<PAGE>

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                    FORM 10-Q

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

     For The Quarterly Period Ended May 3, 2003

                          Commission File Number: 21859

                                   ----------

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

           DELAWARE                                    36-3652087
-------------------------------          ---------------------------------------
(State or other jurisdiction of
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)

                                   ----------

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 June 12,
2003 was 1,508,591.

================================================================================

<PAGE>

                        Factory Card & Party Outlet Corp.

                                    Form 10-Q

                        For the Quarter Ended May 3, 2003
                                      Index
                                                                           Page

         Cautionary Statement Regarding Forward-Looking Statements            2

Part I   Financial Information

Item 1   Financial Statements:

         Condensed Consolidated Balance Sheets (Unaudited) - as of
          May 3, 2003 (Successor Company) and as of February 1, 2003
          (Successor Company)                                                 3

         Condensed Consolidated Statements of Operations
          (Unaudited) - three months ended May 3, 2003, one month
          ended May 4, 2002 (Successor Company) and two months ended
          April 6, 2002 (Predecessor Company)                                 4

         Condensed Consolidated Statements of Cash Flows
          (Unaudited) - three months ended May 3, 2003, one month
          ended May 4, 2002 (Successor Company) and two months ended
          April 6, 2002 (Predecessor Company)                                 5

         Notes to Condensed Consolidated Financial Statements -
          (Unaudited)                                                         6

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

Item 3   Quantitative and Qualitative Disclosures About Market Risk          23

Item 4   Controls and Procedures                                             23

Part II  Other Information
            Item 1. Legal Proceedings                                        23
            Item 2. Changes in Securities and Use of Proceeds                23
            Item 3. Defaults Upon Senior Securities                          23
            Item 4. Submission of Matters to a Vote of Security Holders      24
            Item 5. Other Information                                        24
            Item 6. Exhibits and Reports on Form 8-K                         24
            Signatures                                                       26
            Certifications                                                   27

                                       1

<PAGE>

            CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

As used herein, unless the context otherwise requires, the "Company," "we,"
"our" or "us" refers to Factory Card & Party Outlet Corp. and its subsidiaries.

Statements made in this report, and in our other public filings and releases,
which are not historical facts contain "forward-looking" statements (as defined
in the Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties and are subject to change at any time. These forward-looking
statements may include, but are not limited to, certain statements in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," such as our ability to meet our liquidity needs, scheduled debt and
interest payments and expected future capital expenditure requirements.

The forward-looking statements involve known and unknown risks, uncertainties
and other factors that are, in some cases, beyond our control. You are cautioned
that these statements are not guarantees of future performance and that actual
results and trends in the future may differ materially.

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

     .  ability to meet sales plans;
     .  weather and economic conditions;
     .  dependence on key personnel;
     .  competition;
     .  ability to anticipate merchandise trends and consumer demand;
     .  ability to maintain relationships with suppliers;
     .  successful implementation of information systems;
     .  successful handling of merchandise logistics;
     .  inventory shrinkage;
     .  ability to meet future capital needs;
     .  seasonality of business;
     .  governmental regulations; and
     .  other factors both referenced and not referenced in this Form 10-Q.

                                       2

<PAGE>


PART I - FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS

                        FACTORY CARD & PARTY OUTLET CORP.
                                 AND SUBSIDIARY

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

                                                     Successor       Successor
                                                      Company         Company
                                                    ------------    ------------
                                                       May 3,        February 1,
                                                        2003            2003
                                                    ------------    ------------
ASSETS
Current assets:
   Cash                                             $        328    $        196
   Merchandise inventories, net                           46,807          48,190
   Prepaid expenses and other                              3,851           4,088
                                                    ------------    ------------
      Total current assets                                50,986          52,474
Fixed assets, net                                          6,957           6,801
Other assets                                                 362             389
Deferred tax asset, net                                      480             376
                                                    ------------    ------------
      Total assets                                  $     58,785    $     60,040
                                                    ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Debt                                             $     13,344    $     17,528
   Accounts payable                                       15,143          12,965
   Accrued expenses                                        7,331           6,465
   Current portion of long term debt and
    capital lease obligations                                449             440
                                                    ------------    ------------
      Total current liabilities                           36,267          37,398
                                                    ------------    ------------
Long term debt and capital lease obligations               5,799           5,889
Deferred rent liabilities                                  1,685           1,599
                                                    ------------    ------------
      Total liabilities                                   43,751          44,886
Stockholders' equity                                      15,034          15,154
                                                    ------------    ------------
      Total liabilities and stockholders' equity    $     58,785    $     60,040
                                                    ============    ============

See accompanying notes to condensed consolidated financial statements.

                                       3

<PAGE>

                        FACTORY CARD & PARTY OUTLET CORP.
                                 AND SUBSIDIARY

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

<TABLE>
<CAPTION>
                                                  Successor        Successor     Predecessor
                                                   Company          Company        Company
                                                -------------    ------------    ------------
                                                    Three            One             Two
                                                Months Ended     Month Ended     Months Ended
                                                   May 3,           May 4,         April 6,
                                                    2003             2002            2002
                                                -------------    ------------    ------------
<S>                                             <C>              <C>             <C>
Net sales                                       $      54,541    $     18,187    $     40,837
Cost of sales                                          36,014          11,597          26,991
                                                -------------    ------------    ------------
   Gross profit                                        18,527           6,590          13,846
Selling, general and administrative expenses           17,995           5,697          12,212
Depreciation                                              448             100           1,030
Reorganization items                                       --              --         (18,840)
Interest expense                                          343             154             374
                                                -------------    ------------    ------------
   Income (loss) before income tax expense
    (benefit)                                            (259)            639          19,070
Income tax expense (benefit)                             (104)            249            (360)
                                                -------------    ------------    ------------
   Net income (loss)                            $        (155)   $        390    $     19,430
                                                =============    ============    ============
   Net income (loss) per share - basic          $       (0.11)   $       0.27
                                                -------------    ------------
Weighted average shares outstanding - basic         1,442,743       1,424,548
                                                -------------    ------------
   Net income (loss) per share - diluted        $       (0.11)   $       0.27
                                                -------------    ------------
Weighted average shares outstanding - diluted       1,442,743       1,424,548
                                                -------------    ------------
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       4

