##### Table of Contents



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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-Q

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




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

Party City Corporation


(Exact name of registrant as specified in its charter)


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

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



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

Yes x No: o

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

Yes x No: o

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

As of
November 3, 2003, there were
outstanding 17,537,320 shares of Common
Stock, $.01 par value.



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1



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TABLE OF CONTENTS



|                                          |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION            
|                                          | Item 1. Financial Statements                                                                 
|                                          |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                          |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                          | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                          | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                          | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION               
|                                          | Item 1. Legal Proceedings                                                                    
|                                          | Item 2. Changes in Securities and Use of Proceeds                                            
|                                          | Item 3. Defaults Upon Senior Securities                                                      
|                                          | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                          | Item 5. Other Information                                                                    
|                                          | Item 6. Exhibits and Reports on Form 8-K                                                     
|EXHIBIT INDEX                            
|SIGNATURES                               
|EX-3.2: BYLAWS                           
|EX-10.10: EMPLOYMENT AGREEMENT           
|EX-10.11: EMPLOYMENT AGREEMENT           
|EX-23.1: CONSENT OF DELOITTE & TOUCHE LLP
|EX-31.1: CERTIFICATION OF CEO            
|EX-31.2: CERTIFICATION OF CFO            
|EX-32.1: CERTIFICATION OF CEO            
|EX-32.2: CERTIFICATION OF CFO            



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY

INDEX

|        |  |                                                                                       |  |                                                                                                                              |               |  |      |  | 
|------- |  | ------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------- | ------------- |  | ---- |  | 
|        |  |                                                                                       |  |                                                                                                                              |               |  | Page
|        |  |                                                                                       |  |                                                                                                                              |               |  | No. 
|        |  |                                                                                       |  |                                                                                                                              |               |  |     
|Part I  |  | Financial Information                                                                 |  |                                                                                                                              | 3             | 
|Item 1. |  | Financial Statements                                                                  |  |                                                                                                                              | 3             | 
|        |  |                                                                                       |  | Condensed Consolidated Balance Sheets  September 27, 2003
(Unaudited) September 28, 2002 (Unaudited) and June 28,
2003      |               |  | 3    | 
|        |  |                                                                                       |  | Condensed Consolidated Statements of Operations (Unaudited) For
the quarters ended September 27, 2003 and September 28,
2002 |               |  | 4    | 
|        |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows (Unaudited) For
the quarters ended September 27, 2003 and September 28,
2002 |               |  | 5    | 
|        |  |                                                                                       |  | Notes to Condensed Consolidated (Unaudited) Financial
Statements                                                             |               |  | 6    | 
|Item 2. |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |  |                                                                                                                              | 11            | 
|Item 3. |  | Quantitative and Qualitative Disclosures About Market
Risk                            |  |                                                                                                                              | 18            | 
|Item 4. |  | Controls and Procedures                                                               |  |                                                                                                                              | 18            | 
|Part II |  | Other Information                                                                     |  |                                                                                                                              | 19            | 
|Item 1. |  | Legal Proceedings                                                                     |  |                                                                                                                              | 20            | 
|Item 2. |  | Changes in Securities and Use of Proceeds                                             |  |                                                                                                                              | 20            | 
|Item 3. |  | Defaults Upon Senior Securities                                                       |  |                                                                                                                              | 20            | 
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                                                                              | 20            | 
|Item 5. |  | Other Information                                                                     |  |                                                                                                                              | 20            | 
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                              | 20            | 
|        |  |                                                                                       |  |                                                                                                                              | Exhibit Index |  |      |  | 
|        |  |                                                                                       |  |                                                                                                                              | Signature     |  |      |  | 

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1.Financial Statements

PARTY CITY CORPORATION AND SUBSIDIARY




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

|                                     |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |        |         | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------- | ------- | ------------- | ------ | -------- | ------- |  | ------ | ------ | ------- | 
|                                     |                                                                                                                              |                                            |        | September 27, |         | September 28, |        | June 28,
|                                     |                                                                                                                              |                                            |        | 2003          |         | 2002          |        | 2003(1) 
|                                     |                                                                                                                              |                                            |        |               |         |               |        |         
|                                     |                                                                                                                              |                                            |        | (Unaudited)   |         | (Unaudited)   |        |          |         | 
|ASSETS                               |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |       
|Current assets:                      |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |       
|                                     | Cash and cash equivalents                                                                                                    |                                            | $      | 4,603         |         |               | $      | 5,241    |         |  | $      | 3,372  |        
|                                     | Merchandise inventory                                                                                                        |                                            |        | 93,227        |         |               |        | 94,760   |         |  |        | 65,908 |        
|                                     | Other current assets, net                                                                                                    |                                            |        | 22,360        |         |               |        | 21,402   |         |  |        | 21,900 |        
|                                     |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |       
|                                     |                                                                                                                              | Total current assets                       |        |               | 120,190 |               |        |          | 121,403 |  |        |        | 91,180  | 
|Property and equipment, net          |                                                                                                                              |                                            | 50,495 |               |         |               | 54,941 |          |         |  | 52,819 |       
|Goodwill                             |                                                                                                                              |                                            | 18,614 |               |         |               | 19,062 |          |         |  | 18,614 |       
|Other assets                         |                                                                                                                              |                                            | 5,234  |               |         |               | 4,392  |          |         |  | 5,386  |       
|                                     |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |       
|                                     |                                                                                                                              | Total assets                               |        | $             | 194,533 |               |        | $        | 199,798 |  |        | $      | 167,999 | 
|                                     |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |       
|Current liabilities:                 |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |       
|                                     | Accounts payable                                                                                                             |                                            | $      | 64,841        |         |               | $      | 69,864   |         |  | $      | 37,960 |        
|                                     | Book overdraft                                                                                                               |                                            |        | 1,548         |         |               |        | 3,391    |         |  |        | 4,126  |        
|                                     | Accrued expenses and other current liabilities                                                                               |                                            |        | 24,823        |         |               |        | 23,893   |         |  |        | 24,998 |        
|                                     | Advances under Loan Agreement                                                                                                |                                            |        | 15,171        |         |               |        | 16,136   |         |  |        | 11,229 |        
|                                     |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |       
|                                     |                                                                                                                              | Total current liabilities                  |        |               | 106,383 |               |        |          | 113,284 |  |        |        | 78,313  | 
|Long-term liabilities:               |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |       
|                                     | Deferred rent and other long-term liabilities                                                                                |                                            |        | 10,034        |         |               |        | 10,310   |         |  |        | 10,264 |        
|                                     | Senior Notes                                                                                                                 |                                            |        |              |         |               |        | 9,083    |         |  |        |       |        
|Commitments and contingencies        |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |       
|Stockholders equity:                |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |       
|                                     | Common stock $.01 par value, authorized 25,000,000 shares; issued
17,425,070, 17,010,465 and 17,296,807 shares, respectively |                                            |        | 174           |         |               |        | 170      |         |  |        | 173    |        
|                                     | Additional paid-in capital                                                                                                   |                                            |        | 43,821        |         |               |        | 40,597   |         |  |        | 43,178 |        
|                                     | Retained earnings                                                                                                            |                                            |        | 40,061        |         |               |        | 28,183   |         |  |        | 42,011 |        
|                                     | Treasury stock, at cost (747,012, 284,000 and 747,012
shares, respectively)                                                  |                                            |        | (5,940        | )       |               |        | (1,829   | )       |  |        | (5,940 | )      
|                                     |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |       
|Total stockholders equity           |                                                                                                                              |                                            | 78,116 |               |         |               | 67,121 |          |         |  | 79,422 |       
|                                     |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |       
|                                     |                                                                                                                              | Total liabilities and stockholders equity |        | $             | 194,533 |               |        | $        | 199,798 |  |        | $      | 167,999 | 
|                                     |                                                                                                                              |                                            |        |               |         |               |        |          |         |  |        |        |        



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

See accompanying notes to condensed consolidated financial statements.

