UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

OR

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

For the transition period from                      to                     

Commission file number 000-21827

Amscan Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	13-3911462
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
80 Grasslands Road Elmsford, NY	10523
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code:
(914) 345-2020

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o      Accelerated filer o      Non-accelerated filer þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of November 14, 2007, 1,000.00 shares of Registrant’s common stock, par value $0.10, were outstanding.

AMSCAN HOLDINGS, INC.
FORM 10-Q

September 30, 2007

TABLE OF CONTENTS

	Page
PART I
Item 1 Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2007 and December 31, 2006		3
Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2007 and 2006		4
Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2007 and 2006		5
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2007		6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006		7
Notes to Condensed Consolidated Financial Statements		8
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3 Quantitative and Qualitative Disclosures About Market Risk		41
Item 4 Controls and Procedures		41
PART II
Item 5 Other Information		42
Item 6 Exhibits		42
Signature		43
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32: CERTIFICATION

     References throughout this document to “Amscan,” “AHI,” and the “Company” include Amscan Holdings, Inc. and its wholly owned subsidiaries. In this document the words “we,” “our,” “ours” and “us” refer only to the Company and its majority owned subsidiaries and not to any other person.

     You may read and copy any materials we file with the Securities and Exchange Commission (“SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including us, at http://www.sec.gov.

2

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share amounts)

	September 30,		December 31,
	2007		2006
	(Unaudited)		(Note 3)
ASSETS
Current assets:
Cash and cash equivalents	$	10,246	$	4,966
Accounts receivable, net of allowances		112,419		95,470
Inventories, net of allowances		284,755		227,450
Prepaid expenses and other current assets		48,528		35,700
Total current assets		455,948		363,586
Property, plant and equipment, net		158,005		155,443
Goodwill		480,081		476,704
Trade names		143,000		143,000
Other intangible assets, net		45,403		47,407
Other assets, net		27,653		31,231
Total assets	$	1,310,090	$	1,217,371
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable	$	61,000	$	4,930
Accounts payable		130,621		110,429
Accrued expenses		91,230		68,089
Income taxes payable		809		8,874
Current portion of long-term obligations		4,670		3,703
Total current liabilities		288,329		196,025
Long-term obligations, excluding current portion		558,022		558,372
Deferred income tax liabilities		83,296		83,592
Deferred rent and other long-term liabilities		10,768		10,199
Total liabilities		940,415		848,188
Redeemable common securities		17,083		9,343
Commitments and contingencies
Stockholders’ equity:
Common Stock ($0.01 par value; 40,000.00 shares authorized; 30,435.16 and 30,100.75 shares issued and outstanding at September 30, 2007 and December 31, 2006 respectively.)		—		—
Additional paid-in capital		329,386		331,113
Retained earnings		20,793		27,264
Accumulated other comprehensive income		2,413		1,463
Total stockholders’ equity		352,592		359,840
Total liabilities, redeemable common securities and stockholders’ equity	$	1,310,090	$	1,217,371

See accompanying notes to condensed consolidated financial statements.

3

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands)

(Unaudited)

	Three Months Ended
	September 30,
	2007		2006
Revenues:
Net sales	$	277,564	$	220,514
Royalties and franchise fees		5,783		4,505
Total revenues		283,347		225,019
Expenses:
Cost of sales		180,781		156,383
Selling expenses		10,473		9,978
Retail operating expenses		44,931		27,668
Franchise expenses		3,234		3,424
General and administrative expenses		26,500		19,751
Art and development costs		2,928		2,504
Total expenses		268,847		219,708
Income from operations		14,500		5,311
Interest expense, net		12,936		14,226
Other expense, net		209		319
Income (Loss) before income taxes and minority interests		1,355		(9,234	)
Income tax expense (benefit)		927		(3,671	)
Minority interests		4		112
Net Income (loss)	$	424	$	(5,675	)

See accompanying notes to condensed consolidated financial statements.

4

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
Revenues:
Net sales	$	794,517		$	648,544
Royalties and franchise fees		16,425			13,548
Total revenues		810,942			662,092
Expenses:
Cost of sales		521,629			462,254
Selling expenses		31,439			28,596
Retail operating expenses		116,373			76,230
Franchise expenses		9,640			9,403
General and administrative expenses		75,755			59,390
Art and development costs		8,882			7,462
Total expenses		763,718			643,335
Income from operations		47,224			18,757
Interest expense, net		40,918			41,329
Other expense, (benefit) net		15,916			(1,638	)
Loss before income taxes and minority interests		(9,610	)		(20,934	)
Income tax (benefit) expense		(3,238	)		(8,311	)
Minority interests		68			218
Net loss	$	(6,440	)	$	(12,841	)

See accompanying notes to condensed consolidated financial statements.

5

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2007

(Dollars in thousands, except share and per share amounts)

(Unaudited)

												Accumulated
						Additional						Other
	Common			Common		Paid-in			Retained			Comprehensive
	Shares			Stock		Capital			Earnings			Loss			Total
Balance at December 31, 2006		30,100.75		$	—	$	331,113		$	27,264		$	1,463		$	359,840
Net loss										(6,440	)					(6,440	)
Cumulative change from adoption of FIN 48 (see Note 5)										(31	)					(31	)
Net change in cumulative translation adjustment													1,710			1,710
Change in fair value of interest rate swap contracts, net of income tax benefit													(269	)		(269	)
Change in fair value of foreign exchange contracts, net of income tax benefit													(491	)		(491	)
Comprehensive loss																(5,521	)
Issuance of shares of redeemable and non-redeemable common stock		340.89					4,755									4,755
Reclass of common stock to redeemable common securities							(4,534	)								(4,534	)
Revaluation of common stock							(3,218	)								(3,218	)
Purchase and retirement of redeemable and non-redeemable common stock held by former employees		(6.48	)				(80	)								(80	)
Equity based compensation expense							1,350									1,350
Balance at September 30, 2007		30,435.16		$	—	$	329,386		$	20,793		$	2,413		$	352,592

See accompanying notes to condensed consolidated financial statements.

6

AMSCAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2007			2006
Cash flows used in operating activities:
Net loss	$	(6,440	)	$	(12,841	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		27,946			30,626
Amortization of deferred financing costs		1,586			1,986
Provision for doubtful accounts		966			1,283
Deferred income tax benefit		1,007			(7,553	)
Deferred rent		526			—
Undistributed income in unconsolidated joint venture		(184	)		(184	)
Loss (gain) on disposal of equipment		1,192			(1,156	)
Equity based compensation		1,350			842
Debt retirement costs		3,781			—
Write-off of deferred financing costs		6,333			—
Changes in operating assets and liabilities:
Increase in accounts receivable		(9,434	)		(28,252	)
Increase in inventories		(51,510	)		(18,844	)
(Increase) decrease in prepaid expenses and other current assets		(26,228	)		3,723
Decrease in accounts payable, accrued expenses and income taxes payable		39,406			8,319
Other, net		11			—
Net cash used in operating activities		(9,691	)		(22,051	)
Cash flows used in investing activities:
Cash paid in connection with acquisitions		(8,685	)		(14,270	)
Capital expenditures		(17,753	)		(29,338	)
Proceeds from disposal of property and equipment		1,738			14,273
Net cash used in investing activities		(24,700	)		(29,335	)
Cash flows provided by financing activities:
Repayment of loans, notes payable and long-term obligations		(385,067	)		(2,319	)
Proceeds from loans, notes payable and long-term obligations, net of debt issuance costs of $6,218		418,507			48,450
Proceeds from capital contributions and exercise of options, net of retirements		4,700			1,614
Net cash provided by financing activities		38,140			47,745
Effect of exchange rate changes on cash and cash equivalents		1,531			1,298
Net increase (decrease) in cash and cash equivalents		5,280			(2,343	)
Cash and cash equivalents at beginning of period		4,966			8,745
Cash and cash equivalents at end of period	$	10,246		$	6,402
Supplemental disclosures:
Interest paid	$	36,126		$	31,934
Income taxes paid	$	9,419		$	3,975

See accompanying notes to condensed consolidated financial statements.

7

AMSCAN HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

(Unaudited)

Note 1 – Description of Business

     Amscan Holdings, Inc. (“Amscan”, “AHI” or the “Company”) was incorporated on October 3, 1996 for the purpose of becoming the holding company for Amscan Inc. and certain affiliated entities. The Company designs, manufactures, contracts for manufacture and distributes party goods, including paper and plastic tableware, metallic balloons, accessories, novelties, gifts and stationery throughout the world, including in North America, South America, Europe, Asia and Australia. In addition, the Company operates retail party supply superstores within the United States and sells franchises on an individual store and franchise area basis throughout the United States and Puerto Rico.

Note 2 – Acquisitions

     Party America Acquisition — On September 29, 2006 (the “Party America Acquisition Date”), the Company acquired PA Acquisition Corp. (the “Party America Acquisition”), doing business as Party America (“Party America”), from Gordon Brothers Investment, LLC. In connection with the acquisition, the outstanding common stock, common stock options and subordinated debt of Party America were converted into AAH Holdings Corporation (“AAH”) common stock and common stock options valued at $29,659. AAH also paid transaction costs of $1,100 and repaid $12,583 of Party America senior debt.

     The excess of the Party America purchase price over the tangible net assets acquired has been allocated to intangible assets consisting of franchise licenses ($1,520), which are being amortized using the straight-line method over the assets’ estimated useful life (nine years), above market leases ($800), which are being amortized over the remaining lease lives, trade names ($15,600) and goodwill ($9,800), which are not being amortized, and net deferred tax liabilities ($1,800). In addition, other assets acquired totaled $46,400, including an allocation to adjust property, plant and equipment to market value ($900), and liabilities assumed totaled $41,500. The allocation of the purchase price is based on our estimates of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed, and is reflected in the Company’s consolidated results of operations from the date of acquisition. Independent valuation specialists assisted management in the final determination of fair value of the net assets acquired as of the Party America Acquisition Date.

     Other — On June 1^st, 2007, the Company acquired a retail operation for $5,000 and repaid the company’s existing debt. This acquisition was recorded in the Company’s financial statements based upon the estimated fair value of the tangible and identifiable intangible assets acquired and liabilities assumed, and is reflected in the Company’s consolidated results of operations from the date of acquisition.

     Pending acquisition — On September 17th, 2007, the Company and its wholly-owned subsidiary, Amscan Acquisition, Inc. (Acquisition), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Factory Card & Party Outlet Corp. (FCPO) to acquire FCPO, a publicly traded company, current customer, and retailer of party goods with 185 company-owned and operated stores with locations chiefly in the Midwest and Mid-Atlantic United States. During the twelve month period ended December 31, 2006, sales to FCPO stores accounted for approximately 2% of the Company’s net sales. For the fiscal year ended February 3, 2007, FCPO reported revenues of approximately $244,000.

     Under the terms of the Merger Agreement, on October 1, 2007, Acquisition launched a tender offer (the “Offer”) for all of the outstanding shares of common stock, par value $0.01 (the “Shares”), of FCPO at an offer price of 16.50 per Share, net to the seller in cash, without interest and less any applicable withholding tax.

     We estimate that the total amount of funds required to purchase all outstanding Shares pursuant to the Offer and the planned subsequent merger of Acquisition with and into FCPO will be approximately $72,000, including payments with respect to restricted stock, outstanding stock options and warrants and the assumption of debt. The acquisition, which is subject to approval by FCPO’s shareholders and other customary conditions, is expected to close during the fourth quarter of 2007 or the first quarter of 2008. The Company plans to finance the acquisition through its existing credit facilities.

Note 3 – Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements as of September 30, 2007 and for the three and nine months ended September 30, 2007 and 2006, and audited balance sheet as of December 31, 2006, include the accounts of the Company and its majority-owned and controlled entities. All material intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items and reclassification of prior year amounts to conform to current year presentation) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007. Our business is subject to substantial seasonal variations, as our retail segment has realized a significant portion of its net sales, cash flow and net income in the fourth quarter of each year, principally due to the Halloween season sales in October and, to a lesser extent, other holiday season sales at the end of the calendar year. We expect that this general pattern will continue. Our results of operations may also be affected by industry factors that may be specific to a particular period, such as movement

8

AMSCAN HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except share and per share amounts)

(Unaudited)

in and the general level of raw material costs. For further information, see the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission.

     Our retail segment defines a fiscal year as the 52-week period or 53-week period ended on the Saturday nearest December 31 of each year, and defines it’s fiscal quarters as the four interim 13-week periods following the end of the previous fiscal year, except in the case of a 53-week fiscal year, when the fourth fiscal quarter is extended to 14 weeks.

     The Company has determined the difference between our retail segment fiscal year and the calendar year to be insignificant and are reconciled in the financial consolidation process.

Note 4 – Inventories

     Inventories consisted of the following:

	September 30,			December 31,
	2007			2006
Finished goods	$	272,823		$	215,069
Raw materials		13,521			12,105
Work-in-process		6,131			5,579
		292,475			232,753
Less: reserve for slow moving and obsolete inventory		(7,720	)		(5,303	)
	$	284,755		$	227,450

     Inventories are valued at the lower of cost or market. The Company determines the cost of inventory at its retail stores using the weighted average method. All other inventory cost is determined using the first-in, first-out method.

