##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------



For The Fiscal Year Ended January 29, 2005 OR



| ̈ |  | 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: 21859



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FACTORY CARD & PARTY OUTLET CORP.

(Exact name of registrant as specified in our charter)



|                                                              |  |                                        
|------------------------------------------------------------- |  | ---------------------------------------
|DELAWARE                                                      |  | 36-3652087                             
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. Employer Identification Number)



2727 Diehl Road,
Naperville, IL 60563-2371

(Address of principal executive offices) (Zip Code)



(630) 579-2000

(Registrants telephone number, including area code)



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Securities registered pursuant to Section 12(b) of the
Act: None



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



|                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Title of Each Class                                                                                                                                                                                                                                                                                                                                                                                         
|Common Stock, $.01 par value Series A Warrants to purchase Common Stock, $.01 par value, exercisable until April 9, 2006 Series B
Warrants to purchase Common Stock, $.01 par value, exercisable until April 9, 2008 Series C Warrants to purchase Common Stock, $.01 par
value, exercisable until April 9, 2010 Series D Warrants to purchase Common Stock, $.01 par value, exercisable until April 9,
2010



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



Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K  x



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ̈No  x



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##### Table of Contents

The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of July 31,
2004 was approximately $29,421,000 computed on the basis of the last reported bid price per share $11.09 of such stock on the NASDAQ National Market. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of
the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.



Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes  x  No ̈



The number of shares of the Registrants Common Stock outstanding as of April 14, 2005 was 3,109,225.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the definitive Proxy Statement for Factory Card & Party
Outlet Corp.s 2005 Annual Meeting of Stockholders are incorporated by reference into Part III of the Form 10K.



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##### Table of Contents

Factory Card & Party Outlet Corp.

Annual Report on Form 10-K



TABLE OF CONTENTS



|        |  |                                                                                                |  |      
|------- |  | ---------------------------------------------------------------------------------------------- |  | -----
|        |  | PART I                                                                                         |  |      
|        |  |                                                                                                |  | Page:
|Item 1  |  | Business                                                                                       |  | 1    
|Item 2  |  | Properties                                                                                     |  | 5    
|Item 3  |  | Legal Proceedings                                                                              |  | 5    
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                            |  | 5    
|        |  |                                                                                               
|        |  | PART II                                                                                        |  |      
|Item 5  |  | Market for the Registrants Common Stock and Related Stockholder Matters                       |  | 6    
|Item 6  |  | Selected Financial Data                                                                        |  | 6    
|Item 7  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 8    
|Item 7A |  | Quantitative and Qualitative Disclosures About Market Risks                                    |  | 22   
|Item 8  |  | Financial Statements and Supplementary Data                                                    |  | 22   
|Item 9  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 22   
|Item 9A |  | Controls and Procedures                                                                        |  | 22   
|Item 9B |  | Other Information                                                                              |  | 22   
|        |  |                                                                                               
|        |  | PART III                                                                                       |  |      
|Item 10 |  | Directors and Executive Officers of the Registrant                                             |  | 23   
|Item 11 |  | Executive Compensation                                                                         |  | 23   
|Item 12 |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 23   
|Item 13 |  | Certain Relationships and Related Transactions                                                 |  | 23   
|Item 14 |  | Principal Accounting Fees and Services                                                         |  | 23   
|        |  |                                                                                               
|        |  | PART IV                                                                                        |  |      
|Item 15 |  | Exhibits and Financial Statement Schedules                                                     |  | 24   
|        |  | Signatures                                                                                     |  | 27   



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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS



As used herein, unless the context otherwise requires, the
Company, we, our, or us refers to Factory Card & Party Outlet Corp. and our subsidiary. As used herein, the term fiscal year refers to the 52 or 53 weeks, as applicable, ending the
Saturday nearest to January 31st, unless otherwise noted.



Statements made in this Form 10-K and in our other public filings and releases, which are not historical facts, contain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve
risks and uncertainties and are subject to change at any time. The statements are made a number of times throughout the document and may be identified by forward-looking terminology as estimate, project, expect,
believe, may, intend or similar statements or variations of such terms.



The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. You are
cautioned that these statements are only good at the time made and are not guarantees of future performance and that actual results and trends in the future may differ materially. Unless otherwise required by applicable securities laws, the Company
assumes no obligation to update its forward-looking statements to reflect subsequent events or circumstances.



Factors that could cause actual results to differ materially include, but are not limited to, the following:



| |  |  | ability to meet sales plans;
| | - |  | ----------------------------



| |  |  | weather and economic conditions;
| | - |  | --------------------------------



| |  |  | dependence on key personnel;
| | - |  | ----------------------------



| |  |  | competition;
| | - |  | ------------



| |  |  | ability to anticipate merchandise trends and consumer demand;
| | - |  | -------------------------------------------------------------



| |  |  | ability to maintain relationships with suppliers;
| | - |  | -------------------------------------------------



| |  |  | successful implementation of information systems;
| | - |  | -------------------------------------------------



| |  |  | successful handling of merchandise logistics;
| | - |  | ---------------------------------------------



| |  |  | inventory shrinkage;
| | - |  | --------------------



| |  |  | ability to meet future capital needs;
| | - |  | -------------------------------------



| |  |  | seasonality of business;
| | - |  | ------------------------



| |  |  | disruption with our imported product;
| | - |  | -------------------------------------



| |  |  | vendor performance;
| | - |  | -------------------



| |  |  | political unrest;
| | - |  | -----------------



| |  |  | consumer confidence and consumer spending;
| | - |  | ------------------------------------------



| |  |  | ability to maintain compliance with bank covenants;
| | - |  | ---------------------------------------------------



| |  |  | availability and cost of real estate;
| | - |  | -------------------------------------



| |  |  | adverse developments with respect to litigation;
| | - |  | ------------------------------------------------



| |  |  | changes in accounting policies and practices;
| | - |  | ---------------------------------------------



| |  |  | governmental regulations and
| | - |  | ----------------------------



| |  |  | other factors both referenced and not referenced in this Form 10-K.
| | - |  | -------------------------------------------------------------------



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##### Table of Contents

PART I



ITEM 1.    BUSINESS



General



Factory Card & Party Outlet Corp.
and our subsidiary, Factory Card Outlet of America Ltd., are a specialty retailer offering a wide selection of party supplies, greeting cards, giftwrap, balloons, gifts, seasonal merchandise and other special occasion merchandise at everyday value
prices. As of April 14, 2005, we operated 184 stores in 20 states. Based on the published number of stores of our competitors as compiled by various business publications and other publicly available information, we believe we are one of the largest
chains of company-owned stores in the party supply, greeting card and special occasion industry. Our fiscal year ends on the 52 or 53 weeks, as applicable, ending the Saturday nearest to January 31st. Fiscal 2004 is the period February 1, 2004 to January 29, 2005. Fiscal 2003 is the period February 2, 2003 to January 31, 2004 and fiscal 2002 is the period
February 3, 2002 to February 1, 2003. We opened eight new stores in fiscal 2004 and six new stores in fiscal 2003. These were the first store openings in over five years.



Our stores provide customers with a value-oriented, one-stop shopping solution for party supply, greeting card
and special occasion merchandise for all major holidays and celebratory events, including birthdays, graduations, weddings and baby showers as well as seasonal events including Valentines Day, St. Patricks Day, Easter, Mothers Day,
Fathers Day, Fourth of July, Halloween, Thanksgiving, Christmas and New Years Day and other family, religious and special occasions. Our stores average approximately 12,000 square feet, with approximately 80% of the space devoted to
selling space, and are designed to provide ease of shopping within an attractive, spacious and festive environment.



On September 10, 2003, we announced a two-for-one stock split effective October 21, 2003 for holders of record on October 7, 2003. Accordingly, data
related to our Common Stock (number of shares, average shares outstanding and earnings per share) have been adjusted for the prior periods to reflect the impact of this stock split.



Industry Overview



Traditionally, the retail party supplies business has been fragmented, with consumers purchasing party-related products from party supply stores and
designated departments in drug stores, general mass merchandisers, supermarkets and department stores of local, regional and national chains. According to industry sources, the market for party and special occasion merchandise, comprised of party
supplies, greeting cards, gift-wrap, and related items, was estimated at $14 billion in sales in 2003.



Business Strategy



Our
goal is to become the premier specialty retailer of greeting cards and party supplies in the United States through merchandising innovation, value orientation and controlled growth.



The key elements of our current strategy are as follows:



Merchandise Offering.    We offer a wide selection of greeting cards, giftwrap, balloons,
everyday and seasonal party supplies and special occasion merchandise. With over 23,000 SKUs in each of our stores, our stores provide a single solution for a customers special occasion product needs. The stores offer product selections for
all major holidays and seasonal events such as Valentines Day, St. Patricks Day, Passover, Easter, Administrative Assistants Day, Mothers Day, Fathers Day, Grandparents Day, Fourth of July, Rosh Hashanah,
Halloween, Thanksgiving, Christmas, Hanukkah and New Years; celebratory events including birthdays, graduations, summer luaus, weddings and baby showers; and other family, religious and special occasions. The following five major product
categories comprise our merchandise offering:



| |  |  | Party SuppliesWe stock a broad selection of party supply merchandise for everyday and special occasions in a wide variety of attractive patterns and
distinctive colors including an extensive selection of
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | licensed party patterns in popular childrens themes. Party supplies include tableware, tablecovers, cutlery, invitations, party favors, milestone
birthday items, piñatas, banners, decorations, candles, décor, catering products and other related party items.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Greeting CardsOur stores feature more than 3,000 titles of high quality everyday and seasonal greeting cards for all occasions. Boxed everyday and holiday cards are regularly
sold at substantial discounts. On February 5, 2005 we entered into a definitive agreement with the Premier Greetings division of Paramount Cards Inc. to be our primary supplier of everyday and seasonal greeting cards. This agreement will
considerably broaden our position as a leading provider of exceptional quality, value priced, social expressions merchandise. The agreement with Premier Greetings enables us to reposition our greeting card strategy by introducing a multi-tiered
pricing program featuring high quality greeting cards retailing at 49 cents, blended with the introduction of premium greeting cards selling for 99 cents. We intend to roll out the new greeting card offering at the beginning of the second quarter of
fiscal 2005. We believe that the improved quality and outstanding selection of the Premier Greetings offering will re-energize our card sales and bolster our position as one of the foremost specialty retailers of greeting cards and party supplies in
the United States.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | GiftwrapWe believe our stores have become a solution for shoppers seeking a wide selection of giftwrap and giftwrap accessories and sell most of these items at lower prices
than competitors. Items include glossy, printed, solid and foil giftwrap, solid and printed ribbons, bows, gift bags, gift boxes, tissue paper and gift tags.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | BalloonsBalloons are increasingly popular for all occasions. Our stores offer a large selection of mylar and latex balloons and carry popular licensed designs along with a
large selection of balloon bouquets for any occasion.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other Special Occasion MerchandiseWe complement our major product lines by offering many other special occasion items in order to provide a one-stop shopping
solution for customers. These items include candy, birthday and wedding items, candles and candleholders, stationery, gifts, novelty items and seasonal products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Everyday Value Pricing.    Our strategy of everyday value pricing is designed to provide
customers with consistent value on purchases.



Attractive,
Spacious and Festive Superstore Format.    We have an attractive and festive atmosphere within a spacious easy to shop store. The superstores are designed to provide a comfortable and convenient shopping
experience with bright lights and fixtures that offer customers easy access to merchandise. Our average store size is approximately 12,000 square feet.



Targeted Advertising.    We utilize a storewide direct mail program to reach targeted customers and highlight the breadth and
value of our merchandise. The direct mail pieces are printed in color and range from four to twelve pages depending on the season. We plan to continue this direct mail program and support all holidays and special events.



Distribution Center and Office
Complex.    Our three-story office building and 300,000 square-foot distribution center is on 39 acres. The lease agreement provides for the expansion of the warehouse to 600,000 square feet, as needed. We believe we
are one of a few special occasion store chains to have a distribution facility. We believe the distribution facility can provide us with purchasing, inventory management, store operating and distribution efficiencies.



Store Locations



As of April 14, 2005, we operated 184 stores in 20 states, all of which are leased. Our store leases typically have an
average initial term of 10 years with two five-year renewal options. We currently have plans to open up to six additional stores in fiscal 2005.



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##### Table of Contents

Set forth below is a list of our store locations by state as of April 14, 2005:



|                   |  |                
|------------------ |  | ---------------
|Location           |  | Number ofStores
|Delaware (1)       |  |                
|Wilmington         |  | 1              
|Florida (9)        |  |                
|Gainesville        |  | 1              
|Jacksonville       |  | 1              
|Cape Coral         |  | 1              
|Port Orange        |  | 1              
|Ormond Beach       |  | 1              
|Tampa              |  | 1              
|Altamonte Springs  |  | 1              
|Bradenton          |  | 1              
|Lakeland           |  | 1              
|Illinois (38)      |  |                
|Chicago Metro      |  | 30             
|Bloomington        |  | 1              
|Champaign          |  | 1              
|DeKalb             |  | 1              
|Fairview Heights   |  | 1              
|Moline             |  | 1              
|Peoria             |  | 1              
|Rockford           |  | 1              
|Springfield        |  | 1              
|Indiana (21)       |  |                
|Indianapolis Metro |  | 7              
|Anderson           |  | 1              
|Bloomington        |  | 1              
|Clarksville        |  | 1              
|Evansville         |  | 2              
|Fort Wayne         |  | 1              
|Highland           |  | 1              
|Kokomo             |  | 1              
|Lafayette          |  | 1              
|Merrillville       |  | 1              
|Michigan City      |  | 1              
|Mishawaka          |  | 1              
|Muncie             |  | 1              
|Richmond           |  | 1              
|Iowa (8)           |  |                
|Des Moines Metro   |  | 4              
|Cedar Rapids       |  | 1              
|Davenport          |  | 1              
|Dubuque            |  | 1              
|Waterloo           |  | 1              



|                           |  |                
|-------------------------- |  | ---------------
|Location                   |  | Number ofStores
|Kentucky (6)               |  |                
|Louisville Metro           |  | 3              
|Lexington                  |  | 1              
|Florence                   |  | 1              
|Owensboro                  |  | 1              
|Maryland (14)              |  |                
|Baltimore Metro            |  | 7              
|Washington, D.C.Metro (MD) |  | 4              
|Salisbury                  |  | 1              
|Rosedale                   |  | 1              
|Bowie                      |  | 1              
|Michigan (1)               |  |                
|Benton Harbor              |  | 1              
|Minnesota (6)              |  |                
|Minneapolis St. Paul Metro |  | 4              
|Mankato                    |  | 1              
|Rochester                  |  | 1              
|Missouri (11)              |  |                
|St. Louis Metro            |  | 7              
|Cape Girardeau             |  | 1              
|Columbia                   |  | 1              
|Joplin                     |  | 1              
|Springfield                |  | 1              
|Nebraska (5)               |  |                
|Omaha Metro                |  | 3              
|Lincoln                    |  | 1              
|Grand Island               |  | 1              
|New York (9)               |  |                
|Buffalo Metro              |  | 3              
|Albany                     |  | 1              
|Olean                      |  | 1              
|Rochester                  |  | 3              
|Syracuse                   |  | 1              
|North Carolina (3)         |  |                
|Charlotte                  |  | 1              
|Raleigh                    |  | 1              
|Winston Salem              |  | 1              



|                           |  |               
|-------------------------- |  | --------------
|Location                   |  | NumberofStores
|Ohio (19)                  |  |               
|Cincinnati Metro           |  | 3             
|Cleveland Metro            |  | 4             
|Columbus Metro             |  | 5             
|Akron                      |  | 2             
|Dayton                     |  | 1             
|Lancaster                  |  | 1             
|Mansfield                  |  | 1             
|St. Clairsville            |  | 1             
|Wooster                    |  | 1             
|Pennsylvania (5)           |  |               
|Erie                       |  | 1             
|Hanover                    |  | 1             
|State College              |  | 1             
|Wilkes Barre-Scranton      |  | 2             
|South Carolina (2)         |  |               
|Charleston                 |  | 1             
|Greenville                 |  | 1             
|Tennessee (5)              |  |               
|Chattanooga                |  | 2             
|Memphis                    |  | 1             
|Nashville                  |  | 2             
|Virginia (6)               |  |               
|Washington D.C. Metro (VA) |  | 1             
|Fredericksburg             |  | 1             
|Lynchburg                  |  | 1             
|Newport News               |  | 1             
|Norfolk                    |  | 1             
|Richmond                   |  | 1             
|West Virginia (1)          |  |               
|Clarksburg                 |  | 1             
|Wisconsin (14)             |  |               
|Milwaukee Metro            |  | 6             
|Appleton                   |  | 1             
|Eau Claire                 |  | 1             
|Green Bay                  |  | 1             
|Janesville                 |  | 1             
|Madison                    |  | 2             
|Oshkosh                    |  | 1             
|Wausau                     |  | 1             
|                           |  |               
|Total                      |  | 184           
|                           |  |               

New store sites are selected on the basis of several factors including physical location,
demographic characteristics of the local market, co-tenants, visibility, population density, traffic counts, proximity to superstore competitors, access to highway and other major roadways and available lease terms. We look for co-tenants that are
likely to draw customers whom we would otherwise target within the sites relevant market.



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Product Sourcing



We have historically been able to take advantage of volume purchase discounts due to our size and the use of our distribution center. We purchase our
inventory from more than 300 vendors worldwide, with the largest supplier, Amscan, Inc., representing approximately 14% and the ten largest suppliers representing approximately 43% of our aggregate purchases for the fiscal year ended January 29,
2005. Approximately 10% of our merchandise is directly imported from foreign manufacturers or their agents, principally from the Far East and England.



On February 5, 2005, we entered into a definitive agreement with the Premier Greetings division of Paramount Cards Inc. to be our primary supplier of
everyday and seasonal greeting cards. Under the terms of the agreement, Paramount will supply substantially all of the greeting cards sold in our stores. The Agreement imposes certain requirements and obligations on the parties relating to, among
other things, shelf space, replenishment processes and seasonal returns.



Except for the definitive agreement with the Premier Greetings division of Paramount Cards Inc., we generally do not have long-term contracts with any suppliers, however, we have entered into agreements with certain
trade vendors to provide us with payment terms, including extended payment terms and seasonal advances. We believe our well-established relationships with overseas suppliers have historically provided us with an advantage over many of our
competitors by enabling us to offer an extensive selection of distinctive products at higher gross margins.



Management Information Systems



We believe that our management information systems are an important factor in supporting our business and enhancing our competitive position in the industry. Over the past three years we have invested significant resources in systems and
infrastructure to support our business and make us more efficient. We use a management information and control system which is based on the JDA Merchandise Management System software package (JDA) and supports the complete range of
retail cycle functions in the areas of finance, merchandising and distribution. All stores are linked to our headquarters through personal computers which interface with an IBM AS/400 and provide auto-replenishment of inventory and the ability to
enter payroll information and send and receive electronic mail. These personal computers are also tied into our point-of-sale system (POS system). The POS system provides sales information to our stores and central office and is used to
enhance merchandise planning and buying programs.



Competition



The greeting card, party supply and special occasion
industry is highly competitive. We currently compete against a diverse group of retailers, ranging from other party supply and greeting card retailers to designated departments in drug stores, general mass merchandisers, supermarkets, dollar stores
and department stores of local, regional and national chains. Major chain competitors in our markets include Party City, Party America and iParty. We also compete with internet and catalog businesses with similar merchandise and product offerings.
In addition, a trend toward discounting the cost of party supplies and greeting cards has developed and we may encounter additional competition from new entrants or internet vendors in the future. Our stores compete, among other things, on the basis
of convenience of location and store layout, product mix, selection, customer convenience and price. Some of our competitors have substantially greater financial resources and experience than us.



Trademarks



We have registered trademarks under the name of Factory Card & Party Outlet®, Factory Card Outlet®, and Partymania®. We also have trademarks on the Factory Card & Party Outlet® design and the Partymania® design on the Principal Register of the United
States Patent and Trademark Office.



Government Regulation



Each of our stores must comply with regulations adopted by federal
agencies and with licensing and other regulations enforced by state and local health, sanitation, safety, fire and other departments. More stringent and varied



4



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##### Table of Contents

requirements of local governmental bodies with respect to zoning, land use and environmental factors, and difficulties or failures in obtaining the required
licenses or approvals, can delay and sometimes prevent, the opening of a new store. In addition, we must comply with the Fair Labor Standards Act and various state laws governing various matters such as minimum wage, overtime and other working
conditions. We also must comply with the provisions of the Americans with Disabilities Act of 1990, as amended, which requires generally that employers provide reasonable accommodation for employees with disabilities and that stores be accessible to
customers with disabilities.



Employees



We have approximately 2,700 employees as of April 14, 2005, comprising
approximately 1,000 full-time and 1,700 part-time employees. The number of store employees increases during peak selling seasons. Our employees are not covered by a collective bargaining agreement. We believe relations with our employees are
generally good.



Reorganization



On April 9, 2002, we consummated a joint plan of reorganization under
Chapter 11 of the Bankruptcy Code pursuant to a February 5, 2002 order entered by the U.S. Bankruptcy Court for the District of Delaware approving our joint plan of reorganization. We have been operating out of bankruptcy since April 9, 2002. See
Managements Discussion and Analysis of Financial Condition and Results of Operations for further details.



ITEM 2.    PROPERTIES



In addition to our stores, all of which are leased, we also lease a distribution center in Naperville, Illinois, with the initial lease term expiring in February 2008. We have the option to renew the initial term of the lease for an
additional period of 5 years. This facility consists of a three-story office building and 300,000 square-foot distribution center that sits on 39 acres of land.



The initial term of our store leases are typically 10 years and generally allow us to renew for up to two additional five-year terms. The terms of the
majority of the leases, including renewal terms, extend beyond year 2007.



ITEM 3.    LEGAL PROCEEDINGS



On November 16, 2004, Ronald Kirschenbaum filed a lawsuit against us in the Circuit Court of Cook County, Illinois County Department, Law Division, captioned Ronald Kirschenbaum, Jacqueline Kirschenbaum, Jeanette
Kirschenbaum and Jessica Kirschenbaum vs. Factory Card & Party Outlet, Corp, and Glen S. Kolakowski. The complaint alleges that we were negligent in the hiring and supervising of a former employee who allegedly pleaded guilty to a Class 4 felony
committed while working for us. The plaintiffs seek unspecified damages. We believe that the claims made against us in this lawsuit are without merit.



On March 3, 2004, Midwest One Distribution Company filed a lawsuit against us in the Circuit Court of the Eighteen Judicial Circuit of DuPage County,
Illinois, captioned Midwest One Distribution Co. vs. Factory Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd. The lawsuit alleges that we breached a distribution agreement between the parties that terminated on January 31,
2004 by failing to pay certain invoices from Midwest One for certain services and/or expenses allegedly performed or incurred by Midwest One. Midwest One seeks damages of approximately $4.8 million and an accounting of all distribution services for
which Midwest One was entitled to compensation under the distribution agreement. The parties are proceeding with discovery. We believe that we have meritorious defenses and counterclaims and intend to pursue them vigorously.



Additionally, we are from time to time involved in routine litigation
incidental to the conduct of our business. As of the date of this Annual Report on Form 10-K, we are not aware of any other material existing or threatening litigation to which we are or may be a party.



ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



Not Applicable.



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##### Table of Contents

PART II



ITEM 5.    MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS



The following table sets forth the high and low closing sale prices of our Common Stock as reported on the NASDAQ National Market for the periods
indicated.



|                                                             |  |      |       |     |   |      
|------------------------------------------------------------ |  | ---- | ----- | --- | - | -----
|Fiscal 2004                                                  |  | High |       | Low
|February 1, 2004 to May 1, 2004 [first fiscal quarter]       |  | $    | 13.25 |     | $ | 10.10
|May 2, 2004 to July 31, 2004 [second fiscal quarter]         |  |      | 13.19 |     |   | 9.64 
|August 1, 2004 to October 30, 2004 [third fiscal quarter]    |  |      | 11.90 |     |   | 8.40 
|October 31, 2004 to January 29, 2005 [fourth fiscal quarter] |  |      | 13.05 |     |   | 8.94 
|                                                             |  |     
|Fiscal 2003                                                  |  | High |       | Low
|February 2, 2003 to May 3, 2003 [first fiscal quarter]       |  | $    | 3.00  |     | $ | 2.25 
|May 4, 2003 to August 2, 2003 [second fiscal quarter]        |  |      | 8.87  |     |   | 2.65 
|August 3, 2003 to November 1, 2003 [third fiscal quarter]    |  |      | 19.50 |     |   | 6.12 
|November 2, 2003 to January 31, 2004 [fourth fiscal quarter] |  |      | 22.68 |     |   | 11.99



On April 14, 2005, the
number of holders of record of the Common Stock was approximately 430.



On September 10, 2003, we announced a two-for-one stock split effective October 21, 2003 for holders of record on October 7, 2003. Accordingly, data related to our Common Stock price has been adjusted to reflect the impact of this stock
split.



Dividends



We have never paid cash dividends on our Common Stock and we do not intend
to pay cash dividends in the foreseeable future. We expect earnings will be retained for the continued development of our business. In addition, our financing facility prohibits us from paying dividends on our capital stock. See
Managements Discussion and Analysis of Financial Condition and Results of Operations and Liquidity and Capital Resources.



ITEM 6.    SELECTED FINANCIAL DATA



The following table sets forth certain selected historical financial data that was derived from the consolidated financial statements. The selected financial data presented under the captions Statement of
Operations Data and Balance Sheet Data as of January 29, 2005, January 31, 2004, February 1, 2003 and April 6, 2002 and for the 52 weeks ended January 29, 2005, the 52 weeks ended January 31, 2004, the 43 weeks ended February 1,
2003 and the Nine weeks ended April 6, 2002 are derived from the consolidated financial statements which have been audited by Deloitte & Touche LLP, registered public accounting firm.



The selected financial data presented on the next page under the captions Statement of Operations Data and
Balance Sheet Data as of February 2, 2002 and February 3, 2001 and for the 52-weeks ended February 2, 2002 and the 53-weeks ended February 3, 2001 are derived from the consolidated financial statements which have been audited by KPMG
LLP, independent certified public accountants.



The information
set forth below should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the notes thereto included elsewhere in this
Annual Report on Form 10-K.



On September 10, 2003, we
announced a two-for-one stock split effective October 21, 2003 for holders of record on October 7, 2003. Accordingly, data related to our Common Stock price has been adjusted to reflect the impact of this stock split.



6



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##### Table of Contents

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

(Dollar amounts in thousands, except per share data)



|                                                  |  |                                |           |   |                                |   |           |                                |  |   |                               |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|------------------------------------------------- |  | ------------------------------ | --------- | - | ------------------------------ | - | --------- | ------------------------------ |  | - | ----------------------------- | -- |  | -------------------------- | ------- | - | -------------------------- | - | ------- | - |  | - | ------- | -
|                                                  |  | 52 Weeksended January 29, 2005 |           |   | 52 Weeksended January 31, 2004 |   |           | 43 Weeksended February 1, 2003 |  |   | Nine Weeksended April 6, 2002 |    |  | 52 Weeksended Feb. 2, 2002 |         |   | 53 Weeksended Feb. 3, 2001 |  
|                                                  |  | SuccessorCompany               |           |   | SuccessorCompany               |   |           | SuccessorCompany               |  |   | PredecessorCompany            |    |  | PredecessorCompany         |         |   | PredecessorCompany         |  
|Statement of Operations Data:                     |  |                                |           |   |                                |   |           |                                |  |   |                               |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|Net sales                                         |  | $                              | 230,148   |   |                                | $ | 222,635   |                                |  | $ | 185,699                       |    |  | $                          | 40,837  |   |                            | $ | 227,943 |   |  | $ | 226,122 |  
|Cost of sales                                     |  |                                | 147,970   |   |                                |   | 145,372   |                                |  |   | 122,435                       |    |  |                            | 26,991  |   |                            |   | 149,871 |   |  |   | 150,686 |  
|Greeting card inventory write-down                |  |                                | 4,415     |   |                                |   |          |                                |  |   |                              |    |  |                            |        |   |                            |   |        |   |  |   |        |  
|                                                  |  |                                |           |   |                                |   |           |                                |  |   |                               |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|Gross profit                                      |  |                                | 77,763    |   |                                |   | 77,263    |                                |  |   | 63,264                        |    |  |                            | 13,846  |   |                            |   | 78,072  |   |  |   | 75,436  |  
|Selling, general and administrative expenses      |  |                                | 75,074    |   |                                |   | 71,851    |                                |  |   | 55,872                        |    |  |                            | 12,212  |   |                            |   | 67,311  |   |  |   | 65,597  |  
|Depreciation                                      |  |                                | 2,406     |   |                                |   | 1,957     |                                |  |   | 1,501                         |    |  |                            | 1,030   |   |                            |   | 6,826   |   |  |   | 7,196   |  
|Reorganization items                              |  |                                | (93       | ) |                                |   |          |                                |  |   |                              |    |  |                            | (18,840 | ) |                            |   | 6,653   |   |  |   | 7,998   |  
|Other income                                      |  |                                | (63       | ) |                                |   |          |                                |  |   |                              |    |  |                            |        |   |                            |   |        |   |  |   |        |  
|Interest expense                                  |  |                                | 742       |   |                                |   | 1,182     |                                |  |   | 1,368                         |    |  |                            | 374     |   |                            |   | 2,813   |   |  |   | 3,344   |  
|                                                  |  |                                |           |   |                                |   |           |                                |  |   |                               |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|Income (loss) before income tax expense (benefit) |  |                                | (303      | ) |                                |   | 2,273     |                                |  |   | 4,523                         |    |  |                            | 19,070  |   |                            |   | (5,531  | ) |  |   | (8,699  | )
|Income tax expense (benefit)                      |  |                                | (103      | ) |                                |   | 911       |                                |  |   | 1,981                         |    |  |                            | (360    | ) |                            |   |        |   |  |   |        |  
|                                                  |  |                                |           |   |                                |   |           |                                |  |   |                               |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|Net income (loss)                                 |  | $                              | (200      | ) |                                | $ | 1,362     |                                |  | $ | 2,542                         |    |  | $                          | 19,430  |   |                            | $ | (5,531  | ) |  | $ | (8,699  | )
|                                                  |  |                                |           |   |                                |   |           |                                |  |   |                               |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|Earnings (loss) per sharebasic(1)                |  |                                | (0.07     | ) |                                | $ | 0.47      |                                |  | $ | 0.89                          |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|                                                  |  |                                |           |   |                                |   |           |                                |  |   |                               |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|Weighted average shares outstanding               |  |                                | 3,017,284 |   |                                |   | 2,919,115 |                                |  |   | 2,866,420                     |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|                                                  |  |                                |           |   |                                |   |           |                                |  |   |                               |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|Earnings (loss) per sharediluted(1)              |  |                                | (0.07     | ) |                                | $ | 0.40      |                                |  | $ | 0.86                          |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|                                                  |  |                                |           |   |                                |   |           |                                |  |   |                               |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|Weighted average shares outstanding               |  |                                | 3,017,284 |   |                                |   | 3,426,179 |                                |  |   | 2,957,516                     |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|                                                  |  |                                |           |   |                                |   |           |                                |  |   |                               |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|Operating Data: (Unaudited)                       |  |                                |           |   |                                |   |           |                                |  |   |                               |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|Number of stores:                                 |  |                                |           |   |                                |   |           |                                |  |   |                               |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|Opened during period                              |  |                                | 8         |   |                                |   | 6         |                                |  |   | 0                             |    |  |                            | 0       |   |                            |   | 0       |   |  |   | 0       |  
|Closed/relocated during period                    |  |                                | 1         |   |                                |   | 0         |                                |  |   | 1                             |    |  |                            | 0       |   |                            |   | 3       |   |  |   | 7       |  
|Open at end of period                             |  |                                | 184       |   |                                |   | 177       |                                |  |   | 171                           |    |  |                            | 172     |   |                            |   | 172     |   |  |   | 175     |  
|Comparable store sales increase (decrease)(2)     |  |                                | 0.3       | % |                                |   | (2.0      | %)                             |  |   | (1.3                          | %) |  |                            | 8.6     | % |                            |   | 5.1     | % |  |   | 5.0     | %
|Average sales per store(3)                        |  | $                              | 1,275     |   |                                | $ | 1,295     |                                |  | $ | 1,084                         |    |  | $                          | 237     |   |                            | $ | 1,316   |   |  | $ | 1,264   |  
|Balance Sheet Data (end of period):               |  |                                |           |   |                                |   |           |                                |  |   |                               |    |  |                            |         |   |                            |   |         |   |  |   |         |  
|Working capital                                   |  | $                              | 16,458    |   |                                | $ | 15,134    |                                |  | $ | 15,076                        |    |  | $                          | 10,392  |   |                            | $ | 17,293  |   |  | $ | 16,362  |  
|Total assets                                      |  |                                | 68,270    |   |                                |   | 58,172    |                                |  |   | 60,040                        |    |  |                            | 63,311  |   |                            |   | 81,299  |   |  |   | 83,712  |  
|Total debt(4)                                     |  |                                | 13,693    |   |                                |   | 15,597    |                                |  |   | 23,857                        |    |  |                            | 32,460  |   |                            |   | 27,903  |   |  |   | 26,017  |  
|Total long term debt obligations                  |  |                                | 15        |   |                                |   | 3,699     |                                |  |   | 5,889                         |    |  |                            | 6,632   |   |                            |   | 338     |   |  |   |        |  
|Total stockholders equity (deficit)              |  |                                | 28,873    |   |                                |   | 17,947    |                                |  |   | 15,154                        |    |  |                            | 10,040  |   |                            |   | (18,933 | ) |  |   | (13,402 | )

---

|(1) |  | The per share and share information for the Predecessor Company has been omitted as such information is not deemed to be meaningful due to the fresh-start accounting entries booked
for the Successor Company and the resulting lack of comparability to Predecessor Company periods.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes stores open 13 or 14 months after their opening date. If the opening date of a store falls in the first 14 days of a period, then it will be included in the comparable
store calculation in its 13th month of operation; otherwise, a store is included in the comparable store calculation in its 14th month of operation. A stores sales are excluded from the calculation of comparable sales in the fiscal month of
the store closing.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes only stores open during the entire period.
|--- |  | ---------------------------------------------------

|(4) |  | Total debt is defined as total current and long-term debt, including capital lease obligations.
|--- |  | -----------------------------------------------------------------------------------------------



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



You should read the following discussion and analysis of our financial condition and results of operations in conjunction
with Selected Financial Data and our consolidated financial statements and related notes included elsewhere in this Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under Trends, Risks And
Uncertainties, Cautionary Statements Regarding Forward-Looking Statements and elsewhere in this Form 10-K.



Overview



We are a specialty retailer offering a wide selection of party supplies, greeting cards, giftwrap, gifts, balloons and other special occasion merchandise
at everyday value prices. As of April 14, 2005, we operated 184 stores in 20 states. We currently have plans to open up to six additional stores in fiscal 2005. Please note all Company filings with the Securities & Exchange Commission can
be viewed by visiting our website under Press Releases at www.factorycard.com. This website address is intended to be an inactive textual reference only; none of the information contained on our website is part of this report or is
incorporated by reference herein.



Chapter 11 Proceedings and Reorganization



On March 23, 1999, we filed with the United States
Bankruptcy Court for the District of Delaware (the Bankruptcy Court) petitions for reorganization under chapter 11 of title 11 of the United States Code (the Bankruptcy Code). On March 20, 2002, the Bankruptcy Court confirmed
our Amended Plan of Reorganization (the Plan) that was filed with the Bankruptcy Court on February 5, 2002. On April 9, 2002 (the Effective Date), the Plan of Reorganization became effective and we successfully emerged from
Chapter 11.



Certain of the principal provisions of the Plan
are as follows:



| |  |  | We authorized an aggregate of 10,000,000 shares of new Common Stock, par value $0.01 per share. Our amended and restated certificate of incorporation prohibits the transfer of any
shares of the new Common Stock or any rights to acquire shares of the new Common Stock to any person or group that is a 5% or higher shareholder of Factory Card & Party Outlet Corp.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The common stock of Factory Card & Party Outlet Corp. that was outstanding immediately prior to the Plan becoming effective was canceled and 149,106 shares of our new Common
Stock were issued to holders of the canceled common stock at a ratio of .019846 shares of new Common Stock for each share of canceled common stock.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We issued 2,699,990 shares of the new Common Stock to holders of unsecured claims against us, or General Unsecured Creditors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | We issued 150,000 shares of the new Common Stock to certain members of our management, vesting ratably over a four-year period, as specified in the Plan, and warrants to purchase an
aggregate 62,000 shares of our new Common Stock at a purchase price of $3.76 per share. On June 7, 2002, 25,800 warrants were exercised and the remaining 36,200 warrants expired.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We issued four series of new Warrants, Series A through D, to tendering holders of the canceled common stock, granting such holders the right to purchase an aggregate of 306,934
additional shares of the new Common Stock. The Series A Warrants are exercisable any time prior to April 9, 2006 at a price of $5.50 per share. The Series B Warrants are exercisable at any time prior to April 9, 2008 at a price of $8.00 per share.
The Series C Warrants are exercisable any time prior to April 9, 2010 at a price of $8.00 per share. The Series D Warrants are exercisable any time prior to April 9, 2010 at a price of $17.00 per share.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We adopted an employee stock option plan, the 2002 Stock Option Plan, to provide our eligible employees with the opportunity to purchase an aggregate 333,334 shares of our new
Common Stock.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | We agreed to pay $1 million to the General Unsecured Creditors within 60 days of the Effective Date and agreed to pay the General Unsecured Creditors, three years from emergence an
aggregate of $2.6 million, less any prepayments.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We converted an aggregate of $3.13 million post petition accounts payable into long-term convertible secured subordinated notes (the Trade Conversion Notes) to seven
trade vendors and suppliers (the Trade Participants). This obligation is secured by a subordinated lien on certain of our property. The Trade Participants each have the right to convert their Trade Conversion Notes in whole, or in part,
into an aggregate of 29.35% of the new Common Stock, at any time between April 9, 2005 (the third anniversary of the Plans Effective Date) and April 9, 2006 (the fourth anniversary of such date), subject to adjustments to reflect any
prepayments made by us.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We entered into five separate agreements with various trade vendors, each dated April 9, 2002, pursuant to which such trade vendors agreed to provide us with payment terms,
including extended payment terms and seasonal advances.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We entered into a secured financing facility with Wells Fargo LLC, which became effective concurrent with the Plan, to repay the outstanding amounts owed under our debtor in possession revolving financing agreement and fund our obligations
under the Plan and our ongoing operations following emergence from bankruptcy. Borrowings under this agreement are secured by substantially all of our assets.



Juvenile Party Expansion



In fiscal 2003 we entered into agreements with Party Express by Hallmark and Designware by American Greetings to sell licensed party tableware and
accessories. This new assortment has increased the selection of our juvenile party patterns by approximately 30% and increased the selection of licensed party patterns and accessories by more than 150%. We believe this new assortment puts us in a
favorable position to compete in the expanding market of juvenile party.



Greeting Card Agreement



On February 5, 2005,
we entered into a definitive agreement with the Premier Greetings division of Paramount Cards Inc. to be our primary supplier of everyday and seasonal greeting cards. This agreement will considerably broaden our position as a leading provider of
exceptional quality, value priced, social expressions merchandise. We believe that the improved quality and outstanding selection of the Premier Greetings offering will re-energize our card sales and bolster our position as one of the foremost
specialty retailers of greeting cards and party supplies in the United States.



This agreement enables the repositioning of our greeting card strategy by introducing a multi-tiered pricing program featuring high quality greeting cards retailing at a new low price of 49 cents, blended with the
introduction of premium greeting cards selling for 99 cents. As we replace our one price, 59-cent strategy, our customers will benefit from a greatly improved greeting card value, enriched by our relationship with Premier Greetings, a company with
excellent resources and a recognized leader in the greeting card industry.



Under the terms of the agreement, substantially all the cards sold will be supplied by Premier Greetings. The terms will allow us to materially reduce our ongoing inventory position of greeting card merchandise. In
connection with this program, we recorded a pre-tax charge of $4.4 million in the fourth quarter of fiscal 2004 primarily related to the write down of inventory. We intend to begin the roll out of our new greeting card offering at the beginning of
the second quarter of fiscal 2005.



Critical Accounting Policies



Critical Accounting Policies are defined as those that
are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. We have prepared the accompanying financial statements in conformity with accounting
principles



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generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts in the
consolidated financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. We have identified the following critical accounting policies utilized in the preparation of these
financial statements.



Fresh Start Accounting



As is more fully discussed in Note 3Fresh
Start Accounting in our Notes to Consolidated Financial Statements, we adopted fresh start accounting pursuant to the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code (SOP 90-7), during the first quarter of fiscal 2002 resulting in a change in the basis of accounting of our underlying assets and liabilities at the Effective Date. Accordingly, our
financial statements before and after the Effective Date are not comparable. The operating results for the nine weeks ended April 6, 2002 were significantly impacted by items associated with emerging from bankruptcy including debt forgiveness,
restructuring activities and certain changes to record the excess of book value over enterprise value. Upon implementation of fresh start accounting, our total assets and total liabilities and stockholders equity were adjusted downward by
approximately $17 million.



Revenue Recognition



Revenues include the selling price of party goods sold,
net of returns and discounts, and are recognized at the point of sale. We estimate returns based upon historical return rates and such amounts have not been significant.



Impairment of Long-Lived Assets



We review each store for impairment indicators annually, considering operating results and cash flows. We are not aware of
any impairment indicators for any of our stores at January 29, 2005.



Merchandise Inventories



As discussed in Note
3 Summary of Significant Accounting Polices in the Notes to the Consolidated Financial Statements, merchandise inventories are stated at the lower of average cost or estimated net realizable value utilizing the retail method. We perform
periodic evaluations of the net realizable value of merchandise, including merchandise which is to be discontinued from our ongoing inventory assortment as well as inventory with excess quantities on hand and certain seasonal inventory remaining
from past holidays. Based upon these evaluations, a provision for the excess of inventory cost over the net realizable value is recorded as a reduction to the net inventory balance. At January 29, 2005 and January 31, 2004, we had reserves of $5.9
and $1.1 million respectively, for certain merchandise, which is to be discontinued from our ongoing inventory assortment, as well as inventory with excess quantities on hand, and certain seasonal inventory from past holidays. Included in the $5.9
reserve at January 29, 2005 is the $4.4 for the write down of inventory related to the new greeting card agreement with Premier Greetings. Actual results may differ from these estimates.



Prior to our emergence from bankruptcy, we capitalized certain buying and warehousing costs as a component of inventory. As
of the emergence date, we discontinued this practice, recording all of the aforementioned costs in cost of sales. Going forward, we do not anticipate that the change will have a significant impact on periodic earnings.



We receive vendor allowances principally as a result of meeting defined
purchase levels or promoting vendors products. Those received as a result of purchase levels are accrued as a reduction of merchandise purchase price over the incentive period and result in a reduction of cost of sales. Those received for
promoting vendors products are offset against advertising expense and result in a reduction of selling, general and administrative expenses. Markdown allowances reduce cost of goods sold in the period the related markdown is taken. Placement
allowances are offset against incremental expenses incurred and the remainder, if any, over the



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contract period. In September 2002, the Emerging Issues Task Force (EITF) issued 02-16 Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor, which addressed the accounting for rebates retailers receive from vendors. Our accounting policies relating to cash received from vendors are consistent with the conclusions reached by the EITF.



Liabilities for Insurance Claims



Provision for these losses to the extent not insured are recorded based upon
our estimated losses for claims incurred. The provisions are based upon our historical cost.



Income Taxes



Temporary
differences arising from differing treatment of income and expense items for tax and financial reporting purposes result in deferred tax assets and liabilities that are recorded on the balance sheet. These balances, as well as income tax expense,
are determined through managements estimations, interpretation of tax law for multiple jurisdictions and tax planning. If our actual results differ from estimated results due to changes in tax laws, new store locations or tax planning, our
effective tax rate and tax balances could be affected. We assess our deferred tax assets and establish valuation allowances when it is determined that deferred tax assets are not likely to be realized.



Use of Estimates



This discussion and analysis of financial condition and results of
operations is based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events
occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. It is important that readers of this discussion of financial condition and results of operations and the accompanying consolidated
financial statements understand that actual results may differ from such estimates under different assumptions or conditions.



New Accounting Pronouncements



In February 2005, the Chief Accountant of the Securities Exchange Commission issued a letter clarifying his staffs interpretation of certain
accounting issues and their application under generally accepted accounting principles (GAAP) relating to operating leases. In summary, their interpretation is that (1) leasehold improvements should be amortized by the lessee over the
shorter of their economic lives or the lease term, which could include lease renewal terms when the renewals are reasonably assured, (2) free or reduced rents should be recognized by the lessee on a straight-line basis over the lease
term (including any free or reduced rent period) and (3) the statement of cash flows should reflect cash received from the lessor that is accounted for as a lease incentive within operating activities and the acquisition of leasehold improvements
for cash within investing activities. These positions are based upon existing accounting literature. We believe that our present accounting policies are materially consistent with the positions described by the Chief Accountant and his staff in this
letter. Our policy is to amortize leasehold improvements for 10 years or the life of the lease, whichever period is shorter. Our policy is to amortize free or reduced rent on a straight-line basis over the lease term (including any free or reduced
rent periods). Cash received from lessors/landlords is recorded as an increase to deferred rent and amortized over the lease term and is included within operating activities.



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004),
Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting



11



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##### Table of Contents

for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the
approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer
an alternative.



We must adopt SFAS 123(R) in our first fiscal
quarter of fiscal 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued.



SFAS 123(R) permits public companies to adopt its requirements using one of two methods:



| |  |  | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have not yet determined which method we will use.



As permitted by SFAS 123, we currently account for share-based payments to
employees using the intrinsic value method per Opinion No. 25 and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of the fair value method per SFAS 123(R) will have a significant impact on our
results of operations, although it will have no impact on our overall financial position. Had we adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the pro forma
disclosures in the notes to the consolidated financial statements.



In December 2004, the FASB published SFAS No. 151, Inventory Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4, which clarifies that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We believe that SFAS No. 151 will not have a material impact on the consolidated results of
operations, financial position or cash flows.



