<PAGE>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-Q/A
                                 Amendment No. 1

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

                  For The Quarterly Period Ended August 3, 2002

                          Commission File Number: 21859

                        FACTORY CARD & PARTY OUTLET CORP.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

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

                                2727 Diehl Road,
                            Naperville, IL 60563-2371
--------------------------------------------------------------------------------
               (Address of principal executive offices, zip code)

Registrant's telephone number, including area code:  (630) 579-2000

                            Factory Card Outlet Corp.
                            -------------------------
                                  (Former Name)

Indicate by check mark whether this 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 whether the registrant has filed all documents and
reports required to be filed by Sections 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
September 12, 2002 was 1,512,448.

<PAGE>

                        Factory Card & Party Outlet Corp.

                                   Form 10-Q/A

                      For the Quarter Ended August 3, 2002
                                      Index

<TABLE>
<CAPTION>
                                                                                                      Page

<S>                                                                                                   <C>
            Explanatory Note                                                                            2

            Cautionary Statement Regarding Forward-Looking Statements                                   3

Part I      Financial Information

Item 1      Financial Statements:

            Condensed Consolidated Balance Sheets (Unaudited) - as of August 3, 2002 (Successor
             Company) and as of February 2, 2002 (Predecessor Company)                                  4

            Condensed Consolidated Statements of Operations (Unaudited) - three months ended
             August 3, 2002, four months ended August 3, 2002 (Successor Company), three
            months ended August 4, 2001, two months ended April 6, 2002 (as restated) and
             six months ended August 4, 2001 (Predecessor Company)                                      5

            Condensed Consolidated Statements of Cash Flows (Unaudited) - four months ended
             August 3, 2002 (Successor Company), two months ended April 6, 2002 (as
             restated) and six months ended August 4, 2001 (Predecessor Company)                        6

            Notes to Condensed Consolidated Financial Statements - (Unaudited)                         7-16

Item 2      Management's Discussion and Analysis of Financial Condition
             And Results of Operations                                                                17-24

Item 3      Quantitative and Qualitative Disclosures About Market Risk                                 24

Part II     Other Information
             Item 1.  Legal Proceedings                                                                24
             Item 2.  Changes in Securities and Use of Proceeds                                        24
             Item 3.  Defaults Upon Senior Securities                                                  24
             Item 4.  Submission of Matters to a Vote of Security Holders                              25
             Item 5.  Other Information                                                                25
             Item 6.  Exhibits and Reports on Form 8-K                                                25-26
             Signatures                                                                                27
             Certifications                                                                            28
</TABLE>

                                        1

<PAGE>


                        FACTORY CARD & PARTY OUTLET CORP.

                                EXPLANATORY NOTE

The purpose of this amendment to our Quarterly Report on Form 10-Q is to amend
and restate the reorganization items recorded in the two months ended April 6,
2002 (Predecessor Company) as previously filed in our Quarterly Report on Form
10-Q on September 16, 2002.

Subsequent to the issuance of our condensed consolidated financial statements
for the quarterly period ended May 4, 2002, we determined that our
reorganization items recorded in the two months ended April 6, 2002 (Predecessor
Company) need to be restated. In connection with the reorganization, we issued
1,349,995 shares of our new common stock to certain of the unsecured creditors.
The fair value of these shares was $9.5 million. We initially recorded the
issuance of these shares as a charge to stockholders' equity. We have determined
that the fair value of the shares issued should have also been recorded as a
reorganization item in the Condensed Consolidated Statement of Operations in the
two months ended April 6, 2002. As a result, we have restated our Condensed
Consolidated Statements of Operations and Cash Flows for the two months ended
April 6, 2002 (Predecessor Company). The Condensed Consolidated Statements of
Operations and Cash Flows for the four months ended August 3, 2002 (Successor
Company) as well as the Condensed Consolidated Balance Sheet at August 3, 2002
(Successor Company) are not affected by the aforementioned restatement.
Additionally, the restatement has no effect on our liquidity or cash position.
See note (10) in the Notes to Condensed Consolidated Financial Statements for
summary of the significant effects of the restatement.

This Quarterly Report on Form 10-Q/A does not reflect events occurring after the
filing of our Quarterly Report on Form 10-Q for the fiscal quarter ended August
3, 2002, or materially modify or update those disclosures, except as discussed
above.

                                        2

<PAGE>


            CAUTIONARY STATEMENT 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 its subsidiaries.

Statements made in this report, 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. These forward-looking
statements may include, but are not limited to, certain statements in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," such as our ability to meet our liquidity needs, scheduled debt and
interest payments and expected future capital expenditure requirements.

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 not guarantees of future performance and that actual
results and trends in the future may differ materially.

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;
     .    governmental regulations; and
     .    other factors both referenced and not referenced in this Form 10-Q/A.

                                        3

<PAGE>

PART I - FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS

                        FACTORY CARD & PARTY OUTLET CORP.
                                 AND SUBSIDIARY

                      Condensed Consolidated Balance Sheets
                                   (Unaudited)
                          (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                                         Successor         Predecessor
                                                                          Company            Company
                                                                      ----------------    ---------------
                                                                         August 3,         February 2,
                                                                            2002               2002
                                                                      ----------------    ---------------
    <S>                                                               <C>                 <C>
    ASSETS

    Current assets:
      Cash                                                            $            187    $           182
      Merchandise inventories                                                   47,165             59,496
      Prepaid expenses and other                                                 4,228              2,949
                                                                      ----------------    ---------------
        Total current assets                                                    51,580             62,627

    Fixed assets, net                                                            6,309             18,414
    Other assets                                                                   414                258
                                                                      ----------------    ---------------
        Total assets                                                  $         58,303    $        81,299
                                                                      ================    ===============

    LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

    Current liabilities:
      Debt                                                            $         17,090    $             -
      Debtor-in-possession financing                                                 -             27,260
      Accounts payable                                                          12,401              8,071
      Accrued expenses                                                           7,183              9,698
      Current portion of long term debt and capital lease
       obligations                                                                 431                305
                                                                      ----------------    ---------------
        Total current liabilities                                               37,105             45,334
                                                                      ----------------    ---------------
    Long term debt and capital lease obligations                                 6,070                338
    Deferred rent liabilities                                                      726                  -
    Liabilities subject to compromise                                                -             54,560
                                                                      ----------------    ---------------
        Total liabilities                                                       43,901            100,232

    Stockholders' equity (deficit)                                              14,402            (18,933)
                                                                      ----------------    ---------------
        Total liabilities and stockholders' equity (deficit)          $         58,303    $        81,299
                                                                      ================    ===============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                        4