Note 5 – Income Taxes

     The consolidated income tax expense (benefit) for the three and nine months ended September 30, 2007 and 2006 were determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 2007 and 2006, respectively. The differences between the consolidated effective income tax rate and the U.S. federal statutory rate are primarily attributable to state income taxes and available domestic manufacturing deductions.

     The Company and its subsidiaries file a U.S. federal income tax return, and various state and foreign tax returns. Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48: “Accounting for Uncertainty in Income Taxes.” In accordance with FIN 48, the Company recognized a cumulative-effect adjustment of $635, decreasing its income tax liability for previously reserved tax items, interest, and penalties by that amount, decreasing goodwill by $666, and decreasing the January 1, 2007 balance of retained earnings by $31.

     At January 1, 2007, the Company had $2,229 in unrecognized tax benefits, the recognition of which would have an impact of $888 on the effective tax amount. Liabilities for unrecognized tax benefits are reflected in other long-term liabilities in the condensed consolidated balance sheet. Included in the balance of unrecognized tax benefits at January 1, 2007, is $323 related to tax positions for which it is possible that the total amounts could significantly change during the next twelve months. As discussed below, this amount did result in a decrease in unrecognized tax benefits comprised of items related to expiring statutes in federal and state jurisdictions during the quarter ended September 30, 2007.

     The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. At January 1, 2007, the Company had accrued $162 and $0 for the potential payment of interest and penalties, respectively.

     As of September 30, 2007, for federal income tax purposes, the years 2004 through 2006 remain open to examination. For non-U.S. income tax purposes, tax years from 2003 through 2006 remain open. Lastly, the Company is open to state and local income tax examinations for the tax years 2002 through 2006.

9

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

     During the nine months ended September 30, 2007, a reduction for $323 of unrecognized tax benefits, with a corresponding reduction of goodwill, related to expiring statutes in federal and state jurisdictions, was recorded. During the nine months ended September 2007, the Company also recorded an $88 increase to its income tax benefit and reduction in its net deferred tax liability to reflect a decrease in New York State’s corporate income tax rate and an acceleration of a change in its law governing the apportionment of income to New York State

     During the quarter ended September 30, 2007, the Company also recorded a $149 reduction to its non income tax benefit and increase in its net deferred tax liability to reflect an increase in Michigan’s income tax rate effective in 2008, and recorded a $130 reduction to its income tax benefit and increase in its current tax liability to reflect an assessment by mid-year related to its Anagram International subsidiary for prior tax years.

Note 6 — Restructuring

     In connection with the Party America Acquisition, $1,000 has been accrued related to plans to restructure Party America’s administrative operations, and involuntarily terminate a limited number of Party America personnel. The accrual was recorded as part of the purchase price allocation and is reflected in the Company’s consolidated balance sheet as of the date of acquisition. As of September 30, 2007, the company has paid $100 of such amounts. The Company has also accrued employee retention expenses of approximately $4,000 during the nine months ended September 30, 2007, none of which has been paid as of September 30, 2007.

Note 7 – Comprehensive Income (Loss)

     Comprehensive loss consisted of the following:

	Three months ended						Nine Months ended
	September 30,						September 30,
	2007			2006			2007			2006
Net income (loss)	$	424		$	(5,675	)	$	(6,440	)	$	(12,841	)
Cumulative change from adoption of FIN 48 (see Note 5)		—						(31	)
Net change in cumulative translation adjustment		895			202			1,710			1,727
Change in fair value of interest rate swap contracts, net of income tax expense (benefit) of $192, $(132), $(113), and $35		(328	)		(224	)		(269	)		60
Change in fair value of foreign exchange contracts, net of income tax (benefit) expense of $(184) and $(324)	$	(313	)	$	—		$	(491	)	$	—
	$	678		$	(5,697	)	$	(5,521	)	$	(11,054	)

     Accumulated other comprehensive income consisted of the following:

	September 30,			December 31,
	2007			2006
Cumulative translation adjustment	$	3,159		$	1,449
Interest rate swap contracts, net of income tax (benefit) expense of $(113), and $44		(194	)		75
Foreign exchange contracts, net of income tax (benefit) of $(324), and $(36)		(552	)		(61	)
Total accumulated other comprehensive income	$	2,413		$	1,463

10

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

Note 8 – Capital Stock

     At September 30, 2007 and December 31, 2006, the Company’s authorized capital stock consisted of 10,000.00 shares of preferred stock, $0.01 par value, of which no shares were issued or outstanding and 40,000.00 shares of common stock, $0.01 par value, of which 30,435.16 and 30,100.75 shares were issued and outstanding, respectively.

     Certain employee stockholders owned 891.99 and 574.67 shares of AAH common stock at September 30, 2007 and December 31, 2006, respectively. Under the terms of the AAH stockholders’ agreement dated April 30, 2004, as amended, the Company has an option to purchase all of the shares of common stock held by former employees and, under certain circumstances, former employee stockholders can require the Company to purchase all of their shares held by the former employee. The purchase price as prescribed in the stockholders’ agreement is to be determined through a market valuation of the minority-held shares or, under certain circumstances, based on cost, as defined therein. The aggregate amount that may be payable by the Company to certain employee stockholders based on the estimated fair market value of fully paid and vested common securities is classified as redeemable common securities on the consolidated balance sheet, with a corresponding adjustment to stockholders’ equity. As there is no active market for the Company’s common stock, the Company estimated the fair value of its common stock based on the valuation of the Company common stock at September 30, 2007, calculated on a multiple of earnings at $17,500 per share.

     In June 2007, the Company received subscriptions from employees for the purchase of 248 shares of common stock, valued at $3,534, in advance of issuing stock certificates. Proceeds toward those subscriptions were fully received by July 2007. Common stock was issued in July 2007 to fulfill these subscriptions, and is reported in the redeemable common securities section of the consolidated balance sheet.

     At September 30, 2007 and December 31, 2006, the aggregate amount that may be payable by the Company to employee stockholders and option holders, based on the estimated market value, was approximately $17,083 and $9,343, respectively.

Note 9 – Segment Information

Industry Segments

     The Company has two identifiable business segments. The Wholesale segment includes the design, manufacture, contract for manufacture and wholesale distribution of party goods, including paper and plastic tableware, metallic balloons, accessories, novelties, gifts and stationery, at wholesale. The Retail segment includes the operation of company-owned retail party supply superstores in the United States and the sale of franchises on an individual store and franchise area basis throughout the United States and Puerto Rico.

     The Company’s industry segment data for the three and nine months ended September 30, 2007 and September 30, 2006 is as follows:

	Wholesale		Retail		Eliminations			Consolidated
Three Months Ended September 30, 2007
Revenues:
Net sales	$	169,566	$	153,950	$	(45,952	)	$	277,564
Royalties and franchise fees		—		5,783		—			5,783
Total revenues	$	169,566	$	159,733	$	(45,952	)	$	283,347
Income from operations	$	19,666	$	38	$	(5,204	)	$	14,500
Interest expense, net									12,936
Other expense, net									209
Income (loss) before income taxes and minority interests								$	1,355
Long-lived assets	$	473,731	$	396,368	$	(15,957	)	$	854,142

	Wholesale		Retail			Eliminations			Consolidated
Three Months Ended September 30, 2006
Revenues:
Net sales	$	135,134	$	105,176		$	(19,796	)	$	220,514
Royalties and franchise fees		—		4,505			—			4,505
Total revenues	$	135,134	$	109,681		$	(1,976	)	$	225,019
Income from operations	$	16,059	$	(7,508	)	$	(3,240	)	$	5,311
Interest expense, net										14,226
Other income, net										319
Income (loss) before income tax benefit and minority interests									$	(9,234	)
Long-lived assets	$	455,876	$	358,371		$	(5,264	)	$	808,983

11

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

	Wholesale		Retail		Eliminations			Consolidated
Nine Months Ended September 30, 2007
Revenues:
Net sales	$	458,329	$	454,268	$	(118,080	)	$	794,517
Royalties and franchise fees		—		16,425		—			16,425
Total revenues	$	458,329	$	470,693	$	(118,080	)	$	810,942
Income from operations	$	38,614	$	18,997	$	(10,387	)	$	47,224
Interest expense, net									40,918
Other expense, net									15,916
Income (loss) before income tax benefit and minority interests								$	(9,610	)
Long-lived assets	$	473,731	$	396,368	$	(15,957	)	$	854,142

	Wholesale		Retail			Eliminations			Consolidated
Nine Months Ended September 30, 2006
Revenues:
Net sales	$	375,093	$	322,278		$	(48,827	)	$	648,544
Royalties and franchise fees		—		13,548			—			13,548
Total revenues	$	375,093	$	335,826		$	(48,827	)	$	662,092
Income (loss) from operations	$	34,576	$	(7,200	)	$	(8,619	)	$	18,757
Interest expense, net										41,329
Other income, net										(1,638	)
Income (loss) before income tax benefit and minority interests									$	(20,934	)
Long-lived assets	$	455,876	$	358,371		$	(5,264	)	$	808,983

Geographic Segments

     The Company’s export sales, other than those intercompany sales reported below as sales between geographic areas, are not material. Sales between geographic areas primarily consist of sales of finished goods for distribution in foreign markets. No single foreign operation is significant to the Company’s consolidated operations. Sales between geographic areas are made at cost plus a share of operating profit.

12

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

     The Company’s geographic area data are as follows:

	Domestic		Foreign		Eliminations			Consolidated
Three Months Ended September 30, 2007
Revenues:
Net sales to unaffiliated customers	$	254,770	$	22,794	$	—		$	277,564
Net sales between geographic areas		7,545		—		(7,545	)		—
Net sales		262,315		22,794		(7,545	)		277,564
Royalties and franchise fees		5,783		—		—			5,783
Total revenues	$	268,098	$	22,794	$	(7,545	)	$	283,347
Income from operations	$	11,081	$	3,223	$	196		$	14,500
Interest expense, net									12,936
Other expense, net									209
Income (loss) before income taxes and minority interests								$	1,355
Long-lived assets	$	866,054	$	18,422	$	(50,333	)	$	854,142

	Domestic		Foreign		Eliminations			Consolidated
Three Months Ended September 30, 2006
Revenues:
Net sales to unaffiliated customers	$	199,959	$	20,555	$	—		$	220,514
Net sales between geographic areas		5,920		—		(5,920	)		—
Net sales		205,879		20,555		(5,920	)		220,514
Royalties and franchise fees		4,505		—		—			4,505
Total revenues	$	210,384	$	20,555	$	(5,920	)	$	225,019
Income from operations	$	2,040	$	3,197	$	74		$	5,311
Interest expense, net									14,226
Other income, net									319
Income (loss) before income tax benefit and minority interests								$	(9,234	)
Long-lived assets	$	841,436	$	11,802	$	(44,255	)	$	808,983

13

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

	Domestic		Foreign		Eliminations			Consolidated
Nine Months Ended September 30, 2007
Revenues:
Net sales to unaffiliated customers	$	734,501	$	60,016	$	—		$	794,517
Net sales between geographic areas		17,991		—		(17,991	)		—
Net sales		752,492		60,016		(17,991	)		794,517
Royalties and franchise fees		16,425		—		—			16,425
Total revenues	$	768,917	$	60,016	$	(17,991	)	$	810,942
Income from operations	$	40,663	$	5,687	$	874		$	47,224
Interest expense, net									40,918
Other expense, net									15,916
Income (loss) before income tax benefit and minority interests								$	(9,610	)
Long-lived assets	$	866,054	$	18,422	$	(50,333	)	$	854,142

	Domestic		Foreign		Eliminations			Consolidated
Nine Months Ended September 30, 2006
Revenues:
Net sales to unaffiliated customers	$	596,478	$	52,066	$	—		$	648,544
Net sales between geographic areas		15,110		—		(15,110	)		—
Net sales		611,588		52,066		(15,110	)		648,544
Royalties and franchise fees		13,548		—		—			13,548
Total revenues	$	625,136	$	52,066	$	(15,110	)	$	662,092
Income from operations	$	12,409	$	5,339	$	1,009		$	18,757
Interest expense, net									41,329
Other income, net									(1,638	)
Income (loss) before income tax benefit and minority interests								$	(20,934	)
Long-lived assets	$	841,436	$	11,802	$	(44,255	)	$	808,983

Note 10 – Legal Proceedings

     The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe these proceedings will result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations.

Note 11 – Related Party Transactions

     In connection with its acquisition in April 2004, the Company executed a management agreement with Berkshire Partners LLC and Weston Presidio. Pursuant to the management agreement, Berkshire Partners LLC and Weston Presidio will be paid annual management fees of $833 and $417, respectively. At both September 30, 2007 and December 31, 2006, accrued management fees payable to Berkshire Partners LLC and Weston Presidio totaled $139 and $69, respectively. Although the indenture governing our senior subordinated notes will permit the payments under the management agreement, such payments will be restricted during an event of default under the notes and will be subordinated in right of payment to all obligations due with respect to the notes in the event of a bankruptcy or similar proceeding of Amscan.

