                                                                                         | Merchandise Inventory                          |                                                     |          | (29,609   | )      |        |         | 4,804  |        
|                                                                                                |                                                                                         | Accounts payable                               |                                                     |          | 18,837    |        |        |         | (2,163 | )      
|                                                                                                |                                                                                         | Accrued expenses and other current liabilities |                                                     |          | (2,985    | )      |        |         | 5,601  |        
|                                                                                                |                                                                                         | Other long-term liabilities                    |                                                     |          | 7         |        |        |         | (119   | )      
|                                                                                                |                                                                                         | Other current assets and other assets          |                                                     |          | (7,451    | )      |        |         | 2,456  |        
|                                                                                                |                                                                                         |                                                |                                                     |          |           |       
|                                                                                                |                                                                                         |                                                | Net cash (used in) provided by operating activities |          |           | (5,789 | )      |         |        | 34,807  |  
|Cash flow from investing activities:                                                            |                                                                                         |                                                |                                                     |          |           |        |        |        
|                                                                                                | Purchase of short-term investments                                                      |                                                |                                                     | (123,125 | )         |        |        |        |       
|                                                                                                | Sale of short-term investments                                                          |                                                |                                                     | 123,125  |           |        |        |        |       
|                                                                                                | Purchases of property and equipment                                                     |                                                |                                                     | (8,855   | )         |        |        | (8,638  | )     
|                                                                                                | Proceeds from the sale of assets                                                        |                                                |                                                     | 250      |           |        |        |        |       
|                                                                                                |                                                                                         |                                                |                                                     |          |           |       
|                                                                                                |                                                                                         |                                                | Net cash used in investing activities               |          |           | (8,605 | )      |         |        | (8,638  | )
|Cash flow from financing activities:                                                            |                                                                                         |                                                |                                                     |          |           |        |        |        
|                                                                                                | Proceeds from exercise of stock options                                                 |                                                |                                                     | 900      |           |        |        | 1,482   |       
|                                                                                                | Repayment of capital lease                                                              |                                                |                                                     | (98      | )         |        |        |        |       
|                                                                                                | Net payments on Loan Agreement                                                          |                                                |                                                     |         |           |        |        | (11,229 | )     
|                                                                                                | Change in cash overdrafts                                                               |                                                |                                                     |         |           |        |        | (4,021  | )     
|                                                                                                |                                                                                         |                                                |                                                     |          |           |       
|                                                                                                |                                                                                         |                                                | Net cash provided by (used in) financing activities |          |           | 802    |        |         |        | (13,768 | )
|                                                                                                |                                                                                         |                                                |                                                     |          |           |       
|Net (decrease) increase in cash and cash equivalents                                            |                                                                                         |                                                | (13,592                                             | )        |           |        | 12,401 |        
|Cash and cash equivalents, beginning of period                                                  |                                                                                         |                                                | 27,845                                              |          |           |        | 3,372  |        
|                                                                                                |                                                                                         |                                                |                                                     |          |           |       
|Cash and cash equivalents, end of period                                                        |                                                                                         | $                                              | 14,253                                              |          |           | $      | 15,773 |        
|                                                                                                |                                                                                         |                                                |                                                     |          |           |       
|Supplemental disclosure of cash flow information:                                               |                                                                                         |                                                |                                                     |          |           |        |        |        
|                                                                                                | Income taxes paid                                                                       |                                                | $                                                   | 6,408    |           |        | $      | 7,707   |       
|                                                                                                | Interest paid                                                                           |                                                | $                                                   | 253      |           |        | $      | 330     |       
|                                                                                                | Tax-effect on non-qualified stock options                                               |                                                | $                                                   | 154      |           |        | $      |        |       
|Supplemental disclosure of non-cash financing activity:                                         |                                                                                         |                                                |                                                     |          |           |        |        |        
|                                                                                                | Issuance of shares under employee stock purchase plan                                   |                                                | $                                                   | 236      |           |        | $      | 244     |       
|                                                                                                | Issuance of shares under management stock purchase plan                                 |                                                | $                                                   | 53       |           |        | $      | 99      |       
|                                                                                                | Capital lease obligation used to purchase fixed assets for the
    logistics initiative |                                                | $                                                   | 851      |           |        | $      |        |       






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PARTY CITY CORPORATION AND SUBSIDIARY





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




|   |                      
|-- | ---------------------
|1. | Basis of Presentation











|   |                    
|-- | -------------------
|2. | Accounting Policies







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PARTY CITY CORPORATION AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Short-Term Investments. Accounting for Certain Investments in Debt and Equity
Securities




|   |                         
|-- | ------------------------
|3. | Stock-Based Compensation







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PARTY CITY CORPORATION AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                             |                                                                                                                                         |                                          |        |        |                   |   |        |          |   |   |           |        |   |   |        |        |  
|-------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------ | ------ | ----------------- | - | ------ | -------- | - | - | --------- | ------ | - | - | ------ | ------ | -
|                                             |                                                                                                                                         | Fiscal Quarter Ended                     |        |        | Nine Months Ended |  
|                                             |                                                                                                                                         |                                          |        |        |                   |  
|                                             |                                                                                                                                         | April 2,                                 |        |        | March 27,         |   |        | April 2, |   |   | March 27, |       
|                                             |                                                                                                                                         | 2005                                     |        |        | 2004              |   |        | 2005     |   |   | 2004      |       
|                                             |                                                                                                                                         |                                          |        |        |                   |   |        |          |   |   |           |       
|                                             |                                                                                                                                         | (In thousands, except per share amounts) |       
|Net (loss) income as reported                |                                                                                                                                         | $                                        | (7,233 | )      |                   | $ | (5,561 | )        |   | $ | 4,386     |        |   | $ | 11,779 |       
|                                             | Add: Stock-based employee compensation expense determined under
    APB 25, net of tax                                                  |                                          |        | 33     |                   |   |        | 161      |   |   |           | 43     |   |   |        | 249    |  
|                                             | Deduct: Total stock-based employee compensation expense
    determined under fair value based method of
    SFAS No. 148, net of tax(1) |                                          |        | (766   | )                 |   |        | (533     | ) |   |           | (1,796 | ) |   |        | (1,526 | )
|                                             |                                                                                                                                         |                                          |        |        |                   |   |        |          |   |   |           |       
|                                             | Pro forma net (loss) income                                                                                                             |                                          | $      | (7,966 | )                 |   | $      | (5,933   | ) |   | $         | 2,633  |   |   | $      | 10,502 |  
|                                             |                                                                                                                                         |                                          |        |        |                   |   |        |          |   |   |           |       
|Basic and diluted (loss) earnings per share: |                                                                                                                                         |                                          |        |        |                   |   |        |          |   |   |           |        |   |   |        |       
|                                             | Basic (loss) earnings per share as reported                                                                                             |                                          | $      | (0.42  | )                 |   | $      | (0.33    | ) |   | $         | 0.26   |   |   | $      | 0.70   |  
|                                             | Basic (loss) earnings per share pro forma                                                                                               |                                          | $      | (0.46  | )                 |   | $      | (0.35    | ) |   | $         | 0.15   |   |   | $      | 0.62   |  
|                                             | Diluted (loss) earnings per share as reported                                                                                           |                                          | $      | (0.42  | )                 |   | $      | (0.33    | ) |   | $         | 0.22   |   |   | $      | 0.60   |  
|                                             | Diluted (loss) earnings per share pro forma                                                                                             |                                          | $      | (0.46  | )                 |   | $      | (0.35    | ) |   | $         | 0.13   |   |   | $      | 0.53   |  






|    |                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In accordance with SFAS No. 148, the fair value of
    each option grant is estimated on the date of grant using the
    Black-Scholes option-pricing model using the following
    assumptions for grants in the respective periods:

|                        |  |                    |           |   |           |  |           |  
|----------------------- |  | ------------------ | --------- | - | --------- |  | --------- | -
|                        |  | Fiscal Quarter and |          
|                        |  | Nine Months Ended  |          
|                        |  |                    |          
|                        |  | April 2,           |           |   | March 27, | 
|                        |  | 2005               |           |   | 2004      | 
|                        |  |                    |           |   |           | 
|Expected volatility     |  |                    | 55        | % |           |  | 55        | %
|Expected lives          |  |                    | 4.0 years |   |           |  | 4.0 years |  
|Risk-free interest rate |  |                    | 3.3       | % |           |  | 2.5       | %
|Expected dividend yield |  |                    | 0.0       | % |           |  | 0.0       | %





