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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-Q

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



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|                                                 |  |                               
|------------------------------------------------ |  | ------------------------------
|For The Quarterly Period Ended
December 28, 2002 |  | Commission File Number
0-27826



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PARTY CITY CORPORATION

(Exact name of registrant as specified in its charter)


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

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



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

Yes x No: 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 February 5, 2003, there were outstanding 16,831,714 shares of
Common Stock, $.01 par value.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART 1. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME         
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II OTHER INFORMATION    
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities 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                   
|CERTIFICATION                



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY

INDEX

|                              |  |                                                                                       |  |                                                                                                                                         |       |          |       | 
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------- | ----- | -------- | ----- | 
|                              |  |                                                                                       |  |                                                                                                                                         |       | Page No.
|                              |  |                                                                                       |  |                                                                                                                                         |       |         
|Part I. Financial Information |  |                                                                                       |  |                                                                                                                                        
|Item 1.                       |  | Financial Statements                                                                  |  |                                                                                                                                         |       |         
|                              |  |                                                                                       |  | Condensed Consolidated Balance Sheets  December 28, 2002 (Unaudited),
December 29, 2001 (Unaudited) and June 29, 2002                  |       |          | 3     | 
|                              |  |                                                                                       |  | Condensed Consolidated Statements of Income (Unaudited)  For the
quarters and six months ended December 28, 2002 and December 29, 2001 |       |          | 4     | 
|                              |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows (Unaudited)  For the
six months ended December 28, 2002 and December 29, 2001          |       |          | 5     | 
|                              |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements                                                                                    |       |          | 6-12  | 
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations |  |                                                                                                                                         | 13-21 |         
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |                                                                                                                                         | 21    |         
|Item 4.                       |  | Controls and Procedures                                                               |  |                                                                                                                                         | 21-22 |         
|Part II. Other Information    |  |                                                                                       |  |                                                                                                                                        
|Item 1.                       |  | Legal Proceedings                                                                     |  |                                                                                                                                         | 23    |         
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                             |  |                                                                                                                                         | 23    |         
|Item 3.                       |  | Defaults upon Senior Securities                                                       |  |                                                                                                                                         | 23    |         
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                                                                                         | 24    |         
|Item 5.                       |  | Other Information                                                                     |  |                                                                                                                                         | 24    |         
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                                         | 24    |         
|                              |  |                                                                                       |  | Exhibit Index                                                                                                                           |       |          | 25-26 | 
|                              |  |                                                                                       |  | Signatures                                                                                                                              |       |          | 27    | 
|                              |  |                                                                                       |  | Certifications                                                                                                                          |       |          | 28-29 | 

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##### Table of Contents






PART 1. FINANCIAL INFORMATION




Item 1.Financial Statements




PARTY CITY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                                    |                                                                                                                               |                            |                                            |        |              |         |              |        |          |         |        |        |        |         | 
|--------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------ | ------------ | ------- | ------------ | ------ | -------- | ------- | ------ | ------ | ------ | ------- | 
|                                                    |                                                                                                                               |                            |                                            |        | December 28, |         | December 29, |        | June 29,
|                                                    |                                                                                                                               |                            |                                            |        | 2002         |         | 2001         |        | 2002    
|                                                    |                                                                                                                               |                            |                                            |        |              |         |              |        |         
|                                                    |                                                                                                                               |                            |                                            |        | (Unaudited)  |         | (Unaudited)  |        | (1)     
|ASSETS                                              |                                                                                                                               |                            |                                            |        |              |         |              |        |          |         |        |       
|Current assets:                                     |                                                                                                                               |                            |                                            |        |              |         |              |        |          |         |        |       
|                                                    | Cash and cash equivalents                                                                                                     |                            | $                                          | 3,273  |              |         | $            | 21,530 |          |         | $      | 3,467  |       
|                                                    | Merchandise inventory                                                                                                         |                            |                                            | 69,189 |              |         |              | 55,574 |          |         |        | 55,867 |       
|                                                    | Deferred income taxes                                                                                                         |                            |                                            | 6,733  |              |         |              | 8,105  |          |         |        | 5,827  |       
|                                                    | Other current assets, net                                                                                                     |                            |                                            | 19,606 |              |         |              | 16,786 |          |         |        | 11,789 |       
|                                                    |                                                                                                                               |                            |                                            |        |              |         |              |        |          |         |        |       
|                                                    |                                                                                                                               | Total current assets       |                                            |        | 98,801       |         |              |        | 101,995  |         |        |        | 76,950 |        
|Property and equipment, net                         |                                                                                                                               |                            | 55,878                                     |        |              |         | 45,524       |        |          |         | 49,356 |       
|Goodwill                                            |                                                                                                                               |                            | 19,172                                     |        |              |         | 14,206       |        |          |         | 18,016 |       
|Other assets                                        |                                                                                                                               |                            | 4,087                                      |        |              |         | 6,351        |        |          |         | 4,732  |       
|                                                    |                                                                                                                               |                            |                                            |        |              |         |              |        |          |         |        |       
|                                                    |                                                                                                                               |                            | Total assets                               |        | $            | 177,938 |              |        | $        | 168,076 |        |        | $      | 149,054 | 
|                                                    |                                                                                                                               |                            |                                            |        |              |         |              |        |          |         |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY                |                                                                                                                               |                            |                                            |        |              |         |              |        |          |         |        |       
|Current liabilities:                                |                                                                                                                               |                            |                                            |        |              |         |              |        |          |         |        |       
|                                                    | Accounts payable                                                                                                              |                            | $                                          | 51,544 |              |         | $            | 40,197 |          |         | $      | 35,499 |       
|                                                    | Accrued expenses and other current liabilities                                                                                |                            |                                            | 28,656 |              |         |              | 34,232 |          |         |        | 26,744 |       
|                                                    | Advances under Loan Agreement                                                                                                 |                            |                                            | 4,114  |              |         |              |       |          |         |        |       |       
|                                                    | Senior Notes, current portion                                                                                                 |                            |                                            |       |              |         |              | 5,058  |          |         |        |       |       
|                                                    |                                                                                                                               |                            |                                            |        |              |         |              |        |          |         |        |       
|                                                    |                                                                                                                               | Total current liabilities  |                                            |        | 84,314       |         |              |        | 79,487   |         |        |        | 62,243 |        
|Deferred rent and other long-term liabilities       |                                                                                                                               |                            | 10,683                                     |        |              |         | 9,607        |        |          |         | 10,297 |       
|Senior Notes                                        |                                                                                                                               |                            |                                           |        |              |         | 16,269       |        |          |         | 8,915  |       
|Commitments
and contingencies
Stockholders equity: |                                                                                                                               |                            |                                            |        |              |         |              |        |          |         |        |       
|                                                    | Common stock $0.01 par value, authorized 25,000,000 shares;
issued 17,113,873, 13,257,267 and 16,239,081 shares,
respectively |                            |                                            | 171    |              |         |              | 132    |          |         |        | 162    |       
|                                                    | Additional paid-in capital                                                                                                    |                            |                                            | 41,366 |              |         |              | 38,530 |          |         |        | 39,347 |       
|                                                    | Retained earnings                                                                                                             |                            |                                            | 43,233 |              |         |              | 25,880 |          |         |        | 29,919 |       
|                                                    | Treasury stock, at cost (284,000 shares)                                                                                      |                            |                                            | (1,829 | )            |         |              | (1,829 | )        |         |        | (1,829 | )     
|                                                    |                                                                                                                               |                            |                                            |        |              |         |              |        |          |         |        |       
|                                                    |                                                                                                                               | Total stockholders equity |                                            |        | 82,941       |         |              |        | 62,713   |         |        |        | 67,599 |        
|                                                    |                                                                                                                               |                            |                                            |        |              |         |              |        |          |         |        |       
|                                                    |                                                                                                                               |                            | Total liabilities and stockholders equity |        | $            | 177,938 |              |        | $        | 168,076 |        |        | $      | 149,054 | 
|                                                    |                                                                                                                               |                            |                                            |        |              |         |              |        |          |         |        |       



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|(1) |  | The June 29, 2002 consolidated balance sheet was derived from the
Companys audited consolidated financial statements.
|--- |  | ----------------------------------------------------------------------------------------------------------------------

See accompanying notes to condensed consolidated financial statements.

