##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended May 31, 2005                                                      
|          
|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: 000-50973


CELEBRATE EXPRESS, INC.


(Exact name of registrant as specified in its charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Washington                                                         |  | 91-1644428                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

11220 -
120th Avenue NE, Kirkland, Washington 98033


(Address of principal executive offices)


Registrants telephone number, including area code:


(425) 250-1061


Securities registered pursuant to Section 12(b) of the
Act:


None


Securities registered pursuant to Section 12(g) of the
Act:


Common Stock, $0.001 par value


þ o


o þ


o


o þ






DOCUMENTS INCORPORATED BY REFERENCE












---










CELEBRATE EXPRESS, INC.


ANNUAL REPORT ON FORM 10-K


TABLE OF CONTENTS


|              |  |                                                                                           |    |      |    | 
|------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|              |  |                                                                                           |    | Page |   
|              |  |                                                                                           |    |      |   
|PART I       
|Item 1        |  | Business                                                                                  |    |      | 3  | 
|Item 2        |  | Properties                                                                                |    |      | 11 | 
|Item 3        |  | Legal Proceedings                                                                         |    |      | 11 | 
|Item 4        |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 11 | 
|             
|PART II      
|Item 5        |  | Market for Registrants Common Equity
    and Related Stockholder Matters                 |    |      | 12 | 
|Item 6        |  | Selected Financial Data                                                                   |    |      | 13 | 
|Item 7        |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations |    |      | 14 | 
|Item 7A       |  | Quantitative and Qualitative Disclosures
    About Market Risk                            |    |      | 32 | 
|Item 8        |  | Financial Statements and Supplementary
    Data                                           |    |      | 33 | 
|Item 9        |  | Changes In and Disagreements with
    Accountants on Accounting and Financial Disclosure  |    |      | 54 | 
|Item 9A       |  | Controls and Procedures                                                                   |    |      | 54 | 
|Item 9B       |  | Other Information                                                                         |    |      | 54 | 
|             
|PART III     
|Item 10       |  | Directors and Executive Officers of the
    Registrant                                    |    |      | 54 | 
|Item 11       |  | Executive Compensation                                                                    |    |      | 54 | 
|Item 12       |  | Security Ownership of Certain Beneficial
    Owners and Management                        |    |      | 54 | 
|Item 13       |  | Certain Relationships and Related
    Transactions                                        |    |      | 54 | 
|Item 14       |  | Principal Accountant Fees and Services                                                    |    |      | 55 | 
|             
|PART IV      
|Item 15       |  | Exhibits and Financial Statement
    Schedules                                            |    |      | 55 | 
|Signatures    |  |                                                                                           | 56 |     
|EXHIBIT 10.10
|EXHIBIT 23.1 
|EXHIBIT 23.2 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



2



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PART I







|        |          
|------- | ---------
|Item 1. | Business.

This report contains forward-looking statements that involve
many risks and uncertainties. These statements relate to future
events and our future performance that are based on current
expectations, estimates, forecasts and projections about the
industry in which we operate and the beliefs and assumptions of
our management. In some cases, you can identify forward-looking
statements by terms such as would,
could, may, will,
should, expect, intend,
plan, anticipate, believe,
estimate, predict,
potential, targets, seek, or
continue, the negative of these terms or other
variations of such terms. In addition, any statements that refer
to projections of our future financial performance, our
anticipated growth and trends in our business and other
characterizations of future events or circumstances, are
forward-looking statements. These statements are only
predictions based upon assumptions made that are believed to be
reasonable at the time, and are subject to risk and
uncertainties. Therefore, actual events or results may differ
materially and adversely from those expressed in any
forward-looking statement. In evaluating these statements, you
should specifically consider the risks described under the
caption Factors That May Affect Future Operating
Results and elsewhere in this report. These factors may
cause our actual results to differ materially from any
forward-looking statements. Except as required by law, we
undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise.


Overview










3



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Our Approach








| |                               
| | ------------------------------
| | Broad Merchandising Assortment





| |                                  
| | ---------------------------------
| | Comprehensive Product Information



Detailed Online Information.


Knowledgeable Online and Phone Sales Staff.


4



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| |                                
| | -------------------------------
| | Convenient Shopping Environment





| |                                       
| | --------------------------------------
| | Product Availability and Customization









| |                     
| | --------------------
| | Rapid Time to Market





Our Growth Strategy






| |                                                   
| | --------------------------------------------------
| | Build Brand Awareness and Expand Our Customer Base



5



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| |                           
| | --------------------------
| | Continue to Add New Brands





| |                            
| | ---------------------------
| | Increase Sales Per Customer





| |                             
| | ----------------------------
| | Expand Our Product Offerings



Our Brands and Product Offerings






| |                 
| | ----------------
| | Birthday Express







| |                    
| | -------------------
| | Storybook Heirlooms



6



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| |                
| | ---------------
| | Costume Express



Product Development and Sourcing






Marketing and Customer Acquisition




7



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Online Marketing and Promotion.




| |   |                   
| | - | ------------------
| |  | Email Marketing   
|
| |  | Search Marketing  
|
| |  | Affiliates Program

Offline Marketing and Promotion.


Customer Support




Online Customer Support.


Customer Support Center.




Fulfillment and Shipping




8



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Technology Systems








Competition








Intellectual Property




9



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Government Regulation






10



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Employees




Company Information/Website









|        |            
|------- | -----------
|Item 2. | Properties.








|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.








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



11



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PART II







|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities.

Market for Registrants Common Equity






|                  |                                                        |      |   |       |     |  |   |       | 
|----------------- | ------------------------------------------------------ | ---- | - | ----- | --- |  | - | ----- | 
|                  |                                                        | High |   |       | Low | 
|                  |                                                        |      |   |       |     | 
|Fiscal year 2005: |                                                        |      |   |       |     |  |   |      
|                  | Period from October 20, 2004 through November 30, 2004 |      | $ | 18.75 |     |  | $ | 16.06 | 
|                  | Third Quarter                                          |      | $ | 22.19 |     |  | $ | 18.00 | 
|                  | Fourth Quarter                                         |      | $ | 20.00 |     |  | $ | 11.49 | 



Securities Authorized for Issuance Under Equity Compensation
Plans




Use of Proceeds






12



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|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.





|                                                    |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |        |       |        |   |        |       |        | 
|--------------------------------------------------- | -------------------------- | ----------------------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ----- | ------ | ---- | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                                                    |                            | Fiscal Year Ended May 31,                       |       
|                                                    |                            |                                                 |       
|                                                    |                            | 2005                                            |        |        | 2004   |   |        | 2003   |        |   | 2002   |       |        | 2001 |       
|                                                    |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |       
|                                                    |                            | (In thousands, except share and per share data) |       
|Statement of Operations Data:                       |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |        |       |        |   |        |      
|Net sales                                           |                            | $                                               | 69,138 |        |        | $ | 51,939 |        |        | $ | 37,811 |       |        | $    | 29,914 |       |        | $ | 28,602 |      
|Cost of sales                                       |                            |                                                 | 33,987 |        |        |   | 26,574 |        |        |   | 19,483 |       |        |      | 14,235 |       |        |   | 15,372 |      
|                                                    |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |       
|Gross margin                                        |                            |                                                 | 35,151 |        |        |   | 25,365 |        |        |   | 18,328 |       |        |      | 15,679 |       |        |   | 13,230 |      
|Operating expenses:                                 |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |        |       |        |   |        |      
|                                                    | Fulfillment                |                                                 |        | 8,039  |        |   |        | 6,627  |        |   |        | 5,371 |        |      |        | 5,957 |        |   |        | 6,916 |       
|                                                    | Selling and marketing      |                                                 |        | 16,787 |        |   |        | 12,834 |        |   |        | 9,913 |        |      |        | 8,523 |        |   |        | 8,991 |       
|                                                    | General and administrative |                                                 |        | 6,482  |        |   |        | 4,636  |        |   |        | 4,112 |        |      |        | 3,852 |        |   |        | 3,931 |       
|                                                    | Asset impairment(1)        |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |        | 1,388 |        |   |        |       |       
|                                                    |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |       
|                                                    |                            | Total operating expenses                        |        |        | 31,308 |   |        |        | 24,097 |   |        |       | 19,396 |      |        |       | 19,720 |   |        |       | 19,838 | 
|                                                    |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |       
|Income (loss) from operations                       |                            |                                                 | 3,843  |        |        |   | 1,268  |        |        |   | (1,068 | )     |        |      | (4,041 | )     |        |   | (6,608 | )    
|Other income (expense), net                         |                            |                                                 | 131    |        |        |   | (788   | )      |        |   | (521   | )     |        |      | (225   | )     |        |   | (253   | )    
|                                                    |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |       
|Net income (loss) before income taxes               |                            |                                                 | 3,974  |        |        |   | 480    |        |        |   | (1,589 | )     |        |      | (4,266 | )     |        |   | (6,861 | )    
|Income tax benefit (expense)(2)                     |                            |                                                 | (1,489 | )      |        |   | 9,013  |        |        |   |        |       |        |      |        |       |        |   |        |      
|                                                    |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |       
|Net income (loss)                                   |                            |                                                 | 2,485  |        |        |   | 9,493  |        |        |   | (1,589 | )     |        |      | (4,266 | )     |        |   | (6,861 | )    
|Accretion to preferred stock redemption value       |                            |                                                 | (102   | )      |        |   | (266   | )      |        |   | (265   | )     |        |      | (196   | )     |        |   | (39    | )    
|                                                    |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |       
|Net income (loss) available for common shareholders |                            | $                                               | 2,383  |        |        | $ | 9,227  |        |        | $ | (1,854 | )     |        | $    | (4,462 | )     |        | $ | (6,900 | )    
|                                                    |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |       
|Net income (loss) per share:                        |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |        |       |        |   |        |      
|                                                    | Basic                      |                                                 | $      | 0.46   |        |   | $      | 6.39   |        |   | $      | (1.34 | )      |      | $      | (3.23 | )      |   | $      | (5.10 | )     
|                                                    |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |       
|                                                    | Diluted                    |                                                 | $      | 0.35   |        |   | $      | 1.85   |        |   | $      | (1.34 | )      |      | $      | (3.23 | )      |   | $      | (5.10 | )     
|                                                    |                            |                                                 |        |        |        |   |        |        |        |   |        |       |        |      |       






|    |                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In our fiscal year ended May 31, 2002, we recorded an asset
    impairment charge of $1,388 related to our enterprise software.                                                         
|   
|(2) | In our fiscal year ended May 31, 2004, we recorded a net
    income tax benefit of $9,013 primarily as a result of the
    reversal of a valuation allowance on our deferred tax assets.

13



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|                                                            |  |                           |        |  |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------------------------------- |  | ------------------------- | ------ |  | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                            |  | Fiscal Year Ended May 31, |       
|                                                            |  |                           |       
|                                                            |  | 2005                      |        |  | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                            |  |                           |        |  |      |   |         |      |  |   |         |   |  |      |        
|                                                            |  | (In thousands)            |       
|Balance Sheet Data:                                         |  |                           |        |  |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash and cash equivalents                                   |  | $                         | 30,769 |  |      | $ | 2,243   |      |  | $ | 1,672   |   |  | $    | 331     |   |  | $ | 915     |  
|Working capital                                             |  |                           | 38,076 |  |      |   | 6,041   |      |  |   | 2,733   |   |  |      | 458     |   |  |   | 3,171   |  
|Total assets                                                |  |                           | 53,057 |  |      |   | 20,482  |      |  |   | 8,988   |   |  |      | 7,789   |   |  |   | 11,075  |  
|Long-term debt, less current portion                        |  |                           |       |  |      |   | 4,953   |      |  |   | 2,807   |   |  |      | 35      |   |  |   | 232     |  
|Mandatorily redeemable convertible preferred stock          |  |                           |       |  |      |   | 28,044  |      |  |   | 27,212  |   |  |      | 26,925  |   |  |   | 26,261  |  
|Mandatorily redeemable convertible preferred stock warrants |  |                           |       |  |      |   | 1,056   |      |  |   | 1,622   |   |  |      | 1,201   |   |  |   | 617     |  
|Total shareholders equity (deficit)                        |  |                           | 48,000 |  |      |   | (18,084 | )    |  |   | (27,515 | ) |  |      | (25,697 | ) |  |   | (21,298 | )






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations.