<PAGE>

                        FACTORY CARD & PARTY OUTLET CORP.
                                 AND SUBSIDIARY

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

<TABLE>
<CAPTION>
                                                            Successor        Successor       Predecessor
                                                             Company          Company          Company
                                                          -------------    -------------    -------------
                                                          For the Three     For the One      For the Two
                                                          Months Ended      Month Ended     Months Ended
                                                             May 3,            May 4,          April 6,
                                                              2003              2002            2002
                                                          -------------    -------------    -------------
<S>                                                       <C>              <C>              <C>
Cash flows from operating activities:
   Net income (loss)                                      $        (155)   $         390    $      19,430
   Adjustments to reconcile net income (loss) to net
    cash provided by operating activities:
      Plan of reorganization and fresh start
       adjustments                                                   --               --          (21,898)
      Depreciation and amortization of fixed assets                 448              100            1,030
      Amortization of deferred financing costs                       32                6               26
      Amortization of deferred compensation                          35               12               --
      Non cash portion of reorganization items                       --               --            1,275
      Tax benefit of pre-confirmation net operating
       losses                                                        --              249               --
      Changes in assets and liabilities:
         Merchandise inventories                                  1,383            1,349            2,212
         Prepaid expenses and other assets                          128            2,575           (2,594)
         Accounts payable                                         2,178           (2,489)           3,336
         Accrued expenses                                           866           (2,688)           2,020
         Deferred rent obligation                                    86              161               --
                                                          -------------    -------------    -------------
Net cash provided by (used in) operating activities               5,001             (335)           4,837
                                                          -------------    -------------    -------------
Net cash used in investing activities - purchase of
 fixed assets, net                                                 (604)            (176)            (257)
                                                          -------------    -------------    -------------
Cash flow provided by (used in) financing activities:
   Borrowings                                                    52,235           18,664           38,381
   Repayment of debt                                            (56,419)         (18,134)         (42,898)
   Payment of capital lease obligations                            (106)             (44)             (56)
   Increase in long term debt                                        25               27               --
                                                          -------------    -------------    -------------
Net cash provided by (used in) financing activities              (4,265)             513           (4,573)
                                                          -------------    -------------    -------------
Net increase in cash                                                132                2                7
Cash at beginning of period                                         196              189              182
                                                          -------------    -------------    -------------
Cash at end of period                                     $         328    $         191    $         189
                                                          -------------    -------------    -------------
Supplemental cash flow information:
   Interest paid                                          $         424    $         129    $         334
   Cash paid for reorganization items                               134              358            1,055
Supplemental non cash information:
   Stock issued (Successor Company)                                  --               --          (10,040)
   Fair value adjustments                                            --               --           10,406
   Stock retired (Predecessor Company) and debt
    discharge                                                        --               --          (22,828)
   Unearned restricted stock awards                                 411              552              564
   Capital lease obligations                                         --               --               56
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                        5

<PAGE>

                        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)  Chapter 11 Proceedings and Reorganization

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

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

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

          .  The common stock of Factory Card & Party Outlet Corp. that was
             outstanding immediately prior to the Plan becoming effective was
             canceled and 74,553 shares of our new Common Stock were issued to
             holders of the canceled common stock at a ratio of .00992307034
             shares of new Common Stock for each share of canceled common stock.

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

          .  We issued 75,000 shares of the new Common Stock to certain members
             of our management, vesting ratably over a four-year period, as
             specified in the Plan, and warrants to purchase an aggregate 31,000
             shares of our new Common Stock at a purchase price of $7.52 per
             share. On June 7, 2002, 12,900 warrants were exercised and the
             remaining 18,100 warrants expired.

          .  We issued four series of new Warrants, Series A through D, to
             tendering holders of the canceled Common Stock, granting such
             holders the right to purchase an aggregate of 153,467 additional
             shares of the new Common Stock. The Series A Warrants are
             exercisable any time prior to April 9, 2006 at a price of $11.00
             per share. The Series B Warrants are exercisable at any time prior
             to April 9, 2008 at a price of $16.00 per share. The Series C
             Warrants are exercisable any time prior to April 9, 2010 at a price
             of $16.00 per share. The Series D Warrants are exercisable any time
             prior to April 9, 2010 at a price of $34.00 per share.

          .  We adopted an employee stock option plan, the 2002 Stock Option
             Plan, to provide our eligible employees with the opportunity to
             purchase an aggregate 166,667 shares of our new

                                       6

<PAGE>

             Common Stock.

          .  We paid $1,000 to the General Unsecured Creditors within 60 days of
             the Effective Date and agreed to pay the General Unsecured
             Creditors, three years from emergence an aggregate of $2,600, less
             any prepayments, which obligation is secured by a subordinated lien
             on certain of our property.