14

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

Note 12 – Stock Option Plan

     On May 1, 2004, the Company adopted the 2004 Equity Incentive Plan under which the Company may grant incentive awards in the form of options to purchase shares of the Company’s common stock (“Company Stock Options”) and shares of restricted and unrestricted Company common stock to certain directors, officers, employees and consultants of the Company and its affiliates. A committee of the Company’s board of directors (the “Committee”), or the board itself in the absence of a Committee, is authorized to make grants and various other decisions under the 2004 Equity Incentive Plan. Unless otherwise determined by the Committee, any participant granted an award under the 2004 Equity Incentive Plan must become a party to, and agree to be bound by, the stockholders’ agreement. Company stock reserved under the Equity Incentive Plan totaled 3,525.2068 shares and may include incentive stock options, nonqualified stock options or both types of Company Stock Options. Company Stock Options are nontransferable (except under certain limited circumstances) and, unless otherwise determined by the Committee, vest over five years and have a term of ten years from the date of grant.

     In April 2005, the Company granted 722 time-based, non-qualified options (“TBO’s”) and 760 performance-based, non-qualified options (“PBO’s”) to key employees and its outside directors. Under the PBO feature, the ability to exercise vested option awards is contingent upon the occurrence of an initial public offering of the Company’s common stock or a change in control of the Company and the achievement of specific investment returns to the Company’s shareholders. The Company used a minimum value method under SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” to determine the fair value of the Company Stock Options granted in April 2005 and recorded approximately $101 and $111 in compensation expense, in general and administrative expenses, during the three months ended September 30, 2007 and 2006 respectively, and $303 and $333 in compensation expense, in general and administrative expenses, during the nine months ended September 30, 2007 and 2006 respectively. It has been assumed that the estimated fair value of the options granted in 2005 under the Equity Incentive Plan is amortized on a straight line basis to compensation expense, net of taxes, over the vesting period of the grant of 4.0 years. The estimated fair value of each option on the date of grant was determined using the minimum value method with the following assumptions: dividend yield of 0%, risk-free interest rate of 3.1%, forfeitures and expected cancellation of 6% for PBO’s and 3% for TBO’s and an expected life of 4.0 years.

     On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R) “Share-Based Payment,” which is a revision of SFAS No. 123 “Accounting for Stock-Based Compensation” as amended. SFAS No. 123(R) establishes standards for the accounting for transactions where an entity exchanges its equity for goods or services and transactions that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. Generally, the fair value approach in SFAS No. 123(R) is similar to the fair value approach described in SFAS No. 123.

     The Company adopted SFAS No. 123(R) using the prospective method. Since the Company’s common stock is not publicly traded, the options granted in 2005 under SFAS No. 123 continue to be expensed under the provisions of SFAS No. 123 using a minimum value method. Options issued subsequent to January 1, 2006 are expensed under the provisions of SFAS No. 123(R).

     Since January 11, 2006, the Company granted an additional 489.50 TBO’s and 890.50 PBO’s exercisable at a strike price of $12,000 per share, 187 TBO’s and 314 PBO’s exercisable at a strike price of $14,250 per share, and 20 TBO’s and 30 PBO’s exercisable at a strike price of $17,500 per share to key eligible employees and outside directors. In addition, in connection with the acquisition of Party America, certain Party America employees elected to roll their options to purchase Party America common stock into fully vested TBO’s. As a result, the Company issued 19.023 fully vested TBO’s exercisable at strike prices of $6.267 and $10.321 per share and with a fair market value of $170. The fair value of these options was recorded as part of the purchase price allocations.

          The Company recorded compensation expense of $392 and $1,046 during the three and nine months ended September 30, 2007, respectively, and compensation expense of $255 and $509 during the three and nine months ended September 30, 2006, respectively, related to the options granted since the adoption of SFAS No. 123(R), in general and administrative expenses. The fair value of each grant was estimated on the grant date using a Black-Scholes option valuation model, based on the following assumptions:

Expected dividend rate		—
Risk free interest rate		4.85	%
Expected Life	7.50 years
Price Volatility		15.00
Forfeiture rate		7.75	%

     The weighted average expected lives (estimated period of time outstanding) was estimated using the simplified method for determining the expected term. Expected volatility was based on implied historical volatility of an applicable Dow Jones Industrial Average sector index for a period equal to the stock option’s expected life.

     During the nine months ended September 30, 2007, 7.63 options were exercised.

15

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

Note 13 — Long Term Obligations

     On May 25, 2007, the Company, a wholly owned subsidiary of AAH , and AAH, entered into (i) a Term Loan Credit Agreement (the “Term Loan Credit Agreement”), and (ii) an ABL Credit Agreement (the “ABL Credit Agreement”).

Term Loan Credit Agreement-

     The Term Loan Credit Agreement consisted of a $375,000 term loan, the proceeds of which were used to refinance certain existing indebtedness and to pay transactions costs.

     The Term Loan Credit Agreement provides for two pricing options: (i) an alternate base rate (“ABR”) equal to the greater of (a) Credit Suisse’s prime rate in effect on such day and (b) the federal funds effective rate in effect on such day plus 1/2 of 1% or (ii) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. The applicable margin is 1.25% with respect to ABR borrowings and 2.25% with respect to LIBOR borrowings.

     The Term Loan Credit Agreement provides that the term loans may be prepaid provided that, as a condition to any optional prepayment of the term loans any time prior to the first anniversary of the closing date (other than with the proceeds of an underwritten initial public offering of common stock of the Company or AAH or an optional prepayment of the term loan in full substantially contemporaneously with a change of control), the Company shall pay a premium equal to 1.00% of the principal amount prepaid.

     The term loans are subject to mandatory prepayment out of (i) 100% of net proceeds arising from asset sales, insurance and condemnation proceeds, subject to reinvestment provisions, (ii) 50% of net proceeds arising from certain equity issuances by the Company or its subsidiaries (which percentage will be reduced to 25% or 0% if the Company’s total leverage ratio is less than specified ratios), (iii) net proceeds arising from any debt issued by the Company or its subsidiaries and (iv) commencing with the fiscal year ending December 31, 2007, 50% (which percentage will be reduced to 25% or 0% if the Company’s total leverage ratio is less than specified ratios) of the Excess Cash Flow, as defined, of the Company.

     The Company is required to repay installments on the term loans in quarterly principal amounts of 0.25% of their funded total principal amount, beginning September 30, 2007 and ending March 31, 2013, with the remaining amount payable on the maturity date of May 25, 2013.

      The obligations of the Company under the Term Loan Credit Agreement are jointly and severally guaranteed by AAH and each wholly-owned domestic subsidiary of the Company. Each guarantor has secured its obligations under the guaranty by a first priority lien on substantially all of the Company’s assets, with the exception of accounts receivable and inventories, which are under a second priority lien.

     The Company may, by written notice to the Administrative Agent from time to time, request additional incremental term loans, in an aggregate amount not to exceed $100,000 from one or more lenders (which may include any existing Lender) willing to provide such additional incremental term loans in their own discretion.

     The Term Loan Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its Subsidiaries to incur additional indebtedness; create, incur or suffer to exist liens on any of their property or assets; make investments or enter into joint venture arrangements; pay dividends and distributions or repurchase capital stock of the Company; engage in mergers, consolidations and sales of all or substantially all their assets; sell assets; make capital expenditures; enter into agreements restricting dividends and advances by the Company’s subsidiaries; and engage in transactions with affiliates.

     The Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default.

     At September 30, 2007, the balance of the Term Loan was $373,125.

ABL Credit Agreement —

     The Company has a committed revolving credit facility in an aggregate principal amount of up to $200,000 for working capital, general corporate purposes and the issuance of letters of credit. The ABL Credit Agreement provides for (a) extension of credit in the form of Revolving Loans at any time and from time to time during the period ended May 25, 2012 (the “Availability Period”), in an aggregate principal amount at any time outstanding not in excess of $200,000, subject to the borrowing base described below, (b) commitments to obtain credit, at any time and from time to time during the Availability Period, in the form of Swing Line Loans, in an aggregate principal amount at any time outstanding not in excess of $10,000 and (c) ability to utilize Letters of Credit, in an aggregate

16

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

face amount at any time outstanding not in excess of $25,000 to support payment obligations incurred in the ordinary course of business by the Company and its subsidiaries.

     The borrowing base at any time equals (a) 85% of eligible trade receivables, plus (b) the lesser of (i) 75% of eligible inventory and eligible in-transit inventory, valued at the lower of cost or market value, and (ii) 85% of net orderly liquidation value of eligible inventory and eligible in transit inventory (subject, in the case of eligible in-transit inventory, to a cap of $10,000) , plus (c) 85% of eligible credit card receivables, less (d) certain reserves.

     The ABL Credit Agreement provides for two pricing options: (i) an alternate base rate (“ABR”) equal to the greater of (a) Credit Suisse’s prime rate in effect on such day and (b) the federal funds effective rate in effect on such day plus 1/2 of 1% or (ii) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. The applicable margin is up to 0.50% with respect to ABR borrowings and from 1.00% to 1.50% with respect to LIBOR borrowings. The initial applicable margin is 0.25% with respect to ABR borrowings and 1.25% with respect to LIBOR borrowings.

     In addition to paying interest on outstanding principal under the ABL Credit Agreement, the Company is required to pay a commitment fee of between 0.30% and 0.25% per annum in respect of the unutilized commitments thereunder. The Company must also pay customary letter of credit fees and agency fees.

     Upon prior notice, the Company may prepay any borrowing under the ABL Credit Agreement, in whole or in part, without premium or penalty other than customary “breakage” costs with respect to LIBOR loans.

     There is no scheduled amortization under the ABL Credit Agreement. The principal amount outstanding of the loans under the ABL Credit Agreement is due and payable in full on the fifth anniversary of the closing date.

     The obligations of the Company under the ABL Credit Agreement are jointly and severally guaranteed by AAH and each wholly-owned domestic subsidiary of the Company. Each guarantor has secured its obligations under the guaranty by a first priority lien on its accounts receivable and inventories and a second priority lien on substantially all of its other assets.

     The ABL Credit Agreement contains negative covenants that are substantially similar to the Term Loan Credit Agreement. Although the ABL Credit Agreement does not require the Company to comply with any financial ratio maintenance covenants, if it has less than $20,000 of excess availability the Company is not permitted to borrow any additional amounts. The ABL Credit Agreement also limits the amount of consolidated capital expenditures in any fiscal year

     The ABL Credit Agreement also contains certain customary affirmative covenants and events of default.

     Borrowings under the ABL Credit Agreement were $61,000, and outstanding standby letters of credit totaled $11,991.

Prior Credit Agreements —

     On May 25, 2007, the Company’s $410,000 First Lien Credit and Guaranty Agreement (the “First Lien Agreement”) and (ii) the $60,000,000 Second Lien Credit and Guaranty Agreement (the “Second Lien Agreement”) were terminated. In connection with the repayment of these obligations, costs of $16,300 including $3,781 of debt retirement costs, $6,333 of write off of deferred financing costs, and $6,218 of debt issuance costs, were recorded in Other expenses (income), net, in the consolidated results of operations in the nine months ended September 30, 2007.

     The First Lien Agreement consisted of (i) a $325,000 First Term Loan (“First Term Loan”) and (ii) an $85,000 First Term Revolver (“First Term Revolver”). The First Term Loan provided for amortization (in quarterly installments) of 0.25% of the funded total principal amount through September 2012, with the remaining principal balance payable on December 23, 2012. The First Term Revolver was available through December 23, 2011.

      The First Lien Agreement provided for two interest rate options: (i) loans on which interest was payable quarterly at a Base Rate equal to the higher of (x) the Federal Funds rate plus 50 basis points or (y) the prime rate plus an applicable margin initially equal to 2.00% and subject to adjustment downward based on improvements in the Company’s leverage ratio and (ii) loans on which interest accrued for one, two, three, six or, if generally available, nine or twelve-month interest periods, at a rate of interest per annum equal to the reserve adjusted Eurodollar rate, plus an applicable margin initially equal to 3.00% per annum, subject to downward adjustment based on improvements in the leverage ratio.

     At December 31, 2006, the First Term Loan was $319,814, which included an original issue discount of $2,748, which was net of $502 of accumulated amortization, and the floating interest rate was 8.30%. Borrowings under the First Term Revolver at December 31, 2006 were $4,900 and outstanding standby letters of credit totaled $15,400.

17

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

     The Second Lien Agreement consisted of a $60,000 Second Term Loan. It was not subject to any mandatory sinking fund payments, and was payable on December 23, 2012.

      The Second Lien Agreement provided for two interest rate options: (i) loans on which interest was payable quarterly at a Base Rate equal to the higher of (x) the Federal Funds rate plus 50 basis points or (y) the prime rate plus an applicable margin equal to 4.00% and (ii) loans on which interest accrued for one, two, three, six or if, generally available, nine or twelve-month interest periods at a rate of interest per annum equal to the reserve adjusted Eurodollar rate, plus an applicable margin initially equal to 5.00% per annum.

     At December 31, 2006, the Second Term Loan was $58,732, which included an original issue discount of $1,268, which was net of $232 of accumulated amortization and the floating interest rate was 10.30%.

Capital Lease obligations—

During the nine months ended September 30, 2007, the Company entered into a capital lease agreement for equipment and software with implicit interest rates ranging from 6.79% to 7.21% which extend to 2012. The Company also has various other capital leases for machinery and equipment and automobiles with implicit interest rates ranging from 8.40% to 8.90% which extend to 2009. Capital Lease obligations for the quarters ended September 30, 2007 and December 31, 2006 were $7,465 and $858, respectively.

