##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





|                                                   |  |                                   
|-------------------------------------------------- |  | ----------------------------------
|For the quarterly period Ended
    October 1, 2005 |  | Commission file number
    0-27826

Party City Corporation


(Exact Name of Registrant as Specified in Its Charter)


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

(Registrants telephone number, including area code)


973-983-0888





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TABLE OF CONTENTS


|                                          |  |                                                                                                                          |    |          |    | 
|----------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ | -- | -------- | -- | 
|                                          |  |                                                                                                                          |    | Page No. |   
|                                          |  |                                                                                                                          |    |          |   
|PART I FINANCIAL INFORMATION             
|Item 1.                                   |  | Financial Statements (Unaudited)                                                                                         |    |          | 4  | 
|                                          |  | Condensed Consolidated Balance Sheets as of
    October 1, 2005, July 2, 2005 and October 2,
    2004                    |    |          | 4  | 
|                                          |  | Condensed Consolidated Statements of
    Operations for the fiscal quarter ended October 1, 2005 and
    October 2, 2004 |    |          | 5  | 
|                                          |  | Condensed Consolidated Statements of Cash
    Flows for the fiscal quarter ended October 1, 2005 and
    October 2, 2004 |    |          | 6  | 
|                                          |  | Notes to Condensed Consolidated Financial
    Statements                                                                 |    |          | 7  | 
|Item 2.                                   |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                |    |          | 19 | 
|Item 3.                                   |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                           |    |          | 34 | 
|Item 4.                                   |  | Controls and Procedures                                                                                                  |    |          | 34 | 
|                                         
|PART II OTHER INFORMATION                
|Item 1.                                   |  | Legal Proceedings                                                                                                        |    |          | 36 | 
|Item 2.                                   |  | Unregistered Sales of Equity Securities and
    Use of Proceeds                                                          |    |          | 36 | 
|Item 3.                                   |  | Defaults Upon Senior Securities                                                                                          |    |          | 36 | 
|Item 4.                                   |  | Submission of Matters to a Vote of Security
    Holders                                                                  |    |          | 36 | 
|Item 5.                                   |  | Other Information                                                                                                        |    |          | 36 | 
|Item 6.                                   |  | Exhibits                                                                                                                 |    |          | 36 | 
|Signatures                                |  |                                                                                                                          | 37 |         
|Exhibit Index                             |  |                                                                                                                          |    |         
|EX-15.1: AWARENESS LETTER                
|EX-23.1: CONSENT OF DELOITTE & TOUCHE LLP
|EX-31.1: CERTIFICATION                   
|EX-31.2: CERTIFICATION                   
|EX-32.1: CERTIFICATION                   
|EX-32.2: CERTIFICATION                   





www.partycity.com


http://www.sec.gov.


Forward-Looking Statements




2



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##### Table of Contents






PART I. FINANCIAL INFORMATION







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

PARTY CITY CORPORATION





CONDENSED CONSOLIDATED BALANCE SHEETS


|                                                   |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |         |  |        |        |         | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------- |  | ------ | ---------- | ------- |  | ------ | ------ | ------- | 
|                                                   |                                                                                                                                                                                                                                                                                                                           | October 1,                                 |        |         | July 2, |  |        | October 2, |        
|                                                   |                                                                                                                                                                                                                                                                                                                           | 2005                                       |        |         | 2005    |  |        | 2004       |        
|                                                   |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |        
|                                                   |                                                                                                                                                                                                                                                                                                                           | (In thousands, except share data)          |       
|                                                   |                                                                                                                                                                                                                                                                                                                           | (Unaudited)                                |       
|ASSETS                                            
|Current assets:                                    |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |         |  |        |       
|                                                   | Cash and cash equivalents                                                                                                                                                                                                                                                                                                 |                                            | $      | 10,638  |         |  | $      | 11,034     |         |  | $      | 18,614 |        
|                                                   | Merchandise inventory                                                                                                                                                                                                                                                                                                     |                                            |        | 107,978 |         |  |        | 72,818     |         |  |        | 81,657 |        
|                                                   | Other current assets, net                                                                                                                                                                                                                                                                                                 |                                            |        | 34,362  |         |  |        | 33,486     |         |  |        | 23,033 |        
|                                                   |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |        
|                                                   |                                                                                                                                                                                                                                                                                                                           | Total current assets                       |        |         | 152,978 |  |        |            | 117,338 |  |        |        | 123,304 | 
|                                                   | Property and equipment, net                                                                                                                                                                                                                                                                                               |                                            |        | 47,494  |         |  |        | 45,269     |         |  |        | 46,563 |        
|                                                   | Goodwill                                                                                                                                                                                                                                                                                                                  |                                            |        | 16,378  |         |  |        | 16,378     |         |  |        | 18,614 |        
|                                                   | Other assets                                                                                                                                                                                                                                                                                                              |                                            |        | 5,245   |         |  |        | 4,988      |         |  |        | 4,082  |        
|                                                   |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |        
|                                                   |                                                                                                                                                                                                                                                                                                                           | Total assets                               |        | $       | 222,095 |  |        | $          | 183,973 |  |        | $      | 192,563 | 
|                                                   |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |        
|                                                  
|LIABILITIES AND STOCKHOLDERS EQUITY              
|Current liabilities:                               |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |         |  |        |       
|                                                   | Accounts payable                                                                                                                                                                                                                                                                                                          |                                            | $      | 74,378  |         |  | $      | 43,875     |         |  | $      | 61,882 |        
|                                                   | Accrued expenses and other current liabilities                                                                                                                                                                                                                                                                            |                                            |        | 31,848  |         |  |        | 26,710     |         |  |        | 27,306 |        
|                                                   | Advances under the Loan Agreement                                                                                                                                                                                                                                                                                         |                                            |        | 4,800   |         |  |        |           |         |  |        |       |        
|                                                   |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |        
|                                                   |                                                                                                                                                                                                                                                                                                                           | Total current liabilities                  |        |         | 111,026 |  |        |            | 70,585  |  |        |        | 89,188  | 
|Long-term liabilities:                             |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |         |  |        |       
|                                                   | Deferred rent and other long-term liabilities                                                                                                                                                                                                                                                                             |                                            |        | 12,680  |         |  |        | 10,461     |         |  |        | 9,393  |        
|Commitments and contingencies (See notes 8 and 10) |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |         |  |        |       
|Stockholders equity:                              |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |         |  |        |       
|                                                   | Common stock, $0.01 par value; 40,000,000 shares
    authorized; 18,066,397 shares issued and
    17,319,385 shares outstanding at October 1, 2005;
    18,030,360 shares issued and 17,283,348 shares
    outstanding at July 2, 2005; 17,871,210 shares issued
    and 17,124,198 shares outstanding at October 2, 2004 |                                            |        | 182     |         |  |        | 180        |         |  |        | 179    |        
|Additional paid-in capital                         |                                                                                                                                                                                                                                                                                                                           |                                            | 49,537 |         |         |  | 48,506 |            |         |  | 46,917 |       
|Retained earnings                                  |                                                                                                                                                                                                                                                                                                                           |                                            | 54,610 |         |         |  | 60,181 |            |         |  | 52,826 |       
|Treasury stock, at cost (747,012 shares)           |                                                                                                                                                                                                                                                                                                                           |                                            | (5,940 | )       |         |  | (5,940 | )          |         |  | (5,940 | )     
|                                                   |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |        
|                                                   |                                                                                                                                                                                                                                                                                                                           | Total stockholders equity                 |        |         | 98,389  |  |        |            | 102,927 |  |        |        | 93,982  | 
|                                                   |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |        
|                                                   |                                                                                                                                                                                                                                                                                                                           | Total liabilities and stockholders equity |        | $       | 222,095 |  |        | $          | 183,973 |  |        | $      | 192,563 | 
|                                                   |                                                                                                                                                                                                                                                                                                                           |                                            |        |         |         |  |        |            |        



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PARTY CITY CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