Overview








14



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Fiscal Year




Results of Operations




|                                      |                            |                           |       |      |      |  |       |      |      |  |       |      |      | 
|------------------------------------- | -------------------------- | ------------------------- | ----- | ---- | ---- |  | ----- | ---- | ---- |  | ----- | ---- | ---- | 
|                                      |                            | Fiscal Year Ended May 31, |      
|                                      |                            |                           |      
|                                      |                            | 2005                      |       |      | 2004 |  |       | 2003 |     
|                                      |                            |                           |       |      |      |  |       |      |     
|Statement of Operations Data:         |                            |                           |       |      |      |  |       |      |      |  |       |     
|Net sales                             |                            |                           | 100.0 | %    |      |  | 100.0 | %    |      |  | 100.0 | %   
|Cost of sales                         |                            |                           | 49.2  |      |      |  | 51.2  |      |      |  | 51.5  |     
|                                      |                            |                           |       |      |      |  |       |      |     
|Gross margin                          |                            |                           | 50.8  |      |      |  | 48.8  |      |      |  | 48.5  |     
|Operating expenses:                   |                            |                           |       |      |      |  |       |      |      |  |       |     
|                                      | Fulfillment                |                           |       | 11.6 |      |  |       | 12.8 |      |  |       | 14.2 |     
|                                      | Selling and marketing      |                           |       | 24.3 |      |  |       | 24.7 |      |  |       | 26.2 |     
|                                      | General and administrative |                           |       | 9.4  |      |  |       | 8.9  |      |  |       | 10.9 |     
|                                      |                            |                           |       |      |      |  |       |      |     
|                                      |                            | Total operating expenses  |       |      | 45.3 |  |       |      | 46.4 |  |       |      | 51.3 | 
|Income (loss) from operations         |                            |                           | 5.5   |      |      |  | 2.4   |      |      |  | (2.8  | )   
|Other income (expense), net           |                            |                           | 0.2   |      |      |  | (1.5  | )    |      |  | (1.4  | )   
|                                      |                            |                           |       |      |      |  |       |      |     
|Net income (loss) before income taxes |                            |                           | 5.7   |      |      |  | 0.9   |      |      |  | (4.2  | )   
|Income tax benefit (expense)          |                            |                           | (2.1  | )    |      |  | 17.4  |      |      |  |       |     
|                                      |                            |                           |       |      |      |  |       |      |     
|Net income (loss)                     |                            |                           | 3.6   | %    |      |  | 18.3  | %    |      |  | (4.2  | )%  
|                                      |                            |                           |       |      |      |  |       |      |     

15



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Additional Operating Data




|                                          |  |                           |       |   |      |   |       |      |  |   |       |  
|----------------------------------------- |  | ------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                          |  | Fiscal Year Ended May 31, |      
|                                          |  |                           |      
|                                          |  | 2005                      |       |   | 2004 |   |       | 2003 | 
|                                          |  |                           |       |   |      |   |       |      | 
|                                          |  | (In thousands, except net |      
|                                          |  | sales per order data)     |      
|Additional Operating Data:                |  |                           |       |   |      |   |       |      |  |   |       |  
|Total number of customers in our database |  |                           | 2,280 |   |      |   | 1,866 |      |  |   | 1,519 |  
|Percentage of sales from repeat customers |  |                           | 51    | % |      |   | 47    | %    |  |   | 45    | %
|Number of orders shipped                  |  |                           | 851   |   |      |   | 666   |      |  |   | 524   |  
|Net sales per order                       |  | $                         | 81.27 |   |      | $ | 78.02 |      |  | $ | 72.14 |  

Comparison of Fiscal Years Ended May 31, 2005 and
May 31, 2004




| |          
| | ---------
| | Net Sales





| |             
| | ------------
| | Gross Margin





| |            
| | -----------
| | Fulfillment



16



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| |                      
| | ---------------------
| | Selling and Marketing





| |                           
| | --------------------------
| | General and Administrative





| |                            
| | ---------------------------
| | Other Income (Expense), Net





| |             
| | ------------
| | Income Taxes





17



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Comparison of Fiscal Years Ended May 31, 2004 and
May 31, 2003




| |          
| | ---------
| | Net Sales





| |             
| | ------------
| | Gross Margin





| |            
| | -----------
| | Fulfillment





| |                      
| | ---------------------
| | Selling and Marketing





| |                           
| | --------------------------
| | General and Administrative



18



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| |                            
| | ---------------------------
| | Other Income (Expense), Net





| |             
| | ------------
| | Income Taxes



Liquidity and Capital Resources












19



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|                                        |  |                        |       |           |        |   |     |           |  |   |           |  |  |   |     | 
|--------------------------------------- |  | ---------------------- | ----- | --------- | ------ | - | --- | --------- |  | - | --------- |  |  | - | --- | 
|                                        |  | Payments Due by Period |      
|                                        |  |                        |      
|                                        |  |                        |       | Less Than |        |   |    
|                                        |  | Total                  |       |           | 1 Year |   |     | 1-3 Years |  |   | 3-5 Years | 
|                                        |  |                        |       |           |        |   |     |           |  |   |           | 
|                                        |  | (In thousands)         |      
|Description of Contractual Obligations: |  |                        |       |           |        |   |     |           |  |   |           |  |  |   |     | 
|Capital lease obligations               |  | $                      | 17    |           |        | $ | 17  |           |  | $ |          |  |  | $ |    | 
|Operating lease obligations             |  | $                      | 2,335 |           |        | $ | 778 |           |  | $ | 1,307     |  |  | $ | 250 | 
|                                        |  |                        |       |           |        |   |     |           |  |   |           | 
|Total                                   |  | $                      | 2,352 |           |        | $ | 795 |           |  | $ | 1,307     |  |  | $ | 250 | 
|                                        |  |                        |       |           |        |   |     |           |  |   |           | 

Critical Accounting Policies






| |                    
| | -------------------
| | Revenue Recognition





| |             
| | ------------
| | Income Taxes





| |                         
| | ------------------------
| | Stock-based compensation

Accounting for Stock Issued to
Employees


20



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##### Table of Contents









| |            
| | -----------
| | Inventories





| |                              
| | -----------------------------
| | New accounting pronouncements

Share-Based Payment
(SFAS No. 123R).


Inventory Costs, an amendment of ARB
No. 43, Chapter 4


Factors That May Affect Future Operating Results


You should carefully consider the risks described below
together with all of the other information included in this
report. If any of the following risks actually occurs, our
business, financial condition or results of operations could
suffer. In that case, the trading price of our common stock
could decline and you may lose all or part of your
investment.




| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We achieved annual net income for the first time during
    our fiscal year ended May 31, 2004 and we cannot assure you
    that we will continue to operate profitably.



21



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| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | expand into new product categories;                                        
|
| |  | continue with our marketing efforts to build our brand names;              
|
| |  | expand our customer base;                                                  
|
| |  | upgrade our operational and financial systems, procedures and
    controls;
|
| |  | retain existing personnel and hire additional personnel.                   





| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The favorable impact of the income tax benefit in 2004
    affects the comparability of our results, and utilization of our
    deferred tax assets is dependent on future taxable
    income.





| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not successfully expand sales into other product
    categories beyond party goods, we may not be able to achieve our
    desired revenue growth.





| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | successfully design, produce and market new products;                                          
|
| |  | identify and introduce new product categories;                                                 
|
| |  | maintain our gross margins with respect to new product
    categories;                         
|
| |  | provide a satisfactory mix of merchandise that is responsive to
    the needs of our customers;

22



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| |   |                                                              
| | - | -------------------------------------------------------------
| |  | broaden consumer awareness of our existing and future brands;
|
| |  | manage our online and offline marketing costs; and           
|
| |  | manage our dual-channel direct marketing model.              





| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We must compete with other party goods retailers and mass
    merchandisers on the selection, quality and price of our
    products, and failure to do so successfully could negatively
    affect our stock price.





| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Childrens tastes change and are often difficult to
    predict, and any failure by us to correctly identify and react
    appropriately to these changing preferences could hurt our sales
    and gross margins and render a portion of our inventory
    obsolete.







| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to promote and maintain our brands effectively,
    we may not be able to compete successfully with better-known
    competitors



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| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not successfully maintain and expand our customer
    and prospect databases our sales volume could suffer and our
    marketing costs could increase.





| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to successfully manage our fulfillment and
    distribution operations could cause us to incur increased costs
    or lose customers.





| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results could suffer if we are unable to
    successfully manage the costs of our catalog operations or if
    our catalogs fail to produce sales at satisfactory
    levels.





| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | effective management of costs associated with the production and
    distribution of our catalogs;
|
| |  | achievement of adequate response rates to our mailings;                                           
|
| |  | displaying a mix of merchandise in our catalogs that is
    attractive to our customers; and      
|
| |  | timely delivery of catalog mailings to our customers.                                             





| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We will consider acquisitions as part of our growth
    strategy, and failure to adequately evaluate or integrate any
    acquisitions could harm our business.



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| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | problems assimilating the purchased products or business
    operations;                                       
|
| |  | problems maintaining uniform standards, procedures, controls and
    policies;                                 
|
| |  | unanticipated costs associated with the acquisition, including
    accounting charges and transaction expenses;
|
| |  | diversion of managements attention from our existing
    brands;                                              
|
| |  | adverse effects on existing business relationships with
    suppliers and customers;                           
|
| |  | risks associated with entering product categories in which we
    have no or limited prior experience; and     
|
| |  | potential loss of key employees of acquired organizations.                                                     





| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Increased product returns, or a failure by us to
    accurately predict the level of product returns, could harm our
    business.





| |                                                                                       
| | --------------------------------------------------------------------------------------
| | We may not be able to compete successfully against current
    and future competitors.





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| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on search engines to attract customers to our
    websites, and losing these customers would adversely affect our
    revenues and financial results.





| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Because we do not have long-term contracts for third-party
    products, we may not have continued access to popular
    products.





| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to maintain or acquire licenses to
    intellectual property, we may have fewer proprietary products
    and our sales may decline.





| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we do not have long-term contracts with our
    suppliers, we may not have continued access to necessary
    materials and our sales may suffer.



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| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our reliance on smaller or independent vendors and
    suppliers and manufacturers located abroad exposes us to various
    risks including disruption in product supply.





| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | work stoppages;                                                                                                                                                                     
|
| |  | transportation delays and interruptions;                                                                                                                                            
|
| |  | political instability;                                                                                                                                                              
|
| |  | foreign currency fluctuations;                                                                                                                                                      
|
| |  | changing economic conditions;                                                                                                                                                       
|
| |  | an increased likelihood of counterfeit, knock-off or gray market
    goods;                                                                                                         
|
| |  | product liability claims;                                                                                                                                                           
|
| |  | expropriation, nationalization, imposition of tariffs, import
    and export controls and other non-tariff barriers, including
    quotas and restrictions on the transfer of funds;
|
| |  | environmental regulation; and                                                                                                                                                       
|
| |  | other changes in governmental policies.                                                                                                                                             





| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Failure of third parties to deliver our products
    efficiently and in a timely manner could cause us to lose
    customers.





| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | Fluctuations in commodity prices may increase our
    operating costs and make our expenses difficult to
    predict.



27



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| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | The loss of our senior management or other key personnel
    could harm our current and future operations and
    prospects.





| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business involves the extensive use of intellectual
    property, and related claims against us could be costly or force
    us to abandon popular products.





| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the protection of our trademarks and proprietary rights
    is inadequate, our brands and reputation could be impaired and
    we could lose customers.





| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot maintain and protect our existing domain
    names or acquire suitable new domain names as needed, we may not
    be able to successfully build our brands.



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| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Capacity constraints, systems failures or security
    breaches could prevent access to our websites, which could lower
    our sales and harm our reputation.







| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | If we are unable to provide satisfactory telephone-based
    customer support, we could lose customers.





| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | Temporary or permanent disruption at our fulfillment
    facility could prevent timely shipment of customer orders and
    hurt our sales.





| |   |                                                             
| | - | ------------------------------------------------------------
| |  | a failure to maintain or renew our existing lease agreement;
|
| |  | a power failure;                                            
|
| |  | an employee strike or other labor stoppage;                 

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| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | telecommunications failure, terrorist attacks, acts of war or
    break-ins;             
|
| |  | a disruption in the transportation infrastructure including air
    traffic and roads; or
|
| |  | fire, flood, hurricane or other disaster.                                                





| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may incur significant costs or experience product
    availability delays in complying with regulations applicable to
    the sale of our manufactured products.





| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If use of the Internet, particularly with respect to
    online commerce, does not continue to increase as rapidly as we
    anticipate, our sales may not grow to desired levels.







| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | actual or perceived lack of security of information or privacy
    protection;                                
|
| |  | possible disruptions, computer viruses or other damage to the
    Internet servers or to users computers; and
|
| |  | excessive governmental regulation.                                                                            



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| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Risks related to the Internet, including security and
    reliability issues, are largely outside our control and may hurt
    our reputation or sales.





| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Government regulation of database use in direct marketing
    and Internet and online commerce is evolving. Unfavorable
    changes in these regulations could substantially harm our
    business and results of operations.





| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to protect confidential information of our
    customers and our network against security breaches could damage
    our reputation and brands and subject us to legal
    liability.





| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Our failure to address risks associated with credit card
    fraud could damage our reputation and brands.