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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

|                         |                                                    |                                                         |        |               |         |               |        |        |        | 
|------------------------ | -------------------------------------------------- | ------------------------------------------------------- | ------ | ------------- | ------- | ------------- | ------ | ------ | ------ | 
|                         |                                                    |                                                         |        | Quarter Ended
|                         |                                                    |                                                         |        |              
|                         |                                                    |                                                         |        | September 27, |         | September 28,
|                         |                                                    |                                                         |        | 2003          |         | 2002         
|                         |                                                    |                                                         |        |               |         |              
|                         |                                                    |                                                         |        | (Unaudited)  
|Revenues:                |                                                    |                                                         |        |               |         |               |        |       
|                         | Net sales                                          |                                                         | $      | 102,620       |         |               | $      | 91,124 |       
|                         | Royalty fees                                       |                                                         |        | 3,908         |         |               |        | 3,647  |       
|                         | Franchise fees                                     |                                                         |        | 447           |         |               |        | 235    |       
|                         |                                                    |                                                         |        |               |         |               |        |       
|                         |                                                    | Total revenues                                          |        |               | 106,975 |               |        |        | 95,006 | 
|Expenses:                |                                                    |                                                         |        |               |         |               |        |       
|                         | Cost of goods sold and occupancy costs             |                                                         |        | 74,328        |         |               |        | 64,425 |       
|                         | Company-owned stores operating and selling expense |                                                         |        | 25,879        |         |               |        | 23,698 |       
|                         | Franchise expense                                  |                                                         |        | 1,659         |         |               |        | 1,562  |       
|                         | General and administrative expense                 |                                                         |        | 8,159         |         |               |        | 7,302  |       
|                         |                                                    |                                                         |        |               |         |               |        |       
|                         |                                                    | Total expenses                                          |        |               | 110,025 |               |        |        | 96,987 | 
|                         |                                                    |                                                         |        |               |         |               |        |       
|Operating loss           |                                                    |                                                         | (3,050 | )             |         |               | (1,981 | )     
|                         | Interest income                                    |                                                         |        | (4            | )       |               |        | (7     | )     
|                         | Interest expense                                   |                                                         |        | 204           |         |               |        | 892    |       
|                         |                                                    |                                                         |        |               |         |               |        |       
|                         | Interest expense, net                              |                                                         |        | 200           |         |               |        | 885    |       
|                         |                                                    |                                                         |        |               |         |               |        |       
|Loss before income taxes |                                                    |                                                         | (3,250 | )             |         |               | (2,866 | )     
|                         | Benefit for income taxes                           |                                                         |        | (1,300        | )       |               |        | (1,130 | )     
|                         |                                                    |                                                         |        |               |         |               |        |       
|Net loss                 |                                                    | $                                                       | (1,950 | )             |         | $             | (1,736 | )     
|                         |                                                    |                                                         |        |               |         |               |        |        |       
|                         | Basic and diluted loss per share                   |                                                         | $      | (0.12         | )       |               | $      | (0.11  | )     
|                         |                                                    |                                                         |        |               |         |               |        |        |       
|                         |                                                    | Weighted average shares outstanding  basic and
diluted |        |               | 16,599  |               |        |        | 16,396 | 
|                         |                                                    |                                                         |        |               |         |               |        |       

See accompanying notes to condensed consolidated financial statements.

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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                                            |                                                                  |                                           |        |               |        |               |        |         |         |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------- | ----------------------------------------- | ------ | ------------- | ------ | ------------- | ------ | ------- | ------- | -
|                                                                            |                                                                  |                                           |        | Quarter Ended
|                                                                            |                                                                  |                                           |        |              
|                                                                            |                                                                  |                                           |        | September 27, |        | September 28,
|                                                                            |                                                                  |                                           |        | 2003          |        | 2002         
|                                                                            |                                                                  |                                           |        |               |        |              
|                                                                            |                                                                  |                                           |        | (Unaudited)  
|Cash flow from operating activities:                                        |                                                                  |                                           |        |               |        |               |        |        
|Net loss                                                                    |                                                                  | $                                         | (1,950 | )             |        | $             | (1,736 | )      
|Adjustments to reconcile net loss to net cash used in
operating activities: |                                                                  |                                           |        |               |        |               |        |        
|Depreciation and amortization                                               |                                                                  |                                           | 3,802  |               |        |               | 3,372  |        
|Non-cash interest and financing costs                                       |                                                                  |                                           | 40     |               |        |               | 250    |        
|Deferred rent                                                               |                                                                  |                                           | (123   | )             |        |               | 259    |        
|Equity based compensation                                                   |                                                                  |                                           | 124    |               |        |               | 138    |        
|Provision for doubtful accounts                                             |                                                                  |                                           | (63    | )             |        |               | (301   | )      
|Other                                                                       |                                                                  |                                           | 4      |               |        |               | (312   | )      
|Changes in assets and liabilities:                                          |                                                                  |                                           |        |               |        |               |        |        
|                                                                            | Merchandise inventory                                            |                                           |        | (27,319       | )      |               |        | (38,487 | )      
|                                                                            | Accounts payable, accrued expenses and other current liabilities |                                           |        | 24,128        |        |               |        | 34,905  |        
|                                                                            | Other long-term liabilities                                      |                                           |        | (107          | )      |               |        | 37      |        
|                                                                            | Other current assets and other assets                            |                                           |        | (319          | )      |               |        | (2,939  | )      
|                                                                            |                                                                  |                                           |        |               |        |               |        |        
|                                                                            |                                                                  | Net cash used in operating activities     |        |               | (1,783 | )             |        |         | (4,814  | )
|Cash flow from investment activities:                                       |                                                                  |                                           |        |               |        |               |        |        
|                                                                            | Purchases of property and equipment                              |                                           |        | (1,448        | )      |               |        | (8,737  | )      
|                                                                            | Stores acquired                                                  |                                           |        |              |        |               |        | (1,648  | )      
|                                                                            |                                                                  |                                           |        |               |        |               |        |        
|                                                                            |                                                                  | Net cash used in investment activities    |        |               | (1,448 | )             |        |         | (10,385 | )
|Cash flow from financing activities:                                        |                                                                  |                                           |        |               |        |               |        |        
|                                                                            | Net proceeds from Loan Agreement                                 |                                           |        | 3,942         |        |               |        | 16,136  |        
|                                                                            | Proceeds from exercise of stock options and warrants             |                                           |        | 520           |        |               |        | 837     |        
|                                                                            |                                                                  |                                           |        |               |        |               |        |        
|                                                                            |                                                                  | Net cash provided by financing activities |        |               | 4,462  |               |        |         | 16,973  |  
|                                                                            |                                                                  |                                           |        |               |        |               |        |        
|Net increase in cash and cash equivalents                                   |                                                                  |                                           | 1,231  |               |        |               | 1,774  |        
|Cash and cash equivalents, beginning of period                              |                                                                  |                                           | 3,372  |               |        |               | 3,467  |        
|                                                                            |                                                                  |                                           |        |               |        |               |        |        
|Cash and cash equivalents, end of period                                    |                                                                  | $                                         | 4,603  |               |        | $             | 5,241  |        
|                                                                            |                                                                  |                                           |        |               |        |               |        |        
|                                                                            | Supplemental disclosure of cash flow information:                |                                           |        |               |        |               |        |         |        
|                                                                            | Income taxes paid                                                |                                           | $      | 788           |        |               | $      | 2,167   |        
|                                                                            | Interest paid                                                    |                                           |        | 165           |        |               |        | 642     |        
|                                                                            | Supplemental disclosure of non-cash financing activity:          |                                           |        |               |        |               |        |         |        
|                                                                            | Issuance of shares under employee stock plan                     |                                           | $      |              |        |               | $      |        |        
|                                                                            | Issuance of shares under management stock plan                   |                                           |        | 87            |        |               |        | 282     |        
|                                                                            | Issuance of warrants                                             |                                           |        |              |        |               |        | 245     |        