|                                      |                                                         |                           |        |         |            |   |        |        |         | 
|------------------------------------- | ------------------------------------------------------- | ------------------------- | ------ | ------- | ---------- | - | ------ | ------ | ------- | 
|                                      |                                                         | Fiscal Quarter Ended      |       
|                                      |                                                         |                           |       
|                                      |                                                         | October 1,                |        |         | October 2, |  
|                                      |                                                         | 2005                      |        |         | 2004       |  
|                                      |                                                         |                           |        |         |            |  
|                                      |                                                         | (In thousands, except per |       
|                                      |                                                         | share data)               |       
|                                      |                                                         | (Unaudited)               |       
|Revenues:                             |                                                         |                           |        |         |            |   |        |       
|                                      | Net sales (retail)                                      |                           | $      | 100,622 |            |   | $      | 98,602 |        
|                                      | Royalty fees                                            |                           |        | 3,983   |            |   |        | 3,827  |        
|                                      | Net sales to franchisees                                |                           |        | 8,219   |            |   |        |       |        
|                                      | Franchise fees                                          |                           |        | 80      |            |   |        | 120    |        
|                                      |                                                         |                           |        |         |            |  
|                                      |                                                         | Total revenues            |        |         | 112,904    |   |        |        | 102,549 | 
|Expenses:                             |                                                         |                           |        |         |            |   |        |       
|                                      | Cost of goods sold and occupancy costs (retail)         |                           |        | 74,547  |            |   |        | 71,857 |        
|                                      | Cost of goods sold to franchisees                       |                           |        | 7,166   |            |   |        |       |        
|                                      | Company-owned store operating and selling expense       |                           |        | 26,371  |            |   |        | 24,259 |        
|                                      | Franchise transportation and other selling expense      |                           |        | 954     |            |   |        |       |        
|                                      | Other franchise expense                                 |                           |        | 2,068   |            |   |        | 1,848  |        
|                                      | General and administrative expense                      |                           |        | 11,138  |            |   |        | 9,722  |        
|                                      |                                                         |                           |        |         |            |  
|                                      |                                                         | Total expenses            |        |         | 122,244    |   |        |        | 107,686 | 
|                                      |                                                         |                           |        |         |            |  
|Operating loss                        |                                                         |                           | (9,340 | )       |            |   | (5,137 | )     
|                                      | Interest income                                         |                           |        | (37     | )          |   |        | (54    | )      
|                                      | Interest expense                                        |                           |        | 59      |            |   |        | 111    |        
|                                      |                                                         |                           |        |         |            |  
|                                      | Interest expense, net                                   |                           |        | 22      |            |   |        | 57     |        
|                                      |                                                         |                           |        |         |            |  
|Loss before benefit from income taxes |                                                         |                           | (9,362 | )       |            |   | (5,194 | )     
|Benefit from income taxes             |                                                         |                           | (3,791 | )       |            |   | (2,103 | )     
|                                      |                                                         |                           |        |         |            |  
|Net loss                              |                                                         | $                         | (5,571 | )       |            | $ | (3,091 | )     
|                                      |                                                         |                           |        |         |            |  
|                                      | Basic and diluted loss per share                        |                           | $      | (0.32   | )          |   | $      | (0.18  | )      
|                                      |                                                         |                           |        |         |            |  
|                                      | Weighted average shares outstanding  basic and diluted |                           |        | 17,304  |            |   |        | 17,105 |        
|                                      |                                                         |                           |        |         |            |  



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PARTY CITY CORPORATION





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                          |                                                                                   |                                                |                                           |        |            |        |        |        |         |        |  
|--------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------- | ----------------------------------------- | ------ | ---------- | ------ | ------ | ------ | ------- | ------ | -
|                                                          |                                                                                   | Fiscal Quarter Ended                           |                                          
|                                                          |                                                                                   |                                                |                                          
|                                                          |                                                                                   | October 1,                                     |                                           |        | October 2, |       
|                                                          |                                                                                   | 2005                                           |                                           |        | 2004       |       
|                                                          |                                                                                   |                                                |                                           |        |            |       
|                                                          |                                                                                   | (In thousands)                                 |                                          
|                                                          |                                                                                   | (Unaudited)                                    |                                          
|Cash flow from operating activities:                      |                                                                                   |                                                |                                           |        |            |        |        |       
|                                                          | Net loss                                                                          |                                                | $                                         | (5,571 | )          |        | $      | (3,091 | )      
|                                                          | Adjustments to reconcile net income to net cash used in
    operating activities: |                                                |                                           |        |            |        |        |        |        
|                                                          |                                                                                   | Depreciation and amortization                  |                                           |        | 3,809      |        |        |        | 4,332   |       
|                                                          |                                                                                   | Amortization of financing costs                |                                           |        | 18         |        |        |        | 40      |       
|                                                          |                                                                                   | Deferred rent                                  |                                           |        | (61        | )      |        |        | (127    | )     
|                                                          |                                                                                   | Stock-based compensation                       |                                           |        | 514        |        |        |        | 7       |       
|                                                          |                                                                                   | Provision for doubtful accounts                |                                           |        | 246        |        |        |        | (70     | )     
|                                                          |                                                                                   | Other                                          |                                           |        | 63         |        |        |        | (125    | )     
|                                                          | Changes in assets and liabilities:                                                |                                                |                                           |        |            |        |        |        |        
|                                                          |                                                                                   | Merchandise inventory                          |                                           |        | (35,160    | )      |        |        | (24,301 | )     
|                                                          |                                                                                   | Accounts payable                               |                                           |        | 30,503     |        |        |        | 23,518  |       
|                                                          |                                                                                   | Accrued expenses and other current liabilities |                                           |        | 3,022      |        |        |        | (5,383  | )     
|                                                          |                                                                                   | Other long-term liabilities                    |                                           |        | 2,425      |        |        |        | 60      |       
|                                                          |                                                                                   | Other current assets and other assets          |                                           |        | (1,540     | )      |        |        | (2,264  | )     
|                                                          |                                                                                   |                                                |                                           |        |            |       
|                                                          |                                                                                   |                                                | Net cash used in operating activities     |        |            | (1,732 | )      |        |         | (7,404 | )
|                                                          |                                                                                   |                                                |                                           |        |            |       
|Cash flow from investing activities:                      |                                                                                   |                                                |                                           |        |            |        |        |       
|                                                          | Purchases of property and equipment                                               |                                                |                                           | (3,842 | )          |        |        | (2,252 | )      
|                                                          | Proceeds from the sale of assets                                                  |                                                |                                           |       |            |        |        | 250    |        
|                                                          |                                                                                   |                                                |                                           |        |            |       
|                                                          |                                                                                   |                                                | Net cash used in investing activities     |        |            | (3,842 | )      |        |         | (2,002 | )
|                                                          |                                                                                   |                                                |                                           |        |            |       
|Cash flow from financing activities:                      |                                                                                   |                                                |                                           |        |            |        |        |       
|                                                          | Proceeds from exercise of stock options                                           |                                                |                                           | 236    |            |        |        | 175    |        
|                                                          | Tax-effect on non-qualified stock options                                         |                                                |                                           | 186    |            |        |        |       |        
|                                                          | Repayment of capital lease                                                        |                                                |                                           | (44    | )          |        |        |       |        
|                                                          | Net proceeds from Loan Agreement                                                  |                                                |                                           | 4,800  |            |        |        |       |        
|                                                          |                                                                                   |                                                |                                           |        |            |       
|                                                          |                                                                                   |                                                | Net cash provided by financing activities |        |            | 5,178  |        |        |         | 175    |  
|                                                          |                                                                                   |                                                |                                           |        |            |       
|Net decrease in cash and cash equivalents                 |                                                                                   |                                                | (396                                      | )      |            |        | (9,231 | )     
|Cash and cash equivalents, beginning of year              |                                                                                   |                                                | 11,034                                    |        |            |        | 27,845 |       
|                                                          |                                                                                   |                                                |                                           |        |            |       
|Cash and cash equivalents, end of year                    |                                                                                   | $                                              | 10,638                                    |        |            | $      | 18,614 |       
|                                                          |                                                                                   |                                                |                                           |        |            |       
|Supplemental disclosure of cash flow information:         |                                                                                   |                                                |                                           |        |            |        |        |       
|                                                          | Income taxes paid                                                                 |                                                | $                                         | 853    |            |        | $      | 1,200  |        
|                                                          | Interest paid                                                                     |                                                | $                                         | 28     |            |        | $      | 70     |        
|Supplemental disclosure of non-cash investing activity:   |                                                                                   |                                                |                                           |        |            |        |        |       
|                                                          | Accrued purchases of property and equipment                                       |                                                | $                                         | 2,234  |            |        | $      |       |        
|Supplemental disclosure of non-cash financing activities: |                                                                                   |                                                |                                           |        |            |        |        |       
|                                                          | Issuance of shares under management stock purchase plan                           |                                                | $                                         | 96     |            |        | $      | 53     |        
|                                                          | Capital lease obligation used to purchase fixed assets                            |                                                | $                                         | 693    |            |        | $      |       |        



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PARTY CITY CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)




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











|   |                    
|-- | -------------------
|2. | Recent Developments









|   |                    
|-- | -------------------
|3. | Accounting Policies





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PARTY CITY CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  (Continued)






|   |                         
|-- | ------------------------
|4. | Stock-Based Compensation