          .  We converted an aggregate of $3,130 post petition accounts payable
             into long-term convertible secured subordinated notes (the "Trade
             Conversion Notes") to seven trade vendors and suppliers (the "Trade
             Participants"). The Trade Participants each have the right to
             convert their Trade Conversion Notes in whole, or in part, into an
             aggregate of 29.35% of the new Common Stock, at any time between
             April 9, 2005 (the third anniversary of the Plan's Effective Date)
             and April 9, 2006 (the fourth anniversary of such date), subject to
             adjustments to reflect any prepayments made by us.

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

(2)  Business and Basis of Presentation

     We are a chain of company-owned stores offering an extensive selection of
     party supplies, gifts, greeting cards, giftwrap, and other special occasion
     merchandise at everyday value prices. As of June 12, 2003, we operated 171
     stores in 20 states.

     The consolidated unaudited financial statements include the accounts of
     Factory Card & Party Outlet Corp. and our wholly owned subsidiary, Factory
     Card Outlet of America Ltd. These financial statements have been prepared
     by management without audit and should be read in conjunction with the
     consolidated financial statements and notes for the fiscal year ended
     February 1, 2003 included in our Annual Report on Form 10-K. The operating
     results for the interim periods are not necessarily indicative of the
     results for the year. All intercompany balances and transactions have been
     eliminated in consolidation. In the opinion of management, the accompanying
     consolidated financial statements reflect all normal recurring and certain
     nonrecurring adjustments necessary for a fair presentation of the interim
     financial statements.

     Fresh-Start Accounting

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

                                       7

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

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

                                       8

<PAGE>

<TABLE>
<CAPTION>
                                       Predecessor                           Fresh          Successor
                                         April 6,         Plan of            Start           April 6,
                                           2002        Reorganization     Adjustments         2002
                                       ------------    --------------     ------------     ------------
<S>                                    <C>             <C>                <C>              <C>
ASSETS
Current assets:
   Cash                                $        189    $                  $                $        189
   Merchandise inventories                   56,987                            (5,396)i          51,591
   Prepaid expenses and other                 5,251                                               5,251
                                       ------------    --------------     ------------     ------------
      Total current assets                   62,427                             (5,396)          57,031
Fixed assets, net                            17,600                            (11,760)a          5,840
Other assets                                    240               200b                              440
                                       ------------    --------------     ------------     ------------
      Total assets                     $     80,267    $          200     $    (17,156)    $     63,311
                                       ============    ==============     ============     ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
   Debt                                $               $       22,743c    $                $     22,743
   Debtor-in- possession
    financing                                22,543           (22,543)c
   Accounts payable                          11,407            (3,130)d                           8,277
   Accrued expenses                          12,534                                              12,534
   Liabilities subject to
    settlement                                                  3,085e                            3,085
                                       ------------    --------------     ------------     ------------
      Total current liabilities              46,484               155                            46,639
                                       ------------    --------------     ------------     ------------
Long term notes payable and
 capital leases                               1,128             5,504d,h                          6,632
Deferred rent liabilities                        --             6,750f          (6,750)a             --
Liabilities subject to compromise            54,056           (54,056)f                              --
                                       ------------    --------------     ------------     ------------
      Total liabilities                     101,668           (41,647)          (6,750)          53,271
Stockholders' equity (deficit)              (21,401)           41,847g         (10,406)g         10,040
                                       ------------    --------------     ------------     ------------
      Total liabilities &
       stockholders' equity
       (deficit)                       $     80,267    $          200     $    (17,156)a   $     63,311
                                       ============    ==============     ============     ============

<FN>
<F1>
(a)  To reduce the excess of book value over enterprise value.
<F2>
(b)  To record $200 of deferred financing costs related to exit financing with
     Wells Fargo Retail Finance LLP.
<F3>
(c)  Borrowings under new line of credit agreement with Wells Fargo Retail
     Finance, LLP. Existing debtor in possession financing agreement was paid in
     full upon the effective date of the Plan of Reorganization.
<F4>
(d)  To record the conversion of post-petition accounts payable into the $3,130
     Trade Conversion Note.
<F5>
(e)  To record $1,000 payable due to creditors, $1,700 payable in landlord cure
     amounts, $323 payable in priority claims and $62 payable in convenience
     claims. Amounts were paid within 60 days of the Effective Date.
<F6>
(f)  To record elimination of pre-petition liabilities subject to compromise.
     Pre-petition liabilities subject to compromise included deferred rent
     liabilities that were not extinguished by the Bankruptcy Court.
<F7>
(g)  To write-off old equity upon emergence from chapter 11 and record the
     issuance of new stock in accordance with the Plan of Reorganization and to
     adjust the accumulated deficit by the portion of the liabilities subject to
     compromise that is forgiven.
<F8>
(h)  To record at fair value the $2,600 creditor agreement.
<F9>
(i)  To eliminate the capitalization of certain buying and warehousing costs
     associated with a change in accounting principle.
</FN>
</TABLE>

                                       9

<PAGE>

     Management Estimates

     The preparation of financial statements in conformity with accounting
     principles generally accepted in the United States of America requires
     management to make estimates and assumptions that affect the reported
     amounts of assets and liabilities at the date of the financial statements
     and the reported amounts of revenues and expenses during the reporting
     period and related disclosures. Significant estimates made as of and for
     the three months ended May 3, 2003 and for the one month ended May 4, 2002
     and the two months ended April 6, 2002 include accruals for reorganization
     items, provision for shrinkage, and the carrying values of inventories.
     Actual results could differ from those estimates.