Results of Operations



The following table sets forth, for the periods
indicated, selected statements of operations data expressed as a percentage of net sales and the number of stores open at the end of each period. Effective April 9, 2002, we emerged from Chapter 11 bankruptcy proceedings and implemented fresh-start
accounting. Accordingly, all assets and liabilities were restated to reflect their respective fair values. The consolidated financial statements after that date are those of a new reporting entity and are not comparable to pre-confirmation periods.
However, for purposes of this discussion, the 43-weeks ended February 1, 2003 (Successor Company) has been combined with the nine weeks ended April 6, 2002 (Predecessor Company). Differences between periods due to fresh-start accounting adjustments
are explained when necessary. The lack of comparability in the accompanying consolidated financial statements is most apparent in our capital costs (lease, interest, depreciation and amortization), as well as income taxes, debt restructuring and
reorganization costs.



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The following table is included solely for use in comparative analysis of results of operations and to
complement managements discussion and analysis.



|                                                  |  |                                |   |  |                                |   |  |                                |   |  |                               |   |  |                                |  
|------------------------------------------------- |  | ------------------------------ | - |  | ------------------------------ | - |  | ------------------------------ | - |  | ----------------------------- | - |  | ------------------------------ | -
|                                                  |  | Successor2004 Company          |   |  | Successor2003 Company          |   |  | Successor2002 Company          |   |  | Predecessor2002 Company       |   |  | Combined Fiscal2002            |  
|                                                  |  | 52 weeks endedJanuary 29, 2005 |   |  | 52 weeks endedJanuary 31, 2004 |   |  | 43 weeks endedFebruary 1, 2003 |   |  | Nine weeks endedApril 6, 2002 |   |  | 52 weeks endedFebruary 1, 2003 |  
|Net sales                                         |  | 100.0                          | % |  | 100.0                          | % |  | 100.0                          | % |  | 100.0                         | % |  | 100.0                          | %
|Cost of sales                                     |  | 64.3                           |   |  | 65.3                           |   |  | 65.9                           |   |  | 66.1                          |   |  | 66.0                           |  
|Greeting card inventory write-down                |  | 1.9                            |   |  |                                |   |  |                                |   |  |                               |   |  |                                |  
|                                                  |  |                                |   |  |                                |   |  |                                |   |  |                               |   |  |                                |  
|Gross profit                                      |  | 33.8                           |   |  | 34.7                           |   |  | 34.1                           |   |  | 33.9                          |   |  | 34.0                           |  
|Selling, general and administrative expenses      |  | 32.6                           |   |  | 32.3                           |   |  | 30.1                           |   |  | 30.0                          |   |  | 30.0                           |  
|Depreciation and amortization                     |  | 1.0                            |   |  | 0.9                            |   |  | 0.8                            |   |  | 2.5                           |   |  | 1.1                            |  
|Reorganization items                              |  |                               |   |  |                               |   |  |                               |   |  | (46.1                         | ) |  | (8.3                           | )
|Other income                                      |  |                               |   |  |                               |   |  |                               |   |  |                              |   |  |                               |  
|Interest expense                                  |  | 0.3                            |   |  | 0.5                            |   |  | 0.7                            |   |  | 0.9                           |   |  | 0.8                            |  
|                                                  |  |                                |   |  |                                |   |  |                                |   |  |                               |   |  |                                |  
|Income (loss) before income tax expense (benefit) |  | (0.1                           | ) |  | 1.0                            |   |  | 2.5                            |   |  | 46.6                          |   |  | 10.4                           |  
|Income tax expense (benefit)                      |  | (0.1                           | ) |  | 0.4                            |   |  | 1.1                            |   |  | (0.9                          | ) |  | 0.7                            |  
|                                                  |  |                                |   |  |                                |   |  |                                |   |  |                               |   |  |                                |  
|Net income (loss)                                 |  |                               | % |  | 0.6                            | % |  | 1.4                            | % |  | 47.5                          | % |  | 9.7                            | %
|                                                  |  |                                |   |  |                                |   |  |                                |   |  |                               |   |  |                                |  
|Number of stores open at end of period            |  | 184                            |   |  | 177                            |   |  | 171                            |   |  | 172                           |   |  | 171                            |  



52 Weeks Ended January 29, 2005
(Fiscal 2004) Compared to 52 Weeks Ended January 31, 2004 (Fiscal 2003)



Net Sales.Net sales increased $7.5 million, or 3.4%, to $230.1 million in Fiscal 2004 from $222.6 million in Fiscal 2003. Increase in net sales is attributable to the increased number of
stores. Comparable store sales, which are defined as sales from those stores open for at least one full year, increased 0.3% over Fiscal 2003. Positive comparable sales in our balloon, candy and basic party categories were offset by decreases in
other categories. Declines in sales were attributable to a highly competitive retail environment.



Gross Profit.Cost of sales includes merchandise, distribution and occupancy costs. Gross profit increased $0.5 million to
$77.8 million in Fiscal 2004 from $77.3 Fiscal 2003. As a percentage of net sales, gross profit was 33.8% in Fiscal 2004 as compared to 34.7% in Fiscal 2003. Included in Fiscal 2004 cost of sales is the $4.4 million write-down of greeting card
inventory related to the new program, which is planned to roll out in May 2005. With the exception of the greeting card write-down, we were successful in managing merchandise margins by reducing markdown activity and by obtaining a higher mark on
percentage on goods available for sale. Additionally, we continue to leverage our freight and distribution costs. As a percent of sales, freight and distribution costs improved 0.4% from Fiscal 2003. Store occupancy costs increased $1.7 million or
5.9% primarily as a result of additional stores.



Selling,
General and Administrative Expenses.    Selling, general and administrative expenses include store payroll, advertising, and other store operating and corporate administrative expenses. Selling, general and administrative
expenses increased $3.2 million, or 4.5%, to $75.1 million in Fiscal 2004 from $71.9 million in Fiscal 2003. Store related expenses increased $2.7 million or 6.0% as a function of operating additional stores while net advertising expense decreased
$0.8 million or 7.6% as we leverage our advertising distribution while opening new stores in existing markets. Other corporate administrative expenses increased $1.3 million or 7.9% because of rising payroll and insurance costs, professional fees
and other corporate governance costs. As a percentage of net sales, selling, general and administrative expenses increased to 32.6% in Fiscal 2004 from 32.3% in Fiscal 2003.



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Depreciation Expense.Depreciation Expense was $2.4 million in Fiscal 2004
compared to $2.0 million in Fiscal 2003. The increase is attributable to fixed asset additions primarily related to new store openings and remodels.



Reorganization Items.The $0.1 million of reorganization items represents a reversal of estimated costs accrued which were
associated with our emergence from bankruptcy in Fiscal 2002. We do not anticipate any significant reorganization costs in the future.



Interest Expense.    Interest expense was $0.7 million in Fiscal 2004 compared to $1.2 million in Fiscal 2003. This decrease
resulted from a lower effective interest rate coupled with lower average borrowings as we continue to positively manage our working capital.



Income Tax Expense (Benefit).We recognized income tax benefit of $0.1 in Fiscal 2004 compared to income tax expense of $0.9
million in Fiscal 2003. The tax benefit of $0.1 was a function of our pre-tax loss position. Tax expenses in Fiscal 2003 represent approximately 40% of pre-tax income (loss) for the period described. Until the benefits of our net operating loss
carry forwards are fully utilized, we do not expect to pay federal income tax.



52 Weeks Ended January 31, 2004 (Fiscal 2003) Compared to 52 Weeks Ended February 1, 2003 (Combined Fiscal 2002)



Net Sales.Net sales decreased $3.9 million, or 1.7%, to $222.6 million in Fiscal 2003 from $226.5 million in Combined
Fiscal 2002. Fiscal 2003 net sales include 171 stores that were open at the beginning of the year plus six stores opened during the second half of the fiscal year. The six new stores contributed $1.5 million in net sales and were the first new store
openings in five years. Sales in the Basic Party and Seasonal category experienced an overall increase in sales as we rolled out the expanded party initiative and offered a wider assortment of seasonal Halloween merchandise. However, the other five
categories experienced a decrease in sales. Comparable store sales decreased $4.5 million or 2.0%. Because of the timing of store openings in Fiscal 2003, the new stores were excluded from the calculation of comparable store sales. We include stores
opened 13 or 14 months after their opening date in the calculation of comparable store sales. Declines in sales were attributable to a highly competitive and promotional retail environment and the effect of a softening economy.



Gross Profit.Cost of sales includes
merchandise, distribution and occupancy costs. Gross profit increased $0.2 million, or 0.2%, to $77.3 million in Fiscal 2003 from $77.1 in Combined Fiscal 2002. The increase in Gross Profit is primarily due to an increase in the mark-on percentage
of merchandise available for sale and decrease in distribution costs of $0.3 million partially offset by declining sales volume and an increase in occupancy costs of $0.4 million. As a percentage of net sales, gross profit was 34.7% in Fiscal 2003
and 34.0% in Combined Fiscal 2002.



Selling, General and
Administrative Expenses.    Selling, general and administrative expenses include store payroll, advertising, and other store operating and corporate administrative expenses. Selling, general and administrative expenses
increased $3.8 million, or 5.6%, to $71.9 million in Fiscal 2003 from $68.1 million in Combined Fiscal 2002. The increase is related to additional advertising expenses of $2.7 million as we attempted to drive sales in a difficult retail environment
coupled with $1.1 million increase in corporate administrative expenses related to higher insurance costs, the listing on NASDAQ, professional fees as well as additional staff to support the new store openings. As a percentage of net sales, selling,
general and administrative expenses increased to 32.3% in Fiscal 2003 from 30.0% in Combined Fiscal 2002.



Depreciation Expense.Depreciation Expense was $2.0 million in Fiscal 2003 compared to $2.5 million in Combined Fiscal 2002.
The decrease is primarily due to the fresh-start adjustment on fixed assets of $11.8 million resulting from the write down of fixed assets for the excess of book value over enterprise value.



Reorganization Items.    We did not recognize any
reorganization items in Fiscal 2003 compared to $18.8 million gain in Combined Fiscal 2002. No reorganization items have been recorded since we emerged from bankruptcy in April 2002.



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Interest Expense.    Interest expense was $1.2 million in Fiscal 2003 compared
to $1.7 million in Combined Fiscal 2002. This decrease resulted from decreased borrowing levels due to lower inventory purchases and in increase in vendor terms.



Income Tax Expense (Benefit).We recognized income tax expense of $0.9 million in Fiscal 2003
compared to income tax expense of $1.6 in Combined Fiscal 2002. Amounts booked after emergence from bankruptcy represent approximately 40% of pre-tax income for the period described. Due to the fact we are able to use pre-emergence net operating
losses, we did not pay federal income tax and the expense recorded in each period resulted, net of the impact of deferred taxes, in a direct increase to stockholders equity. Until the benefits of the net operating loss carry forwards are fully
utilized, we do not expect to pay federal income tax. We recognized an income tax benefit of $0.4 million for the nine weeks ended April 6, 2002 which resulted from the cash realization of net operating loss carrybacks due to the enactment of the
Job Creation and Workers Assistance Act of 2002.



Liquidity and Capital
Resources



Our uses of capital for Fiscal 2005 are
expected to include working capital for operating expenses and satisfaction of current liabilities, expenditures related to maintaining and refurbishing existing stores, opening new stores, the repayment of the remaining balance of the extended
creditor payment and interest payments on outstanding borrowings. Historically, these cash requirements have been met through cash flow from operations and borrowings under our credit facility.



The following table sets forth certain consolidated statements of cash flows
data:



|                                     |  |               |      |   |               |   |      |  
|------------------------------------ |  | ------------- | ---- | - | ------------- | - | ---- | -
|                                     |  | Fiscal 2004   |      |   | Fiscal 2003   |  
|                                     |  | (in millions) |      |   | (in millions) |  
|Cash flows from operating activities |  | $             | 4.8  |   |               | $ | 10.6 |  
|                                     |  |               |      |   |               |   |      |  
|Cash flows from investing activities |  | $             | (3.0 | ) |               | $ | (2.7 | )
|                                     |  |               |      |   |               |   |      |  
|Cash flows from financing activities |  | $             | (1.8 | ) |               | $ | (7.9 | )
|                                     |  |               |      |   |               |   |      |  



On January 29, 2005
our working capital was $16.5 million. Net cash flows from operating activities in Fiscal 2004 were $4.8 million compared to $10.6 million of net cash flows from operating activities during Fiscal 2003. The decrease is related to increases in our
inventory balances as we open new stores coupled with the leveling off of our days payable outstanding as we continue to maintain favorable trade terms from our vendor community.



Net cash flows from investing activities was ($3.0) million in Fiscal 2004 compared to ($2.7) million in Fiscal 2004. Net
cash flows from investing activities were primarily for capital expenditures for store remodeling, computer equipment, and warehouse equipment for the distribution center. Additionally, we paid approximately $0.6 million for furniture and fixtures
and leasehold improvements relating to the new store openings in Fiscal 2004.



Net cash flows from financing activities in Fiscal 2004 were ($1.8) million compared to ($7.9) million in Fiscal 2003. Amounts are attributable to the level of borrowings and repayments.



We are party to a secured financing facility, dated April 8, 2002, with Wells
Fargo Retail Finance, LLC (as amended, the Loan Agreement). The Loan Agreement, which is a line of credit expiring on April 8, 2007, currently provides up to $30 million, (including $10 million for letters of credit) to fund working
capital needs and for general corporate purposes. Borrowings under the facility are limited by a percentage of inventory levels. At April 14, 2005, the interest rate on our borrowings was 5.75%. Borrowings under the Loan Agreement are secured by
substantially all of our assets.



The Loan Agreement contains
certain restrictive covenants, which, among other things, require us to achieve specified operating results. The restrictive covenants also limit our capital expenditures, asset sales and dividends and our ability to grant liens and incur additional
indebtedness.



Pursuant to the Plan of Reorganization, we
converted $3.1 million of post petition trade payables into a Trade Conversion Note, which was payable within four years of the Effective Date. In addition, we recorded at fair value the $2.6 million extended creditor payment payable to the general
unsecured creditors.



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In Fiscal 2004, the Trade Conversion Notes were paid in full. In addition, we paid the remaining $1.6
million of extended creditor note on April 7, 2005.



As of
January 29, 2005, we had $12.0 million in borrowings outstanding under the Loan Agreement and had utilized approximately $1.7 million to issue letters of credit.



We do not intend to pay cash dividends in the foreseeable future and under our current Loan Agreement we are restricted from
paying dividends on our capital stock.



Our ability to make
scheduled payments of principal of, or to pay the interest on, or to refinance, indebtedness or to fund planned capital expenditures, will depend upon future performance, which, in turn, is subject to general economic, financial, competitive and
other factors that are beyond our control. Based upon our current level of operations and anticipated growth, we believe that future cash flows from operations, together with available borrowings under the Loan Agreement, will be adequate for the
next twelve months to meet anticipated requirements for capital expenditures, working capital, interest payments and scheduled principal payments. There can be no assurance that our business will continue to generate sufficient cash flow from
operations in the future to service our debt and make necessary capital expenditures after satisfying certain liabilities arising in the ordinary course of business. If unable to do so, we may be required to refinance all or a portion of our
existing debt, sell assets or obtain additional financing. There can be no assurance that any refinancing would be available or that any sales of assets or additional financing could be obtained.



Contractual Obligations



As discussed in Note 3 Summary of Significant Accounting Polices in the Notes to the Consolidated Financial
Statements, we conduct substantially all of our activities using leased premises. Store and office leases generally provide that real estate taxes, insurance, common area maintenance, and operating expenses are our obligations. Certain store leases
also provide for contingent rentals based on sales in excess of specified minimums.



The approximate cost of fixed assets held under capital leases included in fixed assets was $1.1 million at January 29, 2005 and January 31, 2004. Accumulated depreciation related to such fixed assets was
approximately $0.6 million and $0.4 million at January 29, 2005 and January 31, 2004, respectively. Fixed assets held under capital leases consist primarily of technology, office and warehouse equipment.



To facilitate an understanding of our contractual obligations, the following
data is provided which summarizes future payments:



|                                                                |  |                        |       |                   |   |          |  |          |      |                 |   |      |  |   |     
|--------------------------------------------------------------- |  | ---------------------- | ----- | ----------------- | - | -------- |  | -------- | ---- | --------------- | - | ---- |  | - | ----
|                                                                |  | Payments due by Period
|Contractual Obligations                                         |  | Total                  |       | Less ThanOne Year |   | 1-3Years |  | 3-5Years |      | Morethan5 Years
|Debt & Capital Leases (including current portion)               |  | $                      | 13.7  |                   | $ | 13.7     |  | $        |     |                 | $ |     |  | $ |    
|Operating Leases                                                |  |                        | 110.4 |                   |   | 27.6     |  |          | 45.7 |                 |   | 19.6 |  |   | 17.5
|Inventory Purchase Commitments (including open purchase orders) |  |                        | 17.5  |                   |   | 12.9     |  |          | 3.3  |                 |   | 1.3  |  |   |    
|                                                                |  |                        |       |                   |   |          |  |          |      |                 |   |      |  |   |     
|Total                                                           |  | $                      | 141.6 |                   |   | 54.2     |  | $        | 49.0 |                 | $ | 20.9 |  | $ | 17.5
|                                                                |  |                        |       |                   |   |          |  |          |      |                 |   |      |  |   |     



Included in Debt &
Capital Leases is the $12.0 million in borrowings outstanding under the Loan Agreement at January 29, 2005.



Off-Balance Sheet Arrangements



We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purposes of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships
with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.



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Trends, Risks And Uncertainties



In addition to other matters identified or described by us from time to time in filings with the Securities and Exchange
Commission, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking
statement that may be made by us or on our behalf. Some of these important factors, but not necessarily all of the important factors, are as follows:



Intense competition in our industry could prevent us from increasing or sustaining our revenues and prevent us from achieving or sustaining profitability.



The greeting card, party supply and special occasion
retailing business is highly competitive. Increased competition by existing or future competitors may reduce our sales and cause us to incur a loss. As a result of competition from other specialty party supplies and paper goods retailers, we may
need to incur additional marketing and promotional expenses to achieve sales growth in our existing stores. Our stores compete with a variety of smaller and larger retailers, including:



| |  |  | specialty party supplies and paper goods retailers, including other party superstores;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | card shops and designated departments in mass merchandisers;
| | - |  | ------------------------------------------------------------



| |  |  | warehouse/merchandise clubs and discount general merchandise chains;
| | - |  | --------------------------------------------------------------------



| |  |  | toy stores;
| | - |  | -----------



| |  |  | drug stores;
| | - |  | ------------



| |  |  | supermarkets;
| | - |  | -------------



| |  |  | dollar stores;
| | - |  | --------------



| |  |  | department stores of local, regional and national chains; and
| | - |  | -------------------------------------------------------------



| |  |  | internet retailers.
| | - |  | -------------------



Many of our competitors have substantially greater financial and personnel resources than we do. We may encounter additional competition from new entrants
in the future in our existing markets. Our competitors may be able to respond more quickly or adjust prices more effectively to take advantage of new opportunities or customer requirements. Increased competition could result in pricing pressures,
reduced sales, reduced margins or failure to achieve or maintain widespread market acceptance, any of which could prevent us from increasing or sustaining our revenues and achieving or sustaining profitability.



Customers requirements are likely to evolve, and we will not retain customers or
attract new customers if we do not anticipate and meet specific customer requirements and changes in merchandising trends.



Our core operations rely on a stable customer base. Failure to maintain existing customers and obtain new customers will adversely affect our market
position.



Our success depends, in part, on our ability to
anticipate and respond to changing merchandise trends and consumer demands in a timely manner. Accordingly, any delay or failure by us in identifying and responding to emerging trends could adversely affect consumer acceptance of the merchandise in
our stores. If we are required to sell a significant amount of unsold inventory at below average mark-ups over our cost or below cost, such action could have an adverse effect on our financial condition and results of operations.



We make merchandising decisions well in advance of the seasons during which
we will sell the merchandise. As a result, if we fail to identify and respond quickly to emerging trends, consumer acceptance of the merchandise in our stores could diminish and we may experience a reduction in revenues. We sell certain



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licensed products that are in great demand for short time periods, making it difficult to project our inventory needs for these products. Significantly
greater or less-than-projected product demand could lead to one or more of the following:



| |  |  | lost sales due to insufficient inventory;
| | - |  | -----------------------------------------



| |  |  | higher carrying costs associated with slower turning inventory; and
| | - |  | -------------------------------------------------------------------



| |  |  | reduced or eliminated margins due to mark downs on excess inventory.
| | - |  | --------------------------------------------------------------------



If consumer demand for single-use, disposable party goods were to diminish, the party supplies and paper goods industry and our revenues would be
negatively affected. For example, if cost increases in raw materials such as paper, plastic, cardboard or petroleum were to cause our prices to increase significantly, consumers might decide to forgo the convenience associated with single-use,
disposable products. Similarly, changes in consumer preferences away from disposable products and in favor of reusable products for environmental or other reasons could reduce the demand for our products.



If customers do not respond favorably to our new greeting card strategy, our financial
results will be adversely affected.



In the second quarter
of 2005 we intend to introduce a new greeting card strategy. In connection with this strategy, we will be introducing a premium priced greeting card with an everyday price of 99 cents. We intend to roll back the price of our value line greeting
cards from 59 cents to 49 cents. Our customers may not respond favorably to the new greeting card program. In addition, we may experience (a) decline in sales and income as a result of lowering the price of our value line greeting cards to 49 cents
and (b) decline in the aggregate number of greeting cards sold, which in either case could have an adverse effect on our business.



A downturn in the economy may affect consumer purchases of discretionary items, which could reduce our sales.



In general, our sales represent discretionary spending by our customers.
Discretionary spending is affected by many factors, including, among others, general business conditions, interest rates, the availability of consumer credit, taxation and consumer confidence in future economic conditions. Our customers
purchases of discretionary items, including our products, could decline during periods when disposable income is lower or during periods of actual or perceived unfavorable economic conditions. If this occurs, our revenues and profitability will
decline. In addition, our sales could be adversely affected by a continued downturn in the economic conditions of the markets in which we operate.



Our business depends on continued good relations with our suppliers.



Our failure to maintain good relationships with our principal suppliers or the loss of our principal suppliers would hurt our business. We purchase our
inventory from more than 300 vendors world-wide, with the largest supplier representing approximately 14% and the ten largest suppliers representing approximately 43% of our aggregate purchases in Fiscal 2004. Many of our principal suppliers
currently provide us with incentives like volume purchasing allowances and trade discounts. If our suppliers were to reduce or discontinue these incentives, prices from our suppliers would increase and our profitability would be reduced. As is
customary in our industry, we generally do not have long-term contracts with any suppliers and any supplier could discontinue selling to us at any time; however, pursuant to our bankruptcy plan of reorganization, we entered into agreements with
certain of our trade vendors to provide us with competitive trade terms, including, extended credit limits, extended payment terms and seasonal advances. While we are not aware of any reasons to question the operational or financial ability of such
vendors either to ship or provide such terms, the inability of any of such vendors to do so could adversely affect our competitive financial performance. Our arrangements with overseas suppliers are subject to risks of doing business abroad, such as
import duties, trade restrictions, work stoppages, political instability and other factors which could have an adverse effect on our business.