8



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PARTY CITY CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  (Continued)




|                                  |                                                                                                                             |                      |        |        |  
|--------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------ | ------ | -
|                                  |                                                                                                                             | Fiscal Quarter Ended |       
|                                  |                                                                                                                             | October 2, 2004      |       
|                                  |                                                                                                                             |                      |       
|                                  |                                                                                                                             | (In thousands)       |       
|Net loss as reported              |                                                                                                                             | $                    | (3,091 | )     
|                                  | Add: Stock-based employee compensation expense determined under
    APB 25, net of tax                                      |                      |        | 4      |  
|                                  | Deduct: Total stock based employee compensation determined under
    fair value based method of SFAS No. 123, net of tax(1) |                      |        | (436   | )
|                                  |                                                                                                                             |                      |       
|                                  | Pro-Forma net income                                                                                                        |                      | $      | (3,523 | )
|                                  |                                                                                                                             |                      |       
|Basic and diluted loss per share: |                                                                                                                             |                      |        |       
|                                  | Basic and diluted loss per share as reported                                                                                |                      | $      | (0.18  | )
|                                  | Basic and diluted loss per share pro forma                                                                                  |                      | $      | (0.21  | )



|                                                  |  |                   |           |   |                |   |       | 
|------------------------------------------------- |  | ----------------- | --------- | - | -------------- | - | ----- | 
|                                                  |  | Total Outstanding |          
|                                                  |  |                   |          
|                                                  |  | Number of Options |           |   | Average Price* |  
|                                                  |  |                   |           |   |                |  
|July 3, 2005                                      |  |                   | 2,882,669 |   |                | $ | 11.77 | 
|Granted                                           |  |                   | 286,700   |   |                | $ | 13.31 | 
|Canceled/forfeited                                |  |                   | (128,748  | ) |                | $ | 14.78 | 
|Exercised                                         |  |                   | (39,855   | ) |                | $ | 11.84 | 
|                                                  |  |                   |           |   |                |  
|October 1, 2005                                   |  |                   | 3,000,766 |   |                | $ | 11.87 | 
|                                                  |  |                   |           |   |                |  
|Total outstanding  average life(b)               |  |                   | 7.31      |   |                |   |       | 
|                                                  |  |                   |           |   |                |  
|Number of options currently exercisable           |  |                   | 1,822,263 |   |                |   |       | 
|                                                  |  |                   |           |   |                |  
|Average price of options currently exercisable(a) |  | $                 | 11.00     |   |                |   |       | 
|                                                  |  |                   |           |   |                |  
|Average life of options currently exercisable(a)  |  |                   | 6.37      |   |                |   |       | 
|                                                  |  |                   |           |   |                |  






| |     |                                 
| | --- | --------------------------------
| | (a) | Weighted-average exercise price.



|    |                                                      
|--- | -----------------------------------------------------
|(b) | Weighted-average contractual life remaining in years.



|                        |  |                      |           |   |            |  |           |  
|----------------------- |  | -------------------- | --------- | - | ---------- |  | --------- | -
|                        |  | Fiscal Quarter Ended |          
|                        |  |                      |          
|                        |  | October 1,           |           |   | October 2, | 
|                        |  | 2005                 |           |   | 2004       | 
|                        |  |                      |           |   |            | 
|Expected volatility     |  |                      | 42        | % |            |  | 55        | %
|Expected lives          |  |                      | 4.5 years |   |            |  | 4.0 years |  
|Risk-free interest rate |  |                      | 3.8       | % |            |  | 3.3       | %
|Expected dividend yield |  |                      | 0.0       | % |            |  | 0.0       | %

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PARTY CITY CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  (Continued)




|                            |  |           |        |   |               |   |         |  
|--------------------------- |  | --------- | ------ | - | ------------- | - | ------- | -
|                            |  | Number of |        |   | Fair Value at |  
|                            |  | Options   |        |   | Grant Date    |  
|                            |  |           |        |   |               |  
|Nonvested  July 3, 2005    |  |           | 13,567 |   |               | $ | 150,641 |  
|Granted                     |  |           | 440    |   |               |   | 4,838   |  
|Vested                      |  |           | (8,415 | ) |               |   | (96,208 | )
|Forfeited/canceled          |  |           | (172   | ) |               |   | (2,026  | )
|                            |  |           |        |   |               |  
|Nonvested  October 1, 2005 |  |           | 5,420  |   |               | $ | 57,245  |  
|                            |  |           |        |   |               |  



|   |               
|-- | --------------
|5. | Loss Per Share



|                                                                               |  |                       |        |   |            |   |        |  
|------------------------------------------------------------------------------ |  | --------------------- | ------ | - | ---------- | - | ------ | -
|                                                                               |  | Fiscal Quarter Ended  |       
|                                                                               |  |                       |       
|                                                                               |  | October 1,            |        |   | October 2, |  
|                                                                               |  | 2005                  |        |   | 2004       |  
|                                                                               |  |                       |        |   |            |  
|                                                                               |  | (In thousands, except |       
|                                                                               |  | per share data)       |       
|Net loss                                                                       |  | $                     | (5,571 | ) |            | $ | (3,091 | )
|Loss per share  basic and diluted(a)                                          |  | $                     | (0.32  | ) |            | $ | (0.18  | )
|Weighted average common shares outstanding                                     |  |                       | 17,304 |   |            |   | 17,105 |  
|Dilutive effect of stock options(b)                                            |  |                       |       |   |            |   |       |  
|Dilutive effect of warrants(c)                                                 |  |                       |       |   |            |   |       |  
|Dilutive effect of restricted stock units(d)                                   |  |                       |       |   |            |   |       |  
|                                                                               |  |                       |        |   |            |  
|Weighted average common and potentially dilutive common shares
    outstanding |  |                       | 17,304 |   |            |   | 17,105 |  
|                                                                               |  |                       |        |   |            |  






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Stock options and warrants with exercise prices below the
    applicable market price of the Companys common stock and
    all restricted stock units are included in potentially dilutive
    common shares outstanding if the Company reports net income for
    a reporting period. However, when the Company incurs a net loss
    for a reporting period, the inclusion of any such shares would
    result in a decrease in loss per share, and therefore all stock
    options, warrants and restricted stock units are ignored when
    calculating diluted loss per share. Therefore, the
    Companys loss per share for the quarter ended
    October 1, 2005 and October 2, 2004 are the same
    amounts on a basic and diluted basis, respectively.
|   
|(b) |  | Options to purchase 3,000,766 common shares with exercise
    prices ranging from $1.71 to $30.88 per share were
    outstanding at October 1, 2005, and options to
    purchase 3,171,199 common shares with exercise prices
    ranging from $1.71 to $30.88 per share were outstanding at
    October 2, 2004, were not included in the computation of
    diluted loss per share for the fiscal quarter ended
    October 1, 2005 and October 2, 2004, respectively,
    because to do so would have been anti-dilutive.                                                                                                                                                                                                                                       
|   
|(c) |  | Warrants to purchase 2,496,000 common shares with an
    exercise price of $1.07 per share were outstanding at
    October 1, 2005 and October 2, 2004 but were not
    included in the computation of diluted loss per share for the
    fiscal quarter ended October 1, 2005 and October 2,
    2004, respectively, because to do so would have been
    anti-dilutive. See Notes 7 and 14.                                                                                                                                                                                                                                                                                                                                                                      
|   
|(d) |  | Restricted stock units of 5,420 and 13,567 shares of common
    stock were outstanding at October 1, 2005 and
    October 2, 2004, respectively, related to the Management
    Stock Purchase Plan and were not included in the computation of
    diluted loss per share for the fiscal quarter ended
    October 2, 2004 and September 27, 2003, respectively,
    because to do so would have been anti-dilutive.                                                                                                                                                                                                                                                                                                                                               

10



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##### Table of Contents



PARTY CITY CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  (Continued)




|   |                    
|-- | -------------------
|6. | Financing Agreement







|   |                     
|-- | --------------------
|7. | Stockholders Equity



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





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



11



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##### Table of Contents



PARTY CITY CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  (Continued)




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





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













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



12



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##### Table of Contents



PARTY CITY CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  (Continued)






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





|   |                  
|-- | -----------------
|8. | Legal Proceedings





|   |                    
|-- | -------------------
|9. | Segment Information







|              |  |                      |     |   |            |  |     |  
|------------- |  | -------------------- | --- | - | ---------- |  | --- | -
|              |  | Fiscal Quarter Ended |    
|              |  |                      |    
|              |  | October 1,           |     |   | October 2, | 
|              |  | 2005                 |     |   | 2004       | 
|              |  |                      |     |   |            | 
|Seasonal      |  |                      | 24  | % |            |  | 24  | %
|Non-Seasonal: |  |                      | 76  | % |            |  | 76  | %
|              |  |                      |     |   |            | 
|              |  |                      | 100 | % |            |  | 100 | %
|              |  |                      |     |   |            | 

13



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##### Table of Contents



PARTY CITY CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  (Continued)