<PAGE>

                        FACTORY CARD & PARTY OUTLET CORP.
                                 AND SUBSIDIARY

                 Condensed Consolidated Statements of Operations
                                   (Unaudited)
              (Dollar amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                                 Successor        Predecessor      Successor     Predecessor     Predecessor
                                                  Company           Company         Company        Company         Company
                                               -------------     -------------   -------------  -------------    ------------
                                                   Three             Three            Four           Two             Six
                                                  Months            Months           Months         Months          Months
                                                   Ended             Ended           Ended          Ended           Ended
                                                 August 3,         August 4,        August 3,      April 6,        August 4,
                                                   2002              2001             2002          2002             2001
                                               -------------     -------------   -------------  -------------    ------------
                                                                                               [as restated -
                                                                                               see note (10)]
<S>                                            <C>               <C>             <C>            <C>              <C>
Net sales                                      $      59,733     $      57,013   $      77,920  $      40,837    $      113,249
Cost of sales                                         37,808            36,403          49,405         26,991            73,945
                                               -------------     -------------   -------------  -------------    --------------
   Gross profit                                       21,925            20,610          28,515         13,846            39,304
Selling, general and administrative expenses          17,869            15,848          23,566         12,212            32,922
Depreciation                                             356             1,745             456          1,030             3,497
Reorganization items                                       -             1,218               -        (18,840)            2,622
Interest expense                                         412               627             566            374             1,451
                                               -------------     -------------   -------------  -------------    --------------
   Income (loss) before income tax expense
    (benefit)                                          3,288             1,172           3,927         19,070            (1,188)
Income tax expense (benefit)                           1,311                 -           1,560           (360)                -
                                               -------------     -------------   -------------  -------------    --------------
   Net income (loss)                           $       1,977     $       1,172   $       2,367  $      19,430    $       (1,188)
                                               =============     =============   =============  =============    ==============

   Net income per share - basic                $        1.38                     $        1.65
                                               -------------                     -------------
Weighted average shares outstanding - basic        1,432,486                         1,430,619
                                               -------------                     -------------

   Net income per share - diluted              $        1.35                     $        1.62
                                               -------------                     -------------

Weighted average shares outstanding -
 diluted                                           1,463,555                         1,461,688
                                               -------------                     -------------
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                        5

<PAGE>

                        FACTORY CARD & PARTY OUTLET CORP.
                                 AND SUBSIDIARY

                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)
                          (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                        Successor       Predecessor        Predecessor
                                                         Company          Company            Company
                                                     --------------    --------------    --------------
                                                      For the Four       For the Two      For the Six
                                                      Months Ended      Months Ended      Months Ended
                                                     August 3, 2002    April 6, 2002     August 4, 2001
                                                     --------------    --------------    --------------
                                                                       [as restated -
                                                                       see note (10)]
<S>                                                  <C>               <C>               <C>
Cash flows from operating activities:
  Net income (loss)                                  $        2,367    $       19,430    $       (1,188)
  Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
   Plan of reorganization and fresh start
    adjustments                                                   -           (21,898)                -
      Depreciation and amortization of fixed
       assets                                                   456             1,030             3,497
      Amortization of deferred financing costs                   30                26               376
      Amortization of deferred compensation                      47                 -                 -
      Non cash portion of reorganization items                    -             1,275               772
      Benefit of pre-confirmation net operating
       losses                                                 1,850                 -                 -
      Changes in assets and liabilities:
        Merchandise inventories                               4,425             2,212             2,025
        Prepaid expenses and other assets                     1,019            (2,594)              651
        Accounts payable                                      1,039             3,336             2,331
        Accrued expenses                                     (5,351)            2,020            (1,315)
        Deferred rent obligation                                726                 -                 -
        Liabilities subject to compromise                         -                 -                99
                                                     --------------    --------------    --------------
Net cash provided by operating activities                     6,608             4,837             7,248
                                                     --------------    --------------    --------------
Net cash used in investing activities - purchase
 of fixed assets, net                                          (924)             (257)             (550)
                                                     --------------    --------------    --------------
Cash flow provided by (used in) financing activities:
  Borrowings                                                 76,632            38,381           112,822
  Repayment of debt                                         (82,285)          (42,898)         (119,524)
  Payment of capital lease obligations                         (176)              (56)             (104)
  Increase in long term debt                                     46                 -                 -
  Cash received from exercise of management stock
   warrants                                                      97                 -                 -
                                                     --------------    --------------    --------------
Net cash used in financing activities                        (5,686)           (4,573)           (6,806)
                                                     --------------    --------------    --------------
Net increase (decrease) in cash                                  (2)                7              (108)
Cash at beginning of period                                     189               182               281
                                                     --------------    --------------    --------------
Cash at end of period                                $          187    $          189    $          173
                                                     --------------    --------------    --------------

Supplemental cash flow information:
  Interest paid                                      $          221    $          334    $        1,121
  Cash paid for reorganization items                          5,233             1,055             1,497
Supplemental non cash information:
  Stock issued (successor company)                                -           (10,040)                -
  Fair value adjustments                                          -            10,406                 -
  Stock retired (predecessor company) and debt
   discharge                                                      -           (22,828)                -
  Deferred compensation                                         517               564                 -
  Capital lease obligations                                       -                56                 -
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                        6

<PAGE>

                        FACTORY CARD & PARTY OUTLET CORP.
                                 AND SUBSIDIARY
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)
              (Dollar amounts in thousands, except per share data)

(1)     Chapter 11 Proceedings and Reorganization

        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 its
        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 Company's Amended Plan
        of Reorganization (the "Plan of Reorganization") that it 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% 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 74,553 shares of the Company's new Common Stock were
               issued to holders of the canceled common stock at a ratio of
               .00992307034 shares of new Common Stock for each share of
               canceled common stock.

          .    The Company issued 1,349,995 shares of the new Common Stock to
               holders of unsecured claims against the Company, or "General
               Unsecured Creditors."

          .    The Company issued 75,000 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 31,000 shares of the Company's new Common Stock at a
               purchase price of $7.52 per share. On June 7, 2002, 12,900
               warrants were exercised and the remaining 18,100 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 153,467
               additional shares of the new Common Stock. The Series A Warrants
               are exercisable any time prior to April 9, 2006 at a price of
               $11.00 per share. The Series B Warrants are exercisable at any
               time prior to April 9, 2008 at a price of $16.00 per share. The
               Series C Warrants are exercisable any time prior to April 9, 2010
               at a price of $16.00 per share. The Series D Warrants are
               exercisable any time prior to April 9, 2010 at a price of $34.00
               per share.

                                        7

<PAGE>

          .    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 166,667 shares of the
               Company's new Common Stock.

          .    The Company agreed to pay $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, which obligation is
               secured by a subordinated lien on certain of the Company's
               property.

          .    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"). 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 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)     Business and Basis of Presentation

        The Company is a chain of company-owned stores offering an extensive
        selection of party supplies, gifts, greeting cards, giftwrap, and other
        special occasion merchandise at everyday value prices. As of September
        12, 2002, the Company operated 171 stores in 20 states.