     Change in Accounting Principle

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

     New Accounting Pronouncements

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

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

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

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
     No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
     Corrections". Specifically, SFAS 145 rescinds SFAS No. 4, "Reporting Gains
     and Losses from Extinguishment of Debt, an amendment of APB Opinion No. 30"
     and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
     Requirements", as these two standards required that all gains and losses
     from the extinguishment of debt be aggregated and, if material, classified
     as an extraordinary item. Consequently, such gains and losses will now be
     classified as extraordinary only if they meet the criteria for
     extraordinary treatment set forth in APB Opinion No. 30, "Reporting the
     Results of Operations - Reporting the Effects of

                                       10

<PAGE>

     Disposal of a Segment of a Business, and Extraordinary, Unusual and
     Infrequently Occurring Events and Transactions." SFAS No. 145 also rescinds
     SFAS No. 44 "Accounting for Intangible Assets of Motor Carriers, an
     amendment of Chapter 5 of ARB No. 43 and an interpretation of APB Opinions
     17 and 30", because the event to which that Statement relates is no longer
     relevant. SFAS No. 145 amends SFAS No. 13, "Accounting for Leases", to
     require that certain lease modifications that have economic effects similar
     to sale-leaseback transactions be accounted for in the same manner as such
     transactions, and also makes certain technical corrections to a number of
     existing pronouncements. We were required to adopt this statement due to
     the application of fresh-start accounting. The effect of this statement is
     that the net gain associated with the plan of reorganization and
     fresh-start adjustments is reported as a component of operations.

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

     In September 2002, the FASB issued Emerging Issues Task Force ("EITF")
     02-16 "Accounting by a Customer (Including a Reseller) for Certain
     Consideration Received from a Vendor" which addresses the accounting for
     cash retailers receive from vendors. The EITF concluded cash received from
     a vendor is presumed to be a reduction of purchase price of goods unless
     the vendor receives an identifiable benefit or there is reimbursement of a
     specific incremental identifiable cost. Additionally, rebates are to be
     recorded when it is probable and reasonably estimable and allocated to
     transactions giving rise to the rebate. Our accounting policies relating to
     cash received from vendors is consistent with the conclusions reached by
     the EITF.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
     Compensation - Transition and Disclosure" - an amendment of FASB Statement
     123. SFAS No. 148 amends FASB Statement No. 123, "Accounting for
     Stock-Based Compensation" and provides alternative methods for accounting
     for a change by registrants to the fair value method of accounting for
     stock-based compensation. Additionally, SFAS No. 148 amends the disclosure
     requirements of SFAS No. 123 to require disclosure in the significant
     accounting policy footnote of both the annual and interim financial
     statements of the method of accounting for stock-based compensation and the
     related pro-forma disclosures when the intrinsic value method continues to
     be used. SFAS No. 148 is effective for fiscal years ended after December
     15, 2002, and disclosures are effective for the first quarter beginning
     after December 15, 2002. We have adopted the disclosure provisions of SFAS
     No. 148.

                                       11

<PAGE>

(3)  Long Term Debt and Capital Lease Obligations

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

     The following table summarizes the components of Long Term Debt and Capital
     Lease Obligations including its current portion at May 3, 2003.

                                                     May 3,
                                                      2003
                                                  ------------
Trade conversion note                             $      3,130
Discounted value of extended creditor payment            2,505
Financing agreements                                       516
Capital leases                                              97
                                                  ------------
   Total                                          $      6,248
                                                  ============

(4)  Debt

     On the Effective Date, obligations relating to our debtor-in-possession
     financing facility were paid in full and our secured financing facility
     with Wells Fargo Retail Finance, LLC (the "New Loan Agreement") became
     effective. The New Loan Agreement, which is a line of credit, currently
     provides up to $40,000 (including $10,000 for letters of credit) to fund
     working capital needs and for general corporate purposes. Borrowings under
     the facility are limited by a percent of inventory levels. The Loan
     Agreement expires on April 8, 2005 and has a variable interest rate based
     upon the Prime rate or at our option, a variable rate based upon earnings
     performance and the London Interbank Offered Rate ("LIBOR") with a minimum
     threshold of 5.00%. The interest rate on our borrowings was 5.0% at May 3,
     2003. Borrowings under the Loan Agreement are secured by substantially all
     of our assets. Certain restrictive covenants apply, including achievement
     of specified operating results and limitations on the incurrence of
     additional liens and indebtedness, capital expenditures, asset sales and
     payment of dividends, all of which have been met.

(5)  Stockholders' Equity

     We authorized an aggregate of 10,000,000 shares of new Common Stock, par
     value $0.01 per share. A total of 1,348,457 shares were distributed in the
     initial distribution of stock to creditors, 75,000 shares were distributed
     to certain members of management which vest over a 4 year period and 74,553
     shares were distributed to former equity interests.

     As provided in the Plan of Reorganization, we adopted a stock option plan,
     which authorizes the grant of up to 166,667 stock options to our employees
     - 158,250 options at exercise prices ranging from $5.50 to $9.43 were
     outstanding at May 3, 2003.

     We also issued four series of new Warrants, Series A through D, to
     tendering holders of the canceled Common Stock, granting such holders the
     right to purchase an aggregate of 153,467 additional shares of the new
     Common Stock. The 38,346 shares of Series A Warrants are exercisable any
     time prior to April 9, 2006 at a price of $11.00 per share. The 46,256
     shares of Series B Warrants are exercisable at any time prior to April 9,
     2008 at a price of $16.00 per share. The 38,346 shares of Series C Warrants
     are exercisable any time prior to April 9, 2010 at a price of $16.00 per
     share. The 30,519 shares of Series D Warrants are exercisable any time
     prior to April 9, 2010 at a price of $34.00 per

                                       12

<PAGE>

     share.