See accompanying notes to condensed consolidated financial statements.

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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

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

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

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

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

2. Stock-Based Compensation

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

|                                  |                                                                                                                |   |               |        |               |   |        |        |  
|--------------------------------- | -------------------------------------------------------------------------------------------------------------- | - | ------------- | ------ | ------------- | - | ------ | ------ | -
|                                  |                                                                                                                |   | Quarter Ended
|                                  |                                                                                                                |   |              
|                                  |                                                                                                                |   | September 27, |        | September 28,
|                                  |                                                                                                                |   | 2003          |        | 2002         
|                                  |                                                                                                                |   |               |        |              
|Net loss as reported              |                                                                                                                | $ | (1,950        | )      |               | $ | (1,736 | )     
|                                  | Deduct: Total stock-based employee compensation
expense determined under fair value based method,
net of taxes |   |               | (114   | )             |   |        | (188   | )
|                                  |                                                                                                                |   |               |        |               |   |        |       
|                                  | Pro-forma net loss                                                                                             |   | $             | (2,064 | )             |   | $      | (1,924 | )
|                                  |                                                                                                                |   |               |        |               |   |        |       
|Basic and diluted loss per share: |                                                                                                                |   |               |        |               |   |        |       
|                                  | As reported                                                                                                    |   | $             | (0.12  | )             |   | $      | (0.11  | )
|                                  | Pro-forma net loss                                                                                             |   |               | (0.12  | )             |   |        | (0.12  | )

The weighted average fair value of options granted during the first
quarter of Fiscal 2004 and 2003 was $3.94 and $7.92, respectively.

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##### Table of Contents



3. Earnings Per Share

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

|                                                                        |  |               |        |               |  |   |        |    
|----------------------------------------------------------------------- |  | ------------- | ------ | ------------- |  | - | ------ | ---
|                                                                        |  | Quarter Ended
|                                                                        |  |              
|                                                                        |  | September 27, |        | September 28,
|                                                                        |  | 2003          |        | 2002         
|                                                                        |  |               |        |              
|Net loss                                                                |  | $             | (1,950 | )             |  | $ | (1,736 | )  
|Loss per share  basic                                                  |  |               | (0.12  | )             |  |   | (0.11  | )  
|Loss per share  diluted                                                |  |               | (0.12  | )             |  |   | (0.11  | )  
|Weighted average common shares outstanding                              |  |               | 16,599 |               |  |   | 16,396 |    
|Dilutive effect of warrants                                             |  |               |       | (a)           |  |   |       | (b)
|Dilutive effect of stock options                                        |  |               |       | (a)           |  |   |       | (b)
|Restricted stock units                                                  |  |               |       | (c)           |  |   |       | (c)
|                                                                        |  |               |        |               |  |   |        |    
|Weighted average common shares and
common equivalent shares outstanding |  |               | 16,599 |               |  |   | 16,396 |    
|                                                                        |  |               |        |               |  |   |        |    



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|(a) |  | Options to purchase 2,080,618 shares of common stock at prices ranging
from $1.71 to $30.88 per share were outstanding at September 27, 2003 and
warrants to purchase 2,496,000 shares of common stock at $1.07 per share
were outstanding at September 27, 2003 and September 28, 2002 but were not
included in the computation of earnings per share because to do so would
have been antidilutive.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Options to purchase 2,320,586 shares of common stock at prices ranging
from $1.71 to $32.50 per share were outstanding at September 28, 2002 and
warrants to purchase 2,496,000 shares of common stock at $1.07 per share
were outstanding at September 28, 2002 but were not included in the
computation of earnings per share because to do so would have been
antidilutive.                       
|   
|(c) |  | Restricted shares of 17,396 and 97,398 shares of common stock were
outstanding at September 27, 2003 and September 28, 2002, respectively,
related to the Management Stock Purchase Plan which were not included in
the computation of earnings per share because to do so would have
been antidilutive.                                                                                             

4. Financing Agreements

In January 2003, the Company entered into a $65 million revolving credit
facility (Loan Agreement) with Wells Fargo Retail Finance, LLC, as the
arranger, collateral agent and administrative agent, and Fleet Retail Finance,
Inc., as the documentation agent. Under the terms of the Loan Agreement, the
Company may borrow amounts based on a percentage of its eligible inventory and
credit card receivables, subject to certain borrowing conditions and customary
sub-limits, reserves and other limitations. Interest on advances is charged, at
the Companys option, (i) at the adjusted Eurodollar rate plus the applicable
margin, which was set initially at 1.50% and is currently at 1.25%, per annum or (ii)
at the prime rate less the applicable margin, which was initially set at and is
currently 0.25% per annum. The term of the Loan Agreement is through April 30,
2006 and is secured by a lien on substantially all of the Companys assets. The
Company had a standby letter of credit of $3.1 million outstanding at September
27, 2003. At September 27, 2003 and November 3, 2003, the Company had $15.2
million and no borrowings outstanding under the Loan Agreement,
respectively. The Company had $35.2 million available to be borrowed under the
Loan Agreement at November 3, 2003.

5. Stockholders Equity

Shares Outstanding

The Companys authorized capital stock is 25,000,000 shares of its common
stock, $0.01 par value per share. Shares of common stock issued and outstanding
were 17,425,070 and 17,010,465 at September 27, 2003 and September 28, 2002,
respectively.

Stock Repurchase

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

Warrants

7



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##### Table of Contents



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

6. Legal Proceedings

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

In addition to the foregoing, from time to time the Company is involved in
routine litigation incidental to the conduct of the business. The Company is
aware of no other material existing or threatened litigation to which the
Company is or may be a party.