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PARTY CITY CORPORATION AND SUBSIDIARY

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

|                           |                                                    |                |                                               |         |         |               |        |                  |         |              |        |              |         |         |        |         |         |         |  | 
|-------------------------- | -------------------------------------------------- | -------------- | --------------------------------------------- | ------- | ------- | ------------- | ------ | ---------------- | ------- | ------------ | ------ | ------------ | ------- | ------- | ------ | ------- | ------- | ------- |  | 
|                           |                                                    |                |                                               |         |         | Quarter ended |        | Six months ended
|                           |                                                    |                |                                               |         |         |               |        |                 
|                           |                                                    |                |                                               |         |         | December 28,  |        | December 29,     |         | December 28, |        | December 29,
|                           |                                                    |                |                                               |         |         | 2002          |        | 2001             |         | 2002         |        | 2001        
|                           |                                                    |                |                                               |         |         |               |        |                  |         |              |        |             
|Revenues:                  |                                                    |                |                                               |         |         |               |        |                  |         |              |        |              |         |         |        |        
|                           | Net sales                                          |                | $                                             | 161,648 |         |               | $      | 141,979          |         |              | $      | 252,772      |         |         | $      | 222,774 |        
|                           | Royalty fees                                       |                |                                               | 6,503   |         |               |        | 6,133            |         |              |        | 10,150       |         |         |        | 9,379   |        
|                           | Franchise fees                                     |                |                                               | 40      |         |               |        |                 |         |              |        | 275          |         |         |        | 343     |        
|                           |                                                    |                |                                               |         |         |               |        |                  |         |              |        |              |         |         |        |         |        
|                           |                                                    | Total revenues |                                               |         | 168,191 |               |        |                  | 148,112 |              |        |              | 263,197 |         |        |         | 232,496 |        
|Expenses:                  |                                                    |                |                                               |         |         |               |        |                  |         |              |        |              |         |         |        |        
|                           | Cost of goods sold and occupancy costs             |                |                                               | 95,974  |         |               |        | 83,928           |         |              |        | 160,399      |         |         |        | 141,595 |        
|                           | Company-owned stores operating and selling expense |                |                                               | 34,288  |         |               |        | 29,465           |         |              |        | 57,986       |         |         |        | 49,693  |        
|                           | Franchise expense                                  |                |                                               | 1,646   |         |               |        | 1,667            |         |              |        | 3,208        |         |         |        | 3,214   |        
|                           | General and administrative expense                 |                |                                               | 8,403   |         |               |        | 6,538            |         |              |        | 15,705       |         |         |        | 12,702  |        
|                           |                                                    |                |                                               |         |         |               |        |                  |         |              |        |              |         |         |        |         |        
|                           |                                                    |                | Total expenses                                |         |         | 140,311       |        |                  |         | 121,598      |        |              |         | 237,298 |        |         |         | 207,204 | 
|                           |                                                    |                |                                               |         |         |               |        |                  |         |              |        |              |         |         |        |         |        
|Operating income           |                                                    |                | 27,880                                        |         |         |               | 26,514 |                  |         |              | 25,899 |              |         |         | 25,292 |        
|                           | Interest expense, net                              |                |                                               | 2,824   |         |               |        | 1,654            |         |              |        | 3,709        |         |         |        | 3,409   |        
|                           |                                                    |                |                                               |         |         |               |        |                  |         |              |        |              |         |         |        |         |        
|Income before income taxes |                                                    |                | 25,056                                        |         |         |               | 24,860 |                  |         |              | 22,190 |              |         |         | 21,883 |        
|                           | Provision for income taxes                         |                |                                               | 10,006  |         |               |        | 9,921            |         |              |        | 8,876        |         |         |        | 8,730   |        
|                           |                                                    |                |                                               |         |         |               |        |                  |         |              |        |              |         |         |        |         |        
|Net income                 |                                                    | $              | 15,050                                        |         |         | $             | 14,939 |                  |         | $            | 13,314 |              |         | $       | 13,153 |        
|                           |                                                    |                |                                               |         |         |               |        |                  |         |              |        |              |         |         |        |         |        
|                           | Basic earnings per share                           |                | $                                             | 0.90    |         |               | $      | 1.15             |         |              | $      | 0.80         |         |         | $      | 1.02    |        
|                           |                                                    |                |                                               |         |         |               |        |                  |         |              |        |              |         |         |        |         |        
|                           |                                                    |                | Weighted average shares outstanding  basic   |         |         | 16,803        |        |                  |         | 12,991       |        |              |         | 16,600  |        |         |         | 12,872  | 
|                           |                                                    |                |                                               |         |         |               |        |                  |         |              |        |              |         |         |        |         |        
|                           | Diluted earnings per share                         |                | $                                             | 0.76    |         |               | $      | 0.79             |         |              | $      | 0.67         |         |         | $      | 0.70    |        
|                           |                                                    |                |                                               |         |         |               |        |                  |         |              |        |              |         |         |        |         |        
|                           |                                                    |                | Weighted average shares outstanding  diluted |         |         | 19,896        |        |                  |         | 18,798       |        |              |         | 19,904  |        |         |         | 18,700  | 
|                           |                                                    |                |                                               |         |         |               |        |                  |         |              |        |              |         |         |        |         |        

See accompanying notes to condensed consolidated financial statements.

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PARTY CITY CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                                                  |                                                      |                                                                  |                                           |         |                  |        |              |        |        |        | 
|--------------------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------------------- | ----------------------------------------- | ------- | ---------------- | ------ | ------------ | ------ | ------ | ------ | 
|                                                                                  |                                                      |                                                                  |                                           |         | Six months ended
|                                                                                  |                                                      |                                                                  |                                           |         |                 
|                                                                                  |                                                      |                                                                  |                                           |         | December 28,     |        | December 29,
|                                                                                  |                                                      |                                                                  |                                           |         | 2002             |        | 2001        
|                                                                                  |                                                      |                                                                  |                                           |         |                  |        |             
|                                                                                  |                                                      |                                                                  |                                           |         | (Unaudited)     
|Cash flow from operating activities:                                              |                                                      |                                                                  |                                           |         |                  |        |              |       
|Net income                                                                        |                                                      | $                                                                | 13,314                                    |         |                  | $      | 13,153       |       
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                      |                                                                  |                                           |         |                  |        |              |       
|                                                                                  | Depreciation and amortization                        |                                                                  |                                           | 7,133   |                  |        |              | 5,871  |       
|                                                                                  | Deferred taxes                                       |                                                                  |                                           | (441    | )                |        |              | (2,941 | )     
|                                                                                  | Non-cash interest                                    |                                                                  |                                           | 1,554   |                  |        |              | 843    |       
|                                                                                  | Deferred rent and other long-term liabilities        |                                                                  |                                           | 387     |                  |        |              | 907    |       
|                                                                                  | Equity based compensation                            |                                                                  |                                           | 752     |                  |        |              | 221    |       
|                                                                                  | Provision for doubtful accounts                      |                                                                  |                                           | (602    | )                |        |              | 269    |       
|                                                                                  | Changes in assets and liabilities:                   |                                                                  |                                           |         |                  |        |              |        |       
|                                                                                  |                                                      | Merchandise inventory                                            |                                           |         | (12,915          | )      |              |        | (7,243 | )     
|                                                                                  |                                                      | Other current assets and other assets                            |                                           |         | (7,267           | )      |              |        | (5,445 | )     
|                                                                                  |                                                      | Accounts payable, accrued expenses and other current liabilities |                                           |         | 17,956           |        |              |        | 20,250 |       
|                                                                                  |                                                      |                                                                  |                                           |         |                  |        |              |       
|                                                                                  |                                                      |                                                                  | Net cash provided by operating activities |         |                  | 19,871 |              |        |        | 25,885 | 
|Cash flow from investment activities:                                             |                                                      |                                                                  |                                           |         |                  |        |              |       
|                                                                                  | Purchases of property and equipment                  |                                                                  |                                           | (13,444 | )                |        |              | (4,950 | )     
|                                                                                  | Stores acquired                                      |                                                                  |                                           | (1,758  | )                |        |              | (954   | )     
|                                                                                  | Disposals of property and equipment                  |                                                                  |                                           | 44      |                  |        |              | 10     |       
|                                                                                  |                                                      |                                                                  |                                           |         |                  |        |              |       
|                                                                                  |                                                      | Net cash used in investment activities                           |                                           |         | (15,158          | )      |              |        | (5,894 | )     
|Cash flow from financing activities:                                              |                                                      |                                                                  |                                           |         |                  |        |              |       
|                                                                                  | Payments of Senior Notes                             |                                                                  |                                           | (10,207 | )                |        |              | (6,552 | )     
|                                                                                  | Net proceeds from Loan Agreement                     |                                                                  |                                           | 4,114   |                  |        |              |       |       
|                                                                                  | Proceeds from exercise of stock options and warrants |                                                                  |                                           | 1,276   |                  |        |              | 78     |       
|                                                                                  | Payment of financing costs                           |                                                                  |                                           | (90     | )                |        |              |       |       
|                                                                                  | Purchase of treasury stock                           |                                                                  |                                           |        |                  |        |              | (1,829 | )     
|                                                                                  |                                                      |                                                                  |                                           |         |                  |        |              |       
|                                                                                  |                                                      | Net cash used in financing activities                            |                                           |         | (4,907           | )      |              |        | (8,303 | )     
|                                                                                  |                                                      |                                                                  |                                           |         |                  |        |              |       
|Net (decrease) increase in cash and cash equivalents                              |                                                      |                                                                  | (194                                      | )       |                  |        | 11,688       |       
|Cash and cash equivalents, beginning of period                                    |                                                      |                                                                  | 3,467                                     |         |                  |        | 9,842        |       
|                                                                                  |                                                      |                                                                  |                                           |         |                  |        |              |       
|Cash and cash equivalents, end of period                                          |                                                      | $                                                                | 3,273                                     |         |                  | $      | 21,530       |       
|                                                                                  |                                                      |                                                                  |                                           |         |                  |        |              |       
|Supplemental disclosure of cash flow information:                                 |                                                      |                                                                  |                                           |         |                  |        |              |       
|                                                                                  | Income taxes paid                                    |                                                                  | $                                         | 2,414   |                  |        | $            | 433    |       
|                                                                                  | Interest paid                                        |                                                                  | $                                         | 2,651   |                  |        | $            | 2,926  |       
|Supplemental disclosure of non-cash financing activity:                           |                                                      |                                                                  |                                           |         |                  |        |              |       
|                                                                                  | Issuance of shares under management stock
plan       |                                                                  | $                                         | 282     |                  |        | $            |       |       
|                                                                                  | Issuance of
warrants                                 |                                                                  | $                                         | 245     |                  |        | $            |       |       

See accompanying notes to condensed consolidated financial statements.