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| |                                                                             
| | ----------------------------------------------------------------------------
| | Our sales may decrease if we are required to collect taxes
    on purchases.







| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | Failure to rapidly respond to technological change could
    result in our services or systems becoming obsolete.






Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk.


Interest Rate Risk




Foreign Currency Risk




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|        |                                             
|------- | --------------------------------------------
|Item 8. | Financial Statements and Supplementary Data.

CELEBRATE EXPRESS, INC.


Index to Financial Statements


|                                                                                                     |  |      |    | 
|---------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                     |  | Page |   
|                                                                                                     |  |      |   
|Report of Grant Thorton LLP, Independent
    Registered Public Accounting Firm                       |  |      | 34 | 
|Report of Deloitte & Touche LLP,
    Independent Registered Public Accounting Firm                   |  |      | 35 | 
|Balance Sheets as of May 31, 2005 and
    2004                                                       |  |      | 36 | 
|Statements of Operations For the Years
    Ended May 31, 2005, 2004, and 2003                        |  |      | 37 | 
|Statements of Shareholders Equity
    (Deficit) For the Years Ended May 31, 2005, 2004 and
    2003 |  |      | 38 | 
|Statements of Cash Flows For the Years
    Ended May 31, 2005, 2004 and 2003                         |  |      | 39 | 
|Notes to Financial Statements                                                                        |  |      | 40 | 

33



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Report of Independent Registered Public Accounting
Firm


















34



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






















35



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CELEBRATE EXPRESS, INC.





BALANCE SHEETS


|                                                                                                                      |                                                                                                                                                                                                                                                                                                 |                                      |            |             |            |   |            |             |             |  
|--------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ---------- | ----------- | ---------- | - | ---------- | ----------- | ----------- | -
|                                                                                                                      |                                                                                                                                                                                                                                                                                                 | May 31,                              |            |             | May 31,    |  
|                                                                                                                      |                                                                                                                                                                                                                                                                                                 | 2005                                 |            |             | 2004       |  
|                                                                                                                      |                                                                                                                                                                                                                                                                                                 |                                      |            |             |            |  
|ASSETS                                                                                                               
|Current assets:                                                                                                       |                                                                                                                                                                                                                                                                                                 |                                      |            |             |            |   |            |            
|                                                                                                                      | Cash and cash equivalents                                                                                                                                                                                                                                                                       |                                      | $          | 30,768,694  |            |   | $          | 2,243,300   |            
|                                                                                                                      | Accounts receivable                                                                                                                                                                                                                                                                             |                                      |            | 213,365     |            |   |            | 168,599     |            
|                                                                                                                      | Inventories                                                                                                                                                                                                                                                                                     |                                      |            | 8,396,006   |            |   |            | 5,926,287   |            
|                                                                                                                      | Prepaid expenses                                                                                                                                                                                                                                                                                |                                      |            | 3,461,381   |            |   |            | 1,949,644   |            
|                                                                                                                      | Deferred income taxes                                                                                                                                                                                                                                                                           |                                      |            | 292,852     |            |   |            | 265,700     |            
|                                                                                                                      |                                                                                                                                                                                                                                                                                                 |                                      |            |             |            |  
|                                                                                                                      |                                                                                                                                                                                                                                                                                                 | Total current assets                 |            |             | 43,132,298 |   |            |             | 10,553,530  |  
|Fixed assets, net                                                                                                     |                                                                                                                                                                                                                                                                                                 |                                      | 2,517,352  |             |            |   | 962,406    |            
|Deferred income taxes                                                                                                 |                                                                                                                                                                                                                                                                                                 |                                      | 7,230,551  |             |            |   | 8,746,962  |            
|Other assets, net                                                                                                     |                                                                                                                                                                                                                                                                                                 |                                      | 176,633    |             |            |   | 218,632    |            
|                                                                                                                      |                                                                                                                                                                                                                                                                                                 |                                      |            |             |            |  
|Total assets                                                                                                          |                                                                                                                                                                                                                                                                                                 | $                                    | 53,056,834 |             |            | $ | 20,481,530 |            
|                                                                                                                      |                                                                                                                                                                                                                                                                                                 |                                      |            |             |            |  
|                                                                                                                     
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                       
|Current liabilities:                                                                                                  |                                                                                                                                                                                                                                                                                                 |                                      |            |             |            |   |            |            
|                                                                                                                      | Accounts payable                                                                                                                                                                                                                                                                                |                                      | $          | 2,968,546   |            |   | $          | 3,030,417   |            
|                                                                                                                      | Accrued liabilities                                                                                                                                                                                                                                                                             |                                      |            | 2,070,800   |            |   |            | 1,447,233   |            
|                                                                                                                      | Current portion of long-term debt and capital leases                                                                                                                                                                                                                                            |                                      |            | 17,102      |            |   |            | 34,563      |            
|                                                                                                                      |                                                                                                                                                                                                                                                                                                 |                                      |            |             |            |  
|                                                                                                                      |                                                                                                                                                                                                                                                                                                 | Total current liabilities            |            |             | 5,056,448  |   |            |             | 4,512,213   |  
|Long-term debt and capital lease obligations, net of debt
    discount $64,020 at May 31, 2004 and $0 at May 31, 2005 |                                                                                                                                                                                                                                                                                                 |                                      |           |             |            |   | 4,953,081  |            
|                                                                                                                      | Commitments and contingencies (see notes)                                                                                                                                                                                                                                                       |                                      |            |            |            |   |            |            |            
|                                                                                                                      | Mandatorily redeemable convertible preferred stock,
    $0.001 par value  authorized,
    5,653,851 shares: 4,738,584 shares issued and
    outstanding at May 31, 2004, 0 shares at May 31,
    2005; aggregate liquidation preference of $28,744,983 at
    May 31, 2004, $0 at May 31, 2005 |                                      |            |            |            |   |            | 28,043,782  |            
|                                                                                                                      | Mandatorily redeemable convertible preferred stock warrants                                                                                                                                                                                                                                     |                                      |            |            |            |   |            | 1,056,344   |            
|Shareholders equity (deficit):                                                                                       |                                                                                                                                                                                                                                                                                                 |                                      |            |             |            |   |            |            
|                                                                                                                      | Common stock, $0.001 par value and additional
    paid-in-capital-authorized, 10,000,000 shares; issued and
    outstanding, 1,635,365 shares at May 31, 2004;
    7,522,712 shares at May 31, 2005                                                                                             |                                      |            | 64,336,626  |            |   |            | 878,539     |            
|                                                                                                                      | Contributed capital  common stock warrants                                                                                                                                                                                                                                                     |                                      |            |            |            |   |            | 66,803      |            
|                                                                                                                      | Unearned stock-based compensation                                                                                                                                                                                                                                                               |                                      |            | (726,206    | )          |   |            | (934,350    | )          
|                                                                                                                      | Accumulated deficit                                                                                                                                                                                                                                                                             |                                      |            | (15,610,034 | )          |   |            | (18,094,882 | )          
|                                                                                                                      |                                                                                                                                                                                                                                                                                                 |                                      |            |             |            |  
|                                                                                                                      |                                                                                                                                                                                                                                                                                                 | Total shareholders equity (deficit) |            |             | 48,000,386 |   |            |             | (18,083,890 | )
|                                                                                                                      |                                                                                                                                                                                                                                                                                                 |                                      |            |             |            |  
|Total liabilities and shareholders equity (deficit)                                                                  |                                                                                                                                                                                                                                                                                                 | $                                    | 53,056,834 |             |            | $ | 20,481,530 |            
|                                                                                                                      |                                                                                                                                                                                                                                                                                                 |                                      |            |             |            |  



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CELEBRATE EXPRESS, INC.





STATEMENTS OF OPERATIONS


Years Ended May 31, 2005, 2004 and 2003


|                                                     |                                               |                          |            |            |            |   |            |            |            |   |            |            |            | 
|---------------------------------------------------- | --------------------------------------------- | ------------------------ | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                     |                                               | 2005                     |            |            | 2004       |   |            | 2003       |           
|                                                     |                                               |                          |            |            |            |   |            |            |           
|Net sales                                            |                                               | $                        | 69,138,081 |            |            | $ | 51,938,500 |            |            | $ | 37,811,373 |           
|Cost of sales                                        |                                               |                          | 33,987,083 |            |            |   | 26,573,914 |            |            |   | 19,483,058 |           
|                                                     |                                               |                          |            |            |            |   |            |            |           
|Gross margin                                         |                                               |                          | 35,150,998 |            |            |   | 25,364,586 |            |            |   | 18,328,315 |           
|Operating expenses:                                  |                                               |                          |            |            |            |   |            |            |            |   |            |           
|                                                     | Fulfillment                                   |                          |            | 8,039,145  |            |   |            | 6,627,020  |            |   |            | 5,371,004  |           
|                                                     | Selling and marketing                         |                          |            | 16,787,231 |            |   |            | 12,833,675 |            |   |            | 9,912,695  |           
|                                                     | General and administrative                    |                          |            | 6,481,551  |            |   |            | 4,636,440  |            |   |            | 4,112,486  |           
|                                                     |                                               |                          |            |            |            |   |            |            |           
|                                                     |                                               | Total operating expenses |            |            | 31,307,927 |   |            |            | 24,097,135 |   |            |            | 19,396,185 | 
|                                                     |                                               |                          |            |            |            |   |            |            |           
|Income (loss) from operations                        |                                               |                          | 3,843,071  |            |            |   | 1,267,451  |            |            |   | (1,067,870 | )         
|Other income (expense), net;                         |                                               |                          |            |            |            |   |            |            |            |   |            |           
|                                                     | Interest income (expense), net                |                          |            | 131,036    |            |   |            | (787,683   | )          |   |            | (521,069   | )         
|                                                     |                                               |                          |            |            |            |   |            |            |           
|Net income (loss) before income taxes                |                                               |                          | 3,974,107  |            |            |   | 479,768    |            |            |   | (1,588,939 | )         
|Income tax (expense) benefit                         |                                               |                          | (1,489,259 | )          |            |   | 9,012,662  |            |            |   |           |           
|                                                     |                                               |                          |            |            |            |   |            |            |           
|                                                     | Net income (loss)                             |                          |            | 2,484,848  |            |   |            | 9,492,430  |            |   |            | (1,588,939 | )         
|                                                     | Accretion to preferred stock redemption value |                          |            | (102,271   | )          |   |            | (265,902   | )          |   |            | (265,364   | )         
|                                                     |                                               |                          |            |            |            |   |            |            |           
|Net income (loss) available for common shareholders |                                               | $                        | 2,382,577  |            |            | $ | 9,226,528  |            |            | $ | (1,854,303 | )         
|                                                     |                                               |                          |            |            |            |   |            |            |           
|Net income (loss) per share:                         |                                               |                          |            |            |            |   |            |            |            |   |            |           
|                                                     | Basic                                         |                          | $          | 0.46       |            |   | $          | 6.39       |            |   | $          | (1.34      | )         
|                                                     |                                               |                          |            |            |            |   |            |            |           
|                                                     | Diluted                                       |                          | $          | 0.35       |            |   | $          | 1.85       |            |   | $          | (1.34      | )         
|                                                     |                                               |                          |            |            |            |   |            |            |           
|Weighted average shares outstanding:                 |                                               |                          |            |            |            |   |            |            |            |   |            |           
|                                                     | Basic                                         |                          |            | 5,152,155  |            |   |            | 1,444,964  |            |   |            | 1,388,323  |           
|                                                     | Diluted                                       |                          |            | 7,027,002  |            |   |            | 5,127,377  |            |   |            | 1,388,323  |           



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CELEBRATE EXPRESS, INC.