7. Segment Information

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

|                          |  |               |         |               |  |   |         |  
|------------------------- |  | ------------- | ------- | ------------- |  | - | ------- | -
|                          |  | Quarter Ended
|                          |  |              
|                          |  | September 27, |         | September 28,
|                          |  | 2003          |         | 2002         
|                          |  |               |         |              
|RETAIL:                   |  |               |         |               |  |   |         |  
|Net revenue               |  | $             | 102,620 |               |  | $ | 91,124  |  
|Operating income          |  |               | 2,413   |               |  |   | 3,001   |  
|Identifiable assets       |  |               | 177,030 |               |  |   | 180,219 |  
|Depreciation/amortization |  |               | 2,418   |               |  |   | 2,034   |  
|Capital expenditures      |  |               | 460     |               |  |   | 9,830   |  
|FRANCHISING:              |  |               |         |               |  |   |         |  
|Net revenue               |  | $             | 4,355   |               |  | $ | 3,882   |  
|Operating income          |  |               | 2,696   |               |  |   | 2,320   |  
|Identifiable assets       |  |               | 2,402   |               |  |   | 1,942   |  
|Depreciation/amortization |  |               |        |               |  |   |        |  
|Capital expenditures      |  |               |        |               |  |   |        |  
|CORPORATE/OTHER:          |  |               |         |               |  |   |         |  
|Net revenue               |  | $             |        |               |  | $ |        |  
|Operating loss            |  |               | (8,159  | )             |  |   | (7,302  | )
|Identifiable assets       |  |               | 15,101  |               |  |   | 17,637  |  
|Depreciation/amortization |  |               | 1,384   |               |  |   | 1,338   |  
|Capital expenditures      |  |               | 988     |               |  |   | 555     |  
|CONSOLIDATED TOTALS:      |  |               |         |               |  |   |         |  
|Net revenue               |  | $             | 106,975 |               |  | $ | 95,006  |  
|Operating loss            |  |               | (3,050  | )             |  |   | (1,981  | )
|Interest expense, net     |  |               | 200     |               |  |   | 885     |  
|                          |  |               |         |               |  |   |         |  
|Loss before income taxes  |  |               | (3,250  | )             |  |   | (2,866  | )
|Benefit for income taxes  |  |               | (1,300  | )             |  |   | (1,130  | )
|                          |  |               |         |               |  |   |         |  
|Net loss                  |  | $             | (1,950  | )             |  | $ | (1,736  | )
|                          |  |               |         |               |  |   |         |  
|Identifiable assets       |  | $             | 194,533 |               |  | $ | 199,798 |  
|Depreciation/amortization |  |               | 3,802   |               |  |   | 3,372   |  
|Capital expenditures      |  |               | 1,448   |               |  |   | 10,385  |  

8



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##### Table of Contents



8. Acquisitions and Dispositions of Stores

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

In Fiscal 2002, the Company completed the acquisition of thirteen stores
in the Seattle, Washington market from Paper Warehouse, Inc. The conversion of
these locations to the Party City store format was completed and all
stores were opened by the first quarter of Fiscal 2003. Additional goodwill of
$154,000 was recorded in Fiscal 2003 related to the completion of the
conversion of these locations.

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

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

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

|                                   |  |               |         |               |  |   |        |  
|---------------------------------- |  | ------------- | ------- | ------------- |  | - | ------ | -
|                                   |  | Quarter Ended
|                                   |  |              
|                                   |  | September 27, |         | September 28,
|                                   |  | 2003          |         | 2002         
|                                   |  |               |         |              
|Net sales                          |  | $             | 106,975 |               |  | $ | 96,281 |  
|Net loss                           |  | $             | (1,950  | )             |  | $ | (1,395 | )
|Loss per share  basic and diluted |  | $             | (0.12   | )             |  | $ | (0.08  | )

9. Guarantees

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

The Company has unconditionally guaranteed the lease payments of 24 leases
associated with franchise stores and locations sublet. The majority of the
guarantees were given when the Company sold stores in 1999 as part of its
restructuring. The guarantees continue until the leases, which range from 2004
through 2011, expire. The maximum amount of the guarantees may vary, but is
limited to the sum of the total amount due under the lease. As of September 27,
2003, the maximum amount of the guarantees was approximately $19.5 million.

10. Recent Accounting Standards

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

9



---



##### Table of Contents






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

Critical Accounting Policies and Estimates

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

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

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

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

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

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

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

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

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

10



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##### Table of Contents



Results of Operations

|                                                        |                                                |   |               |         |               |   |        |         |  
|------------------------------------------------------- | ---------------------------------------------- | - | ------------- | ------- | ------------- | - | ------ | ------- | -
|                                                        |                                                |   | Quarter Ended
|                                                        |                                                |   | September 27, |         | September 28,
|                                                        |                                                |   | 2003          |         | 2002         
|                                                        |                                                |   |               |         |              
|Statement of Operations Data:                           |                                                |   |               |         |               |   |        |        
|Total revenues                                          |                                                | $ | 106,975       |         |               | $ | 95,006 |        
|                                                        |                                                |   |               |         |               |   |        |        
|Company-owned stores:                                   |                                                |   |               |         |               |   |        |        
|                                                        | Net sales                                      |   | $             | 102,620 |               |   | $      | 91,124  |  
|                                                        | Cost of goods sold and occupancy costs         |   |               | 74,328  |               |   |        | 64,425  |  
|                                                        |                                                |   |               |         |               |   |        |        
|                                                        | Gross profit                                   |   |               | 28,292  |               |   |        | 26,699  |  
|                                                        | Store operating and selling expense            |   |               | 25,879  |               |   |        | 23,698  |  
|                                                        |                                                |   |               |         |               |   |        |        
|                                                        | Company-owned stores profit contribution       |   |               | 2,413   |               |   |        | 3,001   |  
|                                                        | General and administrative expense             |   |               | 8,159   |               |   |        | 7,302   |  
|                                                        |                                                |   |               |         |               |   |        |        
|Retail loss contribution                                |                                                |   | (5,746        | )       |               |   | (4,301 | )      
|                                                        |                                                |   |               |         |               |   |        |        
|Franchise stores:                                       |                                                |   |               |         |               |   |        |        
|                                                        | Royalty fees                                   |   |               | 3,908   |               |   |        | 3,647   |  
|                                                        | Franchise fees                                 |   |               | 447     |               |   |        | 235     |  
|                                                        |                                                |   |               |         |               |   |        |        
|                                                        | Total franchise revenues                       |   |               | 4,355   |               |   |        | 3,882   |  
|                                                        | Total franchise expense                        |   |               | 1,659   |               |   |        | 1,562   |  
|                                                        |                                                |   |               |         |               |   |        |        
|                                                        | Franchise profit contribution                  |   |               | 2,696   |               |   |        | 2,320   |  
|                                                        |                                                |   |               |         |               |   |        |        
|Operating loss                                          |                                                |   | (3,050        | )       |               |   | (1,981 | )      
|Interest expense, net                                   |                                                |   | 200           |         |               |   | 885    |        
|                                                        |                                                |   |               |         |               |   |        |        
|Loss before income taxes                                |                                                |   | (3,250        | )       |               |   | (2,866 | )      
|Benefit for income taxes                                |                                                |   | (1,300        | )       |               |   | (1,130 | )      
|                                                        |                                                |   |               |         |               |   |        |        
|Net loss                                                |                                                | $ | (1,950        | )       |               | $ | (1,736 | )      
|                                                        |                                                |   |               |         |               |   |        |        
|Basic and diluted loss per share (a)                    |                                                | $ | (0.12         | )       |               | $ | (0.11  | )      
|                                                        |                                                |   |               |         |               |   |        |        
|Weighted average shares
outstanding  basic and diluted |                                                |   | 16,599        |         |               |   | 16,396 |        
|                                                        |                                                |   |               |         |               |   |        |        
|Operating Data:                                         |                                                |   |               |         |               |   |        |        
|                                                        | Number of Company-owned stores (end of period) |   |               | 247     |               |   |        | 234     |  
|                                                        |                                                |   |               |         |               |   |        |        
|                                                        | Increase in Company-owned same store sales (b) |   |               | 3.9     | %             |   |        | 3.4     | %
|                                                        |                                                |   |               |         |               |   |        |        
|                                                        | Number of franchise stores (end of period)     |   |               | 253     |               |   |        | 247     |  
|                                                        |                                                |   |               |         |               |   |        |        
|                                                        | Increase in franchise same store sales (b)     |   |               | 3.3     | %             |   |        | 5.9     | %
|                                                        |                                                |   |               |         |               |   |        |        
|                                                        | Average sales per Company-owned store          |   | $             | 429     |               |   | $      | 427     |  
|                                                        |                                                |   |               |         |               |   |        |        
|Other Information:                                      |                                                |   |               |         |               |   |        |        
|                                                        | Depreciation and amortization                  |   | $             | 3,802   |               |   | $      | 3,372   |  
|                                                        |                                                |   |               |         |               |   |        |        
|Cash flow provided by (used in):                        |                                                |   |               |         |               |   |        |        
|                                                        | Investing activities                           |   | $             | (1,448  | )             |   | $      | (10,385 | )
|                                                        |                                                |   |               |         |               |   |        |        
|                                                        | Financing activities                           |   |               | 4,462   |               |   |        | 16,973  |  
|                                                        |                                                |   |               |         |               |   |        |        
|Balance Sheet Data:                                     |                                                |   |               |         |               |   |        |        
|                                                        | Working capital                                |   | $             | 13,807  |               |   | $      | 8,119   |  
|                                                        |                                                |   |               |         |               |   |        |        
|                                                        | Total assets                                   |   |               | 194,533 |               |   |        | 199,798 |  
|                                                        |                                                |   |               |         |               |   |        |        
|                                                        | Borrowings (c)                                 |   |               | 15,171  |               |   |        | 25,219  |  
|                                                        |                                                |   |               |         |               |   |        |        
|                                                        | Stockholders equity                           |   |               | 78,116  |               |   |        | 67,121  |  
|                                                        |                                                |   |               |         |               |   |        |        
|EBITDA:                                                 |                                                |   |               |         |               |   |        |        
|EBITDA(d)                                               |                                                | $ | 752           |         |               | $ | 1,391  |        
|                                                        |                                                |   |               |         |               |   |        |        
|Most directly comparable GAAP measures:                 |                                                |   |               |         |               |   |        |        
|                                                        | Net loss                                       |   | $             | (1,950  | )             |   | $      | (1,736  | )
|                                                        |                                                |   |               |         |               |   |        |        
|                                                        | Cash flows used in:                            |   |               |         |               |   |        |         |  
|                                                        | Operating activities                           |   | $             | (1,783  | )             |   | $      | (4,814  | )
|                                                        |                                                |   |               |         |               |   |        |        