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PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION

The condensed consolidated financial statements, except for the June 29,
2002 consolidated balance sheet, are unaudited. In the opinion of management,
the accompanying condensed consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position of the Company as of December 28, 2002 and
December 29, 2001 and the results of operations for the quarter and six months
ended December 28, 2002 and December 29, 2001 and cash flows for the six months
ended December 28, 2002 and December 29, 2001. 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 fiscal year ended June 29, 2002, 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 27, 2002. All significant intercompany
accounts and transactions have been eliminated. The June 29, 2002 consolidated
balance sheet amounts are derived from the Companys audited consolidated
financial statements.

2.   RECENT ACCOUNTING STANDARDS

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 146, Accounting for
Costs Associated with Exit or Disposal Activities (SFAS
No. 146), replacing Emerging Issues
Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred instead of at the date an entity commits to an exit plan.
This statement also established that fair value is the objective for the
initial measurement of the liability. SFAS No. 146 will be effective for exit
or disposal activities that are initiated after December 31, 2002. The Company
does not expect that adopting this statement will have a material impact on its
financial position or the results of operations.

In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation (SFAS
No. 148). SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. SFAS 148 is effective for fiscal years ending
after December 15, 2002. The Company has not yet determined the effect of the adoption of
this statement on the Companys financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The disclosure requirements are
effective for the Companys current quarter (see Note 9). The Company does not
expect adopting the initial recognition and initial measurement
provision of this interpretation will have a material impact on its financial
position or the results of operations.

In November 2002, the EITF reached a consensus on issues raised in EITF
02-16, Accounting by a Reseller for Cash Consideration Received from a
Vendor (EITF 02-16) This EITF issue addresses the timing of recognition for rebates that
are earned by resellers based on specified levels of purchases or over
specified periods of time. This guidance, related to

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PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

timing of recognition, is to be applied prospectively to new rebate
arrangements entered into in fiscal periods beginning after January 1, 2003.
This EITF issue also addresses the classification of cash consideration
received from vendors in a resellers statement of operations. The guidance
related to income statement classification is to be applied in annual and
interim financial statements for periods beginning after January 1, 2003. The
Company is in the process of reviewing the effect, if any, that the application
of EITF 02-16 will have on its financial position and results of operations.

3.   EARNINGS PER SHARE

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

|                                                        |  |               |        |                  |  |              |        |              |  |   |        |  |  |   |        | 
|------------------------------------------------------- |  | ------------- | ------ | ---------------- |  | ------------ | ------ | ------------ |  | - | ------ |  |  | - | ------ | 
|                                                        |  | Quarter ended |        | Six months ended
|                                                        |  |               |        |                 
|                                                        |  | December 28,  |        | December 29,     |  | December 28, |        | December 29,
|                                                        |  | 2002          |        | 2001             |  | 2002         |        | 2001        
|                                                        |  |               |        |                  |  |              |        |             
|                                                        |  | (Unaudited)   |        | (Unaudited)     
|Net income                                              |  | $             | 15,050 |                  |  | $            | 14,939 |              |  | $ | 13,314 |  |  | $ | 13,153 | 
|Earnings per share  basic                              |  | $             | 0.90   |                  |  | $            | 1.15   |              |  | $ | 0.80   |  |  | $ | 1.02   | 
|Earnings per share  diluted                            |  | $             | 0.76   |                  |  | $            | 0.79   |              |  | $ | 0.67   |  |  | $ | 0.70   | 
|Average common shares outstanding                       |  |               | 16,803 |                  |  |              | 12,991 |              |  |   | 16,600 |  |  |   | 12,872 | 
|Dilutive effect of warrants                             |  |               | 2,284  |                  |  |              | 5,300  |              |  |   | 2,424  |  |  |   | 5,326  | 
|Dilutive effect of stock options (a) (b)                |  |               | 724    |                  |  |              | 420    |              |  |   | 789    |  |  |   | 437    | 
|Restricted stock units (c) (d)                          |  |               | 85     |                  |  |              | 87     |              |  |   | 91     |  |  |   | 65     | 
|                                                        |  |               |        |                  |  |              |        |              |  |   |        |  |  |   |        | 
|Average common and common equivalent shares outstanding |  |               | 19,896 |                  |  |              | 18,798 |              |  |   | 19,904 |  |  |   | 18,700 | 
|                                                        |  |               |        |                  |  |              |        |              |  |   |        |  |  |   |        | 



---

|(a) |  | Options to purchase 701,069 and 534,358 common shares at prices ranging
from $13.83 to $32.50 per share were outstanding but were not included in
the computation of dilutive earnings per share for the quarter and
six-months ended December 28, 2002, respectively, because to do so would
have been anti-dilutive for the periods presented.        
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Options to purchase 779,280 and 711,567 shares of common stock at prices
ranging from $7.00 to $31.13 per share were outstanding but were not
included in the computation of dilutive earnings per share for the quarter
and six-months ended December 29, 2001, respectively, because to do so
would have been anti-dilutive for the periods presented.
|   
|(c) |  | Restricted shares of 84,768 and 91,083 shares of common stock were
outstanding for the quarter and six-months ended December 28, 2002,
respectively, related to the management stock purchase plan.                                                                                                                                                     
|   
|(d) |  | Restricted shares of 86,574 and 64,943 shares of common stock were
outstanding for the quarter and six-months ended December 29, 2001,
respectively, related to the management stock purchase plan.                                                                                                                                                     

4. FINANCING AGREEMENTS

As of December 28, 2002, the Company had $4.1 million outstanding under
the Loan and Security Agreement dated January 14, 2000 (the Loan Agreement),
with Congress Financial Corporation at a weighted average interest
rate of 5.3%. Pursuant to the Loan Agreement, the
Company also had a standby letter of credit of $1.4 million at December 28,
2002. Under the terms of the Loan Agreement, the Company from time to time was
allowed to borrow, based on a percentage of eligible inventory, up to a maximum
of $40 million at any time outstanding. Interest on advances was charged, at
the Companys option, (i) at the adjusted Eurodollar rate plus the applicable
margin, which was 2.25% per annum at December 28, 2002, or (ii) at the rate of
3/4% per annum above the prime rate, totaling 5.0% at December 28, 2002. The
term of the Loan Agreement was three years with renewals at the Companys
discretion thereafter and was secured by a lien on substantially all of the
Companys assets.

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PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

In January 2003, the Company replaced its existing Loan Agreement with a
new $65 million revolving credit facility (New 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 New 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% per annum or (ii) at the prime rate plus the applicable
margin, which was initially set at (0.25)% per annum. The term of the New Loan
Agreement is through April 30, 2006 and is secured by a lien on substantially
all of the Companys assets. At February 5, 2003, the Company had $12.1
million in borrowings outstanding under the new facility.

During the months of November and December 2002, the Company repaid the
remainder of the $9.1 million, net of $1.1 million discount, Series D 14.0%
Notes due 2004. The Notes were secured by a junior lien on substantially all
of the Companys assets. The repurchase resulted in a payment of $2.8
million, including interest and prepayment incentives, and resulted in a
one-time after-tax charge of $1.3 million, or $0.07 per diluted share.

5.   STOCKHOLDERS EQUITY

Stock Repurchase

On September 19, 2001, the Board of Directors authorized the Company to
repurchase up to $15 million of the Companys outstanding common stock. The
stock repurchases are made at the discretion of management. As of December 28,
2002, the Company had repurchased 284,000 shares for an aggregate amount of
$1.8 million, or 12.2% of the total amount authorized to be repurchased. No
stock repurchases were made during the six months ended December 28, 2002 or
subsequent thereto.

Warrants

There were no warrants exercised in the second quarter. In the six months
ended December 28, 2002, there were 688,000 warrants exercised. This included
an exercise of 458,667 warrants for which cash proceeds of $490,774 were
received by the Company. In addition, there was a cashless exercise of
warrants, in which the warrant holders received in the aggregate 213,792 shares
of common stock. The remaining 15,541 shares with a market value of $245,386
were surrendered in connection with this exercise.

6.   LEGAL PROCEEDING

Securities Litigation

The Company was named as a defendant in twelve class action complaints in
the United States District Court for the District of New Jersey. The former
Chief Executive Officer and a former Chief Financial Officer and Executive Vice
President of Operations were also named as defendants in these complaints. The
complaints were filed as class actions on behalf of persons who purchased or
acquired Party City common stock during various time periods between February
26, 1998 and March 18, 1999 (the Class Period). In October 1999, plaintiffs
filed an amended class action complaint and, in February 2000, plaintiffs filed
a second amended complaint, which alleged, among other things, violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5 promulgated thereunder, and sought unspecified damages. The
plaintiffs alleged that defendants issued a series of false and misleading
statements and failed to disclose material facts concerning, among other
things, Party Citys financial condition, adequacy of internal controls and
compliance with certain loan covenants during the Class period. The plaintiffs
further alleged that because of the issuance of a series of false and
misleading statements and/or the failure to disclose material facts, the price
of Party Citys common stock was artificially inflated.

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PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

In early 2000, defendants moved to dismiss the second amended complaint on
the ground that it failed to state a course of action. On May 29, 2001, the
District Court issued an Opinion and Order dismissing the Complaint against all
defendants with prejudice. On June 27, 2001, plaintiffs filed a Notice of
Appeal to the United States Court of Appeals for the Third Circuit. In April
2002, the parties reached an agreement in principle to settle the action, and
the Court of Appeals has remanded the case to the District Court to supervise
the implementation of the settlement. The terms of the settlement are contained
in the agreement in principle, and include the settlement amount, which is not
material to the results of operations or financial condition. The settlement
provided for in the agreement in principle is subject to certain conditions,
including the negotiation of a definitive settlement agreement and the approval
of the terms of the settlement agreement by the District Court after notice to
the members of the class who have the right to object. There can be no
assurance that all these conditions will be satisfied.