|                              |                                                     |                      |         |         |            |   |         |         |  
|----------------------------- | --------------------------------------------------- | -------------------- | ------- | ------- | ---------- | - | ------- | ------- | -
|                              |                                                     | Fiscal Quarter Ended |        
|                              |                                                     |                      |        
|                              |                                                     | October 1,           |         |         | October 2, |  
|                              |                                                     | 2005                 |         |         | 2004       |  
|                              |                                                     |                      |         |         |            |  
|                              |                                                     | (In thousands)       |        
|Retail:                       |                                                     |                      |         |         |            |   |         |        
|                              | Net sales                                           |                      | $       | 100,622 |            |   | $       | 98,602  |  
|                              | Cost of goods sold and occupancy costs              |                      |         | 74,547  |            |   |         | 71,857  |  
|                              |                                                     |                      |         |         |            |  
|                              | Gross profit                                        |                      |         | 26,075  |            |   |         | 26,745  |  
|                              | Store operating and selling expense                 |                      |         | 26,371  |            |   |         | 24,259  |  
|                              |                                                     |                      |         |         |            |  
|                              | Company-owned store (loss) profit contribution      |                      |         | (296    | )          |   |         | 2,486   |  
|                              | General and administrative expense                  |                      |         | 11,138  |            |   |         | 9,722   |  
|                              |                                                     |                      |         |         |            |  
|                              | Retail loss contribution                            |                      |         | (11,434 | )          |   |         | (7,236  | )
|                              |                                                     |                      |         |         |            |  
|                              | Identifiable assets                                 |                      | $       | 212,621 |            |   | $       | 189,966 |  
|                              | Depreciation and amortization                       |                      | $       | 3,736   |            |   | $       | 4,332   |  
|                              | Capital expenditures                                |                      | $       | 3,816   |            |   | $       | 2,252   |  
|Franchise:                    |                                                     |                      |         |         |            |   |         |        
|                              | Royalty fees                                        |                      | $       | 3,983   |            |   | $       | 3,827   |  
|                              | Net sales to franchisees                            |                      |         | 8,219   |            |   |         |        |  
|                              | Franchise fees                                      |                      |         | 80      |            |   |         | 120     |  
|                              |                                                     |                      |         |         |            |  
|                              | Total franchise revenues                            |                      |         | 12,282  |            |   |         | 3,947   |  
|                              |                                                     |                      |         |         |            |  
|                              | Cost of goods sold to franchisees                   |                      |         | 7,166   |            |   |         |        |  
|                              | Franchise transportation and other selling expenses |                      |         | 954     |            |   |         |        |  
|                              | Other franchise expense                             |                      |         | 2,068   |            |   |         | 1,848   |  
|                              |                                                     |                      |         |         |            |  
|                              | Total franchise expense                             |                      |         | 10,188  |            |   |         | 1,848   |  
|                              |                                                     |                      |         |         |            |  
|                              | Franchise profit contribution                       |                      |         | 2,094   |            |   |         | 2,099   |  
|                              |                                                     |                      |         |         |            |  
|                              | Identifiable assets                                 |                      | $       | 9,474   |            |   | $       | 2,597   |  
|                              | Depreciation and amortization                       |                      | $       | 73      |            |   | $       |        |  
|                              | Capital expenditures                                |                      | $       | 26      |            |   | $       |        |  
|Total Company:                |                                                     |                      |         |         |            |   |         |        
|Operating loss                |                                                     |                      | (9,340  | )       |            |   | (5,137  | )      
|Interest expense, net         |                                                     |                      | 22      |         |            |   | 57      |        
|                              |                                                     |                      |         |         |            |  
|Loss before income taxes      |                                                     |                      | (9,362  | )       |            |   | (5,194  | )      
|Benefit from income taxes     |                                                     |                      | (3,791  | )       |            |   | (2,103  | )      
|                              |                                                     |                      |         |         |            |  
|Net loss                      |                                                     | $                    | (5,571  | )       |            | $ | (3,091  | )      
|                              |                                                     |                      |         |         |            |  
|Identifiable assets           |                                                     | $                    | 222,095 |         |            | $ | 192,563 |        
|Depreciation and amortization |                                                     | $                    | 3,809   |         |            | $ | 4,332   |        
|Capital expenditures          |                                                     | $                    | 3,842   |         |            | $ | 2,252   |        



14



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##### Table of Contents



PARTY CITY CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  (Continued)




|    |                                              
|--- | ---------------------------------------------
|10. | Lease Commitments and Contractual Obligations



|                    |  |                |         |           |           |   |             |                |  |            |             |  |  |             |       |  |  |   |     | 
|------------------- |  | -------------- | ------- | --------- | --------- | - | ----------- | -------------- |  | ---------- | ----------- |  |  | ----------- | ----- |  |  | - | --- | 
|                    |  |                |         |           |           |   |             | Logistics      |  |            |            
|                    |  |                |         | Operating |           |   | Merchandise |                |  | Initiative |             |  | 
|                    |  | Total          |         |           | Leases(1) |   |             | Commitments(2) |  |            | Obligations |  |  | Auto Leases |      
|                    |  |                |         |           |           |   |             |                |  |            |             |  |  |             |      
|                    |  | (In thousands) |        
|Fiscal year ending: |  |                |         |           |           |   |             |                |  |            |             |  |  |             |       |  |  |   |     | 
|2006                |  | $              | 54,671  |           |           | $ | 36,540      |                |  | $          | 15,899      |  |  | $           | 2,025 |  |  | $ | 207 | 
|2007                |  |                | 47,286  |           |           |   | 44,368      |                |  |            |            |  |  |             | 2,700 |  |  |   | 218 | 
|2008                |  |                | 35,832  |           |           |   | 35,760      |                |  |            |            |  |  |             |      |  |  |   | 72  | 
|2009                |  |                | 24,022  |           |           |   | 24,021      |                |  |            |            |  |  |             |      |  |  |   | 1   | 
|2010                |  |                | 15,938  |           |           |   | 15,938      |                |  |            |            |  |  |             |      |  |  |   |    | 
|Thereafter          |  |                | 46,517  |           |           |   | 46,517      |                |  |            |            |  |  |             |      |  |  |   |    | 
|                    |  |                |         |           |           |   |             |                |  |            |             |  |  |             |      
|                    |  | $              | 224,266 |           |           | $ | 203,144     |                |  | $          | 15,899      |  |  | $           | 4,725 |  |  | $ | 498 | 
|                    |  |                |         |           |           |   |             |                |  |            |             |  |  |             |      






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company is also obligated for guarantees, subleases or
    assigned lease obligations for 22 of the franchise stores
    through 2011. The majority of the guarantees, subleases and
    assigned lease obligations were given when the Company sold
    stores in 1999 as part of its restructuring. The guarantees,
    subleases and assigned lease obligations continue until the
    applicable leases expire. The maximum amount of the guarantees,
    subleases and assigned lease obligations may vary, but is
    limited to the sum of the total amount due under the lease. As
    of October 1, 2005, the maximum amount of the guarantees,
    subleases and assigned lease obligations was approximately
    $10.3 million, which is not included in the table above.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The operating leases included in the above table also do not
    include contingent rent based upon sales volume, which
    represented less than 1% of the Companys minimum lease
    obligations during the first quarter of Fiscal 2006, or other
    variable costs such as maintenance, insurance and taxes, which
    represented approximately 4.5% of minimum lease obligations
    during the first quarter of Fiscal 2006.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | In Fiscal 2005, the Company and its franchisees purchased in
    excess of $400 million of merchandise from third party
    suppliers. The Company currently has one contract, which
    terminates on December 31, 2005 but may be extended until
    December 31, 2010 at the suppliers option, that
    provides for minimum merchandise commitments equal to less than
    5% per year of our total merchandise purchased from third
    party suppliers (based on Fiscal 2005 total purchases). These
    potential merchandise commitments are not reflected in the table
    above.

Severance.






15



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##### Table of Contents



PARTY CITY CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  (Continued)




Operating Leases.






Merchandise Commitments.


Logistics Initiative Obligations.


Auto Leases.


Capital Leases.


Other.


16



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##### Table of Contents



PARTY CITY CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  (Continued)




|    |                                      
|--- | -------------------------------------
|11. | Costs Associated with Exit Activities





|                                                  |  |            |      |   |              |   |     |  
|------------------------------------------------- |  | ---------- | ---- | - | ------------ | - | --- | -
|                                                  |  | Severance  |      |   | Closed Store |  
|                                                  |  | Reserve(a) |      |   | Reserve      |  
|                                                  |  |            |      |   |              |  
|Balance as of July 2, 2005                        |  |            | 537  |   |              |   | 775 |  
|Accrual made in the first quarter of Fiscal 2006  |  |            | 30   |   |              |   | (8  | )
|Payments made in the first quarter of Fiscal 2006 |  |            | (301 | ) |              |   | (63 | )
|                                                  |  |            |      |   |              |  
|Balance as of October 1, 2005                     |  | $          | 266  |   |              | $ | 704 |  
|                                                  |  |            |      |   |              |  






| |     |                                                                                                                                                   
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Severance associated with staff restructuring, which took place
    during the fourth quarter of fiscal 2005 and first quarter of
    fiscal 2006.



|    |                      
|--- | ---------------------
|12. | Non-Compete Agreement



|                           |  |                |     | 
|-------------------------- |  | -------------- | --- | 
|                           |  | Amortization   |    
|Fiscal year ending:        |  | Expense        |    
|                           |  |                |    
|                           |  | (In thousands) |    
|2006                       |  | $              | 62  | 
|2007                       |  |                | 82  | 
|2008                       |  |                | 82  | 
|2009                       |  |                | 21  | 
|2010                       |  |                | 1   | 
|Thereafter                 |  |                | 13  | 
|                           |  |                |    
|Total amortization expense |  | $              | 261 | 
|                           |  |                |    



|    |                                 
|--- | --------------------------------
|13. | Recent Accounting Pronouncements



17



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##### Table of Contents



PARTY CITY CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  (Continued)












|    |                  
|--- | -----------------
|14. | Subsequent Events

Warrants.


Hurricane Wilma.


18



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##### Table of Contents








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

Overview






Recent Developments












Business Strategies






19



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##### Table of Contents







| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to return to positive same-store net sales comparisons on a
    consistent basis, by increasing both customer traffic and the
    average transaction;               
|
| |  | to improve margins through net sales growth as well as
    leveraging our prior investments in logistics and systems;                                                
|
| |  | to foster a more direct, in-depth relationship with our
    customers through our marketing efforts; and                                                             
|
| |  | to improve customer service by using our systems and
    distribution infrastructure to further centralize tasks that
    otherwise would be done at the store level.





Cash Flow and Liquidity.


Inventory.