STATEMENT OF SHAREHOLDERS EQUITY (DEFICIT)


Years Ended May 31, 2005, 2004 and 2003


|                       |                                                                               |                 |           |           |             |   |            |            |   |   |              |              |   |         |          |            |           |   |             |            |   |   |             |            |  
|---------------------- | ----------------------------------------------------------------------------- | --------------- | --------- | --------- | ----------- | - | ---------- | ---------- | - | - | ------------ | ------------ | - | ------- | -------- | ---------- | --------- | - | ----------- | ---------- | - | - | ----------- | ---------- | -
|                       |                                                                               | Common Stock    |           |           | Contributed |   |            |            |   |   |              |             
|                       |                                                                               | and Additional  |           |           | Capital-    |   |            |            |   |   |              | Total        |  
|                       |                                                                               | Paid-In-Capital |           |           | Common      |   |            |            |   |   |              | Shareholders |  
|                       |                                                                               |                 |           |           | Stock       |   |            | Unearned   |   |   | Accumulated  |              |   | Equity  |         
|                       |                                                                               | Shares          |           |           | Amount      |   |            | Warrants   |   |   | Compensation |              |   | Deficit |          |            | (Deficit) |  
|                       |                                                                               |                 |           |           |             |   |            |            |   |   |              |              |   |         |          |            |           |  
|BALANCE  May 31, 2002 |                                                                               |                 | 1,386,656 |           |             | $ | 1,387      |            |   | $ | 70,455       |              |   | $       | (35,633  | )          |           | $ | (25,733,591 | )          |   | $ | (25,697,382 | )         
|                       | Exercise of stock options                                                     |                 |           | 3,106     |             |   |            | 585        |   |   |              |              |   |         |          |            |           |   |             |            |   |   |             | 585        |  
|                       | Accretion of preferred stock discount                                         |                 |           |           |             |   |            | (582       | ) |   |              |              |   |         |          |            |           |   |             | (264,782   | ) |   |             | (265,364   | )
|                       | Amortization of unearned compensation                                         |                 |           |           |             |   |            |            |   |   |              |              |   |         |          | 35,633     |           |   |             |            |   |   |             | 35,633     |  
|                       | Net loss                                                                      |                 |           |           |             |   |            |            |   |   |              |              |   |         |          |            |           |   |             | (1,588,939 | ) |   |             | (1,588,939 | )
|                       |                                                                               |                 |           |           |             |   |            |            |   |   |              |              |   |         |          |            |           |  
|BALANCE  May 31, 2003 |                                                                               |                 | 1,389,762 |           |             | $ | 1,390      |            |   | $ | 70,455       |              |   | $       | 0        |            |           | $ | (27,587,312 | )          |   | $ | (27,515,467 | )         
|                       |                                                                               |                 |           |           |             |   |            |            |   |   |              |              |   |         |          |            |           |  
|                       | Exercise of common stock options                                              |                 |           | 46,607    |             |   |            | 12,735     |   |   |              |              |   |         |          |            |           |   |             |            |   |   |             | 12,735     |  
|                       | Exercise of common stock warrants                                             |                 |           | 198,996   |             |   |            | 73,460     |   |   |              | (70,455      | ) |         |          |            |           |   |             |            |   |   |             | 3,005      |  
|                       | Unearned stock-based compensation                                             |                 |           |           |             |   |            | 1,056,856  |   |   |              |              |   |         |          | (1,056,856 | )         |   |             |            |   |   |             |           |  
|                       | Amortization of stock-based compensation                                      |                 |           |           |             |   |            |            |   |   |              |              |   |         |          | 122,506    |           |   |             |            |   |   |             | 122,506    |  
|                       | Issuance of common stock warrants                                             |                 |           |           |             |   |            |            |   |   |              | 66,803       |   |         |          |            |           |   |             |            |   |   |             | 66,803     |  
|                       | Accretion of preferred stock discount                                         |                 |           |           |             |   |            | (265,902   | ) |   |              |              |   |         |          |            |           |   |             |            |   |   |             | (265,902   | )
|                       | Net Income                                                                    |                 |           |           |             |   |            |            |   |   |              |              |   |         |          |            |           |   |             | 9,492,430  |   |   |             | 9,492,430  |  
|                       |                                                                               |                 |           |           |             |   |            |            |   |   |              |              |   |         |          |            |           |  
|BALANCE  May 31, 2004 |                                                                               |                 | 1,635,365 |           |             | $ | 878,539    |            |   | $ | 66,803       |              |   | $       | (934,350 | )          |           | $ | (18,094,882 | )          |   | $ | (18,083,890 | )         
|                       |                                                                               |                 |           |           |             |   |            |            |   |   |              |              |   |         |          |            |           |  
|                       | Exercise of common stock options                                              |                 |           | 120,102   |             |   |            | 81,511     |   |   |              |              |   |         |          |            |           |   |             |            |   |   |             | 81,511     |  
|                       | Accretion of preferred stock discount                                         |                 |           |           |             |   |            | (102,271   | ) |   |              |              |   |         |          |            |           |   |             |            |   |   |             | (102,271   | )
|                       | Issuance of common stock in connection with employee stock
    purchase plan  |                 |           | 7,945     |             |   |            | 104,715    |   |   |              |              |   |         |          |            |           |   |             |            |   |   |             | 104,715    |  
|                       | Conversion of mandatorily redeemable convertible preferred stock              |                 |           | 3,138,175 |             |   |            | 28,146,053 |   |   |              |              |   |         |          |            |           |   |             |            |   |   |             | 28,146,053 |  
|                       | Conversion of mandatorily redeemable convertible preferred stock
    warrants |                 |           |           |             |   |            |            |   |   |              | 199,439      |   |         |          |            |           |   |             |            |   |   |             | 199,439    |  
|                       | Proceeds from issuance of common stock, net of offering costs                 |                 |           | 2,465,651 |             |   |            | 34,011,674 |   |   |              |              |   |         |          |            |           |   |             |            |   |   |             | 34,011,674 |  
|                       | Exercise of preferred stock warrants                                          |                 |           | 146,766   |             |   |            | 856,905    |   |   |              |              |   |         |          |            |           |   |             |            |   |   |             | 856,905    |  
|                       | Exercise of common stock warrants                                             |                 |           | 8,708     |             |   |            | 272,234    |   |   |              | (266,242     | ) |         |          |            |           |   |             |            |   |   |             | 5,992      |  
|                       | Unearned stock-based compensation                                             |                 |           |           |             |   |            | 191,822    |   |   |              |              |   |         |          | (191,822   | )         |   |             |            |   |   |             |           |  
|                       | Cancellation of stock options                                                 |                 |           |           |             |   |            | (104,556   | ) |   |              |              |   |         |          | 104,556    |           |   |             |            |   |   |             |           |  
|                       | Amortization of stock-based compensation                                      |                 |           |           |             |   |            |            |   |   |              |              |   |         |          | 295,410    |           |   |             |            |   |   |             | 295,410    |  
|                       | Net Income                                                                    |                 |           |           |             |   |            |            |   |   |              |              |   |         |          |            |           |   |             | 2,484,848  |   |   |             | 2,484,848  |  
|                       |                                                                               |                 |           |           |             |   |            |            |   |   |              |              |   |         |          |            |           |  
|BALANCE  May 31, 2005 |                                                                               |                 | 7,522,712 |           |             | $ | 64,336,626 |            |   | $ | 0            |              |   | $       | (726,206 | )          |           | $ | (15,610,034 | )          |   | $ | 48,000,386  |           
|                       |                                                                               |                 |           |           |             |   |            |            |   |   |              |              |   |         |          |            |           |  



38



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##### Table of Contents



CELEBRATE EXPRESS, INC.





STATEMENT OF CASH FLOWS


Years Ended May 31, 2005, 2004 and 2003


|                                                                            |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |            |            |           |            |           |          |            |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------- | ---------------------------------------------------- | --------- | ---------- | ---------- | ---------- | ---------- | ---------- | --------- | ---------- | --------- | -------- | ---------- | -
|                                                                            |                                                                                                   | 2005                                         |                                   |                                                      | 2004      |            |            | 2003       |           
|                                                                            |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |           
|Cash flows from operating activities:                                       |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |            |            |           |           
|                                                                            | Net income (loss)                                                                                 |                                              | $                                 | 2,484,848                                            |           |            | $          | 9,492,430  |            |            | $         | (1,588,939 | )        
|                                                                            | Adjustments to reconcile net income to net cash provided by
    (used in) operating activities:   |                                              |                                   |                                                      |           |            |            |            |            |            |           |            |          
|                                                                            |                                                                                                   | Deferred income taxes                        |                                   |                                                      | 1,489,259 |            |            |            | (9,012,662 | )          |           |            |          |         
|                                                                            |                                                                                                   | Depreciation and amortization                |                                   |                                                      | 709,485   |            |            |            | 743,331    |            |           |            | 1,168,238 |         
|                                                                            |                                                                                                   | Noncash compensation expense  stock options |                                   |                                                      | 295,410   |            |            |            | 122,506    |            |           |            | 35,633    |         
|                                                                            |                                                                                                   | Amortization of deferred financing costs     |                                   |                                                      | 23,958    |            |            |            |           |            |           |            |          |         
|                                                                            |                                                                                                   | Accretion of debt discount                   |                                   |                                                      | 70,012    |            |            |            | 301,504    |            |           |            | 100,874   |         
|                                                                            |                                                                                                   | Changes in operating assets and liabilities: |                                   |                                                      |           |            |            |            |            |            |           |            |           |         
|                                                                            |                                                                                                   |                                              | Accounts receivable               |                                                      |           | (44,766    | )          |            |            | (29,789    | )         |            |           | (1,843   | )         
|                                                                            |                                                                                                   |                                              | Inventories                       |                                                      |           | (2,469,719 | )          |            |            | (1,807,468 | )         |            |           | 154,338  |           
|                                                                            |                                                                                                   |                                              | Prepaid expenses and other assets |                                                      |           | (1,510,803 | )          |            |            | (251,832   | )         |            |           | (650,969 | )         
|                                                                            |                                                                                                   |                                              | Accounts payable                  |                                                      |           | (61,871    | )          |            |            | 1,167,191  |           |            |           | (561,093 | )         
|                                                                            |                                                                                                   |                                              | Accrued liabilities               |                                                      |           | 623,567    |            |            |            | 432,763    |           |            |           | 30,965   |           
|                                                                            |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |           
|                                                                            |                                                                                                   |                                              |                                   | Net cash provided by (used in) operating activities  |           |            | 1,609,380  |            |            |            | 1,157,974 |            |           |          | (1,312,796 | )
|                                                                            |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |           
|Cash flows from investing activities:                                       |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |            |            |           |           
|                                                                            | Payments for purchases of fixed assets                                                            |                                              |                                   | (2,247,324                                           | )         |            |            | (563,972   | )          |            |           | (469,370   | )        
|                                                                            | Purchase of marketable securities                                                                 |                                              |                                   | (61,050,000                                          | )         |            |            |           |            |            |           |           |          
|                                                                            | Maturities of marketable securities                                                               |                                              |                                   | 8,950,000                                            |           |            |            |           |            |            |           |           |          
|                                                                            | Sale of marketable securities                                                                     |                                              |                                   | 52,100,000                                           |           |            |            |           |            |            |           |           |          
|                                                                            |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |           
|                                                                            |                                                                                                   |                                              |                                   | Net cash used in investing activities                |           |            | (2,247,324 | )          |            |            | (563,972  | )          |           |          | (469,370   | )
|                                                                            |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |           
|Cash flows from financing activities:                                       |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |            |            |           |           
|                                                                            | Principal payments on capital lease obligations                                                   |                                              |                                   | (34,562                                              | )         |            |            | (39,008    | )          |            |           | (21,176    | )        
|                                                                            | Borrowings on notes payable                                                                       |                                              |                                   |                                                     |           |            |            | 1,666,666  |            |            |           | 5,000,000  |          
|                                                                            | Principal payments on notes payable                                                               |                                              |                                   | (5,000,000                                           | )         |            |            | (1,666,666 | )          |            |           | (245,598   | )        
|                                                                            | Principal payments under line of credit agreement                                                 |                                              |                                   |                                                     |           |            |            |           |            |            |           | (1,350,000 | )        
|                                                                            | Repayments on related party notes payable                                                         |                                              |                                   |                                                     |           |            |            |           |            |            |           | (261,000   | )        
|                                                                            | Net proceeds from sale of common stock, net of issuance costs                                     |                                              |                                   | 34,011,674                                           |           |            |            |           |            |            |           |           |          
|                                                                            | Issuance of mandatorily redeemable convertible preferred
    stock  net of issuance costs        |                                              |                                   |                                                     |           |            |            | 721        |            |            |           |           |          
|                                                                            | Proceeds from shares issued under the employee stock purchase
    plan                            |                                              |                                   | 104,715                                              |           |            |            |           |            |            |           |           |          
|                                                                            | Proceeds from exercise of stock options                                                           |                                              |                                   | 81,511                                               |           |            |            | 15,740     |            |            |           | 585        |          
|                                                                            |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |           
|                                                                            |                                                                                                   |                                              |                                   | Net cash provided by/ (used in) financing activities |           |            | 29,163,338 |            |            |            | (22,547   | )          |           |          | 3,122,811  |  
|                                                                            |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |           
|Net increase in cash and cash equivalents                                   |                                                                                                   |                                              | 28,525,394                        |                                                      |           |            | 571,455    |            |            |            | 1,340,645 |           
|Cash and cash equivalents:                                                  |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |            |            |           |           
|                                                                            | Beginning of year                                                                                 |                                              |                                   | 2,243,300                                            |           |            |            | 1,671,845  |            |            |           | 331,200    |          
|                                                                            |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |           
|                                                                            | End of year                                                                                       |                                              | $                                 | 30,768,694                                           |           |            | $          | 2,243,300  |            |            | $         | 1,671,845  |          
|                                                                            |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |           
|Supplemental disclosures of cash flow information:                          |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |            |            |           |           
|                                                                            | Cash paid for interest                                                                            |                                              | $                                 | 213,707                                              |           |            | $          | 489,294    |            |            | $         | 430,257    |          
|                                                                            |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |           
|Supplemental disclosures of noncash financing and investing
    activities: |                                                                                                   |                                              |                                   |                                                      |           |            |            |            |            |            |           |           
|                                                                            | Conversion of mandatorily redeemable convertible preferred stock
    and preferred stock warrants |                                              | $                                 | 28,345,492                                           |           |            |            |           |            |            |           |           |          
|                                                                            | Net exercise of common stock warrants                                                             |                                              | $                                 | 272,234                                              |           |            |            |           |            |            |           |           |          
|                                                                            | Net exercise of preferred stock warrants                                                          |                                              | $                                 | 856,905                                              |           |            |            |           |            |            |           |           |          
|                                                                            | Conversion of notes payable to Series C preferred stock                                           |                                              |                                   |                                                     |           |            |            |           |            |            | $         | 42,034     |          
|                                                                            | Purchase of fixed assets under capital leases                                                     |                                              |                                   |                                                     |           |            |            |           |            |            | $         | 58,167     |          
|                                                                            | Cancellation of unvested stock options                                                            |                                              | $                                 | 104,556                                              |           |            |            |           |            |            |           |           |          
|                                                                            | Accretion of preferred stock discounts                                                            |                                              | $                                 | 102,271                                              |           |            | $          | 265,902    |            |            | $         | 265,364    |          