Other

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.

9



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##### Table of Contents



PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

7.   SEGMENT INFORMATION

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

|                           |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|-------------------------- |  | ------------- | ------- | ---------------- |  | ------------ | ------- | ------------ |  | - | ------- | - |  | - | ------- | -
|                           |  | Quarter ended |         | Six months ended
|                           |  |               |         |                 
|                           |  | December 28,  |         | December 29,     |  | December 28, |         | December 29,
|                           |  | 2002          |         | 2001             |  | 2002         |         | 2001        
|                           |  |               |         |                  |  |              |         |             
|                           |  | (Unaudited)   |         | (Unaudited)     
|RETAIL                     |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Net revenue                |  | $             | 161,648 |                  |  | $            | 141,979 |              |  | $ | 252,772 |   |  | $ | 222,774 |  
|Operating income           |  |               | 31,386  |                  |  |              | 28,586  |              |  |   | 34,387  |   |  |   | 31,486  |  
|Identifiable assets        |  |               | 157,390 |                  |  |              | 146,290 |              |  |   | 157,390 |   |  |   | 146,290 |  
|Depreciation/amortization  |  |               | 2,333   |                  |  |              | 1,809   |              |  |   | 4,367   |   |  |   | 3,610   |  
|Capital expenditures       |  |               | 3,994   |                  |  |              | 466     |              |  |   | 13,824  |   |  |   | 2,361   |  
|FRANCHISING                |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Net revenue                |  | $             | 6,543   |                  |  | $            | 6,133   |              |  | $ | 10,425  |   |  | $ | 9,722   |  
|Operating income           |  |               | 4,897   |                  |  |              | 4,466   |              |  |   | 7,217   |   |  |   | 6,508   |  
|Identifiable assets        |  |               | 3,998   |                  |  |              | 4,222   |              |  |   | 3,998   |   |  |   | 4,222   |  
|Depreciation/amortization  |  |               |        |                  |  |              |        |              |  |   |        |   |  |   |        |  
|Capital expenditures       |  |               |        |                  |  |              |        |              |  |   |        |   |  |   |        |  
|CORPORATE/OTHER            |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Net revenue                |  | $             |        |                  |  | $            |        |              |  | $ |        |   |  | $ |        |  
|Operating loss             |  |               | (8,403  | )                |  |              | (6,538  | )            |  |   | (15,705 | ) |  |   | (12,702 | )
|Identifiable assets        |  |               | 16,550  |                  |  |              | 17,564  |              |  |   | 16,550  |   |  |   | 17,564  |  
|Depreciation/amortization  |  |               | 1,428   |                  |  |              | 1,237   |              |  |   | 2,766   |   |  |   | 2,261   |  
|Capital expenditures       |  |               | 823     |                  |  |              | 874     |              |  |   | 1,378   |   |  |   | 2,687   |  
|CONSOLIDATED TOTALS        |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Net revenue                |  | $             | 168,191 |                  |  | $            | 148,112 |              |  | $ | 263,197 |   |  | $ | 232,496 |  
|Operating income           |  |               | 27,880  |                  |  |              | 26,514  |              |  |   | 25,899  |   |  |   | 25,292  |  
|Interest expense, net      |  |               | 2,824   |                  |  |              | 1,654   |              |  |   | 3,709   |   |  |   | 3,409   |  
|                           |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Income before income taxes |  |               | 25,056  |                  |  |              | 24,860  |              |  |   | 22,190  |   |  |   | 21,883  |  
|Provision for income taxes |  |               | 10,006  |                  |  |              | 9,921   |              |  |   | 8,876   |   |  |   | 8,730   |  
|                           |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Net income                 |  | $             | 15,050  |                  |  | $            | 14,939  |              |  | $ | 13,314  |   |  | $ | 13,153  |  
|                           |  |               |         |                  |  |              |         |              |  |   |         |   |  |   |         |  
|Identifiable assets        |  | $             | 177,938 |                  |  | $            | 168,076 |              |  | $ | 177,938 |   |  | $ | 168,076 |  
|Depreciation/amortization  |  |               | 3,761   |                  |  |              | 3,046   |              |  |   | 7,133   |   |  |   | 5,871   |  
|Capital expenditures       |  |               | 4,817   |                  |  |              | 1,340   |              |  |   | 15,202  |   |  |   | 5,048   |  

10



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PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

8.   ACQUISITIONS AND DISPOSITIONS OF STORES

During the first six months of fiscal 2003, the Company acquired two
stores from a franchisee. The aggregate consideration paid in connection with
this acquisition was $1,604,000. 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 has been completed and all
stores were opened by the first quarter of fiscal 2003. Additional goodwill of
$154,000 was recorded in the first six months of 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 changes in the carrying amount of goodwill for the six months ended
December 28, 2002, by operating segment, are as follows (in thousands):

|                                    |  |                   |        | 
|----------------------------------- |  | ----------------- | ------ | 
|Retail:                             |  | Six months ended 
|                                    |  | December 28, 2002
|                                    |  |                  
|Balance as of June 29, 2002         |  | $                 | 18,016 | 
|Goodwill acquired during the period |  |                   | 1,156  | 
|                                    |  |                   |        | 
|Balance as of December 28, 2002     |  | $                 | 19,172 | 
|                                    |  |                   |        | 

Assuming the stores acquired during the quarter and six months ended
December 28, 2002 and December 29, 2001 were acquired on July 1, 2001, the pro
forma results would have been as follows (in thousands, except per share
amounts) (unaudited):

|                             |  |               |         |                  |  |              |         |              |  |   |         |  |  |   |         | 
|---------------------------- |  | ------------- | ------- | ---------------- |  | ------------ | ------- | ------------ |  | - | ------- |  |  | - | ------- | 
|                             |  | Quarter Ended |         | Six months Ended
|                             |  |               |         |                 
|                             |  | December 28,  |         | December 29,     |  | December 28, |         | December 29,
|                             |  | 2002          |         | 2001             |  | 2002         |         | 2001        
|                             |  |               |         |                  |  |              |         |             
|Net sales                    |  | $             | 161,648 |                  |  | $            | 147,787 |              |  | $ | 254,221 |  |  | $ | 232,998 | 
|Net income                   |  | $             | 15,050  |                  |  | $            | 14,836  |              |  | $ | 13,391  |  |  | $ | 12,381  | 
|Earnings per share  basic   |  | $             | 0.90    |                  |  | $            | 1.14    |              |  | $ | 0.81    |  |  | $ | 0.96    | 
|Earnings per share 
diluted |  | $             | 0.76    |                  |  | $            | 0.79    |              |  | $ | 0.67    |  |  | $ | 0.66    | 

9.   GUARANTEES

In November 2002, the 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.

11



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PARTY CITY CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

The Company has unconditionally guaranteed the repayment of 27 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 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 December 28, 2002, the maximum amount of the
guarantees was approximately $24.2 million.

12



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##### Table of Contents






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

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles 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.

Management believes 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, management has found the
application of accounting policies to be appropriate, and actual results
generally do not differ materially from those determined using necessary
estimates.

The Companys accounting policies are more fully described in Note 1 to
the consolidated financial statements located in the Annual Report on Form 10-K
filed with the Securities and Exchange Commission on September 27, 2002.
Management has 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.

Long-lived assets excluding goodwill.In the evaluation of the fair value
and future benefits of long-lived assets, the Company performs an analysis of
the anticipated undiscounted future net cash flows of the related 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.The determination of insurance accruals is done using
the services of an actuary, applying certain historical experience factors.
Should a greater amount of claims occur compared to what was estimated or costs
increase beyond what was anticipated, reserves recorded may not be sufficient
and additional costs to the consolidated financial statements could be
required.

Goodwill.The Company evaluates goodwill whenever events and changes in
circumstances suggest that the carrying amount may not be recoverable from its
estimated future cash flows. To the extent these future projections or
strategies change, the conclusion regarding impairment may differ from the
current estimates.

Sales Returns.The Company estimates future sales returns and, when
material, records a provision in the period that the related sales are recorded
based on historical information. Should actual returns differ from the
Companys estimates, the Company may be required to revise estimated sales
returns.