On February 5, 2005, we entered into a definitive agreement with the Premier Greetings division of Paramount Cards Inc. Under the terms of the agreement,
Paramount will supply substantially all of our greeting



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cards. As a result of this agreement, we will become more dependent on one supplier for providing greeting cards to our stores. The failure of Paramount to
adequately satisfy the needs of our customers or to meet our greeting card volume requirements could have an adverse effect on our business.



We may need to raise additional capital to fund our operations and support our long-term growth strategy.



Our ability to make scheduled payments of principal of, or to pay the
interest on, or to refinance, indebtedness or to fund planned capital expenditures, will depend upon our future performance, which, in turn, is subject to general economic, financial, competitive and other factors that are beyond our control. Based
upon our current level of operations and anticipated growth, we believe that future cash flow from operations, together with available borrowings under our financing facility, will be adequate to meet our anticipated requirements for capital
expenditures, working capital, interest payments and scheduled principal payments. There can be no assurance that our business will continue to generate sufficient cash flow from operations in the future to service our debt and make necessary
capital expenditures after satisfying certain liabilities arising in the ordinary course of business. If unable to do so, we may be required to refinance all or a portion of our existing debt, sell assets or obtain additional financing. There can be
no assurance that any refinancing would be available or available on favorable terms or that any sales of assets or additional financing could be obtained or obtained on favorable terms. If adequate funds are not available or are not available on
acceptable terms, we may be unable to develop or enhance our products and services, implement our long-term growth strategy, take advantage of future opportunities or respond in a timely manner to competitive pressures.



We are substantially leveraged and our financing facility contains covenants that could
adversely affect our business.



Our indebtedness restricts
our ability to obtain additional financing in the future and, because we may be more leveraged than some of our competitors, may place us at a competitive disadvantage. Also, the financing facility that we entered into as part of our emergence from
bankruptcy contains covenants that impose operating and financial restrictions on us. These covenants could adversely affect our ability to finance future operations, potential acquisitions or capital needs or to engage in other business activities
that may be in our best interest.



The seasonal nature of our business could
adversely impact our operations.



Our business is highly
seasonal, with operating results varying from quarter to quarter. We have historically experienced higher sales during the second and fourth quarters primarily due to increased demand by customers for our products attributable to special occasions
and holiday seasons during these periods. Lower sales than expected by us during these periods, a lack of availability of product, or a general economic downturn in sales could have a material adverse effect on our business, financial condition and
results of operations for the full year. In addition, the timing of new store openings, related pre-opening expenses and the amount of revenue contributed by new and existing stores may cause our quarterly results of operations to fluctuate. Any or
all of these factors could also cause the price of our Common Stock to decline.



We may not be able to profitably grow our business.



In order to profitably grow our business, we need to increase sales in our existing markets and open additional stores. Opening additional stores in existing markets could reduce sales from our stores located in or near those markets and
stores opened in new markets may not be profitable. In addition, the opening of new stores could put additional strain on our existing infrastructure and may limit our ability to effectively leverage the costs of the new stores.



We may not be able to effectively execute our long-term growth strategy.



Our long-term growth strategy requires effective planning and management.
Once a new geographic market is identified, we must obtain suitable store sites on acceptable terms. Also, the competitive and merchandising challenges we face in new geographic markets may be different from the challenges we face in our existing



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geographic markets. We may have to adapt to regional tastes and customs and compete against established and familiar local businesses with innovative or
unique techniques for marketing party supplies and paper goods. Entering new markets may also place significant demands on our management, financial controls, operations and information systems. This may cause us to incur higher costs relating to
marketing and operations. Expansion will require an increase in our personnel, particularly store managers and sales associates, to operate our new stores.



Higher administrative expenses could adversely affect our business and operations.



Higher selling, general and administrative expenses occasioned by the potential need for additional advertising, marketing,
administrative or management information systems expenditures could negatively impact our business and operations.



Adverse publicity could adversely affect our business.



We generally operate in medium sized towns and suburban neighborhoods. Adverse publicity or news coverage relating to us could negatively impact our
efforts to establish and promote name recognition and a positive image.



If
we do not comply with the numerous laws and regulations that govern our business, our business could be harmed.



Each of our stores must comply with regulations adopted by Federal agencies and with licensing and other regulations enforced by state and local health,
sanitation, safety, fire and other departments. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors, and difficulties or failures in obtaining the required licenses or
approvals, can delay and sometimes prevent, the opening of a new store. In addition, we comply with the Fair Labor Standards Act and various state laws governing various matters such as minimum wage, overtime and other working conditions. We also
comply with the provisions of the Americans with Disabilities Act of 1990, as amended, which requires generally that employers provide reasonable accommodation for employees with disabilities and that stores be accessible to customers with
disabilities. We believe that the procedures currently in effect at our stores are in general compliance with such laws and regulations. However, future violations of such laws, the enactment of stricter laws or regulations or the implementation of
more aggressive enforcement policies could adversely affect our operations or financial condition.



If we are unable to hire additional qualified personnel or retain existing personnel, we may not be able to operate our business successfully.



Our success depends upon the efforts of our senior management and other key personnel. The loss of the services of any
member of our management team or a key employee, or a failure to timely retain a replacement officer could have a material adverse effect on us. Our future success will also depend in part on attracting and retaining quality employees. Many of our
employees are in entry level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling costs is subject to external factors, such as unemployment levels, minimum wage legislation and
changing demographics. There can be no assurance that we will be successful in retaining our existing key personnel or in attracting and retaining additional employees we may require. Any difficulties in obtaining, retaining and training qualified
personnel could have a material adverse effect on us.



Interruption or
obsolescence of our management information systems could have a negative effect on our competitive ability and our business generally.



We believe that our management information systems are an important factor in supporting our business and enhancing our competitive position in the
industry. Over the past three years, we have invested significant resources in systems and infrastructure to support our business and make it more efficient. We use a management information and control system, which is based on the JDA Merchandise
Management System software package



20



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##### Table of Contents

(JDA) and supports the complete range of retail cycle functions in the areas of finance, merchandising and distribution. All stores are linked to
our headquarters through personal computers, which interface with an IBM AS/400 and provide auto-replenishment of inventory and the ability to enter payroll information and send and receive electronic mail. These personal computers are also tied
into our point-of-sale system (POS system). The POS system provides sales information to our stores and central office and is used to enhance merchandise planning and buying programs. Any obsolescence or continuing interruption in the
functioning of these systems could have a negative effect on our ability to compete effectively in the industry and on our business.



Our warrants and stock options may have significant dilutive effects on holders of Common Stock generally.



Pursuant to our bankruptcy plan of reorganization, we issued four series of
warrants to holders of our old pre-bankruptcy common stock to purchase up to approximately 10% (subject to certain dilution events) of the Common Stock issued under the bankruptcy plan (assuming exercise of all such warrants). These four series of
warrants are exercisable for terms ranging from four to eight years.



We currently have stock option plans pursuant to which we have the authority to issue options to our employees and directors for up to 1,133,334 shares of our Common Stock. As of January 29, 2005, there were options issued to purchase
829,018 shares of our Common Stock outstanding with a weighted average exercise price of $6.11 per share.



The issuance of shares of Common Stock pursuant to the exercise of the four series of warrants, the exercise of stock options, and the antidilution rights
protection of the warrants issued to management could significantly dilute the holders of Common Stock currently issued and outstanding.



Certain provisions of our charter may prevent or delay a change of control of the Company.



Our certificate of incorporation provides for a classified Board of Directors. Any effort to obtain control of our Board of
Directors by causing the election of a majority of the Board of Directors may require more time than would be required without a staggered election structure. Our certificate of incorporation also imposes restrictions on the direct or indirect
transferability of our Common Stock, subject to certain exceptions, such that no person or certain groups of persons (x) may acquire or accumulate five percent (5%) or more (as determined under tax law principles governing the application of Section
382 of the Internal Revenue Code of 1986, as amended) of the Common Stock or (y) who, upon implementation of the Plan, owns 5% or more of the Common Stock, may acquire additional Common Stock. These provisions would have the effect of preventing a
change of control for the duration of such restrictions.



It is difficult to
compare post-emergence financial information with that of prior periods.



Since we emerged from bankruptcy on April 9, 2002, there is limited operating and financial data available from which to analyze our operating results and cash flow. As a result of fresh-start reporting, it is
difficult to compare information reflecting our results of operations and financial condition after our emergence from bankruptcy to the results of prior periods. See Selected Financial Data.



Our stock price may be volatile and could decline.



Since the effective date of our bankruptcy restructuring, our Common Stock
has had limited trading activity. We cannot predict the extent to which investor interest in our stock will lead to the development of a more active trading market, how liquid that market might become or whether it will be sustained. The trading
price of our Common Stock could be subject to wide fluctuations due to the factors discussed in this risk factors section and elsewhere in this document, including:



| |  |  | our operating results failing to meet the expectations of our investors;
| | - |  | ------------------------------------------------------------------------



| |  |  | material announcements by us or our competitors;
| | - |  | ------------------------------------------------



21



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##### Table of Contents

| |  |  | governmental regulatory action; or
| | - |  | ----------------------------------



| |  |  | adverse changes in general market conditions or economic trends.
| | - |  | ----------------------------------------------------------------



In addition, the stock markets in general have experienced extreme price and volume fluctuations. These broad market and industry factors may decrease the
market price of our Common Stock, regardless of our actual operating performance.



We do not anticipate paying dividends.



We
have not paid dividends on our Common Stock and we do not anticipate paying dividends in the foreseeable future. We intend to retain future earnings, if any, to finance the expansion of our operations and for general corporate purposes, including
future acquisitions. In addition, our financing facility prohibits us from paying dividends on our capital stock.



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS



We are subject to market risks from changes in interest rates. The interest rate on our revolving credit facilities, which represents a significant
portion of our outstanding debt, is variable based upon earnings performance, the LIBOR and the prime rate with a minimum threshold of 5.00%. A hypothetical 10 percent increase to the average interest rate under the credit facilities applied to the
average outstanding balance during the 52-week week period ended January 29, 2005 would not have had a material impact on our financial position or results of operations.



ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The response to this item is submitted as a separate section of this Report commencing on page F-1 and is incorporated by reference.



|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



None.



ITEM 9A.    CONTROLS AND PROCEDURES



Our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error. In addition, the design of any
disclosure control and procedures is based in part upon certain assumptions about the likelihood of future events. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance, and not absolute assurance, of
achieving their control objectives. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.



No change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the fiscal quarter ended January 29, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



ITEM 9B.    OTHER INFORMATION



None.



22



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##### Table of Contents

PART III



Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, portions of the information required by Part III of Form 10-K are incorporated by
reference from our Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2005 Annual Meeting of Stockholders (the Proxy Statement).



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Information concerning directors, including our audit committee financial expert, appears in our Proxy Statement under Election of Directors.
This portion of the Proxy Statement is incorporated herein by reference.



Information concerning Executive Officers appears in our Proxy Statement under Management. This portion of the Proxy Statement is incorporated herein by reference.



Information concerning Section 16(a) beneficial ownership reporting
compliance appears in our Proxy Statement under Security Ownership of Certain Beneficial Owners and Management. This portion of the Proxy Statement is incorporated herein by reference.



We have adopted the Standards of Business Conduct, a code of ethics with
which every person who works for us is expected to comply. For anyone that would like to receive a copy of our Standards of Business Conduct please contact our Corporate Secretary at: Factory Card & Party Outlet Corp., 2727 Diehl Road,
Naperville, Illinois 60563. If any substantive amendments are made to the Standards of Business Conduct or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive Officer or Chief Financial Officer, we
will disclose the nature of such amendment or waiver in a report on Form 8-K.



ITEM 11.    EXECUTIVE COMPENSATION



Information concerning executive compensation appears in our Proxy Statement under Executive Compensation and Related Information. This portion of the Proxy Statement is incorporated herein by reference.



|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- |  | ----------------------------------------------------------------------------------------------



Information concerning the security ownership of certain beneficial owners and management and related stockholder matters
appears on our Proxy Statement under Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information. This portion of the Proxy Statement is incorporated herein by reference.



ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information appearing in our Proxy Statement under the heading Certain Relationships and Related Transactions is incorporated herein by
reference.



ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES



Information concerning principal accounting fees and services and the audit committees preapproval policies and procedures appear in our Proxy
Statement under the heading Fees Paid to Independent Auditors for Fiscal 2004 and 2003 and is incorporated herein by reference.



23



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##### Table of Contents

PART IV



ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



(a) List of Documents filed as part of this Report on Form 10-K.



1. The following financial statements are filed as a separate section of this Report commencing on page F-1.



Report of Independent Registered Public Accounting Firm



Consolidated Balance Sheets as of January 29, 2005 and January 31, 2004
(Successor Company)



Consolidated Statements of Operations
for the 52 weeks ended January 29, 2005, the 52 weeks ended January 31, 2004, the 43 weeks ended February 1, 2003 (Successor Company) and the nine weeks ended April 6, 2002 (Predecessor Company)



Consolidated Statements of Stockholders Equity (Deficit) for the 52
weeks ended January 29, 2005, the 52 weeks ended January 31, 2004, the 43 weeks ended February 1, 2003 (Successor Company) and the nine weeks ended April 6, 2002 (Predecessor Company)



Consolidated Statements of Cash Flows for the 52 weeks ended January 29, 2005, the 52 weeks ended January 31, 2004, the 43
weeks ended February 1, 2003 (Successor Company) and the nine weeks ended April 6, 2002 (Predecessor Company)



Notes to Consolidated Financial Statements



2. Financial Statement Schedules



The following financial statement schedule is filed as a separate section of this Report commencing on page S-1.



Condensed Financial Information of Factory Card & Party Outlet
Corp.Balance Sheets as of January 29, 2005 and January 31, 2004



Condensed Financial Information of Factory Card & Party Outlet Corp.Statements of Operations for the 52 weeks ended January 29, 2005, the 52 weeks ended January 31, 2004, the 43 weeks ended February 1, 2003 (Successor Company) and
the nine weeks ended April 6, 2002 (Predecessor Company)



Condensed Financial Information of Factory Card & Party Outlet Corp.Statements of Cash Flows for the 52 weeks ended January 29, 2005, the 52 weeks ended January 31, 2004, the 43 weeks ended February 1, 2003 (Successor Company) and
the nine weeks ended April 6, 2002 (Predecessor Company)



Notes to Condensed Financial Information of Factory Card & Party Outlet Corp.



3. Exhibits.



The exhibits listed in the accompanying Index to Exhibits, which are identified by numbers corresponding to the Exhibit Table of Item 601 of Regulation
S-K, are filed with or incorporated by reference as part of this Annual Report on Form 10-K. Unless otherwise indicated, all exhibits are part of Commission File Number 000-21859.



24



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##### Table of Contents

|           |      |  |                                                                                                                                                                                                                                                                                                                    
|---------- | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |      |  | Description                                                                                                                                                                                                                                                                                                        
|           |     
|2.1        | (1)  |  | Debtors Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated February 5, 2002.                                                                                                                                                                                                     
|           |     
|3.1        | (2)  |  | Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp.                                                                                                                                                                                                                             
|           |     
|3.2        | (4)  |  | Amended Bylaws of Factory Card & Party Outlet Corp.                                                                                                                                                                                                                                                                
|           |     
|4.1        | (2)  |  | Warrant Agreement, dated April 9, 2002, between Factory Card & Party Outlet Corp. and Wells Fargo Bank Minnesota, N.A.                                                                                                                                                                                             
|           |     
|4.2        | (2)  |  | Form of New Management Warrant, dated April 9, 2002.                                                                                                                                                                                                                                                               
|           |     
|4.3        | (2)  |  | Schedule of New Management Warrants (pursuant to Instruction 2 of Item 601).                                                                                                                                                                                                                                       
|           |     
|4.4        | (2)  |  | Trade Conversion Note of Factory Card & Party Outlet Corp. and Factory Card Outlet of America Ltd., dated April 9, 2002, for the benefit of CSS Industries, Inc.                                                                                                                                                   
|           |     
|4.5        | (2)  |  | Schedule of Trade Conversion Notes (pursuant to Instruction 2 of Item 601).                                                                                                                                                                                                                                        
|           |     
|4.6        | (2)  |  | Trade Conversion Agreement, dated as of April 9, 2002, among Factory Card & Party Outlet Corp., Factory Card Outlet of America, Ltd., Amscan, Inc., Creative Expressions Group, Inc.,
Images and Editions Limited, Unique Industries, Inc., CSS Industries, Inc., P.S. Greetings, Inc., and Maryland Plastics, Inc.
|           |     
|10.1       | (2)  |  | Loan and Security Agreement dated as of April 9, 2002, among Factory Card Outlet of America, Ltd., as borrower, the lenders thereto as Wells Fargo Retail Finance, LLC, as arranger, collateral
agent and administrative agent.                                                                                    
|           |     
|10.2       | (7)  |  | First Amendment dated April 9, 2004, to the Loan and Security Agreement, among Factory Card Outlet of America, Ltd., as borrower, the lenders thereto as Well Fargo Retail Finance, LLC, as
arranger, collateral agent and administrative agent.                                                                   
|           |     
|10.3       | (2)  |  | Security Agreement, dated April 9, 2002, among Factory Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd., in favor of William Kaye, as Collateral
Trustee.                                                                                                                                        
|           |     
|10.4       | (2)  |  | Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.                                                                                                                                                                                                                                                       
|           |     
|10.5       | (2)  |  | Trade Vendor Supply Agreement, dated April 9, 2002, between Factory Card & Party Outlet Corp., Factory Card Outlet of America, Ltd. and Maryland Plastics.                                                                                                                                                         
|           |     
|10.6       | (2)  |  | Schedule of Trade Vendor Supply Agreements (pursuant to Instruction 2 of Item 601).                                                                                                                                                                                                                                
|           |     
|10.7       | (2)* |  | Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd. and James D. Constantine.                                                                                                                                                                                            
|           |     
|10.8       | (5)* |  | Employment Agreement, dated as of December 23, 2004, between Factory Card Outlet of America, Ltd. and Timothy F. Gower.                                                                                                                                                                                            
|           |     
|10.9       | (5)* |  | Employment Agreement, dated as of December 23, 2004, between Factory Card Outlet of America, Ltd. and Gary W. Rada.                                                                                                                                                                                                
|           |     
|10.10      | (3)* |  | Factory Card & Party Outlet Corp. 2002 Non-Employee Directors Stock Option Plan.                                                                                                                                                                                                                                   
|           |     
|10.11      | (3)* |  | First Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.                                                                                                                                                                                                                                
|           |     
|10.12      | (3)* |  | Second Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Option Plan.                                                                                                                                                                                                                                  
|           |     
|10.13      | (4)* |  | Factory Card & Party Outlet Corp. 2003 Equity Incentive Plan.                                                                                                                                                                                                                                                      
|           |     
|10.14      | *    |  | Factory Card & Party Outlet Corp. Executive Severance Plan.                                                                                                                                                                                                                                                        



25



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##### Table of Contents

|      |       |  |                                                                                                                                      
|----- | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------
|      |      
|10.15 | (6)** |  | Primary Supply and Consignment Agreement dated February 5, 2005 between Factory Card Outlet of America, Ltd and Paramount Cards, Inc.
|      |      
|21    |       |  | Subsidiaries of the Company                                                                                                          
|      |      
|23.1  |       |  | Consent of Independent Registered Public Accounting Firm                                                                             
|      |      
|31.1  |       |  | Chief Executive Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002                                            
|      |      
|31.2  |       |  | Chief Financial Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002                                            
|      |      
|32.1  |       |  | Chief Executive Officer Certification of Periodic Report under Section 906 of Sarbanes-Oxley Act of 2002                             
|      |      
|32.2  |       |  | Chief Financial Officer Certification of Periodic Report under Section 906 of Sarbanes-Oxley Act of 2002                             

---

Notes

|* |  | Management contracts or compensatory plans or arrangements.
|- |  | -----------------------------------------------------------

|** |  | The Company has submitted, to the Securities and Exchange Commission (the Commission), a request for confidential treatment for portions of this document. The redacted
material has been filed separately with the Commission.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(1) |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on March 25, 2002.
|--- |  | -------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on April 23, 2002.
|--- |  | -------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q as filed on June 18, 2002.
|--- |  | ---------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-K as filed on May 2, 2003.
|--- |  | -------------------------------------------------------------------------------------------------

|(5) |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on December 23, 2004.
|--- |  | ----------------------------------------------------------------------------------------------------

|(6) |  | Incorporated by reference to the Company Current Report on Form 8-K as filed on February 7, 2005.
|--- |  | -------------------------------------------------------------------------------------------------

|(7) |  | Incorporated by reference to the Company Current Report on Form 10-K as filed on April 21, 2004.
|--- |  | ------------------------------------------------------------------------------------------------



26



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##### Table of Contents

SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.



FACTORY CARD & PARTY OUTLET
CORP.By:

/s/    GARY W. RADAGary W. Rada President and Chief Executive Officer




Dated: April 22, 2005



Pursuant to the requirements
of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                                |  |                                                                                                    |  |               
|----------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | --------------
|Name                                            |  | Title                                                                                              |  | Date          
|                                                |  |                                                                                                   
|/s/    GARY W. RADAGary W. Rada                 |  | President and Chief Executive Officer                                                              |  | April 22, 2005
|                                                |  |                                                                                                   
|/s/    JAMES D.
CONSTANTINEJames D.
Constantine |  | Executive Vice President and Chief Financial and Administrative Officer [Chief Accounting Officer] |  | April 22, 2005
|                                                |  |                                                                                                   
|/s/    RICHARD E.
GEORGERichard E.
George       |  | Non-Executive Chairman of the Board                                                                |  | April 22, 2005
|                                                |  |                                                                                                   
|/s/    BEN EVANSBen Evans                       |  | Director                                                                                           |  | April 22, 2005
|                                                |  |                                                                                                   
|/s/    PETER MICHAEL
HOLMESPeter Michael
Holmes |  | Director                                                                                           |  | April 22, 2005
|                                                |  |                                                                                                   
|/s/    MARTIN MANDMartin Mand                   |  | Director                                                                                           |  | April 22, 2005
|                                                |  |                                                                                                   
|/s/    PATRICK
OBRIENPatrick
OBrien           |  | Director                                                                                           |  | April 22, 2005
|                                                |  |                                                                                                   
|/s/    ROBERT S.
SANDLERRobert S.
Sandler       |  | Director                                                                                           |  | April 22, 2005



27



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##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



|                                                                                                                                                                                                                                                             |  |     
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                                                                                                                                                                                                                                                             |  | Page
|                                                                                                                                                                                                                                                             | 
|Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                      |  | F-2 
|                                                                                                                                                                                                                                                             | 
|Consolidated Balance Sheets as of January 29, 2005 (Successor Company) and January 31, 2004 (Successor Company)                                                                                                                                              |  | F-3 
|                                                                                                                                                                                                                                                             | 
|Consolidated Statements of Operations for the 52 weeks ended January 29, 2005, the 52 weeks ended January 29, 2004, the 43 weeks ended February 1, 2003 (Successor Company) and the nine weeks ended April 6, 2002 (Predecessor
Company)                     |  | F-4 
|                                                                                                                                                                                                                                                             | 
|Consolidated Statements of Stockholders Equity (Deficit) for the 52 weeks ended January 29, 2005, the 52 weeks ended January 31, 2004, the 43 weeks ended February 1, 2003 (Successor Company) and the nine weeks ended April
6, 2002 (Predecessor Company) |  | F-5 
|                                                                                                                                                                                                                                                             | 
|Consolidated Statements of Cash Flows for the 52 weeks ended January 29, 2005, the 52 weeks ended January 31, 2004, the 43 weeks ended February 1, 2003 (Successor Company) and the nine weeks ended April 6, 2002 (Predecessor
Company)                     |  | F-6 
|                                                                                                                                                                                                                                                             | 
|Notes to Consolidated Financial Statements                                                                                                                                                                                                                   |  | F-7 



F-1



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of

Factory Card & Party Outlet Corp.