---

|(a) |  | Options, warrants and restricted stock units related to the Management
Stock Purchase Plan were not included in the computation of diluted
earnings per share for the quarters ended September 27, 2003 and September
28, 2002 because to do so would have been antidilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Same store sales for Company-owned and franchise stores are subject to
material differences based on the age of the respective stores for each
group. New stores historically have had higher same store comparable
sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(c) |  | The borrowings at September 27, 2003 and September 28, 2002,
respectively, are net of an unamortized debt discount of $0 and $1.1
million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(d) |  | Our definition of EBITDA is earnings before interest, taxes, depreciation
and amortization. We believe EBITDA provides additional information for
determining our ability to meet future debt service requirements. EBITDA
should not be construed as a substitute for net income or cash flow from
operating activities (all as determined in accordance with generally
accepted accounting principles) for the purpose of analyzing our operating
performance, financial position and cash flows as EBITDA is not defined by
generally accepted accounting principles. We have presented EBITDA,
however, because it is commonly used by certain investors and analysts to
analyze and compare companies on the basis of operating performance and to
determine a companys ability to service and/or incur debt. Our
computation of EBITDA may not be comparable to similar titled
measures of other companies.

11



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##### Table of Contents



A reconciliation of EBITDA to net loss follows for the periods indicated:

|                              |  |               |        |               |  |   |        |  
|----------------------------- |  | ------------- | ------ | ------------- |  | - | ------ | -
|                              |  | Quarter Ended
|                              |  |              
|                              |  | September 27, |        | September 28,
|                              |  | 2003          |        | 2002         
|                              |  |               |        |              
|EBITDA                        |  | $             | 752    |               |  | $ | 1,391  |  
|Depreciation and amortization |  |               | (3,802 | )             |  |   | (3,372 | )
|Interest expense, net         |  |               | (200   | )             |  |   | (885   | )
|Benefit for income taxes      |  |               | 1,300  |               |  |   | 1,130  |  
|                              |  |               |        |               |  |   |        |  
|Net loss                      |  | $             | (1,950 | )             |  | $ | (1,736 | )
|                              |  |               |        |               |  |   |        |  

Because we also consider EBITDA useful as a liquidity measure, we present
the following reconciliation of EBITDA to our cash flow used in operating
activities:

|                                   |                                                                  |                                       |       |               |        |               |       |         |        |  
|---------------------------------- | ---------------------------------------------------------------- | ------------------------------------- | ----- | ------------- | ------ | ------------- | ----- | ------- | ------ | -
|                                   |                                                                  |                                       |       | Quarter Ended
|                                   |                                                                  |                                       |       |              
|                                   |                                                                  |                                       |       | September 27, |        | September 28,
|                                   |                                                                  |                                       |       | 2003          |        | 2002         
|                                   |                                                                  |                                       |       |               |        |              
|EBITDA                             |                                                                  | $                                     | 752   |               |        | $             | 1,391 |        
|Interest expense, net              |                                                                  |                                       | (200  | )             |        |               | (885  | )      
|Benefit for income taxes           |                                                                  |                                       | 1,300 |               |        |               | 1,130 |        
|Non-cash interest                  |                                                                  |                                       | 40    |               |        |               | 250   |        
|Deferred rent                      |                                                                  |                                       | (123  | )             |        |               | 259   |        
|Equity based compensation          |                                                                  |                                       | 124   |               |        |               | 138   |        
|Provision for doubtful accounts    |                                                                  |                                       | (63   | )             |        |               | (301  | )      
|Other                              |                                                                  |                                       | 4     |               |        |               | (312  | )      
|Changes in assets and liabilities: |                                                                  |                                       |       |               |        |               |       |        
|                                   | Accounts payable, accrued expenses
and other current liabilities |                                       |       | 24,128        |        |               |       | 34,905  |       
|                                   | Merchandise inventory                                            |                                       |       | (27,319       | )      |               |       | (38,487 | )     
|                                   | Other long-term liabilities                                      |                                       |       | (107          | )      |               |       | 37      |       
|                                   | Other current assets and other assets                            |                                       |       | (319          | )      |               |       | (2,939  | )     
|                                   |                                                                  |                                       |       |               |        |               |       |        
|                                   |                                                                  | Net cash used in operating activities |       | $             | (1,783 | )             |       | $       | (4,814 | )
|                                   |                                                                  |                                       |       |               |        |               |       |        

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

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

     EBITDA
does not reflect our current expenditures, 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;

     Other companies in our industry may calculate EBITDA differently than we
do, limiting its usefulness as a comparative measure.