9



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                   
|-- | ------------------
|4. | Earnings Per Share



|                                                                               |  |                                          |        |        |                   |   |        |          |  |   |           |  |  |   |        | 
|------------------------------------------------------------------------------ |  | ---------------------------------------- | ------ | ------ | ----------------- | - | ------ | -------- |  | - | --------- |  |  | - | ------ | 
|                                                                               |  | Fiscal Quarter Ended                     |        |        | Nine Months Ended |  
|                                                                               |  |                                          |        |        |                   |  
|                                                                               |  | April 2,                                 |        |        | March 27,         |   |        | April 2, |  |   | March 27, | 
|                                                                               |  | 2005                                     |        |        | 2004              |   |        | 2005     |  |   | 2004      | 
|                                                                               |  |                                          |        |        |                   |   |        |          |  |   |           | 
|                                                                               |  | (In thousands, except per share amounts) |       
|Net (loss) income                                                              |  | $                                        | (7,233 | )      |                   | $ | (5,561 | )        |  | $ | 4,386     |  |  | $ | 11,779 | 
|(Loss) earnings per share  basic                                              |  | $                                        | (0.42  | )      |                   | $ | (0.33  | )        |  | $ | 0.26      |  |  | $ | 0.70   | 
|(Loss) earnings per share  diluted                                            |  | $                                        | (0.42  | )      |                   | $ | (0.33  | )        |  | $ | 0.22      |  |  | $ | 0.60   | 
|Weighted average common shares outstanding                                     |  |                                          | 17,231 |        |                   |   | 16,992 |          |  |   | 17,171    |  |  |   | 16,871 | 
|Dilutive effect of stock options                                               |  |                                          |       | (a)(b) |                   |   |       | (a)(b)   |  |   | 349       |  |  |   | 454    | 
|Dilutive effect of warrants                                                    |  |                                          |       | (a)(c) |                   |   |       | (a)(c)   |  |   | 2,294     |  |  |   | 2,286  | 
|Dilutive effect of restricted stock units                                      |  |                                          |       | (a)(d) |                   |   |       | (a)(d)   |  |   | 13        |  |  |   | 19     | 
|                                                                               |  |                                          |        |        |                   |   |        |          |  |   |           | 
|Weighted average common and potentially dilutive common shares
    outstanding |  |                                          | 17,231 |        |                   |   | 16,992 |          |  |   | 19,827    |  |  |   | 19,630 | 
|                                                                               |  |                                          |        |        |                   |   |        |          |  |   |           | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Stock options and warrants with exercise prices below the
    applicable market price of the Companys common stock and
    all restricted stock units are included in potentially dilutive
    common shares outstanding if the Company reports net income for
    a reporting period. Therefore, if the Company reports net
    income, its earnings per share would be lower on a diluted
    basis. Options to purchase 1,648,134 common shares with
    exercise prices ranging from $1.71 to $12.82 per share at
    April 2, 2005, and options to purchase 2,292,331
    common shares with exercise prices ranging from $1.71 to
    $13.77 per share at March 27, 2004, would have been
    included in the weighted-average common and potentially dilutive
    common shares outstanding, respectively, if the Company was in a
    net income position.
|   
|    | However, when the Company incurs a net loss for a reporting
    period, the inclusion of any such shares would result in a
    decrease in loss per share, and therefore all stock options,
    warrants and restricted stock units are ignored when calculating
    diluted earnings per share. Therefore, the Companys loss
    per share for the quarter ended April 2, 2005 and
    March 27, 2004 are the same amounts on a basic and diluted
    basis, respectively.                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(b) | Options to purchase 2,971,534 common shares with exercise
    prices ranging from $1.71 to $30.88 per share were
    outstanding at April 2, 2005, and options to
    purchase 2,958,213 common shares with exercise prices
    ranging from $1.71 to $30.88 per share were outstanding at
    March 27, 2004, were not included in the computation of
    diluted loss per share for the fiscal quarter ended
    April 2, 2005 and March 27, 2004, respectively,
    because to do so would have been anti-dilutive.                                                                                                                                                                                                                                                                                                                                             
|   
|(c) | Warrants to purchase 2,496,000 common shares with an
    exercise price of $1.07 per share were outstanding at
    April 2, 2005 and March 27, 2004 but were not included
    in the computation of diluted loss per share for the fiscal
    quarter ended April 2, 2005 and March 27, 2004,
    respectively, because to do so would have been anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(d) | Restricted stock units of 13,567 and 16,012 shares of
    common stock were outstanding at April 2, 2005 and
    March 27, 2004, respectively, related to the Management
    Stock Purchase Plan and were not included in the computation of
    diluted loss per share for the fiscal quarter ended
    April 2, 2005 and March 27, 2004, respectively,
    because to do so would have been anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                       



|   |                    
|-- | -------------------
|5. | Financing Agreement



10



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










6.     Stockholders Equity




| |                   
| | ------------------
| | Shares Outstanding





| |                 
| | ----------------
| | Stock Repurchase





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





| |              
| | -------------
| | Stock Options





11



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












| |                               
| | ------------------------------
| | Management Stock Purchase Plan



12



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                             
| | ----------------------------
| | Employee Stock Purchase Plan





|   |                  
|-- | -----------------
|7. | Legal Proceedings











|   |                    
|-- | -------------------
|8. | Segment Information





13



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)







|                                                    |  |                      |         |   |                   |   |         |          |  |   |           |   |  |   |         | 
|--------------------------------------------------- |  | -------------------- | ------- | - | ----------------- | - | ------- | -------- |  | - | --------- | - |  | - | ------- | 
|                                                    |  | Fiscal Quarter Ended |         |   | Nine Months Ended |  
|                                                    |  |                      |         |   |                   |  
|                                                    |  | April 2,             |         |   | March 27,         |   |         | April 2, |  |   | March 27, |  
|                                                    |  | 2005                 |         |   | 2004              |   |         | 2005     |  |   | 2004      |  
|                                                    |  |                      |         |   |                   |   |         |          |  |   |           |  
|                                                    |  | (In thousands)       |        
|                                                    |  | (Unaudited)          |        
|Retail:                                             |  |                      |         |   |                   |   |         |          |  |   |           |   |  |   |         | 
|Net sales                                           |  | $                    | 90,980  |   |                   | $ | 97,662  |          |  | $ | 356,361   |   |  | $ | 375,586 | 
|Cost of goods sold and occupancy costs              |  |                      | 70,062  |   |                   |   | 71,432  |          |  |   | 242,803   |   |  |   | 250,465 | 
|                                                    |  |                      |         |   |                   |   |         |          |  |   |           |  
|Gross profit                                        |  |                      | 20,918  |   |                   |   | 26,230  |          |  |   | 113,558   |   |  |   | 125,121 | 
|Store operating and selling expense                 |  |                      | 24,407  |   |                   |   | 24,754  |          |  |   | 84,943    |   |  |   | 86,923  | 
|                                                    |  |                      |         |   |                   |   |         |          |  |   |           |  
|Company owned store (loss) profit contribution      |  |                      | (3,489  | ) |                   |   | 1,476   |          |  |   | 28,615    |   |  |   | 38,198  | 
|General and administrative expense                  |  |                      | 10,283  |   |                   |   | 8,506   |          |  |   | 30,666    |   |  |   | 24,163  | 
|Litigation charge                                   |  |                      |        |   |                   |   | 4,100   |          |  |   |          |   |  |   | 4,100   | 
|                                                    |  |                      |         |   |                   |   |         |          |  |   |           |  
|Retail (loss) profit contribution                   |  | $                    | (13,772 | ) |                   | $ | (11,130 | )        |  | $ | (2,051    | ) |  | $ | 9,935   | 
|Identifiable assets                                 |  | $                    | 190,144 |   |                   | $ | 167,283 |          |  | $ | 190,144   |   |  | $ | 167,283 | 
|Depreciation and amortization                       |  | $                    | 4,050   |   |                   | $ | 4,614   |          |  | $ | 12,938    |   |  | $ | 12,306  | 
|Capital expenditures                                |  | $                    | 2,611   |   |                   | $ | 5,109   |          |  | $ | 8,092     |   |  | $ | 8,638   | 
|Franchise:                                          |  |                      |         |   |                   |   |         |          |  |   |           |   |  |   |         | 
|Royalty fees                                        |  | $                    | 3,763   |   |                   | $ | 3,806   |          |  | $ | 15,101    |   |  | $ | 14,929  | 
|Net sales to franchisees                            |  |                      | 6,677   |   |                   |   |        |          |  |   | 6,677     |   |  |   |        | 
|Franchise fees                                      |  |                      |        |   |                   |   | 80      |          |  |   | 120       |   |  |   | 568     | 
|                                                    |  |                      |         |   |                   |   |         |          |  |   |           |  
|Total franchise revenue                             |  |                      | 10,440  |   |                   |   | 3,886   |          |  |   | 21,898    |   |  |   | 15,497  | 
|Cost of goods sold to franchisees                   |  |                      | 5,608   |   |                   |   |        |          |  |   | 5,608     |   |  |   |        | 
|Franchise transportation and other selling expenses |  |                      | 931     |   |                   |   |        |          |  |   | 931       |   |  |   |        | 
|Other franchise expense                             |  |                      | 2,335   |   |                   |   | 2,024   |          |  |   | 5,955     |   |  |   | 5,245   | 
|                                                    |  |                      |         |   |                   |   |         |          |  |   |           |  
|Total franchise expense                             |  |                      | 8,874   |   |                   |   | 2,024   |          |  |   | 12,494    |   |  |   | 5,245   | 
|                                                    |  |                      |         |   |                   |   |         |          |  |   |           |  
|Franchise profit contribution                       |  | $                    | 1,566   |   |                   | $ | 1,862   |          |  | $ | 9,404     |   |  | $ | 10,252  | 
|                                                    |  |                      |         |   |                   |   |         |          |  |   |           |  
|Identifiable assets                                 |  | $                    | 8,296   |   |                   | $ | 2,137   |          |  | $ | 8,296     |   |  | $ | 2,137   | 
|Depreciation and amortization                       |  | $                    | 25      |   |                   | $ |        |          |  | $ | 25        |   |  | $ |        | 
|Capital expenditures                                |  | $                    | 763     |   |                   | $ |        |          |  | $ | 763       |   |  | $ |        | 




