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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For The Quarterly Period Ended October 30, 2004



Commission File Number: 21859



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FACTORY CARD & PARTY OUTLET CORP.

(Exact name of registrant as specified
in its charter)



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



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)



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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 ̈



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



The number of shares of the Registrants Common Stock outstanding as of December 8, 2004 was 3,106,242.



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##### Table of Contents

Factory Card & Party Outlet Corp.



Form
10-Q



For the Quarter Ended October, 30, 2004

Index



|        |  |                                                                                                                                       |  |      
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | -----
|        |  |                                                                                                                                       |  | Page 
|        |  | Cautionary Statement Regarding Forward-Looking Statements                                                                             |  | 2    
|        |  |                                                                                                                                      
|Part I  |  | Financial Information                                                                                                                 |  |      
|        |  |                                                                                                                                      
|Item 1  |  | Financial Statements:                                                                                                                 |  |      
|        |  |                                                                                                                                      
|        |  | Condensed Consolidated Balance Sheets (Unaudited) as of October 30, 2004 and January 31, 2004                                         |  | 3    
|        |  |                                                                                                                                      
|        |  | Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended October 30, 2004 and November 1, 2003 |  | 4    
|        |  |                                                                                                                                      
|        |  | Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended October 30, 2004 and November 1, 2003           |  | 5    
|        |  |                                                                                                                                      
|        |  | Notes to Condensed Consolidated Financial Statements - (Unaudited)                                                                    |  | 6-12 
|        |  |                                                                                                                                      
|Item 2  |  | Managements Discussion and Analysis of Financial Condition And Results of Operations                                                 |  | 13-21
|        |  |                                                                                                                                      
|Item 3  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                            |  | 21   
|        |  |                                                                                                                                      
|Item 4  |  | Controls and Procedures                                                                                                               |  | 22   
|        |  |                                                                                                                                      
|Part II |  | Other Information                                                                                                                     |  |      
|        |  | Item 1. Legal Proceedings                                                                                                             |  | 22   
|        |  | Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                                              |  | 22   
|        |  | Item 3. Defaults Upon Senior Securities                                                                                               |  | 23   
|        |  | Item 4. Submission of Matters to a Vote of Security Holders                                                                           |  | 23   
|        |  | Item 5. Other Information                                                                                                             |  | 23   
|        |  | Item 6. Exhibits and Reports on Form 8-K                                                                                              |  | 23-25
|        |  | Signatures                                                                                                                            |  | 25   



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS



References throughout this document to the Company include Factory Card & Party Outlet Corp. and its wholly-owned subsidiary. In accordance with the Securities and Exchange Commissions Plain English guidelines, this
Quarterly Report on Form 10-Q has been written in the third person. In this document the words we, our, ours and us refer only to Factory Card & Party Outlet Corp. and its wholly-owned subsidiary
and not to any other person.



The Companys website 
www.factorycard.com  provides access, free of charge, to the Companys SEC reports, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports.



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. The forward-looking statements are made
a number of times throughout the document and may be identified by forward-looking terminology as estimate, project, expect, believe, may, will, intend or similar
statements or variations of such terms.



The forward-looking statements involve
known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. You are cautioned that these statements are 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;
| | - | ----------------------------



| |  | unseasonable weather;
| | - | ---------------------



| |  | dependence on key personnel;
| | - | ----------------------------



| |  | competition;
| | - | ------------



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



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



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



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



| |  | inventory shrinkage;
| | - | --------------------



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



| |  | seasonality of business;
| | - | ------------------------



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



| |  | vendor performance;
| | - | -------------------



| |  | political unrest;
| | - | -----------------



| |  | general economic and other developments affecting consumer confidence and/or consumer spending;
| | - | -----------------------------------------------------------------------------------------------



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



| |  | availability of retail store space on reasonable lease terms;
| | - | -------------------------------------------------------------



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



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



| |  | governmental regulations; and
| | - | -----------------------------



| |  | other factors both referenced and not referenced in this Form 10-Q.
| | - | -------------------------------------------------------------------



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PART I - FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS



FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



Condensed Consolidated Balance Sheets

(Unaudited)

(Dollar amounts in thousands)



|                                                                |  |                 |        |                 |   |       
|--------------------------------------------------------------- |  | --------------- | ------ | --------------- | - | ------
|                                                                |  | October 30,2004 |        | January 31,2004
|ASSETS                                                          |  |                 |        |                 |   |       
|                                                                |  |                
|Current assets:                                                 |  |                 |        |                 |   |       
|Cash                                                            |  | $               | 187    |                 | $ | 179   
|Merchandise inventories, net                                    |  |                 | 51,489 |                 |   | 45,667
|Prepaid expenses and other                                      |  |                 | 3,994  |                 |   | 4,089 
|                                                                |  |                 |        |                 |   |       
|Total current assets                                            |  |                 | 55,670 |                 |   | 49,935
|                                                                |  |                
|Fixed assets, net                                               |  |                 | 8,107  |                 |   | 7,551 
|Other assets                                                    |  |                 | 159    |                 |   | 259   
|Deferred tax asset, net                                         |  |                 | 471    |                 |   | 427   
|                                                                |  |                 |        |                 |   |       
|Total assets                                                    |  | $               | 64,407 |                 | $ | 58,172
|                                                                |  |                 |        |                 |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY                            |  |                 |        |                 |   |       
|                                                                |  |                
|Current liabilities:                                            |  |                 |        |                 |   |       
|Debt  line of credit                                           |  | $               | 6,741  |                 | $ | 9,763 
|Accounts payable                                                |  |                 | 21,262 |                 |   | 15,929
|Accrued expenses                                                |  |                 | 9,337  |                 |   | 6,974 
|Current portion of long term debt and capital lease obligations |  |                 | 2,754  |                 |   | 2,135 
|                                                                |  |                 |        |                 |   |       
|Total current liabilities                                       |  |                 | 40,094 |                 |   | 34,801
|                                                                |  |                 |        |                 |   |       
|Long term debt and capital lease obligations                    |  |                 | 18     |                 |   | 3,699 
|Deferred rent liabilities                                       |  |                 | 1,580  |                 |   | 1,725 
|                                                                |  |                 |        |                 |   |       
|Total liabilities                                               |  |                 | 41,692 |                 |   | 40,225
|                                                                |  |                
|Stockholders equity                                            |  |                 | 22,715 |                 |   | 17,947
|                                                                |  |                 |        |                 |   |       
|Total liabilities and stockholders equity                      |  | $               | 64,407 |                 | $ | 58,172
|                                                                |  |                 |        |                 |   |       



See accompanying notes to condensed
consolidated financial statements.