20



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##### Table of Contents



Key Performance Indicators and Statistics




|                                                                                          |  |                      |         |    |            |   |        |   
|----------------------------------------------------------------------------------------- |  | -------------------- | ------- | -- | ---------- | - | ------ | --
|                                                                                          |  | Fiscal Quarter Ended |        
|                                                                                          |  |                      |        
|                                                                                          |  | October 1,           |         |    | October 2, |  
|                                                                                          |  | 2005                 |         |    | 2004       |  
|                                                                                          |  |                      |         |    |            |  
|Net sales (in thousands)                                                                  |  | $                    | 100,622 |    |            | $ | 98,602 |   
|Total Company-owned store count                                                           |  |                      | 249     |    |            |   | 249    |   
|Total Company-owned temporary store count                                                 |  |                      | 10      |    |            |   |       |   
|Average same store net sales for Company-owned
    stores  current period (in thousands) |  | $                    | 407     |    |            | $ | 400    |   
|Increase (decrease) in Company-owned same store net sales                                 |  |                      | 1.8     | %  |            |   | (5.2   | )%
|Same store average net sale per retail transaction(a)                                     |  | $                    | 19.56   |    |            | $ | 19.12  |   
|Gross profit as a percent of net sales                                                    |  |                      | 25.9    | %  |            |   | 27.1   | % 
|Store profit (loss) contribution as a percent of net sales                                |  |                      | (0.3    | )% |            |   | 2.5    | % 
|Basic and diluted loss per share                                                          |  | $                    | (0.32   | )  |            | $ | (0.18  | ) 
|EBITDA(b) (in thousands)                                                                  |  | $                    | (5,531  | )  |            | $ | (805   | ) 
|Increase (decrease) in franchise same store net sales                                     |  |                      | 1.8     | %  |            |   | (2.9   | )%




|    |  |                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Same store sales divided by same store retail transactions.
    Retail transactions represent each time a customer makes a
    purchase or return at the register.
|   
|(b) |  | See EBITDA discussion on page 30.                                                                                                                                 



|            |                                          |                                                      |                              |     |            |     |   |     |     |     |  
|----------- | ---------------------------------------- | ---------------------------------------------------- | ---------------------------- | --- | ---------- | --- | - | --- | --- | --- | -
|            |                                          | Fiscal Quarter Ended                                 |                             
|            |                                          |                                                      |                             
|            |                                          | October 1,                                           |                              |     | October 2, |    
|            |                                          | 2005                                                 |                              |     | 2004       |    
|            |                                          |                                                      |                              |     |            |    
|Store Data: |                                          |                                                      |                              |     |            |     |   |    
|            | Company-owned:                           |                                                      |                              |     |            |     |   |     |    
|            |                                          | Stores open at beginning of period                   |                              |     | 247        |     |   |     | 249 |    
|            |                                          |                                                      | Stores opened                |     |            | 2   |   |     |     | 1   |  
|            |                                          |                                                      | Stores closed                |     |            |    |   |     |     | (1  | )
|            |                                          |                                                      |                              |     |            |    
|            |                                          |                                                      | Stores open at end of period |     |            | 249 |   |     |     | 249 |  
|            |                                          |                                                      |                              |     |            |    
|            |                                          | Weighted-average Company-owned stores open in period |                              |     | 247        |     |   |     | 249 |    
|            |                                          |                                                      |                              |     |            |    
|            | Franchise:                               |                                                      |                              |     |            |     |   |     |    
|            |                                          | Stores open at beginning of period                   |                              |     | 255        |     |   |     | 257 |    
|            |                                          |                                                      | Stores opened                |     |            | 3   |   |     |     | 3   |  
|            |                                          |                                                      | Stores closed                |     |            | (1  | ) |     |     | (1  | )
|            |                                          |                                                      |                              |     |            |    
|            |                                          |                                                      | Stores open at end of period |     |            | 257 |   |     |     | 259 |  
|            |                                          |                                                      |                              |     |            |    
|            |                                          | Weighted-average franchise stores open in period     |                              |     | 255        |     |   |     | 258 |    
|            |                                          |                                                      |                              |     |            |    
|            | Total Company-owned and franchise stores |                                                      |                              | 506 |            |     |   | 508 |    
|            |                                          |                                                      |                              |     |            |    

Critical Accounting Policies and Estimates




21



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##### Table of Contents









Merchandise inventory.






Allowance for doubtful accounts.


Finite long-lived assets.




| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | significant changes in the manner of our use of assets or the
    strategy for our overall business;
|
| |  | significant negative industry or economic trends;                                                   
|
| |  | store closings; or                                                                                  
|
| |  | underperforming business trends.                                                                    

Insurance accruals.


22



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##### Table of Contents



Goodwill.


Sales Returns.


Store Closure Costs.


Stock Option Expenses.


Income Taxes.




General Definitions for Operating Results


Net Sales


23



---



##### Table of Contents



Cost of goods sold and occupancy costs


Gross profit


Store operating and selling expenses


Company-owned store profit contribution


General and administrative expense


Franchising.


Franchise profit contribution


Interest expense, net


24



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##### Table of Contents



Results of Operations




PARTY CITY CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


|                              |                                                         |                       |         |         |            |   |         |        |  
|----------------------------- | ------------------------------------------------------- | --------------------- | ------- | ------- | ---------- | - | ------- | ------ | -
|                              |                                                         | Fiscal Quarter Ended  |        
|                              |                                                         |                       |        
|                              |                                                         | October 1,            |         |         | October 2, |  
|                              |                                                         | 2005                  |         |         | 2004       |  
|                              |                                                         |                       |         |         |            |  
|                              |                                                         | (In thousands, except |        
|                              |                                                         | share data)           |        
|Statement of Operations Data: |                                                         |                       |         |         |            |   |         |       
|Total revenues                |                                                         | $                     | 112,904 |         |            | $ | 102,549 |       
|                              |                                                         |                       |         |         |            |  
|Company-owned stores:         |                                                         |                       |         |         |            |   |         |       
|                              | Net sales                                               |                       | $       | 100,622 |            |   | $       | 98,602 |  
|                              | Cost of goods sold and occupancy costs                  |                       |         | 74,547  |            |   |         | 71,857 |  
|                              |                                                         |                       |         |         |            |  
|                              | Gross profit                                            |                       |         | 26,075  |            |   |         | 26,745 |  
|                              | Store operating and selling expense                     |                       |         | 26,371  |            |   |         | 24,259 |  
|                              |                                                         |                       |         |         |            |  
|                              | Company-owned store (loss) profit contribution          |                       |         | (296    | )          |   |         | 2,486  |  
|                              | General and administrative expense                      |                       |         | 11,138  |            |   |         | 9,722  |  
|                              |                                                         |                       |         |         |            |  
|                              | Retail loss contribution                                |                       |         | (11,434 | )          |   |         | (7,236 | )
|                              |                                                         |                       |         |         |            |  
|Franchise stores:             |                                                         |                       |         |         |            |   |         |       
|                              | Royalty fees                                            |                       |         | 3,983   |            |   |         | 3,827  |  
|                              | Net sales to franchisees                                |                       |         | 8,219   |            |   |         |       |  
|                              | Franchise fees                                          |                       |         | 80      |            |   |         | 120    |  
|                              |                                                         |                       |         |         |            |  
|                              | Total franchise revenues                                |                       |         | 12,282  |            |   |         | 3,947  |  
|                              |                                                         |                       |         |         |            |  
|                              | Cost of goods sold to franchisees                       |                       |         | 7,166   |            |   |         |       |  
|                              | Franchise transportation and other selling expenses     |                       |         | 954     |            |   |         |       |  
|                              | Other franchise expense                                 |                       |         | 2,068   |            |   |         | 1,848  |  
|                              |                                                         |                       |         |         |            |  
|                              | Total franchise expense                                 |                       |         | 10,188  |            |   |         | 1,848  |  
|                              |                                                         |                       |         |         |            |  
|                              | Franchise profit contribution                           |                       |         | 2,094   |            |   |         | 2,099  |  
|                              |                                                         |                       |         |         |            |  
|Operating loss                |                                                         |                       | (9,340  | )       |            |   | (5,137  | )     
|Interest expense, net         |                                                         |                       | 22      |         |            |   | 57      |       
|                              |                                                         |                       |         |         |            |  
|Loss before income taxes      |                                                         |                       | (9,362  | )       |            |   | (5,194  | )     
|Benefit from income taxes     |                                                         |                       | (3,791  | )       |            |   | (2,103  | )     
|                              |                                                         |                       |         |         |            |  
|Net loss                      |                                                         | $                     | (5,571  | )       |            | $ | (3,091  | )     
|                              |                                                         |                       |         |         |            |  
|                              | Basic and diluted loss per share                        |                       | $       | (0.32   | )          |   | $       | (0.18  | )
|                              |                                                         |                       |         |         |            |  
|                              | Weighted average shares outstanding  basic and diluted |                       |         | 17,304  |            |   |         | 17,105 |  
|                              |                                                         |                       |         |         |            |  



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Fiscal Quarter Ended October 1, 2005 Compared To
    Fiscal Quarter Ended October 2, 2004

Retail.