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

12



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##### Table of Contents



|            |                |                                             |                                  |  |                    |     |                    |  |     |     |  
|----------- | -------------- | ------------------------------------------- | -------------------------------- |  | ------------------ | --- | ------------------ |  | --- | --- | -
|            |                |                                             |                                  |  | Quarter Ended     
|            |                |                                             |                                  |  |                   
|            |                |                                             |                                  |  | September 27, 2003 |     | September 28, 2002
|            |                |                                             |                                  |  |                    |     |                   
|            |                |                                             |                                  |  | (Unaudited)       
|Store Data: |                |                                             |                                  |  |                    |     |                    | 
|            | Company-owned: |                                             |                                  |  |                    |     |                    |  |    
|            |                | Stores open at beginning of period          |                                  |  | 242                |     |                    |  | 209 |    
|            |                |                                             | Stores opened                    |  |                    | 6   |                    |  |     | 23  |  
|            |                |                                             | Stores closed                    |  |                    | (1  | )                  |  |     |    |  
|            |                |                                             | Stores acquired from franchisees |  |                    |    |                    |  |     | 2   |  
|            |                |                                             |                                  |  |                    |     |                    |  |     |    
|            |                |                                             | Stores open at end of period     |  |                    | 247 |                    |  |     | 234 |  
|            |                |                                             |                                  |  |                    |     |                    | 
|            |                | Average Company-owned stores open in period |                                  |  | 245                |     |                    |  | 224 |    
|            |                |                                             |                                  |  |                    |     |                    | 
|            | Franchise:     |                                             |                                  |  |                    |     |                    |  |    
|            |                | Stores open at beginning of period          |                                  |  | 241                |     |                    |  | 242 |    
|            |                |                                             | Stores opened                    |  |                    | 12  |                    |  |     | 7   |  
|            |                |                                             | Stores sold to Company           |  |                    |    |                    |  |     | (2  | )
|            |                |                                             |                                  |  |                    |     |                    |  |     |    
|            |                |                                             | Stores open at end of period     |  |                    | 253 |                    |  |     | 247 |  
|            |                |                                             |                                  |  |                    |     |                    |  |     |    
|            |                | Average Franchise stores open in period     |                                  |  | 248                |     |                    |  | 244 |    
|            |                |                                             |                                  |  |                    |     |                    | 
|            |                | Total stores chainwide                      |                                  |  | 500                |     |                    |  | 481 |    
|            |                |                                             |                                  |  |                    |     |                    | 

13



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##### Table of Contents



General

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

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

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

General and administrative expenses.General and administrative expenses
include payroll and employee benefits, employment taxes, management information
systems, marketing, insurance, legal and other corporate level expenses.
Corporate level expenses are primarily attributable to our corporate office in
Rockaway, New Jersey.

Franchising.Franchise revenue is composed of the initial franchise fees,
which are recorded as revenue when a franchise store opens, and ongoing royalty
fees, generally 4.0% of the stores net sales.

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

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

Retail.Net sales from company-owned stores increased 12.6% to $102.6
million in the first quarter of Fiscal 2004 from $91.1 million in the same
period last year. The first quarter of Fiscal 2004 results include 242 stores
that were open at the beginning of Fiscal 2004 and six stores opened during the
first quarter. Of the 12.6% increase in sales, 3.9% resulted from a same store
sales increase and the remaining 8.7% relates
to the stores that have not been open for one year. The same store sales
increase was due to a 2.5% increase in the dollar amount of the
average sale and an increase of 1.4% in the number of transactions.

Gross profit, which is net sales minus cost of goods sold and occupancy
costs, increased 6.0% to $28.3 million in first quarter of Fiscal 2004 from
$26.7 million in the same period last year. The increase in the first quarter
of Fiscal 2004 was due to increased sales volume. Gross margin was 27.6% and
29.3% of sales for the first quarter of Fiscal 2004 and Fiscal 2003,
respectively. The decrease in gross margin percent was related primarily to
a high level of promotional activity in July and August, and
the continued emphasis on the clearance of discontinued merchandise
as part of the Companys strategic focus.

Store operating and selling expenses increased 9.2% to $25.9 million for
the first quarter of Fiscal 2004 from $23.7 million in the same period last
year. The increase in store operating expenses is primarily attributable to
increased expenses related to the additional stores opened since the same
period last year. Store operating expenses were 25.2% of sales for the first
quarter of Fiscal 2004 compared with 26.0% of sales in the same period last
year due to a decrease in store opening  expenses and a decrease in
grand-opening advertising.

Pre-opening expenses of $303,000 were recorded in the first quarter of
Fiscal 2004 for six new stores opened during the first quarter of Fiscal 2004
and three stores projected to be opened later in the fiscal year. Pre-opening
expenses of $409,000 were recorded in the first quarter of Fiscal 2003 related
to 11 new stores opened during the quarter and for eight stores projected to be
opened later in the fiscal year.

Company-owned store profit contribution, which is gross profit minus store
operating and selling expenses, was $2.4 million in the first quarter of Fiscal
2004 compared with $3.0 million for the same period last year. Store profit
contribution was 2.4% of sales for the first quarter of Fiscal 2004 compared
with 3.3% of sales in the same period last year because of the
decrease in gross margin described above.

14



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##### Table of Contents



General and administrative (G&A) expenses increased 11.7% to $8.2
million in the first quarter of Fiscal 2004, compared with $7.3 million in the
same period last year. The increase is primarily attributable to an increased
store base.
G&A expenses remained flat at 8.0% of sales for the first quarter of Fiscal
2004 and Fiscal 2003.

Retail loss contribution, which is store profit contribution minus general
and administrative expenses, increased by 33.6% to $5.7 million in first
quarter of Fiscal 2004, compared with $4.3 million in the same period last
year. Retail loss contribution as a percent of sales was 5.6% in first quarter
of Fiscal 2004 compared with 4.7% in the same period last year for the reasons
set forth above.

Franchising. Royalty fees increased 7.2% to $3.9 million in the first
quarter of Fiscal 2004 compared some with $3.6 million in the same period last year
which was due to an overall franchise store sales increase of 6.8% and a
franchise same store sales increase of 3.3%. Franchise fees, recognized
on 12 store openings during the first quarter of Fiscal 2004, increased 90.2%
to $447,000 compared with $235,000 during the same period last year recognized
on seven store openings. Franchise same store sales increased 3.3% in first
quarter of Fiscal 2004 as compared with a 5.9% during the same period last
year.

Expenses related to franchise revenue increased 6.2% to $1.7 million in
first quarter of Fiscal 2004 from $1.6 million in the same period last year. As
a percentage of franchise revenue, franchise expenses were 38.1% and 40.2% for
first quarter of Fiscal 2004 and Fiscal 2003, respectively. Franchise expenses
include direct and indirect expenses. The direct expenses include salaries,
travel and other direct expenses of the franchise operations department in
addition to legal fees, bad debt expense, insurance expense and other
miscellaneous charges. The indirect expenses include pro-rata allocations of
corporate expenses for salaries, including bonuses, occupancy and depreciation
based on time spent on franchise support.

Franchise profit contribution, which is franchise revenue minus expenses
related to franchise revenue, increased 16.2% to $2.7 million in first quarter
of Fiscal 2004 from $2.3 million in the same period last year. The increase in
franchise profit contribution is due to the increase in royalty and franchise
fees offset in part by an increase in franchise expenses.