        The consolidated unaudited financial statements include the accounts of
        Factory Card & Party Outlet Corp. and its wholly owned subsidiary,
        Factory Card Outlet of America Ltd. These financial statements have been
        prepared by management without audit and should be read in conjunction
        with the consolidated financial statements and notes for the fiscal year
        ended February 2, 2002 included in the Company's Annual Report on Form
        10-K. The operating results for the interim periods are not necessarily
        indicative of the results for the year. All intercompany balances and
        transactions have been eliminated in consolidation. In the opinion of
        management, the accompanying consolidated financial statements reflect
        all normal recurring and certain nonrecurring adjustments necessary for
        a fair presentation of the interim financial statements. In addition,
        certain prior year amounts have been reclassified to conform to the
        current year presentation.

        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.

                                        8

<PAGE>

        As a result of fresh-start reporting, the Company reflected the
        distributions under the Plan of Reorganization in its 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 Standard ("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:

                                        9

<PAGE>

<TABLE>
<CAPTION>
                                        Predecessor       Plan of              Fresh Start           Successor
                                       April 6, 2002   Reorganization          Adjustments         April 6, 2002
                                       --------------  --------------        --------------       ----------------
<S>                                    <C>             <C>                   <C>                  <C>
ASSETS

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              200b                                        440
                                       -------------   --------------        --------------       ---------------

    Total assets                       $      80,267   $          200        $      (17,156)      $        63,311
                                       =============   ==============        ==============       ===============

LIABILITIES AND
 STOCKHOLDERS' EQUITY
 (DEFICIT)

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                             3,085e                                      3,085
                                       -------------   --------------        --------------       ---------------
    Total current liabilities                 46,484              155                                      46,639
                                       -------------   --------------        --------------       ---------------
Long term notes payable and
 capital leases                                1,128            5,504d,h                                    6,632
Deferred rent liabilities                          -            6,750f               (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)          41,847g              (10,406)g              10,040
                                       -------------   --------------        --------------       ---------------
    Total liabilities &
     stockholders' equity (deficit)    $      80,267   $          200        $      (17,156)a    $         63,311
                                       =============   ==============        ==============       ===============
</TABLE>

     (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 are to be 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 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.

                                       10

<PAGE>

        Management Estimates

        The preparation of financial statements in conformity with accounting
        principles generally accepted in the United States of America requires
        management 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. Significant estimates made as
        of and for the three and four fiscal months ended August 3, 2002, the
        two fiscal months ended April 6, 2002 and the three and six fiscal month
        period ended August 4, 2001 include accruals for reorganization items,
        provision for shrinkage, and the carrying values of inventories. Actual
        results could differ from those estimates.

        Change in Accounting Principle

        Prior to its 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 that the change will have a significant impact on
        periodic earnings.

        New Accounting Pronouncements

        In June 2001, the FASB ("Financial Accounting Standards Board") issued
        SFAS ("Statement of Financial Accounting Standards") No. 142 "Goodwill
        and Other Intangible Assets", which establishes financial accounting and
        reporting for acquired goodwill and other intangible assets and
        supercedes APB Opinion No. 17, "Intangible Assets". The provisions of
        SFAS No. 142 are effective for fiscal years beginning after December 15,
        2001. As the Company does not have goodwill or intangible assets
        recorded in the financial statements, the adoption of SFAS No. 142
        during the first quarter of fiscal 2002 did not have an impact on the
        financial condition or results of operations of the Company.

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
        Retirement Obligations", which addresses financial accounting and
        reporting for obligations associated with the retirement of tangible
        long-lived assets and the associated asset retirement costs. The
        standard applies to legal obligations associated with the retirement of
        long-lived assets that result from the acquisition, construction,
        development and (or) normal use of the asset. The Company has adopted
        the provisions of SFAS No. 143 and it did not have a material impact on
        the Company's consolidated financial position or results of operations.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the
        Impairment or Disposal of Long Lived Assets", which addresses financial
        accounting and reporting for the impairment or disposal of long-lived
        assets and supercedes SFAS No. 121, "Accounting for the Impairment of
        Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", although
        it retains many of the fundamental provisions of that Statement. The
        provisions of SFAS No. 144 are effective for fiscal years beginning
        after December 15, 2001, thereby applying to fiscal 2002. In conjunction
        with fresh-start reporting, the Company recorded a $11,760 adjustment to
        fixed assets to reflect the excess of book value over enterprise value.
        We have adopted the provisions of SFAS No. 144 and it did not have a
        material impact on our consolidated financial position or results of
        operations.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
        Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
        Technical Corrections". Specifically, SFAS 145 rescinds SFAS No. 4,
        "Reporting Gains and Losses from Extinguishment of Debt, an amendment of
        APB Opinion No. 30" and SFAS No. 64, "Extinguishments of Debt Made to
        Satisfy Sinking-Fund Requirements", as these two standards required that
        all gains and losses from the extinguishment of

                                       11

<PAGE>

        debt be aggregated and, if material, classified as an extraordinary
        item. Consequently, such gains and losses will now be classified as
        extraordinary only if they meet the criteria for extraordinary treatment
        set forth in APB Opinion No. 30, "Reporting the Results of Operations -
        Reporting the Effects of Disposal of a Segment of a Business, and
        Extraordinary, Unusual and Infrequently Occurring Events and
        Transactions." SFAS No. 145 also rescinds SFAS No. 44 "Accounting for
        Intangible Assets of Motor Carriers, an amendment of Chapter 5 of ARB
        No. 43 and an interpretation of APB Opinions 17 and 30", because the
        event to which that Statement relates is no longer relevant. SFAS No.
        145 amends SFAS No. 13, "Accounting for Leases", to require that certain
        lease modifications that have economic effects similar to sale-leaseback
        transactions be accounted for in the same manner as such transactions,
        and also makes certain technical corrections to a number of existing
        pronouncements. The Company is required to adopt this statement due to
        the application of fresh-start accounting. The effect of this statement
        on the Company is that the net gain associated with the plan of
        reorganization and fresh-start adjustments is reported as a component of
        operations.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
        Associated with Exit or Disposal Activities." This statement changes the
        timing of recognition for certain exit costs associated with
        restructuring activities, so that certain exit costs would be recognized
        over the period in which the restructuring activities occur. Currently,
        exit costs are recognized when the Company commits to a restructuring
        plan. SFAS No. 146 is effective for exit or disposal activities
        initiated after December 31, 2002 and could result in the Company
        recognizing the cost of future restructuring activities over a period of
        time as opposed to as a single event.

(3)     Long Term Debt and Capital Lease Obligations

        Pursuant to the Plan of Reorganization, the Company converted $3,130 of
        post petition trade payables into a trade conversion note, which will be
        payable within 4 years of the Effective Date. In addition, the Company
        recorded at fair value a $2,600 extended creditor payment to the general
        unsecured creditors.

        The following table summarizes the components of Short and Long Term
        Debt and Capital Lease Obligations at August 3, 2002.