25



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##### Table of Contents







|                                                   |  |                         |      |   |                                |                                                                                                    
|-------------------------------------------------- |  | ----------------------- | ---- | - | ------------------------------ | ---------------------------------------------------------------------------------------------------
|                                                   |  | Portion of Total Change |      |   |                               
|Component                                          |  | Increase/(Decrease)     |      |   | Reason of Increase/(Decrease):
|                                                   |  |                         |      |   |                               
|                                                   |  | (In millions)           |      |   |                               
|Net sales impact on merchandise margins            |  | $                       | 0.5  |   |                                | Due to increased sales on new merchandise assortments.                                             
|Merchandise margins (including distribution costs) |  |                         | (2.0 | ) |                                | Due to transitional distribution costs of $600,000 and increased
    promotional markdown activity.
|Occupancy and other costs                          |  |                         | 0.9  |   |                                | Due to reduced depreciation expenses                                                               
|                                                   |  |                         |      |   |                               
|                                                   |  |                         |      |   |                                | and insurance liabilities, partially offset by an increase in
    rent and utility expenses.       
|Total                                              |  | $                       | (0.6 | ) |                                |                                                                                                    
|                                                   |  |                         |      |   |                               



|                               |  |                         |      |   |                                |                                                                              
|------------------------------ |  | ----------------------- | ---- | - | ------------------------------ | -----------------------------------------------------------------------------
|                               |  | Portion of Total Change |      |   |                               
|Component                      |  | Increase/(Decrease)     |      |   | Reason of Increase/(Decrease):
|                               |  |                         |      |   |                               
|                               |  | (In millions)           |      |   |                               
|Variable store operating costs |  | $                       | 0.1  |   |                                | Due to increased net sales.                                                  
|Payroll                        |  |                         | (1.0 | ) |                                | Due primarily to reduced labor costs from efficiency
    improvements.       
|Other operating costs          |  |                         | 3.0  |   |                                | Due to increased advertising expenses, credit card fees and
    supply costs.
|                               |  |                         |      |   |                               
|Total                          |  | $                       | 2.1  |   |                                |                                                                              
|                               |  |                         |      |   |                               



26



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|                            |  |                         |      |   |                                |                                                                                                                                             
|--------------------------- |  | ----------------------- | ---- | - | ------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------
|                            |  | Portion of Total Change |      |   |                               
|Component                   |  | Increase/(Decrease)     |      |   | Reason of Increase/(Decrease):
|                            |  |                         |      |   |                               
|                            |  | (In millions)           |      |   |                               
|Payroll and fringe benefits |  | $                       | 0.2  |   |                                | Due primarily to $500,000 of stock option expenses, partially
    offset by a decrease in fringe benefit expenses.                          
|Occupancy                   |  |                         | 0.5  |   |                                | Due to leasing of additional corporate office space.                                                                                        
|Professional fees           |  |                         | 1.1  |   |                                | Due primarily to $1.4 million of professional fees
    associated with the proposed merger, partially offset by reduced
    consulting fees.
|Other                       |  |                         | (0.4 | ) |                                | Due to a decrease in recruiting fees and store closing costs.                                                                               
|                            |  |                         |      |   |                               
|Total                       |  | $                       | 1.4  |   |                                |                                                                                                                                             
|                            |  |                         |      |   |                               

Franchising.








Interest Expense.


Income Taxes.


Net Income.


Liquidity and Capital Resources




27



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| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | implementing new merchandising systems;                                                                                                                                                                               
|
| |  | transitioning to our new corporate headquarters;                                                                                                                                                                      
|
| |  | investing in our current and future permanent and temporary
    store locations;                                                                                                                                      
|
| |  | improving customer service to foster a more direct, in depth
    relationship with our customers through our marketing efforts;                                                                                       
|
| |  | supporting our logistics initiative, pursuant to which we have
    outsourced the management of our centralized warehousing and
    distribution facilities and continued to enhance our
    distribution network; and
|
| |  | servicing our franchise owners participating in the distribution
    network.                                                                                                                                         





Key Indicators of Liquidity and Capital Resources




|                                  |                               |                                |   |         |            |   |   |         |        |  
|--------------------------------- | ----------------------------- | ------------------------------ | - | ------- | ---------- | - | - | ------- | ------ | -
|                                  |                               | Fiscal Quarter Ended           |  
|                                  |                               |                                |  
|                                  |                               | October 1,                     |   |         | October 2, |  
|                                  |                               | 2005                           |   |         | 2004       |  
|                                  |                               |                                |   |         |            |  
|                                  |                               | (In thousands)                 |  
|Balance Sheet Data:               |                               |                                |   |         |            |   |   |        
|                                  | Cash and cash equivalents     |                                | $ | 10,638  |            |   | $ | 18,614  |       
|                                  | Working capital               |                                |   | 41,952  |            |   |   | 34,116  |       
|                                  | Total assets                  |                                |   | 222,095 |            |   |   | 192,563 |       
|                                  | Capital leases                |                                |   | 693     |            |   |   |        |       
|                                  | Stockholders equity          |                                |   | 98,389  |            |   |   | 93,982  |       
|Other Information:                |                               |                                |   |         |            |   |   |        
|                                  | Depreciation and amortization |                                | $ | 3,809   |            |   | $ | 4,332   |       
|Cash Flows (Used In) Provided By: |                               |                                |   |         |            |   |   |        
|                                  | Operating activities          |                                | $ | (1,732  | )          |   | $ | (7,404  | )     
|                                  | Investing activities          |                                |   | (3,842  | )          |   |   | (2,002  | )     
|                                  | Financing activities          |                                |   | 5,178   |            |   |   | 175     |       
|                                  |                               |                                |   |         |            |  
|                                  |                               | Total cash used in the Company |   | $       | (396       | ) |   | $       | (9,231 | )
|                                  |                               |                                |   |         |            |  

Operating Activities.


28



---



##### Table of Contents





Investing Activities.


Financing Activities.


Loan Agreement.




Warrants.


29



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##### Table of Contents



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


|                                        |                                         |                      |   |        |            |  |   |        |  
|--------------------------------------- | --------------------------------------- | -------------------- | - | ------ | ---------- |  | - | ------ | -
|                                        |                                         | Fiscal Quarter Ended |  
|                                        |                                         |                      |  
|                                        |                                         | October 1,           |   |        | October 2, | 
|                                        |                                         | 2005                 |   |        | 2004       | 
|                                        |                                         |                      |   |        |            | 
|                                        |                                         | (In thousands)       |  
|EBITDA:                                 |                                         |                      |   |        |            |  |   |       
|                                        | EBITDA(a)                               |                      | $ | (5,531 | )          |  | $ | (805   | )
|                                        |                                         |                      |   |        |            | 
|Most directly comparable GAAP measures: |                                         |                      |   |        |            |  |   |       
|                                        | Net loss                                |                      | $ | (5,571 | )          |  | $ | (3,091 | )
|                                        |                                         |                      |   |        |            | 
|                                        | Cash flows used in operating activities |                      | $ | (1,732 | )          |  | $ | (7,404 | )
|                                        |                                         |                      |   |        |            | 






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Our definition of EBITDA is earnings before interest, taxes, and
    depreciation and amortization. EBITDA should not be construed as
    a substitute for net income (loss) or net cash (used in)
    provided by operating activities (all as determined in
    accordance with generally accepted accounting principles
    (GAAP)) for the purpose of analyzing our operating
    performance, financial position and cash flows as EBITDA is not
    defined by GAAP.                                                                                                                                                                                                                                                                                
|   
|    |  | We have presented EBITDA, because we believe it is an indicative
    measure of, and is commonly used by certain investors and
    analysts to analyze and compare companies on the basis of
    operating performance and a companys ability to service
    and/or incur debt. Furthermore, our executive compensation plans
    base incentive compensation payments on our EBITDA performance
    measured against budget. EBITDA is also widely used by us and
    others in our industry to evaluate and price potential
    acquisitions. EBITDA has limitations as an analytical tool, and
    you should not consider it in isolation or as a substitute for
    analyses of our results as reported under GAAP. Some of these
    limitations are:
|   
|    |  |  EBITDA does not reflect our cash expenditures, or
    future requirements, for capital expenditures or contractual
    commitments;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  |  EBITDA does not reflect changes in, or cash
    requirements for, our working capital needs;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  |  EBITDA does not reflect the interest expense, or the
    cash requirements necessary to service interest or principal
    payments, on any debts we may have;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  |  Although depreciation and amortization are non-cash
    charges, the assets being depreciated and amortized will often
    have to be replaced in the future, and EBITDA does not reflect
    any cash requirements for such replacements;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  |  EBITDA does not reflect the impact of earnings or
    charges resulting from matters we consider not to be indicative
    of our ongoing operations; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  |  Other companies in our industry may calculate EBITDA
    differently than we do, limiting its usefulness as comparative
    measures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     



|                              |  |                      |        |   |            |   |        |  
|----------------------------- |  | -------------------- | ------ | - | ---------- | - | ------ | -
|                              |  | Fiscal Quarter Ended |       
|                              |  |                      |       
|                              |  | October 1,           |        |   | October 2, |  
|                              |  | 2005                 |        |   | 2004       |  
|                              |  |                      |        |   |            |  
|                              |  | (In thousands)       |       
|EBITDA                        |  | $                    | (5,531 | ) |            | $ | (805   | )
|Depreciation and amortization |  |                      | (3,809 | ) |            |   | (4,332 | )
|Interest expense, net         |  |                      | (22    | ) |            |   | (57    | )
|Benefit from income taxes     |  |                      | 3,791  |   |            |   | 2,103  |  
|                              |  |                      |        |   |            |  
|Net loss                      |  | $                    | (5,571 | ) |            | $ | (3,091 | )
|                              |  |                      |        |   |            |  