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

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

     On April 23, 2002, the Board of Directors approved the non-employee
     Director Stock Option Plan, which authorized the grant of up to 150,000
     common stock options to non-employee members of the Board of Directors -
     90,000 options at exercise prices ranging from $5.30 to $7.52 were
     outstanding at May 3, 2003.

     On January 27, 2003, the Board of Directors adopted the 2003 Equity
     Incentive Plan whereby 250,000 shares would become available to our
     employees and officers. The 2003 Equity Incentive Plan is subject to
     stockholder approval at our annual meeting of stockholders on July 16,
     2003.

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

(6)  Earnings Per Share

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

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

                                       13

<PAGE>

                                    Net loss         Shares        Per share
                                  ------------    ------------    ------------
For the three months ended
 May 3, 2003:
Loss per share - basic:
   Net loss                       $       (155)      1,442,743    $      (0.11)
Effect of dilutive securities:
   Stock options and warrants                               --
Loss per share - diluted:
                                  ------------    ------------    ------------
   Net loss                       $       (155)      1,442,743    $      (0.11)
                                  ============    ============    ============

                                   Net income        Shares         Per share
                                  ------------    ------------    ------------
For the one month ended
 May 4, 2002:
Earnings per share - basic:
   Net income                     $        390       1,424,548    $       0.27
Effect of dilutive securities:
   Stock options and warrants                               --
Earnings per share - diluted:
                                  ------------    ------------    ------------
   Net income                     $        390       1,424,548    $       0.27
                                  ============    ============    ============

     The dilutive impact of stock options and warrants was calculated using the
     treasury method. Had we reported a profit in the first quarter ended May 3,
     2003, the number of average shares diluted would have increased by 2,025
     shares. The 153,467 warrants issued to old equity and the shares related to
     the trade conversion notes did not meet the criteria for inclusion in the
     diluted earning per share calculation and thus were excluded.

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

(7)  Stock-Based Compensation

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

                                       14

<PAGE>

                                               For the three    For the one
                                               months ended     month ended
                                                May 3, 2003     May 4, 2002
                                               -------------    ------------
Net income (loss), as reported                 $        (155)   $        390
Deduct:  Total  stock-based
 employee compensation expense  determined
 under fair  value  basis for all awards,
 net of related tax effects                               38              11
                                               -------------    ------------
Pro forma net income (loss)                    $        (193)   $        379
                                               =============    ============
Earnings (loss) per share:
------------------------------------------
Basic-as reported                              $       (0.11)   $       0.27
                                               -------------    ------------
Basic-pro forma                                $       (0.13)   $       0.27
                                               =============    ============
Diluted-as reported                            $       (0.11)   $       0.27
                                               -------------    ------------
Diluted-pro forma                              $       (0.13)   $       0.27
                                               =============    ============

     The per share weighted average fair value of stock options granted during
     the three months ended May 3, 2003 and for the one month ended May 4, 2002
     was estimated using the Black Scholes Option-Pricing Model with the
     following weighted average assumptions: expected dividend rate 0.0%, risk
     free interest rate of 3.875%, volatility of 50% and an expected life of
     approximately 10 years.

(8)  Reorganization Items

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

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

     The Successor Company has not recorded any Reorganization Items.

                                       15

<PAGE>
(9)  Income Taxes

     We have recorded a valuation allowance to fully reserve for the value of
     net deferred tax assets that existed upon emergence from bankruptcy. These
     assets include remaining net operating loss carryforwards. This allowance
     on pre-emergence deferred tax assets is necessary, as the utilization of
     the Company's net loss carry forwards is dependent upon sufficient future
     taxable income. In the three months ended May 3, 2003, we recorded $104 in
     new deferred tax assets, of which $35 related to deferred rent liabilities
     with the remaining $69 representing a new net operating loss carryforward.
     We have not recorded a valuation allowance on these new deferred tax assets
     as we anticipate that we will realize these deferred tax assets in the
     future.

     We recorded an income tax benefit of $104 for the three months ended May 3,
     2003 and income tax expense of $249 for the one month ended May 4, 2002. As
     we realize the benefits of cumulative temporary differences and net
     operating loss carryforwards that existed at the date of emergence, we will
     report those benefits as an addition to paid-in-capital rather than as a
     reduction to the tax provisions in the future statement of operations.

     We recorded an income tax benefit of $360 for the two months ended April 6,
     2002 which resulted from the realization of net operating loss carry backs
     due the enactment of the Job Creation and Workers Assistance Act of 2002.

(10) Related Party Transactions

     As described in the Plan of Reorganization, 90% of the new Common Stock was
     distributed to unsecured creditors, five percent was distributed to our
     management and 5 % was distributed to old equity shareholders. Only one
     entity has an ownership interest of more than 10%. Total purchases from
     that entity were $760 during the three months ended May 3, 2003 and amounts
     owed to that entity as of May 3, 2003 were $342. There were no purchases
     from this entity during the three months ended May 4, 2002. We believe
     transactions with former unsecured creditors, as well as other vendors, are
     deemed to be consummated on terms equivalent to those prevailing in an
     arm's length transaction.