                                                                    August 3,
                                                                      2002
                                                                ---------------
        Trade conversion note                                   $         3,130
        Discounted value of extended creditor payment                     2,420
        Financing agreements                                                803
        Capital leases                                                      148
                                                                ---------------
          Total                                                 $         6,501
                                                                ===============

(4)     Debt

        On the Effective Date, obligations relating to the Company's
        debtor-in-possession financing facility were paid in full and the
        Company's secured financing facility with Wells Fargo Retail Finance,
        LLC (the "New Loan Agreement") became effective. The New Loan Agreement,
        which is a line of credit, currently provides up to $40,000 (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 percent of inventory levels. The Loan Agreement expires on April 8,
        2005 and has a variable interest rate based upon the Prime rate or at
        the Company's option, a variable rate based upon earnings performance
        and the London Interbank Offered Rate ("LIBOR") with a minimum threshold
        of 5.00%. The interest rate on the Company's borrowings was 5.00% at
        August 3, 2002. Borrowings under the Loan Agreement

                                       12

<PAGE>

        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.

(5)     Stockholders' Equity

        The Company has 10,000,000 shares of authorized common stock, par value
        $0.01 per share, 1,512,448 of which were deemed issued and outstanding
        for accounting purposes at August 3, 2002. A total of 1,349,995 shares
        were distributed in the initial distribution of stock to creditors,
        75,000 shares were distributed to certain members of management which
        vest over a 4 year period and 74,553 shares were distributed to former
        equity interests.

        As provided in the Plan of Reorganization, the Company adopted a stock
        option plan, which authorizes the grant of up to 166,667 stock options
        to employees of the Company - 124,900 options with an exercise price of
        $7.52 were outstanding at August 3, 2002.

        The Company also 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 153,467 additional shares of the
        new Common Stock. The 38,346 shares of Series A Warrants are exercisable
        any time prior to April 9, 2006 at a price of $11.00 per share. The
        46,256 shares of Series B Warrants are exercisable at any time prior to
        April 9, 2008 at a price of $16.00 per share. The 38,346 shares of
        Series C Warrants are exercisable any time prior to April 9, 2010 at a
        price of $16.00 per share. The 30,519 shares of Series D Warrants are
        exercisable any time prior to April 9, 2010 at a price of $34.00 per
        share.

        Warrants were issued to management to purchase an aggregate 31,000
        shares of the Common Stock at a purchase price of $7.52 per share. On
        June 7, 2002, 12,900 warrants were exercised and the remaining 18,100
        warrants expired.

        As provided in the Plan of Reorganization, the Company entered into a
        Trade Conversion Agreement with certain trade creditors to convert
        $3,130 of accounts payable into long term Trade Conversion Notes. Per
        the agreement, these notes will be payable on the fourth anniversary of
        the Effective Date and contain a conversion feature into common stock
        between the third and fourth anniversary of the Effective Date.

        On April 23, 2002, the Board of Directors approved the non-employee
        Director Stock Option Plan, which authorized the grant of up to 150,000
        common stock options to non-employee members of the Board of Directors -
        70,000 were granted with an exercise price of $7.52.

        A separate Statement of Stockholders' Equity is not required to be
        presented for interim periods. Comprehensive income equaled net income
        for the periods presented as the Company does not have any currency
        translation adjustments, minimum pension liability adjustments or SFAS
        No. 133 "Accounting for Derivative Instruments and Hedging Activities"
        adjustments.

                                       13

<PAGE>

(6)     Earnings Per Share

        In accordance with SFAS No. 128 "Earnings per Share", earnings per share
        - basic were computed by dividing net income by the weighted average
        number of common shares outstanding during the period. Earnings per
        share - diluted includes, in addition to the above, the effect of
        potentially dilutive securities, if dilutive.

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

<TABLE>
<CAPTION>
                                                                      Income            Shares          Per share
                                                                  --------------    --------------    --------------
        <S>                                                       <C>                    <C>          <C>
        For the three fiscal months ended August 3, 2002:
        Earnings per share - basic:
          Net income                                              $        1,977         1,432,486    $         1.38

        Effect of dilutive securities:
           Stock options and warrants                                                       31,069
        Earnings per share - diluted:
           Net income                                             $        1,977         1,463,555    $         1.35
                                                                  ==============    ==============    ==============

<CAPTION>
                                                                      Income            Shares          Per share
                                                                  --------------    --------------    --------------
        <S>                                                       <C>                    <C>          <C>
        For the four fiscal months ended August 3, 2002:
        Earnings per share - basic:
          Net income                                              $        2,367         1,430,619    $         1.65

        Effect of dilutive securities:
          Stock options and warrants                                                        31,069
        Earnings per share - diluted:
          Net income                                              $        2,367         1,461,688    $         1.62
                                                                  ==============    ==============    ==============
</TABLE>

        The dilutive impact of stock options and warrants was calculated using
        the treasury method. The 153,467 warrants issued to old equity and the
        shares related to the trade conversion notes did not meet the criteria
        for inclusion in the diluted earning per share calculation and thus were
        excluded.

        Per share and share information for the Predecessor Company for all
        periods presented in the Condensed Consolidated Statements of Operations
        have been omitted as such information is not deemed to be meaningful.

                                       14

<PAGE>

(7)     Reorganization Items

        Reorganization Items consisted of professional fees related to legal,
        accounting and consulting services directly attributable to the Plan of
        Reorganization and employee retention bonuses. In addition,
        Reorganization Items include the write-off of old equity upon emergence
        from chapter 11 and the elimination of pre-petition obligations during
        the two-month period ended April 6, 2002. The components of
        Reorganization Items are as follows:

<TABLE>
<CAPTION>
                                                         Predecessor        Predecessor     Predecessor
                                                           Company           Company          Company
                                                        ---------------    -------------    -------------
                                                             Two              Three             Six
                                                            months            months          months
                                                            ended             ended            ended
                                                           April 6,         August 4,        August 4,
                                                             2002              2001            2001
                                                        ---------------    -------------    -------------
           <S>                                          <C>                <C>              <C>
           Professional fees                            $         1,379    $         597    $       1,419
           Severance/retention bonus                              1,026              200              718
           Closed store expense                                     311              363              406
           Fresh start adjustments                               10,406                -                -
           Forgiveness of debt                                  (41,847)               -                -
           Unsecured creditors' ownership share
            of reorganized Company                                9,543                -                -
           Other                                                    342               58               79
                                                        ---------------    -------------    -------------
             Total                                      $       (18,840)   $       1,218    $       2,622
                                                        ---------------    -------------    -------------
</TABLE>

        The Successor Company has not recorded any Reorganization Items in the
        four month period ended August 3, 2002.

(8)     Income Taxes

        Since the Company utilized fresh start accounting upon emerging from
        bankruptcy, income tax expense of $1,560 for the four months ended
        August 3, 2002 is offset by a direct increase in stockholders' equity
        due to the Company's ability to utilize prior period net operating loss
        benefits. Because the Company utilized net operating loss carryforwards,
        we did not pay federal income taxes in the four months ended August 3,
        2002. The income tax benefit of $360 for the two months ended April 6,
        2002 results from the realization of net operating loss carry backs due
        to the enactment of the Job Creation and Workers Assistance Act of 2002.