Naperville, Illinois



We have
audited the accompanying consolidated balance sheets of Factory Card & Party Outlet Corp. and subsidiary as of January 29, 2005 and January 31, 2004 (Successor Company balance sheets), and the related consolidated statements of operations,
stockholders equity, and cash flows for the 52 weeks ended January 29, 2005 and January 31, 2004, the 43 weeks ended February 1, 2003 (Successor Company operations), and the nine weeks ended April 6, 2002 (Predecessor Company operations). Our
audits also included the financial statement schedules listed in the index at item 15(a)(2) for the condensed balance sheets as of January 29, 2005 and January 31, 2004 (Successor Company balance sheets), and the related condensed statements of
operations and cash flows for the 52 weeks ended January 29, 2005 and January 31, 2004, the 43 weeks ended February 1, 2003 (Successor Company operations), and the nine weeks ended April 6, 2002 (Predecessor Company operations). These financial
statements and financial statement schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.



We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.



As
discussed in Note 1 to the consolidated financial statements, on March 20, 2002, the Bankruptcy Court entered an order confirming the plan of reorganization which became effective after the close of business on April 8, 2002. Accordingly, the
accompanying financial statements have been prepared in conformity with AICPA Statement of Position 90-7, Financial Reporting for Entities in Reorganization Under the Bankruptcy Code, for the Successor Company as a new entity with
assets, liabilities, and a capital structure having carrying values not comparable with prior periods as described in Note 2.



In our opinion, the Successor Company consolidated financial statements present fairly, in all material respects, the financial position of Factory Card
& Party Outlet Corp. and subsidiary as of January 29, 2005 and January 31, 2004, and the results of their operations and their cash flows for the 52 weeks ended January 29, 2005 and January 31, 2004, and the 43 weeks ended February 1, 2003, in
conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Predecessor Company financial statements referred to above present fairly, in all material respects, the results of their
operations and their cash flows for the nine weeks ended April 6, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules for the condensed balance
sheets as of January 29, 2005 and January 31, 2004 (Successor Company balance sheets) and the related condensed statements of operations and cash flows for the 52 weeks ended January 29, 2005 and January 31, 2004, the 43 weeks ended February 1, 2003
(Successor Company operations) and the nine weeks ended April 6, 2002 (Predecessor Company operations), when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the
information set forth therein.



/s/    DELOITTE &
TOUCHE LLP



Chicago, Illinois

April 18, 2005



F-2



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)



|                                                                                                                                                                         |  |                  |        |   |                  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                                                                                         |  | January 29,2005  |        |   | January 31,2004  |  
|                                                                                                                                                                         |  | SuccessorCompany |        |   | SuccessorCompany |  
|A S S E T S                                                                                                                                                              |  |                  |        |   |                  |   |        |  
|Current assets:                                                                                                                                                          |  |                  |        |   |                  |   |        |  
|Cash                                                                                                                                                                     |  | $                | 188    |   |                  | $ | 179    |  
|Merchandise inventories, net                                                                                                                                             |  |                  | 43,653 |   |                  |   | 45,667 |  
|Prepaid expenses and other                                                                                                                                               |  |                  | 4,577  |   |                  |   | 4,089  |  
|Deferred tax asset, net                                                                                                                                                  |  |                  | 5,527  |   |                  |   |       |  
|                                                                                                                                                                         |  |                  |        |   |                  |   |        |  
|Total current assets                                                                                                                                                     |  |                  | 53,945 |   |                  |   | 49,935 |  
|Fixed assets, net                                                                                                                                                        |  |                  | 8,164  |   |                  |   | 7,551  |  
|Other assets                                                                                                                                                             |  |                  | 170    |   |                  |   | 259    |  
|Deferred tax asset, net                                                                                                                                                  |  |                  | 5,991  |   |                  |   | 427    |  
|                                                                                                                                                                         |  |                  |        |   |                  |   |        |  
|Total assets                                                                                                                                                             |  | $                | 68,270 |   |                  | $ | 58,172 |  
|                                                                                                                                                                         |  |                  |        |   |                  |   |        |  
|L I A B I L I T I E S    A N D    S T O C K H O L D E R S  
  E Q U I T Y                                                                                               |  |                  |        |   |                  |   |        |  
|Current liabilities:                                                                                                                                                     |  |                  |        |   |                  |   |        |  
|Line of credit                                                                                                                                                           |  | $                | 12,032 |   |                  | $ | 9,763  |  
|Accounts payable                                                                                                                                                         |  |                  | 16,245 |   |                  |   | 15,929 |  
|Accrued expenses                                                                                                                                                         |  |                  | 7,564  |   |                  |   | 6,974  |  
|Current portion of long term debt and capital lease obligations                                                                                                          |  |                  | 1,646  |   |                  |   | 2,135  |  
|                                                                                                                                                                         |  |                  |        |   |                  |   |        |  
|Total current liabilities                                                                                                                                                |  |                  | 37,487 |   |                  |   | 34,801 |  
|Long term debt and capital lease obligations                                                                                                                             |  |                  | 15     |   |                  |   | 3,699  |  
|Deferred rent liabilities                                                                                                                                                |  |                  | 1,895  |   |                  |   | 1,725  |  
|                                                                                                                                                                         |  |                  |        |   |                  |   |        |  
|Total liabilities                                                                                                                                                        |  |                  | 39,397 |   |                  |   | 40,225 |  
|                                                                                                                                                                         |  |                  |        |   |                  |   |        |  
|Stockholders equity:                                                                                                                                                    |  |                  |        |   |                  |   |        |  
|Common stock, $.01 par value. Authorized 10,000,000 shares; 3,109,041 and 3,074,082 shares issued and outstanding at January 29, 2005 and
January 31, 2004, respectively |  |                  | 31     |   |                  |   | 31     |  
|Unearned restricted stock awards                                                                                                                                         |  |                  | (148   | ) |                  |   | (275   | )
|Additional paid-in capital                                                                                                                                               |  |                  | 25,286 |   |                  |   | 14,287 |  
|Accumulated earnings                                                                                                                                                     |  |                  | 3,704  |   |                  |   | 3,904  |  
|                                                                                                                                                                         |  |                  |        |   |                  |   |        |  
|Total stockholders equity                                                                                                                                               |  |                  | 28,873 |   |                  |   | 17,947 |  
|                                                                                                                                                                         |  |                  |        |   |                  |   |        |  
|Total liabilities and stockholders equity                                                                                                                               |  | $                | 68,270 |   |                  | $ | 58,172 |  
|                                                                                                                                                                         |  |                  |        |   |                  |   |        |  



See accompanying notes
to consolidated financial statements.



F-3



---

##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollar amounts in thousands, except per share data)



|                                                  |  |                                      |           |   |                                      |   |                                      |  |                                       |           |  |   |         |  
|------------------------------------------------- |  | ------------------------------------ | --------- | - | ------------------------------------ | - | ------------------------------------ |  | ------------------------------------- | --------- |  | - | ------- | -
|                                                  |  | For the 52weeks endedJanuary 29,2005 |           |   | For the 52weeks endedJanuary 31,2004 |   | For the 43weeks endedFebruary 1,2003 |  | For the nineweeks ended April 6, 2002 |          
|                                                  |  | SuccessorCompany                     |           |   | SuccessorCompany                     |   | SuccessorCompany                     |  | PredecessorCompany                    |          
|Net sales                                         |  | $                                    | 230,148   |   |                                      | $ | 222,635                              |  | $                                     | 185,699   |  | $ | 40,837  |  
|Cost of sales                                     |  |                                      | 147,970   |   |                                      |   | 145,372                              |  |                                       | 122,435   |  |   | 26,991  |  
|Greeting card inventory write-down                |  |                                      | 4,415     |   |                                      |   |                                     |  |                                       |          |  |   |        |  
|                                                  |  |                                      |           |   |                                      |   |                                      |  |                                       |           |  |   |         |  
|Gross profit                                      |  |                                      | 77,763    |   |                                      |   | 77,263                               |  |                                       | 63,264    |  |   | 13,846  |  
|Selling, general and administrative expenses      |  |                                      | 75,074    |   |                                      |   | 71,851                               |  |                                       | 55,872    |  |   | 12,212  |  
|Depreciation and amortization                     |  |                                      | 2,406     |   |                                      |   | 1,957                                |  |                                       | 1,501     |  |   | 1,030   |  
|Reorganization items                              |  |                                      | (93       | ) |                                      |   |                                     |  |                                       |          |  |   | (18,840 | )
|Other income                                      |  |                                      | (63       | ) |                                      |   |                                     |  |                                       |          |  |   |        |  
|Interest expense                                  |  |                                      | 742       |   |                                      |   | 1,182                                |  |                                       | 1,368     |  |   | 374     |  
|                                                  |  |                                      |           |   |                                      |   |                                      |  |                                       |           |  |   |         |  
|Income (loss) before income tax expense (benefit) |  |                                      | (303      | ) |                                      |   | 2,273                                |  |                                       | 4,523     |  |   | 19,070  |  
|Income tax expense (benefit)                      |  |                                      | (103      | ) |                                      |   | 911                                  |  |                                       | 1,981     |  |   | (360    | )
|                                                  |  |                                      |           |   |                                      |   |                                      |  |                                       |           |  |   |         |  
|Net income (loss)                                 |  | $                                    | (200      | ) |                                      | $ | 1,362                                |  | $                                     | 2,542     |  | $ | 19,430  |  
|                                                  |  |                                      |           |   |                                      |   |                                      |  |                                       |           |  |   |         |  
|Net income (loss) per sharebasic                 |  | $                                    | (0.07     | ) |                                      | $ | 0.47                                 |  | $                                     | 0.89      |  |   |         |  
|                                                  |  |                                      |           |   |                                      |   |                                      |  |                                       |           |  |   |         |  
|Weighted average shares outstandingbasic         |  |                                      | 3,017,284 |   |                                      |   | 2,919,115                            |  |                                       | 2,866,420 |  |   |         |  
|                                                  |  |                                      |           |   |                                      |   |                                      |  |                                       |           |  |   |         |  
|Net income (loss) per sharediluted               |  | $                                    | (0.07     | ) |                                      | $ | 0.40                                 |  | $                                     | 0.86      |  |   |         |  
|                                                  |  |                                      |           |   |                                      |   |                                      |  |                                       |           |  |   |         |  
|Weighted average shares outstandingdiluted       |  |                                      | 3,017,284 |   |                                      |   | 3,426,179                            |  |                                       | 2,957,516 |  |   |         |  
|                                                  |  |                                      |           |   |                                      |   |                                      |  |                                       |           |  |   |         |  



See accompanying notes
to consolidated financial statements.

All share and per share amounts are adjusted for the two-for-one stock split effective October 21,
2003 (note 2).



F-4



---

##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

(Dollar amounts in thousands)



|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  
|-------------------------------------------------- |  | ------------ | - |  | ------ | --- | - | ------------------------ | - | ------- | ----------------------------- |  | - | ---------------------------- | - |  | --------------------------------- | ------- | - |  | - | ------- | -
|                                                   |  | Common Stock |   |  |        |     |   |                          |   |         |                               |  |   |                              |  
|Predecessor Company                                |  | Shares       |   |  | Amount |     |   | AdditionalPaid-inCapital |   |         | UnearnedRestrictedStockAwards |  |   | AccumulatedEarnings(Deficit) |   |  | TotalStockholdersEquity(Deficit) |        
|                                                   |  |              |   |  |       
|Balance at February 2, 2002                        |  | 7,503,098    |   |  | $      | 75  |   |                          | $ | 52,021  |                               |  | $ |                             |   |  | $                                 | (71,029 | ) |  | $ | (18,933 | )
|Net income                                         |  |             |   |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   | 19,430  |   |  |   | 19,430  |  
|Elimination of old equity                          |  | (7,503,098   | ) |  |        | (75 | ) |                          |   | (52,021 | )                             |  |   |                             |   |  |                                   | 51,599  |   |  |   | (497    | )
|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  
|Distribution of new equity                         |  | 2,999,096    |   |  |        | 30  |   |                          |   | 10,574  |                               |  |   | (564                         | ) |  |                                   |        |   |  |   | 10,040  |  
|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  
|Balance April 6, 2002                              |  | 2,999,096    |   |  |        | 30  |   |                          |   | 10,574  |                               |  |   | (564                         | ) |  |                                   |        |   |  |   | 10,040  |  
|                                                   |  |              |   |  |        |    
|Successor Company                                  |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |        
|Exercise of management stock warrants              |  | 25,800       |   |  |        |    |   |                          |   | 97      |                               |  |   |                             |   |  |                                   |        |   |  |   | 97      |  
|Compensation costrestricted stock awards          |  |             |   |  |        |    |   |                          |   |        |                               |  |   | 118                          |   |  |                                   |        |   |  |   | 118     |  
|Utilization of pre bankruptcy net operating losses |  |             |   |  |        |    |   |                          |   | 2,357   |                               |  |   |                             |   |  |                                   |        |   |  |   | 2,357   |  
|Adjustment to new shares issued                    |  | (3,076       | ) |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   |        |   |  |   |        |  
|Net income                                         |  |             |   |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   | 2,542   |   |  |   | 2,542   |  
|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  
|Balance at February 1, 2003                        |  | 3,021,820    |   |  |        | 30  |   |                          |   | 13,028  |                               |  |   | (446                         | ) |  |                                   | 2,542   |   |  |   | 15,154  |  
|Adjustment to new shares issued                    |  | 3,076        |   |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   |        |   |  |   |        |  
|Right certificates                                 |  | 2,286        |   |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   |        |   |  |   |        |  
|Exercise of stock options and stock warrants       |  | 57,650       |   |  |        | 1   |   |                          |   | 337     |                               |  |   |                             |   |  |                                   |        |   |  |   | 338     |  
|Compensation costrestricted stock awards          |  |             |   |  |        |    |   |                          |   |        |                               |  |   | 131                          |   |  |                                   |        |   |  |   | 131     |  
|Forfeited restricted stock                         |  | (10,750      | ) |  |        |    |   |                          |   | (40     | )                             |  |   | 40                           |   |  |                                   |        |   |  |   |        |  
|Utilization of pre bankruptcy net operating losses |  |             |   |  |        |    |   |                          |   | 962     |                               |  |   |                             |   |  |                                   |        |   |  |   | 962     |  
|Net income                                         |  |             |   |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   | 1,362   |   |  |   | 1,362   |  
|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  
|Balance at January 31, 2004                        |  | 3,074,082    |   |  |        | 31  |   |                          |   | 14,287  |                               |  |   | (275                         | ) |  |                                   | 3,904   |   |  |   | 17,947  |  
|Right certificates                                 |  | 708          |   |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   |        |   |  |   |        |  
|Exercise of stock options and stock warrants       |  | 34,251       |   |  |        |    |   |                          |   | 148     |                               |  |   |                             |   |  |                                   |        |   |  |   | 148     |  
|Compensation costrestricted stock awards          |  |             |   |  |        |    |   |                          |   |        |                               |  |   | 127                          |   |  |                                   |        |   |  |   | 127     |  
|Recognition of pre bankruptcy deferred tax assets  |  |             |   |  |        |    |   |                          |   | 10,851  |                               |  |   |                             |   |  |                                   |        |   |  |   | 10,851  |  
|Net loss                                           |  |             |   |  |        |    |   |                          |   |        |                               |  |   |                             |   |  |                                   | (200    | ) |  |   | (200    | )
|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  
|Balance at January 29, 2005                        |  | 3,109,041    |   |  | $      | 31  |   |                          | $ | 25,286  |                               |  | $ | (148                         | ) |  | $                                 | 3,704   |   |  | $ | 28,873  |  
|                                                   |  |              |   |  |        |     |   |                          |   |         |                               |  |   |                              |   |  |                                   |         |   |  |   |         |  

---

|* |  | All 150,000 shares of restricted common stock originally issued to the Companys management are considered outstanding for purposes of this financial statement.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying notes to consolidated financial
statements.

All share amounts subsequent to the distribution of new equity are

adjusted for the two-for-one stock split effective October 21, 2003 (note 2).



F-5



---

##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)



|                                                                                        |  |                                       |          |   |                                       |   |          |                                       |  |   |                                       |   |  |   |         |  
|--------------------------------------------------------------------------------------- |  | ------------------------------------- | -------- | - | ------------------------------------- | - | -------- | ------------------------------------- |  | - | ------------------------------------- | - |  | - | ------- | -
|                                                                                        |  | For the 52 weeks endedJanuary 29,2005 |          |   | For the 52 weeks endedJanuary 31,2004 |   |          | For the 43 weeks endedFebruary 1,2003 |  |   | For the nine weeks endedApril 6, 2002 |  
|                                                                                        |  | SuccessorCompany                      |          |   | SuccessorCompany                      |   |          | SuccessorCompany                      |  |   | PredecessorCompany                    |  
|Cash flows from operating activities:                                                   |  |                                       |          |   |                                       |   |          |                                       |  |   |                                       |   |  |   |         |  
|Net income (loss)                                                                       |  | $                                     | (200     | ) |                                       | $ | 1,362    |                                       |  | $ | 2,542                                 |   |  | $ | 19,430  |  
|Adjustments to reconcile net income (loss) to net cash flows from operating activities: |  |                                       |          |   |                                       |   |          |                                       |  |   |                                       |   |  |   |         |  
|Plan of reorganization and fresh start adjustments                                      |  |                                       |         |   |                                       |   |         |                                       |  |   |                                      |   |  |   | (21,898 | )
|Depreciation and amortization of fixed assets                                           |  |                                       | 2,406    |   |                                       |   | 1,957    |                                       |  |   | 1,501                                 |   |  |   | 1,030   |  
|Amortization of deferred financing costs and unearned compensation                      |  |                                       | 199      |   |                                       |   | 331      |                                       |  |   | 205                                   |   |  |   | 26      |  
|Non cash portion of reorganization items                                                |  |                                       | 93       |   |                                       |   |         |                                       |  |   |                                      |   |  |   | 1,275   |  
|Loss on disposal of fixed assets                                                        |  |                                       | 6        |   |                                       |   |         |                                       |  |   |                                      |   |  |   |        |  
|Changes in assets and liabilities:                                                      |  |                                       |          |   |                                       |   |          |                                       |  |   |                                       |   |  |   |         |  
|Merchandise inventories, net                                                            |  |                                       | 2,014    |   |                                       |   | 2,523    |                                       |  |   | 3,401                                 |   |  |   | 2,212   |  
|Prepaid expenses and other assets                                                       |  |                                       | (471     | ) |                                       |   | (71      | )                                     |  |   | 1,127                                 |   |  |   | (2,594  | )
|Deferred tax asset, net                                                                 |  |                                       | (240     | ) |                                       |   | 911      |                                       |  |   | 1,981                                 |   |  |   |        |  
|Accounts payable                                                                        |  |                                       | 316      |   |                                       |   | 2,964    |                                       |  |   | 1,603                                 |   |  |   | 3,336   |  
|Accrued expenses                                                                        |  |                                       | 497      |   |                                       |   | 509      |                                       |  |   | (6,069                                | ) |  |   | 2,020   |  
|Deferred rent obligation                                                                |  |                                       | 170      |   |                                       |   | 126      |                                       |  |   | 1,599                                 |   |  |   |        |  
|                                                                                        |  |                                       |          |   |                                       |   |          |                                       |  |   |                                       |   |  |   |         |  
|Net cash flows from operating activities                                                |  |                                       | 4,790    |   |                                       |   | 10,612   |                                       |  |   | 7,890                                 |   |  |   | 4,837   |  
|                                                                                        |  |                                       |          |   |                                       |   |          |                                       |  |   |                                       |   |  |   |         |  
|Net cash flows from investing activitiespurchase of fixed assets                       |  |                                       | (3,025   | ) |                                       |   | (2,708   | )                                     |  |   | (2,462                                | ) |  |   | (257    | )
|Cash flows from financing activities:                                                   |  |                                       |          |   |                                       |   |          |                                       |  |   |                                       |   |  |   |         |  
|Borrowingsline of credit                                                               |  |                                       | 244,348  |   |                                       |   | 227,024  |                                       |  |   | 190,401                               |   |  |   | 38,381  |  
|Repaymentline of credit                                                                |  |                                       | (242,079 | ) |                                       |   | (234,789 | )                                     |  |   | (195,616                              | ) |  |   | (42,898 | )
|Payment of long term obligations                                                        |  |                                       | (4,313   | ) |                                       |   | (440     | )                                     |  |   | (408                                  | ) |  |   | (56     | )
|Increase (decrease) in long term debt                                                   |  |                                       | 160      |   |                                       |   | (54      | )                                     |  |   | 105                                   |   |  |   |        |  
|Discount on payment of trade conversion and extended creditor notes                     |  |                                       | (20      | ) |                                       |   |         |                                       |  |   |                                      |   |  |   |        |  
|Cash received from exercise of stock options and warrants                               |  |                                       | 148      |   |                                       |   | 338      |                                       |  |   | 97                                    |   |  |   |        |  
|                                                                                        |  |                                       |          |   |                                       |   |          |                                       |  |   |                                       |   |  |   |         |  
|Net cash flows from financing activities                                                |  |                                       | (1,756   | ) |                                       |   | (7,921   | )                                     |  |   | (5,421                                | ) |  |   | (4,573  | )
|                                                                                        |  |                                       |          |   |                                       |   |          |                                       |  |   |                                       |   |  |   |         |  
|Net increase (decrease) in cash                                                         |  |                                       | 9        |   |                                       |   | (17      | )                                     |  |   | 7                                     |   |  |   | 7       |  
|Cash at beginning of period                                                             |  |                                       | 179      |   |                                       |   | 196      |                                       |  |   | 189                                   |   |  |   | 182     |  
|                                                                                        |  |                                       |          |   |                                       |   |          |                                       |  |   |                                       |   |  |   |         |  
|Cash at end of period                                                                   |  | $                                     | 188      |   |                                       | $ | 179      |                                       |  | $ | 196                                   |   |  | $ | 189     |  
|                                                                                        |  |                                       |          |   |                                       |   |          |                                       |  |   |                                       |   |  |   |         |  
|Supplemental cash flow information:                                                     |  |                                       |          |   |                                       |   |          |                                       |  |   |                                       |   |  |   |         |  
|Interest paid                                                                           |  | $                                     | 812      |   |                                       | $ | 796      |                                       |  | $ | 1,045                                 |   |  | $ | 334     |  
|Alternative minimum taxes paid                                                          |  |                                       |         |   |                                       |   | 45       |                                       |  |   | 57                                    |   |  |   |        |  
|Cash paid for reorganization items                                                      |  |                                       | 7        |   |                                       |   |         |                                       |  |   | 5,648                                 |   |  |   | 1,055   |  
|Income taxes refunded                                                                   |  |                                       | (3       | ) |                                       |   |         |                                       |  |   | (360                                  | ) |  |   |        |  
|Supplemental non cash information:                                                      |  |                                       |          |   |                                       |   |          |                                       |  |   |                                       |   |  |   |         |  
|Stock issued (successor company)                                                        |  |                                       |         |   |                                       |   |         |                                       |  |   |                                      |   |  |   | (10,040 | )
|Fair value adjustments                                                                  |  |                                       |         |   |                                       |   |         |                                       |  |   |                                      |   |  |   | 10,406  |  
|Stock retirement (predecessor company) and debt discharge                               |  |                                       |         |   |                                       |   |         |                                       |  |   |                                      |   |  |   | (22,828 | )
|Unearned restricted stock awards                                                        |  |                                       | 148      |   |                                       |   | 275      |                                       |  |   | 446                                   |   |  |   | 564     |  
|Capital lease obligations incurred                                                      |  |                                       |         |   |                                       |   |         |                                       |  |   |                                      |   |  |   | 56      |  



See accompanying notes
to consolidated financial statements.