Note 14 – Recently Issued Accounting Standards

     In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The new guidance will be effective for the Company on January 1, 2008. The Company is in the process of determining the effect, if any, of adopting SFAS No. 157 on the Company’s consolidated financial statements.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” including an amendment to FASB No. 115” (“SFAS 159”). Under SFAS 159, entities may elect to measure specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the fair value option, will enable entities to achieve an offset accounting effect for changes in fair value of certain related assets and liabilities without having to apply complex hedge accounting provisions. SFAS 159 is expected to expand the use of fair value measurement consistent with the FASB’s long-term objectives for financial instruments. The new guidance will be effective for the Company on January 1, 2008. The Company is in the process of evaluating the impact that adoption of SFAS 159 will have on its future consolidated financial statements.

Note 15 – Subsequent Events

Amendment of existing ABL Agreement

On November 2, 2007, Amscan Holdings, Inc. (the “Company”) entered into an amendment to its ABL credit facility with AAH, certain subsidiaries of the Company, the lenders party thereto, Credit Suisse, as administrative agent, and Bank of America, N.A., as collateral agent (the “Amendment”). The Amendment increases the aggregate commitments of the lenders under the ABL credit facility by $50,000 to $250,000. Borrowings under the ABL credit facility will continue to be subject to the borrowing base as provided for in the ABL credit agreement. In addition, the Amendment modifies the ABL credit facility by providing that the Company must maintain a Fixed Charge Coverage Ratio (as defined in the ABL credit agreement) of not less than 1.0 to 1.0 if it has less than $25,000 of excess availability under the ABL credit facility. Prior to the amendment, the minimum threshold of excess availability for this purpose was $20,000.

Unrestricted Subsidiary Credit Agreement

On November 2, 2007, Party City Franchise Group, LLC (“PCFG”), an indirect subsidiary of the Company, entered into a Credit Agreement (the “Credit Agreement”), among PCFG, CIT Group/Business Credit, Inc., as Administrative Agent and Collateral Agent, Newstar Financial, Inc., as Syndication Agent, CIT Capital Securities LLC, as Sole Arranger, and the Lenders party thereto. PCFG and Party City Franchise Group Holdings, LLC (“Party City Holdings”), the sole member of PCFG and an indirect majority owned subsidiary of the Company, have been designated by the board of directors of the Company as “Unrestricted Subsidiaries” pursuant to the Company’s existing ABL and term loan credit facilities and the indenture governing the 8.75% senior subordinated notes and neither PCFG nor Party City Holdings will be guarantors of the Company’s existing credit facilities or indenture. PCFG’s credit facility described below is a stand alone facility for PCFG and is not guaranteed by the Company or its other subsidiaries. A description of the material terms of the Credit Agreement follows.

18

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

Credit Agreement

Pursuant to the Credit Agreement, PCFG borrowed $30,000 in term loans and obtained a committed revolving credit facility in an aggregate principal amount of up to $20,000 for working capital and general corporate purposes and the issuance of letters of credit (of up to $5,000 at any time outstanding). The term loans and approximately $811 from an initial revolving borrowing of $10,000 were used to pay a portion of the purchase price of the acquisitions of retail stores from franchisees as described in Item 2.01.

Interest Rate and Fees

The Credit Agreement provides for two pricing options: (i) an alternate base rate (“ABR”) equal to the greater of (a) JPMorgan Chase Bank’s prime rate in effect on such day and (b) the federal funds effective rate in effect on such day plus ¹/2 of 1% or (ii) an adjusted LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. At closing the applicable margin was 2.75% with respect to ABR borrowings and 4.25% with respect to LIBOR borrowings, provided, however, that from and after the delivery of financial statements of Party City Holdings for the fiscal quarter ending December 31, 2008, the applicable margin will be subject to a single decrease of 0.50%, based on Party City Holdings’ total leverage ratio. In addition to paying interest on outstanding principal under the Credit Agreement, PCFG is required to pay a quarterly commitment fee equal to 0.50% in respect of the unutilized revolving commitments thereunder. PCFG must also pay customary letter of credit fees and agency fees.

Prepayments

The Credit Agreement provides that the term loans may be voluntarily prepaid and the revolving loan commitments be permanently reduced, provided that, as a condition to any optional prepayment of the term loans or permanent reduction in the revolving loan commitments any time prior to May 1, 2008, PCFG shall pay, in certain circumstances, a premium equal to 1.00% of the principal amount prepaid. Upon prior notice, PCFG may prepay any borrowing of the revolving loans at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans. The term loans are subject to mandatory prepayment out of (i) 100% of net proceeds arising from asset sales, insurance and condemnation proceeds, subject to certain exceptions and reinvestment provisions, (ii) 100% of net proceeds arising from certain equity or debt issuances by Party City Holdings or its subsidiaries subject to certain exceptions, and (iii) commencing with the fiscal year ending December 31, 2008, 75% (which percentage will be reduced to 50% or to 0% depending on Party City Holdings’ total leverage ratio being less than certain specified ratios) of the Excess Cash Flow of Party City Holdings.

Amortization

PCFG is required to repay installments on the term loans in quarterly principal amounts of $500 beginning on December 31, 2007 and ending September 30, 2009, increasing to $750 beginning on December 31, 2009 and ending September 30, 2012, with the remaining amount payable on the maturity date of November 1, 2012. There is no scheduled amortization for the revolving loans. The principal amount outstanding on the revolving loans under the Credit Agreement is due and payable in full on November 1, 2012.

Guarantee and Security

The obligations of PCFG under the Credit Agreement are jointly and severally guaranteed by Party City Holdings. Party City Holdings has secured its obligations under the guaranty by a first priority lien on substantially all of its assets. PCFG has secured its obligations under the Credit Agreement by a first priority lien on substantially all of its assets.

Certain Covenants and events of default

The Credit Agreement contains a number of customary negative covenants that restrict, subject to certain exceptions, the ability of Party City Holdings and its subsidiaries to take certain actions. The Credit Agreement requires Party City Holdings and its subsidiaries to maintain a leverage ratio, fixed charge coverage ratio and minimum EBITDA. The Credit Agreement also contains certain customary affirmative covenants and events of default.

Franchise related transactions

On November 2, 2007, Party City Corporation (“Party City”), an indirect subsidiary of the Company, and its subsidiaries completed the acquisition of new stores from franchisees in a series of transactions involving Party City, Party City Franchise Group Holdings, LLC (“Party City Holdings”), a majority owned subsidiary of Party City, and Party City Franchise Group, LLC (“PCFG”), a wholly-owned subsidiary of Party City Holdings. Party City acquired 9 retail stores located in New Jersey, New York and Pennsylvania from Party Supermarket, Inc., Party City of 22, Inc., Party City of Jersey City, Inc., Party City of Oceanside, Inc., Party City of Ralph Avenue, Inc., Party City of Watchung, Inc. and Party City of Woodbridge, Inc.

Concurrently, Party City contributed cash and 11 of its corporate retail stores located in Florida to Party City Holdings. Party City Holdings and PCFG acquired a total of 55 retail stores located in Florida and Georgia from franchisees Party City of Atlanta, Inc., Party Supermarket, Inc., M&M Party, Inc., Party City of Bonita Springs, Inc., Party City of Ft. Myers, Inc., Party City of Hialeah, Inc., Party City of Little Havana, Inc., Party City of Miami (Doral), Inc., Party City of Naples, Inc.,

19

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

Party City of West Dade, Inc. and Party City of Winter Garden, Inc. PCFG will operate the acquired 66 stores in the Florida and Georgia regions. The franchisee sellers received approximately $80,000 in cash and, in certain instances, equity interests in Party City Holdings in exchange for the retail stores. The acquisitions were financed through the combination of cash contributed by Party City, borrowings under the Company’s existing credit facility and a new credit facility entered into by PCFG and equity issued in exchange for certain stores. PCFG and Party City Holdings are unrestricted subsidiaries under the Company’s existing debt facilities and the new PCFG credit facility is a stand alone facility which is not guaranteed by the Company or its other subsidiaries.

Note 16 – Condensed Consolidating Financial Information

          On May 25, 2007, the Company, a wholly owned subsidiary of AAH, along with AAH entered into (i) a $375,000 Term Loan Credit Agreement, and (ii) a $200,000 ABL Credit Agreement (see Note 13).

          Borrowings under the Term Loan Credit Agreement, the ABL Credit Agreement and the Company’s 8.75% $175,000 senior subordinated notes issued in April 30, 2004 and due in April 30, 2014 are guaranteed jointly and severally, fully and unconditionally, by the following wholly-owned domestic subsidiaries of the Company (the “Guarantors”):

• Amscan Inc.

• Am-Source, LLC

• Anagram Eden Prairie Property Holdings LLC

• Anagram International, Inc.

• Anagram International Holdings, Inc.

• Anagram International, LLC

• Gags & Games, Inc.

• JCS Packaging Inc. (formerly JCS Realty Corp.)

• M&D Industries, Inc.

• Party City Corporation

• PA Acquisition Corporation

• SSY Realty Corp.

• Trisar, Inc.

     Non-guarantor subsidiaries (“Non-guarantors”) include the following:

• Amscan (Asia-Pacific) Pty. Ltd.

• Amscan de Mexico, S.A. de C.V.

• Amscan Distributors (Canada) Ltd.

• Anagram Espana, S.A.

• Anagram France S.C.S.

• Amscan Holdings Limited

• Anagram International (Japan) Co., Ltd.

• Amscan Partyartikel GmbH

• JCS Hong Kong Ltd.

          The following information presents condensed consolidating balance sheets at September 30, 2007 and December 31, 2006, and the condensed consolidating statements of operations for the three and nine months ended September 30, 2007 and 2006, and the related condensed consolidating statements of cash flows for the nine months ended September 30, 2007 and 2006, for the combined Guarantors and the combined Non-guarantors, together with the elimination entries necessary to consolidate the entities comprising the combined companies.

20

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2007

	AHI and		Combined
	Combined		Non-
	Guarantors		Guarantors			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	9,283	$	963		$	—		$	10,246
Accounts receivable, net of allowances		90,004		22,415			—			112,419
Inventories, net of allowances		272,331		13,084			(660	)		284,755
Prepaid expenses and other current assets		46,449		2,079			—			48,528
Total current assets		418,067		38,541			(660	)		455,948
Property, plant and equipment, net		155,654		2,351			—			158,005
Goodwill		475,699		4,382			—			480,081
Trade names		143,000								143,000
Other intangible assets, net		45,403		—			—			45,403
Other assets, net		66,297		11,689			(50,333	)		27,653
Total assets	$	1,304,120	$	56,963		$	(50,993	)	$	1,310,090
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable		61,000		—			—			61,000
Accounts payable		128,006		2,615			—			130,621
Accrued expenses		80,530		10,700			—			91,230
Income taxes payable		929		(77	)		(43	)		809
Current portion of long-term obligations		4,549		121			—			4,670
Total current liabilities		275,013		13,359			(43	)		288,329
Long-term obligations, excluding current portion		557,989		33			—			558,022
Deferred income tax liabilities		82,573		723			—			83,296
Other		18,280		40,329			(47,841	)		10,768
Total liabilities		933,855		54,444			(47,884	)		940,415
Redeemable common securities		17,083		—			—			17,083
Commitments and contingencies
Stockholders’ equity:
Common Stock		—		339			(339	)		—
Additional paid-in capital		329,386		—			—			329,386
Retained earnings		21,383		1,654			(2,244	)		20,793
Accumulated other comprehensive income (loss)		2,413		526			(526	)		2,413
Total stockholders’ equity		353,182		2,519			(3,109	)		352,592
Total liabilities, redeemable common securities and stockholders’ equity	$	1,304,120	$	56,963		$	(50,993	)	$	1,310,090

21

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2006

	AHI and		Combined
	Combined		Non-
	Guarantors		Guarantors			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	4,395	$	571		$	—		$	4,966
Accounts receivable, net		82,193		13,277						95,470
Inventories, net		214,681		13,313			(544	)		227,450
Prepaid expenses and other current assets		33,960		1,740			—			35,700
Total current assets		335,229		28,901			(544	)		363,586
Property, plant and equipment, net		152,956		2,487						155,443
Goodwill, net		472,448		4,256						476,704
Trade names		143,000		—						143,000
Other intangible assets, net		47,407		—						47,407
Other assets		66,092		10,575			(45,436	)		31,231
Total assets	$	1,217,131	$	46,219		$	(45,980	)	$	1,217,371
LIABILITIES, REDEEMABLE COMMON SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Loans and notes payable	$	4,930	$	—		$	—		$	4,930
Accounts payable		108,192		2,237						110,429
Accrued expenses		61,940		6,149						68,089
Income taxes payable		8,908		(50	)		16			8,874
Current portion of long-term obligations		3,523		180			—			3,703
Total current liabilities		187,493		8,516			16			196,025
Long-term obligations, excluding current portion		558,265		107						558,372
Deferred income tax liabilities		82,891		701						83,592
Deferred rent and other long-term liabilities		18,879		36,963			(45,643	)		10,199
Total liabilities		847,528		46,287			(45,627	)		848,188
Redeemable common securities		9,343		—			—			9,343
Commitments and contingencies
Stockholders’ equity:
Common stock		—		339			(339	)		—
Additional paid-in capital		331,113		—			—			331,113
Retained earnings (deficit)		27,685		(327	)		(94	)		27,264
Accumulated other comprehensive income (loss)		1,463		(80	)		80			1,463
Total stockholders’ equity		360,261		(68	)		(353	)		359,840
Total liabilities, redeemable common securities and stockholders’ equity	$	1,217,132	$	46,219		$	(45,980	)	$	1,217,371