14



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                     |  |                      |         |   |                   |   |         |          |  |   |           |   |  |   |         | 
|------------------------------------ |  | -------------------- | ------- | - | ----------------- | - | ------- | -------- |  | - | --------- | - |  | - | ------- | 
|                                     |  | Fiscal Quarter Ended |         |   | Nine Months Ended |  
|                                     |  |                      |         |   |                   |  
|                                     |  | April 2,             |         |   | March 27,         |   |         | April 2, |  |   | March 27, |  
|                                     |  | 2005                 |         |   | 2004              |   |         | 2005     |  |   | 2004      |  
|                                     |  |                      |         |   |                   |   |         |          |  |   |           |  
|                                     |  | (In thousands)       |        
|                                     |  | (Unaudited)          |        
|Total Company:                       |  |                      |         |   |                   |   |         |          |  |   |           |   |  |   |         | 
|Operating (loss) income              |  | $                    | (12,206 | ) |                   | $ | (9,268  | )        |  | $ | 7,353     |   |  | $ | 20,187  | 
|Interest (income) expense, net       |  |                      | (44     | ) |                   |   | 79      |          |  |   | (12       | ) |  |   | 391     | 
|                                     |  |                      |         |   |                   |   |         |          |  |   |           |  
|(Loss) income before income taxes    |  |                      | (12,162 | ) |                   |   | (9,347  | )        |  |   | 7,365     |   |  |   | 19,796  | 
|(Benefit) provision for income taxes |  |                      | (4,929  | ) |                   |   | (3,786  | )        |  |   | 2,979     |   |  |   | 8,017   | 
|                                     |  |                      |         |   |                   |   |         |          |  |   |           |  
|Net (loss) income                    |  | $                    | (7,233  | ) |                   | $ | (5,561  | )        |  | $ | 4,386     |   |  | $ | 11,779  | 
|                                     |  |                      |         |   |                   |   |         |          |  |   |           |  
|Identifiable assets                  |  | $                    | 198,440 |   |                   | $ | 169,420 |          |  | $ | 198,440   |   |  | $ | 169,420 | 
|Depreciation and amortization        |  | $                    | 4,075   |   |                   | $ | 4,614   |          |  | $ | 12,963    |   |  | $ | 12,306  | 
|Capital expenditures                 |  | $                    | 3,374   |   |                   | $ | 5,109   |          |  | $ | 8,855     |   |  | $ | 8,638   | 





|   |                                                   
|-- | --------------------------------------------------
|9. | Contractual Obligations and Commercial Commitments






|                       |  |       |         |           |           |   |             |           |  |            |             |  |  |             |         |  |        |   |     |              |  |   |     |  |  |   |     | 
|---------------------- |  | ----- | ------- | --------- | --------- | - | ----------- | --------- |  | ---------- | ----------- |  |  | ----------- | ------- |  | ------ | - | --- | ------------ |  | - | --- |  |  | - | --- | 
|                       |  |       |         |           |           |   |             | Logistics |  |            |             |  |  |             |        
|                       |  |       |         | Operating |           |   | Merchandise |           |  | Initiative |             |  |  |             | Capital |  |        |  
|                       |  | Total |         |           | Leases(1) |   |             | Orders    |  |            | Obligations |  |  | Auto Leases |         |  | Leases |   |     | Severance(2) | 
|                       |  |       |         |           |           |   |             |           |  |            |             |  |  |             |         |  |        |   |     |              | 
|Fiscal year ending:    |  |       |         |           |           |   |             |           |  |            |             |  |  |             |         |  |        |   |     |              |  |   |     |  |  |   |     | 
|2005                   |  | $     | 31,897  |           |           | $ | 11,890      |           |  | $          | 19,003      |  |  | $           | 675     |  |        | $ | 69  |              |  | $ | 43  |  |  | $ | 217 | 
|2006                   |  |       | 49,881  |           |           |   | 46,329      |           |  |            |            |  |  |             | 2,700   |  |        |   | 181 |              |  |   | 181 |  |  |   | 490 | 
|2007                   |  |       | 46,037  |           |           |   | 42,680      |           |  |            |            |  |  |             | 2,700   |  |        |   | 129 |              |  |   | 528 |  |  |   |     | 
|2008                   |  |       | 34,262  |           |           |   | 34,255      |           |  |            |            |  |  |             |        |  |        |   | 7   |              |  |   |    |  |  |   |    | 
|2009                   |  |       | 22,176  |           |           |   | 22,176      |           |  |            |            |  |  |             |        |  |        |   |    |              |  |   |    |  |  |   |    | 
|Thereafter             |  |       | 55,932  |           |           |   | 55,932      |           |  |            |            |  |  |             |        |  |        |   |    |              |  |   |    |  |  |   |    | 
|                       |  |       |         |           |           |   |             |           |  |            |             |  |  |             |         |  |        |   |     |              | 
|Total minimum payments |  | $     | 240,185 |           |           | $ | 213,262     |           |  | $          | 19,003      |  |  | $           | 6,075   |  |        | $ | 386 |              |  | $ | 752 |  |  | $ | 707 | 
|                       |  |       |         |           |           |   |             |           |  |            |             |  |  |             |         |  |        |   |     |              | 









|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company is also obligated for guarantees, subleases or
    assigned lease obligations for 23 of the franchise stores
    through 2011. The majority of the guarantees, subleases and
    assigned lease obligations were given when the Company sold
    stores in 1999 as part of its restructuring. The guarantees,
    subleases and assigned lease obligations continue until the
    applicable leases expire. The maximum amount of the guarantees,
    subleases and assigned lease obligations may vary, but is
    limited to the sum of the total amount due under the leases. As
    of April 2, 2005, the maximum amount of the guarantees,
    subleases and assigned lease obligations was approximately
    $12.9 million, which is not included in this table.









15



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)







|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The severance obligations specified in the table above are for
    the Companys former Chief Executive Officer. In addition,
    as of April 29, 2005 and April 2, 2005, the Company
    had an aggregate contingent liability of up to $1.9 million
    related to potential severance payments for 17 employees
    pursuant to their respective employment agreements. The Company
    is not currently aware of any event that would trigger such
    $1.9 million contingent liability.












































|    |         
|--- | --------
|10. | Goodwill



16



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                            |                                                   |   |        |      |  
|--------------------------- | ------------------------------------------------- | - | ------ | ---- | -
|Balance as of July 3, 2004  |                                                   | $ | 18,614 |     
|                            | Goodwill impairment during the third quarter 2005 |   |        | (115 | )
|                            |                                                   |   |       
|Balance as of April 2, 2005 |                                                   | $ | 18,499 |     
|                            |                                                   |   |       



|    |                                                       
|--- | ------------------------------------------------------
|11. | Non-Compete Agreement and Trademark License Agreements



|                           |  |                      |     | 
|-------------------------- |  | -------------------- | --- | 
|Fiscal Year Ending:        |  | Amortization Expense |    
|                           |  |                      |    
|2005 (fourth quarter)      |  | $                    | 21  | 
|2006                       |  |                      | 82  | 
|2007                       |  |                      | 82  | 
|2008                       |  |                      | 82  | 
|2009                       |  |                      | 20  | 
|Thereafter                 |  |                      | 14  | 
|                           |  |                      |    
|Total amortization expense |  | $                    | 301 | 
|                           |  |                      |    



|    |                                 
|--- | --------------------------------
|12. | Recent Accounting Pronouncements







17



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##### Table of Contents








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

Overview
















18



---



##### Table of Contents








Product.








Store Configuration.
















Logistics.





