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FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



Condensed Consolidated Statements of Operations

(Unaudited)

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



|                                              |  |                                 |           |                                 |   |                                 |  |   |                                 |   |  |   |          
|--------------------------------------------- |  | ------------------------------- | --------- | ------------------------------- | - | ------------------------------- |  | - | ------------------------------- | - |  | - | ---------
|                                              |  | ThreeMonthsEndedOctober 30,2004 |           | ThreeMonthsEndedNovember 1,2003 |   | Nine MonthsEndedOctober 30,2004 |  |   | Nine MonthsEndedNovember 1,2003
|Net sales                                     |  | $                               | 53,735    |                                 | $ | 51,353                          |  | $ | 172,825                         |   |  | $ | 165,729  
|Cost of sales                                 |  |                                 | 34,216    |                                 |   | 32,622                          |  |   | 110,071                         |   |  |   | 106,509  
|                                              |  |                                 |           |                                 |   |                                 |  |   |                                 |   |  |   |          
|Gross profit                                  |  |                                 | 19,519    |                                 |   | 18,731                          |  |   | 62,754                          |   |  |   | 59,220   
|                                              |  |                                 |           |                                
|Selling, general and administrative expenses  |  |                                 | 17,860    |                                 |   | 17,232                          |  |   | 55,662                          |   |  |   | 52,893   
|Depreciation expense                          |  |                                 | 681       |                                 |   | 466                             |  |   | 1,895                           |   |  |   | 1,400    
|Other income                                  |  |                                 |          |                                 |   |                                |  |   | (30                             | ) |  |   |         
|Interest expense                              |  |                                 | 187       |                                 |   | 283                             |  |   | 586                             |   |  |   | 863      
|                                              |  |                                 |           |                                 |   |                                 |  |   |                                 |   |  |   |          
|Income before income tax expense              |  |                                 | 791       |                                 |   | 750                             |  |   | 4,641                           |   |  |   | 4,064    
|Income tax expense                            |  |                                 | 319       |                                 |   | 300                             |  |   | 1,859                           |   |  |   | 1,625    
|                                              |  |                                 |           |                                 |   |                                 |  |   |                                 |   |  |   |          
|Net income                                    |  | $                               | 472       |                                 | $ | 450                             |  | $ | 2,782                           |   |  | $ | 2,439    
|                                              |  |                                 |           |                                 |   |                                 |  |   |                                 |   |  |   |          
|Net income per share - basic                  |  | $                               | 0.16      |                                 | $ | 0.15                            |  | $ | 0.92                            |   |  | $ | 0.84     
|                                              |  |                                 |           |                                 |   |                                 |  |   |                                 |   |  |   |          
|Weighted average shares outstanding  basic   |  |                                 | 3,028,121 |                                 |   | 2,923,163                       |  |   | 3,010,665                       |   |  |   | 2,908,650
|                                              |  |                                 |           |                                 |   |                                 |  |   |                                 |   |  |   |          
|Net income per share  diluted                |  | $                               | 0.14      |                                 | $ | 0.13                            |  | $ | 0.79                            |   |  | $ | 0.75     
|                                              |  |                                 |           |                                 |   |                                 |  |   |                                 |   |  |   |          
|Weighted average shares outstanding  diluted |  |                                 | 3,486,838 |                                 |   | 3,597,393                       |  |   | 3,527,153                       |   |  |   | 3,238,425
|                                              |  |                                 |           |                                 |   |                                 |  |   |                                 |   |  |   |          



See accompanying notes to condensed
consolidated financial statements.



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FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollar amounts in thousands)



|                                                                                  |  |                                         |          |   |                                         |   |          |  
|--------------------------------------------------------------------------------- |  | --------------------------------------- | -------- | - | --------------------------------------- | - | -------- | -
|                                                                                  |  | For the NineMonths EndedOctober 30,2004 |          |   | For the NineMonths EndedNovember 1,2003 |  
|Cash flows from operating activities:                                             |  |                                         |          |   |                                         |   |          |  
|Net income                                                                        |  | $                                       | 2,782    |   |                                         | $ | 2,439    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                         |          |   |                                         |   |          |  
|Depreciation and amortization of fixed assets                                     |  |                                         | 1,895    |   |                                         |   | 1,400    |  
|Amortization of deferred financing costs                                          |  |                                         | 82       |   |                                         |   | 101      |  
|Amortization of deferred compensation                                             |  |                                         | 95       |   |                                         |   | 100      |  
|Loss on disposal of fixed assets                                                  |  |                                         | 6        |   |                                         |   |         |  
|Tax benefit of pre-confirmation net operating Losses                              |  |                                         | 1,801    |   |                                         |   | 1,673    |  
|Changes in assets and liabilities:                                                |  |                                         |          |   |                                         |   |          |  
|Merchandise inventories                                                           |  |                                         | (5,822   | ) |                                         |   | (1,133   | )
|Prepaid expenses and other assets                                                 |  |                                         | 69       |   |                                         |   | (84      | )
|Accounts payable                                                                  |  |                                         | 5,333    |   |                                         |   | 7,913    |  
|Accrued expenses                                                                  |  |                                         | 2,363    |   |                                         |   | 2,285    |  
|Deferred rent obligation                                                          |  |                                         | (145     | ) |                                         |   | 120      |  
|                                                                                  |  |                                         |          |   |                                         |   |          |  
|Net cash provided by operating activities                                         |  |                                         | 8,459    |   |                                         |   | 14,814   |  
|                                                                                  |  |                                         |          |   |                                         |   |          |  
|Net cash used in investing activities  purchase of fixed assets                  |  |                                         | (2,457   | ) |                                         |   | (1,833   | )
|                                                                                  |  |                                         |          |   |                                         |   |          |  
|Cash flow provided by (used in) financing activities:                             |  |                                         |          |   |                                         |   |          |  
|Borrowings - line of credit                                                       |  |                                         | 177,336  |   |                                         |   | 161,364  |  
|Repayments  line of credit                                                       |  |                                         | (180,358 | ) |                                         |   | (174,016 | )
|Payment of trade conversion and extended creditor note payable                    |  |                                         | (2,932   | ) |                                         |   |         |  
|Payment of capital lease obligations                                              |  |                                         | (246     | ) |                                         |   | (327     | )
|Discount on payment of trade conversion and extended creditor note payable        |  |                                         | (20      | ) |                                         |   |         |  
|Increase in extended creditor note payable                                        |  |                                         | 136      |   |                                         |   | (89      | )
|Cash received from exercise of stock options and warrants                         |  |                                         | 90       |   |                                         |   | 87       |  
|                                                                                  |  |                                         |          |   |                                         |   |          |  
|Net cash used in financing activities                                             |  |                                         | (5,994   | ) |                                         |   | (12,981  | )
|                                                                                  |  |                                         |          |   |                                         |   |          |  
|Net increase (decrease) in cash                                                   |  |                                         | 8        |   |                                         |   |         |  
|Cash at beginning of period                                                       |  |                                         | 179      |   |                                         |   | 196      |  
|                                                                                  |  |                                         |          |   |                                         |   |          |  
|Cash at end of period                                                             |  | $                                       | 187      |   |                                         | $ | 196      |  
|                                                                                  |  |                                         |          |   |                                         |   |          |  
|Supplemental cash flow information:                                               |  |                                         |          |   |                                         |   |          |  
|Interest paid                                                                     |  | $                                       | 587      |   |                                         | $ | 705      |  
|Income taxes refunded                                                             |  |                                         | 3        |   |                                         |   |         |  
|Cash paid for reorganization items                                                |  |                                         | 7        |   |                                         |   | 143      |  
|Supplemental non cash information:                                                |  |                                         |          |   |                                         |   |          |  
|Unearned restricted stock awards                                                  |  |                                         | 180      |   |                                         |   | 310      |  



See accompanying notes to condensed
consolidated financial statements.