Interest Expense.Interest expense decreased to $200,000 for the first
quarter of Fiscal 2004 from $885,000 in Fiscal 2003. This decrease in interest
expense is due to lower average borrowings and a lower average borrowing rate
than during the same period last year.

Income Taxes.An income tax benefit of $1.1 million, or 40% of our
pre-tax loss, and $1.1 million, or 39.4% of our pre-tax loss, was recorded in
the first quarter of Fiscal 2004 and Fiscal 2003, respectively.

Net Loss. As a result of the above factors, net loss increased to $2.0
million or $0.12 per basic and diluted share in the first quarter of Fiscal
2004, as compared to a net loss of $1.7 million, or $0.11 per basic and diluted
share in Fiscal 2003. Weighted average basic and diluted shares outstanding
increased to 16.6 million in the first quarter of Fiscal 2004 from 16.4 million
in the same period last year. This increase is mainly due to warrant and stock
option exercises during the past 12 months ending September 27, 2003.

15



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##### Table of Contents



Liquidity and Capital Resources

The Companys cash requirements are primarily for working capital, the
opening of new stores, the improvement and expansion of existing facilities and
the improvement of information systems. Historically, these cash requirements
have been met through cash flow from operations and borrowings under credit
facilities. At September 27, 2003, working capital was $13.8 million compared
to $8.1 million in the prior period.

For the quarter ended September 27, 2003, cash used in operating
activities was $1.8 million, compared to $4.8 million for the same period of
the last fiscal year. The decrease in cash used in operating activities was
primarily attributable to a decrease in other current assets of approximately
$2.7 million. There was also an increase in inventory which was offset by an
increase in accounts payable and other current liabilities related to store
growth. The decrease in average inventory level per store of 6.8%
from the same period last year was
attributed to managements efforts to control inventory and enable the Company
to focus on product assortment, merchandise presentation and identify and
discontinue slower moving SKUs.

Cash used in investment activities for the quarter ended September 27,
2003 was $1.4 million compared to $10.4 million in the same period in the last
fiscal year. The decrease in cash used in investing activities was primarily
attributable to the opening of six Company-owned stores this year as compared
with 23 new store openings and the acquisition of two stores from a franchisee
during the same period last year.

Cash provided by financing activities was $4.5 million for the quarter
ended September 27, 2003 compared with $16.9 million for the same period last
year. The decrease in borrowing is mainly due to the lower number of stores
opened this year compared to last year.

At September 27, 2003, the Company had a $15.2 million balance outstanding
under the Loan Agreement. Under the terms of the Loan Agreement, the Company
may from time to time borrow amounts based on a percentage of its eligible
inventory, up to a maximum of $65 million at any time outstanding. Advances
bear interest, at the Companys option, (i) at the adjusted Eurodollar rate
plus the applicable margin, which was set initially at 1.50% and is currently at
1.25%, per annum or (ii) at the prime rate less the applicable margin, which
was initially set at and is currently 0.25% per annum,
totaling 3.75% at September 27, 2003. The term of the Loan Agreement is three
years, and is secured by a lien on substantially all of the assets of the
Company. At September 27, 20003 and November 3, 2003, the
Company had $15.2 million and no borrowings outstanding under the
Loan Agreement. The Company had $35.2 million available to
be borrowed under the Loan Agreement at November 3, 2003.

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

Contractual Obligations and Commercial Commitments

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

|                              |                               |   |                                       |         |        |   |           |        |           |   |               |        |  |   |        |        |  |   |        |        | 
|----------------------------- | ----------------------------- | - | ------------------------------------- | ------- | ------ | - | --------- | ------ | --------- | - | ------------- | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                              |                               |   | Payments Due By Period (in thousands)
|                              |                               |   |                                      
|                              |                               |   | Total                                 |         | 1 Year |   | 2-3 Years |        | 4-5 Years |   | After 5 years
|                              |                               |   |                                       |         |        |   |           |        |           |   |              
|Contractual Obligations       |                               |   |                                       |         |        |   |           |        |           |   |               |        |  |   |        |        |  |   |        |       
|                              | Operating leases              |   | $                                     | 256,013 |        |   | $         | 34,760 |           |   | $             | 88,891 |  |   | $      | 70,633 |  |   | $      | 61,819 | 
|                              | Advances under Loan Agreement |   |                                       | 15,171  |        |   |           | 15,171 |           |   |               |       |  |   |        |       |  |   |        |       | 
|                              | Severance arrangements        |   |                                       | 149     |        |   |           | 149    |           |   |               |       |  |   |        |       |  |   |        |       | 
|                              | Capital lease obligations     |   |                                       | 21      |        |   |           | 21     |           |   |               |       |  |   |        |       |  |   |        |       | 
|                              |                               |   |                                       |         |        |   |           |        |           |   |               |        |  |   |        |        |  |   |        |       
|Total Contractual Obligations |                               | $ | 271,444                               |         |        | $ | 50,101    |        |           | $ | 88,891        |        |  | $ | 70,633 |        |  | $ | 61,819 |       
|                              |                               |   |                                       |         |        |   |           |        |           |   |               |        |  |   |        |        |  |   |        |       

As of
September 27, 2003 and November 3, 2003, we had a contingent
liability related to severance payments for 11 employees. The total contingent
liability ranges from zero to approximately $1.1 million. As of September 27,
2003 and November 3, 2003, we had a standby letter of credit of $3.1 million
pursuant to the Loan Agreement.

16



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##### Table of Contents



Off-Balance Sheet Arrangements

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

Accounting and Reporting Changes

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

Forward-Looking Statements

This Form 10-Q (including the information incorporated herein by
reference) contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. The statements are made a
number of times throughout the document and may be identified by
forward-looking terminology as estimate, project, expect, believe,
may, will, intend or similar statements or variations of such terms. Such
forward-looking statements are based on many assumptions that are subject to
certain risks and uncertainties, and include among others, the following:
levels of sales, store traffic, acceptance of product offerings, competitive
pressures from other party supplies retailers and other retailers, availability
of qualified personnel, availability of suitable future store locations,
schedules of store expansion plans and other factors beyond our control. As a
result of the foregoing risks and uncertainties, actual results and performance
may differ materially from those projected or suggested herein. Additional
information concerning certain risks and uncertainties that could cause our
actual results to differ materially from those projected or suggested may be
identified from time to time in our Securities and Exchange Commission filings
and our public announcements.




Item 3.Quantitative and Qualitative Disclosures About Market Risk

We, in the normal course of doing business, are exposed to interest rate
change and market risk. As borrowing patterns are cyclical, we are not
dependent on borrowing throughout the year. Therefore, a sudden increase in
interest rates (which under the Loan Agreement is dependent on, at the
Companys option, (i) at the adjusted Eurodollar rate plus the applicable
margin, which was set initially at 1.50% per annum, and is currently at 1.25%
per annum, or (ii) at the prime rate less the applicable margin, which was set
initially at and is 0.25% per annum) may, during peak borrowing, have a
negative impact on short-term results.




Item 4.Controls and Procedures

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

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

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

17



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##### Table of Contents






PART II. OTHER INFORMATION




Item 1.Legal Proceedings

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

In addition to the foregoing, from time to time the Company is involved in
routine litigation incidental to the conduct of the business. The Company is
aware of no other material existing or threatened litigation to which the
Company is or may be a party.