19



---



##### Table of Contents






















Promotion and Marketing.








Information Systems.
















Employee Base.







20



---



##### Table of Contents



Key Performance Indicators and Statistics




|                                                                         |  |                      |        |    |                   |   |        |          |  |   |           |    |  |   |         |  
|------------------------------------------------------------------------ |  | -------------------- | ------ | -- | ----------------- | - | ------ | -------- |  | - | --------- | -- |  | - | ------- | -
|                                                                         |  | Fiscal Quarter Ended |        |    | Nine Months Ended |  
|                                                                         |  |                      |        |    |                   |  
|                                                                         |  | April 2,             |        |    | March 27,         |   |        | April 2, |  |   | March 27, |   
|                                                                         |  | 2005                 |        |    | 2004              |   |        | 2005     |  |   | 2004      |   
|                                                                         |  |                      |        |    |                   |   |        |          |  |   |           |   
|Net sales (in thousands)                                                 |  | $                    | 90,980 |    |                   | $ | 97,662 |          |  | $ | 356,361   |    |  | $ | 375,586 |  
|Total Company-owned store count                                          |  |                      | 247    |    |                   |   | 249    |          |  |   | 247       |    |  |   | 249     |  
|Average same store net sales for Company owned stores (in
    thousands) |  | $                    | 369    |    |                   | $ | 398    |          |  | $ | 1,441     |    |  | $ | 1,544   |  
|Same store average net sale per retail transaction(a)                    |  | $                    | 17.41  |    |                   | $ | 17.62  |          |  | $ | 19.16     |    |  | $ | 19.08   |  
|(Decrease) increase in Company-owned same store net sales                |  |                      | (7.1   | )% |                   |   | (0.9   | )%       |  |   | (5.9      | )% |  |   | 2.5     | %
|Gross profit as a percent of net sales                                   |  |                      | 23.0   | %  |                   |   | 26.9   | %        |  |   | 31.9      | %  |  |   | 33.3    | %
|Store (loss) profit contribution as a percent of net sales               |  |                      | (3.8   | )% |                   |   | 1.5    | %        |  |   | 8.0       | %  |  |   | 10.2    | %
|Diluted (loss) earnings per share                                        |  | $                    | (0.42  | )  |                   | $ | (0.33  | )        |  | $ | 0.22      |    |  | $ | 0.60    |  
|EBITDA(b) (in thousands)                                                 |  | $                    | (8,131 | )  |                   | $ | (4,654 | )        |  | $ | 20,316    |    |  | $ | 32,493  |  
|(Decrease) increase in franchise same store net sales                    |  |                      | (7.4   | )% |                   |   | 1.3    | %        |  |   | (4.0      | )% |  |   | 4.5     | %






|    |  |                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Same store net sales divided by same store retail transactions.
    Retail transactions represent each time a customer makes a
    purchase or return at the register.
|   
|(b) |  | See EBITDA discussion on page 32.                                                                                                                                     



|                       |               |                                             |                              |  |                   |     |     |          |     |     |           |  |     |     |     |  |     |     |  
|---------------------- | ------------- | ------------------------------------------- | ---------------------------- |  | ----------------- | --- | --- | -------- | --- | --- | --------- |  | --- | --- | --- |  | --- | --- | -
|                       |               | Fiscal Quarter Ended                        |                              |  | Nine Months Ended |    
|                       |               |                                             |                              |  |                   |    
|                       |               | April 2,                                    |                              |  | March 27,         |     |     | April 2, |     |     | March 27, | 
|                       |               | 2005                                        |                              |  | 2004              |     |     | 2005     |     |     | 2004      | 
|                       |               |                                             |                              |  |                   |     |     |          |     |     |           | 
|Store Data:            |               |                                             |                              |  |                   |     |     |          |     |     |           |  |     |     |     | 
|                       | Company-owned |                                             |                              |  |                   |     |     |          |     |     |           |  |     |     |     |  |    
|                       |               | Stores open at beginning of period          |                              |  | 248               |     |     |          | 247 |     |           |  | 249 |     |     |  | 242 |    
|                       |               |                                             | Stores opened                |  |                   |    |     |          |     | 2   |           |  |     | 1   |     |  |     | 8   |  
|                       |               |                                             | Stores closed                |  |                   | (1  | )   |          |     |    |           |  |     | (3  | )   |  |     | (1  | )
|                       |               |                                             |                              |  |                   |     |     |          |     |     |           | 
|                       |               |                                             | Stores open at end of period |  |                   | 247 |     |          |     | 249 |           |  |     | 247 |     |  |     | 249 |  
|                       |               |                                             |                              |  |                   |     |     |          |     |     |           | 
|                       |               | Average Company-owned stores open in period |                              |  | 248               |     |     |          | 248 |     |           |  | 249 |     |     |  | 247 |    
|                       |               |                                             |                              |  |                   |     |     |          |     |     |           | 
|                       | Franchise:    |                                             |                              |  |                   |     |     |          |     |     |           |  |     |     |     |  |    
|                       |               | Stores open at beginning of period          |                              |  | 259               |     |     |          | 254 |     |           |  | 257 |     |     |  | 241 |    
|                       |               |                                             | Stores opened                |  |                   |    |     |          |     | 2   |           |  |     | 3   |     |  |     | 15  |  
|                       |               |                                             | Stores closed                |  |                   |    |     |          |     | (2  | )         |  |     | (1  | )   |  |     | (2  | )
|                       |               |                                             |                              |  |                   |     |     |          |     |     |           | 
|                       |               |                                             | Stores open at end of period |  |                   | 259 |     |          |     | 254 |           |  |     | 259 |     |  |     | 254 |  
|                       |               |                                             |                              |  |                   |     |     |          |     |     |           | 
|                       |               | Average franchise stores open in period     |                              |  | 259               |     |     |          | 253 |     |           |  | 259 |     |     |  | 251 |    
|                       |               |                                             |                              |  |                   |     |     |          |     |     |           | 
|Total stores chainwide |               |                                             | 506                          |  |                   |     | 503 |          |     |     | 506       |  |     |     | 503 | 
|                       |               |                                             |                              |  |                   |     |     |          |     |     |           | 

21



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Critical Accounting Policies and Estimates








Merchandise inventory.




Finite long-lived assets.


Insurance accruals.


Goodwill.


Sales Returns.


22



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##### Table of Contents



Store Closure Costs.


Income Taxes.


General Definitions for Operating Results


Net sales


Cost of goods sold and occupancy costs


Gross profit


Store operating and selling expenses


Company-owned store profit contribution


General and administrative expense


Franchising.