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FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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



|(1) | Business and Basis of Presentation
|--- | ----------------------------------



The Company is a chain of company-owned stores offering an extensive selection of party supplies, greeting cards, giftwrap, balloons, everyday and
seasonal merchandise and other special occasion merchandise at everyday value prices. As of December 8, 2004, the Company operated 183 stores in 20 states. The Companys fiscal year ends on the Saturday closest to January 31st.



The condensed 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 January 31, 2004 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 condensed consolidated financial statements reflect all normal recurring and certain nonrecurring adjustments necessary for
a fair presentation of the interim financial statements.



Management Estimates



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



|(2) | Debt  Line of Credit
|--- | ---------------------



The Company is party to a secured financing facility, dated April 8, 2002, with Wells Fargo Retail Finance, LLC (as amended, the Loan
Agreement). The Loan Agreement, which is a line of credit expiring on April 8, 2007, currently provides up to $30,000 (including $10,000 for letters of credit) to fund working capital needs and for general corporate purposes. Borrowings under
the facility are limited by a percent of inventory levels. At October 30, 2004, the interest rate on the Companys borrowings was 4.75%. Borrowings under the Loan Agreement are secured by substantially all of the Companys assets. Certain
restrictive covenants apply, including achievement of specified operating results and limitations on the incurrence of additional liens and indebtedness, capital expenditures, asset sales and payment of dividends, all of which have been met.



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At October 30, 2004 the Company had outstanding borrowings under the Loan Agreement of $6,741 and
utilized $1,187 for issuance of letters of credit. At January 31, 2004, the Company had outstanding borrowings under the Loan Agreement of $9,763 and utilized $1,441 for issuance of letters of credit.



|(3) | Debt and Capital Lease Obligations
|--- | ----------------------------------



The following table summarizes the components of Debt and Capital Lease Obligations at October 30, 2004 and January 31, 2004, including its current
portion.



|                                                   |  |                 |        |   |                 |   |        |  
|-------------------------------------------------- |  | --------------- | ------ | - | --------------- | - | ------ | -
|                                                   |  | October 30,2004 |        |   | January 31,2004 |  
|Trade conversion note                              |  | $               | 1,127  |   |                 | $ | 3,130  |  
|Discounted value of extended creditor payment      |  |                 | 1,610  |   |                 |   | 2,425  |  
|Financing agreements                               |  |                 |       |   |                 |   | 210    |  
|Capital leases                                     |  |                 | 35     |   |                 |   | 69     |  
|                                                   |  |                 |        |   |                 |   |        |  
|Sub total                                          |  |                 | 2,772  |   |                 |   | 5,834  |  
|                                                   |  |                 |        |   |                 |   |        |  
|Less current maturities                            |  |                 | (2,754 | ) |                 |   | (2,135 | )
|                                                   |  |                 |        |   |                 |   |        |  
|Total long term debt and capital lease obligations |  | $               | 18     |   |                 | $ | 3,699  |  
|                                                   |  |                 |        |   |                 |   |        |  



During the nine months
ended October 30, 2004, the Company made prepayments, at a discount, on the Trade Conversion Note and Extended Creditor Payment.



|(4) | Stockholders Equity
|--- | --------------------



In April 2002, the Company authorized an aggregate of 10,000,000 shares of new Common Stock, par value $0.01 per share. A total of 3,097,612 common shares
were outstanding at October 30, 2004.



In April 2002, the
Company issued 150,000 shares of common stock to certain members of management, which vest ratably over a four-year period. At the date of grant, the market value of the award was recorded in common stock and additional paid-in-capital; an
offsetting amount was recorded as a component of stockholders equity in unearned restricted stock awards. Compensation cost is included in results of operations over the vesting period. Expense relating to outstanding restricted stock awards
for the three and nine months ended October 30, 2004 was $32 and $95, respectively. Additionally, expense relating to outstanding restricted stock awards for the three and nine months ended November 1, 2003 was $32 and $ 100, respectively.



In April 2002, the Company adopted a 2002 stock option plan,
which authorizes the grant of up to 333,334 stock options to the Companys employees  307,900 options under the 2002 stock option plan at exercise prices ranging from $2.75 to $22.40 were outstanding at October 30, 2004.



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In April 2002, the Company issued four series of new Warrants, Series A through D, granting such holders
the right to purchase an aggregate of 306,934 additional shares of the new Common Stock. The Series A Warrants are exercisable any time prior to April 9, 2006 at a price of $5.50 per share. The Series B Warrants are exercisable at any time prior to
April 9, 2008 at a price of $8.00 per share. The Series C Warrants are exercisable any time prior to April 9, 2010 at a price of $8.00 per share. The Series D Warrants are exercisable any time prior to April 9, 2010 at a price of $17.00 per share.
At October 30, 2004, the number of common shares which could be purchased using Series A, B, C and D Warrants are 62,052, 76,460, 72,330 and 60,152, respectively.



In April 2002, 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 and contain a conversion feature into common stock between the third and fourth anniversary. The Company fully expects
to pay the remaining $1,127 principal and accrued interest related to the Trade Conversion Notes prior to April 9, 2005, thus negating the Trade Conversion Note holders options to convert the notes into 11.8% of the Companys common
stock.



On April 23, 2002, the Board of Directors approved the
non-employee Director Stock Option Plan, which authorized the grant of up to 300,000 common stock options to non-employee members of the Board of Directors  180,000 options at exercise prices ranging from $2.65 to $11.90 were outstanding at
October 30, 2004.



On January 27, 2003, the Board of Directors
adopted the 2003 Equity Incentive Plan whereby 500,000 shares would become available to employees and officers. The 2003 Equity Incentive Plan was approved by the stockholders at the annual meeting of stockholders on July 16, 2003. Under the 2003
Equity Incentive Plan  349,700 options were outstanding at October 30, 2004 with exercise prices ranging from $6.38 to $19.00.



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 Statement of Financial Accounting Standard (SFAS) No. 133 Accounting for Derivative Instruments and
Hedging Activities adjustments.



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|(5) | Earnings Per Share
|--- | ------------------



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



The reconciliation of earnings per share - basic to earnings per share - diluted is as follows (in thousands, except per
share and share amounts):



|                                                                 |  |                                          |           |                                          |   |          
|---------------------------------------------------------------- |  | ---------------------------------------- | --------- | ---------------------------------------- | - | ---------
|                                                                 |  | For the threemonths endedOctober 30,2004 |           | For the threemonths endedNovember 1,2003
|Net income                                                       |  | $                                        | 472       |                                          | $ | 450      
|Earnings per share  basic                                       |  | $                                        | 0.16      |                                          | $ | 0.15     
|Earnings per share  diluted                                     |  | $                                        | 0.14      |                                          | $ | 0.13     
|Weighted average common shares outstanding                       |  |                                          | 3,028,121 |                                          |   | 2,923,163
|Dilutive effect of stock options and warrants                    |  |                                          | 458,717   |                                          |   | 674,230  
|                                                                 |  |                                          |           |                                          |   |          
|Weighted average common and common equivalent shares outstanding |  |                                          | 3,486,838 |                                          |   | 3,597,393
|                                                                 |  |                                          |           |                                          |   |          
|                                                                 |  |                                         
|                                                                 |  | For the ninemonths endedOctober 30,2004  |           | For the ninemonths endedNovember 1,2003 
|Net income                                                       |  | $                                        | 2,782     |                                          | $ | 2,439    
|Earnings per share  basic                                       |  | $                                        | 0.92      |                                          | $ | 0.84     
|Earnings per share  diluted                                     |  | $                                        | 0.79      |                                          | $ | 0.75     
|Weighted average common shares outstanding                       |  |                                          | 3,010,665 |                                          |   | 2,908,650
|Dilutive effect of stock options and warrants                    |  |                                          | 516,488   |                                          |   | 329,775  
|                                                                 |  |                                          |           |                                          |   |          
|Weighted average common and common equivalent shares outstanding |  |                                          | 3,527,153 |                                          |   | 3,238,425
|                                                                 |  |                                          |           |                                          |   |          