(11) Contingencies

     In 2003 we implemented an in-house program to sort merchandise by store in
     our warehouse facility. Prior to this program, a third party logistical
     vendor performed the sorting of this merchandise. We have a contract with
     this vendor to perform certain logistical services requested by us that
     expires on January 31, 2004. This vendor has continued to over bill us for
     sort and various other charges. At May 3, 2003 these charges were
     approximately $1,600. We believe these disputed charges are without merit
     and are in violation of the terms of our agreement. Consequently, these
     charges are not accrued at May 3, 2003.

                                       16

<PAGE>

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

     The Company is a chain of company-owned stores offering an extensive
selection of party supplies, gifts, greeting cards, giftwrap and other special
occasion merchandise at everyday value prices. As of June 11, 2003, the Company
operated 171 stores in 20 states.

     On March 23, 1999 the Company filed voluntary petitions for relief under
chapter 11 of title 11 of the United States Code under case numbers 99-685(JCA)
and 99-686(JCA). From that time until March 20, 2002, the Company operated its
business as a debtor-in-possession subject to the jurisdiction and supervision
of the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). On March 20, 2002, we announced that the Bankruptcy Court
confirmed our Amended Plan of Reorganization (the "Plan of Reorganization") that
it filed with the Bankruptcy Court on February 5, 2002. On April 9, 2002 (the
"Effective Date") the Plan of Reorganization became effective and we
successfully emerged from Chapter 11. See Note (1) to the Notes to the Condensed
Consolidated Financial Statements for a summary of the principal provisions of
the Plan of Reorganization.

Critical Accounting Policies

     Critical Accounting Policies are defined as those that are reflective of
significant judgments and uncertainties and could potentially result in
materially different results under different assumptions and conditions. 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.

Fresh Start Accounting

     As is more fully discussed in Note 2 - "Business and Basis of Presentation"
in our Notes to Condensed Consolidated Financial Statements, we adopted fresh
start accounting pursuant to the American Institute of Certified Public
Accountant's Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"), during the first quarter
of fiscal 2002 resulting in a change in the basis of accounting of our
underlying assets and liabilities at the Effective Date. Accordingly, our
financial statements before and after the Effective Date are not comparable. The
operating results for the two months ended April 6, 2002 were significantly
impacted by items associated with emerging from bankruptcy including debt
forgiveness, restructuring activities and certain changes to record the excess
of book value over enterprise value. Upon implementation of fresh start
accounting, our total assets and total liabilities and stockholders' equity were
adjusted downward by approximately $17,000.

                                       17

<PAGE>

Fresh-start Reporting; Factors Affecting Comparability of Financial Information

     Effective April 9, 2002, we emerged from Chapter 11 bankruptcy proceedings
and implemented fresh-start accounting. Accordingly, all assets and liabilities
were restated to reflect their respective fair values. The consolidated
financial statements after that date are those of a new reporting entity and are
not comparable to pre-confirmation periods. However, for purposes of this
discussion, the one month period ended May 4, 2002 (Successor Company) has been
combined with the two month period ended April 6, 2002 (Predecessor Company) and
then compared to the three months ended May 3, 2003. Differences between periods
due to fresh-start accounting adjustments are explained when necessary.

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

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.

                                                                Combined
                                                               results -
                                              Three months    three months
                                                 ended           ended
                                              ------------    ------------
                                                 May 3,          May 4,
                                                  2003            2002
                                              ------------    ------------
Net sales                                            100.0%          100.0%
Cost of sales                                         66.0            65.4
                                              ------------    ------------
   Gross profit                                       34.0            34.6
Selling, general and administrative expenses          33.0            30.3
Depreciation                                           0.8             1.9
Reorganization items                                    --           (31.9)
Interest expense                                       0.6             0.9
                                              ------------    ------------
   Income (loss) before income tax benefit            (0.4)           33.4
Income tax benefit                                    (0.2)           (0.2)
                                              ------------    ------------
Net income (loss)                                     (0.2)%          33.6%
                                              ============    ============
Number of stores open at end of period                 171             172

Three Months Ended May 3, 2003 and May 4, 2002

     Net Sales. Net sales decreased $4,483 or 7.6% to $54,541 for the three
month period ended May 3, 2003 ("first quarter of fiscal 2003") from $59,024 for
the three month period ended May 4, 2002 ("first quarter of fiscal 2002"). All
major product categories experienced decreased sales with our gift and novelty
category contributing the largest decrease. During the first quarter of 2003, we
completed our juvenile party initiative whereby we expanded our product
assortment by over 30%. This expansion partially attributed to the decrease in
our gift and novelty category as we phased out product to accommodate the
expansion of juvenile party merchandise. Comparable store sales decreased 7.1%
as a result of a challenging retail environment, weakening consumer confidence
and the business interruption experienced during our juvenile party initiative.
No stores opened or closed in either period. Please note we closed one store in
the second quarter of fiscal 2002.

                                       18

<PAGE>

     Gross Profit. Cost of sales includes merchandise, distribution and store
occupancy costs. Gross profit decreased $1,909 or 9.3%, to $18,527 for the first
quarter of fiscal 2003 from $20,436 for the first quarter of fiscal 2002. The
decrease was primarily due to decreased sales volume coupled with an increase in
store occupancy costs. As a percentage of net sales, gross profit was 34.0% for
the first quarter of fiscal 2003 compared to 34.6% in the same period in the
prior year. The 0.6% decrease in gross profit percent can be attributed to
negative variances in store occupancy and distribution costs offset by an
increase in inventory gross margins as we experience improved markdown and
shrinkage results.