Franchise profit contribution





Interest (income) expense, net





23



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##### Table of Contents



Results of Operations




PARTY CITY CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |         |   |   |        |         |  
|------------------------------------ | --------------------------------------------------- | ---------------------------------------- | ------- | ------- | ----------------- | - | ------ | -------- | - | - | --------- | ------- | - | - | ------ | ------- | -
|                                     |                                                     | Fiscal Quarter Ended                     |         |         | Nine Months Ended |  
|                                     |                                                     |                                          |         |         |                   |  
|                                     |                                                     | April 2,                                 |         |         | March 27,         |   |        | April 2, |   |   | March 27, |        
|                                     |                                                     | 2005                                     |         |         | 2004              |   |        | 2005     |   |   | 2004      |        
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|                                     |                                                     | (In thousands, except per share amounts) |        
|                                     |                                                     | (Unaudited)                              |        
|Statement of Operations Data:        |                                                     |                                          |         |         |                   |   |        |          |   |   |           |         |   |   |        |        
|                                     | Company-owned stores:                               |                                          |         |         |                   |   |        |          |   |   |           |         |   |   |        |         |  
|                                     | Net sales                                           |                                          | $       | 90,980  |                   |   | $      | 97,662   |   |   | $         | 356,361 |   |   | $      | 375,586 |  
|                                     | Cost of goods sold and occupancy costs              |                                          |         | 70,062  |                   |   |        | 71,432   |   |   |           | 242,803 |   |   |        | 250,465 |  
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|                                     | Gross profit                                        |                                          |         | 20,918  |                   |   |        | 26,230   |   |   |           | 113,558 |   |   |        | 125,121 |  
|                                     | Store operating and selling expense                 |                                          |         | 24,407  |                   |   |        | 24,754   |   |   |           | 84,943  |   |   |        | 86,923  |  
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|                                     | Company-owned store profit contribution             |                                          |         | (3,489  | )                 |   |        | 1,476    |   |   |           | 28,615  |   |   |        | 38,198  |  
|                                     | General and administrative expense                  |                                          |         | 10,283  |                   |   |        | 8,506    |   |   |           | 30,666  |   |   |        | 24,163  |  
|                                     | Litigation charge                                   |                                          |         |        |                   |   |        | 4,100    |   |   |           |        |   |   |        | 4,100   |  
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|                                     | Retail (loss) profit contribution                   |                                          |         | (13,772 | )                 |   |        | (11,130  | ) |   |           | (2,051  | ) |   |        | 9,935   |  
|                                     | Franchise stores:                                   |                                          |         |         |                   |   |        |          |   |   |           |         |   |   |        |         |  
|                                     | Royalty fees                                        |                                          |         | 3,763   |                   |   |        | 3,806    |   |   |           | 15,101  |   |   |        | 14,929  |  
|                                     | Net sales to franchisees                            |                                          |         | 6,677   |                   |   |        |         |   |   |           | 6,677   |   |   |        |        |  
|                                     | Franchise fees                                      |                                          |         |        |                   |   |        | 80       |   |   |           | 120     |   |   |        | 568     |  
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|                                     | Total franchise revenue                             |                                          |         | 10,440  |                   |   |        | 3,886    |   |   |           | 21,898  |   |   |        | 15,497  |  
|                                     | Cost of goods sold to franchisees                   |                                          |         | 5,608   |                   |   |        |         |   |   |           | 5,608   |   |   |        |        |  
|                                     | Franchise transportation and other selling expenses |                                          |         | 931     |                   |   |        |         |   |   |           | 931     |   |   |        |        |  
|                                     | Other franchise expense                             |                                          |         | 2,335   |                   |   |        | 2,024    |   |   |           | 5,955   |   |   |        | 5,245   |  
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|                                     | Total franchise expense                             |                                          |         | 8,874   |                   |   |        | 2,024    |   |   |           | 12,494  |   |   |        | 5,245   |  
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|                                     | Franchise profit contribution                       |                                          |         | 1,566   |                   |   |        | 1,862    |   |   |           | 9,404   |   |   |        | 10,252  |  
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|Operating (loss) income              |                                                     |                                          | (12,206 | )       |                   |   | (9,268 | )        |   |   | 7,353     |         |   |   | 20,187 |        
|                                     | Interest income                                     |                                          |         | (166    | )                 |   |        | (29      | ) |   |           | (385    | ) |   |        | (59     | )
|                                     | Interest expense                                    |                                          |         | 122     |                   |   |        | 108      |   |   |           | 373     |   |   |        | 450     |  
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|                                     | Interest (income) expense, net                      |                                          |         | (44     | )                 |   |        | 79       |   |   |           | (12     | ) |   |        | 391     |  
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|(Loss) income before income taxes    |                                                     |                                          | (12,162 | )       |                   |   | (9,347 | )        |   |   | 7,365     |         |   |   | 19,796 |        
|(Benefit) provision for income taxes |                                                     |                                          | (4,929  | )       |                   |   | (3,786 | )        |   |   | 2,979     |         |   |   | 8,017  |        
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|Net (loss) income                    |                                                     | $                                        | (7,233  | )       |                   | $ | (5,561 | )        |   | $ | 4,386     |         |   | $ | 11,779 |        
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|                                     | Basic (loss) earnings per share                     |                                          | $       | (0.42   | )                 |   | $      | (0.33    | ) |   | $         | 0.26    |   |   | $      | 0.70    |  
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|                                     | Weighted average shares outstanding  basic         |                                          |         | 17,231  |                   |   |        | 16,992   |   |   |           | 17,171  |   |   |        | 16,871  |  
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|                                     | Diluted (loss) earnings per share                   |                                          | $       | (0.42   | )                 |   | $      | (0.33    | ) |   | $         | 0.22    |   |   | $      | 0.60    |  
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        
|                                     | Weighted average shares outstanding  diluted       |                                          |         | 17,231  |                   |   |        | 16,992   |   |   |           | 19,827  |   |   |        | 19,630  |  
|                                     |                                                     |                                          |         |         |                   |   |        |          |   |   |           |        

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| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Fiscal Quarter Ended April 2, 2005 Compared To Fiscal
    Quarter Ended March 27, 2004

Retail.




|                                                   |       |                         |      |      |                                 |                                                                                                                                                                                                                                                          | 
|-------------------------------------------------- | ----- | ----------------------- | ---- | ---- | ------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                   |       | Portion of Total Change |      |      |                                
|Component                                          |       | Increase/(Decrease)     |      |      | Reason for Increase/(Decrease):
|                                                   |       |                         |      |      |                                
|                                                   |       | (In millions)           |      |      |                                
|Net sales impact on merchandise margins            |       | $                       | (1.9 | )    |                                 | Due to lower total sales: same store and new store sales.                                                                                                                                                                                               
|Merchandise margins (including distribution costs) |       |                         | (2.4 | )    |                                 | Due to clearance markdowns on products displaced by the store
    resets and increased distribution costs because product volume
    throughput has not reached critical mass, partially offset by
    improved margin due to less promotional activity.
|Occupancy and other costs                          |       |                         | (1.0 | )    |                                 | Due to higher fixed expenses associated with new stores opened
    within the last 12 months and higher other occupancy costs.                                                                                                                          
|                                                   |       |                         |      |      |                                
|                                                   | Total |                         | $    | (5.3 | )                               |                                                                                                                                                                                                                                                          | 
|                                                   |       |                         |      |      |                                

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|                              |       |                         |      |      |                                 |                                                                                                                                                                                               | 
|----------------------------- | ----- | ----------------------- | ---- | ---- | ------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                              |       | Portion of Total Change |      |      |                                
|Component                     |       | Increase/(Decrease)     |      |      | Reason for Increase/(Decrease):
|                              |       |                         |      |      |                                
|                              |       | (In millions)           |      |      |                                
|Variable store operating cost |       | $                       | (0.4 | )    |                                 | Due to lower total sales: same and new store sales.                                                                                                                                          
|Payroll and fringe benefit    |       |                         | 1.0  |      |                                 | Due primarily to store labor hours required for the store resets
    as well as higher costs of fringe benefits, partially offset by
    reduced estimates of year end employee compensation.
|Payroll  labor efficiencies  |       |                         | (0.6 | )    |                                 | Due primarily to labor efficiencies from systems and supply
    chain initiatives.                                                                                                           
|Other operating costs         |       |                         | (0.3 | )    |                                 | Due primarily to the timing of physical inventory fees compared
    to last year, partially offset by increased charge card fees.                                                            
|                              |       |                         |      |      |                                
|                              | Total |                         | $    | (0.3 | )                               |                                                                                                                                                                                               | 
|                              |       |                         |      |      |                                











|                            |       |                         |     |     |                                 |                                                                                                                                                                                                                                                                                                                                                       | 
|--------------------------- | ----- | ----------------------- | --- | --- | ------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                            |       | Portion of Total Change |     |     |                                
|Component                   |       | Increase/(Decrease)     |     |     | Reason for Increase/(Decrease):
|                            |       |                         |     |     |                                
|                            |       | (In millions)           |     |     |                                
|Payroll and fringe benefits |       | $                       | 1.2 |     |                                 | Due to increased corporate staffing and related staffing costs
    to support the transitioning of our product assortment and
    logistics and information systems initiatives, as well as
    increased fringe benefits and severance related to our departed
    CEO, partially offset by reduced estimates of year-end employee
    compensation.
|Occupancy                   |       |                         | 0.2 |     |                                 | Due to additional corporate office space.                                                                                                                                                                                                                                                                                                            
|Other                       |       |                         | 0.4 |     |                                 | Due to the discontinuation of management fee income related to
    the ad-fund as well as increased sales and use tax expenses
    relating to state audits.                                                                                                                                                                                         
|                            |       |                         |     |     |                                
|                            | Total |                         | $   | 1.8 |                                 |                                                                                                                                                                                                                                                                                                                                                       | 
|                            |       |                         |     |     |                                






26



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Franchising.




























Interest (Income) Expense.





Income Taxes.





Net (Loss) Income.







| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | Fiscal Nine Months Ended April 2, 2005 Compared To
    Fiscal Quarter Ended March 27, 2004




Retail.