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



Options to purchase 177,500 common shares at prices ranging from $10.50 to
$22.40 per share and warrants to purchase 60,152 common shares at a price of $17.00 per share were outstanding as of October 30, 2004 but were not included in the calculation of diluted earnings per share for the three months ended October 30, 2004
because the strike price was greater than the average market price per share during the period.



Options to purchase 177,100 common shares at prices ranging from $11.00 to $22.40 per share and warrants to purchase 60,152 common shares at a price of
$17.00 per share were outstanding as of October 30, 2004 but were not included in the calculation of diluted earnings per share for the nine months ended October 30, 2004 because the strike price was greater than the average market price per share
during the quarter.



9



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##### Table of Contents

|(6) | Stock-Based Compensation
|--- | ------------------------



The Company accounts for stock option plans under Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock Issued to
Employees, under which no compensation cost has been recognized. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation, as amended by SFAS No. 148, Accounting for Stock Based Compensation  Transition and Disclosure, an Amendment of SFAS No. 123. Had the Company determined compensation cost based upon the fair value at the grant
date for our stock options under SFAS No. 123, net income would have changed as indicated below:



|                                                                                                                                     |  |                                        |      |   |                                        |   |      |                                       |  |   |                                         |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------- | ---- | - | -------------------------------------- | - | ---- | ------------------------------------- |  | - | --------------------------------------- | - |  | - | ----- | -
|                                                                                                                                     |  | For thethreemonthsendedOctober 30,2004 |      |   | For thethreemonthsendedNovember 1,2003 |   |      | For theninemonthsendedOctober 30,2004 |  |   | For the nine monthsendedNovember 1,2003 |  
|Net income, as reported                                                                                                              |  | $                                      | 472  |   |                                        | $ | 450  |                                       |  | $ | 2,782                                   |   |  | $ | 2,439 |  
|Deduct: Total stock-based employee compensation expense determined under fair value basis for all awards, net of related tax
effects |  |                                        | (149 | ) |                                        |   | (117 | )                                     |  |   | (419                                    | ) |  |   | (208  | )
|                                                                                                                                     |  |                                        |      |   |                                        |   |      |                                       |  |   |                                         |   |  |   |       |  
|Pro forma net income                                                                                                                 |  | $                                      | 323  |   |                                        | $ | 333  |                                       |  | $ | 2,363                                   |   |  | $ | 2,231 |  
|                                                                                                                                     |  |                                        |      |   |                                        |   |      |                                       |  |   |                                         |   |  |   |       |  
|Earnings per share:                                                                                                                  |  |                                        |      |   |                                        |   |      |                                       |  |   |                                         |   |  |   |       |  
|Basic-as reported                                                                                                                    |  | $                                      | 0.16 |   |                                        | $ | 0.15 |                                       |  | $ | 0.92                                    |   |  | $ | 0.84  |  
|                                                                                                                                     |  |                                        |      |   |                                        |   |      |                                       |  |   |                                         |   |  |   |       |  
|Basic-pro forma                                                                                                                      |  | $                                      | 0.11 |   |                                        | $ | 0.11 |                                       |  | $ | 0.78                                    |   |  | $ | 0.77  |  
|                                                                                                                                     |  |                                        |      |   |                                        |   |      |                                       |  |   |                                         |   |  |   |       |  
|Diluted-as reported                                                                                                                  |  | $                                      | 0.14 |   |                                        | $ | 0.13 |                                       |  | $ | 0.79                                    |   |  | $ | 0.75  |  
|                                                                                                                                     |  |                                        |      |   |                                        |   |      |                                       |  |   |                                         |   |  |   |       |  
|Diluted-pro forma                                                                                                                    |  | $                                      | 0.09 |   |                                        | $ | 0.09 |                                       |  | $ | 0.67                                    |   |  | $ | 0.69  |  
|                                                                                                                                     |  |                                        |      |   |                                        |   |      |                                       |  |   |                                         |   |  |   |       |  



The per share weighted
average fair value of stock options granted during the three and nine months ended October 30, 2004 as well as the three and nine months ended November 1, 2003 was estimated using the Black Scholes Option-Pricing Model with the following weighted
average assumptions: expected dividend rate 0.0%, risk free interest rate of 3.875% to 4.36%, volatility of 50% and an expected life of approximately 10 years.



|(7) | Income Taxes
|--- | ------------



The Company files a consolidated federal income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.



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##### Table of Contents

The Company has recorded a valuation allowance to fully reserve for the value of net deferred tax assets
that existed upon emergence from bankruptcy in April 2002. The Company has fully reserved for these amounts because the utilization of its net operating loss carryforwards is depended upon sufficient future taxable income, which is not reasonably
assured. The Companys reorganization resulted in a modified capital structure by which Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, required the Company to apply fresh
start accounting. Under fresh start accounting, reversals of valuation -reserves recorded against deferred tax assets that existed as of the emergence date will result in an increase to paid-in capital. Consequently, the Company will recognize cash
tax savings in the year of asset recognition without the corresponding benefit to income tax expense.



The Company has recorded new deferred tax assets since emergence from bankruptcy in April 2002 because it believes it will realize the benefit of the new
deferred tax asset, net, in future periods and therefore has not recorded a valuation allowance on these new deferred tax assets at this time.



|(8) | Related Party Transactions
|--- | --------------------------



One entity had an ownership interest of more than 5% of the Company. Total purchases from that entity were $3,031 during the nine months ended October 30,
2004 and $1,924 during the nine months ended November 1, 2003. Amounts owed to that entity were $380 and $146 at October 30, 2004 and November 1, 2003, respectively.



|(9) | Contingencies
|--- | -------------



On March 3, 2004, Midwest One Distribution Company filed a lawsuit against the Company in the Circuit Court of the Eighteen Judicial Circuit of DuPage
County, Illinois, captioned Midwest One Distribution Co. vs. Factory Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd. The lawsuit alleges that the Company breached a distribution agreement between the parties that terminated on
January 31, 2004 by failing to pay certain invoices from Midwest One for certain services and/or expenses allegedly performed or incurred by Midwest One. Midwest One seeks damages of approximately $4,800 and an accounting of all distribution
services for which Midwest One was entitled to compensation under the distribution agreement. On April 29, 2004, the Company answered the complaint by denying all allegations and counterclaiming for breach of contract. The Company seeks damages,
costs and attorneys fees. No trial date has been set. The Company believes that it has meritorious defenses and counterclaims and is pursuing them vigorously.