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

13



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##### Table of Contents



Results of Operations

SELECTED FINANCIAL DATA
(in thousands, except per share and store data)

|                                              |                                            |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |         |         | 
|--------------------------------------------- | ------------------------------------------ | ---------------------------------------- | ------- | ------------- | ------- | ---------------- | ------- | ------------ | ------- | ------------ | ------- | ------- | ------- | - | ------ | ------- | ------- | 
|                                              |                                            |                                          |         | Quarter ended |         | Six months ended
|                                              |                                            |                                          |         |               |         |                 
|                                              |                                            |                                          |         | December 28,  |         | December 29,     |         | December 28, |         | December 29,
|                                              |                                            |                                          |         | 2002          |         | 2001             |         | 2002         |         | 2001        
|                                              |                                            |                                          |         |               |         |                  |         |              |         |             
|                                              |                                            |                                          |         | (Unaudited)   |         | (Unaudited)     
|                                              | Statement of Operations Data               |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |         |        
|                                              | Total revenue                              |                                          | $       | 168,191       |         |                  | $       | 148,112      |         |              | $       | 263,197 |         |   | $      | 232,496 |        
|                                              |                                            |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |         |        
|                                              | Company-owned stores:                      |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |         |        
|                                              |                                            | Net sales                                |         | $             | 161,648 |                  |         | $            | 141,979 |              |         | $       | 252,772 |   |        | $       | 222,774 | 
|                                              |                                            | Cost of goods sold and occupancy costs   |         |               | 95,974  |                  |         |              | 83,928  |              |         |         | 160,399 |   |        |         | 141,595 | 
|                                              |                                            |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |         |        
|                                              |                                            | Gross profit                             |         |               | 65,674  |                  |         |              | 58,051  |              |         |         | 92,373  |   |        |         | 81,179  | 
|                                              |                                            | Store operating and selling expense      |         |               | 34,288  |                  |         |              | 29,465  |              |         |         | 57,986  |   |        |         | 49,693  | 
|                                              |                                            |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |         |        
|                                              |                                            | Company-owned stores profit contribution |         |               | 31,386  |                  |         |              | 28,586  |              |         |         | 34,387  |   |        |         | 31,486  | 
|                                              |                                            | General and administrative expense       |         |               | 8,403   |                  |         |              | 6,538   |              |         |         | 15,705  |   |        |         | 12,702  | 
|                                              |                                            |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |         |        
|                                              |                                            | Company-owned profit contribution        |         |               | 22,983  |                  |         |              | 22,048  |              |         |         | 18,682  |   |        |         | 18,784  | 
|Franchise stores:                             |                                            |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |        
|                                              |                                            | Royalty fees                             |         |               | 6,503   |                  |         |              | 6,133   |              |         |         | 10,150  |   |        |         | 9,379   | 
|                                              |                                            | Franchise fees                           |         |               | 40      |                  |         |              |        |              |         |         | 275     |   |        |         | 343     | 
|                                              |                                            |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |         |        
|                                              |                                            | Total franchise revenues                 |         |               | 6,543   |                  |         |              | 6,133   |              |         |         | 10,425  |   |        |         | 9,722   | 
|                                              |                                            | Total franchise expense                  |         |               | 1,646   |                  |         |              | 1,667   |              |         |         | 3,208   |   |        |         | 3,214   | 
|                                              |                                            |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |         |        
|                                              |                                            | Franchise profit contribution            |         |               | 4,897   |                  |         |              | 4,466   |              |         |         | 7,217   |   |        |         | 6,508   | 
|                                              | Operating income                           |                                          |         | 27,880        |         |                  |         | 26,514       |         |              |         | 25,899  |         |   |        | 25,292  |        
|                                              | Interest expense, net                      |                                          |         | 2,824         |         |                  |         | 1,654        |         |              |         | 3,709   |         |   |        | 3,409   |        
|                                              |                                            |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |         |        
|                                              | Income before income taxes                 |                                          |         | 25,056        |         |                  |         | 24,860       |         |              |         | 22,190  |         |   |        | 21,883  |        
|                                              | Provision for income taxes                 |                                          |         | 10,006        |         |                  |         | 9,921        |         |              |         | 8,876   |         |   |        | 8,730   |        
|                                              |                                            |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |         |        
|                                              | Net income                                 |                                          | $       | 15,050        |         |                  | $       | 14,939       |         |              | $       | 13,314  |         |   | $      | 13,153  |        
|                                              |                                            |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |         |        
|                                              | Basic earnings per share                   |                                          | $       | 0.90          |         |                  | $       | 1.15         |         |              | $       | 0.80    |         |   | $      | 1.02    |        
|                                              | Diluted earnings per share                 |                                          | $       | 0.76          |         |                  | $       | 0.79         |         |              | $       | 0.67    |         |   | $      | 0.70    |        
|                                              | Weighted average shares outstanding basic |                                          |         | 16,803        |         |                  |         | 12,991       |         |              |         | 16,600  |         |   |        | 12,872  |        
|Weighted average shares outstanding  diluted |                                            |                                          | 19,896  |               |         |                  | 18,798  |              |         |              | 19,904  |         |         |   | 18,700 |        
|EBITDA (a)                                    |                                            | $                                        | 31,641  |               |         | $                | 29,560  |              |         | $            | 33,032  |         |         | $ | 31,163 |        
|Cash flows provided from (used in):           |                                            |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |        
|Operating activities                          |                                            | $                                        | 24,685  |               |         | $                | 29,986  |              |         | $            | 19,871  |         |         | $ | 25,885 |        
|Investing activities                          |                                            |                                          | (4,773  | )             |         |                  | (1,395  | )            |         |              | (15,158 | )       |         |   | (5,894 | )      
|Financing activities                          |                                            |                                          | (21,880 | )             |         |                  | (12,156 | )            |         |              | (4,907  | )       |         |   | (8,303 | )      
|Other information:                            |                                            |                                          |         |               |         |                  |         |              |         |              |         |         |         |   |        |        
|Depreciation and amortization                 |                                            |                                          | 3,761   |               |         |                  | 3,046   |              |         |              | 7,133   |         |         |   | 5,871  |        

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|                                            |                                    |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |         |     |     |     |  
|------------------------------------------- | ---------------------------------- | ---------------------------------- | ------------------------------------------- | -------------------------------- | --- | ------------- | ------- | ---------------- | --- | ------------ | ------- | ------------ | --- | --- | ------- | ------- | --- | --- | --- | -
|                                            |                                    |                                    |                                             |                                  |     | Quarter ended |         | Six months ended
|                                            |                                    |                                    |                                             |                                  |     |               |         |                 
|                                            |                                    |                                    |                                             |                                  |     | December 28,  |         | December 29,     |     | December 28, |         | December 29,
|                                            |                                    |                                    |                                             |                                  |     | 2002          |         | 2001             |     | 2002         |         | 2001        
|                                            |                                    |                                    |                                             |                                  |     |               |         |                  |     |              |         |             
|                                            |                                    |                                    |                                             |                                  |     | (Unaudited)   |         | (Unaudited)     
|Store Data:                                 |                                    |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |        
|                                            | Company-owned:                     |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |         |    
|                                            |                                    | Stores open at beginning of period |                                             |                                  | 234 |               |         |                  | 198 |              |         |              | 209 |     |         |         | 193 |    
|                                            |                                    |                                    |                                             | Stores opened                    |     |               | 5       |                  |     |              |        |              |     |     | 28      |         |     |     | 4   |  
|                                            |                                    |                                    |                                             | Stores acquired from franchisees |     |               |        |                  |     |              |        |              |     |     | 2       |         |     |     | 1   |  
|                                            |                                    |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |        
|                                            |                                    | Stores open at end of period       |                                             |                                  | 239 |               |         |                  | 198 |              |         |              | 239 |     |         |         | 198 |    
|                                            |                                    |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |        
|Average Company-owned stores open in
period |                                    |                                    | 236                                         |                                  |     |               | 198     |                  |     |              | 230     |              |     |     | 196     |        
|                                            |                                    |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |        
|                                            | Franchise:                         |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |         |    
|                                            |                                    | Stores open at beginning of period |                                             |                                  | 247 |               |         |                  | 273 |              |         |              | 242 |     |         |         | 261 |    
|                                            |                                    |                                    |                                             | Stores opened                    |     |               | 1       |                  |     |              |        |              |     |     | 8       |         |     |     | 13  |  
|                                            |                                    |                                    |                                             | Stores closed                    |     |               | (8      | )                |     |              | (1      | )            |     |     | (8      | )       |     |     | (1  | )
|                                            |                                    |                                    |                                             | Stores sold to Company           |     |               |        |                  |     |              |        |              |     |     | (2      | )       |     |     | (1  | )
|                                            |                                    |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |        
|                                            |                                    |                                    |                                             | Stores open at end of period     |     |               | 240     |                  |     |              | 272     |              |     |     | 240     |         |     |     | 272 |  
|                                            |                                    |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |        
|                                            |                                    |                                    | Average franchise stores open in
period (b) |                                  |     | 247           |         |                  |     | 273          |         |              |     | 245 |         |         |     | 267 |    
|                                            |                                    |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |        
|Total stores chainwide                      |                                    |                                    | 479                                         |                                  |     |               | 470     |                  |     |              | 479     |              |     |     | 470     |        
|                                            |                                    |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |        
|Chainwide sales                             |                                    | $                                  | 335,000                                     |                                  |     | $             | 321,000 |                  |     | $            | 523,000 |              |     | $   | 499,000 |        
|                                            |                                    |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |        
|Same store sales increase (c):              |                                    |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |        
|Company-owned stores                        |                                    |                                    | 1.9                                         | %                                |     |               | 1.7     | %                |     |              | 2.5     | %            |     |     | 3.2     | %      
|Franchise stores                            |                                    |                                    | 2.9                                         | %                                |     |               | 1.7     | %                |     |              | 4.0     | %            |     |     | 2.4     | %      
|Average sales per Company-owned store       |                                    | $                                  | 731                                         |                                  |     | $             | 717     |                  |     | $            | 1,158   |              |     | $   | 1,137   |        
|Balance Sheet Data:                         |                                    |                                    |                                             |                                  |     |               |         |                  |     |              |         |              |     |     |         |        
|                                            | Working capital                    |                                    | $                                           | 14,487                           |     |               | $       | 22,508           |     |              | $       | 14,487       |     |     | $       | 22,508  |    
|                                            | Total assets                       |                                    |                                             | 177,938                          |     |               |         | 168,076          |     |              |         | 177,938      |     |     |         | 168,076 |    
|                                            | Bank borrowings and other debt (d) |                                    |                                             | 4,114                            |     |               |         | 21,327           |     |              |         | 4,114        |     |     |         | 21,327  |    
|                                            | Stockholders equity               |                                    |                                             | 82,941                           |     |               |         | 62,713           |     |              |         | 82,941       |     |     |         | 62,713  |    



---

|(a) |  | The Companys definition of EBITDA is earnings before interest, taxes,
depreciation, amortization. The Company believes
EBITDA provides additional information for determining our ability to meet
future debt service requirements. EBITDA should not be construed as a
substitute for income from operations, 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. The Company has 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. The Companys computation of EBITDA may not be comparable to similar
titled measures of other companies.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The Canadian master franchisee filed for bankruptcy protection under
Canadian law, closing 28 stores in fiscal 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(c) |  | 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. Approximately 30% of the comparable franchise stores have less than
three full years of operation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(d) |  | The bank borrowings and other debt at December 29, 2001 is net of an
unamortized debt discount of $1.6 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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Quarter Ended December 28, 2002 Compared with Quarter Ended December 29, 2001

Retail.Net sales from Company-owned stores increased 13.9% to $161.6
million for the second quarter of fiscal 2003 from $142.0 million for the
second quarter of the prior fiscal year. Same store sales for Company-owned
stores increased 1.9% in the second quarter of fiscal 2003 compared with 1.7%
for the same period last year. The Company opened five new stores during the
second quarter of fiscal 2003 and none in the second quarter of the prior
fiscal year. The total number of Company-owned stores with less than one full
year of operations is 17% of the total Company-owned store base, or 41 stores.
Same store sales for Company-owned stores and franchise stores are subject to
material differences based on the age of the respective stores. New stores
historically have had higher same store comparable sales.