27



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|                                                   |       |                         |      |       |                                 |                                                                                                                                                                                                                                                                                                                              | 
|-------------------------------------------------- | ----- | ----------------------- | ---- | ----- | ------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                   |       | Portion of Total Change |      |       |                                
|Component                                          |       | Increase/(Decrease)     |      |       | Reason for Increase/(Decrease):
|                                                   |       |                         |      |       |                                
|                                                   |       | (In millions)           |      |       |                                
|Net sales impact on merchandise margins            |       | $                       | (6.4 | )     |                                 | Due to lower total sales: same store and new store sales.                                                                                                                                                                                                                                                                   
|Merchandise margins (including distribution costs) |       |                         | (1.3 | )     |                                 | Due to clearance markdowns on products displaced by store resets
    and increased distribution costs because product volume
    throughput has not reached critical mass during our initial
    phase, partially offset by a reduction in promotional markdown
    activity reflecting a shift to less promotional pricing.
|Occupancy and other costs                          |       |                         | (3.9 | )     |                                 | Due to higher fixed expenses associated with new stores and
    accelerated depreciable life of certain stores internal
    sign and graphics, partially offset by improved insurance claims
    experience.                                                                                                               
|                                                   |       |                         |      |       |                                
|                                                   | Total |                         | $    | (11.6 | )                               |                                                                                                                                                                                                                                                                                                                              | 
|                                                   |       |                         |      |       |                                



|                               |       |                         |      |      |                                 |                                                                                                                                                                                                        | 
|------------------------------ | ----- | ----------------------- | ---- | ---- | ------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|                               |       | Portion of Total Change |      |      |                                
|Component                      |       | Increase/(Decrease)     |      |      | Reason for Increase/(Decrease):
|                               |       |                         |      |      |                                
|                               |       | (In millions)           |      |      |                                
|Variable store operating costs |       | $                       | (1.0 | )    |                                 | Due to lower total sales; and new store sales.                                                                                                                                                        
|Payroll and fringe benefit     |       |                         | 1.0  |      |                                 | Due primarily to store labor hours required for the store reset
    initiative as well as higher costs of fringe benefits partially
    offset by reduced estimates of year-end employee compensation.
|Payroll  labor efficiencies   |       |                         | (1.9 | )    |                                 | Due primarily to reduced labor costs from efficiency
    improvements in customer checkout, product replenishment, store
    receiving and logistics, and inventory management.                       
|Other operating costs          |       |                         | (0.1 | )    |                                 | Due primarily to increased advertising and increased charge card
    fees, more than offset by a gain realized on one store closing
    in the first quarter and a reduction in other store expenses. 
|                               |       |                         |      |      |                                
|                               | Total |                         | $    | (2.0 | )                               |                                                                                                                                                                                                        | 
|                               |       |                         |      |      |                                

28



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|                            |       |                         |     |     |                                 |                                                                                                                                                                                                                                                                                                                                            | 
|--------------------------- | ----- | ----------------------- | --- | --- | ------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|                            |       | Portion of Total Change |     |     |                                
|Component                   |       | Increase/(Decrease)     |     |     | Reason for Increase/(Decrease):
|                            |       |                         |     |     |                                
|                            |       | (In millions)           |     |     |                                
|Payroll and fringe benefits |       | $                       | 3.6 |     |                                 | Due to increased corporate staffing and related staffing costs
    to support the transition of our product assortment and
    logistics and information systems initiatives as well as
    increased fringe benefits and severance for the departed CEO,
    partially offset by reduced estimates of year-end employee
    compensation.
|Occupancy                   |       |                         | 1.7 |     |                                 | Due to additional corporate office space.                                                                                                                                                                                                                                                                                                 
|Professional fees           |       |                         | 0.3 |     |                                 | Due to increased one-time expenditures related to our store
    re-set initiative as well as increased miscellaneous
    professional fees.                                                                                                                                                                                               
|Other                       |       |                         | 0.9 |     |                                 | Due to the discontinuation of management fee income related to
    the ad-fund as well as increased sales and use tax expenses
    relating to state audits.                                                                                                                                                                              
|                            |       |                         |     |     |                                
|                            | Total |                         | $   | 6.5 |                                 |                                                                                                                                                                                                                                                                                                                                            | 
|                            |       |                         |     |     |                                



Franchising.








29



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Interest (Income) Expense.


Income Taxes.


Net Income.


Liquidity and Capital Resources








| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our logistics initiative, pursuant to which we have outsourced
    the management of our centralized warehousing and distribution
    facilities and are implementing a new distribution network;
|
| |  | servicing our franchise owners participating in the distribution
    network;                                                                                                                    
|
| |  | revitalizing our brand and retail environment through
    re-merchandising our stores;                                                                                                           
|
| |  | implementing new merchandising systems;                                                                                                                                                          
|
| |  | transitioning to our new corporate headquarters;                                                                                                                                                 
|
| |  | evaluating our current and future store locations; and                                                                                                                                           
|
| |  | improving customer service at the stores.                                                                                                                                                        





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Key Indicators of Liquidity and Capital Resources




|                                  |                               |                                              |   |         |                   |   |   |          |        |   |           |         |         |   |   |         |        | 
|--------------------------------- | ----------------------------- | -------------------------------------------- | - | ------- | ----------------- | - | - | -------- | ------ | - | --------- | ------- | ------- | - | - | ------- | ------ | 
|                                  |                               | Fiscal Quarter Ended                         |   |         | Nine Months Ended |  
|                                  |                               |                                              |   |         |                   |  
|                                  |                               | April 2,                                     |   |         | March 27,         |   |   | April 2, |        |   | March 27, |        
|                                  |                               | 2005                                         |   |         | 2004              |   |   | 2005     |        |   | 2004      |        
|                                  |                               |                                              |   |         |                   |   |   |          |        |   |           |        
|                                  |                               | (In thousands)                               |  
|Balance Sheet Data:               |                               |                                              |   |         |                   |   |   |          |        |   |           |         |         |   |   |        
|                                  | Cash and cash equivalents     |                                              | $ | 14,253  |                   |   | $ | 15,773   |        |   | $         | 14,253  |         |   | $ | 15,773  |       
|                                  | Working capital               |                                              |   | 42,596  |                   |   |   | 29,946   |        |   |           | 42,596  |         |   |   | 29,946  |       
|                                  | Total assets                  |                                              |   | 198,440 |                   |   |   | 169,420  |        |   |           | 198,440 |         |   |   | 169,420 |       
|                                  | Advance under Loan Agreement  |                                              |   |        |                   |   |   |         |        |   |           |        |         |   |   |        |       
|                                  | Stockholders equity          |                                              |   | 102,610 |                   |   |   | 93,101   |        |   |           | 102,610 |         |   |   | 93,101  |       
|Other Information:                |                               |                                              |   |         |                   |   |   |          |        |   |           |         |         |   |   |        
|                                  | Depreciation and amortization |                                              | $ | 4,075   |                   |   | $ | 4,614    |        |   | $         | 12,963  |         |   | $ | 12,306  |       
|Cash Flows (Used In) Provided By: |                               |                                              |   |         |                   |   |   |          |        |   |           |         |         |   |   |        
|                                  | Operating activities          |                                              | $ | (31,848 | )                 |   | $ | 83       |        |   | $         | (5,789  | )       |   | $ | 34,807  |       
|                                  | Investing activities          |                                              |   | (3,374  | )                 |   |   | (5,109   | )      |   |           | (8,605  | )       |   |   | (8,638  | )     
|                                  | Financing activities          |                                              |   | 293     |                   |   |   | 249      |        |   |           | 802     |         |   |   | (13,768 | )     
|                                  |                               |                                              |   |         |                   |   |   |          |        |   |           |        
|                                  |                               | Total cash (used in) provided by the Company |   | $       | (34,929           | ) |   | $        | (4,777 | ) |           | $       | (13,592 | ) |   | $       | 12,401 | 
|                                  |                               |                                              |   |         |                   |   |   |          |        |   |           |        




Operating Activities.








Investing Activities.








Financing Activities.





Loan Agreement.


31



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##### Table of Contents





Warrants.


EBITDA (Earnings before interest, taxes, depreciation and
amortization)


|                                        |                                                       |                      |        |         |                   |   |        |          |   |   |           |        |   |   |        |        | 
|--------------------------------------- | ----------------------------------------------------- | -------------------- | ------ | ------- | ----------------- | - | ------ | -------- | - | - | --------- | ------ | - | - | ------ | ------ | 
|                                        |                                                       | Fiscal Quarter Ended |        |         | Nine Months Ended |  
|                                        |                                                       |                      |        |         |                   |  
|                                        |                                                       | April 2,             |        |         | March 27,         |   |        | April 2, |   |   | March 27, |       
|                                        |                                                       | 2005                 |        |         | 2004              |   |        | 2005     |   |   | 2004      |       
|                                        |                                                       |                      |        |         |                   |   |        |          |   |   |           |       
|                                        |                                                       | (In thousands)       |       
|                                        |                                                       | (Unaudited)          |       
|EBITDA(a)                               |                                                       | $                    | (8,131 | )       |                   | $ | (4,654 | )        |   | $ | 20,316    |        |   | $ | 32,493 |       
|Most directly comparable GAAP measures: |                                                       |                      |        |         |                   |   |        |          |   |   |           |        |   |   |        |       
|                                        | Net (loss) income                                     |                      | $      | (7,233  | )                 |   | $      | (5,561   | ) |   | $         | 4,386  |   |   | $      | 11,779 | 
|                                        | Cash flows (used in) provided by operating activities |                      |        | (31,848 | )                 |   |        | 83       |   |   |           | (5,789 | ) |   |        | 34,807 | 