30



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|                                   |                                                |                                       |        |         |            |   |       |         |        |  
|---------------------------------- | ---------------------------------------------- | ------------------------------------- | ------ | ------- | ---------- | - | ----- | ------- | ------ | -
|                                   |                                                | Fiscal Quarter Ended                  |       
|                                   |                                                |                                       |       
|                                   |                                                | October 1,                            |        |         | October 2, |  
|                                   |                                                | 2005                                  |        |         | 2004       |  
|                                   |                                                |                                       |        |         |            |  
|                                   |                                                | (In thousands)                        |       
|EBITDA                             |                                                | $                                     | (5,531 | )       |            | $ | (805  | )      
|Interest expense, net              |                                                |                                       | (22    | )       |            |   | (57   | )      
|Benefit from income taxes          |                                                |                                       | 3,791  |         |            |   | 2,103 |        
|Amortization of financing costs    |                                                |                                       | 18     |         |            |   | 40    |        
|Deferred rent                      |                                                |                                       | (61    | )       |            |   | (127  | )      
|Stock-based compensation           |                                                |                                       | 514    |         |            |   | 7     |        
|Provision for doubtful accounts    |                                                |                                       | 246    |         |            |   | (70   | )      
|Other                              |                                                |                                       | 63     |         |            |   | (125  | )      
|Changes in assets and liabilities: |                                                |                                       |        |         |            |   |       |        
|                                   | Merchandise inventory                          |                                       |        | (35,160 | )          |   |       | (24,301 | )     
|                                   | Accounts payable                               |                                       |        | 30,503  |            |   |       | 23,518  |       
|                                   | Accrued expenses and other current liabilities |                                       |        | 3,022   |            |   |       | (5,383  | )     
|                                   | Other long-term liabilities                    |                                       |        | 2,425   |            |   |       | 60      |       
|                                   | Other current assets and other assets          |                                       |        | (1,540  | )          |   |       | (2,264  | )     
|                                   |                                                |                                       |        |         |            |  
|                                   |                                                | Net cash used in operating activities |        | $       | (1,732     | ) |       | $       | (7,404 | )
|                                   |                                                |                                       |        |         |            |  

Contractual Obligations and Commercial Commitments




|                    |  |                |         |           |     |   |             |     |  |            |             |  |  |             |       |  |  |   |     | 
|------------------- |  | -------------- | ------- | --------- | --- | - | ----------- | --- |  | ---------- | ----------- |  |  | ----------- | ----- |  |  | - | --- | 
|                    |  |                |         | Operating |     |   | Merchandise |     |  | Logistics  |             |  | 
|                    |  |                |         | Leases    |     |   | Commitments |     |  | Initiative |             |  | 
|                    |  | Total          |         |           | (1) |   |             | (2) |  |            | Obligations |  |  | Auto Leases |      
|                    |  |                |         |           |     |   |             |     |  |            |             |  |  |             |      
|                    |  | (In thousands) |        
|Fiscal year ending: |  |                |         |           |     |   |             |     |  |            |             |  |  |             |       |  |  |   |     | 
|2006                |  | $              | 54,671  |           |     | $ | 36,540      |     |  | $          | 15,899      |  |  | $           | 2,025 |  |  | $ | 207 | 
|2007                |  |                | 47,286  |           |     |   | 44,368      |     |  |            |            |  |  |             | 2,700 |  |  |   | 218 | 
|2008                |  |                | 35,832  |           |     |   | 35,760      |     |  |            |            |  |  |             |      |  |  |   | 72  | 
|2009                |  |                | 24,022  |           |     |   | 24,021      |     |  |            |            |  |  |             |      |  |  |   | 1   | 
|2010                |  |                | 15,938  |           |     |   | 15,938      |     |  |            |            |  |  |             |      |  |  |   |    | 
|Thereafter          |  |                | 46,517  |           |     |   | 46,517      |     |  |            |            |  |  |             |      |  |  |   |    | 
|                    |  |                |         |           |     |   |             |     |  |            |             |  |  |             |      
|                    |  | $              | 224,266 |           |     | $ | 203,144     |     |  | $          | 15,899      |  |  | $           | 4,725 |  |  | $ | 498 | 
|                    |  |                |         |           |     |   |             |     |  |            |             |  |  |             |      






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We are also obligated for guarantees, subleases or assigned
    lease obligations for 22 of the franchise stores through 2011.
    The majority of the guarantees, subleases and assigned lease
    obligations were given when we sold stores in 1999 as part of
    our restructuring. The guarantees, subleases and assigned lease
    obligations continue until the applicable leases expire. The
    maximum amount of the guarantees, subleases and assigned lease
    obligations may vary, but is limited to the sum of the total
    amount due under the lease. As of October 1, 2005, the
    maximum amount of the guarantees, subleases and assigned lease
    obligations was approximately $10.3 million, which is not
    included in the table above.



| |                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The operating leases included in the above table also do not
    include contingent rent based upon sales volume, which
    represented less than 1% of our minimum lease obligations during
    the first quarter of Fiscal 2006, or other variable costs such
    as maintenance, insurance and taxes, which represented
    approximately 4.5% of minimum lease obligations during the first
    quarter of Fiscal 2006.



|    |                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | In Fiscal 2005, we and our franchisees purchased in excess of
    $400 million of merchandise from third party suppliers. We
    currently have one contract, which terminates on
    December 31, 2005 but may be

31



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##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | extended until December 31, 2010 at the suppliers
    option, that provides for minimum merchandise commitments equal
    to less than 5% per year of our total merchandise purchased
    from third party suppliers (based on Fiscal 2005 total
    purchases). These potential merchandise commitments are not
    reflected in the table above.

Severance.






Operating Leases.






Merchandise Commitments.


Logistics Initiative Obligations.


Auto Leases.


32



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##### Table of Contents



Capital Leases.


Other.


Off-Balance Sheet Arrangements




Seasonality






Recent Accounting Pronouncements






33



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##### Table of Contents












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








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



| |                                        
| | ---------------------------------------
| | Evaluation of Disclosure and Procedures





34



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##### Table of Contents







| |                  
| | -----------------
| | Material Weakness





| |                                               
| | ----------------------------------------------
| | Remediation Steps to Address Material Weakness





| |                                                         
| | --------------------------------------------------------
| | Changes in Internal Control over Financial
    Reporting





35



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##### Table of Contents






PART II.     OTHER
INFORMATION







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








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








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








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








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








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



36



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##### Table of Contents






SIGNATURES






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



| |     |                         
| | --- | ------------------------
| | By: | /s/MICHAEL E. TENNENBAUM

| |                                    
| | -----------------------------------
| |                                    
| | Michael E. Tennenbaum              
| | Chairman of the Executive Committee



| |    |                    
| | -- | -------------------
| | By | /s/GREGG A. MELNICK

| |                        
| | -----------------------
| |                        
| | Gregg A. Melnick       
| | Chief Financial Officer