22

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2007

	AHI and
	Combined			Combined Non-
	Guarantors			Guarantors		Eliminations			Consolidated
Revenues:
Net sales	$	262,315		$	22,794	$	(7,545	)	$	277,564
Royalties and franchise fees		5,783			—		—			5,783
Total revenues		268,098			22,794		(7,545	)		283,347
Expenses:
Cost of sales		173,323			14,869		(7,411	)		180,781
Selling expenses		7,995			2,478		—			10,473
Retail operating expenses		44,931			—		—			44,931
Franchise expenses		3,234			—		—			3,234
General and administrative expenses		24,606			2,224		(330	)		26,500
Art and development costs		2,928			—		—			2,928
Total expenses		257,017			19,571		(7,741	)		268,847
Income from operations		11,081			3,223		196			14,500
Interest expense, net		12,902			34		—			12,936
Other income, net		(2,254	)		89		2,374			209
Loss before income taxes and minority interests		433			3,100		(2,178	)		1,355
Income tax (benefit) expense		(75	)		1,052		(50	)		927
Minority interests		—			4		—			4
Net loss	$	508		$	2,044	$	(2,128	)	$	424

23

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2007

	AHI and
	Combined			Combined Non-
	Guarantors			Guarantors		Eliminations			Consolidated
Revenues:
Net sales	$	752,492		$	60,016	$	(17,991	)	$	794,517
Royalties and franchise fees		16,425			—		—			16,425
Total revenues		768,917			60,016		(17,991	)		810,942
Expenses:
Cost of sales		498,961			40,543		(17,875	)		521,629
Selling expenses		24,222			7,217		—			31,439
Retail operating expenses		116,373			—		—			116,373
Franchise expenses		9,640			—		—			9,640
General and administrative expenses		70,176			6,569		(990	)		75,755
Art and development costs		8,882			—		—			8,882
Total expenses		728,254			54,329		(18,865	)		763,718
Income from operations		40,663			5,687		874			47,224
Interest expense, net		40,821			97		—			40,918
Other income, net		11,264			2		4,650			15,916
Loss before income taxes and minority interests		(11,422	)		5,588		(3,776	)		(9,610	)
Income tax (benefit) expense		(5,057	)		1,862		(43	)		(3,238	)
Minority interests		—			68		—			68
Net loss	$	(6,365	)	$	3,658	$	(3,733	)	$	(6,440	)

24

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2006

	AHI and
	Combined			Combined Non-
	Guarantors			Guarantors			Eliminations			Consolidated
Revenues:
Net sales	$	205,879		$	20,555		$	(5,920	)	$	220,514
Royalties and franchise fees		4,505			—						4,505
Total revenues		210,384			20,555			(5,920	)		225,019
Expenses:
Cost of sales		149,021			13,026			(5,664	)		156,383
Selling expenses		7,782			2,196						9,978
Retail operating expenses		27,668			—						27,668
Franchise expenses		3,424			—						3,424
General and administrative expenses		17,945			2,136			(330	)		19,751
Art and development costs		2,504			—						2,504
Total expenses		208,344			17,358			(5,994	)		219,708
Income from operations		2,040			3,197			74			5,311
Interest expense, net		14,178			48						14,226
Other (income) expense, net		(2,046	)		(99	)		2,464			319
(Loss) income before income taxes and minority interests		(10,092	)		3,248			(2,390	)		(9,234	)
Income tax (benefit) expense		(4,578	)		1,002			(95	)		(3,671	)
Minority interests		—			112						112
Net (loss) income	$	(5,514	)	$	2,134		$	(2,295	)	$	(5,675	)

25

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2006

	AHI and
	Combined			Combined Non-
	Guarantors			Guarantors		Eliminations			Consolidated
Revenues:
Net sales	$	611,588		$	52,066	$	(15,110	)	$	648,544
Royalties and franchise fees		13,548			—					13,548
Total revenues		625,136			52,066		(15,110	)		662,092
Expenses:
Cost of sales		442,927			34,456		(15,129	)		462,254
Selling expenses		22,534			6,062					28,596
Retail operating expenses		76,230			—					76,230
Franchise expenses		9,403			—					9,403
General and administrative expenses		54,171			6,209		(990	)		59,390
Art and development costs		7,462			—					7,462
Total expenses		612,727			46,727		(16,119	)		643,335
Income from operations		12,409			5,339		(1,009	)		18,757
Interest expense, net		41,209			120					41,329
Other (income) expense, net		(6,150	)		237		4,275			(1,638	)
(Loss) income before income taxes and minority interests		(22,650	)		4,982		(3,266	)		(20,934	)
Income tax (benefit) expense		(9,798	)		1,479		8			(8,311	)
Minority interests		—			218					218
Net (loss) income	$	(12,852	)	$	3,285	$	(3,274	)	$	(12,841	)

26

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2007

	AHI and			Combined
	Combined			Non-
	Guarantors			Guarantors			Eliminations			Consolidated
Cash flows used in operating activities:
Net (loss) income	$	(6,365	)	$	3,658		$	(3,733	)	$	(6,440	)
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization expense		27,252			694			—			27,946
Amortization of deferred financing costs		1,586			—			—			1,586
Provision for doubtful accounts		780			186			—			966
Deferred income tax expense (benefit)		1,007			—			—			1,007
Deferred rent		526			—			—			526
Undistributed loss (gain) in unconsolidated joint venture		(184	)		—			—			(184	)
(Gain) Loss on disposal of equipment		1,192			—			—			1,192
Equity based compensation		1,350			—			—			1,350
Debt retirement costs		3,781			—			—			3,781
Write-off of deferred financing costs		6,333			—			—			6,333
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable		(106	)		(9,328	)		—			(9,434	)
(Increase) decrease in inventories		(51,855	)		229			116			(51,510	)
(Increase) decrease in prepaid expenses and other current assets		(25,722	)		(508	)		2			(26,228	)
Increase (decrease) in accounts payable, accrued expenses and income taxes payable		31,256			4,536			3,614			39,406
Other, net		11			—			—			11
Net cash used in operating activities		(9,158	)		(533	)		(1	)		(9,691	)
Cash flows used in investing activities:
Cash paid in connection with store acquisitions		(8,685	)		—			—			(8,685	)
Capital expenditures		(17,250	)		(503	)		—			(17,753	)
Proceeds from disposal of property and equipment		1,738			—			—			1,738
Net cash used in investing activities		(24,197	)		(503	)		—			(24,700	)
Cash flows provided by financing activities:
Repayments of loans, notes payable and long-term obligations		(384,949	)		(118	)		—			(385,067	)
Proceeds from loans, notes payable and long-term obligations		418,507			—			—			418,507
Proceeds from capital contributions and exercise of options		4,700			—			—			4,700
Net cash provided by financing activities		38,258			(118	)		—			38,140
Effect of exchange rate changes on cash and cash equivalents		(15	)		1,546			—			1,531
Net decrease in cash and cash equivalents		4,888			392			(1	)		5,280
Cash and cash equivalents at beginning of period		4,395			571			—			4,966
Cash and cash equivalents at end of period	$	9,283		$	963		$	(1	)	$	10,246

27

AMSCAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

AMSCAN HOLDINGS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2006

	AHI and
	Combined			Combined Non-
	Guarantors			Guarantors			Eliminations			Consolidated
Cash flows used in operating activities:
Net (loss) income	$	(12,852	)	$	3,285		$	(3,274	)	$	(12,841	)
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization expense		30,026			600						30,626
Amortization of deferred financing costs		1,986			—						1,986
Provision for doubtful accounts		988			295						1,283
Deferred income tax benefit		(7,553	)		—						(7,553	)
Undistributed gain in unconsolidated joint venture		(184	)		—						(184	)
Gain on disposal of property, plant and equipment		(1,152	)		(4	)					(1,156	)
Equity based compensation		842			—						842
Changes in operating assets and liabilities:
Increase in accounts receivable		(20,563	)		(7,689	)					(28,252	)
(Increase) decrease in inventories		(19,337	)		512			(19	)		(18,844	)
(Increase) decrease in prepaid expenses, other current assets and other, net		(90	)		528			3,285			3,723
Increase in accounts payable, accrued expenses, income taxes payable and other liabilities		6,646			1,665			8			8,319
Net cash used in operating activities		(21,243	)		(808	)		—			(22,051	)
Cash flows used in investing activities:
Cash paid in connection with acquisitions		(14,270	)		—						(14,270	)
Capital expenditures		(28,819	)		(519	)					(29,338	)
Proceeds from disposal of property, plant and equipment		14,229			44						14,273
Net cash used in investing activities		(28,860	)		(475	)		—			(29,335	)
Cash flows provided by (used in) financing activities:
Repayment of loans, notes payable and long-term obligations		(2,115	)		(204	)					(2,319	)
Proceeds from short term obligations		48,450			—						48,450
Proceeds from the sale of common stock		1,614			—						1,614
Net cash provided by (used in) financing activities		47,949			(204	)		—			47,745
Effect of exchange rate changes on cash and cash equivalents		56			1,242						1,298
Net decrease in cash and cash equivalents		(2,098	)		(245	)					(2,343	)
Cash and cash equivalents at beginning of period		7,695			1,050						8,745
Cash and cash equivalents at end of period	$	5,597		$	805		$			$	6,402

28

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

Acquisitions

The Party America Acquisition

          On September 29, 2006 (the “Party America Acquisition Date”), the Company acquired PA Acquisition Corp. (the “Party America Acquisition”), doing business as Party America (“Party America”), from Gordon Brothers Investment, LLC. In connection with the acquisition, the outstanding common stock, common stock options and subordinated debt of Party America were converted into AAH Holdings Corporation (“AAH”) common stock and common stock options valued at $29.7 million. AAH also paid transaction costs of $1.1 million and repaid $12.6 million of Party America senior debt.

The excess of the Party America purchase price over the tangible net assets acquired has been allocated to intangible assets consisting of franchise licenses ($1.5 million), which are being amortized using the straight-line method over the assets’ estimated useful life (nine years), above market leases ($0.8 million), which are being amortized over the remaining lease lives, trade names ($15.6 million) and goodwill ($9.8 million), which are not being amortized, and net deferred tax liabilities ($1.8 million). In addition, other assets acquired totaled $46.4 million, including an allocation to adjust property, plant and equipment to market value ($0.9 million), and liabilities assumed totaled $41.5 million. The allocation of the purchase price is based on our estimates of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. Independent valuation specialists assisted management in the final determination of fair value of the net assets acquired as of the Party America Acquisition Date.

     The results of Party America’s operations are included in the Company’s consolidated results of operations from the date of acquisition.

Other acquisitions

     On June 1^st, 2007, the Company acquired a retail operation for $5.0 million and repaid the company’s existing debt. This acquisition is recorded in the Company’s financial statements based upon the estimated fair value of the tangible and identifiable intangible assets acquired and liabilities assumed and is reflected in the Company’s consolidated results of operations from the date of acquisition.

Pending acquisition

     On September 17th, 2007, the Company and AAH entered into a definitive agreement to acquire Factory Card & Party Outlet Corp. (“FCPO”), a current customer, and retailer of party goods with 184 company-owned and operated stores with locations chiefly in the Midwest and Mid-Atlantic U.S. During the twelve month period ended September 30, 2007, sales to FCPO stores accounted for approximately 2% of the Company’s net sales. For the fiscal year ended February 3, 2007, FCPO reported revenues of approximately $244,000. Under the terms of the agreement, FCPO shareholders will receive total consideration of approximately $72,000. The acquisition, which is subject to approval by FCPO’s shareholders and other customary conditions, is expected to close during the fourth quarter of 2007 or the first quarter of 2008. The Company plans to finance the acquisition through a it’s existing credit facilities.

Subsequent Events

Amendment of existing ABL Agreement

On November 2, 2007, Amscan Holdings, Inc. (the “Company”) entered into an amendment to its ABL credit facility with AAH, certain subsidiaries of the Company, the lenders party thereto, Credit Suisse, as administrative agent, and Bank of America, N.A., as collateral agent (the “Amendment”). The Amendment increases the aggregate commitments of the lenders under the ABL credit facility by $50.0 million to $250.0 million. Borrowings under the ABL credit facility will continue to be subject to the borrowing base as provided for in the ABL credit agreement. In addition, the Amendment modifies the ABL credit facility by providing that the Company must maintain a Fixed Charge Coverage Ratio (as defined in the ABL credit agreement) of not less than 1.0 to 1.0 if it has less than $25.0 million of excess availability under the ABL credit facility. Prior to the amendment, the minimum threshold of excess availability for this purpose was $20.0 million.