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Our definition of EBITDA is earnings before interest, taxes,
    depreciation and amortization. We use EBITDA to determine a
    portion of our executive compensation, as our incentive
    compensation payments are partially based on our EBITDA
    performance measured against budget, and we believe EBITDA
    provides additional information for determining our ability to
    meet future debt service requirements. EBITDA is also widely
    used by us and others in our industry to evaluate and price
    potential acquisitions. Furthermore, EBITDA 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. EBITDA
    should not be construed as a substitute for net (loss) income or
    net cash (used in) 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. Our
    computation of EBITDA may not be comparable to similar titled
    measures of other companies.



|                                     |  |                      |        |   |                   |   |        |          |  |   |           |   |  |   |         |  
|------------------------------------ |  | -------------------- | ------ | - | ----------------- | - | ------ | -------- |  | - | --------- | - |  | - | ------- | -
|                                     |  | Fiscal Quarter Ended |        |   | Nine Months Ended |  
|                                     |  |                      |        |   |                   |  
|                                     |  | April 2,             |        |   | March 27,         |   |        | April 2, |  |   | March 27, |  
|                                     |  | 2005                 |        |   | 2004              |   |        | 2005     |  |   | 2004      |  
|                                     |  |                      |        |   |                   |   |        |          |  |   |           |  
|                                     |  | (In thousands)       |       
|                                     |  | (Unaudited)          |       
|EBITDA(a)                            |  | $                    | (8,131 | ) |                   | $ | (4,654 | )        |  | $ | 20,316    |   |  | $ | 32,493  |  
|Depreciation and amortization        |  |                      | (4,075 | ) |                   |   | (4,614 | )        |  |   | (12,963   | ) |  |   | (12,306 | )
|Interest income (expense), net       |  |                      | 44     |   |                   |   | (79    | )        |  |   | 12        |   |  |   | (391    | )
|Benefit (provision) for income taxes |  |                      | 4,929  |   |                   |   | 3,786  |          |  |   | (2,979    | ) |  |   | (8,017  | )
|                                     |  |                      |        |   |                   |   |        |          |  |   |           |  
|Net (loss) income                    |  | $                    | (7,233 | ) |                   | $ | (5,561 | )        |  | $ | 4,386     |   |  | $ | 11,779  |  
|                                     |  |                      |        |   |                   |   |        |          |  |   |           |  

32



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|                                     |                                                |                                                     |        |         |                   |   |        |          |    |   |           |         |        |   |        |        |        | 
|------------------------------------ | ---------------------------------------------- | --------------------------------------------------- | ------ | ------- | ----------------- | - | ------ | -------- | -- | - | --------- | ------- | ------ | - | ------ | ------ | ------ | 
|                                     |                                                | Fiscal Quarter Ended                                |        |         | Nine Months Ended |  
|                                     |                                                |                                                     |        |         |                   |  
|                                     |                                                | April 2,                                            |        |         | March 27,         |   |        | April 2, |    |   | March 27, |        
|                                     |                                                | 2005                                                |        |         | 2004              |   |        | 2005     |    |   | 2004      |        
|                                     |                                                |                                                     |        |         |                   |   |        |          |    |   |           |        
|                                     |                                                | (In thousands)                                      |       
|                                     |                                                | (Unaudited)                                         |       
|EBITDA(a)                            |                                                | $                                                   | (8,131 | )       |                   | $ | (4,654 | )        |    | $ | 20,316    |         |        | $ | 32,493 |       
|Interest income (expense), net       |                                                |                                                     | 44     |         |                   |   | (79    | )        |    |   | 12        |         |        |   | (391   | )     
|Benefit (provision) for income taxes |                                                |                                                     | 4,929  |         |                   |   | 3,786  |          |    |   | (2,979    | )       |        |   | (8,017 | )     
|Impairment of assets                 |                                                |                                                     | 161    |         |                   |   |       |          |    |   | 161       |         |        |   |       |       
|Amortization of financing costs      |                                                |                                                     | 40     |         |                   |   | 40     |          |    |   | 120       |         |        |   | 120    |       
|Deferred rent                        |                                                |                                                     | 84     |         |                   |   | (86    | )        |    |   | (328      | )       |        |   | (326   | )     
|Deferred taxes                       |                                                |                                                     | (1,208 | )       |                   |   |       |          |    |   | (2,074    | )       |        |   |       |       
|Stock-based compensation             |                                                |                                                     | 32     |         |                   |   | 270    |          |    |   | 43        |         |        |   | 418    |       
|Provision for doubtful accounts      |                                                |                                                     | 280    |         |                   |   | 58     |          |    |   | 231       |         |        |   | (82    | )     
|Other                                |                                                |                                                     | 5      |         |                   |   | 3      |          |    |   | (90       | )       |        |   | 13     |       
|Changes in assets and liabilities:   |                                                |                                                     |        |         |                   |   |       |          |    |   |           |         |        |   |        |       
|                                     | Merchandise inventory                          |                                                     |        | (17,381 | )                 |   |        | (823     | )  |   |           | (29,609 | )      |   |        | 4,804  |       
|                                     | Accounts payable                               |                                                     |        | (2,056  | )                 |   |        | 1,388    |    |   |           | 18,837  |        |   |        | (2,163 | )     
|                                     | Accrued expenses and other current liabilities |                                                     |        | (6,987  | )                 |   |        | (5,464   | )  |   |           | (2,985  | )      |   |        | 5,601  |       
|                                     | Other long-term liabilities                    |                                                     |        | (51     | )                 |   |        |         |    |   |           | 7       |        |   |        | (119   | )     
|                                     | Other current assets and other assets          |                                                     |        | (1,609  | )                 |   |        | 5,644    |    |   |           | (7,451  | )      |   |        | 2,456  |       
|                                     |                                                |                                                     |        |         |                   |   |        |          |    |   |           |        
|                                     |                                                | Net cash (used in) provided by operating activities |        | $       | (31,848           | ) |        | $        | 83 |   |           | $       | (5,789 | ) |        | $      | 34,807 | 
|                                     |                                                |                                                     |        |         |                   |   |        |          |    |   |           |        





| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                                                                                                                                  
|
| |  | 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.                                                                                                            



33



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Contractual Obligations and Commercial Commitments







|                       |  |       |         |           |           |   |             |           |  |            |             |  |  |             |         |  |        |   |     |              |  |   |     |  |  |   |     | 
|---------------------- |  | ----- | ------- | --------- | --------- | - | ----------- | --------- |  | ---------- | ----------- |  |  | ----------- | ------- |  | ------ | - | --- | ------------ |  | - | --- |  |  | - | --- | 
|                       |  |       |         |           |           |   |             | Logistics |  |            |             |  |  |             |        
|                       |  |       |         | Operating |           |   | Merchandise |           |  | Initiative |             |  |  |             | Capital |  |        |  
|                       |  | Total |         |           | Leases(1) |   |             | Orders    |  |            | Obligations |  |  | Auto Leases |         |  | Leases |   |     | Severance(2) | 
|                       |  |       |         |           |           |   |             |           |  |            |             |  |  |             |         |  |        |   |     |              | 
|Fiscal year ending:    |  |       |         |           |           |   |             |           |  |            |             |  |  |             |         |  |        |   |     |              |  |   |     |  |  |   |     | 
|2005                   |  | $     | 31,897  |           |           | $ | 11,890      |           |  | $          | 19,003      |  |  | $           | 675     |  |        | $ | 69  |              |  | $ | 43  |  |  | $ | 217 | 
|2006                   |  |       | 49,881  |           |           |   | 46,329      |           |  |            |            |  |  |             | 2,700   |  |        |   | 181 |              |  |   | 181 |  |  |   | 490 | 
|2007                   |  |       | 46,037  |           |           |   | 42,680      |           |  |            |            |  |  |             | 2,700   |  |        |   | 129 |              |  |   | 528 |  |  |   |     | 
|2008                   |  |       | 34,262  |           |           |   | 34,255      |           |  |            |            |  |  |             |        |  |        |   | 7   |              |  |   |    |  |  |   |    | 
|2009                   |  |       | 22,176  |           |           |   | 22,176      |           |  |            |            |  |  |             |        |  |        |   |    |              |  |   |    |  |  |   |    | 
|Thereafter             |  |       | 55,932  |           |           |   | 55,932      |           |  |            |            |  |  |             |        |  |        |   |    |              |  |   |    |  |  |   |    | 
|                       |  |       |         |           |           |   |             |           |  |            |             |  |  |             |         |  |        |   |     |              | 
|Total minimum payments |  | $     | 240,185 |           |           | $ | 213,262     |           |  | $          | 19,003      |  |  | $           | 6,075   |  |        | $ | 386 |              |  | $ | 752 |  |  | $ | 707 | 
|                       |  |       |         |           |           |   |             |           |  |            |             |  |  |             |         |  |        |   |     |              | 