Additionally, 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 other material existing or threatening litigation to which it may be a party except case described in note (11).



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##### Table of Contents

|(10) | New Accounting Pronouncements
|---- | -----------------------------



On March 31, 2004, the Financial Accounting Standards Board (FASB) issued its Exposure Draft No. 1102-100 Share-Based Payment, which is a
proposed amendment to FASB Statement No. 123, Accounting for Stock-Based Compensation. Generally, the approach in the Exposure Draft is similar to the approach described in Statement 123. However, the Exposure Draft would require all
share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The FASB expects to issue a final standard late in 2004 that would be effective for public companies
for fiscal years beginning after June 15, 2005. The Company currently accounts for stock options under APB Opinion No. 25. The pro-forma impact of expensing options is disclosed in note (6) to the Companys condensed consolidated financial
statements included herein.



In June 2004, the FASB issued an
interpretation of FASB No. 143, Accounting for Asset Retirement Obligations (FASB No. 143). This interpretation clarifies the scope and timing of liability recognition for conditional asset retirement obligations under FASB
No. 143 and is effective no later than the end of fiscal 2004. The Company has determined that this interpretation, and the adoption of FASB No. 143, will not have a material impact on the Companys condensed consolidated results of operations,
financial position or cash flows.



|(11) | Subsequent Event
|---- | ----------------



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



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##### Table of Contents

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollar amounts in thousands)



We are a chain of company-owned stores offering a wide
selection of party supplies, greeting cards, giftwrap, gifts, balloons everyday and seasonal merchandise and other special occasion merchandise at everyday value prices. As of December 8, 2004, we operated 183 stores in 20 states. The following
table summarizes store opening and closing activity.



|                    |  |                             |  |                            |  |                 |   |  |                
|------------------- |  | --------------------------- |  | -------------------------- |  | --------------- | - |  | ---------------
|                    |  | For the three months ended: |  | For the nine months ended:
|                    |  | October 30,2004             |  | November 1,2003            |  | October 30,2004 |   |  | November 1,2003
|Beginning of period |  | 180                         |  | 171                        |  | 177             |   |  | 171            
|Openings            |  | 1                           |  | 3                          |  | 5               |   |  | 3              
|Closings            |  |                            |  |                           |  | (1              | ) |  |               
|                    |  |                             |  |                            |  |                 |   |  |                
|End of period       |  | 181                         |  | 174                        |  | 181             |   |  | 174            
|                    |  |                             |  |                            |  |                 |   |  |                



We have plans to open
one store during the remainder of fiscal year 2004.



Critical Accounting
Policies and Estimates



Critical Accounting Policies are
defined as those that are reflective of significant judgments and estimates and could potentially result in materially different results under different assumptions and conditions. We have prepared the accompanying financial statements in conformity
with accounting principles 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. We have identified the following critical accounting policies utilized in the preparation of these financial statements.



Revenue Recognition



Revenues include the selling price of party goods sold, net of returns and discounts, and are recognized at the point of
sale. We estimate returns based upon historical return rates and such amounts have not been significant. We use gift cards and store credits, the revenue of which is recognized upon redemption by the customer.



Impairment of Long-Lived Assets



We review each store for impairment indicators annually, considering
operating results and cash flows. We are not aware of any impairment indicators for any of our stores at October 30, 2004. Assumptions and estimates used to estimate cash flows in the evaluation of impairment and the fair values used to determine
the impairment are subject to a degree of judgment and complexity. Any changes to the assumptions and estimates resulting from changes in the actual results or market conditions from those anticipated, may effect the carrying value of long-lived
assets and could result in an impairment charge.



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##### Table of Contents

Merchandise Inventories



We state merchandise inventories at the lower of average cost or estimated net realizable value utilizing the retail method. We perform periodic
evaluations of the net realizable value of merchandise, including merchandise which is to be discontinued from our ongoing inventory assortment as well as inventory with excess quantities on hand and certain seasonal inventory remaining from past
holidays. Based upon these evaluations, a provision for the excess of inventory cost over the net realizable value is recorded as a reduction to the net inventory balance. At October 30, 2004 and January 31, 2004, we had reserves of $1,200 and
$1,117, respectively, for certain merchandise which is to be discontinued from our ongoing inventory assortment, as well as inventory with excess quantities on hand, and certain seasonal inventory from past holidays.



We receive vendor allowances principally as a result of meeting defined
purchase levels or promoting vendors products. Those received as a result of purchase levels are accrued as a reduction of merchandise purchase price and results in a reduction of cost of sales as the merchandise is sold. Those received for
promoting vendors products are offset against specific advertising expense relating to the promotion and result in a reduction of selling, general and administrative expenses. Markdown allowances reduce cost of goods sold in the period the
related markdown is taken. Placement allowances are offset against specific, incremental expenses incurred in getting the product ready for sale.



Liabilities for Insurance Claims



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



Income Taxes



Historically, we have not recognized an income tax benefit for our losses.
We have recorded a valuation allowance to fully reserve for the value of the net deferred tax assets that existed upon emergence from bankruptcy. This allowance on pre-emergence deferred tax assets is necessary, as the utilization of our net loss
carryforwards is dependent upon sufficient future taxable income. Under fresh start accounting, reversals of valuation reserves recorded against deferred tax assets that existed as of the emergence date will result in an increase to paid-in capital.
Consequently, we will recognize cash tax savings in the year of asset recognition without the corresponding benefit to income tax expense.



We have recorded new deferred tax assets since emergence from bankruptcy in April 2002 because we believe we will realize the benefit of the new net
deferred tax asset, net, in future periods and therefore have not recorded a valuation allowance on these new deferred tax assets at this time.



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##### Table of Contents

New Accounting Pronouncements



On March 31, 2004, the Financial Accounting Standards Board (FASB) issued its Exposure Draft, 1102-100 Share-Based
Payment, which is a proposed amendment to FASB Statement No. 123, Accounting for Stock-Based Compensation. Generally, the approach in the Exposure Draft is similar to the approach described in Statement 123. However, the Exposure
Draft would require all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The FASB expects to issue a final standard late in 2004 that would be
effective for public companies for fiscal years beginning after June 15, 2005. We account for stock option plans under Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees, under which no
compensation cost has been recognized. The pro-forma impact of expensing options is disclosed in note (6) to our condensed consolidated financial statements included herein.



In June 2004, the FASB issued an interpretation of FASB No. 143, Accounting for Asset Retirement Obligations
(FASB No. 143). This interpretation clarifies the scope and timing of liability recognition for conditional asset retirement obligations under FASB No. 143 and is effective no later than the end of fiscal 2004. We have determined that
this interpretation, and the adoption of FASB No. 143, will not have a material impact on our condensed consolidated results of operations, financial position or cash flows.



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##### Table of Contents

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.



Fiscal 2004 has 52 weeks and ends on January 29, 2005. Fiscal 2003 had 52
weeks and ended on January 31, 2004.