37



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##### Table of Contents






EXHIBIT INDEX


|        |    |     |  |                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     | 
|No.     |    |     | 
|        |    |     | 
|        | 2  | .1  |  | Agreement and Plan of Merger (the Merger Agreement),
    dated September 26, 2005, by and between the Company,
    Amscan Holdings, Inc., and BWP Acquisition, Inc., incorporated
    by reference from the Companys Current Report on
    Form 8-K as filed with the SEC on September 26, 2005.                                                                 
|        | 2  | .2  |  | First Amendment to the Merger, dated October 11, 2005, by
    and between the Company, Amscan Holdings, Inc., and BWP
    Acquisition, Inc., incorporated by reference the Companys
    Current Report on Form 8-K as filed with the SEC on
    October 11, 2005.                                                                                                  
|        | 3  | .1  |  | Amended and Restated Certificate of Incorporation of the
    Company, incorporated by reference from the Companys
    Quarterly Report on Form 10-Q as filed with the SEC on
    May 17, 2004.                                                                                                                                                                     
|        | 3  | .2  |  | Bylaws of the Company, as amended, incorporated by reference
    from the Companys Quarterly Report on Form 10-Q as
    filed with the SEC on November 12, 2003 (the November
    2003 10-Q).                                                                                                                                                                    
|        | 4  | .1  |  | Specimen stock certificate evidencing the Common Stock,
    incorporated by reference from the Companys Registration
    Statement, as amended, on Form S-1 Number 333-00350 as
    filed with the SEC on January 18, 1996 (the
    S-1).                                                                                                                        
|        | 10 | .1  |  | Form of Unit Franchise Agreement entered into by the Company and
    franchisees, incorporated by reference from the S-1.                                                                                                                                                                                                                                           
|        | 10 | .2  |  | Amended and Restated Investor Rights Agreement, dated as of
    August 18, 2003, by and among the Company and the
    Investors, incorporated by reference from the Companys
    Annual Report on Form 10-K as filed with the SEC on
    September 26, 2003 (the September 2003 10-K).                                                                           
|        | 10 | .3  |  | Description of oral consulting agreement between the Company and
    Ralph Dillon, incorporated by reference from the Companys
    Quarterly Report on Form 10-Q as filed with the SEC on
    February 13, 2001.                                                                                                                                                   
|        | 10 | .4  |  | Consulting Agreement between the Company and Dillon Associates
    Retail Consultants, dated April 12, 2005, incorporated by
    reference from the Companys Current Report 8-K as filed
    with the SEC on April 18, 2005.                                                                                                                                       
|        | 10 | .5  |  | Employment Agreement of Steven Skiba, dated as of
    November 29, 2002, by and between the Company and Steven
    Skiba, incorporated by reference from the September 2003 10-K.                                                                                                                                                                                   
|        | 10 | .6  |  | Employment Agreement of Linda M. Siluk, dated as of
    November 7, 2003, by and between the Company and Linda M.
    Siluk, incorporated by reference from the November 2003 10-Q.                                                                                                                                                                                 
|        | 10 | .7  |  | Separation Agreement of Linda M. Siluk, dated as of
    September 30, 2004, by and between the Company and Linda M.
    Siluk, incorporated by reference from the Companys Current
    Report on Form 8-K as filed with the SEC on October 1,
    2004.                                                                                                            
|        | 10 | .8  |  | Employment Agreement of Warren Jeffrey, dated as of
    November 7, 2003, by and between the Company and Warren
    Jeffery, incorporated by reference from the November 2003 10-Q.
    This Employment Agreement was terminated as of January 8,
    2005, as specified in the Companys Current Report on
    Form 8-K as filed with the SEC on December 30, 2004.
|        | 10 | .9  |  | Employment Agreement of Richard H. Griner dated as of
    January 12, 2004, by and between the Company and Richard H.
    Griner, incorporated by reference from the February 2004 10-Q.                                                                                                                                                                            
|        | 10 | .10 |  | Employment Agreement of Gregg A. Melnick, dated as of
    September 7, 2004, by and between the Company and Gregg A.
    Melnick incorporated by reference from the Companys
    Current Report on Form 8-K as filed on September 9,
    2004.                                                                                                                     
|        | 10 | .11 |  | Employment Agreement of Lisa Laube, dated as of April 26,
    2004, by and between the Company and Lisa Laube, incorporated by
    reference from the Companys Current Report on
    Form 10-Q as filed with the SEC on November 12, 2004.                                                                                                                         
|        | 10 | .12 |  | Employment Agreement of Nancy Pedot, dated December 23,
    2004, by and between the Company and Nancy Pedot, incorporated
    by reference from the Companys Current Report on
    Form 8-K as filed with the SEC on December 27, 2004.                                                                                                                           
|        | 10 | .13 |  | Separation Agreement of Nancy Pedot, dated March 30, 2005,
    by and between the Company and Nancy Pedot, incorporated by
    reference from the Companys Current Report on
    Form 8-K as filed with the SEC on August 1, 2005.                                                                                                                                 



---



##### Table of Contents



|        |    |     |  |                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     | 
|No.     |    |     | 
|        |    |     | 
|        | 10 | .14 |  | Form of Indemnification Agreement, dated May 26, 2005, by
    and between the Company and each of its directors, incorporated
    by reference from the Companys Current Report on
    Form 8-K as filed with the SEC on May 26, 2005.                                                                                                                                                        
|        | 10 | .15 |  | Form of Retention Bonus and Severance Agreements, dated
    June 30, 2005, by and between the Company and certain
    employees of the Company, incorporated by reference from the
    Companys Current Report on Form 8-K as filed with the
    SEC on July 5, 2005.                                                                                                                         
|        | 10 | .16 |  | Management Stock Purchase Plan of the Company, incorporated by
    reference from the Registration of Form S-8 as filed with
    the SEC on July 23, 2001.                                                                                                                                                                                                                                     
|        | 10 | .17 |  | Employee Stock Purchase Plan of the Company, incorporated by
    reference from the Companys Definitive Proxy Statement for
    the 2001 Annual Meeting of Stockholders, included within
    Form 14-A as filed with the SEC on October 18, 2001.                                                                                                                                             
|        | 10 | .18 |  | Amended and Restated 1994 Stock Option Plan, incorporated by
    reference from the Companys Registration Statement on
    Form S-8 as filed with the SEC on January 9, 1997.                                                                                                                                                                                                                 
|        | 10 | .19 |  | 1999 Stock Incentive Plan (Amended and Restated as of
    October 17, 2003), incorporated by reference from the
    Companys Definitive Proxy Statement for the 2003 Annual
    Meeting of Stockholders included within Form 14-A as filed
    with the SEC on October 20, 2003.                                                                                                              
|        | 10 | .20 |  | Form of Employee Stock Option Agreement (1999 Stock Incentive
    Plan) incorporated by reference from the Companys
    Quarterly Report on Form 10-Q as filed with the SEC on
    February 10, 2005 (the February 2005 10-Q).                                                                                                                                                              
|        | 10 | .21 |  | Forms of Non-Employee Director Stock Option Agreement (1999
    Stock Incentive Plan) incorporated by reference from the
    February 2005 10-Q.                                                                                                                                                                                                                                               
|        | 10 | .22 |  | Summary of Fiscal Year 2005 Corporate Bonus Plan incorporated by
    reference from the February 2005 10-Q.                                                                                                                                                                                                                                                                                    
|        | 10 | .23 |  | Compensation Payable to Non-Employee Directors incorporated by
    reference from the February 2005 10-Q.                                                                                                                                                                                                                                                                                      
|        | 10 | .24 |  | Loan and Security Agreement, dated January 9, 2003, by and
    between the Company and Wells Fargo Retail Finance, LLC
    (WFRF), as the arranger, collateral agent and
    administrative agent, and Fleet Retail Finance, Inc., as the
    documentation agent, incorporated by reference from the
    Companys Current Report on Form 8-K as filed with the
    SEC on January 10, 2003.
|        | 10 | .25 |  | First Amendment to the Loan Agreement, dated February 10,
    2005 by and between the Company and WFRF, incorporated by
    reference from the February 2005 10-Q.                                                                                                                                                                                                                             
|        | 10 | .26 |  | Second Amendment to the Loan, dated June 23, 2005 by and
    between the Company and WFRF, incorporated by reference from the
    Companys Current Report on Form 10-K as filed with
    the SEC on September 15, 2005.                                                                                                                                                                       
|        | 10 | .27 |  | Third Amendment to the Loan Agreement, dated July 15, 2005
    by and between the Company and WFRF, incorporated by reference
    from the Companys Current Report on Form 8-K as filed
    with the SEC on July 19, 2005.                                                                                                                                                                    
|        | 10 | .28 |  | Stock Pledge Agreement, dated January 9, 2003, by and among
    the Company, Party City Michigan, Inc. and WFRF, as the
    arranger, collateral agent and administrative agent for the
    lender group under the Loan Agreement, incorporated by reference
    from the September 2003 10-K.                                                                                                 
|        | 10 | .29 |  | Trademark Security Agreement, dated January 9, 2003, by and
    between the Company and WFRF, as the arranger, collateral agent
    and administrative agent for the lender group under the Loan
    Agreement, incorporated by reference from the September 2003
    10-K.                                                                                                                    
|        | 10 | .30 |  | Copyright Security Agreement, dated January 9, 2003, by and
    between the Company and WFRF, as the arranger, collateral agent
    and administrative agent for the lender group under the Loan
    Agreement, incorporated by reference from the September 2003
    10-K.                                                                                                                    
|        | 10 | .31 |  | Guaranty and Security Agreement, dated January 9, 2003, by
    and between PCMI and WFRF, as the arranger, collateral agent and
    administrative agent for the lender group under the Loan
    Agreement, incorporated by reference from the September 2003
    10-K.                                                                                                                        
|        | 10 | .32 |  | Agreement of Lease, dated September 16, 2004, by and
    between the Company and North Jersey Green 501, LLC, for the
    Companys new corporate headquarters, incorporated by
    reference from the Companys Current Report on
    Form 8-K as filed with the SEC on September 20, 2004.                                                                                                   



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##### Table of Contents



|        |     |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | --- | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |     | 
|No.     |     |     | 
|        |     |     | 
|        | 10  | .33 |  | First Modification of Agreement of Lease, dated January 26,
    2005 by and between the Company and North Jersey Green 501, LLC
    incorporated by reference from the February 2005 10-Q.                                                                                                                                                                                                                            
|        | 10  | .34 |  | Voting Agreement, dated September 26, 2005, by and among
    Michael E. Tennenbaum, Tennenbaum Capital Partners, LLC,
    Tennenbaum & Co., LLC, Special Bond Fund, LLC, Special
    Value Absolute Return Fund, LLC, and Special Value Bond
    Fund II, LLC, and Amscan Holdings, Inc., incorporated by
    reference from the Companys Current Report on
    Form 8-K as filed with the SEC on September 26, 2005.
|        | *15 | .1  |  | Awareness Letter of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                            
|        | *23 | .1  |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                                     
|        | *31 | .1  |  | Certification of Chief Executive Officer pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                            
|        | *31 | .2  |  | Certification of Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                            
|        | *32 | .1  |  | Certification of Chief Executive Officer pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                            
|        | *32 | .2  |  | Certification of Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                            






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