     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 $86 or 0.5% to $17,995 for the first quarter
of fiscal 2003 from $17,909 for the first quarter of fiscal 2002. As a
percentage of net sales, selling, general and administrative expenses increased
to 33.0% in the first quarter of fiscal 2003 from 30.3% in the first quarter of
fiscal 2002. The increase in percent is attributable to increases in advertising
costs and remodel/re-merchandising costs of $401 and $332, respectively, coupled
with not leveraging other store and administrative expenses against decreased
sales volume. Furthermore, the increase in our remodel/re-merchandising costs of
$332 is due to the expansion of our juvenile party assortment which was
completed in the first quarter of fiscal 2003.

     Depreciation expense. Depreciation expense was $448 in the first quarter of
fiscal 2003 compared to $1,130 in the first quarter of fiscal 2002. The decrease
is primarily due to the fresh-start adjustment on fixed assets of $11,760
resulting from the write down of fixed assets for the excess of book value over
enterprise value.

     Interest Expense. Interest expense was $343 in the first quarter of fiscal
2003 compared to $528 in the first quarter of fiscal 2002. Decreases in
inventory levels coupled with increases in accounts payable translated to lower
borrowing levels.

     Reorganization Items, net. Reorganization Items recognized in first quarter
of fiscal 2002 resulted in a gain of $18,840. The major components of
Reorganization Items are as follows:

                                             Combined
                                             results
                                           Three months
                                           ended May 4,
Reorganization Items:                          2002
---------------------------------------    ------------
Professional fees                          $      1,379
Severance/retention bonus                         1,026
Closed store expense                                311
Fresh start adjustments                          10,406
Forgiveness of debt                             (41,847)
Unsecured creditors' ownership share of
 reorganized  Company                             9,543
Other                                               342
                                           ------------
   Total                                   $    (18,840)
                                           ------------

     The Successor Company has not recorded any Reorganization Items.

     Income Taxes. Income tax benefit was $104 in the first quarter of fiscal
2003 compared to income tax expense of $249 in one month ended May 4, 2002.
These amounts represent approximately 40% of our pre tax income (loss) for the
period described.

                                       19

<PAGE>

     The income tax benefit of $360 for the two months ended April 6, 2002
results from the realization of net operating loss carrybacks due to the
enactment of the Job Creation and Workers Assistance Act of 2002.

Liquidity and Capital Resources

     Our uses of capital for the remainder of fiscal 2003 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.

     On April 9, 2002, obligations relating to our debtor-in-possession
financing facility were paid in full and our secured financing facility with
Wells Fargo Retail Finance, LLC (the "New Loan Agreement") became effective. The
New Loan Agreement, which is a line of credit, currently provides up to $40,000
(including $10,000 for letters of credit) to fund working capital needs and for
general corporate purposes. Borrowings under the facility are limited by a
percent of inventory levels. The New Loan Agreement expires on April 8, 2005 and
has a variable interest rate based upon the Prime rate or at our option, a
variable rate based upon earnings performance and the London Interbank Offered
Rate ("LIBOR") with a minimum threshold of 5.0%. The interest rate on our
borrowings was 5.0% at May 3, 2003. Borrowings under the New Loan Agreement are
secured by substantially all of our assets.

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

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

     As of May 3, 2003, we had $13,344 in borrowings outstanding under the New
Loan Agreement and had utilized approximately $92 under the New Loan Agreement
to issue letters of credit.

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

                                           FY2003          FY2002
                                        ------------    ------------
                                                          Combined
                                                          results-
                                        Three months    Three months
                                           ended           ended
                                        May 3, 2003     May 4, 2002
                                        ------------    ------------
Cash provided by operating activities   $      5,001    $      4,502
                                        ------------    ------------
Cash used in investing activities       $       (604)   $       (433)
                                        ------------    ------------
Cash used in financing activities       $     (4,265)   $     (4,060)
                                        ------------    ------------

     At May 3, 2003 our working capital was $14,719. Net cash provided by
operating activities for the three month period ended May 3, 2003 was $5,001
compared to $4,502 of net cash provided by operating activities during the three
month period ended May 4, 2002. Cash provided for the current period is related
to decreases in inventory balances coupled with increases in accounts payable
and accrued expenses.

                                       20

<PAGE>

     Net cash used in investing activities during the three month period ended
May 3, 2003 and the three month period ended May 4, 2002 was $604 and $433,
respectively. Net cash used in investing activities was primarily for capital
expenditures for computer equipment, store remodeling and warehouse equipment
for the distribution center.

     Net cash used in financing activities during the three month period ended
May 3, 2003 was $4,265 compared to $4,060 during the three month period ended
May 4, 2002. Amounts are attributable to the level of borrowings and repayments.

     We do not intend to pay cash dividends in the foreseeable future and our
current Loan Agreement restricts us from paying dividends on our capital stock.

     In 2003 we implemented an in-house program to sort merchandise by store in
our warehouse facility. Prior to this program, a third party logistical vendor
performed the sorting of this merchandise. We have a contract with this vendor
to perform certain logistical services requested by us that expires on
January 31, 2004. This vendor has continued to over bill us for sort and various
other charges. At May 3, 2003 these charges were approximately $1,600. We
believe these disputed charges are without merit and are in violation of the
terms of our agreement. Consequently, these charges are not accrued at May 3,
2003.

     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 current levels of operation and anticipated growth, we
believe that future cash flow from operations, together with available
borrowings under the New Loan Agreement, will be adequate to meet anticipated
requirements for capital expenditures, working capital, interest payments and
scheduled principal payments. There can be no assurance that 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 its existing debt, sell
assets or obtain additional financing. There can be no assurance that any
refinancing would be available or that any sales of assets or additional
financing could be obtained.