The third quarter of
fiscal 2004 had 13 weeks and ended on October 30, 2004. The third quarter of fiscal 2003 had 13 weeks and ended on November 1, 2003.



|                                             |  |                             |   |  |                                  |   |  |                                 |   |  |                                 |  
|-------------------------------------------- |  | --------------------------- | - |  | -------------------------------- | - |  | ------------------------------- | - |  | ------------------------------- | -
|                                             |  | ThreemonthsendedOct 30,2004 |   |  | Three monthsendedNovember 1,2003 |   |  | Nine monthsendedOctober 30,2004 |   |  | Nine monthsendedNovember 1,2003 |  
|Net sales                                    |  | 100.0                       | % |  | 100.0                            | % |  | 100.0                           | % |  | 100.0                           | %
|Cost of sales                                |  | 63.7                        |   |  | 63.5                             |   |  | 63.7                            |   |  | 64.3                            |  
|                                             |  |                             |   |  |                                  |   |  |                                 |   |  |                                 |  
|Gross profit                                 |  | 36.3                        |   |  | 36.5                             |   |  | 36.3                            |   |  | 35.7                            |  
|Selling, general and administrative expenses |  | 33.2                        |   |  | 33.6                             |   |  | 32.2                            |   |  | 31.9                            |  
|Depreciation expense                         |  | 1.3                         |   |  | 0.9                              |   |  | 1.1                             |   |  | 0.8                             |  
|Other income                                 |  |                            |   |  |                                 |   |  |                                |   |  |                                |  
|Interest expense                             |  | 0.3                         |   |  | 0.6                              |   |  | 0.3                             |   |  | 0.5                             |  
|                                             |  |                             |   |  |                                  |   |  |                                 |   |  |                                 |  
|Income before income tax expense             |  | 1.5                         |   |  | 1.4                              |   |  | 2.7                             |   |  | 2.5                             |  
|Income tax expense                           |  | 0.6                         |   |  | 0.6                              |   |  | 1.1                             |   |  | 1.0                             |  
|                                             |  |                             |   |  |                                  |   |  |                                 |   |  |                                 |  
|Net income                                   |  | 0.9                         | % |  | 0.8                              | % |  | 1.6                             | % |  | 1.5                             | %
|                                             |  |                             |   |  |                                  |   |  |                                 |   |  |                                 |  
|Number of stores open at end of period       |  | 181                         |   |  | 174                              |   |  | 181                             |   |  | 174                             |  



Three Months Ended October 30, 2004
and November 1, 2003



Net Sales. Net sales
increased $2,382 or 4.6% to $53,735 for the three months ended October 30, 2004 (third quarter of fiscal 2004) from $51,353 for the three months ended November 1, 2003 (third quarter of fiscal 2003). The increase is
attributed to the number of stores. At the end of the third quarter of fiscal 2004 we operated 181 stores compared to 174 stores at the end of the third quarter of fiscal 2003. Comparable store sales increased 1.0% and are defined as sales from
those stores open for at least one full year. Increases in comparable store sales in our candy, basic party, seasonal and balloon categories were offset by decreases in other categories. Non-comparable store sales totaled $2,171 in the third quarter
of fiscal 2004 compared to $259 in the third quarter of fiscal 2003.



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##### Table of Contents

Gross Profit. Cost of sales includes merchandise, distribution and store occupancy costs. Gross
profit increased $788 or 4.2%, to $19,519 for the third quarter of fiscal 2004 from $18,731 for the third quarter of fiscal 2003. The increase is primarily due to sales volume of the new stores. As a percentage of net sales, gross profit was 36.3%
for the third quarter of fiscal 2004 compared to 36.5% in the same period in the prior year. As a percent of sales, gross profit, excluding store occupancy costs, improved slightly as we continued to leverage our freight and distribution costs.
Additionally, store occupancy costs increased $476 or 6.6% primarily as a result of additional stores.



Selling, General and Administrative Expenses. Selling, general and administrative expenses include store payroll, advertising and other store
operating and corporate administrative expenses. Selling, general and administrative expenses increased $628 or 3.6% to $17,860 for the third quarter of fiscal 2004 from $17,232 for the third quarter of fiscal 2003. Store related expenses increased
$661 or 6.0% as a function of operating additional stores while net advertising expense decreased $114 or 7.2% to $1,468 as we try to leverage our existing channels of advertising. Other corporate administrative expenses increased only $81 or 1.8%.
As a percentage of net sales, selling, general and administrative expenses was 33.2% in the third quarter of fiscal 2004 compared to 33.6% in the third quarter of fiscal 2003.



Depreciation expense. Depreciation expense was $681 in the third quarter of fiscal 2004 compared to $466 in the third
quarter of fiscal 2003. The increase is attributed to the level of fixed asset additions primarily related to new store openings and store remodels.



Interest Expense. Interest expense was $187 in the third quarter of fiscal 2004 compared to $283 in the third quarter of fiscal 2003. The decrease
resulted from a lower effective interest rate on increased average borrowing levels as we continue to open new stores.



Income Tax Expense. Income tax expense was $319 in the third quarter of fiscal 2004 compared to $300 in the third quarter of fiscal 2003. These
amounts represent approximately 40% of our pre tax income for the period described. Until the benefits of our net operating loss carry forwards are fully utilized, we do not expect to pay federal income tax.



17



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##### Table of Contents

Nine Months Ended October 30, 2004 and November 1, 2003



Net Sales. Net sales increased $7,096 or 4.3%, to $172,825 for the
nine months ended October 30, 2004 from $165,729 for the nine months ended November 1, 2003. The increase is attributed to the number of stores. Comparable store sales, which are defined as sales from those stores open for at least one full year,
increased 0.9%. We experienced positive comparable store sales in our candy, basic party and balloon while experiencing negative trends in other categories. Non-comparable store sales totaled $6,451 for the nine months ended October 30, 2004
compared to only $259 for the nine months ended November 1, 2003.



Gross Profit. Cost of sales includes merchandise, distribution and occupancy costs. Gross profit increased $3,534 or 6.0%, to $62,754 for the nine months ended October 1, 2004 from $59,220 for the nine months ended November 1, 2003.
The increase is primarily due to sales volume of the new stores. As a percentage of net sales, gross profit was 36.3% for nine months ended October 30, 2004 compared to 35.7% for the nine months ended November 1, 2003. We were successful in managing
merchandise margins while continuing to leverage our freight and distribution costs. As a percent of sales, gross profit, excluding store occupancy costs, improved 0.8% from the prior period. Store occupancy costs increased $1,276 or 5.9% primarily
as a result of additional stores.



Selling, General and
Administrative Expenses. Selling, general and administrative expenses include store payroll, advertising and other store operating and corporate administrative expenses. Selling, general and administrative expenses increased $2,769 or 5.2%, to
$55,662 for the nine months ended October 30, 2004 from $52,893 for the nine months ended November 1, 2004. Store related expenses increased $2,010 or 6.0% as a function of operating additional stores while net advertising expense decreased $92 or
1.4% to $6,444 as we leverage our advertising distribution while opening stores in existing markets. Other corporate administrative expenses increased $851 or 6.7% because of additional insurance costs and professional fees. As a percentage of net
sales, selling, general and administrative expenses was 32.2% for the nine months ended October 30, 2004 compared to 31.9% for the nine months ended November 1, 2003.