Unrestricted Subsidiary Credit Agreement

On November 2, 2007, Party City Franchise Group, LLC (“PCFG”), an indirect subsidiary of the Company, entered into a Credit Agreement (the “Credit Agreement”), among PCFG, CIT Group/Business Credit, Inc., as Administrative Agent and Collateral Agent, Newstar Financial, Inc., as Syndication Agent, CIT Capital Securities LLC, as Sole Arranger, and the Lenders party thereto. PCFG and Party City Franchise Group Holdings, LLC (“Party City Holdings”), the sole member of PCFG and an indirect majority owned subsidiary of the Company, have been designated by the board of directors of the Company as “Unrestricted Subsidiaries” pursuant to the

29

Company’s existing ABL and term loan credit facilities and the indenture governing the 8.75% senior subordinated notes and neither PCFG nor Party City Holdings will be guarantors of the Company’s existing credit facilities or indenture. PCFG’s credit facility described below is a stand alone facility for PCFG and is not guaranteed by the Company or its other subsidiaries.

A description of the material terms of the Credit Agreement follows.

Credit Agreement

Pursuant to the Credit Agreement, PCFG borrowed $30.0 million in term loans and obtained a committed revolving credit facility in an aggregate principal amount of up to $20.0 million for working capital and general corporate purposes and the issuance of letters of credit (of up to $5.0 million at any time outstanding). The term loans and approximately $0.8 million from an initial revolving borrowing of $10.0 million were used to pay a portion of the purchase price of the acquisitions of retail stores from franchisees as described in Item 2.01.

Interest Rate and Fees

The Credit Agreement provides for two pricing options: (i) an alternate base rate (“ABR”) equal to the greater of (a) JPMorgan Chase Bank’s prime rate in effect on such day and (b) the federal funds effective rate in effect on such day plus ¹/2 of 1% or (ii) an adjusted LIBO rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. At closing the applicable margin was 2.75% with respect to ABR borrowings and 4.25% with respect to LIBO borrowings, provided, however, that from and after the delivery of financial statements of Party City Holdings for the fiscal quarter ending December 31, 2008, the applicable margin will be subject to a single decrease of 0.50%, based on Party City Holdings’ total leverage ratio. In addition to paying interest on outstanding principal under the Credit Agreement, PCFG is required to pay a quarterly commitment fee equal to 0.50% in respect of the unutilized revolving commitments thereunder. PCFG must also pay customary letter of credit fees and agency fees.

Prepayments

The Credit Agreement provides that the term loans may be voluntarily prepaid and the revolving loan commitments be permanently reduced, provided that, as a condition to any optional prepayment of the term loans or permanent reduction in the revolving loan commitments any time prior to May 1, 2008, PCFG shall pay, in certain circumstances, a premium equal to 1.00% of the principal amount prepaid. Upon prior notice, PCFG may prepay any borrowing of the revolving loans at any time without premium or penalty other than customary “breakage” costs with respect to LIBO loans. The term loans are subject to mandatory prepayment out of (i) 100% of net proceeds arising from asset sales, insurance and condemnation proceeds, subject to certain exceptions and reinvestment provisions, (ii) 100% of net proceeds arising from certain equity or debt issuances by Party City Holdings or its subsidiaries subject to certain exceptions, and (iii) commencing with the fiscal year ending December 31, 2008, 75% (which percentage will be reduced to 50% or to 0% depending on Party City Holdings’ total leverage ratio being less than certain specified ratios) of the Excess Cash Flow of Party City Holdings.

Amortization

PCFG is required to repay installments on the term loans in quarterly principal amounts of $0.5 million beginning on December 31, 2007 and ending September 30, 2009, increasing to $0.8 million beginning on December 31, 2009 and ending September 30, 2012, with the remaining amount payable on the maturity date of November 1, 2012. There is no scheduled amortization for the revolving loans. The principal amount outstanding on the revolving loans under the Credit Agreement is due and payable in full on November 1, 2012.

Guarantee and Security

The obligations of PCFG under the Credit Agreement are jointly and severally guaranteed by Party City Holdings. Party City Holdings has secured its obligations under the guaranty by a first priority lien on substantially all of its assets. PCFG has secured its obligations under the Credit Agreement by a first priority lien on substantially all of its assets.

Certain Covenants and events of default

The Credit Agreement contains a number of customary negative covenants that restrict, subject to certain exceptions, the ability of Party City Holdings and its subsidiaries to take certain actions. The Credit Agreement requires Party City Holdings and its subsidiaries to maintain a leverage ratio, fixed charge coverage ratio and minimum EBITDA. The Credit Agreement also contains certain customary affirmative covenants and events of default.

Completion of Acquisition

On November 2, 2007, Party City Corporation (“Party City”), an indirect subsidiary of the Company, and its subsidiaries completed the acquisition of new stores from franchisees in a series of transactions involving Party City, Party City Franchise Group Holdings, LLC (“Party City Holdings”), a majority owned subsidiary of Party City, and Party City Franchise Group, LLC (“PCFG”), a wholly-owned subsidiary of Party City Holdings. Party City acquired 9 retail stores located in New Jersey, New York and Pennsylvania from Party Supermarket, Inc., Party City of 22, Inc., Party City of Jersey City, Inc., Party City of Oceanside, Inc., Party City of Ralph Avenue, Inc., Party City of Watchung, Inc. and Party City of Woodbridge, Inc. Party City contributed cash and 11 of its corporate retail stores located in Florida to Party City Holdings. Party City Holdings and PCFG acquired a total of 55 retail stores located in Florida and Georgia from franchisees Party City of Atlanta, Inc., Party Supermarket, Inc., M&M Party, Inc., Party City of Bonita Springs, Inc., Party City of Ft.

30

Myers, Inc., Party City of Hialeah, Inc., Party City of Little Havana, Inc., Party City of Miami (Doral), Inc., Party City of Naples, Inc., Party City of West Dade, Inc. and Party City of Winter Garden, Inc. PCFG will operate the acquired 66 stores in the Florida and Georgia regions. The franchisee sellers received approximately $80,000 in cash and, in certain instances, equity interests in Party City Holdings in exchange for the retail stores. The acquisitions were financed through the combination of cash contributed by Party City, borrowings under the Company’s existing credit facility and a new credit facility entered into by PCFG and equity issued in exchange for certain stores. PCFG and Party City Holdings are unrestricted subsidiaries under the Company’s existing debt facilities and the new PCFG credit facility is a stand alone facility which is not guaranteed by the Company or its other subsidiaries.

31

THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2006

Percentage of Total Revenues

     The following table sets forth the Company’s consolidated statements of operations for the three months ended September 30, 2007 and 2006.

	Three Months Ended September 30,
	2007			2006
Revenues:
Net sales		98.0	%		98.0	%
Royalties and franchise fees		2.0			2.0
Total revenues		100.0			100.0
Expenses:
Cost of sales		63.8			69.5
Selling expenses		3.7			4.4
Retail operating expenses		15.9			12.3
Franchise expenses		1.1			1.5
General and administrative expenses		9.4			8.8
Art and development costs		1.0			1.1
Total expenses		94.9			97.6
Income from operations		5.1			2.4
Interest expense, net		4.6			6.3
Other expense (income), net		0.1			0.1
Income (loss) before income taxes and minority interests		0.5			(4.1	)
Income tax (benefit) expense		0.3			(1.6	)
Minority interests		0.0			0.0
Net income (loss )		0.1	%		(2.5	)%

Total Revenues

          The following table sets forth the Company’s total revenues for the three months ended September 30, 2007 and 2006.

	Three Months Ended September 30,
	2007						2006
	Dollars in			Percentage of			Dollars in			Percentage of
Revenues	Thousands			Total Revenue			Thousands			Total Revenue
Sales
Wholesale	$	169,566			59.8	%	$	135,134			60.1	%
Eliminations		(45,952	)		(16.2	)		(19,796	)		(8.8	)
Net wholesale		123,614			43.6			115,338			51.3
Retail		153,950			54.3			105,176			46.7
Total net sales		277,564			98.0			220,514			98.0
Franchise related		5,783			2.0			4,505			2.0
Total revenues	$	283,347			100.0	%	$	225,019			100.0	%

32

     Wholesale

          Net sales, at wholesale, of $123.6 million were $8.3 million or 7.2% higher than sales for the quarter ended September 30, 2006. Net sales for the quarter ended September 30, 2007 reflect the elimination of inter-company sales to Party City and Party America company-owned stores , while net sales for the second quarter of 2006 only reflect the elimination of inter-company sales to Party City company-owned stores. Had the Party America Acquisition occurred January 1, 2006, the Company would have eliminated $2.8 million of sales to Party America stores during the quarter ended September 30, 2006. Accordingly, net sales for the quarter ended September 30, 2007, at wholesale, of $123.6 million were $11.1 million or 9.8% higher than adjusted sales for the quarter ended September 30, 2006.

          Net sales to party superstores, including sales to our retail franchisees, totaled $ 40.7 million and were 26.0% higher than the adjusted 2006 sales to party superstores.  The increase in sales to party superstores principally reflects our synergistic growth with Party City and Party America franchisees.  International sales totaled $ 22.7 million and were 10.9 % higher than in 2006, principally due to the strong demand for our party goods at European national accounts.  Net sales of metallic balloons and flexible packaging were $ 21.3 million or 0.2% lower than in 2006.  Net sales to other retail channels (principally mass merchant, drug, craft and contract manufacturing) were $ 38.7 million, an increase of 1.2 % from 2006, principally due to the increase in the craft and contract manufacturing channels.

     Retail

          Net retail sales for company-owned stores for the quarter ended September 30, 2007 of $154.0 million were $48.8 million or 46.4% higher than net retail sales for the quarter ended September 30, 2006, and included $35.3 million Party America sales (acquired September 29, 2006), as well as $4.4 million of sales from other retail operations which were acquired June 1, 2007.

          Same-store net retail sales for Party City company-owned stores during the September 2007 quarter totaled $113.1 million and were 10.5% higher than the net retail sales for the quarter ended September 30, 2006. The improvements at Party City reflect increases of non-seasonal merchandise of 13.6% and seasonal merchandise sales of 0.1%. Party America same-store sales for this quarter were $34.0 million or 3.0% lower than their net retail sales for the quarter ended September 30, 2006.  The decreases at Party America reflect lower non-seasonal merchandise of 2.1%, and seasonal merchandise of 6.9%.  The favorable performance at Party City principally reflects an increase in the average net sale per retail transaction at our company-owned stores.  The decreases in performance at Party America principally reflects the impact of transitioning our product line to affect wholesale synergies.

     Royalties and franchise fees

          Franchise related revenue for the quarter ended September 2007 totaled $5.8 million or 28.4% higher than revenue for the corresponding quarter of 2006, principally due to the inclusion of Party America franchise related revenues of $0.5 million, and the net increase of 13 franchise stores during 2007. During the quarter ended September 30, 2007, one franchise store closed, 13 stores opened, two stores were acquired and one store was sold, as compared to two new stores opening and one store closing in the comparable quarter of 2006.  In addition, Party City franchise stores reported same-store net sales of $119.4 million, or an increase of 5.1%, while Party America franchise stores reported same-store net sales of $13.1 million, or an increase of 1.3%, when comparing the quarter ended September 30, 2007 with the corresponding quarter of 2006.

Gross Profit

          The following table sets forth the Company’s consolidated gross profit on net sales for the three months ended September 30, 2007 and 2006.

	Three Months Ended September 30,
	2007					2006
	Dollars in		% of associated			Dollars in		% of associated
	Thousands		sales			Thousands		sales
Net Wholesale	$	39,749		32.2	%	$	33,271		28.8	%
Net Retail		57,034		37.0			30,860		29.3
Total Gross Profit	$	96,783		34.9	%	$	64,131		29.1	%

          The gross profit margin on net sales at wholesale, after inter-company eliminations, for the quarter ended September 30, 2007 was 32.2% or 340 basis points higher than in 2006. The increase in gross profit margin principally reflects improved product pricing and changes in product mix.

33

               Retail gross profit margin for the quarter ended September 30, 2007 was 37.0%, or 770 basis points higher than in the quarter ended September 30, 2006, and reflects the recognition of previously deferred wholesale gross profit margin on product purchased from its wholesale affiliates, favorable product pricing and product mix.

Operating expenses

          Selling expenses of $10.5 million for the quarter-ended September 30, 2007 were $0.5 million higher than for the quarter ended September 30, 2006 due to increases in base compensation and employee benefits. As a percent of total revenues, selling expenses were 3.7% for the quarter ended September 30, 2007, or 70 basis points lower than for the quarter ended September 30, 2006.

          Retail operating expenses for the quarter ended September 30, 2007 totaled $44.9 million, or $17.3 million higher than in the prior year quarter, principally due to the inclusion of Party America operating expenses of $10.6 million, the inclusion of $2.8 million of operating expenses from other acquired retail operations , the timing of advertising costs and additional retail payroll.

          Franchise expenses for the quarter ended September 30, 2007 were $3.2 million, or $0.2 million lower than the quarter ended September 30, 2006, reflecting lower franchise expenses in the Party City group, partially offset by the addition of Party America franchisees during 2007, and increased amortization of franchise license intangibles.

          General and administrative expenses of $26.5 million for the quarter ended September 30, 2007 were $6.7 million higher than the prior year quarter, principally reflecting the inclusion of Party America expenses of $2.9 million, other acquired retail operation expenses of $1.4 million, and higher base compensation and employee benefit costs.

          Art and development costs of $2.9 million for the quarter ended September 30, 2007 were $0.4 million higher than costs for the quarter ended September 30, 2006. As a percentage of total revenues, art and development costs were 1.0% of total revenue for the quarter ended September 2007, versus 1.1% for the quarter ended September 2006.