        The Company has recorded a valuation allowance to fully reserve for the
        value of net deferred tax assets that existed upon emergence from
        bankruptcy. These assets include remaining net operating loss
        carryforwards. This allowance on pre-emergence deferred tax assets is
        necessary, as the utilization of the Company's net loss carry forwards
        is dependent upon sufficient future taxable income. In the four month
        period ended August 3, 2002, the Company has recorded a $290 new
        deferred tax asset related to deferred rent liabilities which is offset
        by a direct increase in stockholders' equity due to the Company's
        ability to utilize prior period net operating loss benefits. The Company
        believes they will realize the benefit of the new deferred tax asset in
        future periods and therefore has not recorded a valuation allowance at
        this time.

                                       15

<PAGE>

(9)     Related Party Transactions

        As described in the Plan of Reorganization, 90% of the new Common Stock
        was distributed to unsecured creditors, five percent was distributed to
        our management and five percent was distributed to old equity
        shareholders. Only one entity has an ownership interest of more than
        10%. There were no purchases from that entity during the quarterly
        period ended August 3, 2002 and no amounts were owed at August 3, 2002.
        Management believes transactions with former unsecured creditors, as
        well as other vendors, are deemed to be consummated on terms equivalent
        to those prevailing in an arm's length transaction.

(10)    Restatement of Reorganization Items

        Subsequent to the issuance of the condensed consolidated financial
        statements for the quarterly period ended May 4, 2002, the Company
        determined that reorganization items recorded in the two months ended
        April 6, 2002 (Predecessor Company) need to be restated. In connection
        with the reorganization, 1,349,995 shares of new common stock were
        issued to certain of the unsecured creditors. The fair value of these
        shares was $9,543. The Company initially recorded the issuance of these
        shares as a charge to stockholders' equity. The Company has determined
        that the fair value of the shares issued should have also been recorded
        as a reorganization item in the Condensed Consolidated Statement of
        Operations in the two months ended April 6, 2002. As a result, the
        Condensed Consolidated Statements of Operations and Cash Flows for the
        two months ended April 6, 2002 (Predecessor Company) have been restated
        from the amounts previously recorded. A summary of the effects of the
        restatement is as follows:

<TABLE>
<CAPTION>
                                                              Predecessor             Predecessor
                                                              2002 Company           2002 Company
                                                        ------------------------    ------------------
                                                            Two months ended        Two months ended
                                                             April 6, 2002            April 6, 2002
                                                        [as previously reported]     [as restated]
                                                        ------------------------    ------------------
              <S>                                       <C>                         <C>
              Net sales                                 $                 40,837    $          40,837
              Cost of sales                                               26,991               26,991
                                                        ------------------------    -----------------
                Gross profit                                              13,846               13,846
              Selling, general and administrative
               expenses                                                   12,212               12,212
              Depreciation                                                 1,030                1,030
              Reorganization items                                       (28,383)             (18,840)
              Interest expense                                               374                  374
                                                        ------------------------    -----------------
                  Income before income tax expense                        28,613               19,070
              Income tax expense (benefit)                                  (360)                (360)
                                                        ------------------------    -----------------
              Net income                                $                 28,973    $          19,430
                                                        ========================    =================
</TABLE>

        The Condensed Consolidated Statements of Operations and Cash Flows for
        the four months ended August 3, 2002 (Successor Company) as well as the
        Condensed Consolidated Balance Sheet at August 3, 2002 (Successor
        Company) are not affected by the aforementioned restatement.
        Additionally, the restatement has no effect on the Company's liquidity
        or cash position.

                                       16

<PAGE>

ITEM 2          MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  FINANCIAL
                  CONDITION  AND  RESULTS  OF  OPERATIONS  (Dollar  amounts  in
                  thousands)

        The Company is a chain of company-owned stores offering an extensive
selection of party supplies, gifts, greeting cards, giftwrap and other special
occasion merchandise at everyday value prices. As of September 12, 2002, the
Company operated 171 stores in 20 states.

        On March 23, 1999 the Company filed voluntary petitions for relief under
chapter 11 of title 11 of the United States Code under case numbers 99-685(JCA)
and 99-686(JCA). From that time until March 20, 2002, the Company operated its
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 Company's Amended Plan of Reorganization (the
"Plan of Reorganization") that it 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. See Note (1) to
the Notes to the Condensed Consolidated Financial Statements for a summary of
the principal provisions of the Plan of Reorganization.

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

Fresh Start Accounting

        As is more fully discussed in Note 2 - "Business and Basis of
Presentation" in our Notes to Condensed Consolidated Financial Statements, the
Company adopted fresh start accounting pursuant to the American Institute of
Certified Public Accountant's 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, the Company's financial statements before and after the Effective
Date are not comparable. The operating results for the two months 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, the Company's total assets and total
liabilities and stockholders' equity were adjusted downward by approximately
$17,000.

                                       17

<PAGE>

Fresh-start Reporting; Factors Affecting Comparability of Financial Information

        Effective April 9, 2002, the Company 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 four month period ended August 3, 2002 (Successor
Company) has been combined with the two month period ended April 6, 2002
(Predecessor Company) and then compared to the six months ended August 4, 2001.
Differences between periods due to fresh-start accounting adjustments are
explained when necessary.

        The lack of comparability in the accompanying unaudited consolidated
financial statements is most apparent in the Company's capital costs (lease,
interest, depreciation and amortization), as well as income taxes, debt
restructuring and reorganization costs.

        As discussed in Note (10) to the Company's Condensed Consolidated
Financial Statements, the Condensed Consolidated Statements of Operations and
Cash Flows for the two months ended April 6, 2002 (Predecessor Company) have
been restated. The following discussion and analysis gives effect to the
restatement.

                                       18

<PAGE>

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

<TABLE>
<CAPTION>
                                                                  Three fiscal
                                                 Three fiscal        months
                                                 months ended        ended            Six fiscal months ended
                                                --------------    -------------    ------------------------------
                                                                                     Combined
                                                                                     results
                                                  August 3,         August 4,        August 3,        August 4,
                                                    2002              2001             2002             2001
                                                --------------    -------------    ------------     -------------
<S>                                                      <C>              <C>             <C>               <C>
Net sales                                                100.0%           100.0%          100.0%            100.0%
Cost of sales                                             63.3             63.9            64.3              65.3
                                                --------------    -------------    ------------     -------------
  Gross profit                                            36.7             36.1            35.7              34.7
Selling, general and administrative expenses              29.9             27.8            30.1              29.1
Depreciation                                               0.6              3.0             1.3               3.0
Reorganization items                                         -              2.1           (15.9)              2.3
Interest expense                                           0.7              1.1             0.8               1.3
                                                --------------    -------------    ------------     -------------
  Income (loss) before income tax expense                  5.5              2.1            19.4              (1.0)
Income tax expense                                         2.2                -             1.0                 -
                                                --------------    -------------    ------------     -------------
Net income (loss)                                          3.3%             2.1%           18.4%             (1.0)%
                                                ==============    =============    ============     =============
Number of stores open at end of period                     171              173             171               173
</TABLE>

THREE FISCAL MONTHS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001

        Net Sales. Net sales increased $2,720 or 4.8%, to $59,733 for the three
fiscal month period ended August 3, 2002 ("second quarter of fiscal 2002") from
$57,013 for the three fiscal month period ended August 4, 2001 ("second quarter
of fiscal 2001"). Comparable store sales increased $3,182 or 5.6%. The
fluctuation relates to a strong demand for merchandise in the Company's basic
party and gift categories. No new stores opened in either period and one store
closed in the second quarter of fiscal 2002 and two stores closed in the second
quarter of 2001. A closed store's sales are excluded from the calculation of
comparable store sales in the fiscal month of the store closing.