Depreciation expense. Depreciation expense was $1,895 for the nine months ended October 30, 2004 compared to $1,400
for the nine months ended November 1, 2003. The increase is attributed to the level of fixed asset additions primarily related to new store openings and store remodels.



Other income.The $30 of other income recorded in the nine months ended October 30, 2004 relates to a $55 debt
discount realized on an optional prepayment of the Trade Conversion Note and a $10 recovery of an amount previously written off in bankruptcy offset by a $35 fair value adjustment to the Extended Creditor Note Payable related to a prepayment on the
debt.



Interest Expense. Interest expense was $586 in
nine months ended October 31, 2004 compared to $863 in the nine months ended November 1, 2003. The decrease resulted from a lower effective interest rate coupled with lower average borrowing levels as we continue to positively manage our working
capital.



Income Tax Expense. Income tax expense was
$1,859 in the nine months ended October 30, 2004 compared to $1,625 in the nine months ended November 1, 2003. These amounts represent approximately 40% of our pre tax income for the period described. Until the benefits of our net operating loss
carry forwards are fully utilized, we do not expect to pay federal income tax.



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##### Table of Contents

Liquidity and Capital Resources



Our uses of capital for the remainder of fiscal 2004 are expected to include working capital for operating expenses
and satisfaction of current liabilities, expenditures related to maintaining and refurbishing existing stores, opening new stores and interest payments on outstanding borrowings. Historically, these cash requirements have been met through cash flow
from operations and borrowing from our credit facility.



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



|                                      |  |                                   |       |                                   |   |       
|------------------------------------- |  | --------------------------------- | ----- | --------------------------------- | - | ------
|                                      |  | FY2004                            |       | FY2003                           
|                                      |  | Nine months endedOctober 30, 2004 |       | Nine months endedNovember 1, 2003
|Cash provided by operating activities |  | $                                 | 8,459 |                                   | $ | 14,814
|                                      |  |                                   |       |                                   |   |       
|Cash used in investing activities     |  | $                                 | 2,457 |                                   | $ | 1,833 
|                                      |  |                                   |       |                                   |   |       
|Cash used in financing activities     |  | $                                 | 5,994 |                                   | $ | 12,981
|                                      |  |                                   |       |                                   |   |       



At October 30, 2004
our working capital was $15,576. Net cash provided by operating activities for the nine months ended October 30, 2004 was $8,459 compared to $14,814 of net cash provided by operating activities during the nine months ended November 1, 2003. The
decrease is related to increases in our inventory balances as we open new stores coupled with the leveling off of our days payable outstanding as we continue to get favorable trade terms from our vendors.



Net cash used in investing activities during the nine months ended October
30, 2004 and the nine months ended November 1, 2003 was $2,457 and $1,833, respectively. Net cash used in investing activities was primarily for capital expenditures related to new store openings, computer equipment, store remodeling and warehouse
equipment for the distribution center.



Net cash used in
financing activities during the nine months ended October 30, 2004 was $5,994 compared to $12,981 during the nine months ended November 1, 2003. Amounts are attributable to the level of borrowings and repayments.



We are party to a secured financing facility, dated April 8, 2002, with Wells
Fargo Retail Finance, LLC (as amended, the Loan Agreement). The Loan Agreement, which is a line of credit expiring on April 8, 2007, currently provides up to $30 million, (including $10 million for letters of credit) to fund working
capital needs and for general corporate purposes. Borrowings under the facility are limited by a percent of inventory levels. At December 8, 2004, the interest rate on our borrowings was 5.00%. Borrowings under the Loan Agreement are secured by
substantially all of our assets.



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



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##### Table of Contents

As of October 30, 2004, we had $6.7 million in borrowings outstanding under the Loan Agreement and had
utilized approximately $1.2 million for issuance of letters of credit.



Pursuant to the Plan of Reorganization in April 2002, we converted $3,130 of post petition trade payables into a Trade Conversion Note, which is payable within four years of issue date. In addition, we recorded at fair value the $2,600
extended creditor payment payable to the general unsecured creditors. During the nine months ended October 30, 2004, we made payments of $1,949 on the Trade Conversion Note and $983 on the Extended Creditor Payment, net of a $20 discount. We expect
to pay down the remaining balance of both debt instruments by April 9, 2005, thus negating the conversion factor of the Trade Conversion Note.



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



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



Contractual Obligations



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



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



|                               |  |                                              |      |                 |   |                 |  |              |      |       |   |      |  |   |      
|------------------------------ |  | -------------------------------------------- | ---- | --------------- | - | --------------- |  | ------------ | ---- | ----- | - | ---- |  | - | -----
|                               |  | Payments Due By Period (amounts in millions)
|                               |  | Within1 Year                                 |      | Within2-3 Years |   | Within4-5 years |  | After 5Years |      | Total
|Line of credit (*)             |  | $                                            | 6.7  |                 | $ |                |  | $            |     |       | $ |     |  | $ | 6.7  
|Trade conversion note (*)      |  |                                              | 1.1  |                 |   |                |  |              |     |       |   |     |  |   | 1.1  
|Extended creditor note (*)     |  |                                              | 1.6  |                 |   |                |  |              |     |       |   |     |  |   | 1.6  
|Operating leases               |  |                                              | 27.0 |                 |   | 44.7            |  |              | 19.8 |       |   | 16.1 |  |   | 107.6
|Capital leases                 |  |                                              |     |                 |   |                |  |              |     |       |   |     |  |   |     
|Inventory purchase commitments |  |                                              | 15.4 |                 |   |                |  |              |     |       |   |     |  |   | 15.4 
|                               |  |                                              |      |                 |   |                 |  |              |      |       |   |      |  |   |      
|Total payments                 |  | $                                            | 51.8 |                 | $ | 44.7            |  | $            | 19.8 |       |   | 16.1 |  | $ | 132.4
|                               |  |                                              |      |                 |   |                 |  |              |      |       |   |      |  |   |      

---

|(*) | Amounts exclude interest.
|--- | -------------------------



Off-Balance Sheet Arrangements



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



Seasonality



Our business is highly seasonal, with operating results varying from quarter to quarter. We historically have experienced higher sales during the second
and fourth fiscal quarters due to increased demand by customers for our products attributable to special occasions and holiday seasons during these periods. Our fiscal 2004 quarters are defined as follows: first fiscal quarter is February 1, 2004 to
May 1, 2004, second fiscal quarter is May 2, 2004 to July 31, 2004, third fiscal quarter is August 1, 2004 to October 30, 2004 and fourth fiscal quarter is October 31, 2004 to January 29, 2005. Our fiscal year ends on the 52 or 53 weeks, as
applicable, ending the Saturday nearest to January 31st.



ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS



We are subject to market risks from changes in interest rates. As of October 30, 2004, 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 the prime rate. We believe our interest rate risk is minimal as a hypothetical 1.0% increase to the average interest rate under the credit facilities applied to the average outstanding balance during the
three and nine months ended October 30, 2004 and the three and nine months ended November 1, 2003 would not have had a material impact on our financial position or results of operations.



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ITEM 4 CONTROLS AND PROCEDURES



We
maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commissions (the SEC) rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.