39



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##### Table of Contents



CELEBRATE EXPRESS, INC.





NOTES TO FINANCIAL STATEMENTS


Years Ended May 31, 2005, 2004 and 2003




|   |                                                                            
|-- | ---------------------------------------------------------------------------
|1. | Organization of Business and Summary of Significant
    Accounting Policies

Description of Business


Basis of Presentation


Use of Estimates


Reclassifications


Concentrations of Risk




Segments Disclosure about Segments of an Enterprise and
Related Information


Cash and Cash Equivalents


Inventories




|               |  |                     |           |  |      |   |           | 
|-------------- |  | ------------------- | --------- |  | ---- | - | --------- | 
|               |  | Years Ended May 31, |          
|               |  |                     |          
|               |  | 2005                |           |  | 2004 |  
|               |  |                     |           |  |      |  
|Finished goods |  | $                   | 7,877,486 |  |      | $ | 5,591,969 | 
|Raw materials  |  |                     | 518,520   |  |      |   | 334,318   | 
|               |  |                     |           |  |      |  
|               |  | $                   | 8,396,006 |  |      | $ | 5,926,287 | 
|               |  |                     |           |  |      |  



40



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CELEBRATE EXPRESS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


Prepaid Expenses


Fixed Assets


Capitalized Software Accounting for
Costs of Computer Software Developed for Internal Use.


Long-Lived Assets


Fair Value of Financial Instruments


Revenue Recognition


Cost of Sales


Shipping and Handling Charges


Advertising


Income Taxes


Stock-Based Compensation


41



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CELEBRATE EXPRESS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


Accounting for Stock Issued to
Employees


Accounting for Stock-Based Compensation


|                                                                                                       |                                  |                    |           |           |      |   |           |           |  |   |            |           |  
|------------------------------------------------------------------------------------------------------ | -------------------------------- | ------------------ | --------- | --------- | ---- | - | --------- | --------- |  | - | ---------- | --------- | -
|                                                                                                       |                                  | Year Ended May 31, |          
|                                                                                                       |                                  |                    |          
|                                                                                                       |                                  | 2005               |           |           | 2004 |   |           | 2003      | 
|                                                                                                       |                                  |                    |           |           |      |   |           |           | 
|Net income (loss) available for common shareholders, as reported                                       |                                  | $                  | 2,382,577 |           |      | $ | 9,226,528 |           |  | $ | (1,854,303 | )        
|Add: Stock-based employee compensation expense, as reported                                            |                                  |                    | 295,410   |           |      |   | 80,854    |           |  |   | 23,518     |          
|Deduct: Stock-based employee compensation expense determined
    under the fair-value-based method     |                                  |                    | (634,610  | )         |      |   | (85,424   | )         |  |   | (73,750    | )        
|                                                                                                       |                                  |                    |           |           |      |   |           |           | 
|Pro forma net income (loss) available for common
    shareholders  basic                              |                                  | $                  | 2,043,377 |           |      | $ | 9,221,958 |           |  | $ | (1,904,535 | )        
|                                                                                                       |                                  |                    |           |           |      |   |           |           | 
|Add: Accretion to preferred stock redemption value                                                     |                                  |                    | 102,271   |           |      |   | 265,902   |           |  |   |           |          
|                                                                                                       |                                  |                    |           |           |      |   |           |           | 
|Pro Forma net income (loss) available for common
    shareholders  diluted                            |                                  | $                  | 2,145,648 |           |      | $ | 9,487,860 |           |  |   |           |          
|                                                                                                       |                                  |                    |           |           |      |   |           |           | 
|Total weighted average shares outstanding in computing pro forma
    net income (loss) per share Basic |                                  |                    | 5,152,155 |           |      |   | 1,444,964 |           |  |   | 1,388,323  |          
|                                                                                                       | Diluted                          |                    |           | 6,892,204 |      |   |           | 5,038,997 |  |   |            | 1,383,323 |  
|Net income (loss) per share:                                                                           |                                  |                    |           |           |      |   |           |           |  |   |            |          
|                                                                                                       | Basic  as reported              |                    | $         | 0.46      |      |   | $         | 6.39      |  |   | $          | (1.34     | )
|                                                                                                       |                                  |                    |           |           |      |   |           |           | 
|                                                                                                       | Diluted  as reported            |                    | $         | 0.35      |      |   | $         | 1.85      |  |   | $          | (1.34     | )
|                                                                                                       |                                  |                    |           |           |      |   |           |           | 
|                                                                                                       | Basic  SFAS No. 123 pro forma   |                    | $         | 0.40      |      |   | $         | 6.38      |  |   | $          | (1.37     | )
|                                                                                                       |                                  |                    |           |           |      |   |           |           | 
|                                                                                                       | Diluted  SFAS No. 123 pro forma |                    | $         | 0.31      |      |   | $         | 1.88      |  |   | $          | (1.37     | )
|                                                                                                       |                                  |                    |           |           |      |   |           |           | 



|                        |  |                    |                |  |      |  |               |      |  |  |         | 
|----------------------- |  | ------------------ | -------------- |  | ---- |  | ------------- | ---- |  |  | ------- | 
|                        |  | Year Ended May 31, |               
|                        |  |                    |               
|                        |  | 2005               |                |  | 2004 |  |               | 2003 | 
|                        |  |                    |                |  |      |  |               |      | 
|Expected dividend rate  |  |                    | 0%             |  |      |  | 0%            |      |  |  | 0%      | 
|Expected volatility     |  |                    | 60.3% - 110.0% |  |      |  | 0%            |      |  |  | 0%      | 
|Expected lives (years)  |  |                    | 3 - 4 years    |  |      |  | 4 years       |      |  |  | 4 years | 
|Risk-free interest rate |  |                    | 4.10% - 4.73%  |  |      |  | 3.83% - 4.30% |      |  |  | 4.61%   | 

New Accounting Pronouncements Share-Based Payment


42



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##### Table of Contents



CELEBRATE EXPRESS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


(SFAS No. 123R).


Inventory Costs, an amendment of ARB
No. 43, Chapter 4




|   |                        
|-- | -----------------------
|2. | Initial Public Offering









|   |             
|-- | ------------
|3. | Fixed Assets



|                         |  |      |            |   |      |   |            |  
|------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                         |  | 2005 |            |   | 2004 |  
|                         |  |      |            |   |      |  
|Equipment                |  | $    | 3,749,885  |   |      | $ | 2,350,426  |  
|Computers and software   |  |      | 5,087,342  |   |      |   | 4,636,984  |  
|Furniture and fixtures   |  |      | 712,303    |   |      |   | 523,707    |  
|Leasehold improvements   |  |      | 1,009,707  |   |      |   | 800,796    |  
|                         |  |      |            |   |      |  
|                         |  |      | 10,559,237 |   |      |   | 8,311,913  |  
|Accumulated depreciation |  |      | (8,041,885 | ) |      |   | (7,349,507 | )
|                         |  |      |            |   |      |  
|                         |  | $    | 2,517,352  |   |      | $ | 962,406    |  
|                         |  |      |            |   |      |  



43



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CELEBRATE EXPRESS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






|   |             
|-- | ------------
|4. | Income Taxes



|                                   |  |                     |           |  |      |   |            |      |  |   |          |  
|---------------------------------- |  | ------------------- | --------- |  | ---- | - | ---------- | ---- |  | - | -------- | -
|                                   |  | Years Ended May 31, |          
|                                   |  |                     |          
|                                   |  | 2005                |           |  | 2004 |   |            | 2003 | 
|                                   |  |                     |           |  |      |   |            |      | 
|Deferred income tax expense        |  | $                   | 1,489,259 |  |      | $ | 209,999    |      |  | $ | (535,867 | )
|Change in valuation allowance      |  |                     |          |  |      |   | (9,222,661 | )    |  |   | 535,867  |  
|                                   |  |                     |           |  |      |   |            |      | 
|Total income tax expense (benefit) |  | $                   | 1,489,259 |  |      | $ | (9,012,662 | )    |  | $ |         |  
|                                   |  |                     |           |  |      |   |            |      | 



|                                                       |  |      |           |  |      |  |      |      |  |   |            |   |  |  |         |    |  |   |          |   |  |  |       |   
|------------------------------------------------------ |  | ---- | --------- |  | ---- |  | ---- | ---- |  | - | ---------- | - |  |  | ------- | -- |  | - | -------- | - |  |  | ----- | --
|                                                       |  | 2005 |           |  | 2004 |  |      | 2003 | 
|                                                       |  |      |           |  |      |  |      |      | 
|Federal income tax expense (benefit) at statutory rate |  | $    | 1,351,196 |  |      |  | 34.0 | %    |  | $ | 163,121    |   |  |  | 34.0    | %  |  | $ | (540,239 | ) |  |  | 34.0  | % 
|Permanent differences and other                        |  |      | 91,547    |  |      |  | 2.3  | %    |  |   | 46,878     |   |  |  | 9.8     | %  |  |   | 4,372    |   |  |  | (0.3  | )%
|State income taxes, net of federal effect              |  |      | 46,516    |  |      |  | 1.2  | %    |  |   |            |   |  |  |         |    |  |   |          |   |  |  |       |   
|Change in valuation allowance                          |  |      |          |  |      |  | 0.0  | %    |  |   | (9,222,661 | ) |  |  | (1922.3 | )% |  |   | 535,867  |   |  |  | (33.7 | )%
|                                                       |  |      |           |  |      |  |      |      |  |   |            |   |  |  |         |    |  |  
|Income tax expense (benefit)                           |  | $    | 1,489,259 |  |      |  | 37.5 | %    |  | $ | (9,012,662 | ) |  |  | (1878.5 | )% |  | $ |         |   |  |  | 0.0   | % 
|                                                       |  |      |           |  |      |  |      |      |  |   |            |   |  |  |         |    |  |  



|                     |                        |                                        |   |           |           |  |   |           |           | 
|-------------------- | ---------------------- | -------------------------------------- | - | --------- | --------- |  | - | --------- | --------- | 
|                     |                        | 2005                                   |   |           | 2004      | 
|                     |                        |                                        |   |           |           | 
|Deferred tax assets: |                        |                                        |   |           |           |  |   |          
|                     | Current:               |                                        |   |           |           |  |   |           |          
|                     |                        | Reserves and allowances                |   | $         | 233,276   |  |   | $         | 193,271   | 
|                     |                        | Accrued vacation and other             |   |           | 59,576    |  |   |           | 72,429    | 
|                     | Noncurrent:            |                                        |   |           |           |  |   |           |          
|                     |                        | Net operating loss carry forwards      |   |           | 6,787,825 |  |   |           | 7,729,513 | 
|                     |                        | Excess of book over tax depreciation   |   |           | 414,988   |  |   |           | 772,666   | 
|                     |                        | Stock compensation and warrant expense |   |           | 4,342     |  |   |           | 222,005   | 
|                     |                        | Charitable contribution carry forwards |   |           | 23,396    |  |   |           | 22,778    | 
|                     |                        |                                        |   |           |           | 
|                     | Deferred tax asset     |                                        |   | 7,523,403 |           |  |   | 9,012,662 |          
|                     | Valuation allowance    |                                        |   |          |           |  |   |          |          
|                     |                        |                                        |   |           |           | 
|                     | Net deferred tax asset |                                        | $ | 7,523,403 |           |  | $ | 9,012,662 |          
|                     |                        |                                        |   |           |           | 