Item 2.Changes in Securities and Use of Proceeds



| |  | None
| |  | ----




Item 3.Defaults Upon Senior Securities



| |  | None
| |  | ----




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



| |  | None
| |  | ----




Item 5.Other Information



| |  | None
| |  | ----




Item 6.Exhibits and Reports on Form 8-K



| | (a) |  | The exhibits required to be filed as part of this report on Form 10-Q
are listed in the attached Exhibit Index.                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Reports on Form 8-K:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |     |  | The Company furnished a Current Report on Form 8-K dated August 29, 2003 in
reference to a press release dated August 29, 2003 reporting certain
information regarding the Companys search for a new Chief Executive
Officer (CEO) after Acting CEO Nancy Pedot announced she did not wish to
be a candidate for the CEO position on a permanent basis. In addition,
Franklin R. Johnson had been named to the Companys Board of Directors to
fill a vacancy created by the resignation of director Michael Gatto.
|
| |     |  | The Company furnished a Current Report on Form 8-K dated August 21, 2003 in
reference to a press release dated August 21, 2003 reporting certain
information regarding the Companys sales and earnings results for the
fourth quarter and fiscal year ended June 28, 2003.                                                                                                                                                                                                                                           
|
| |     |  | The Company furnished a Current Report on Form 8-K dated July 15, 2003 in
reference to a press release dated July 10, 2003 reporting certain
information regarding the Companys sales results for the fourth quarter
ended June 28, 2003.                                                                                                                                                                                                                                                                            

18



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##### Table of Contents






EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                 
|3.1         |  | Certificate of Incorporation of the Company, incorporated by
reference from the Companys Registration Statement as
amended on Form S-1 Number 333-00350 as filed with the
Commission on January 18, 1996 (the S-1).                                                          
|            |  |                                                                                                                                                                                                                                                                                 
|3.2         |  | Bylaws of the Company as amended.                                                                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                 
|4.1         |  | Specimen stock certificate evidencing the Common Stock,
incorporated by reference from the S-1.                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                 
|4.2         |  | Form of Amended and Restated Warrant, incorporated by
reference from the Companys Current Report on Form 8-K as
filed with the Commission on January 19, 2000 (the January
2000 8-K).                                                                                        
|            |  |                                                                                                                                                                                                                                                                                 
|4.3         |  | Form of Securities Purchase Agreement, dated as of August
16, 1999, by and between the Company and each of the
Investors, incorporated by reference from the Companys
Current Report on Form 8-K as filed with the Commission on
August 25, 1999 (the August 1999 8-K).      
|            |  |                                                                                                                                                                                                                                                                                 
|4.4         |  | First Amendment to Securities Purchase Agreement, dated as
of January 14, 2000, by and between the Company and each of
the Investors, incorporated by reference from the January
2000 8-K.                                                                                      
|            |  |                                                                                                                                                                                                                                                                                 
|4.5         |  | Second Amendment to Securities Purchase Agreement, dated as
of April 1, 2001, by and among the Company and each of the
Investors, incorporated by reference from the Companys
Quarterly Report on Form 10-Q as filed with the Commission
on May 15, 2001 (the May 2001 10-Q).
|            |  |                                                                                                                                                                                                                                                                                 
|10.1        |  | Form of Unit Franchise Agreement entered into by the Company
and franchisees, incorporated by reference from the S-1.                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                 
|10.2        |  | Option Agreement, dated as of June 8, 1999, between Steven
Mandell and Jack Futterman, incorporated by reference from
Amendment No. 1 to Schedule 13D as filed by Jack Futterman
with the Commission on June 17, 1999 (Futtermans 13D).                                      
|            |  |                                                                                                                                                                                                                                                                                 
|10.3        |  | Stock Pledge Agreement, dated as of June 8, 1999, between
Steven Mandell and Jack Futterman, incorporated by reference
from Futtermans 13D.                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                 
|10.4        |  | Amended and Restated Investor Rights Agreement, dated as of
August 18, 2003, by and among the Company and the Investors,
incorporated by reference from the Companys Annual Report on
Form 10-K as filed with the Commission on September 26, 2003
(the September 2003 10-K).
|            |  |                                                                                                                                                                                                                                                                                 
|10.5        |  | Description of oral consulting agreement between the Company
and Ralph Dillon, incorporated by reference from the
Companys Quarterly Report on Form 10-Q as filed with the
Commission on February 13, 2001 (the February 2001 10-Q).                                         
|            |  |                                                                                                                                                                                                                                                                                 
|10.6        |  | General Release and Severance Agreement of James Shea, dated
as of May 28, 2003, by and between the Company and James
Shea, incorporated by reference from the September 2003 10-K.                                                                                             
|            |  |                                                                                                                                                                                                                                                                                 
|10.7        |  | Separation Agreement of Andrew Bailen, dated as of July 14,
2003, by and between the Company and Andrew Bailen,
incorporated by reference from the September 2003 10-K.                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                 
|10.8        |  | Separation Agreement of Thomas Larson, dated as of August
26, 2002, by and between the Company and Thomas Larson,
incorporated by reference from the September 2003 10-K.                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                 
|10.9        |  | Employment Agreement of Steven Skiba, dated as of November
29, 2002, by and between the Company and Steven Skiba,
incorporated by reference from the September 2003 10-K.                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                 
|10.10       |  | Employment Agreement of Linda Siluk, dated as of November 7,
2003, by and between the Company and Linda M. Siluk.                                                                                                                                                               
|           
|10.11       |  | Employment Agreement of Warren Jeffrey, dated as of November 7,
2003, by and between the Company and Warren Jeffery.                                                                                                                                                            
|           
|10.12       |  | Management Stock Purchase Plan of the Company, incorporated                                                                                                                                                                                                                     

19



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|            |  | by reference from the Registration of Form S-8 as filed with
the Commission on July 23, 2001.                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.13       |  | Employee Stock Purchase Plan of the Company, incorporated by
reference from the Companys Definitive Proxy Statement for
the 2001 Annual Meeting of Stockholders, included within
Form 14-A as filed with the Commission on October 18, 2001.                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.14       |  | Amended and Restated 1994 Stock Option Plan, incorporated by
reference from the Registration of Form S-8 as filed with
the Commission on January 9, 1997.                                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.15       |  | 1999 Stock Incentive Plan (Amended and Restated as of
October 25, 2000), incorporated by reference from the
February 2001 10-Q.                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.16       |  | Loan and Security Agreement (the Loan Agreement), dated
January 9, 2003, by and between the Company and Wells Fargo
Retail Finance, LLC (WFRF), as the arranger, collateral
agent and administrative agent, and Fleet Retail Finance,
Inc., as the documentation agent, incorporated by reference
from the Companys Current Report on Form 8-K as filed with
the Commission on January 10, 2003.
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.17       |  | 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.                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.18       |  | 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.                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.19       |  | 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.                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|10.20       |  | 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.                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|21.1        |  | Subsidiaries. The wholly owned subsidiary of the Company is
Party City Michigan, Inc. incorporated on October 23, 1997,
in the State of Delaware. This subsidiary does business
under the name Party City Michigan, Inc.                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|23.1        |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|31.1        |  | Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|31.2        |  | Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|32.1        |  | Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|32.2        |  | Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                   

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##### Table of Contents






SIGNATURES

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

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

Date: November 12, 2003

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