F-6



---

##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



(1)    Reorganization and Emergence
from Chapter 11



On March 23, 1999 (the petition
date), Factory Card & Party Outlet Corp. and its wholly owned subsidiary, Factory Card Outlet of America Ltd. (collectively the Company), filed voluntary petitions for relief under chapter 11 of title 11 of the United States
Code (the Bankruptcy Code) under case numbers 99-685(JCA) and 99-686(JCA) (the Chapter 11 Cases). From that time until March 20, 2002, the Company operated the business as a debtor-in-possession subject to the jurisdiction
and supervision of the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court). On March 20, 2002, the Company announced that the Bankruptcy Court confirmed the Amended Plan of Reorganization (the Plan of
Reorganization) that was filed with the Bankruptcy Court on February 5, 2002. On April 9, 2002 (the Effective Date) the Plan of Reorganization became effective and the Company successfully emerged from Chapter 11.



Certain of the principal provisions of the Plan of Reorganization are as
follows:



| |  |  | The Company authorized an aggregate of 10,000,000 shares of new Common Stock, par value $0.01 per share. The Companys amended and restated certificate of incorporation
prohibits the transfer of any shares of the new Common Stock or any rights to acquire shares of the new Common Stock to any person or group that is a 5% or higher shareholder of the Company.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The common stock of the Company that was outstanding immediately prior to the Plan becoming effective was canceled and 149,106 shares of the Companys new Common Stock were
issued to holders of the canceled common stock at a ratio of .019846 shares of new Common Stock for each share of canceled common stock.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company issued 2,699,990 shares of the new Common Stock to holders of unsecured claims against the Company, or General Unsecured Creditors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company issued 150,000 shares of the new Common Stock to certain members of management, vesting ratably over a four-year period, as specified in the Plan, and warrants to
purchase an aggregate 62,000 shares of its new Common Stock at a purchase price of $3.76 per share. The exercise of warrants on June 7, 2002 allowed the holders to purchase 25,800 shares of new Common Stock and the remaining 36,200 warrants expired.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company issued four series of new Warrants, Series A through D, to tendering holders of the canceled Common Stock, granting such holders the right to purchase an aggregate of
306,934 additional shares of the new Common Stock. The Series A Warrants are exercisable any time prior to April 9, 2006 at a price of $5.50 per share. The Series B Warrants are exercisable at any time prior to April 9, 2008 at a price of $8.00 per
share. The Series C Warrants are exercisable any time prior to April 9, 2010 at a price of $8.00 per share. The Series D Warrants are exercisable any time prior to April 9, 2010 at a price of $17.00 per share.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company adopted an employee stock option plan, the 2002 Stock Option Plan, to provide the Companys eligible employees with the opportunity to purchase an aggregate 333,334
shares of its new Common Stock.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company paid $1,000 to the General Unsecured Creditors within 60 days of the Effective Date and agreed to pay the General Unsecured Creditors, three years from emergence an
aggregate of $2,600, less any prepayments. This obligation is secured by a subordinated lien on certain property of the Company. On March 17, 2004, the Company elected to make a prepayment on the $2,600 obligation that totaled $133, net of discount.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company converted an aggregate of $3,130 post petition accounts payable into long-term convertible secured subordinated notes (the Trade Conversion
Notes) to seven trade vendors and suppliers (the Trade Participants). This obligation is secured by a subordinated lien on certain of the Companys
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-7



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



| | property. The Trade Participants each have the right to convert their Trade Conversion Notes in whole, or in part, into an aggregate of 29.35% of the new
Common Stock, at any time between April 9, 2005 (the third anniversary of the Plans Effective Date) and April 9, 2006 (the fourth anniversary of such date), subject to adjustments to reflect any prepayments made by the Company. The balance of
the Trade Conversion Notes was paid in full during the 52-week period ended January 29, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company entered into five separate agreements with various trade vendors, each dated April 9, 2002, pursuant to which such trade vendors agreed to provide the Company with
payment terms, including extended payment terms and seasonal advances.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(2)    Two-for-one Stock Split



On September 10, 2003, the Company announced a two-for-one stock split effective October 21, 2003 for holders of record on October 7, 2003. Accordingly, data related to the Companys Common Stock (number of shares, average shares
outstanding and earnings per share) have been adjusted for the prior periods subsequent to emergence to reflect the impact of this stock split.



(3)    Summary of Significant Accounting Policies



Basis of Presentation and Organization



The Company is a chain of company-owned stores offering a wide selection of party supplies, greeting cards, giftwrap, balloons, everyday and seasonal
merchandise and other special occasion merchandise at everyday value prices. The consolidated financial statements include the accounts of Factory Card & Party Outlet Corp. and its wholly owned subsidiary, Factory Card Outlet of America Ltd. All
intercompany balances and transactions have been eliminated in consolidation.



Use of Estimates



The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period and related disclosures. Actual results could differ from those estimates.



Fiscal Years



The Companys fiscal year ends on the Saturday closest to January 31st. The following table describes the periods presented in the financial
statements and related notes thereto:



|                                                                    |  |                                      
|------------------------------------------------------------------- |  | -------------------------------------
|Period:                                                             |  | Referred to as:                      
|Results for the 52 weeks ended January 29, 2005 Successor Company  |  | Fiscal 2004                        
|                                                                   
|Results for the 52 weeks ended January 31, 2004 Successor Company  |  | Fiscal 2003                        
|                                                                   
|Results for the 43 weeks ended February 1, 2003Successor Company   |  | Successor Company 2002 43 weeks    
|                                                                   
|Results for the nine weeks ended April 6, 2002 Predecessor Company |  | Predecessor Company 2002 nine weeks
|                                                                   



F-8



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Fresh Start Accounting



Pursuant to the guidance provided by the American Institute of Certified Public Accountants in Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7), the Company adopted fresh-start reporting because holders of existing voting shares immediately before filing and confirmation of the
plan received less than 50% of the voting shares of the emerging entity and its reorganization value was less than its post petition liabilities and allowed claims.



As a result of fresh-start reporting, the Company reflected the distributions under the Plan of Reorganization in the
balance sheet as of April 6, 2002 (the effective date of the consummation of the plan for accounting purposes). Accordingly, all consolidated financial statements for any period prior to April 6, 2002 are referred to as the Predecessor
Company as they reflect the periods prior to the implementation of fresh-start reporting and are not comparable to the consolidated financial statements for periods after the implementation of fresh-start reporting.



Fresh-start reporting requires that the reorganization value of the
reorganized debtors be allocated to their assets in conformity with Statement of Financial Accounting Standards (SFAS) No. 141 Business Combinations, for transactions reported on the basis of the purchase method. Any
reorganization value less than the fair value of the specific tangible or identified intangible assets is to be allocated to their non-current tangible assets on a pro rata basis after offsetting any intangible assets. The reorganized enterprise
value of the Company on the effective date was established at $42,500 based upon a calculation of discounted cash flows under the Companys financial projections and trading multiples of comparable companies. The effects of the Plan of
Reorganization and the application of fresh-start accounting on the Companys pre-confirmation consolidated balance sheet are as follows:

|                                                                                          |  |                         |         |   |                       |   |         |                        |  |   |                       |    |  |   |       
|----------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | --------------------- | - | ------- | ---------------------- |  | - | --------------------- | -- |  | - | ------
|                                                                                          |  | PredecessorApril 6,2002 |         |   | Plan ofReorganization |   |         | Fresh StartAdjustments |  |   | SuccessorApril 6,2002
|A S S E T S                                                                               |  |                         |         |   |                       |   |         |                        |  |   |                       |    |  |   |       
|Current assets:                                                                           |  |                         |         |   |                       |   |         |                        |  |   |                       |    |  |   |       
|Cash                                                                                      |  | $                       | 189     |   |                       | $ |         |                        |  | $ |                       |    |  | $ | 189   
|Merchandise inventories                                                                   |  |                         | 56,987  |   |                       |   |         |                        |  |   | (5,396                | )i |  |   | 51,591
|Prepaid expenses and other                                                                |  |                         | 5,251   |   |                       |   |         |                        |  |   |                       |    |  |   | 5,251 
|                                                                                          |  |                         |         |   |                       |   |         |                        |  |   |                       |    |  |   |       
|Total current assets                                                                      |  |                         | 62,427  |   |                       |   |         |                        |  |   | (5,396                | )  |  |   | 57,031
|Fixed assets, net                                                                         |  |                         | 17,600  |   |                       |   |         |                        |  |   | (11,760               | )a |  |   | 5,840 
|Other assets                                                                              |  |                         | 240     |   |                       |   | 200     | b                      |  |   |                       |    |  |   | 440   
|                                                                                          |  |                         |         |   |                       |   |         |                        |  |   |                       |    |  |   |       
|Total assets                                                                              |  | $                       | 80,267  |   |                       | $ | 200     |                        |  | $ | (17,156               | )  |  | $ | 63,311
|                                                                                          |  |                         |         |   |                       |   |         |                        |  |   |                       |    |  |   |       
|L I A B I L I T I E S    A N D    S T O C K H O L D E R S
E Q U I T Y    (D E F I C I T) |  |                         |         |   |                       |   |         |                        |  |   |                       |    |  |   |       
|Current liabilities:                                                                      |  |                         |         |   |                       |   |         |                        |  |   |                       |    |  |   |       
|Debt                                                                                      |  | $                       |         |   |                       | $ | 22,743  | c                      |  | $ |                       |    |  | $ | 22,743
|Debtor-in-possession financing                                                            |  |                         | 22,543  |   |                       |   | (22,543 | )c                     |  |   |                       |    |  |   |      
|Accounts payable                                                                          |  |                         | 11,407  |   |                       |   | (3,130  | )d                     |  |   |                       |    |  |   | 8,277 
|Accrued expenses                                                                          |  |                         | 12,534  |   |                       |   |         |                        |  |   |                       |    |  |   | 12,534
|Liabilities subject to settlement                                                         |  |                         |         |   |                       |   | 3,085   | e                      |  |   |                       |    |  |   | 3,085 
|                                                                                          |  |                         |         |   |                       |   |         |                        |  |   |                       |    |  |   |       
|Total current liabilities                                                                 |  |                         | 46,484  |   |                       |   | 155     |                        |  |   |                       |    |  |   | 46,639
|                                                                                          |  |                         |         |   |                       |   |         |                        |  |   |                       |    |  |   |       
|Long term notes payable and capital leases                                                |  |                         | 1,128   |   |                       |   | 5,504   | d,h                    |  |   |                       |    |  |   | 6,632 
|Deferred rent liabilities                                                                 |  |                         |        |   |                       |   | 6,750   | f                      |  |   | (6,750                | )a |  |   |      
|Liabilities subject to compromise                                                         |  |                         | 54,056  |   |                       |   | (54,056 | )f                     |  |   |                       |    |  |   |      
|                                                                                          |  |                         |         |   |                       |   |         |                        |  |   |                       |    |  |   |       
|Total liabilities                                                                         |  |                         | 101,668 |   |                       |   | (41,647 | )                      |  |   | (6,750                | )  |  |   | 53,271
|Stockholders equity (deficit)                                                            |  |                         | (21,401 | ) |                       |   | 41,847  | g                      |  |   | (10,406               | )g |  |   | 10,040
|                                                                                          |  |                         |         |   |                       |   |         |                        |  |   |                       |    |  |   |       
|Total liabilities & stockholders equity (deficit)                                        |  | $                       | 80,267  |   |                       | $ | 200     |                        |  | $ | (17,156               | )a |  | $ | 63,311
|                                                                                          |  |                         |         |   |                       |   |         |                        |  |   |                       |    |  |   |       



F-9



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



---

|(a) |  | To reduce the excess of book value over enterprise value.
|--- |  | ---------------------------------------------------------

|(b) |  | To record $200 of deferred financing costs related to exit financing with Wells Fargo Retail Finance LLP.
|--- |  | ---------------------------------------------------------------------------------------------------------

|(c) |  | Borrowings under new line of credit agreement with Wells Fargo Retail Finance, LLP. Existing debtor-in possession financing agreement was paid in full upon the effective date of the
Plan of Reorganization.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) |  | To record the conversion of post-petition accounts payable into the $3,130 Trade Conversion Note.
|--- |  | -------------------------------------------------------------------------------------------------

|(e) |  | To record $1,000 payable due to creditors, $1,700 payable in landlord cure amounts, $323 payable in priority claims and $62 payable in convenience claims. Amounts were paid within
60 days of the Effective Date.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) |  | To record elimination of pre-petition liabilities subject to compromise. Pre-petition liabilities subject to compromise included deferred rent liabilities that were not extinguished
by the Bankruptcy Court.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) |  | To write-off old equity upon emergence from chapter 11 and record the issuance of new stock in accordance with the Plan of Reorganization and to adjust the accumulated deficit by
the portion of the liabilities subject to compromise that is forgiven.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(h) |  | To record at fair value the $2,600 creditor agreement.
|--- |  | ------------------------------------------------------

|(i) |  | To eliminate the capitalization of certain buying and warehousing costs associated with a change in accounting principle.
|--- |  | -------------------------------------------------------------------------------------------------------------------------



Revenue Recognition



Revenues include the selling price of party goods sold, net of returns and
discounts, and are recognized at the point of sale. The Company estimates returns based upon historical return rates and such amounts have not been significant.



Fixed Assets



Fixed asset additions are recorded at cost. Depreciation is computed on a straight-line basis over three to ten years for fixtures and equipment and over
the initial term of the lease for leasehold improvements. Depreciation related to capital leases is also included in depreciation.



The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets
may not be fully recoverable. The Company performs operating cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be
disposed of, if any, are based on the estimated proceeds to be received, less cost of disposal. The Company is not aware of any impairment indicators for any stores as of January 29, 2005.



Merchandise Inventories



Merchandise inventories are stated at the lower of average cost or estimated
net realizable value utilizing the retail method. The Company purchases inventory from more than 300 vendors world-wide, with the largest supplier representing approximately 14% and the ten largest suppliers representing approximately 43% of the
Companys aggregate purchases for the 52-weeks ended January 29, 2005. In Fiscal 2003 the Companys largest supplier represented approximately 20% and the ten largest suppliers represented 47% of the Companys aggregate purchases.
Purchases for the combined 52-weeks ended February 1, 2003 [Successor Company 2002 43-weeks and Predecessor Company 2002 nine weeks] from the Companys largest supplier represented approximately 12% and the ten largest suppliers represented
approximately 43% of the Companys aggregate purchases.



Prior to emergence from bankruptcy, the Company capitalized certain buying and warehousing costs as a component of inventory. As of the emergence date, the Company discontinued this practice, recording all of the aforementioned costs in
cost of sales. Going forward, the Company does not anticipate the change will have a significant impact on periodic earnings.



F-10



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At January 29, 2005 and January 31, 2004, the Company had reserves of $5,893 and $1,117 respectively,
for certain merchandise, which is to be discontinued from the ongoing inventory assortment, as well as inventory with excess quantities on hand, and certain seasonal inventory remaining from past holidays. In Fiscal 2004 the Company increased its
inventory reserve by $4,415 related to greeting card inventory that is being discontinued while a new greeting card strategy is implemented in 2005. See further details in note 16, Subsequent Events.



Cooperative Advertising, Markdown Reimbursement and Placement Fees



The Company receives vendor allowances principally as a
result of meeting defined purchase levels or promoting vendors products. Those received as a result of purchase levels are accrued as a reduction of merchandise purchase price over the incentive period and result in a reduction of cost of
sales. Those received for promoting vendors products are offset against advertising expense and result in a reduction of selling, general and administrative expenses to the extent that the allowance received does not exceed the cost of
advertising the vendors merchandise. Markdown allowances reduce cost of goods sold in the period the related markdown was taken. Placement allowances are offset against incremental expenses incurred and the remainder, if any, over the contract
period.



Liabilities for Insurance Claims



Provision for these losses to the extent not insured are recorded based upon
our estimated losses for claims incurred. The provisions are based upon our historical cost.



Income Taxes



The
Company files a consolidated federal income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting and tax basis of assets and liabilities and are
determined using tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company assesses its deferred tax assets and establishes valuation allowances when it is determined that deferred tax assets are
not likely to be realized.



Deferred Rent Liabilities



Certain operating leases provide for scheduled increases
in base rentals over their terms. For these leases, the Company recognizes the total rental amounts expected to be paid over the lease terms on a straight-line basis and, accordingly, has established corresponding deferred rent liabilities for the
differences between the amounts recognized and the amounts paid. The Company also receives certain lease incentives. These allowances have been deferred and are amortized on a straight-line basis over the initial term of a lease as a reduction of
rent expense.



Advertising Expenses



The Company expenses advertising costs when the advertising first occurs.
Advertising production costs incurred before the advertising takes place are recorded as a prepaid expense. At January 29, 2005 and January 31, 2004, $68 and $62 of advertising production costs were included in prepaid expenses, respectively.
In Fiscal 2004 advertising expense was $9,442 compared to $10,215 in Fiscal 2003. In the combined 52 weeks ended February 1, 2003 [Successor Company 2002 43-weeks and Predecessor Company 2002 nine weeks], advertising expense was $5,903 and $1,647,
respectively.



F-11



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Store Pre-opening Expenses



The Company expenses store pre-opening expenses as incurred. These expenses include labor, advertising and supply costs
incurred up to the stores grand opening.



Earnings per
Share



In accordance with SFAS No. 128 Earnings per
Share, earnings per sharebasic was computed by dividing net income by the weighted average number of common shares outstanding during the period. Earnings per sharediluted assumes, in addition to above, the effect of potentially
dilutive securities.



The reconciliation of earnings per share
basic to earnings per share diluted is as follows:



|                                                                 |  |             |           |   |             |   |                                |  |   |          
|---------------------------------------------------------------- |  | ----------- | --------- | - | ----------- | - | ------------------------------ |  | - | ---------
|                                                                 |  | Fiscal 2004 |           |   | Fiscal 2003 |   | Successor Company2002 43-weeks
|Net income (loss)                                                |  | $           | (200      | ) |             | $ | 1,362                          |  | $ | 2,542    
|Earnings per sharebasic                                         |  | $           | (0.07     | ) |             | $ | 0.47                           |  | $ | 0.89     
|Earnings per sharediluted                                       |  | $           | (0.07     | ) |             | $ | 0.40                           |  | $ | 0.86     
|Weighted average common shares outstanding                       |  |             | 3,017,284 |   |             |   | 2,919,115                      |  |   | 2,866,420
|Dilutive effect of stock options and warrants                    |  |             |          |   |             |   | 507,064                        |  |   | 91,096   
|                                                                 |  |             |           |   |             |   |                                |  |   |          
|Weighted average common and common equivalent shares outstanding |  |             | 3,017,284 |   |             |   | 3,426,179                      |  |   | 2,957,516
|                                                                 |  |             |           |   |             |   |                                |  |   |          
|Options and warrants excluded from dilutive calculation          |  |             | 236,502   |   |             |   | 62,952                         |  |   | 306,934  
|                                                                 |  |             |           |   |             |   |                                |  |   |          



The dilutive impact of
stock options and warrants was calculated using the treasury method. Stock options and warrants with exercise prices below the applicable market price of the Companys common stock are included in potentially dilutive common shares outstanding
if the Company reports net income for a reporting period. Therefore, if the Company reports net income, its earnings per share would be lower on a diluted basis. However, when the Company incurs a net loss for a reporting period, the inclusion of
any such shares would result in a decrease in loss per share, and therefore all stock options and warrants are ignored when calculating diluted earnings per share. Therefore, the Companys net loss per share for Fiscal 2004 is the same amount
on a basic and diluted basis, respectively. Had the Company reported net income in Fiscal 2004, the number of shares would have increased by 510,474 shares. Options to purchase 176,350 common shares at prices ranging from $11.00 to $22.40 per share
and warrants to purchase 60,152 common shares at a price of $17.00 per share were outstanding as of January 29, 2005 but were not included in the calculation of diluted earnings per share in Fiscal 2004 because the strike price was greater than
average market price per share during the period.



Options to
purchase 2,800 common shares at prices ranging from $10.50 to $22.40 per share and warrants to purchase 60,152 common shares at a price of $17.00 per share were outstanding as of January 31, 2004 but were not included in the calculation of diluted
earnings per share in Fiscal 2003 because the strike price was greater than the average market price per share during the period.



Warrants to purchase 306,934 common shares at a prices ranging from $5.50 to $17.00 were outstanding as of February 1, 2003 but were not included in the
calculation of diluted earnings per share for the 43-weeks ended February 1, 2003 because the strike price was greater than the average market price per share during the period.



Per share and share information for the Predecessor Company for all periods presented in the Consolidated Statements of
Operations has been omitted as such information is not deemed to be meaningful due to the fresh-start accounting entries booked for the Successor Company and the resulting lack of comparability to Predecessor Company periods.