Gross profit reflects the cost of goods sold and store occupancy costs
including rent, common area maintenance, real estate taxes, repair and
maintenance, depreciation and utilities. Gross profit for the second quarter of
fiscal 2003 increased 13.1% to $65.7 million from $58.1 million for the second
quarter of the last fiscal year. The increase was primarily due to increased
sales volume and improved merchandise margin. Gross margin as a percent of
sales was 40.6% for the second quarter of fiscal 2003 compared with 40.9% for
the second quarter of the last fiscal year. Although merchandise margins
improved due to better buying and inventory control, this improvement was
offset by a higher occupancy cost ratio for our new stores.

Store operating and selling expenses increased 16.4% to $34.3 million for
the second quarter of fiscal 2003 from $29.5 million in the second quarter of
the last fiscal year. The increase in store operating expenses is attributable
to same store sales increases and the increase in the number of stores. Store
operating and selling expenses were 21.2% and 20.8% of sales for the second
quarter of fiscal 2003 and fiscal 2002, respectively. The increase as a percent
of sales is due mainly to start-up costs and increased advertising expense
associated with stores in their first year of operations. The pre-opening
expenses incurred in the second quarter of fiscal 2003 for the new stores and
stores to be opened later in the fiscal year amounted to $314,000 compared with
$10,000 incurred during the second quarter of the prior fiscal year.

Company-owned stores recorded a contribution, which is gross profit less
store operating and selling expenses, of $31.4 million for the second quarter
of fiscal 2003 compared with $28.6 million for the second quarter of the last
fiscal year. The improvement over the prior year is primarily the result of
same store sales increases and the increase in the number of stores. Store
contribution as a percent of sales was 19.4% for this quarter compared to 20.1%
for last year. This decrease is due to the reduced contribution rate of new
stores. Contribution for new stores increased approximately 16% because of
efficiencies in margin.

General
and administrative expenses increased 28.5% to $8.4 million in the
second quarter of fiscal 2003 from $6.5 million in the second quarter of the
last fiscal year. General and administrative expenses was 5.2% and 4.6% of
sales for the second quarter of fiscal 2003 and fiscal 2002, respectively. This
increase is primarily due to unusual expenses associated with the Companys new
logistics initiative and professional fees related to the implementation of a
new information system. These unusual expense items reduced after-tax earnings
by $0.03 per diluted share. The newly developed systems have taken longer in
testing and rollout than originally planned. Nevertheless, the Company is
committed to improve its infrastructure and provide substantial long-term
benefits to the operation of its stores and its planned store growth.

Franchising.Franchise revenue is composed of the initial franchise fees
that are recorded as revenue when the store opens, and ongoing royalty fees,
generally 4.0% of the stores net sales. Franchise fees, recognized on one
store opening, were $40,000 in the second quarter of fiscal 2003. No franchise
fees were recorded in the same period last year. Royalty fees increased 6.0%
to $6.5 million in the second quarter of fiscal 2003 from $6.1 million in the
second quarter of the prior fiscal year which is primarily due to a same store
sales increase of 2.9% for the franchise stores in the second quarter of fiscal
2003, as compared with 1.7% for the same period last year.

Expenses directly related to franchise revenue decreased 1.3% to $1.6
million for the second quarter of fiscal 2003 from $1.7 million for the second
quarter of the prior fiscal year. As a percentage of franchise revenue,
franchise

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expenses were 25.2% and 27.2% for the second quarter of fiscal 2003 and fiscal
2002, respectively. The decrease is due to better leveraging of franchise
revenue and a lower provision for bad debt in fiscal 2003. The Company
recorded a provision for the bad debt associated with the royalty receivables
of its Canadian franchises in fiscal 2002.

Interest Expense. Interest expense increased 70.7% to $2.8 million for the
second quarter of fiscal 2003 from $1.7 million in the second quarter of the
last fiscal year. This increase in interest expense is due to the repurchase of
outstanding senior notes that had an effective interest rate of 29%. These
notes had a cash interest rate of 18.5% as well as original issue discount
accounting for the high effective interest rate. The repurchase of these notes
was completed using working capital and borrowings under the Companys
asset-based revolving credit agreement. The repurchase of the notes resulted
in a payment of approximately $2.8 million related to interest and a
pre-payment premium, and resulted in a one-time unplanned charge of
approximately $0.07 per diluted share.

Income Taxes.The effective income tax rate was 39.9% in the second
quarter of fiscal 2003 and fiscal 2002.

Net Income. Earnings before interest, taxes, depreciation, and
amortization (EBITDA) for the quarter increased 7.0% to $31.6 million
compared to $29.6 million in the second quarter of fiscal 2002. Excluding the
after-tax charges related to unusual items of $0.03 per diluted share, pro
forma EBITDA was $32.7 million. As a result of the above factors, net income
for the second quarter of fiscal 2003 was $15.0 million, or $0.90 earnings per
basic share and $0.76 earnings per diluted share, as compared with net income
of $14.9 million, or $1.15 earnings per basic share and $0.79 earnings per
diluted share in second quarter of the last fiscal year. Excluding the after
tax charges related to debt retirement and unusual expenses, pro forma net
income was $17.0 million or $0.85 per diluted share. The increase in the number
of shares outstanding is mainly due to incremental shares of options that are
dilutive as well as shares issued in conjunction with the management and
employee stock purchase plans.

Six Months Ended December 28, 2002 Compared with Six Months Ended December 29, 2001

Retail.Net sales from Company-owned stores increased 13.5% to $252.8
million for the six months ended December 28, 2002 from $222.8 million for the
six months ended December 29, 2001. Same store sales for Company-owned stores
increased 2.5% in the six months ended December 28, 2002 as compared with 3.2%
for the same period last year. The total number of Company-owned stores with
less than one full year of operations is 17% of the total Company-owned store
base. Same store sales for Company-owned stores and franchise stores are
subject to material differences based on the age of the respective stores. New
stores historically have had higher same store comparable sales.

Gross profit reflects the cost of goods sold and store occupancy costs
including rent, common area maintenance, real estate taxes, repair and
maintenance, depreciation and utilities. Gross profit for the six months ended
December 28, 2002 increased 13.8% to $92.4 million from $81.2 million for the
six months ended December 29, 2001. The increase was primarily due to increased
sales volume and improved merchandise margin. Gross margin as a percent of
sales was 36.5% for the six months ended December 28, 2002 compared with 36.4%
for the same period last year. Although merchandise margins improved due to
better buying and inventory control, this improvement was offset by a higher
occupancy cost ratio for our new stores.

Store operating and selling expenses increased 16.7% to $58.0 million for
the six months ended December 28, 2002 from $49.7 million in the six months
ended December 29, 2001. The increase in store operating expenses is
attributable to same store sales increases and the increase in the number of
stores. Store operating and selling expenses were 22.9% and 22.3% of sales for
the six-month period ended December 28, 2002 and December 29, 2001,
respectively. This increase is mainly due to start-up costs and advertising
expense associated with the stores in their first year of operations.
Pre-opening expenses incurred in the first six months of fiscal 2003 for the
new stores and stores to be opened later in the fiscal year amounted to $796,000 compared with
$215,000 incurred during the same period last year.

Company-owned stores recorded a contribution, which is gross profit less
store operating and selling expenses, of $34.4 million for the six months ended
December 28, 2002 compared with $31.5 million for the six months ended December
29, 2001. The improvement over the prior year is primarily the result of same
store sales increases and the increase in the number of stores. Store
contribution as a percent of sales was 13.6% compared to 14.1% for the six

17



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month period ended December 28, 2002 and December 29, 2001, respectively. This
decrease is due to the reduced contribution rate of new stores.

General and administrative expenses increased 23.6% to $15.7 million in
the six months ended December 28, 2002 from $12.7 million in the six months
ended December 29, 2001. General and administrative expenses was 6.2% and 5.7%
of sales for the six months ended December 28, 2002 and December 29, 2001,
respectively. This increase is primarily due to unusual expenses associated
with the Companys new logistics initiative and professional fees related to
the implementation of a new information system. These unusual expense items
reduced after-tax earnings by $0.03 per diluted share. The newly developed
systems have taken longer in testing and rollout than originally planned.
Nevertheless, the Company is committed to improve its infrastructure and
provide substantial long-term benefits to the operation of its stores and its
planned store growth.