As of December 8, 2004 and as required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this
report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.



During the quarter ended October 30, 2004, there has been no change in our
internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting



PART II - OTHER INFORMATION



Item 1. Legal Proceedings



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



On March 3, 2004, Midwest One Distribution Company filed a lawsuit against us in the Circuit Court of the Eighteen Judicial Circuit of DuPage County,
Illinois, captioned Midwest One Distribution Co. vs. Factory Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd. The lawsuit alleges that we breached a distribution agreement between the parties that terminated on January 31, 2004
by failing to pay certain invoices from Midwest One for certain services and/or expenses allegedly performed or incurred by Midwest One. Midwest One seeks damages of approximately $4.8 million and an accounting of all distribution services for which
Midwest One was entitled to compensation under the distribution agreement. On April 29, 2004, we answered the complaint by denying all allegations and counterclaiming for breach of contract. We are seeking damages, costs and attorneys fees. No
trial date has been set. We believe we have meritorious defenses and counterclaims and are pursuing them vigorously.



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



22



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##### Table of Contents

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities



None.



Item 3. Defaults Upon Senior Securities



None



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



|         |  |                                                                                                                                                                                                                                                                                                                    
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1(1)   |  | Debtors Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated February 5, 2002.                                                                                                                                                                                                     
|         | 
|3.1(2)   |  | Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp.                                                                                                                                                                                                                             
|         | 
|3.2(4)   |  | Amended Bylaws of Factory Card & Party Outlet Corp.                                                                                                                                                                                                                                                                
|         | 
|3.11 (5) |  | Amendment to the Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp. dated July 17, 2003.                                                                                                                                                                                       
|         | 
|3.12 (5) |  | Amendment to the Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp. dated April 6, 2004.                                                                                                                                                                                       
|         | 
|4.1 (2)  |  | Warrant Agreement, dated April 9, 2002, between Factory Card & Party Outlet and Wells Fargo Bank Minnesota, N.A.                                                                                                                                                                                                   
|         | 
|4.2 (2)  |  | Form of New Management Warrant, dated April 9, 2002.                                                                                                                                                                                                                                                               
|         | 
|4.3 (2)  |  | Schedule of New Management Warrants (pursuant to Instruction 2 of Item 601).                                                                                                                                                                                                                                       
|         | 
|4.4 (2)  |  | Trade Conversion Note of Factory Card & Party Outlet Corp. and Factory Card Outlet of America Ltd., dated April 9, 2002, for the benefit of CSS Industries, Inc.                                                                                                                                                   
|         | 
|4.5 (2)  |  | Schedule of Trade Conversion Notes (pursuant to Instruction 2 of Item 601).                                                                                                                                                                                                                                        
|         | 
|4.6 (2)  |  | Trade Conversion Agreement, dated as of April 9, 2002, among Factory Card & Party Outlet Corp., Factory Card Outlet of America, Ltd., Amscan, Inc., Creative Expressions Group, Inc.,
Images and Editions Limited, Unique Industries, Inc., CSS Industries, Inc., P.S. Greetings, Inc., and Maryland Plastics, Inc.
|         | 
|10.1 (2) |  | Loan and Security Agreement dated as of April 9, 2002, among Factory Card Outlet of America, Ltd., as borrower, the lenders thereto as Wells Fargo Retail Finance, LLC, as arranger, collateral
agent and administrative agent.                                                                                    



23



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##### Table of Contents

|          |  |                                                                                                                                                                                                                                                 
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.2 (5)  |  | First Amendment dated April 9, 2004, to the Loan and Security Agreement, among Factory Card Outlet of America, Ltd., as borrower, the lenders thereto as Well Fargo Retail Finance, LLC, as
arranger, collateral agent and administrative agent.
|          | 
|10.3 (2)  |  | Security Agreement, dated April 9, 2002, among Factory Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd., in favor of William Kaye, as Collateral
Trustee.                                                                     
|          | 
|10.4 (2)  |  | Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.                                                                                                                                                                                    
|          | 
|10.5 (2)  |  | Trade Vendor Supply Agreement, dated April 9, 2002, between Factory Card & Party Outlet Corp., Factory Card Outlet of America, Ltd. and Maryland Plastics.                                                                                      
|          | 
|10.6 (2)  |  | Schedule of Trade Vendor Supply Agreements (pursuant to Instruction 2 of Item 601).                                                                                                                                                             
|          | 
|10.7 (2)  |  | Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd. and James D. Constantine.                                                                                                                         
|          | 
|10.8 (2)  |  | Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd. and Timothy F. Gower.                                                                                                                             
|          | 
|10.9 (2)  |  | Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd. and Gary W. Rada.                                                                                                                                 
|          | 
|10.10 (3) |  | Factory Card & Party Outlet Corp. 2002 Non-Employee Directors Stock Option Plan.                                                                                                                                                                
|          | 
|10.11 (3) |  | First Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.                                                                                                                                                             
|          | 
|10.12 (3) |  | Second Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Option Plan.                                                                                                                                                               
|          | 
|10.13 (4) |  | Factory Card & Party Outlet Corp. 2003 Equity Incentive Plan.                                                                                                                                                                                   
|          | 
|21        |  | Subsidiaries of the Company.                                                                                                                                                                                                                    
|          | 
|23.1      |  | Report of Independent Registered Public Accounting Firm.                                                                                                                                                                                        
|          | 
|23.2      |  | Awareness Letter from Deloitte & Touche, LLP.                                                                                                                                                                                                   
|          | 
|31.1      |  | Chief Executive Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                      
|          | 
|31.2      |  | Chief Financial Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                      
|          | 
|32.1      |  | Chief Executive Officer Certification of Periodic Report under Section 906 of Sarbanes-Oxley Act of 2002.                                                                                                                                       
|          | 
|32.2      |  | Chief Financial Officer Certification of Periodic Report under Section 906 of Sarbanes-Oxley Act of 2002.                                                                                                                                       

---

|Notes | 
|----- | 



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



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

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

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

|(5) | Incorporated by reference to the Companys Current Report on Form 10-K filed on April 21, 2004.
|--- | -----------------------------------------------------------------------------------------------



(b) Reports on 8-K.



Current Report on Form 8-K filed on August 6, 2004 announcing net sales results for fiscal July 2004.



Current Report on Form 8-K filed on September 3, 2004 announcing net sales
results for fiscal August 2004 and plans to announce second quarter results on September 10, 2004.



Current Report on Form 8-K filed on September 13, 2004 announcing its financial and operating results for the three and six months ended July 31, 2004.



Current Report on Form 8-K filed on October 8, 2004
announcing net sales results for fiscal September 2004.



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: December 8, 2004 |  | By:                               |  | /s/ Gary W. Rada                                                       
|                        |  |                                   |  | Gary W. Rada                                                           
|                        |  |                                   |  | President and Chief Executive Officer                                  
|                        |  |                                  
|Dated: December 8, 2004 |  | By:                               |  | /s/ James D. Constantine                                               
|                        |  |                                   |  | James D. Constantine                                                   
|                        |  |                                   |  | Executive Vice President and Chief Financial and Administrative Officer
|                        |  |                                   |  | [Principal Accounting Officer]                                         



25