F-12



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Stock-Based Compensation



The Company accounts for stock option plans under Accounting Principles Board Opinion No. 25 Accounting for Stock
Issued to Employees, under which no compensation cost has been recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 Accounting for Stock Based Compensation and has been
determined as if the Company had accounted for stock option plans under the fair value method of SFAS No. 123. Had the Company determined compensation cost based upon the fair value at the grant date for its stock options under SFAS No. 123, net
income (loss) would have changed as indicated below:



|                                                                                                                                     |  |             |       |   |             |   |                                |  |   |      
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ----- | - | ----------- | - | ------------------------------ |  | - | -----
|                                                                                                                                     |  | Fiscal 2004 |       |   | Fiscal 2003 |   | Successor Company2002 43-weeks
|Net income (loss), as reported                                                                                                       |  | $           | (200  | ) |             | $ | 1,362                          |  | $ | 2,542
|Deduct: Total stock-based employee compensation expense determined under fair value basis for all awards, net of related tax
effects |  |             | 566   |   |             |   | 345                            |  |   | 99   
|                                                                                                                                     |  |             |       |   |             |   |                                |  |   |      
|Pro forma net income (loss)                                                                                                          |  | $           | (766  | ) |             | $ | 1,017                          |  | $ | 2,443
|                                                                                                                                     |  |             |       |   |             |   |                                |  |   |      
|Earnings per share:                                                                                                                  |  |             |       |   |             |   |                                |  |   |      
|Basicas reported                                                                                                                    |  | $           | (0.07 | ) |             | $ | 0.47                           |  | $ | 0.89 
|                                                                                                                                     |  |             |       |   |             |   |                                |  |   |      
|Basicpro forma                                                                                                                      |  | $           | (0.25 | ) |             | $ | 0.35                           |  | $ | 0.85 
|                                                                                                                                     |  |             |       |   |             |   |                                |  |   |      
|Dilutedas reported                                                                                                                  |  | $           | (0.07 | ) |             | $ | 0.40                           |  | $ | 0.86 
|                                                                                                                                     |  |             |       |   |             |   |                                |  |   |      
|Dilutedpro forma                                                                                                                    |  | $           | (0.25 | ) |             | $ | 0.30                           |  | $ | 0.83 
|                                                                                                                                     |  |             |       |   |             |   |                                |  |   |      



The per share weighted
average fair value of stock options granted during Fiscal 2004 was estimated using the Black Scholes Option-Pricing Model with the following weighted average assumptions: expected dividend rate 0.0%, risk free interest rate of 3.390% to 4.730%,
volatility of 50% and an expected life of approximately 10 years. Assumptions used in Fiscal 2003 were: expected dividend rate 0.0%, risk free interest rate of 3.120% to 4.360%, volatility of 50% and an expected life of approximately 10 years.
Lastly, the per share weighted average fair value of stock options granted during the 43-weeks ended February 1, 2003 was estimated using the Black Scholes Option-Pricing Model with the following weighted average assumptions: expected dividend rate
0.0%, risk free interest rate of 3.875%, volatility of 50% and an expected life of approximately 10 years.



(4)    Fixed Assets



The components of fixed assets, net are as follows:



|                                               |  |                  |        |                  |   |       
|---------------------------------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                                               |  | SuccessorCompany |        | SuccessorCompany
|                                               |  | January 29,2005  |        | January 31,2004 
|Furniture and equipment                        |  | $                | 8,754  |                  | $ | 6,686 
|Leasehold improvements                         |  |                  | 5,273  |                  |   | 4,324 
|                                               |  |                  |        |                  |   |       
|Total fixed assets                             |  |                  | 14,026 |                  |   | 11,010
|Less accumulated depreciation and amortization |  |                  | 5,862  |                  |   | 3,459 
|                                               |  |                  |        |                  |   |       
|Fixed assets, net                              |  | $                | 8,164  |                  | $ | 7,551 
|                                               |  |                  |        |                  |   |       



F-13



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Pursuant to Fresh Start Accounting under SOP 90-7, the Company wrote down the value of fixed assets
by $11,760 on April 6, 2002 to adjust for the excess of book value over enterprise value. In Fiscal 2004 depreciation expense was $2,406 compared to $1,957 in Fiscal 2003. In the Successor Company 2002 43-weeks and Predecessor Company 2002 nine
weeks, depreciation expense was $1,501 and $1,030, respectively.



(5)    Debt



The Company
is party to a secured financing facility, dated April 8, 2002, with Wells Fargo Retail Finance, LLC (as amended, the Loan Agreement). The Loan Agreement, which is a line of credit expiring on April 8, 2007, currently provides up to
$30,000 (including $10,000 for letters of credit) to fund working capital needs and for general corporate purposes. Borrowings under the facility are limited by a percentage of inventory levels. At January 29, 2005, the interest rate on the
Companys borrowings was 5.25%. Borrowings under the Loan Agreement are secured by substantially all of the Companys assets. Certain restrictive covenants apply, including achievement of specified operating results and limitations on the
incurrence of additional liens and indebtedness, capital expenditures, asset sales and payment of dividends, all of which have been met as of January 29, 2005 and January 31, 2004.



At January 29, 2005 and January 31, 2004, the Company had outstanding borrowings under the New Loan Agreement of $12,032 and
$9,763, respectively.



Due to the fact there are certain
restrictions on the Companys assets and the Company has guaranteed the New Loan Agreement between its subsidiary and Wells Fargo Retail Finance, LLC, the Company is required to file Condensed Financial Information of Factory Card & Party
Outlet Corp. on pages S-1 through S-5.



(6)    Long Term
Debt and Capital Lease Obligations



The following table
summarizes the components of Debt and Capital Lease Obligations at January 29, 2005 and January 31, 2004, including the current portion.



|                                                         |  |                  |         |   |                  |   |         |  
|-------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                                         |  | SuccessorCompany |         |   | SuccessorCompany |  
|                                                         |  | January 29,2005  |         |   | January 31,2004  |  
|Wells Fargo Retail Finance, LLC line of credit agreement |  | $                | 12,032  |   |                  | $ | 9,763   |  
|Trade conversion note                                    |  |                  |        |   |                  |   | 3,130   |  
|Discounted value of extended creditor payment            |  |                  | 1,634   |   |                  |   | 2,425   |  
|Financing agreements                                     |  |                  |        |   |                  |   | 210     |  
|Capital leases                                           |  |                  | 27      |   |                  |   | 69      |  
|                                                         |  |                  |         |   |                  |   |         |  
|Sub total                                                |  |                  | 13,693  |   |                  |   | 15,597  |  
|                                                         |  |                  |         |   |                  |   |         |  
|Less current maturities                                  |  |                  | (13,678 | ) |                  |   | (11,898 | )
|                                                         |  |                  |         |   |                  |   |         |  
|Total long term debt                                     |  | $                | 15      |   |                  | $ | 3,699   |  
|                                                         |  |                  |         |   |                  |   |         |  



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FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following schedule summarizes future payments in excess of one year for Debt and Capital Lease
Obligations at January 31, 2005.



|               |  |                                   |        |  
|-------------- |  | --------------------------------- | ------ | -
|               |  | SuccessorCompany                  |       
|               |  | Debt and CapitalLease Obligations |       
|Fiscal year:   |  |                                   |        |  
|2005           |  | $                                 | 13,696 |  
|2006           |  |                                   | 15     |  
|2007           |  |                                   | 1      |  
|2008           |  |                                   |       |  
|Thereafter     |  |                                   |       |  
|               |  |                                   |        |  
|Total payments |  | $                                 | 13,712 |  
|               |  |                                   |        |  
|Less interest  |  |                                   | (19    | )
|               |  |                                   |        |  
|Total payments |  |                                   | 13,693 |  
|               |  |                                   |        |  



Included in Fiscal
year 2005 is the $12,032 outstanding balance as of January 29, 2005 related to the Wells Fargo Retail Finance, LLC line of credit.



(7)    Lease Commitments



The Company conducts substantially all of its activities using leased premises. Store and office leases generally provide that real estate taxes,
insurance, common area maintenance, and operating expenses are the Companys obligations. Certain store leases also provide for contingent rentals based on sales in excess of specified minimums.



The approximate cost of fixed assets held under capital leases included in
fixed assets was $1,061 at January 29, 2005 and January 31, 2004, respectively. Accumulated depreciation related to such fixed assets was approximately $611 and $416 at January 29, 2005 and January 31, 2004, respectively. Fixed assets held under
capital leases consist primarily of technology, office and warehouse equipment.



The following is a schedule of future lease payments for capital and operating leases as well as other financing agreements with initial or remaining terms in excess of one year as of January 29, 2005.



|                                  |  |                                    |    |   |                 |   |        
|--------------------------------- |  | ---------------------------------- | -- | - | --------------- | - | -------
|                                  |  | CapitalLeases &FinancingAgreements |    |   | Operatingleases
|Fiscal year:                      |  |                                    |    |   |                 |   |        
|2005                              |  | $                                  | 15 |   |                 | $ | 27,587 
|2006                              |  |                                    | 15 |   |                 |   | 25,284 
|2007                              |  |                                    |   |   |                 |   | 20,380 
|2008                              |  |                                    |   |   |                 |   | 11,633 
|Thereafter                        |  |                                    |   |   |                 |   | 25,497 
|                                  |  |                                    |    |   |                 |   |        
|Total payments                    |  |                                    | 30 |   |                 | $ | 110,381
|                                  |  |                                    |    |   |                 |   |        
|Less amount representing interest |  |                                    | (3 | ) |                 |   |        
|                                  |  |                                    |    |   |                 |   |        
|Present value of payments         |  | $                                  | 27 |   |                 |   |        
|                                  |  |                                    |    |   |                 |   |        



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Rent expense charged to operations under operating leases in Fiscal 2004 was $26,259 compared to
$24,873 in Fiscal 2003. Rent expense charged to operations under operating leases in Successor Company 2002 43-weeks and Predecessor Company 2002 nine weeks was $20,617 and $3,984, respectively.



(8)    Reorganization Items



Reorganization items consisted of professional fees related to legal,
accounting and consulting services directly attributable to the Plan of Reorganization, store closing costs and employee retention bonuses. In addition, Reorganization items also include the gain associated with the forgiveness of debt offset by
fresh-start adjustments and distribution of ownership share in the Reorganized Company to the unsecured creditors during the nine weeks ended April 6, 2002. The components of Reorganization items are as follows:



|                                                            |  |                              |         |  
|----------------------------------------------------------- |  | ---------------------------- | ------- | -
|Reorganization Items:                                       |  | Nine weeksended April 6,2002 |        
|Professional fees                                           |  | $                            | 1,379   |  
|Severance/retention bonus                                   |  |                              | 1,026   |  
|Closed store expense                                        |  |                              | 311     |  
|Fresh start adjustments                                     |  |                              | 10,406  |  
|Forgiveness of debt                                         |  |                              | (41,847 | )
|Unsecured creditors ownership share of reorganized Company |  |                              | 9,543   |  
|Other                                                       |  |                              | 342     |  
|                                                            |  |                              |         |  
|Total                                                       |  | $                            | (18,840 | )
|                                                            |  |                              |         |  



Included in the Fiscal
2004 statement of operations is a reversal of a previously recorded reorganization accrual of $93.



(9)    Income Taxes



The provisions for income taxes consisted of the following:



|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|----------------------------------- |  | ------- | ---- | - | -------- | - | ----- | ------------------- |  | - | ------ | - |  | - | ----- | -
|                                    |  | Current |      |   | Deferred |   |       | Valuation Allowance |  |   | Total  |  
|Fiscal 2004                         |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Federal                             |  | $       | 129  |   |          | $ | (183  | )                   |  |   | (37    | ) |  | $ | (91   | )
|State                               |  |         | 8    |   |          |   | (20   | )                   |  |   |       |   |  |   | (12   | )
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|                                    |  | $       | 137  |   |          |   | (203  | )                   |  | $ | (37    | ) |  | $ | (103  | )
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Fiscal 2003                         |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Federal                             |  | $       | 3    |   |          | $ | 815   |                     |  | $ |       |   |  | $ | 818   |  
|State                               |  |         |     |   |          |   | 93    |                     |  |   |       |   |  |   | 93    |  
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|                                    |  | $       | 3    |   |          | $ | 908   |                     |  | $ |       |   |  | $ | 911   |  
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Successor Company 2002 43-weeks     |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Federal                             |  | $       | 69   |   |          | $ | 1,697 |                     |  | $ |       |   |  | $ | 1,766 |  
|State                               |  |         |     |   |          |   | 215   |                     |  |   |       |   |  |   | 215   |  
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|                                    |  | $       | 69   |   |          | $ | 1,912 |                     |  | $ |       |   |  | $ | 1,981 |  
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Predecessor Company 2002 nine weeks |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|Federal                             |  | $       | (360 | ) |          | $ | 7,354 |                     |  | $ | (7,354 | ) |  | $ | (360  | )
|State                               |  |         |     |   |          |   | 946   |                     |  |   | (946   | ) |  |   |      |  
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  
|                                    |  | $       | (360 | ) |          | $ | 8,300 |                     |  | $ | (8,300 | ) |  | $ | (360  | )
|                                    |  |         |      |   |          |   |       |                     |  |   |        |   |  |   |       |  



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Income tax expense (benefit) differs from the amounts computed by applying the federal income tax
rate of 34% to income (loss) before income taxes as a result of the following:



|                                                                    |  |                              |    |  |                              |   |  |                              |   |  |                        |   
|------------------------------------------------------------------- |  | ---------------------------- | -- |  | ---------------------------- | - |  | ---------------------------- | - |  | ---------------------- | --
|                                                                    |  | SuccessorCompany             |    |  | SuccessorCompany             |   |  | SuccessorCompany             |   |  | PredecessorCompany     |   
|                                                                    |  | 52 weeksendedJanuary 29,2005 |    |  | 52 weeksendedJanuary 31,2004 |   |  | 43 weeksendedFebruary 1,2003 |   |  | Nine weeksApril 6,2002 |   
|Statutory federal rate                                              |  | (34.0                        | )% |  | 34.0                         | % |  | 34.0                         | % |  | 34.0                   | % 
|Increase (decrease) in income taxes resulting from:                 |  |                              |    |  |                              |   |  |                              |   |  |                        |   
|Change in valuation allowance                                       |  |                             |    |  |                             |   |  |                             |   |  | (41.6                  | ) 
|Job Creation and Workers Assistance Act of 2002                     |  |                             |    |  |                             |   |  |                             |   |  | (1.9                   | ) 
|Change in valuation allowance on post emergence deferred tax assets |  | (12.2                        | )  |  | 1.8                          |   |  | 3.8                          |   |  |                       |   
|State and local income taxes, net of federal income taxes           |  | (2.5                         | )  |  | 4.1                          |   |  | 4.8                          |   |  | 5.0                    |   
|Reorganization costs, net                                           |  |                             |    |  |                             |   |  |                             |   |  | 2.6                    |   
|Permanent items                                                     |  | 15.7                         |    |  | 0.2                          |   |  | 1.2                          |   |  |                        |   
|Other, net                                                          |  | (0.9                         | )  |  |                             |   |  |                             |   |  |                       |   
|                                                                    |  |                              |    |  |                              |   |  |                              |   |  |                        |   
|Effective income tax rate                                           |  | (33.9                        | )% |  | 40.1                         | % |  | 43.8                         | % |  | (1.9                   | )%
|                                                                    |  |                              |    |  |                              |   |  |                              |   |  |                        |   



Deferred income taxes
reflect the net tax effect of operating loss and alternative minimum tax credit carryforwards along with the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Companys deferred tax assets and liabilities are as follows:



|                                            |  |                  |        |                  |   |         |  
|------------------------------------------- |  | ---------------- | ------ | ---------------- | - | ------- | -
|                                            |  | SuccessorCompany |        | SuccessorCompany |  
|                                            |  | January 29,2005  |        | January 31,2004  |  
|Deferred tax assets related to:             |  |                  |        |                  |   |         |  
|Alternative minimum tax credit carryforward |  | $                | 466    |                  | $ | 373     |  
|Deferred rent liabilities                   |  |                  | 731    |                  |   | 596     |  
|Accrued expenses                            |  |                  | 1,107  |                  |   | 537     |  
|Contingent note                             |  |                  | 702    |                  |   | 607     |  
|Merchandise inventories                     |  |                  | 3,818  |                  |   | 2,146   |  
|Fixed assets                                |  |                  | 1,242  |                  |   | 1,668   |  
|Net operating loss carryforwards            |  |                  | 3,621  |                  |   | 5,556   |  
|                                            |  |                  |        |                  |   |         |  
|Total deferred tax assets                   |  |                  | 11,687 |                  |   | 11,483  |  
|Valuation allowance                         |  |                  |       |                  |   | (10,887 | )
|                                            |  |                  |        |                  |   |         |  
|Deferred tax assets                         |  |                  | 11,687 |                  |   | 596     |  
|Deferred tax liabilities                    |  |                  | 169    |                  |   | 169     |  
|                                            |  |                  |        |                  |   |         |  
|Deferred tax asset, net                     |  | $                | 11,518 |                  | $ | 427     |  
|                                            |  |                  |        |                  |   |         |  



The Company has not
recorded a valuation allowance on its deferred tax assets as of January 29, 2005 because it believes it will realize the benefit of the deferred tax assets in future periods. The $10,851 valuation allowance, which existed upon the Companys
emergence from bankruptcy, was reversed and resulted in an increase to paid-in-capital.



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FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company has made payments of $57 for estimated Alternative Minimum Taxes due for the 43-weeks
ended February 1, 2003. Additionally, the Company made payments of $45 for estimated Alternative Minimum Taxes during the 52-weeks ended January 31, 2004. No payments have been made in Fiscal 2004 for Alternative Minimum Taxes.



At January 29, 2005, the Company has net operating loss (NOL)
carryforwards for federal and state tax purposes of approximately $9,381, which will expire by the end of 2021. In addition to the NOL carryforwards, the Company also has Alternative Minimum Tax carryforwards of $466, which have no expiration. The
utilization of NOL carryforwards may be significantly limited by future events related to direct and/or indirect ownership changes of the Company.



(10)    Employee Benefit Plans



On March 20, 2002, the Company announced that the Bankruptcy Court confirmed its Plan of Reorganization that was filed on February 5, 2002. On April 9,
2002 the Plan of Reorganization became effective and the Company successfully emerged from Chapter 11. As of the Effective date of the Plan, all existing stock and all stock options, employee stock purchase plans and stock option plans of the
Predecessor Company were canceled.



2002 Stock Option
PlanSuccessor Company



As provided in the Plan of
Reorganization, the Company adopted a stock option plan, which authorized the grant of up to 333,334 stock options to its employees. Under the plan, stock options may be granted for the purchase of its Common Stock at an exercise price of not less
than 100% of the fair market value at the time of grant as determined by the Board of Directors. The term of each option is also determined by the Board of Directors, but cannot be more than ten years from the date of grant. Options are exercisable
in accordance with the Plan and generally vest at the rate of 25% to 33% per year from the date of grant.



2002 Non Employee Stock Option PlanSuccessor Company



The Company adopted a non-employee Stock Option Plan, which authorized the grant of up to 300,000 Common Stock options to
non-employee members of the Board of Directors. Under the Plan, options may be granted for the purchase of its Common Stock at an exercise price not less than 100% of the fair market value of a share of Common Stock on the date of grant. Options are
exercisable in accordance with the Plan and generally vest at the rate of 33% to 50% per year from the date of grant.



2003 Equity Incentive PlanSuccessor Company



The Company adopted the 2003 Equity Incentive Plan on January 27, 2003. Stockholders approved the plan on July 16, 2003. Under this plan, 500,000 shares
of Common Stock would be available for the settlement of the following types of awards: stock options; stock appreciation awards; restricted shares; deferred stock; dividend equivalents; performance units; performance shares; and other stock based
awards.



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FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



All stock option activity since the Company emerged from bankruptcy is as follows:



|                                     |  |                       |   |  |                               |      
|------------------------------------ |  | --------------------- | - |  | ----------------------------- | -----
|                                     |  | Number ofStockOptions |   |  | WeightedAverageExercise Price
|OutstandingApril 7, 2002            |  | 0                     |   |  | $                             | 0.00 
|Granted                              |  | 474,600               |   |  |                               | 3.63 
|Exercised                            |  | 0                     |   |  |                               | 0.00 
|Forfeited                            |  | (4,600                | ) |  |                               | 3.76 
|                                     |  |                       |   |  |                               |      
|OutstandingFebruary 1, 2003         |  | 470,000               |   |  | $                             | 3.63 
|Granted                              |  | 287,000               |   |  |                               | 5.97 
|Exercised                            |  | (23,200               | ) |  |                               | 3.76 
|Forfeited                            |  | (31,650               | ) |  |                               | 4.22 
|                                     |  |                       |   |  |                               |      
|OutstandingJanuary 31, 2004         |  | 702,150               |   |  | $                             | 4.55 
|Granted                              |  | 178,000               |   |  |                               | 11.87
|Exercised                            |  | (26,897               | ) |  |                               | 4.00 
|Forfeited                            |  | (24,235               | ) |  |                               | 6.30 
|                                     |  |                       |   |  |                               |      
|OutstandingJanuary 29, 2005         |  | 829,018               |   |  | $                             | 6.11 
|                                     |  |                       |   |  |                               |      
|ExercisableJanuary 29, 2005         |  | 342,876               |   |  | $                             | 4.13 
|                                     |  |                       |   |  |                               |      
|Available for grantJanuary 29, 2005 |  | 254,219               |   |  |                               |      
|                                     |  |                       |   |  |                               |      



Information regarding
outstanding and exercisable options at January 29, 2005 is as follows:



|                         |  |                     |  |                                          |  |                               |       |                   |         |                                |   |      
|------------------------ |  | ------------------- |  | ---------------------------------------- |  | ----------------------------- | ----- | ----------------- | ------- | ------------------------------ | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                     
|                         |  | NumberOutstanding   |  | Weighted-averageremainingcontractuallife |  | Weighted-averageexerciseprice |       | Numberexercisable |         | Weighted- averageexerciseprice
|Range of Exercise Prices |  |                     |  |                                          |  |                               |       |                   |         |                                |   |      
|January 29, 2005:        |  |                     |  |                                          |  |                               |       |                   |         |                                |   |      
|$2.65 to $6.38           |  | 651,468             |  | 7.8                                      |  | $                             | 4.50  |                   | 341,812 |                                | $ | 4.09 
|9.31 to 12.44            |  | 174,750             |  | 9.2                                      |  |                               | 11.87 |                   | 133     |                                |   | 10.50
|17.55 to 22.40           |  | 2,800               |  | 8.8                                      |  |                               | 20.36 |                   | 931     |                                |   | 20.36
|                         |  |                     |  |                                          |  |                               |       |                   |         |                                |   |      
|$2.65 to $22.40          |  | 829,018             |  | 8.1                                      |  | $                             | 6.11  |                   | 342,876 |                                | $ | 4.13 
|                         |  |                     |  |                                          |  |                               |       |                   |         |                                |   |      



Restricted Stock
Awards



As provided in the Plan of Reorganization, the
Company issued 150,000 shares of the new Common Stock to certain members of management, which vest ratably over a four-year period. At the date of the grant, the market value of the award was recorded in common stock and additional paid-in capital;
an offsetting amount is recorded as a component of stockholders equity in unearned restricted stock awards. Compensation cost is included in results of operations over the vesting period. Expense relating to the vesting of restricted stock for
the 52-weeks ended January 29, 2005 and the 52-weeks ended January 31, 2004 was $127 and $131, respectively. Expense relating to the vesting of restricted stock for the 43-weeks ended February 1, 2003 was $118.



Incentive Savings Plan



The Incentive Savings Plan (the ISP Plan) is a defined
contribution plan sponsored by the Company for all eligible employees. Participants in the ISP Plan may elect to contribute between 2% and 13% of their pre-tax



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FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



base salary, subject to limitations imposed by the Internal Revenue Service. The Company makes discretionary matching contributions to the ISP Plan at the
rate of 33% of the first 6% of the participants contribution. In Fiscal 2004 the Companys discretionary matching contributions to the ISP Plan were $207 compared to $189 in Fiscal 2003. For Successor Company 2002 43-weeks and Predecessor
Company 2002 nine weeks, the Companys discretionary matching contributions to the ISP Plan were $152 and $38, respectively. The ISP Plan also allows for a discretionary base contribution to be made by the Company only if the Company has
current or accumulated net profits. No discretionary base contributions have been made by the Company to date.