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CELEBRATE EXPRESS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)








|   |                       
|-- | ----------------------
|5. | Borrowing Arrangements











Long-Term Obligation 


|                                                                                                               |  |      |         |   |      |   |           |  
|-------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | --------- | -
|                                                                                                               |  | 2005 |         |   | 2004 |  
|                                                                                                               |  |      |         |   |      |  
|Note payable with interest only payments at prime plus 2.75%,
    but at least 7.75% through May 2005          |  | $    |        |   |      | $ | 5,000,000 |  
|Capital lease obligations with imputed interest rates ranging
    from 5.6% to 12% maturing through March 2006 |  |      | 17,102  |   |      |   | 51,664    |  
|                                                                                                               |  |      |         |   |      |  
|                                                                                                               |  |      | 17,102  |   |      |   | 5,051,664 |  
|Less current portion                                                                                           |  |      | (17,102 | ) |      |   | (34,563   | )
|                                                                                                               |  |      |         |   |      |  
|                                                                                                               |  | $    |        |   |      | $ | 5,017,101 |  
|                                                                                                               |  |      |         |   |      |  



45



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CELEBRATE EXPRESS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|   |                              
|-- | -----------------------------
|6. | Commitments and Contingencies





|     |  |                  |           | 
|---- |  | ---------------- | --------- | 
|     |  | Operating Leases |          
|     |  |                  |          
|2006 |  | $                | 777,660   | 
|2007 |  |                  | 792,389   | 
|2008 |  |                  | 514,908   | 
|2009 |  |                  | 250,427   | 
|     |  |                  |          
|     |  | $                | 2,335,384 | 
|     |  |                  |          

Contingencies




|   |                                                   
|-- | --------------------------------------------------
|7. | Mandatorily Redeemable Convertible Preferred Stock



|                                                            |  |            |           |  |             |               |           |               |  |  |           |  |             |            |            |  |  |   |            | 
|----------------------------------------------------------- |  | ---------- | --------- |  | ----------- | ------------- | --------- | ------------- |  |  | --------- |  | ----------- | ---------- | ---------- |  |  | - | ---------- | 
|                                                            |  |            |           |  |             | Common Shares |           |               |  |  |          
|                                                            |  | Authorized |           |  | Shares      |               |           | Issuable Upon |  |  |           |  | Liquidation |           
|                                                            |  | Shares     |           |  | Outstanding |               |           | Conversion    |  |  | Amount    |  |             | Preference |           
|                                                            |  |            |           |  |             |               |           |               |  |  |           |  |             |            |           
|Series A mandatorily redeemable convertible preferred stock |  |            | 1,500,005 |  |             |               | 1,500,005 |               |  |  | 993,396   |  |             | $          | 1,780,285  |  |  | $ | 1,800,006  | 
|Series B mandatorily reedemable convertible preferred stock |  |            | 1,650,000 |  |             |               | 1,538,814 |               |  |  | 1,019,094 |  |             |            | 12,655,375 |  |  |   | 12,802,932 | 
|Series C mandatorily reedemable convertible preferred stock |  |            | 2,503,846 |  |             |               | 1,699,765 |               |  |  | 1,125,685 |  |             |            | 13,608,122 |  |  |   | 14,142,045 | 
|                                                            |  |            |           |  |             |               |           |               |  |  |           |  |             |            |           
|                                                            |  |            | 5,653,851 |  |             |               | 4,738,584 |               |  |  | 3,138,175 |  |             | $          | 28,043,782 |  |  | $ | 28,744,983 | 
|                                                            |  |            |           |  |             |               |           |               |  |  |           |  |             |            |           

Series A Mandatorily Redeemable Convertible Preferred
Stock


46



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CELEBRATE EXPRESS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Series A preferred shares were able to be redeemed, at the
    option of the holder, at any time after September 30, 2005,
    at $1.20 per share plus any declared but unpaid dividends.
    In the event of liquidation of the Company, the holders of
    Series A preferred stock were entitled to receive, prior to
    any distributions to the common shareholders, an amount equal to
    $1.20 per share plus any dividends declared but unpaid.

Series B Mandatorily Redeemable Convertible Preferred
Stock 




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Series B preferred shares were able to be redeemed, at the
    option of the holder, at any time after September 30, 2005,
    at $8.32 per share plus any declared but unpaid dividends.
    In the event of liquidation of the Company, the holders of
    Series B preferred stock were entitled to receive, prior to
    any distributions to the common shareholders, an amount equal to
    $8.32 per share plus any dividends declared but unpaid.

Series C Mandatorily Redeemable Convertible Preferred
Stock 




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the event of liquidation of the Company, the holders of
    Series C preferred stock were entitled to receive, prior to
    any distributions to the common stock or Series A or
    Series B shareholders, an amount equal to $8.32 per
    share plus any dividends declared but unpaid. After all
    preferred distributions were made each share of Series C
    preferred would share in any remaining distributions to common
    shareholders as if converted on a one-for-one basis.







47



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CELEBRATE EXPRESS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                                                       |  |                        |            |   |          |   |            |                      |  |  |            |   |  |        |             |   |        |  |            |          |  |   |             |   |  |  |          |   |  |   |           |  
|------------------------------------------------------ |  | ---------------------- | ---------- | - | -------- | - | ---------- | -------------------- |  |  | ---------- | - |  | ------ | ----------- | - | ------ |  | ---------- | -------- |  | - | ----------- | - |  |  | -------- | - |  | - | --------- | -
|                                                       |  | Mandatorily Redeemable |            |   |          |   |           
|                                                       |  |                        |            |   |         
|                                                       |  |                        |            |   |          |   |            | Warrants to Purchase | 
|                                                       |  | Series A               |            |   | Series B |   |            | Series C             |  |  | Series C   |  
|                                                       |  |                        |            |   |          |   |            |                      |  |  |            |  
|                                                       |  | Shares                 |            |   | Amount   |   |            | Shares               |  |  | Amount     |   |  | Shares |             |   | Amount |  |            | Warrants |  |   | Amount      |  
|                                                       |  |                        |            |   |          |   |            |                      |  |  |            |   |  |        |             |   |        |  |            |          |  |   |             |  
|Balance, May 31, 2002                                  |  |                        | 1,500,005  |   |          | $ | 1,780,285  |                      |  |  | 1,538,814  |   |  | $      | 12,655,375  |   |        |  | 1,622,597  |          |  | $ | 12,489,605  |   |  |  | 233,342  |   |  | $ | 1,201,245 |  
|Conversion of note payable to Series C preferred stock |  |                        |            |   |          |   |            |                      |  |  |            |   |  |        |             |   |        |  | 5,052      |          |  |   | 21,025      |   |  |  |          |   |  |   |           |  
|Issuance of Series C preferred stock warrants          |  |                        |            |   |          |   |            |                      |  |  |            |   |  |        |             |   |        |  |            |          |  |   |             |   |  |  | 167,312  |   |  |   | 420,604   |  
|Accretion of redemption value                          |  |                        |            |   |          |   |            |                      |  |  |            |   |  |        |             |   |        |  |            |          |  |   | 265,364     |   |  |  |          |   |  |   |           |  
|                                                       |  |                        |            |   |          |   |            |                      |  |  |            |   |  |        |             |   |        |  |            |          |  |   |             |  
|Balance, May 31, 2003                                  |  |                        | 1,500,005  |   |          |   | 1,780,285  |                      |  |  | 1,538,814  |   |  |        | 12,655,375  |   |        |  | 1,627,649  |          |  |   | 12,775,994  |   |  |  | 400,654  |   |  |   | 1,621,849 |  
|Accretion of redemption value                          |  |                        |            |   |          |   |            |                      |  |  |            |   |  |        |             |   |        |  |            |          |  |   | 265,902     |   |  |  |          |   |  |   |           |  
|Exercise of Series C preferred stock warrants          |  |                        |            |   |          |   |            |                      |  |  |            |   |  |        |             |   |        |  | 72,116     |          |  |   | 566,226     |   |  |  | (72,116  | ) |  |   | (565,505  | )
|                                                       |  |                        |            |   |          |   |            |                      |  |  |            |   |  |        |             |   |        |  |            |          |  |   |             |  
|Balance, May 31, 2004                                  |  |                        | 1,500,005  |   |          |   | 1,780,285  |                      |  |  | 1,538,814  |   |  |        | 12,655,375  |   |        |  | 1,699,765  |          |  |   | 13,608,122  |   |  |  | 328,538  |   |  |   | 1,056,344 |  
|Accretion of redemption value                          |  |                        |            |   |          |   |            |                      |  |  |            |   |  |        |             |   |        |  |            |          |  |   | 102,271     |   |  |  |          |   |  |   |           |  
|Conversion to common stock warrants                    |  |                        |            |   |          |   |            |                      |  |  |            |   |  |        |             |   |        |  |            |          |  |   |             |   |  |  | (27,175  | ) |  |   | (199,439  | )
|Conversion to shares of common stock                   |  |                        | (1,500,005 | ) |          |   | (1,780,285 | )                    |  |  | (1,538,814 | ) |  |        | (12,655,375 | ) |        |  | (1,699,765 | )        |  |   | (13,710,393 | ) |  |  | (301,363 | ) |  |   | (856,905  | )
|                                                       |  |                        |            |   |          |   |            |                      |  |  |            |   |  |        |             |   |        |  |            |          |  |   |             |  
|Balance, May 31, 2005                                  |  |                        |           |   |          | $ |           |                      |  |  |           |   |  | $      |            |   |        |  |           |          |  | $ |            |   |  |  |         |   |  | $ |          |  
|                                                       |  |                        |            |   |          |   |            |                      |  |  |            |   |  |        |             |   |        |  |            |          |  |   |             |  







|                   |       |      |         |         |      |   |      |  |  |  |         |         |  |   |      |  | 
|------------------ | ----- | ---- | ------- | ------- | ---- | - | ---- |  |  |  | ------- | ------- |  | - | ---- |  | 
|                   |       | 2004 |         |         | 2003 |  
|                   |       |      |         |         |      |  
|Preferred Warrants |       |      | 41,034  |         |      | $ | 8.32 |  |  |  | 41,034  |         |  | $ | 8.32 | 
|                   |       |      | 162,260 |         |      |   | 4.16 |  |  |  | 162,260 |         |  |   | 4.16 | 
|                   |       |      | 125,244 |         |      |   | 0.01 |  |  |  | 197,360 |         |  |   | 0.01 | 
|                   |       |      |         |         |      |   |      |  |  |  |         |        
|                   | Total |      |         | 328,538 |      |   |      |  |  |  |         | 400,654 |  |   |      |  | 
|                   |       |      |         |         |      |   |      |  |  |  |         |        
|Common Warrants    |       |      | 6,622   |         |      | $ | 1.66 |  |  |  | 199,233 |         |  | $ | 0.02 | 
|                   |       |      |         |         |      |   |      |  |  |  |         |        