|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We are also obligated for guarantees, subleases or assigned
    lease obligations for 23 of the franchise stores through 2011.
    The majority of the guarantees, subleases and assigned lease
    obligations were given when we sold stores in 1999 as part of
    its restructuring. The guarantees, subleases and assigned lease
    obligations continue until the leases expire. The maximum amount
    of the guarantees, subleases and assigned lease obligations may
    vary, but is limited to the sum of the total amount due under
    the lease. As of April 2, 2005, the maximum amount of the
    guarantees, subleases and assigned lease obligations was
    approximately $12.9 million, which is not included in the
    table above.
|   
|   
|    | The operating leases included in the above table do not include
    contingent rent based upon sales volume, which represented less
    than 1% of minimum lease obligation in Fiscal 2004, or other
    variable costs such as maintenance, insurance and taxes, which
    represented approximately 5.9% of minimum lease obligations in
    Fiscal 2004.                                                                                                                                                                                                                                                                                                                                                                                               
|   
|   
|   
|(2) | The severance obligations specified in the table above is for
    our former Chief Executive Officer. In addition, as of
    April 29, 2005 and April 2, 2005, we had an aggregate
    contingent liability of up to $1.9 million related to
    potential severance payments for 17 employees pursuant to
    their respective employment agreements. We are not currently
    aware of any event that would trigger such $1.9 million
    contingent liability.                                                                                                                                                                                                                                                                                         
|   













34



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Off-Balance Sheet Arrangements




Seasonality






Recent Accounting Pronouncements








35



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##### Table of Contents










|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures About Market
    Risk








|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

Evaluation of disclosure and procedures.




Internal Control over financial reporting.




36



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##### Table of Contents











37



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##### Table of Contents






PART II.


OTHER INFORMATION







|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings








|        |                                                                
|------- | ---------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and Use of
    Proceeds








|        |                                
|------- | -------------------------------
|Item 3. | Defaults Upon Senior Securities








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








|        |                  
|------- | -----------------
|Item 5. | Other Information








|        |         
|------- | --------
|Item 6. | Exhibits



38



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##### Table of Contents






SIGNATURES






| |                       
| | ----------------------
| | PARTY CITY CORPORATION



| |    |                          
| | -- | -------------------------
| | By | /s/ Michael E. Tennenbaum

| |                                    
| | -----------------------------------
| |                                    
| | Michael E. Tennenbaum              
| | Chairman of the Executive Committee
| | (principal executive officer)      



| |    |                     
| | -- | --------------------
| | By | /s/ Gregg A. Melnick

| |                              
| | -----------------------------
| |                              
| | Gregg A. Melnick             
| | Chief Financial Officer      
| | (principal financial officer)



39



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##### Table of Contents






EXHIBIT INDEX


|        |     |     |  |                                                                                                                                                                                                                                                                                                                                                                     
|------- | --- | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |     | 
|No.     |     |     | 
|        |     |     | 
|        | 3   | .1  |  | Amended and Restated Certificate of Incorporation of the
    Company, incorporated by reference from the Companys
    Quarterly Report on Form 10-Q as filed with the SEC on
    May 17, 2004 (the S-1).                                                                                                                                                         
|       
|        | 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 SEC 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 SEC on January 18, 1996 (the
    S-1).                                                                                                                          
|       
|        | 10  | .1  |  | Form of Unit Franchise Agreement entered into by the Company and
    franchisees, incorporated by reference from the S-1.                                                                                                                                                                                                                                           
|       
|        | 10  | .2  |  | 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 SEC on
    September 26, 2003 (the September 2003 10-K).                                                                           
|       
|        | 10  | .3  |  | 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 SEC on
    February 13, 2001.                                                                                                                                                   
|       
|        | *10 | .4  |  | Consulting agreement between the Company and Dillon Associates
    Retail Consultants, dated April 12, 2005.                                                                                                                                                                                                                                                        
|       
|        | 10  | .5  |  | 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  | .6  |  | 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  | .7  |  | 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.
    This Employment Agreement was terminated as of January 8,
    2005, as specified in the Companys Current Report on Form
    8-K as filed with the SEC on December 30, 2004.
|       
|        | 10  | .8  |  | Employment Agreement of Richard H. Griner dated as of
    January 12, 2004, by and between the Company and Richard H.
    Griner, incorporated by reference from the February 2004 10-Q.                                                                                                                                                                            
|       
|        | 10  | .9  |  | Employment Agreement of Gregg A. Melnick, dated as of
    September 7, 2004, by and between the Company and Gregg A.
    Melnick incorporated by reference from the Companys
    Current Report on Form 8-K as filed on September 9, 2004.                                                                                                                         
|       
|        | 10  | .10 |  | Separation Agreement of Linda M. Siluk, dated as of
    September 30, 2004, by and between the Company and Linda M.
    Siluk, incorporated by reference from the Companys Current
    Report on Form 8-K as filed with the SEC on October 1, 2004.                                                                                                                
|       
|        | 10  | .11 |  | Employment Agreement of Lisa Laube, dated as of April 26,
    2004, by and between the Company and Lisa Laube incorporated by
    reference from the Companys Current Report on Form 10-Q as
    filed with the SEC on November 12, 2004.                                                                                                                          
|       
|        | 10  | .12 |  | Employment Agreement of Nancy Pedot, dated December 23,
    2004, by and between the Company and Nancy Pedot, incorporated
    by reference from the Companys Current Report on Form 8-K
    as filed with the SEC on December 27, 2004.                                                                                                                           
|       
|        | 10  | .13 |  | Management Stock Purchase Plan of the Company, incorporated by
    reference from the Registration of Form S-8 as filed with
    the SEC 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.                                                                                                           

40



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|        |     |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | --- | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |     | 
|No.     |     |     | 
|        |     |     | 
|       
|        | 10  | .15 |  | Amended and Restated 1994 Stock Option Plan, incorporated by
    reference from the Registration of Form S-8 as filed with
    the SEC 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 SEC on October 20, 2003.                                                                                                                                     
|       
|        | 10  | .17 |  | Form of Employee Stock Option Agreement (1999 Stock Incentive
    Plan) incorporated by reference from the Companys
    Quarterly Report on Form 10-Q as filed with the SEC on
    February 10, 2005.                                                                                                                                                                                                                
|       
|        | 10  | .18 |  | Forms of Non-Employee Director Stock Option Agreement (1999
    Stock Incentive Plan) incorporated by reference from the
    Companys Quarterly Report on Form 10-Q as filed with the
    SEC on February 10, 2005.                                                                                                                                                                                                  
|       
|        | 10  | .19 |  | Summary of Fiscal Year 2005 Corporate Bonus Plan incorporated by
    reference from the Companys Quarterly Report on Form 10-Q
    as filed with the SEC on February 10, 2005.                                                                                                                                                                                                                                       
|       
|        | 10  | .20 |  | Compensation Payable to Non-Employee Directors incorporated by
    reference from the Companys Quarterly Report on Form 10-Q
    as filed with the SEC on February 10, 2005.                                                                                                                                                                                                                                         
|       
|        | 10  | .21 |  | 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 SEC on January 10, 2003.
|       
|        | 10  | .22 |  | First Amendment to the Loan Agreement (included herein as
    Exhibit 10.20), dated February 10, 2005 by and between
    the Company and Wells Fargo Retail Finance, LLC incorporated by
    reference from the Companys Quarterly Report on
    Form 10-Q as filed with the SEC on February 10, 2005.                                                                                                               
|       
|        | 10  | .23 |  | 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  | .24 |  | 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  | .25 |  | 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  | .26 |  | 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.                                                                                                                                               
|       
|        | 10  | .27 |  | Agreement of Lease, dated September 16, 2004, by and
    between the Company and North Jersey Green 501, LLC, for
    the Companys new corporate headquarters, incorporated by
    reference from the Companys Current Report on Form 8-K as
    filed with the SEC on September 20, 2004.                                                                                                                          
|       
|        | 10  | .28 |  | First Modification of Agreement of Lease (included herein as
    Exhibit 10.26), dated January 26, 2005 by and between
    the Company and North Jersey Green 501, LLC incorporated by
    reference from the Companys Quarterly Report on Form 10-Q
    as filed with the SEC on February 10, 2005.                                                                                                                 
|       
|        | *15 | .1  |  | Awareness Letter 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.                                                                                                                                                                                                                                                            

41



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|        |     |    |  |                                                                                                                                                           
|------- | --- | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |    | 
|No.     |     |    | 
|        |     |    | 
|       
|        | *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.






|  |                 
|- | ----------------
|* | Included herein.

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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






























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| | DELOITTE & TOUCHE LLP











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