Deferred Compensation Plan



In January 2003 the Companys Board of Directors approved a Supplemental Incentive Savings Plan (the Supplemental Plan). The Supplemental
Plan is intended to be an un-funded deferred compensation arrangement for a select group of management or highly compensated employees. The Supplemental Plan is intended to restore eligible participants the benefits to which they would have been
entitled under the Companys ISP Plan but were limited because of Internal Revenue Code rules and regulations.



(11)    Fair Value of Financial Instruments



The Companys financial instruments at January 29, 2005 and January 31, 2004 include accounts payable and debt. The Company has assumed that the
carrying value of trade accounts payable approximates fair value because of the short period in which these liabilities are settled. The Company believes the carrying value of the debt approximates fair value due to the variable rate of interest on
this instrument.



(12)    New Accounting Pronouncements



In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However,
SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.



The Company must adopt SFAS 123(R) in its first fiscal quarter of fiscal
2006. Early adoption will be permitted in periods in which financial statements have not yet been issued.



SFAS 123(R) permits public companies to adopt its requirements using one of two methods:



| |  |  | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company has not yet determined which method it will use. As permitted by
SFAS 123, the Company currently accounts for share-based payments to employees using the intrinsic value method per Opinion No. 25 and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of



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FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the fair value method per SFAS 123(R) will have a significant impact on the Companys results of operations, although it will have no impact on its
overall financial position. Had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the pro forma disclosures in Note 3 to the consolidated financial
statements.



In December 2004, the FASB published SFAS No. 151,
Inventory Costs (SFAS No. 151), an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4, which clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials
(spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of
SFAS No. 151 shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company believes that SFAS No. 151 will not have a material impact on the consolidated results of operations, financial position or
cash flows.



(13)    Related-party Transactions



As described in the Plan of Reorganization, 90% of the
new Common Stock was distributed to unsecured creditors, 5% was distributed to the Companys management and 5% was distributed to old equity shareholders. One entity had an ownership interest of more than 10% upon emergence, however that party
sold their position during Fiscal 2004 and now holds less then 5% of the outstanding common stock. Purchases from that vendor in Fiscal 2004 were $4,029 and amounts owed were $339 at January 29, 2005. Purchases from that vendor in Fiscal 2003 were
$3,063 and amounts owed were $106 at January 31, 2004. There were no purchases from that entity during the 43-weeks ended February 1, 2003 or nine weeks ended April 6, 2002.



(14)    Contingencies



On November 16, 2004, Ronald Kirschenbaum filed a lawsuit against the Company in the Circuit Court of Cook County, Illinois County Department, Law
Division, captioned Ronald Kirschenbaum, Jacqueline Kirschenbaum, Jeanette Kirschenbaum and Jessica Kirschenbaum vs. Factory Card & Party Outlet, Corp. and Glen S. Kolakowski. The complaint alleges that the Company was negligent in the hiring
and supervising of a former employee who allegedly pleaded guilty to a Class 4 felony committed while working for the Company. The plaintiffs seek unspecified damages. The Company believes that the claims made against the Company in this lawsuit are
without merit.



On March 3, 2004, Midwest One Distribution
Company filed a lawsuit against the Company in the Circuit Court of the Eighteen Judicial Circuit of DuPage County, Illinois, captioned Midwest One Distribution Co. vs. Factory Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd.
The lawsuit alleges that the Company breached a distribution agreement between the parties that terminated on January 31, 2004 by failing to pay certain invoices from Midwest One for certain services and/or expenses allegedly performed or incurred
by Midwest One. Midwest One seeks damages of approximately $4,800 and an accounting of all distribution services for which Midwest One was entitled to compensation under the distribution agreement. The Company believes that it has meritorious
defenses and counterclaims and intends to pursue them vigorously.



Additionally, the Company from time to time is involved in routine litigation incidental to the conduct of its business. As of the date of this Annual Report on Form 10-K, the Company is not aware of any other material existing or
threatening litigation to which it may be a party.



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FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(15)    Quarterly Financial Information (unaudited)



Following is a summary of unaudited quarterly information:



|                                                  |  |                         |        |   |                            |   |                              |  |                               |        |  |   |        |  
|------------------------------------------------- |  | ----------------------- | ------ | - | -------------------------- | - | ---------------------------- |  | ----------------------------- | ------ |  | - | ------ | -
|                                                  |  | FirstQuarter            |        |   | Second Quarter             |   | Third Quarter                |  | Fourth Quarter                |       
|Fiscal 2004:                                      |  | 13 weeksendedMay 1,2004 |        |   | 13 weeksendedJuly 31, 2004 |   | 13 weeksendedOctober 30,2004 |  | 13 weeksendedJanuary 29, 2005 |       
|Total sales                                       |  | $                       | 56,928 |   |                            | $ | 62,162                       |  | $                             | 53,735 |  | $ | 57,323 |  
|Cost of Sales                                     |  |                         | 36,827 |   |                            |   | 39,028                       |  |                               | 34,216 |  |   | 37,899 |  
|Greeting card inventory write-down                |  |                         |       |   |                            |   |                             |  |                               |       |  |   | 4,415  |  
|Gross profit                                      |  |                         | 20,101 |   |                            |   | 23,134                       |  |                               | 19,519 |  |   | 15,009 |  
|Selling, general and administrative expenses      |  |                         | 18,835 |   |                            |   | 18,967                       |  |                               | 17,860 |  |   | 19,412 |  
|Depreciation                                      |  |                         | 583    |   |                            |   | 631                          |  |                               | 681    |  |   | 511    |  
|Reorganization items                              |  |                         |       |   |                            |   |                             |  |                               |       |  |   | (93    | )
|Other (income) expense                            |  |                         | (55    | ) |                            |   | 25                           |  |                               |       |  |   | (33    | )
|Interest expense                                  |  |                         | 231    |   |                            |   | 168                          |  |                               | 187    |  |   | 156    |  
|Income (loss) before income tax expense (benefit) |  |                         | 507    |   |                            |   | 3,343                        |  |                               | 791    |  |   | (4,944 | )
|Income tax expense (benefit)                      |  |                         | 203    |   |                            |   | 1,337                        |  |                               | 319    |  |   | (1,962 | )
|Net income (loss)                                 |  | $                       | 304    |   |                            | $ | 2,006                        |  | $                             | 472    |  | $ | (2,982 | )
|Earnings (loss) per sharebasic                   |  | $                       | 0.10   |   |                            | $ | 0.66                         |  | $                             | 0.16   |  | $ | (0.98  | )
|Earnings (loss) per sharediluted                 |  | $                       | 0.09   |   |                            | $ | 0.56                         |  | $                             | 0.14   |  | $ | (0.98  | )



|                                                  |  |                         |        |   |                             |   |                              |  |                               |        |  |   |        |  
|------------------------------------------------- |  | ----------------------- | ------ | - | --------------------------- | - | ---------------------------- |  | ----------------------------- | ------ |  | - | ------ | -
|                                                  |  | FirstQuarter            |        |   | Second Quarter              |   | Third Quarter                |  | Fourth Quarter                |       
|Fiscal 2003:                                      |  | 13 weeksendedMay 3,2003 |        |   | 13 weeksendedAugust 2, 2003 |   | 13 weeksendedNovember 1,2003 |  | 13 weeksendedJanuary 31, 2004 |       
|Total sales                                       |  | $                       | 54,541 |   |                             | $ | 59,835                       |  | $                             | 51,353 |  | $ | 56,906 |  
|Cost of sales                                     |  |                         | 36,014 |   |                             |   | 37,873                       |  |                               | 32,622 |  |   | 38,863 |  
|Gross profit                                      |  |                         | 18,527 |   |                             |   | 21,962                       |  |                               | 18,731 |  |   | 18,043 |  
|Selling, general and administrative expenses      |  |                         | 17,995 |   |                             |   | 17,666                       |  |                               | 17,232 |  |   | 18,958 |  
|Depreciation                                      |  |                         | 448    |   |                             |   | 486                          |  |                               | 466    |  |   | 557    |  
|Interest expense                                  |  |                         | 343    |   |                             |   | 237                          |  |                               | 283    |  |   | 319    |  
|Income (loss) before income tax expense (benefit) |  |                         | (259   | ) |                             |   | 3,573                        |  |                               | 750    |  |   | (1,791 | )
|Income tax expense (benefit)                      |  |                         | (104   | ) |                             |   | 1,429                        |  |                               | 300    |  |   | (714   | )
|Net income (loss)                                 |  | $                       | (155   | ) |                             | $ | 2,144                        |  | $                             | 450    |  | $ | (1,077 | )
|Earnings (loss) per sharebasic                   |  | $                       | (0.05  | ) |                             | $ | 0.74                         |  | $                             | 0.15   |  | $ | (0.36  | )
|Earnings (loss) per sharediluted                 |  | $                       | (0.05  | ) |                             | $ | 0.70                         |  | $                             | 0.13   |  | $ | (0.36  | )



(16)    Subsequent Events



On February 5, 2005 the Company entered into a definitive agreement with the Premier Greetings division of Paramount Cards Inc. to be its primary supplier of everyday and seasonal greeting cards. This agreement will considerably broaden the
Companys position as a leading provider of exceptional quality, value priced, social expressions merchandise. The agreement with Premier Greetings enables the Company to reposition its greeting card strategy by introducing a multi-tiered
pricing program featuring high quality greeting cards retailing at 49 cents, blended with the introduction of premium greeting cards selling for 99 cents. In conjunction with the program, the Company recorded a pre-tax charge of $4,415 in the fourth
quarter of Fiscal 2004 to value its existing greeting card inventory at the lower of cost or market. This inventory write-down is recorded as a separate line item in Cost of Goods in the Consolidated Statements of Operations. This estimate is
included in the $5,893 inventory reserve balance at January 29, 2005. The Company will roll out the new greeting card offering at the beginning of the second quarter of fiscal 2005.



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On April 7, 2005 the Company made a $1,650 payment which represents the remaining balance of the
extended creditor notes payable.



On April 14, 2005 the Company
approved the accelerated vesting of unvested and out-of-the-money options held by current employees, executive officers and non-employee directors (the Acceleration) that have been granted under the Companys 2002 Stock
Option Plan, 2003 Equity Incentive Plan and 2002 Non Employee Directors Stock Option Plan. As a result of the Acceleration, the affected unvested options are those which had exercise prices of greater than $9.64 per share, which was the
closing sales price of the Companys common stock on the NASDAQ National Market on April 14, 2005, the effective date of the Acceleration. Pursuant to the Acceleration, options granted under the Plans to purchase approximately 122,000 shares of
the Companys common stock that would otherwise have vested at various times within the next two years became fully vested. As a result of the Companys decision to approve the Acceleration, each option agreement underlying options subject
to the Acceleration is deemed to be amended to reflect the Acceleration as of the effective date, but all other terms and conditions of each such option agreement remain in full force and effect. The decision to initiate the Acceleration under the
plans, which the Company believes to be in the best interest of the Company and its shareholders, was made primarily to reduce compensation expense that might be recorded in future periods following the Companys adoption at the beginning of
the first fiscal year beginning after June 15, 2005 of FASB Statement No. 123, Share-Based Payment (revised 2004) (SFAS 123(R)).



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##### Table of Contents

Schedule I



FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONDENSED FINANCIAL
INFORMATION OF FACTORY CARD & PARTY OUTLET CORP.



BALANCE SHEETS

(Dollar amounts in thousands, except share and per share data)



|                                                                                                                                                                                       |  |                 |        |   |                 |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | - | --------------- | - | ------ | -
|                                                                                                                                                                                       |  | January 29,2005 |        |   | January 31,2004 |  
|A S S E T S                                                                                                                                                                            |  |                 |        |   |                 |   |        |  
|                                                                                                                                                                                       |  |                
|Current assets:                                                                                                                                                                        |  |                 |        |   |                 |   |        |  
|Due from subsidiary                                                                                                                                                                    |  | $               |       |   |                 | $ |       |  
|Note receivablesubsidiary                                                                                                                                                             |  |                 |       |   |                 |   |       |  
|                                                                                                                                                                                       |  |                 |        |   |                 |   |        |  
|Total current assets                                                                                                                                                                   |  |                 |       |   |                 |   |       |  
|Investment in subsidiary                                                                                                                                                               |  |                 | 28,873 |   |                 |   | 17,947 |  
|                                                                                                                                                                                       |  |                 |        |   |                 |   |        |  
|Total assets                                                                                                                                                                           |  | $               | 28,873 |   |                 | $ | 17,947 |  
|                                                                                                                                                                                       |  |                 |        |   |                 |   |        |  
|                                                                                                                                                                                       |  |                
|S T O C K H O L D E R S    E Q U I T Y                                                                                                                                                |  |                 |        |   |                 |   |        |  
|                                                                                                                                                                                       |  |                
|Common stock, $0.01 par value. Voting class-authorized 10,000,000 shares: 3,109,041 and 3,074,082 shares issued and outstanding at January 29,
2005 and January 31, 2004, respectively |  | $               | 31     |   |                 | $ | 31     |  
|Unearned restricted stock awards                                                                                                                                                       |  |                 | (148   | ) |                 |   | (275   | )
|Additional paid-in capital                                                                                                                                                             |  |                 | 25,116 |   |                 |   | 14,287 |  
|Accumulated earnings                                                                                                                                                                   |  |                 | 3,874  |   |                 |   | 3,904  |  
|                                                                                                                                                                                       |  |                 |        |   |                 |   |        |  
|Total stockholders equity                                                                                                                                                             |  | $               | 28,873 |   |                 | $ | 17,947 |  
|                                                                                                                                                                                       |  |                 |        |   |                 |   |        |  



See accompanying notes
to condensed financial information.



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##### Table of Contents

Schedule I



FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONDENSED FINANCIAL
INFORMATION OF FACTORY CARD & PARTY OUTLET CORP.



STATEMENTS OF OPERATIONS

(Dollar amounts in thousands)



|                                                   |  |                                     |      |   |                                     |   |                                      |  |                                       |       |  |   |        |  
|-------------------------------------------------- |  | ----------------------------------- | ---- | - | ----------------------------------- | - | ------------------------------------ |  | ------------------------------------- | ----- |  | - | ------ | -
|                                                   |  | For the 52weeks endedJanuary 292005 |      |   | For the 52weeks endedJanuary 312004 |   | For the 43weeks endedFebruary 1,2003 |  | For theNine weeks ended April 6, 2002 |      
|                                                   |  | SuccessorCompany                    |      |   | SuccessorCompany                    |   | SuccessorCompany                     |  | PredecessorCompany                    |      
|Royalty income                                     |  | $                                   |     |   |                                     | $ |                                     |  | $                                     |      |  | $ | 612    |  
|Interest incomesubsidiary note receivable         |  |                                     |     |   |                                     |   |                                     |  |                                       |      |  |   | 619    |  
|Equity in net income (loss) of subsidiary          |  |                                     | (200 | ) |                                     |   | 1,362                                |  |                                       | 2,542 |  |   | (3,350 | )
|Operating expenses                                 |  |                                     |     |   |                                     |   |                                     |  |                                       |      |  |   | 349    |  
|Plan of reorganization and fresh start adjustments |  |                                     |     |   |                                     |   |                                     |  |                                       |      |  |   | 21,898 |  
|                                                   |  |                                     |      |   |                                     |   |                                      |  |                                       |       |  |   |        |  
|Net income (loss)                                  |  | $                                   | (200 | ) |                                     | $ | 1,362                                |  | $                                     | 2,542 |  | $ | 19,430 |  
|                                                   |  |                                     |      |   |                                     |   |                                      |  |                                       |       |  |   |        |  



See accompanying notes
to condensed financial information.



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##### Table of Contents

Schedule I



FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



CONDENSED FINANCIAL
INFORMATION OF FACTORY CARD & PARTY OUTLET CORP.



STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)



|                                                                                        |  |                                      |         |   |                                      |   |        |                                      |  |   |                                      |   |  |   |         |  
|--------------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ------------------------------------ | - | ------ | ------------------------------------ |  | - | ------------------------------------ | - |  | - | ------- | -
|                                                                                        |  | For the 52weeks endedJanuary 29,2005 |         |   | For the 52weeks endedJanuary 31,2004 |   |        | For the 43weeks endedFebruary 1,2003 |  |   | For the Nineweeks ended April 6,2002 |  
|                                                                                        |  | SuccessorCompany                     |         |   | SuccessorCompany                     |   |        | SuccessorCompany                     |  |   | PredecessorCompany                   |  
|Cash flows from operating activities:                                                   |  |                                      |         |   |                                      |   |        |                                      |  |   |                                      |   |  |   |         |  
|Net income (loss)                                                                       |  | $                                    | (200    | ) |                                      | $ | 1,362  |                                      |  | $ | 2,542                                |   |  | $ | 19,430  |  
|Adjustments to reconcile net income (loss) to net cash flows from operating activities: |  |                                      |         |   |                                      |   |        |                                      |  |   |                                      |   |  |   |         |  
|Amortization of deferred compensation                                                   |  |                                      | 127     |   |                                      |   | 131    |                                      |  |   | 118                                  |   |  |   |        |  
|Increase in investment in subsidiary                                                    |  |                                      | (10,926 | ) |                                      |   | (2,793 | )                                    |  |   | (5,114                               | ) |  |   | (93,522 | )
|Decrease in due from subsidiary                                                         |  |                                      |         |   |                                      |   |       |                                      |  |   |                                     |   |  |   | 12,179  |  
|Tax benefit of pre-confirmation operating losses                                        |  |                                      | 10,851  |   |                                      |   | 962    |                                      |  |   | 2,357                                |   |  |   |        |  
|                                                                                        |  |                                      |         |   |                                      |   |        |                                      |  |   |                                      |   |  |   |         |  
|Net cash flows from operating activities                                                |  |                                      | (148    | ) |                                      |   | (338   | )                                    |  |   | (97                                  | ) |  |   | (61,913 | )
|                                                                                        |  |                                      |         |   |                                      |   |        |                                      |  |   |                                      |   |  |   |         |  
|Cash flows from investing activities:                                                   |  |                                      |         |   |                                      |   |        |                                      |  |   |                                      |   |  |   |         |  
|Decrease in note receivable from subsidiary                                             |  |                                      |        |   |                                      |   |       |                                      |  |   |                                     |   |  |   | 61,913  |  
|                                                                                        |  |                                      |         |   |                                      |   |        |                                      |  |   |                                      |   |  |   |         |  
|Net cash flows from investing activities                                                |  |                                      |        |   |                                      |   |       |                                      |  |   |                                     |   |  |   | 61,913  |  
|                                                                                        |  |                                      |         |   |                                      |   |        |                                      |  |   |                                      |   |  |   |         |  
|Cash flows from financing activities:                                                   |  |                                      |         |   |                                      |   |        |                                      |  |   |                                      |   |  |   |         |  
|Cash received from exercise of management stock warrants                                |  |                                      | 148     |   |                                      |   | 338    |                                      |  |   | 97                                   |   |  |   |        |  
|                                                                                        |  |                                      |         |   |                                      |   |        |                                      |  |   |                                      |   |  |   |         |  
|Net cash flows from financing activities                                                |  |                                      | 148     |   |                                      |   | 338    |                                      |  |   | 97                                   |   |  |   |        |  
|                                                                                        |  |                                      |         |   |                                      |   |        |                                      |  |   |                                      |   |  |   |         |  
|Net increase (decrease) in cash                                                         |  |                                      |        |   |                                      |   |       |                                      |  |   |                                     |   |  |   |        |  
|Cash at end of period                                                                   |  | $                                    |        |   |                                      | $ |       |                                      |  | $ |                                     |   |  | $ |        |  
|                                                                                        |  |                                      |         |   |                                      |   |        |                                      |  |   |                                      |   |  |   |         |  
|Supplemental cash flow information:                                                     |  |                                      |         |   |                                      |   |        |                                      |  |   |                                      |   |  |   |         |  
|Income taxes refunded                                                                   |  | $                                    | (3      | ) |                                      | $ |       |                                      |  | $ | (360                                 | ) |  | $ |        |  
|Stock issued (successor company)                                                        |  |                                      |        |   |                                      |   |       |                                      |  |   |                                     |   |  |   | (10,040 | )
|Fair value adjustments                                                                  |  |                                      |        |   |                                      |   |       |                                      |  |   |                                     |   |  |   | 10,406  |  
|Stock retirement (predecessor company) and debt discharge                               |  |                                      |        |   |                                      |   |       |                                      |  |   |                                     |   |  |   | (22,828 | )
|Unearned restricted stock awards                                                        |  | $                                    | 148     |   |                                      | $ | 275    |                                      |  | $ | 446                                  |   |  | $ | 564     |  



See accompanying notes
to condensed financial information.



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##### Table of Contents

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



NOTES TO CONDENSED FINANCIAL INFORMATION OF FACTORY CARD &

PARTY OUTLET CORP.

(Dollar amounts in thousands)



(1)    Basis of Accounting



The condensed financial information of Factory Card & Party Outlet Corp. (the Company) has been prepared pursuant to Securities and
Exchange Commission rules and regulations and should be read in conjunction with the Consolidated Financial Statements and Notes thereto of Factory Card & Party Outlet Corp. and Subsidiary as of January 29, 2005 and January 31, 2004 (Successor
Company), and for the 52 weeks ended January 29, 2005, 52 weeks ended January 31, 2004, the 43 weeks ended February 1, 2003 (Successor Company) and the nine weeks ended April 6, 2002 (Predecessor Company). The Companys Condensed Financial
Information has been prepared on an unconsolidated basis. The Companys investment in and amounts due from subsidiary are recorded on the equity basis. Due to the fact that there are certain restrictions on the Companys assets and the
Company has guaranteed the New Loan Agreement between our subsidiary and Wells Fargo Retail Finance, LLC, the Company is required to file Condensed Financial Information of Factory Card & Party Outlet Corp.



(2)    Reorganization and Emergence from Chapter 11



On March 23, 1999, the Company and its subsidiary, Factory Card Outlet of
America, Ltd., filed a petition for reorganization under chapter 11 of title 11 of the United States Code. The Company filed a plan of reorganization and related disclosure statement with the bankruptcy court on February 5, 2002. The bankruptcy
court confirmed the plan of reorganization on March 20, 2002 and on April 9, 2002 (the Effective Date) the Company successfully emerged from Chapter 11. See Note 1 of the Notes to Consolidated Financial Statements.



(3)    Guarantees



The Company has guaranteed the credit and debt agreements between its
subsidiary and various lenders. For information related to the agreements, see Note 5 of the Notes to Consolidated Financial Statements.



(4)    Notes ReceivableSubsidiary



During Fiscal 1997, the Companys subsidiary issued a note payable to the Company. Interest was accrued quarterly based on the prime lending rate
plus two percent per year. The note and any accrued interest was due and payable on demand. Pursuant to the Plan of Reorganization, the current assets Note ReceivableSubsidiary and Due From Subsidiary were deemed to be contributed to capital
under the reorganized Company.



(5)    Royalty and
Licensing Agreement



In June 1997, the Company entered
into a Royalty and Licensing Agreement (Agreement) with its subsidiary. The Agreement grants the subsidiary the right to use trademarks and tradenames owned by the Company in exchange for a royalty fee of one and one-half percent of net
sales from operations. Pursuant to the Plan of Reorganization, the Agreement was deemed null and void on the Effective Date. In the 52 weeks ended January 29, 2005, the 52 weeks ended January 31, 2004 and the 43 weeks ended February 1, 2003, the
Company did not record any Royalty Income.



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