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CELEBRATE EXPRESS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|   |                        
|-- | -----------------------
|8. | Income (Loss) Per Share





|                                                                  |                                                                           |      |           |           |      |   |           |           |  |   |            |           | 
|----------------------------------------------------------------- | ------------------------------------------------------------------------- | ---- | --------- | --------- | ---- | - | --------- | --------- |  | - | ---------- | --------- | 
|                                                                  |                                                                           | 2005 |           |           | 2004 |   |           | 2003      | 
|                                                                  |                                                                           |      |           |           |      |   |           |           | 
|Net income (loss) available for common shareholders 
    basic   |                                                                           | $    | 2,382,577 |           |      | $ | 9,226,528 |           |  | $ | (1,854,303 | )        
|Add: Accretion to preferred stock redemption value                |                                                                           |      | 102,271   |           |      |   | 265,902   |           |  |   |            |          
|                                                                  |                                                                           |      |           |           |      |   |           |           | 
|Net income (loss) available for common shareholders 
    diluted |                                                                           | $    | 2,484,848 |           |      | $ | 9,492,430 |           |  | $ | (1,854,303 | )        
|                                                                  |                                                                           |      |           |           |      |   |           |           | 
|Weighted average common shares outstanding                        |                                                                           |      | 5,152,155 |           |      |   | 1,444,964 |           |  |   | 1,388,323  |          
|Basic net income (loss) per share                                 |                                                                           | $    | 0.46      |           |      | $ | 6.39      |           |  | $ | (1.34      | )        
|                                                                  |                                                                           |      |           |           |      |   |           |           | 
|Common share equivalents:                                         |                                                                           |      |           |           |      |   |           |           |  |   |            |          
|                                                                  | Dilutive effect of common stock options                                   |      |           | 579,514   |      |   |           | 300,457   |  |   |            |           | 
|                                                                  | Dilutive effect of common and preferred stock warrants                    |      |           | 65,856    |      |   |           | 256,412   |  |   |            |           | 
|                                                                  | Dilutive effect of mandatorily redeemable convertible preferred
    stock |      |           | 1,229,477 |      |   |           | 3,125,544 |  |   |            |           | 
|                                                                  |                                                                           |      |           |           |      |   |           |           | 
|                                                                  | Weighted average common shares and common share equivalents               |      |           | 7,027,002 |      |   |           | 5,127,377 |  |   |            | 1,388,323 | 
|Diluted net income (loss) per share                               |                                                                           | $    | 0.35      |           |      | $ | 1.85      |           |  | $ | (1.34      | )        
|                                                                  |                                                                           |      |           |           |      |   |           |           | 



|                                                   |  |                    |        |  |      |  |        |      |  |  |           | 
|-------------------------------------------------- |  | ------------------ | ------ |  | ---- |  | ------ | ---- |  |  | --------- | 
|                                                   |  | Year Ended May 31, |       
|                                                   |  |                    |       
|                                                   |  | 2005               |        |  | 2004 |  |        | 2003 | 
|                                                   |  |                    |        |  |      |  |        |      | 
|Mandatorily redeemable convertible preferred stock |  |                    |       |  |      |  |       |      |  |  | 3,090,141 | 
|Preferred stock warrants                           |  |                    |       |  |      |  |       |      |  |  | 251,226   | 
|Common stock warrants                              |  |                    |       |  |      |  |       |      |  |  | 198,996   | 
|Common stock options                               |  |                    | 23,589 |  |      |  | 79,291 |      |  |  | 554,307   | 
|                                                   |  |                    |        |  |      |  |        |      | 
|                                                   |  |                    | 23,589 |  |      |  | 79,291 |      |  |  | 4,094,670 | 
|                                                   |  |                    |        |  |      |  |        |      | 



|   |                  
|-- | -----------------
|9. | Stock Option Plan



49



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CELEBRATE EXPRESS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)










|                               |                                 |        |  |           |       |  |   |        |           |  |       |         |   |           |   |      |       |  |  |         |   |  |   |      | 
|------------------------------ | ------------------------------- | ------ |  | --------- | ----- |  | - | ------ | --------- |  | ----- | ------- | - | --------- | - | ---- | ----- |  |  | ------- | - |  | - | ---- | 
|                               |                                 | 2005   |  |           | 2004  |  |   | 2003   |          
|                               |                                 |        |  |           |       |  |   |        |          
|                               |                                 |        |  | Weighted- |       |  |   |        | Weighted- |  |       |         |   | Weighted- |  
|                               |                                 |        |  | Average   |       |  |   |        | Average   |  |       |         |   | Average   |  
|                               |                                 |        |  | Exercise  |       |  |   |        | Exercise  |  |       |         |   | Exercise  |  
|                               |                                 | Shares |  |           | Price |  |   | Shares |           |  | Price |         |   | Shares    |   |      | Price | 
|                               |                                 |        |  |           |       |  |   |        |           |  |       |         |   |           |   |      |       | 
|Number of shares under option: |                                 |        |  |           |       |  |   |        |           |  |       |         |   |           |   |      |       |  |  |         |   |  |   |     
|                               | Outstanding  beginning of year |        |  | 702,588   |       |  | $ | 1.36   |           |  |       | 522,972 |   |           | $ | 1.68 |       |  |  | 539,902 |   |  | $ | 1.89 | 
|                               | Granted                         |        |  | 288,055   |       |  |   | 14.36  |           |  |       | 306,303 |   |           |   | 0.82 |       |  |  | 81,940  |   |  |   | 0.41 | 
|                               | Exercised                       |        |  | (120,103  | )     |  |   | 0.68   |           |  |       | (46,608 | ) |           |   | 0.27 |       |  |  | (3,106  | ) |  |   | 0.19 | 
|                               | Cancelled or expired            |        |  | (112,956  | )     |  |   | 11.87  |           |  |       | (80,079 | ) |           |   | 2.02 |       |  |  | (95,764 | ) |  |   | 1.85 | 
|                               |                                 |        |  |           |       |  |   |        |           |  |       |         |   |           |   |      |       | 
|                               | Outstanding  end of year       |        |  | 757,584   |       |  |   | 4.86   |           |  |       | 702,588 |   |           |   | 1.36 |       |  |  | 522,972 |   |  |   | 1.68 | 
|                               |                                 |        |  |           |       |  |   |        |           |  |       |         |   |           |   |      |       | 
|                               | Exercisable  end of year       |        |  | 395,331   |       |  |   | 2.35   |           |  |       | 366,334 |   |           |   | 1.91 |       |  |  | 319,871 |   |  |   | 2.32 | 
|                               |                                 |        |  |           |       |  |   |        |           |  |       |         |   |           |   |      |       | 



|                         |             |             |  |          |                    |  |         |             |  |  |     |  |  |  |         | 
|------------------------ | ----------- | ----------- |  | -------- | ------------------ |  | ------- | ----------- |  |  | --- |  |  |  | ------- | 
|                         |             | Number      |  |          | Weighted- Average) |  |         | Number      | 
|Range of Exercise Prices |             | Outstanding |  |          | Remaining          |  |         | Exercisable | 
|                         |             |             |  |          | Contractual        |  |         |             | 
|                         |             |             |  | Life (in |                    |  |        
|                         |             |             |  | Years    |                    |  |        
|                         |             |             |  |          |                    |  |        
|                         | $0.15-0.53  |             |  |          |                    |  | 428,722 |             |  |  | 7.1 |  |  |  | 291,740 | 
|                         | 1.66-1.72   |             |  |          |                    |  | 72,190  |             |  |  | 8.7 |  |  |  | 21,172  | 
|                         | 7.55        |             |  |          |                    |  | 57,790  |             |  |  | 4.3 |  |  |  | 57,790  | 
|                         | 12.07-14.72 |             |  |          |                    |  | 121,136 |             |  |  | 9.2 |  |  |  | 21,859  | 
|                         | 16.06-18.75 |             |  |          |                    |  | 77,746  |             |  |  | 9.7 |  |  |  | 2,770   | 
|                         |             |             |  |          |                    |  |         |             |  |  |     | 
|                         |             |             |  |          |                    |  | 757,584 |             |  |  |     |  |  |  | 395,331 | 
|                         |             |             |  |          |                    |  |         |             |  |  |     | 



50



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CELEBRATE EXPRESS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)






|                           |  |                     |         |  |      |   |         |      |  |   |        | 
|-------------------------- |  | ------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------ | 
|                           |  | Years Ended May 31, |        
|                           |  |                     |        
|                           |  | 2005                |         |  | 2004 |   |         | 2003 | 
|                           |  |                     |         |  |      |   |         |      | 
|Cost of sales              |  | $                   | 20,112  |  |      | $ | 8,191   |      |  | $ |       | 
|Fulfillment                |  |                     | 19,608  |  |      |   | 3,268   |      |  |   |       | 
|Selling and marketing      |  |                     | 183,868 |  |      |   | 95,571  |      |  |   |       | 
|General and administrative |  |                     | 71,822  |  |      |   | 15,476  |      |  |   | 35,633 | 
|                           |  |                     |         |  |      |   |         |      | 
|                           |  | $                   | 295,410 |  |      | $ | 122,506 |      |  | $ | 35,633 | 
|                           |  |                     |         |  |      |   |         |      | 



|    |                             
|--- | ----------------------------
|10. | Employee Stock Purchase Plan









|    |                      
|--- | ---------------------
|11. | Employee Benefit Plan



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CELEBRATE EXPRESS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)




|    |                                     
|--- | ------------------------------------
|12. | Quarterly Financial Data (Unaudited)



|                                              |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |        |       |       |   |        |        |        | 
|--------------------------------------------- | ------------------------------ | ---------------------------------------- | ------ | ----- | ------- | - | ------ | ------- | ----- | - | ------ | ----- | ----- | -------- | ------ | ----- | ----- | - | ------ | ------ | ------ | 
|                                              |                                | 2005 Quarter Ended                       |        |       |        
|                                              |                                |                                          |        |       | Total   |  
|                                              |                                | Aug. 31                                  |        |       | Nov. 30 |   |        | Feb. 28 |       |   | May 31 |       |       | 2005 YTD |       
|                                              |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|                                              |                                | (In thousands, except per share amounts) |       
|Net sales                                     |                                | $                                        | 14,523 |       |         | $ | 18,770 |         |       | $ | 16,304 |       |       | $        | 19,541 |       |       | $ | 69,138 |       
|Cost of sales                                 |                                |                                          | 7,361  |       |         |   | 9,303  |         |       |   | 7,885  |       |       |          | 9,438  |       |       |   | 33,987 |       
|                                              |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|Gross margin                                  |                                |                                          | 7,162  |       |         |   | 9,467  |         |       |   | 8,419  |       |       |          | 10,103 |       |       |   | 35,151 |       
|Operating expenses:                           |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |        |       |       |   |        |       
|                                              | Fulfillment                    |                                          |        | 1,821 |         |   |        | 1,945   |       |   |        | 1,982 |       |          |        | 2,291 |       |   |        | 8,039  |       
|                                              | Selling and marketing          |                                          |        | 3,392 |         |   |        | 4,579   |       |   |        | 4,220 |       |          |        | 4,596 |       |   |        | 16,787 |       
|                                              | General and administrative     |                                          |        | 1,431 |         |   |        | 1,719   |       |   |        | 1,561 |       |          |        | 1,771 |       |   |        | 6,482  |       
|                                              |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|                                              |                                | Total operating expenses                 |        |       | 6,644   |   |        |         | 8,243 |   |        |       | 7,763 |          |        |       | 8,658 |   |        |        | 31,308 | 
|Income from operations                        |                                |                                          | 518    |       |         |   | 1,224  |         |       |   | 656    |       |       |          | 1,445  |       |       |   | 3,843  |       
|Other income (expense), net:                  |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |        |       |       |   |        |       
|                                              | Interest income (expense), net |                                          |        | (111  | )       |   |        | (144    | )     |   |        | 172   |       |          |        | 214   |       |   |        | 131    |       
|                                              |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|Net income before income taxes                |                                |                                          | 407    |       |         |   | 1,080  |         |       |   | 828    |       |       |          | 1,659  |       |       |   | 3,974  |       
|Income tax expense                            |                                |                                          | (166   | )     |         |   | (395   | )       |       |   | (307   | )     |       |          | (621   | )     |       |   | (1,489 | )     
|                                              |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|                                              | Net income                     |                                          |        | 241   |         |   |        | 685     |       |   |        | 521   |       |          |        | 1,038 |       |   |        | 2,485  |       
|                                              |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|Accretion to preferred stock redemption value |                                |                                          | (66    | )     |         |   | (36    | )       |       |   |       |       |       |          |       |       |       |   | (102   | )     
|                                              |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|Net income available for common shareholders |                                | $                                        | 175    |       |         | $ | 649    |         |       | $ | 521    |       |       | $        | 1,038  |       |       | $ | 2,383  |       
|                                              |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|Net income per share:                         |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |        |       |       |   |        |       
|                                              | Basic                          |                                          | $      | 0.11  |         |   | $      | 0.16    |       |   | $      | 0.07  |       |          | $      | 0.14  |       |   | $      | 0.46   |       
|                                              |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|                                              | Diluted                        |                                          | $      | 0.05  |         |   | $      | 0.11    |       |   | $      | 0.07  |       |          | $      | 0.13  |       |   | $      | 0.35   |       
|                                              |                                |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       