Interest expense, net

          Interest expense of $12.9 million for the three months ended September 30, 2007 was $1.3 million lower than for the three months ended September 30, 2006, reflecting reduced interest rates resulting from our 2007 debt refinancing, partially offset by higher average borrowings following the Party America Acquisition in September 2006.

Other expense, net

          Other expense, net of $0.2 million principally consists of our share of loss (income) in an unconsolidated joint venture. The undistributed loss (income) represents our share of the operations of a Mexican balloon distribution joint venture, and includes the elimination of inter-company profit in the joint venture’s inventory at September 30, 2007 and 2006.

Income tax expense (benefit)

Income taxes expense (benefit) for the quarters ended September 30, 2007 and 2006 were based upon the estimated consolidated effective income tax rates of 38.2% and 39.7% for the years ending December 31, 2007 and 2006, respectively. The decrease in the 2007 effective income tax rate is primarily attributable to a lower average state income tax rates.

34

NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006

Percentage of Total Revenues

     The following table sets forth the Company’s consolidated statements of operations for the nine months ended September 30, 2007 and 2006.

	Nine Months Ended
	September 30,
	2007			2006
Revenues:
Net sales		98.0	%		98.0	%
Royalties and franchise fees		2.0			2.0
Total revenues		100.0			100.0
Expenses:
Cost of sales		64.3			69.8
Selling expenses		3.9			4.3
Retail operating expenses		14.4			11.5
Franchise expenses		1.2			1.4
General and administrative expenses		9.3			9.0
Art and development costs		1.1			1.1
Total expenses		94.2			97.2
Income from operations		5.8			2.8
Interest expense, net		5.0			6.2
Other expense (income), net		2.0			(0.2	)
Income (loss) before income taxes and minority interests		(1.2	)		(3.2	)
Income tax (benefit) expense		(0.4	)		(1.3	)
Minority interests		0.0			0.0
Net income (loss )		(0.8	)%		(1.9	)%

Total Revenues

          The following table sets forth the Company’s total revenues for the nine months ended September 30, 2007 and 2006.

	Nine Months Ended September 30,
	2007						2006
	Dollars in			Percentage of			Dollars in			Percentage of
Revenues	Thousands			Total Revenue			Thousands			Total Revenue
Sales
Wholesale	$	458,329			56.5	%	$	375,093			56.7	%
Eliminations		(118,080	)		(14.6	)		(48,827	)		(7.4	)
Net wholesale		340,249			42.0			326,266			49.3
Retail		454,268			56.0			322,278			48.7
Total net sales		794,517			98.0			648,544			98.0
Franchise related		16,425			2.0			13,548			2.0
Total revenues	$	810,942			100.0	%	$	662,092			100.0	%

35

     Wholesale

          Net sales, at wholesale, of $340.2 million were $14.0 million or 4.3% higher than net sales for the first nine months of 2006. Net sales for the first nine months of 2007 reflect the first nine months of 2007 elimination of inter-company sales to Party City and Party America company-owned stores, while net sales for the first nine months of 2006 only reflect the elimination of inter-company sales to Party City. Had the Party America Acquisition occurred January 1, 2006, the Company would have eliminated $10.7 million of sales to Party America during the first nine months of 2006. Accordingly, net sales, at wholesale, for the nine months ended September 30, 2007, of $340.2 million were $24.7 million or 7.8% higher than adjusted sales for the comparable period of 2006.

          Net sales to party superstores, including sales to our retail franchisees, totaled $ 116.3 million and were 19.9% higher for the first nine months of 2007 than the adjusted 2006 sales to party superstores.  The increase in sales to party superstores principally reflects our synergistic growth with Party City and Party America franchisees.  International sales totaled $ 60.0 million or 15.3% higher for the first nine months of 2007 than in 2006, principally due to the strong demand for our party goods at European national accounts.   Net sales of metallic balloons and flexible packaging totaled $ 65.6 million or 0.2% higher for the first nine months of 2007 than in 2006, as growth in metallic balloon sales was offset by lower flexible packaging sales.  Net sales to other retail channels (principally mass merchant, drug, craft and contract manufacturing) were $ 98.3 million, down 2.7 % for the first nine months of 2007 from 2006, principally due to the declines in the craft and contract manufacturing channels.

     Retail

          Net retail sales for company-owned stores for the nine months ended September 30, 2007 of $454.3 million were $132.0 million or 41.0% higher than net retail sales for the nine months ended September 30, 2006, and include Party America sales of $113.6 million,  as well as $4.9 million of retail sales from other retail operations which were acquired September 1, 2007.

          Same-store net retail sales for Party City company-owned stores during the first nine months of 2007 totaled $334.4 million or 7.2% higher than the same store sales for the corresponding period last year. Party America same-store sales for the first nine months of 2007 were $106.4 million or 0.3% higher than their net retail sales for the corresponding period of 2006.  The results at Party City and Party America reflect changes of non-seasonal merchandise of 8.5% and (0.2%), respectively, and increases of seasonal merchandise of 2.2% and 1.8%, respectively.  The increases in net sales of seasonal and non-seasonal merchandise principally reflect an increase in the average net sale per retail transaction at our company-owned stores.

     Royalties and franchise fees

          Franchise related revenue for the first nine months of 2007 totaled $16.4 million or 21.2% higher than franchise related revenue for the first nine months of 2006, principally due to the inclusion of Party America franchise related revenues of $1.5 million.  During the first nine months of 2007, our Party City franchise store count increased by 24, with 21 new Party City franchise store openings, 4 Party City franchise store closings, and 7 Party City Franchise acquisitions/conversions as compared to 11 Party City new stores, 8 Party City store closing and 2 Party City acquisitions/conversions during the nine months ended September 30, 2006.  In addition, Party City franchise stores reported same-store net sales of $354.2 million, or an increase of 4.6%, while Party America franchise stores reported same-store net sales of $42.0 million, or an increase of 2.4%, when comparing the nine months ended September 2007 and the nine months ended September 2006.

Gross Profit

          The following table sets forth the Company’s consolidated gross profit on net sales for the nine months ended September 30, 2007 and 2006.

	Nine Months Ended September 30,
	2007					2006
	Dollars in		% of associated			Dollars in		% of associated
	Thousands		sales			Thousands		sales
Net Wholesale	$	102,662		30.2	%	$	91,848		28.2	%
Net Retail		170,226		37.5			94,442		29.3
Total Gross Profit	$	272,888		34.3	%	$	186,290		28.7	%

36

          The gross profit margin on sales at wholesale, after eliminations, for the nine months ended September 30, 2007 was 30.2% or 200 basis points higher than in 2006. The increase in gross profit margin principally reflects improved product pricing and changes in product mix.

          Retail gross profit margin for the first nine months of 2007 was 37.5% or 820 basis points higher than in the first nine months of 2006, reflecting the wholesale gross profit margin on product purchased from the Company’s wholesale affiliates, favorable product pricing and product mix.

Operating expenses

          Selling expenses of $31.4 million for the nine months ended September 30, 2007 were $2.8 million higher than for the first nine months of 2006, principally due to increases in base compensation and employee benefits. As a percent of total revenues, selling expenses were 3.9% for the nine months ended September 30, 2007, or 40 basis points lower than selling expenses as a percentage of total revenue for the first nine months of 2006.

          Retail operating expenses for the first nine months of 2007 were $116.4 million, or $40.1 million over the first nine months of 2006, principally due to the inclusion of year to date 2007 Party America operating expenses of $28.8 million, year to date 2007 expenses from other acquired retail operations of $3.0 million, and additional Party City payroll and other costs associated with store layout resets.

          Franchise expenses for the nine months ended September 30, 2007 were $9.6 million, or $0.2 million higher than the comparable period last year, reflecting the addition of Party America franchisees during 2007, and increased amortization of franchise license intangibles, partially offset by lower franchise expenses in the Party City group.

          General and administrative expenses of $75.8 million for the nine months ended September 30, 2007 were $16.4 million higher than the nine months ended September 30, 2006, and include Party America current year expenses of $10.7 million, newly acquired retail operation expenses of $1.7 million, and higher base compensation and employee benefit costs.

          Art and development costs of $8.9 million for the nine months ended September 30, 2007 were $1.4 million higher than costs for the nine months ended September 30, 2006. As a percentage of total revenues, art and development costs were 1.1% of total revenue for the first nine months of 2007 and 2006.

Interest expense, net

          Interest expense of $40.9 million for the nine months ended September 30, 2007 was $0.4 million lower than for the nine months ended September 30, 2006, reflecting reduced interest rates resulting from our 2007 debt refinancing, partially offset by higher average borrowings following the Party America Acquisition in September 2006.

Other expense (income), net

          Other expense (income), net of $15.9 million principally consists of financing costs related to the refinancing of our term and revolving credit facilities during the second quarter of 2007. It also includes derivative gains or losses, and our share of loss (income) in an unconsolidated joint venture. The undistributed loss (income) represents our share of the operations of a Mexican balloon distribution joint venture and includes the elimination of inter-company profit in the joint venture’s inventory at September 30, 2007 and 2006.

Income tax benefit.

          Income taxes for the nine months ended September 30, 2007 and 2006 were based upon the estimated consolidated effective income tax rates of 38.2% and 39.7% for the years ending December 31, 2007 and 2006, respectively. The decrease in the 2007 effective income tax rate is primarily attributable to a lower average state income tax rates.

Liquidity and Capital Resources

Capital Structure

          On May 25, 2007, the Company, and AAH, entered into (i) a $375 million Term Loan Credit Agreement (the “Term Loan Credit Agreement”), and (ii) an ABL Credit Agreement (the “ABL Credit Agreement”) with a committed revolving credit facility in an aggregate principal amount of up to $200 million. The Company used the proceeds from these facilities to terminate the previously existing $410 million First Lien Credit and Guaranty Agreement and (ii) the $60 million Second Lien Credit and Guaranty Agreement.

Term Loan Credit Agreement

          The Term Loan Credit Agreement provides for two pricing options: (i) an alternate base rate (“ABR”) equal to the greater of (a) Credit Suisse’s prime rate in effect on such day and (b) the federal funds effective rate in effect on such day plus 1/2 of 1% or (ii) a

37

LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. The applicable margin is 1.25% with respect to ABR borrowings and 2.25% with respect to LIBOR borrowings.

          The Term Loan Credit Agreement provides that the term loans may be prepaid provided that, as a condition to any optional prepayment of the term loans any time prior to the first anniversary of the closing date (other than with the proceeds of an underwritten initial public offering of common stock of the Company or AAH or an optional prepayment of the term loan in full substantially contemporaneously with a change of control), the Company shall pay a premium equal to 1.00% of the principal amount prepaid.

          The term loans are subject to mandatory prepayment out of (i) 100% of net proceeds arising from asset sales, insurance and condemnation proceeds, subject to reinvestment provisions, (ii) 50% of net proceeds arising from certain equity issuances by the Company or its subsidiaries (which percentage will be reduced to 25% or 0% if the Company’s total leverage ratio is less than specified ratios), (iii) net proceeds arising from any debt issued by the Company or its subsidiaries and (iv) commencing with the fiscal year ending December 31, 2007, 50% (which percentage will be reduced to 25% or 0% if the Company’s total leverage ratio is less than specified ratios) of the Company’s Excess Cash Flow, as defined, if any.

          The Company is required to repay installments on the term loans in quarterly principal amounts of 0.25% of their funded total principal amount, beginning September 30, 2007 and ending March 31, 2013, with the remaining amount payable on the maturity date of May 25, 2013.

          The obligations of the Company under the Term Loan Credit Agreement are jointly and severally guaranteed by AAH and each wholly-owned domestic subsidiary of the Company. Each guarantor has secured its obligations under the guaranty by a first priority lien on substantially all of its assets, with the exception of accounts receivable and inventories, which are under a second priority lien.

          The Company may, by written notice to the Administrative Agent from time to time, request additional incremental term loans, in an aggregate amount not to exceed $100 million from one or more lenders (which may include any existing Lender) willing to provide such additional incremental term loans in their own discretion.

          The Term Loan Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its Subsidiaries to incur additional indebtedness; create, incur or suffer to exist liens on any of their property or assets; make investments or enter into joint venture arrangements; pay dividends and distributions or repurchase capital stock of the Company; engage in mergers, consolidations and sales of all or substantially all their assets; sell assets;   make capital expenditures; enter into agreements restricting dividends and advances by the Company’s subsidiaries; and engage in transactions with affiliates.

          The Term Loan Credit Agreement also contains certain customary affirmative covenants and events of default.

          At September 30, 2007, the balance of the Term Loan was $373.1 million.

ABL Credit Agreement

          The Company has a committed revolving credit facility in an aggregate principal amount of up to $200 million for working capital, general corporate purposes and the issuance of letters of credit. The ABL Credit Agreement provides for (a) extension of credit in the form of Revolving Loans at any time and from time to time during the period ended May 25, 2012 (the “Availability Period”), in an aggregate principal amount at any time outstanding not in excess of $200 million, subject to a borrowing base described below, (b) commitments to obtain credit, at any time and from time to time during the Availability Period, in the form of Swingline Loans, in an aggregate principal amount at any time outstanding not in excess of $10 million and (c) ability to utilize Letters of Credit, in an aggregate face amount at any time outstanding not in excess of $25 million, to support payment obligations incurred in the ordinary course of business by the Company and its subsidiaries.