Franchising.Franchise revenue is composed of the initial franchise fees
that are recorded as revenue when the store opens, and ongoing royalty fees,
generally 4.0% of the stores net sales. Franchise fees, recognized on eight
store openings, were $275,000 for the six months ended December 28, 2002,
compared with $343,000 for the six months ended December 29, 2001 relating to
13 store openings. Royalty fees increased 8.2% to $10.2 million in the six
months ended December 28, 2002 from $9.4 million in the six months ended
December 29, 2001 which is primarily due to a same store sales increase of 4.0%
for the franchise stores in the six month period ended December 28, 2002, as
compared with 2.4% for the same period last year.

Expenses directly related to franchise revenue were $3.2 million for the
six months ended December 28, 2002 and the six months ended December 29, 2001.
As a percentage of franchise revenue, franchise expenses were 30.8% and 33.1%
for the six months ended December 28, 2002 and December 29, 2001, respectively.
This decrease is due to better leveraging of franchise revenue and a lower
provision for bad debt in fiscal 2003. In the six month period ended December
29, 2001, the Company recorded a provision for the bad debt associated with the
royalty receivable of its Canadian franchises.

Interest Expense.Interest expense increased 8.8% to $3.7 million for the
six months ended December 28, 2002 from $3.4 million in the six months ended
December 29, 2001. This increase in interest expense is due to the repurchase
of outstanding senior notes that had an effective interest rate of 29%. These
notes had a cash interest rate of 18.5% as well as original issue discount
accounting for the high effective interest rate. The repurchase of these notes
was completed using working capital and borrowings under the Companys
asset-based revolving credit agreement. The repurchase of the notes resulted
in a one-time unplanned after-tax charge of $1.3 million related to interest and a
pre-payment premium, or approximately $0.07 per diluted share.

Income Taxes.The effective income tax rate was 40.0% in the six months
ended December 28, 2002 and 39.9% in the six months ended December 29, 2001.

Net Income. Including the unusual expenses noted above, EBITDA for the
first six months of the fiscal year increased 6.0% to $33.0 million from $31.2
million in the same period last year. Excluding the after-tax charge related
to unusual expenses of $0.03 per diluted share, pro forma EBITDA was $34.3
million. As a result of the above factors, net income for the six months ended
December 28, 2002 was $13.3 million, or $0.80 per basic share and $0.67 per
diluted share, as compared with net income of $13.2 million, or $1.02 per basic
share and $0.70 per diluted share for the six months ended December 29, 2001.
Excluding the after tax charges related to debt retirement and unusual
expenses, pro-forma net income was $15.4 million, or $0.77 per diluted share,
on 19,904,000 weighted average shares outstanding. The increase in the number
of shares outstanding is mainly due to incremental shares of options that are
dilutive as well as shares issued in conjunction with the management and
employee stock purchase plans.

18



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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 December 28, 2002, working capital was $14.5 million compared
with $22.5 million at December 29, 2001.

For the six month period ended December 28, 2002, cash provided by
operating activities was $19.9 million, compared with $25.9 million for the
same period of the last fiscal year. The decrease in cash provided by operating
activities was primarily attributable to an increase in inventory offset by an
increase in accounts payable and other current liabilities related to store
growth. The increase in average inventory levels per store of 3.1% is the
result of the Companys plan to sustain strong in-stock levels.

Cash used in investment activities for the six-month period ended December
28, 2002 was $15.2 million compared with $5.9 million in the same period in the
last fiscal year. The increase in cash used in investing activities was
primarily attributable to the continued investment in 28 new store openings
during the six months ended December 28, 2002 as compared with four openings
during the same period last year.

Cash used in financing activities was $4.9 million for the six-month
period ended December 28, 2002 as compared to $8.3 million in the same period
in the last fiscal year. The current years cash used in
financing activities relates to a payment of $10.2 million in Senior
Notes in advance of maturity, as well as increasing borrowings under the Loan
Agreement and proceeds from the exercise of stock options and warrants. In the
prior period, payments of Senior Notes were $6.6 million and purchases of
treasury stock were $1.8 million.

As of December 28, 2002, the Company had $4.1 million outstanding under
the Loan and Security Agreement dated January 14, 2000 (the Loan Agreement),
with Congress Financial Corporation at a weighted average interest
rate of 5.3%. Pursuant to the Loan Agreement, the
Company had a standby letter of credit of $1.4 million at December 28, 2002.
Under the terms of the Loan Agreement, the Company from time to time was
allowed to borrow, based on a percentage of eligible inventory, up to a maximum
of $40 million at any time outstanding. Interest on advances was charged, at
the Companys option, (i) at the adjusted Eurodollar rate plus the applicable
margin, which was 2.25% per annum at December 28, 2002, or (ii) at the rate of
3/4% per annum above the prime rate, totaling 5.0% at December 28, 2002. The
term of the Loan Agreement was three years with renewals at the Companys
discretion thereafter and was secured by a lien on substantially all
of the Companys assets.

In January 2003, the Company replaced its existing Loan Agreement with a
new $65 million revolving credit facility (the New 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 New 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% per annum or (ii) at the prime rate plus the applicable
margin, which was initially set at (0.25)% per annum. The term of the New Loan
Agreement is through April 30, 2006 and is secured by a lien on substantially
all of the Companys assets. At February 5, 2003, the Company had $12.1
million in borrowings outstanding under the new facility.

During the months of November and December 2002 the Company repaid the
remainder of the $9.1 million, net of $1.1 million discount, Series D 14.0%
Notes due 2004. The Note was secured by a junior lien on substantially all of
the Companys assets. The repurchase resulted in a payment of $2.8 million,
including interest and an incentive premium, and resulted in a one-time
after-tax charge of $1.3 million, or $0.07 per diluted share.

Company management currently believes that the cash generated by
operations, together with the borrowing availability under the New Loan
Agreement, will be sufficient to meet the Companys working capital needs for
the next twelve months.

19



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##### Table of Contents



Contractual Obligations and Commercial Commitments

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

|                              |                           |   |                        |         |        |   |           |        |           |   |               |        |  |   |        |        |  |   |        |        | 
|----------------------------- | ------------------------- | - | ---------------------- | ------- | ------ | - | --------- | ------ | --------- | - | ------------- | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                              |                           |   | Payments Due By Period
|                              |                           |   |                       
|                              |                           |   | Total                  |         | 1 Year |   | 2-3 Years |        | 4-5 Years |   | After 5 years
|                              |                           |   |                        |         |        |   |           |        |           |   |              
|                              |                           |   | (in thousands)        
|Contractual Obligations:      |                           |   |                        |         |        |   |           |        |           |   |               |        |  |   |        |        |  |   |        |       
|                              | Capital lease obligations |   | $                      | 54      |        |   | $         | 44     |           |   | $             | 10     |  |   | $      |       |  |   | $      |       | 
|                              | Severance arrangements    |   |                        | 175     |        |   |           | 175    |           |   |               |       |  |   |        |       |  |   |        |       | 
|                              | Operating leases          |   |                        | 278,155 |        |   |           | 22,172 |           |   |               | 88,478 |  |   |        | 80,659 |  |   |        | 86,846 | 
|                              |                           |   |                        |         |        |   |           |        |           |   |               |        |  |   |        |        |  |   |        |       
|Total Contractual Obligations |                           | $ | 278,384                |         |        | $ | 22,391    |        |           | $ | 88,488        |        |  | $ | 80,659 |        |  | $ | 86,846 |       
|                              |                           |   |                        |         |        |   |           |        |           |   |               |        |  |   |        |        |  |   |        |       

Accounting and Reporting Changes

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 146, Accounting for
Costs Associated with Exit or Disposal Activities
(SFAS No. 146), replacing Emerging Issues
Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred instead of at the date an entity commits to an exit plan.
This statement also established that fair value is the objective for the
initial measurement of the liability. SFAS No. 146 will be effective for exit
or disposal activities that are initiated after December 31, 2002. The Company
does not expect adopting this statement will have a material impact on its
financial position or the results of operations.

In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation (SFAS No. 148). SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. SFAS 148 is effective for fiscal years ending
after December 15, 2002. The Company has not yet determined the effect of the adoption of
this statement on the Companys financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The disclosure requirements are
effective for the Companys current quarter. The Company does not expect
the initial recognition and initial measurement provisions of this
interpretation will have a material impact on its financial position
or the results of operations.

In November 2002, the EITF reached a consensus on issues raised in EITF
02-16, Accounting by a Reseller for Cash Consideration Received from a
Vendor (EITF 02-16). This EITF issue addresses the timing of recognition for rebates that
are earned by resellers based on specified levels of purchases or over
specified periods of time. This guidance, related to timing of recognition, is
to be applied prospectively to new rebate arrangements entered into in fiscal
periods beginning after January 1, 2003. This EITF issue also addresses the
classification of cash consideration received from vendors in a resellers
statement of operations. The guidance related to income statement
classification is to be applied in annual and interim financial statements for
periods beginning after January 1, 2003. The Company is in the process of
reviewing the effect, if any, that the application of EITF 02-16 will have on
its balance sheet, results of operations and cash flows.

20



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Inflation

The Company does not believe that its operating results have been
materially affected by inflation during the preceding three years. There can
be no assurance, however, that the Companys operating results will not be
affected by inflation in the future.