        Gross Profit. Cost of sales includes merchandise, distribution and
occupancy costs. Gross profit increased $1,315 or 6.4%, to $21,925 for the
second quarter of fiscal 2002 from $20,610 for the second quarter of fiscal
2001. As a percentage of net sales, gross profit was 36.7% for the second
quarter of fiscal 2002 compared to 36.1% in the same period in the prior year.
The higher gross profit percentage was the result of improved markdown
experience coupled with leveraged freight costs.

        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 $2,021 or 12.8% to $17,869 for the second
quarter of fiscal 2002 from $15,848 for the second quarter of fiscal 2001. As a
percentage of net sales, selling, general and administrative expenses increased
to 29.9% in the second quarter of fiscal 2002 from 27.8% in the second quarter
of fiscal 2001. This increase primarily relates to a $425 increase in insurance
costs, $560 increase in advertising costs and $240 of severance costs.

                                       19

<PAGE>

        Depreciation expense. Depreciation expense was $356 in the three fiscal
month period ended August 3, 2002 compared to $1,745 in the three fiscal period
ended August 4, 2001. This decrease relates to the fresh-start adjustment on
fixed assets of $11,760 whereby the Company adjusted for the excess of book
value over enterprise value.

        Interest Expense. Interest expense was $412 in the second quarter of
fiscal 2002 compared to $627 in the second quarter of fiscal 2001. This decrease
relates to lower borrowing levels coupled with lower effective interest rates.

        Reorganization Items, net. The Company did not record any Reorganization
costs in the second quarter of fiscal 2002. As previously discussed, the Company
successfully emerged from bankruptcy on April 9, 2002. Reorganization costs in
the second quarter of fiscal 2001 totaled $1,218. These costs include
professional fees and other costs related to the Company's reorganization.

        Income taxes. Income tax expense of $1,311 for the second quarter of
fiscal 2002 is offset by a direct increase in stockholders' equity due to the
Company's ability to utilize prior period net operating loss benefits.

SIX FISCAL MONTHS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001

        Net Sales. Net sales increased $5,508 or 4.9%, to $118,757 for the six
fiscal month period ended August 3, 2002 ("first half of fiscal 2002") from
$113,249 for the six fiscal month period ended August 4, 2001 ("first half of
fiscal 2001"). Comparable store sales increased $6,631 or 5.9%. The fluctuation
relates to increases in the basic party and gift categories. No new stores
opened in either period, one store closed in the first half of fiscal 2002 and
two stores closed in the first half of fiscal 2001. A closed store's sales are
excluded from the calculation of comparable store sales in the fiscal month of
the store closing.

        Gross Profit. Cost of sales includes merchandise, distribution and
occupancy costs. Gross profit increased $3,057 or 7.8%, to $42,361 for the first
half of fiscal 2002 from $39,304 for the first half of fiscal 2001. As a
percentage of net sales, gross profit was 35.7% for the first half of fiscal
2002 compared to 34.7% in the same period in the prior year. The higher gross
profit percentage relates to improved shrink experience coupled with leveraged
freight and distribution costs.

        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 $2,856 or 8.7%, to $35,778 for the first half
of fiscal 2002 from $32,922 for the first half of fiscal 2001. As a percentage
of net sales, selling, general and administrative expenses increased to 30.1% in
the first half of fiscal 2002 from 29.1% in the first half of fiscal 2001. This
increase relates primarily to a $758 increase in insurance costs and $381 of
remodel costs.

        Depreciation expense. Depreciation expense was $1,486 in the first half
of fiscal 2002 compared to $3,497 in the first half of fiscal 2001. This
decrease relates to the fresh-start adjustment of $11,760 on fixed assets
whereby the Company adjusted for the excess of book value over enterprise value.

        Interest Expense. Interest expense was $940 in the first half of fiscal
2002 compared to $1,451 in the first half of fiscal 2001. This decrease relates
to lower effective interest rates and decreases in borrowing levels.

                                       20

<PAGE>

        Reorganization Items, net. Reorganization Items fluctuated $21,462 for
the first half of fiscal 2002 from $2,622 for the first half of fiscal 2001. The
change relates to the gain related to the discharge of indebtedness that
resulted from the forgiveness of certain liabilities in accordance with the
Company's Plan of Reorganization and fresh-start adjustments. The major
components of Reorganization Items are as follows:

<TABLE>
<CAPTION>
                                                     Six Months ended     Six Months Ended
                                                      August 3, 2002       August 4, 2001
                                                     ----------------     ----------------
   <S>                                               <C>                  <C>
   Professional fees                                 $          1,379     $          1,419
   Severance/retention bonus                                    1,026                  718
   Closed store expense                                           311                  406
   Fresh start adjustments                                     10,406                    -
   Forgiveness of debt                                        (41,847)                   -
   Unsecured creditors' ownership share of
    reorganized Company                                         9,543                    -
   Other                                                          342                   79
                                                     ----------------     ----------------
    Total                                            $        (18,840)     $         2,622
                                                     ----------------     ----------------
</TABLE>

The Successor Company has not recorded any Reorganization Items in the four
month period ended August 3, 2002.

        Income Taxes. Income tax expense of $1,560 for the four fiscal months
ended August 3, 2002 is offset by a direct increase in stockholders' equity due
to the Company's ability to utilize prior period net operating loss benefits.
The income tax benefit of $360 for the two months ended April 6, 2002 results
from the realization of net operating loss carry backs due to the enactment of
the Job Creation and Workers Assistance Act of 2002.

LIQUIDITY AND CAPITAL RESOURCES

        The Company's uses of capital for the remainder of fiscal 2002 are
expected to include working capital for operating expenses and satisfaction of
current liabilities, expenditures related to maintaining and refurbishing
existing stores and interest payments on outstanding borrowings.