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CELEBRATE EXPRESS, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)


|                                                     |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |        |       |       |   |        |        |        | 
|---------------------------------------------------- | --------------------------------------------- | ---------------------------------------- | ------ | ----- | ------- | - | ------ | ------- | ----- | - | ------ | ----- | ----- | -------- | ------ | ----- | ----- | - | ------ | ------ | ------ | 
|                                                     |                                               | 2004 Quarter Ended                       |        |       |        
|                                                     |                                               |                                          |        |       | Total   |  
|                                                     |                                               | Aug. 31                                  |        |       | Nov. 30 |   |        | Feb. 28 |       |   | May 31 |       |       | 2004 YTD |       
|                                                     |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|                                                     |                                               | (In thousands, except per share amounts) |       
|Net sales                                            |                                               | $                                        | 10,528 |       |         | $ | 13,158 |         |       | $ | 12,634 |       |       | $        | 15,619 |       |       | $ | 51,939 |       
|Cost of sales                                        |                                               |                                          | 5,421  |       |         |   | 6,761  |         |       |   | 6,450  |       |       |          | 7,942  |       |       |   | 26,574 |       
|                                                     |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|Gross margin                                         |                                               |                                          | 5,107  |       |         |   | 6,397  |         |       |   | 6,184  |       |       |          | 7,677  |       |       |   | 25,365 |       
|Operating expenses:                                  |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |        |       |       |   |        |       
|                                                     | Fulfillment                                   |                                          |        | 1,581 |         |   |        | 1,507   |       |   |        | 1,646 |       |          |        | 1,893 |       |   |        | 6,627  |       
|                                                     | Selling and marketing                         |                                          |        | 2,805 |         |   |        | 3,540   |       |   |        | 2,990 |       |          |        | 3,499 |       |   |        | 12,834 |       
|                                                     | General and administrative                    |                                          |        | 1,191 |         |   |        | 1,119   |       |   |        | 1,103 |       |          |        | 1,223 |       |   |        | 4,636  |       
|                                                     |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|                                                     |                                               | Total operating expenses                 |        |       | 5,577   |   |        |         | 6,166 |   |        |       | 5,739 |          |        |       | 6,615 |   |        |        | 24,097 | 
|Income (loss) from operations                        |                                               |                                          | (470   | )     |         |   | 231    |         |       |   | 445    |       |       |          | 1,062  |       |       |   | 1,268  |       
|Other income (expense), net:                         |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |        |       |       |   |        |       
|                                                     | Interest income (expense), net                |                                          |        | (151  | )       |   |        | (159    | )     |   |        | (148  | )     |          |        | (330  | )     |   |        | (788   | )     
|                                                     |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|Net income (loss) before income taxes                |                                               |                                          | (621   | )     |         |   | 72     |         |       |   | 297    |       |       |          | 732    |       |       |   | 480    |       
|Income tax expense                                   |                                               |                                          |       |       |         |   |       |         |       |   |       |       |       |          | 9,013  |       |       |   | 9,013  |       
|                                                     |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|                                                     | Net income (loss)                             |                                          |        | (621  | )       |   |        | 72      |       |   |        | 297   |       |          |        | 9,745 |       |   |        | 9,493  |       
|                                                     |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|                                                     | Accretion to preferred stock redemption value |                                          |        | (67   | )       |   |        | (66     | )     |   |        | (67   | )     |          |        | (66   | )     |   |        | (266   | )     
|                                                     |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|Net income (loss) available for common shareholders |                                               | $                                        | (688   | )     |         | $ | 6      |         |       | $ | 230    |       |       |          | 9,679  |       |       |   | 9,227  |       
|                                                     |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|Net income (loss) per share:                         |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |        |       |       |   |        |       
|                                                     | Basic                                         |                                          | $      | (0.49 | )       |   | $      | 0.00    |       |   | $      | 0.16  |       |          | $      | 6.27  |       |   | $      | 6.39   |       
|                                                     |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       
|                                                     | Diluted                                       |                                          | $      | (0.49 | )       |   | $      | 0.01    |       |   | $      | 0.06  |       |          | $      | 1.86  |       |   | $      | 1.85   |       
|                                                     |                                               |                                          |        |       |         |   |        |         |       |   |        |       |       |          |       

53



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure.








|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures.












|         |                   
|-------- | ------------------
|Item 9B. | Other Information.






PART III


Proxy
Statement







|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant.



Code of Ethics. th







|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.








|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters.








|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions.



54



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##### Table of Contents








|         |                                        
|-------- | ---------------------------------------
|Item 14. | Principal Accountant Fees and Services.






PART IV







|         |                                            
|-------- | -------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules.





| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | (1) Financial Statements and Reports of Grant Thorton LLP
    and Deloitte & Touche LLP
|
| | (2) Exhibits                                                                           

| |    |        |  |                                                                                                                                               
| | -- | ------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------
| | 3  | .1(1)  |  | Amended and Restated Articles of Incorporation of Celebrate
    Express, Inc.                                                                 
| | 3  | .2(1)  |  | Bylaws of the Registrant  Celebrate Express, Inc.                                                                                            
| | 4  | .1(1)  |  | Specimen Common Stock Certificate.                                                                                                            
| | 4  | .2(1)  |  | Amended and Restated Investors Rights Agreement dated
    November 15, 2001, by and among the Company and the
    investors named therein.   
| | 10 | .1(1)* |  | Form of Indemnity Agreement entered into by the Registrant and
    each of its directors and executive officers                               
| | 10 | .2(1)* |  | 2004 Amended and Restated Equity Incentive Plan and forms of
    agreements thereunder                                                        
| | 10 | .3(1)* |  | Employee Stock Purchase Plan                                                                                                                  
| | 10 | .4(1)  |  | Loan and Security Agreement, dated May 21, 2004, by and
    between the Registrant and ORIX Venture Finance, LLC and
    agreements thereunder
| | 10 | .5(1)  |  | Lease agreement between Registrant and Highwoods Realty Limited
    Partnership dated November 12, 1999                                       
| | 10 | .6(1)  |  | First Amendment to Lease between Registrant and Highwoods Realty
    Limited Partnership dated June 14, 2004                                  
| | 10 | .7(1)  |  | Lease agreement between Registrant and Queen Investment Company
    dated October 1, 2003                                                     
| | 10 | .8(1)  |  | Lease Amendment No. 1 between Registrant and Queen
    Investment Company dated March 3, 2004                                                 
| | 10 | .9(2)  |  | Second Amendment to Lease Agreement between the Company and
    Highwoods Realty Limited Partnership, dated as of
    December 15, 2004       
| | 10 | .10    |  | Severance agreement with Allen McDowell, dated May 6, 2005.                                                                                   
| | 23 | .1     |  | Consent of Grant Thorton LLP, Independent Registered Public
    Accounting Firm                                                               
| | 23 | .2     |  | Consent of Deloitte & Touche LLP, Independent
    Registered Public Accounting Firm                                                           
| | 31 | .1     |  | Rule 13a-14(a) Certification (CEO)                                                                                                            
| | 31 | .2     |  | Rule 13a-14(a) Certification (CFO)                                                                                                            
| | 32 | .1     |  | Section 1350 Certification (CEO)                                                                                                              
| | 32 | .2     |  | Section 1350 Certification (CFO)                                                                                                              






|    |                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Registrants Registration
    Statement on Form S-1 (File No. 333-117459), as
    amended, initially filed with the Securities and Exchange
    Commission on July 16, 2004.
|   
|(2) | Incorporated by reference to Registrants Quarterly Report
    on Form 10-Q filed with the Securities & Exchange
    Commission on April 14, 2005.                                                       



|  |                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------
|* | Management compensatory plans, contract or arrangement required
    to be filed as exhibits to this report.

55



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##### Table of Contents






SIGNATURES






| |                        
| | -----------------------
| | CELEBRATE EXPRESS, INC.



| |     |                      
| | --- | ---------------------
| | By: | /s/ Michael K. Jewell

| |                        
| | -----------------------
| |                        
| | Michael K. Jewell      
| | Chief Executive Officer





| |     |                   
| | --- | ------------------
| | By: | /s/ Darin L. White

| |                        
| | -----------------------
| |                        
| | Darin L. White         
| | Vice President, Finance



POWER OF ATTORNEY






|                                           |  |                                                                                                             |  |                 |  | 
|------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------- |  | --------------- |  | 
|Signature                                  |  | Title                                                                                                       |  | Date           
|                                           |  |                                                                                                             |  |                
|                                          
|/s/ Michael K. JewellMichael
    K. Jewell |  | Chief Executive Officer, President and Chairman of the Board of
    Directors (Principal Executive Officer) |  | August 22, 2005
|                                          
|/s/ Darin L. WhiteDarin
    L. White       |  | Vice President, Finance and Secretary (Principal Financial and
    Accounting Officer)                      |  | August 22, 2005
|                                          
|/s/ Keith CrandellKeith
    Crandell       |  | Director                                                                                                    |  | August 22, 2005
|                                          
|/s/ Estelle DeMuesyEstelle
    DeMuesy     |  | Director                                                                                                    |  | August 22, 2005
|                                          
|/s/ Donald R. HughesDonald
    R. Hughes   |  | Director                                                                                                    |  | August 22, 2005

56



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##### Table of Contents



|                                               |  |          |  |                 |  | 
|---------------------------------------------- |  | -------- |  | --------------- |  | 
|Signature                                      |  | Title    |  | Date           
|                                               |  |          |  |                
|                                              
|/s/ Tim McGarveyTim
    McGarvey               |  | Director |  | August 22, 2005
|                                              
|/s/ Jean ReynoldsJean
    Reynolds             |  | Director |  | August 22, 2005
|                                              
|/s/ Ronald A. WeinsteinRonald
    A. Weinstein |  | Director |  | August 22, 2005

57



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##### Table of Contents






EXHIBIT INDEX


|        |    |             |  |                                                                                                                                               
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 3  | .1(1)       |  | Amended and Restated Articles of Incorporation of Celebrate
    Express, Inc.                                                                 
|       
|        | 3  | .2(1)       |  | Bylaws of the Registrant  Celebrate Express, Inc.                                                                                            
|       
|        | 4  | .1(1)       |  | Specimen Common Stock Certificate.                                                                                                            
|       
|        | 4  | .2(1)       |  | Amended and Restated Investors Rights Agreement dated
    November 15, 2001, by and among the Company and the
    investors named therein.   
|       
|        | 10 | .1(1)*      |  | Form of Indemnity Agreement entered into by the Registrant and
    each of its directors and executive officers                               
|       
|        | 10 | .2(1)*      |  | 2004 Amended and Restated Equity Incentive Plan and forms of
    agreements thereunder                                                        
|       
|        | 10 | .3(1)*      |  | Employee Stock Purchase Plan                                                                                                                  
|       
|        | 10 | .4(1)       |  | Loan and Security Agreement, dated May 21, 2004, by and
    between the Registrant and ORIX Venture Finance, LLC and
    agreements thereunder
|       
|        | 10 | .5(1)       |  | Lease agreement between Registrant and Highwoods Realty Limited
    Partnership dated November 12, 1999                                       
|       
|        | 10 | .6(1)       |  | First Amendment to Lease between Registrant and Highwoods Realty
    Limited Partnership dated June 14, 2004                                  
|       
|        | 10 | .7(1)       |  | Lease agreement between Registrant and Queen Investment Company
    dated October 1, 2003                                                     
|       
|        | 10 | .8(1)       |  | Lease Amendment No. 1 between Registrant and Queen
    Investment Company dated March 3, 2004                                                 
|       
|        | 10 | .9(2)       |  | Second Amendment to Lease Agreement between the Company and
    Highwoods Realty Limited Partnership, dated as of
    December 15, 2004       
|       
|        | 10 | .10         |  | Severance agreement with Allen McDowell, dated May 6, 2005.                                                                                   
|       
|        | 23 | .1          |  | Consent of Grant Thorton LLP, Independent Registered Public
    Accounting Firm                                                               
|       
|        | 23 | .2          |  | Consent of Deloitte & Touche LLP, Independent
    Registered Public Accounting Firm                                                           
|       
|        | 31 | .1          |  | Rule 13a-14(a) Certification (CEO)                                                                                                            
|       
|        | 31 | .2          |  | Rule 13a-14(a) Certification (CFO)                                                                                                            
|       
|        | 32 | .1          |  | Section 1350 Certification (CEO)                                                                                                              
|       
|        | 32 | .2          |  | Section 1350 Certification (CFO)                                                                                                              






|    |                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Registrants Registration
    Statement on Form S-1 (File No. 333-117459), as
    amended, initially filed with the Securities and Exchange
    Commission on July 16, 2004.
|   
|(2) | Incorporated by reference to Registrants Quarterly Report
    on Form 10-Q filed with the Securities & Exchange
    Commission on April 14, 2005.                                                       



|  |                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------
|* | Management compensatory plans, contract or arrangement required
    to be filed as exhibits to this report.