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 2003 quarters are defined as follows: first fiscal quarter
is February 2, 2003 to May 3, 2003, second fiscal quarter is May 4, 2003 to
August 2, 2003, third fiscal quarter is August 3, 2003 to November 1, 2003 and
fourth fiscal quarter is November 2, 2003 to January 31, 2004. Our fiscal year
ends on the 52 or 53 weeks, as applicable, ending the Saturday nearest to
January 31/st/.

New Accounting Pronouncements

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

                                       21

<PAGE>

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

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

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

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

     In September 2002, the FASB issued Emerging Issues Task Force ("EITF")
02-16 "Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor" which addresses the accounting for cash retailers
receive from vendors. The EITF concluded cash received from a vendor is presumed
to be a reduction of purchase price of goods unless the vendor receives an
identifiable benefit or there is reimbursement of a specific incremental
identifiable cost. Additionally, rebates are to be recorded when it is probable
and reasonably estimable and allocated to transactions giving rise to the
rebate. Our accounting policies relating to cash received from vendors is
consistent with the conclusions reached by the EITF.

                                       22

<PAGE>

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" - an amendment of FASB Statement 123.
SFAS No. 148 amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation" and provides alternative methods for accounting for a change by
registrants to the fair value method of accounting for stock-based compensation.
Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require disclosure in the significant accounting policy footnote of both the
annual and interim financial statements of the method of accounting for
stock-based compensation and the related pro-forma disclosures when the
intrinsic value method continues to be used. SFAS No. 148 is effective for
fiscal years ended after December 15, 2002, and disclosures are effective for
the first quarter beginning after December 15, 2002. We have adopted the
disclosure provisions of SFAS No. 148.

ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

     We are subject to market risks from changes in interest rates. As of May 3,
2003, the interest rate on the Company's revolving credit facilities, which
represents a significant portion of the Company's outstanding debt, is variable
based upon earnings performance, the London Interbank Offered Rate ("LIBOR") and
the prime rate. A hypothetical 10 percent increase to the average interest rate
under the credit facilities applied to the average outstanding balance during
the three months ended May 3, 2003, the one month ended May 4, 2002 and two
months ended April 6, 2002 would not have had a material impact on our financial
position or results of operations.

ITEM 4  CONTROLS AND PROCEDURES

     (a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, our principal executive officer and principal financial
officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
"Exchange Act")) are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.

     (b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

         We are from time to time involved in litigation, either asserted or
unasserted, incidental to the conduct of our business. While the outcome of
these matters cannot be predicted with certainty, we do not believe that the
outcome of these matters will have a material adverse effect on our consolidated
financial position, results of operations or cash flow.

Item 2.  Changes in Securities

         None.

Item 3.  Defaults Upon Senior Securities

                                       23

<PAGE>
         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

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

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

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

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

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

         Exhibit 4.4 (1) Trade Conversion Note of Factory Card & Party Outlet
         Corp. and Factory Card Outlet of America Ltd., dated April 9, 2002, for
         the benefit of CSS Industries, Inc.

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

         Exhibit 4.6 (1) Trade Conversion Agreement, dated as of April 9, 2002,
         among Factory Card & Party Outlet Corp., Factory Card Outlet of
         America. Ltd., Amscan, Inc., Creative Expressions Group, Inc., Images
         and Editions Limited, Unique Industries, Inc., CSS Industries, Inc.,
         P.S. Greetings, Inc., and Maryland Plastics, Inc.

         Exhibit 10.1 (1) Loan and Security Agreement, dated as of April 9,
         2002, among Factory Card Outlet of America, Ltd., as borrower, the
         lenders thereto as Wells Fargo Retail Finance, LLC, as arranger,
         collateral agent and administrative agent.

         Exhibit 10.2 (1) Security Agreement, dated April 9, 2002, among Factory
         Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd., in
         favor of William Kaye, as Collateral Trustee.

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

                                       24

<PAGE>

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

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

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

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

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

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

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

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

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

         Exhibit 99.2 Acknowledgement of Awareness Letter from Deloitte &
         Touche, LLP dated December 9, 2002 (March 5, 2003 as to the effect of
         the restatement described in Note 10) Concerning Unaudited Interim
         Financial Information.

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

         Notes

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

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

         (b) Reports on 8-K

         Current Report on Form 8-K filed on May 23, 2003 announcing the date of
         our meeting of shareholders.

         Current Report on Form 8-K filed on April 30, 2003 announcing the
         restatement of financial results related to pre-emergence
         reorganization gain.

         Current Report on Form 8-K filed on March 6, 2003 announcing our fourth
         quarter results and expansion of our juvenile party selection.

                                       25

<PAGE>

SIGNATURES

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

                                        FACTORY CARD & PARTY OUTLET CORP.


Dated: June 12, 2003                    By:        /s/  Gary W. Rada
                                           -------------------------------------
                                                      Gary W. Rada
                                           President and Chief Executive Officer


Dated: June 12, 2003                    By:      /s/  James D. Constantine
                                           -------------------------------------
                                                    James D. Constantine
                                           Executive Vice President and Chief
                                           Financial and Administrative Officer
                                             [Principal Accounting Officer]

                                       26

<PAGE>

CERTIFICATIONS

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

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

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

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

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

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

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

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

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

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

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

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

Date: June 12, 2003

                                        By:        /s/ Gary W. Rada
                                           -------------------------------------
                                                     Gary W. Rada
                                           President and Chief Executive Officer

                                       27

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

Date:  June 12, 2003

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

                                       28