        On April 9, 2002, obligations relating to the Company's
debtor-in-possession financing facility were paid in full and the Company's
secured financing facility with Wells Fargo Retail finance, LLC (the "New Loan
Agreement") became effective. The New Loan Agreement, which is a line of credit,
currently provides up to $40,000 (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 percent of inventory levels. The New Loan
Agreement expires on April 8, 2005 and has a variable interest rate based upon
the Prime rate or at the Company's option, a variable rate based upon earnings
performance and the London Interbank Offered Rate ("LIBOR") with a minimum
threshold of 5.00%. The interest rate on the Company's borrowings was 5.00% at
August 3, 2002. Borrowings under the New Loan Agreement are secured by
substantially all of the Company's assets.

                                       21

<PAGE>

        The New Loan Agreement contains certain restrictive covenants, which,
among other things, require the Company to maintain certain inventory levels and
achieve specified operating results. The restrictive covenants also limit the
Company's capital expenditures, asset sales and dividends and the ability of the
Company to grant liens and incur additional indebtedness.

        Pursuant to the Plan of Reorganization, the Company converted $3,130 of
post petition trade payables into a trade conversion note, which will be payable
within 4 years of the Effective Date. In addition, the Company recorded at fair
value the $2,600 extended creditor payment payable to the general unsecured
creditors. Management intends to pay down the trade conversion note within three
years of the Effective Date.

        As of August 3, 2002, the Company had $17,090 borrowings outstanding
under the New Loan Agreement and had utilized approximately $2,420 under the New
Loan Agreement to issue letters of credit. The following table sets forth
certain consolidated statements of cash flows:

                                              Six months        Six months
                                             ended August      ended August
                                              3, 2002            4, 2001
                                            -------------     -------------
Cash provided by operating activities       $      11,445     $       7,248
                                            -------------     -------------
Cash used in investing activities           $      (1,181)    $        (550)
                                            -------------     -------------
Cash used in financing activities           $     (10,259)    $      (6,806)
                                            -------------     -------------

        At August 3, 2002 the Company's working capital was $14,475. Net cash
provided by operating activities for the first half of fiscal 2002 was $11,445
compared to $7,248 of net cash provided by operating activities during the first
half of fiscal 2001. The fluctuation is related to changes in inventory and
accounts payable coupled with the Company utilizing pre-confirmation net
operating losses in the 4 month period ended August 3, 2002.

        Net cash used in investing activities during the first half of fiscal
2002 and 2001 was $1,181 and $550, respectively. Net cash used in investing
activities was primarily for capital expenditures for computer equipment, store
remodeling and warehouse equipment for the distribution center.

        Net cash used in financing activities during the first half of fiscal
2002 was $10,259 compared to $6,806 of net cash used in financing activities
during the first half of fiscal 2001. Amounts are attributable to the level of
borrowings and repayments.

        The Company does not intend to pay cash dividends in the foreseeable
future and under its current Loan Agreement is restricted from paying dividends
on its capital stock.

        The Company's 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 the
Company's control. Based upon current levels of operation and anticipated
growth, the Company believes that future cash flow from operations, together
with available borrowings under the New Loan Agreement, will be adequate to meet
anticipated requirements for capital expenditures, working capital, interest
payments and scheduled principal payments. There can be no assurance that the
Company's business will continue to generate sufficient cash flow from
operations in the future to service the Company's debt and make necessary
capital expenditures after satisfying certain liabilities arising in the
ordinary course of business. If unable to do so, the Company may be required to
refinance all or a portion of its 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.

                                       22

<PAGE>

Seasonality

        The Company's business is highly seasonal, with operating results
varying from quarter to quarter. The Company historically experienced higher
sales during the second and fourth fiscal quarters due to increased demand by
customers for the Company's products attributable to special occasions and
holiday seasons during these periods. The Company's fiscal 2002 quarters are as
defined as follows: first fiscal quarter is February 3, 2002 to May 4, 2002,
second fiscal quarter is May 5, 2002 to August 3, 2002, third fiscal quarter is
August 4, 2002 to November 2, 2002 and fourth fiscal quarter is November 3, 2002
to February 1, 2003.

New Accounting Pronouncements

        In June 2001, the FASB ("Financial Accounting Standards Board") issued
SFAS ("Statement of Financial Accounting Standards") No. 142 "Goodwill and Other
Intangible Assets", which establishes financial accounting and reporting for
acquired goodwill and other intangible assets and supercedes APB Opinion No. 17,
"Intangible Assets". The provisions of SFAS No. 142 are effective for fiscal
years beginning after December 15, 2001. As the Company does not have goodwill
or intangible assets recorded in the financial statements, the adoption of SFAS
No. 142 during the first quarter of fiscal 2002 did not have an impact on the
financial condition or results of operations of the Company.

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the asset. The
Company has adopted the provisions of SFAS No. 143 and it did not have a
material impact of the Company's consolidated financial position or results of
operations.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", although it retains many of the
fundamental provisions of that Statement. The provisions of SFAS No. 144 are
effective for fiscal years beginning after December 15, 2001, thereby applying
to fiscal 2002. In conjunction with fresh-start reporting, the Company recorded
a $11,760 adjustment to fixed assets to reflect the excess of book value over
enterprise value. We have adopted the provisions of SFAS No. 144 and it did not
have a material impact on our consolidated financial position or results of
operations.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". Specifically, SFAS 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt, an amendment of APB Opinion No. 30" and SFAS
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements", as
these two standards required that all gains and losses from the extinguishment
of debt be aggregated and, if material, classified as an extraordinary item.
Consequently, such gains and losses will now be classified as extraordinary only
if they meet the criteria for extraordinary treatment set forth in APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 145 also rescinds SFAS No. 44
"Accounting for Intangible Assets of Motor Carriers, an amendment of Chapter 5
of ARB No. 43 and an interpretation of APB Opinions 17 and 30", because the
event to which that Statement relates is no longer relevant. SFAS No. 145 amends
SFAS No. 13, "Accounting for Leases", to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as such transactions, and also makes certain
technical corrections to a number of existing pronouncements. The Company is
required to adopt this statement due to the application of fresh-start
accounting. The effect of this statement on the Company is that the net gain
associated with the plan of reorganization and fresh-start adjustments is
reported as a component of operations.

                                       23

<PAGE>

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement changes the timing
of recognition for certain exit costs associated with restructuring activities,
so that certain exit costs would be recognized over the period in which the
restructuring activities occur. Currently, exit costs are recognized when the
Company commits to a restructuring plan. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002 and could result in the
Company recognizing the cost of future restructuring activities over a period of
time as opposed to as a single event.

ITEM 3          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

        The Company is subject to market risks from changes in interest rates.
As of August 3, 2002, the interest rate on the Company's revolving credit
facilities, which represents a significant portion of the Company's outstanding
debt, is variable based upon earnings performance and the London Interbank
Offered Rate ("LIBOR"). A hypothetical 10 percent increase to the average
interest rate under the credit facilities applied to the average outstanding
balance during the two months ended April 6, 2002 and the four months ended
August 3, 2002 would not have had a material impact on our financial position or
results of operations.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

        The Company from time to time is involved in routine litigation
incidental to the conduct of its business. The Company is not aware of any
material existing or threatened litigation to which it is or may be a party.