          The borrowing base at any time equals (a) 85% of eligible trade receivables, plus (b) the lesser of (i) 75% of eligible inventory and eligible in-transit inventory, valued at the lower of cost or market value, and (ii) 85% of net orderly liquidation value of eligible inventory and eligible in transit inventory (subject in the case of eligible in-transit inventory to a cap of $10 million) , plus (c) 85% of eligible credit card receivables, less (d) certain reserves.

          The ABL Credit Agreement provides for two pricing options: (i) an alternate base rate (“ABR”) equal to the greater of (a) Credit Suisse’s prime rate in effect on such day and (b) the federal funds effective rate in effect on such day plus 1/2 of 1% or (ii) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. The applicable margin is up to 0.50% with respect to ABR borrowings and from 1.00% to 1.50% with respect to LIBOR borrowings. The initial applicable margin is 0.25% with respect to ABR borrowings and 1.25% with respect to LIBOR borrowings.

          In addition to paying interest on outstanding principal under the ABL Credit Agreement, the Company is required to pay a commitment fee of between 0.30% and 0.25% per annum in respect of the unutilized commitments thereunder. The Company must also pay customary letter of credit fees and agency fees.

38

          Upon prior notice, the Company may prepay any borrowing under the ABL Credit Agreement, in whole or in part, without premium or penalty other than customary “breakage” costs with respect to LIBOR loans.

          There is no scheduled amortization under the ABL Credit Agreement. The principal amount outstanding of the loans under the ABL Credit Agreement is due and payable in full on the fifth anniversary of the closing date.

          The obligations of the Company under the ABL Credit Agreement are jointly and severally guaranteed by AAH and each wholly-owned domestic subsidiary of the Company. Each guarantor has secured its obligations under the guaranty by a first priority lien on its accounts receivable and inventories and a second priority lien on substantially all of its other assets.

          The ABL Credit Agreement contains negative covenants that are substantially similar to the Term Loan Credit Agreement. Although the ABL Credit Agreement does not require the Company to comply with any financial ratio maintenance covenants, if it has less than $20 million of excess availability, the Company is not permitted to borrow any additional amounts. The ABL Credit Agreement also limits the amount of consolidated capital expenditures in any fiscal year

          The ABL Credit Agreement also contains certain customary affirmative covenants and events of default.

          Borrowings under the ABL Credit Agreement were $61.0 million, and outstanding standby letters of credit totaled $12.0 million at September 30, 2007.

          At September 30, 2007, we had a $0.4 million Canadian dollar denominated revolving credit facility that bears interest at the Canadian prime rate plus 0.6% and expires in April 2008, and a 1.0 million British Pound Sterling denominated revolving credit facility that bears interest at the U.K. base rate plus 1.75% and expires on May 31, 2008. No borrowings were outstanding under these revolving credit facilities at September 30, 2007 or December 31, 2006. We expect to renew these revolving credit facilities upon expiration.

          Long-term borrowings at September 30, 2007 include a mortgage note with the New York State Job Development Authority of $7.0 million which requires monthly payments based on a 180-month amortization period with a balloon payment upon maturity in January 2010. The mortgage note bears interest at the rate of 7.24%, and is subject to review and adjustment semi-annually based on the New York State Job Development Authority’s confidential internal protocols. The mortgage note is collateralized by a distribution facility located in Chester, New York.

          In connection with its acquisition by AAH in April 2004, the Company issued $175.0 million of 8.75% senior subordinated notes due 2014 to their initial purchasers, which were subsequently resold to qualified institutional buyers and non-U.S. persons in reliance upon Rule 144A and Regulation S under the Securities Act of 1933 (the “Note Offering”). In August 2004, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-4, offering to exchange registered notes for the notes issued in connection with the Note Offering. The terms of the notes and the exchange notes were substantially identical. The exchange was completed in October 2004. Interest is payable semi-annually on May 1 and November 1 of each year.

          We have entered into various capital leases for machinery and equipment and automobiles with implicit interest rates ranging from 6.79% to 12.29% which extend to 2012. The Company has numerous non-cancelable operating leases for its retail store sites as well as several leases for offices, distribution and manufacturing facilities, showrooms and equipment. These leases expire on various dates through 2018 and generally contain renewal options and require the Company to pay real estate taxes, utilities and related insurance costs. In addition, in May 2006, the Company sold a warehouse located in Chester, New York and entered into a leaseback for the same warehouse under a one-year lease agreement. Net proceeds to the Company for the sale of the property were approximately $12.6 million and the total gain on the transaction was $2.7 million, half of which was recorded at the time of the transaction. The balance of the gain, along with a corresponding charge to rent expense, was recognized ratably from May 2006 through the May 2007.

          Rent expense for the quarters ended September 30, 2007 and 2006 totaled $21.9 million and $15.6 million, respectively. Rent expense for the nine months ended September 30, 2007 and 2006 totaled $63.6 million and $45.2 million, respectively. Minimum lease payments currently required under non-cancelable operating leases for the year ending December 31, 2007, including corporate facilities and company-owned stores, approximate $87.4 million.

          Estimated restructuring costs associated with the Party America Acquisition of $1.0 million were accrued for as part of net assets acquired.

          The Company has a management agreement with its Principal Investors, Berkshire Partners LLC and Weston Presidio. Pursuant to the management agreement, Berkshire Partners LLC and Weston Presidio will be paid annual management fees of $0.8 million and $0.4 million, respectively. Although the indenture governing the 8.75% senior subordinated notes will permit the payments under the management agreement, such payments will be restricted during an event of default under the notes and will be subordinated in right of payment to all obligations due with respect to the notes in the event of a bankruptcy or similar proceeding of Amscan.

39

          We expect that cash generated from operating activities and availability under our Credit Agreement will be our principal sources of liquidity. Based on our current level of operations, we believe these sources will be adequate to meet our liquidity needs for at least the next twelve months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our senior secured credit facilities in an amount sufficient to enable us to repay our indebtedness, including the 8.75% senior subordinated notes, or to fund our other liquidity needs.

Cash Flow Data – Nine months ended September 30, 2007 Compared to Nine months ended September 30, 2006

          Net cash used in operating activities during the nine months ended September 30, 2007 totaled $9.7 million, as compared to $22.1 million for the nine months ended September 30, 2006. Net cash flow provided by operating activities before changes in operating assets and liabilities for the nine months ended September 30, 2007 and 2006, was $38.1 million and $13.0 million, respectively. Changes in operating assets and liabilities for the nine months ended September 30, 2007 and 2006 resulted in the use of cash of $47.8 million and $35.1 million, respectively. The use of cash during the first nine months of 2007 principally reflects the payment of Halloween and other seasonal retail trade payables arising during the third and fourth quarters of 2006, and increases in inventory levels to support synergistic growth and the addition of Party America and other retail operations, using borrowings under our revolving credit facilities.

          During the nine months ended September 30, 2007 and 2006, net cash used in investing activities totaled $24.7 million and $29.3 million, respectively. The Company had capital expenditures of $13.3 million and $12.5 million for its retail operations during the first nine months of 2007 and 2006, respectively, including leasehold improvements and furniture and fixtures in company-owned stores. During the nine months ended September 2007 and 2006, the Company had capital expenditures of $10.8 million and $16.8 million, respectively, for its wholesale operations, principally for additional distribution assets. The Company also acquired retail operations during the current period amounting to $8.0 million of cash, and sold individual stores for $1.5 million. During the nine months ended September 30, 2006, the Company paid $14.3 million in connection with the acquisition of Party America and other retail store operations, and received net proceeds from the sale of property, plant and equipment during the nine months ended September 30, 2006 of $14.3 million, principally from the sale-leaseback of a Chester, New York warehouse and the sale of several company-owned retail stores.

          During the nine months ended September 30, 2007, net cash provided by financing activities of $38.1 million included (i) net borrowings under our revolving credit agreements of $61.0 million, principally used to pay Halloween and other seasonal retail trade payables arising during the third and fourth quarters of 2006 and (ii) capital contributions of $4.7 million. These sources were partially offset by a $10 million reduction of our term loan resulting from the refinancing, a $12.0 million cost to refinance current debt and retire prior debt, and scheduled payments on capital leases and other long-term obligations. During the nine months ended September 30, 2006, net cash provided by financing activities of $47.7 million included borrowings under the First Term Loan Revolver of $48.5 million used principally to pay down trade payables from seasonally higher year end balances and proceeds from the sale of common stock to directors and certain employees of $1.6 million, partially offset by scheduled payments on capital leases and other long-term obligations.

Legal Proceedings

          The Company is a party to certain claims and litigation in the ordinary course of business. The Company does not believe any of these proceedings will result, individually or in the aggregate, in a material adverse effect on its financial condition or future results of operations.

Seasonality

Wholesale Operations

           Despite a concentration of holidays in the fourth quarter of the year, as a result of our expansive product lines and customer base and increased promotional activities, the impact of seasonality on our quarterly results of operations has been limited. Promotional activities, including special dating terms, particularly with respect to Halloween and Christmas products sold in the third quarter, and the introduction of our new everyday products and designs during the fourth quarter result in higher accounts receivables and inventory balances and higher interest costs to support these balances.

Retail Operations 

          Our retail operations are subject to significant seasonal variations. Historically, this segment has realized a significant portion of its revenues, cash flow and net income in the fourth quarter of the year, principally due to the sales in October for the Halloween season and, to a lesser extent, due to sales for end of year holidays. In addition, the results of retail operations and cash flows may also fluctuate significantly as a result of a variety of other factors, including the timing of new store openings and store closings and the timing of the acquisition and disposition of stores.

40

Cautionary Note Regarding Forward-Looking Statements

          This quarterly report on Form 10-Q may contain “forward-looking statements.” Forward-looking statements give our current expectations or forecasts of future events. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “project” or “continue” or the negative thereof and similar words. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this quarterly report and in any public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual results may vary materially. Investors are cautioned not to place undue reliance on any forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: our inability to satisfy our debt obligations, the reduction of volume of purchases by one or more of our large customers, our inability to collect receivables from our customers, the termination of our licenses, our inability to identify and capitalize on changing design trends and customer preferences, changes in the competitive environment, increases in the costs of raw materials and the possible risks and uncertainties that have been noted in reports filed by us with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2006.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

                Our earnings are affected by changes in interest rates as a result of our variable rate indebtedness. However, we have utilized interest rate swap agreements to manage the market risk associated with fluctuations in interest rates. If market interest rates for our variable rate indebtedness averaged 2% more than the interest rate actually paid for the three and nine months ended September 30, 2007 and 2006, our interest expense, after considering the effects of our interest rate swap agreements, would have increased, and the income before income taxes and minority interest for the three months ended September 30, 2007 would have decreased by $1.9 million and the loss before income taxes and minority interest would have increased by $1.5 million. The loss before income taxes and minority interest for the nine months ended September 30, 2007 and 2006 would have increased by $5.8 million and $4.8 million, respectively. These amounts are determined by considering the impact of the hypothetical interest rates on our borrowings and interest rate swap agreements. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that we would take and their possible effects, the sensitivity analysis assumes no changes in our financial structure.

                Our earnings are also affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominately in European countries, as a result of the sales of our products in foreign markets. Although we periodically enter into foreign currency forward contracts to hedge against the earnings effects of such fluctuations, we may not be able to hedge such risks completely or permanently. A uniform 10% strengthening in the value of the U.S. dollar relative to the currencies in which our foreign sales are denominated would have resulted in a decrease in gross profit of $1.5 million and $1.3 million for the three months ended September 30, 2007 and 2006, respectively and $4.1 million and $3.4 million for the nine months ended September 30, 2007 and 2006, respectively. These calculations assume that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which could change the U.S. dollar value of the resulting sales, changes in exchange rates may also affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.

Item 4. Controls and Procedures

           Based on an evaluation of the effectiveness of the Company’s disclosure controls and procedures performed by the Company’s management, with the participation of the Company’s Chief Executive Officer and its Chief Financial Officer, as of the end of the period covered by this report, the Company’s Chief Executive Officer and its Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

                As used herein, “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

41

          There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation described in the preceding paragraph that occurred during the Company’s fiscal quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

Item 5. Other Information

          During the nine months ended September 30, 2007, the Company issued 92.89 shares of its Common Stock, $0.01 par value, that were not registered under the Securities Act of 1933. Of this amount, 70.175 shares were issued to certain employees in connection our acquisition of retail operations on September 1, 2007. The balance of shares were issued to certain directors and employees.

          Also during the nine months ended September 2007 we received $3.5 million of proceeds from associates to purchase 248 restricted shares of our redeemable common stock. 

          The Company claims an exemption from registration of the offer and sale of these shares pursuant to Section 4(2) of the Securities Act and Rule 506 thereunder.

Item 6. Exhibits

31(1)	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31(2)	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32	Certification of Chief Executive and Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

42

SIGNATURE

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

		AMSCAN HOLDINGS, INC.
	By:	/s/ Michael A. Correale
		Michael A. Correale
		Chief Financial Officer
		(on behalf of the registrant and as principal
Date: November 14, 2007		financial and accounting officer)

43