Seasonality

The Companys business is subject to substantial seasonal variations.
Historically, the Company has realized a significant portion of its net sales
and net income for the year during the second fiscal quarter. The Companys
quarterly results of operations may also fluctuate significantly as a result of
a variety of other factors, including the timing of new store openings, store
closings and store sales. The Company believes this is the general pattern
associated with its segment of the retail industry and expects this pattern
will continue in the future. Consequently, comparisons between quarters are not
necessarily meaningful and the results for any quarter are not necessarily
indicative of future results.

Forward-Looking Statements

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




Item 3.Quantitative and Qualitative Disclosures about Market Risk

The Company, in the normal course of doing business, is exposed to
interest rate change market risk. As borrowing patterns are cyclical, the
Company is not dependent on borrowing throughout the year. Therefore, a sudden
increase in interest rates (which under the New Loan Agreement is dependent on
the prime rate) 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 periodic
reports filed under the Securities Exchange Act of 1934, as amended, 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 timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized 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 necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. The Company also established a disclosure committee which consists
of certain members of the Companys senior management.

Within 90 days prior to the date of this report, 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

21



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##### Table of Contents



and procedures. 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.

There have been no significant changes in the Companys internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation. There were no
significant deficiencies or material weaknesses, and therefore there were no
corrective actions taken.

22



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##### Table of Contents






PART II OTHER INFORMATION




Item 1.Legal Proceedings

Securities Litigation

The Company was named as a defendant in twelve class action complaints in
the United States District Court for the District of New Jersey. The former
Chief Executive Officer and a former Chief Financial Officer and Executive Vice
President of Operations were also named as defendants in these complaints. The
complaints were filed as class actions on behalf of persons who purchased or
acquired Party City common stock during various time periods between February
26, 1998 and March 18, 1999 (the Class Period). In October 1999, plaintiffs
filed an amended class action complaint and, in February 2000, plaintiffs filed
a second amended complaint, which alleged, among other things, violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5 promulgated thereunder, and sought unspecified damages. The
plaintiffs alleged that defendants issued a series of false and misleading
statements and failed to disclose material facts concerning, among other
things, Party Citys financial condition, adequacy of internal controls and
compliance with certain loan covenants during the Class Period. The plaintiffs
further alleged that because of the issuance of a series of false and
misleading statements and/or the failure to disclose material facts, the price
of Party Citys common stock was artificially inflated.

In early 2000, defendants moved to dismiss the second amended complaint on
the ground that it failed to state a course of action. On May 29, 2001, the
District Court issued an Opinion and Order dismissing the Complaint against all
defendants with prejudice. On June 27, 2001, plaintiffs filed a Notice of
Appeal to the United States Court of Appeals for the Third Circuit. In April
2002, the parties reached an agreement in principle to settle the action, and
the Court of Appeals has remanded the case to the District Court to supervise
the implementation of the settlement. The terms of the settlement are contained
in the agreement in principle, and include the settlement amount, which is not
material to the results of operations or financial condition. The settlement
provided for in the agreement in principle is subject to certain conditions,
including the negotiation of a definitive settlement agreement and the approval
of the terms of the settlement agreement by the District Court after notice to
the members of the class who have the right to object. There can be no
assurance that all these conditions will be satisfied.

Other

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

23



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##### Table of Contents






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

The Companys 2002 Annual Meeting of Stockholders was held on Wednesday,
November 13, 2002 for the following purposes:



| | 1. |  | To elect nine directors to the Board of Directors who shall
serve until the 2003 Annual Meeting of Stockholders, or until their
successors are elected and qualified (Proposal 1).
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The voting as to Proposal 1 was as follows:

Proposal 1

|                      |  |     |            |         |  |  |         | 
|--------------------- |  | --- | ---------- | ------- |  |  | ------- | 
|Name                  |  | For |            | Against
|                      |  |     |            |        
|Ralph D. Dillon       |  |     | 13,316,251 |         |  |  | 512,541 | 
|Michael A. Gatto      |  |     | 13,711,243 |         |  |  | 117,549 | 
|Richard H. Griner     |  |     | 13,818,929 |         |  |  | 9,863   | 
|L.R. Jalenak, Jr.     |  |     | 13,662,193 |         |  |  | 166,599 | 
|Howard Levkowitz      |  |     | 13,658,443 |         |  |  | 170,349 | 
|Nancy Pedot           |  |     | 13,783,534 |         |  |  | 45,258  | 
|Walter J. Salmon      |  |     | 13,624,193 |         |  |  | 204,599 | 
|James Shea            |  |     | 13,315,956 |         |  |  | 512,836 | 
|Michael E. Tennenbaum |  |     | 13,711,338 |         |  |  | 117,454 | 




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) Report on Form 8-K                                                                                                                                                                                                                                                                                                                                              
|
| |  | The Company filed a Current Report on Form 8-K dated January 10, 2003,
disclosing that Party City Corporation has replaced its existing
revolving credit facility with a new revolving credit facility with Wells
Fargo Retail Finance, LLC, as the arranger, collateral agent and
administrative agent, and Fleet Retail Finance, Inc., as the
documentation agent.

24



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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, incorporated by reference from the
Companys Current Report on Form 8-K as filed with the Commission on
August 25, 1999.                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                     
|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
Amendment No. 1 to Schedule 13D as filed by Jack Futterman with the
Commission on June 17, 1999 (Futtermans 13D).                                                                                           
|            |  |                                                                                                                                                                                                                                                                                     
|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 June 8, 2000 (the June 2000 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 Futtermans 13D.                                                                                               
|            |  |                                                                                                                                                                                                                                                                                     
|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 Current Report on Form 8-K as filed with the
Commission on January 19, 2000 (the January 2000 8-K).
|            |  |                                                                                                                                                                                                                                                                                     
|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 the Companys Quarterly
Report on Form 10-Q as filed with the Commission on May 15, 2001 (the May
2001 10-Q).                                               
|            |  |                                                                                                                                                                                                                                                                                     
|10.3        |  | Stock Pledge Agreement, dated as of June 8, 1999, between Steven Mandell
and Jack Futterman, incorporated by reference from the May 2001 10-Q.                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                     
|10.4        |  | Investor Rights Agreement, dated as of August 16, 1999, by and among the
Company, the Investors and Jack Futterman, incorporated by reference from
the Companys Quarterly Report on Form 10-Q as filed with the Commission
on August 25, 1999 (the August 1999 10-Q).            
|            |  |                                                                                                                                                                                                                                                                                     
|10.5        |  | First Amendment to Investor Rights Agreement, dated as of October 11,
2000, by and among the Company, the Investors and Jack Futterman,
incorporated by reference from the January 2000 8-K.                                                                                        
|            |  |                                                                                                                                                                                                                                                                                     
|10.6        |  | Second Amendment to Investor Rights Agreement, dated as of November 20,
2000, by and among the Company, the Investors and Jack Futterman,
incorporated by reference from the January 2000 8-K.                                                                                      
|            |  |                                                                                                                                                                                                                                                                                     
|10.7        |  | 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).                                             

25



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##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                       
|10.8        |  | Employment Agreement of James Shea, dated as of December 10, 1999, by and
between the Company and James Shea, incorporated by reference from the
February 2001 10-Q.                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                       
|10.9        |  | Employment Agreement of Andrew Bailen, dated as of August 7, 2000, by and
between the Company and Andrew Bailen, incorporated by reference from the
February 2001 10-Q.                                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                       
|10.10       |  | Employment Agreement of Thomas Larson, dated as of June 18, 1999, by and
between the Company and Thomas Larson, incorporated by reference from the
February 2001 10-Q.                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                       
|10.11       |  | Management Stock Purchase Plan of the Company, incorporated by reference
from the Registration of Form S-8 as filed with the Commission on July 23,
2001 (the July 2001 S-8).                                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                       
|10.12       |  | Employee Stock Purchase Plan of the Company, incorporated by reference
from the July 2001 S-8.                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                       
|10.13       |  | 1999 Stock Incentive Plan (Amended and Restated as of October 25, 2000),
incorporated by reference from the Registration of Form S-8 as filed with
the Commission on December 16, 2002.                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                       
|10.14       |  | Loan and Security Agreement, dated January 10, 2003, by and between the
Company and Wells Fargo Retail Finance, LLC, 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.
|            |  |                                                                                                                                                                                                                                                                                                                                                                       
|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.                                                                                                                                               

26



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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/ JAMES SHEA                        
|                        |  |                        |  |                                       
|                        |  |                        |  | James Shea
Chief Executive Officer    
|                        |  |                        |  |                                       
|                        |  |                        |  |                                       
|                        |  | By                     |  | /s/ LINDA M. SILUK                    
|                        |  |                        |  |                                       
|                        |  |                        |  | Linda M. Siluk
Chief Financial Officer
|                        |  |                        |  |                                       
|                        |  |                        |  |                                       
|                        |  | By                     |  | /s/ SUSAN HYDE                        
|                        |  |                        |  |                                       
|                        |  |                        |  | Susan Hyde
Chief Accounting Officer   
|                        |  |                        |  |                                       
|                        |  |                        |  |                                       
|Date: February 11, 2003 |  |                        |  |                                       

27



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##### Table of Contents






CERTIFICATION

I, James Shea, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Party City
Corporation;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
|
| | b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|
| | b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.



| | /s/ JAMES SHEA
Name: James Shea
Title: Chief Executive Officer
| | --------------------------------------------------------------

Date: February 11, 2003

28



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##### Table of Contents



CERTIFICATION

I, Linda M. Siluk, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Party City
Corporation;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
|
| | b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|
| | b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.



| | /s/ LINDA M. SILUK
Name: Linda M. Siluk
Title: Chief Financial Officer
| | ----------------------------------------------------------------------

Date: February 11, 2003

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