Item 2. Changes in Securities

        On June 7, 2002, the Company issued 12,900 shares of Common Stock upon
exercise of warrants previously issued to management. The Company received the
exercise price of $7.52 per share. Exemption from registration is claimed
pursuant to Section 4(2) of the Securities Act of 1933, as amended, no public
sale having been involved.

Item 3. Defaults Upon Senior Securities

        None

                                       24

<PAGE>

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

        None

Item 5. Other Information

        None

Item 6. Exhibits and reports on Form 8-K

        (a)     Exhibits

        Exhibit 3.1 (1) Certificate on Incorporation of Factory Card & Party
        Outlet Corp.

        Exhibit 3.2 (1) Bylaws of Factory Card & Party Outlet Corp.

        Exhibit 4.1 (1) Warrant Agreement, dated April 9, 2002, between Factory
        Card & Party Outlet and Wells Fargo Bank Minnesota, N.A.

        Exhibit 4.2 (1) Form of New Management Warrant, dated April 9, 2002.

        Exhibit 4.3 (1) Schedule of New Management Warrants (pursuant to
        Instruction 2 of Item 601).

        Exhibit 4.4 (1) 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.

        Exhibit 4.5 (1) Schedule of Trade Conversion Notes (pursuant to
        Instruction 2 of Item 601).

        Exhibit 4.6 (1) 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.

        Exhibit 10.1 (1) 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.

        Exhibit 10.2 (1) 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.

        Exhibit 10.3 (1) Form of Factory Card & Party Outlet Corp. 2002 Stock
        Incentive Plan.

        Exhibit 10.4 (1) Trade Vendor Supply Agreement, dated April 9, 2002,
        between Factory Card & Party Outlet Corp., Factory Card Outlet of
        America, Ltd and Maryland Plastics.

        Exhibit 10.5 (1) Schedule of Trade Vendor Supply Agreements (pursuant to
        Instruction 2 of Item 601).

                                       25

<PAGE>

        Exhibit 10.6 (1) Employment Agreement, dated as of April 9, 2002,
        between Factory Card Outlet of America, Ltd and James D. Constantine.

        Exhibit 10.7 (1) Employment Agreement, dated as of April 9, 2002,
        between Factory Card Outlet of America, Ltd and Timothy F. Gower.

        Exhibit 10.8 (1) Employment Agreement, dated as of April 9, 2002,
        between Factory Card Outlet of America, Ltd and Gary W. Rada.

        Exhibit 10.9 (2) Form of Factory Card & Party Outlet Corp. 2002 Non-
        Employee Directors Stock Option Plan.

        Exhibit 10.10 (2) First Amendment to the Factory Card & Party Outlet
        Corp. 2002 Stock Incentive Plan.

        Exhibit 10.11 (2) Second Amendment to the Factory Card & Party Outlet
        Corp. 2002 Stock Option Plan.

        Exhibit 99.1 Independent Accountants' Report from Deloitte & Touche,
        LLP.

        Exhibit 99.2 Acknowledgement of Awareness Letter from Deloitte & Touche,
        LLP dated September 16, 2002 (March 5, 2003 as to the effect of the
        restatement described in Note 10) Concerning Unaudited Interim Financial
        Information.

        Exhibit 99.3 Certifications under Section 906 of the Sarbanes-Oxley Act
        of 2002.

        NOTES

        (1) Incorporated by reference to the Company's Current Report on Form
        8-K as filed on April 23,2002

        (2) Incorporated by reference to the Company's Current Report on Form
        10-Q as filed on June 18, 2002.

        (b) Reports on 8-K

        Company's current Report on Form 8-K filed on June 13, 2002 - Changes in
        Registrant's Certifying Accountant.

                                       26

<PAGE>

SIGNATURES

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

                             FACTORY CARD & PARTY OUTLET CORP.

Dated: April 30, 2003          By: /s/ Gary W. Rada
                                   -----------------
                                       Gary W. Rada
                                       President and Chief Executive Officer

Dated: April 30, 2003          By: /s/ James D. Constantine
                                   -------------------------
                                       James D. Constantine
                                       Executive Vice President and Chief
                                        Financial and Administrative Officer
                                       [Principal Accounting Officer]

                                       27

<PAGE>

CERTIFICATIONS

I, Gary W. Rada, President and Chief Executive Officer of Factory Card & Party
Outlet Corp., certify that:

1.      I have reviewed this quarterly report, as amended, on Form 10-Q/A of
        Factory Card & Party Outlet Corp.;

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

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

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

        a)      designed such disclosure controls and procedures to ensure that
                material information relating to the registrant, including its
                consolidated subsidiaries, is made known to us by others within
                those entities, particularly during the period in which this
                quarterly report, as amended, is being prepared;

        b)      evaluated the effectiveness of the registrant's disclosure
                controls and procedures as of a date within 90 days prior to the
                filing date of this quarterly report, as amended, (the
                "Evaluation Date"); and

        c)      presented in this quarterly report, as amended, our conclusions
                about the effectiveness of the disclosure controls and
                procedures based on our evaluation as of the Evaluation Date;

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

        a)      all significant deficiencies in the design or operation of
                internal controls which could adversely affect the registrant's
                ability to record, process, summarize and report financial data
                and have identified for the registrant's auditors any material
                weaknesses in internal controls; and

        b)      any fraud, whether or not material, that involves management or
                other employees who have a significant role in the registrant's
                internal controls; and

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

Date:  April 30, 2003

                                           /s/ Gary W. Rada
                                           -------------------------------------
                                           Gary W. Rada
                                           President and Chief Operating Officer

                                       28

<PAGE>

I, James D. Constantine, Executive Vice President and Chief Financial and
Administrative Officer of Factory Card & Party Outlet Corp., certify that:

1.      I have reviewed this quarterly report, as amended, on Form 10-Q/A of
        Factory Card & Party Outlet Corp.;

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

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

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

        a)      designed such disclosure controls and procedures to ensure that
                material information relating to the registrant, including its
                consolidated subsidiaries, is made known to us by others within
                those entities, particularly during the period in which this
                quarterly report, as amended, is being prepared;

        b)      evaluated the effectiveness of the registrant's disclosure
                controls and procedures as of a date within 90 days prior to the
                filing date of this quarterly report, as amended (the
                "Evaluation Date"); and

        c)      presented in this quarterly report, as amended, our conclusions
                about the effectiveness of the disclosure controls and
                procedures based on our evaluation as of the Evaluation Date;

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

        a)      all significant deficiencies in the design or operation of
                internal controls which could adversely affect the registrant's
                ability to record, process, summarize and report financial data
                and have identified for the registrant's auditors any material
                weaknesses in internal controls; and

        b)      any fraud, whether or not material, that involves management or
                other employees who have a significant role in the registrant's
                internal controls; and

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

Date:  April 30, 2003

                                    /s/ James D. Constantine
                                    ------------------------
                                    James D. Constantine
                                    Executive Vice President and Chief Financial
                                     and Administrative Officer