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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For The Quarterly Period Ended April 30, 2005



Commission File Number: 21859



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FACTORY CARD & PARTY OUTLET CORP.

(Exact name of registrant as specified in its charter)



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



2727 Diehl Road,

Naperville, IL 60563-2371

(Address of principal executive offices, zip code)



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



Factory Card Outlet Corp.

(Former Name)



---



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 13, 2005 was 3,110,333.



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##### Table of Contents

Factory Card & Party Outlet Corp.



Form
10-Q



For the Quarter Ended April 30, 2005

Index



|        |  |                                                                                                                 |  |     
|------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                 |  | Page
|        |  | Cautionary Statement Regarding Forward-Looking Statements                                                       |  | 2   
|        |  |                                                                                                                
|Part I  |  | Financial Information                                                                                           |  |     
|        |  |                                                                                                                
|Item 1  |  | Financial Statements:                                                                                           |  |     
|        |  |                                                                                                                
|        |  | Condensed Consolidated Balance Sheets (Unaudited) - as of April 30, 2005 and as of January 29, 2005             |  | 3   
|        |  |                                                                                                                
|        |  | Condensed Consolidated Statements of Operations (Unaudited)  three months ended April 30, 2005 and May 1, 2004 |  | 4   
|        |  |                                                                                                                
|        |  | Condensed Consolidated Statements of Cash Flows (Unaudited)  three months ended April 30, 2005 and May 1, 2004 |  | 5   
|        |  |                                                                                                                
|        |  | Notes to Condensed Consolidated Financial Statements - (Unaudited)                                              |  | 6   
|        |  |                                                                                                                
|Item 2  |  | Managements Discussion and Analysis of Financial Condition And Results of Operations                           |  | 11  
|        |  |                                                                                                                
|Item 3  |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 18  
|        |  |                                                                                                                
|Item 4  |  | Controls and Procedures                                                                                         |  | 18  
|        |  |                                                                                                                
|Part II |  | Other Information                                                                                               |  |     
|        |  | Item 1. Legal Proceedings                                                                                       |  | 18  
|        |  | Item 2. Changes in Securities and Use of Proceeds                                                               |  | 19  
|        |  | Item 3. Defaults Upon Senior Securities                                                                         |  | 19  
|        |  | Item 4. Submission of Matters to a Vote of Security Holders                                                     |  | 19  
|        |  | Item 5. Other Information                                                                                       |  | 19  
|        |  | Item 6. Exhibits and Reports on Form 8-K                                                                        |  | 19  
|        |  | Signatures                                                                                                      |  | 23  



1



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS



References throughout this document to the Company include Factory Card & Party Outlet Corp. and its wholly-owned subsidiary. In this document the words we, our, ours and us refer only to
Factory Card & Party Outlet Corp. and its wholly-owned subsidiary and not to any other person.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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PART I - FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS



FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



Condensed Consolidated Balance Sheets

(Unaudited)

(Dollar amounts in thousands)



|                                                                |  |               |        |                  |   |       
|--------------------------------------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|                                                                |  | April 30,2005 |        | January 29, 2005
|ASSETS                                                          |  |               |        |                  |   |       
|                                                                |  |              
|Current assets:                                                 |  |               |        |                  |   |       
|Cash                                                            |  | $             | 192    |                  | $ | 188   
|Merchandise inventories, net                                    |  |               | 47,500 |                  |   | 43,653
|Prepaid expenses and other assets                               |  |               | 4,547  |                  |   | 4,577 
|Deferred tax asset, net                                         |  |               | 4,423  |                  |   | 5,527 
|                                                                |  |               |        |                  |   |       
|Total current assets                                            |  |               | 56,662 |                  |   | 53,945
|                                                                |  |              
|Fixed assets, net                                               |  |               | 8,493  |                  |   | 8,164 
|Other assets                                                    |  |               | 423    |                  |   | 170   
|Deferred tax asset, net                                         |  |               | 6,849  |                  |   | 5,991 
|                                                                |  |               |        |                  |   |       
|Total assets                                                    |  | $             | 72,427 |                  | $ | 68,270
|                                                                |  |               |        |                  |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY                            |  |               |        |                  |   |       
|                                                                |  |              
|Current liabilities:                                            |  |               |        |                  |   |       
|Debt  line of credit                                           |  | $             | 10,658 |                  | $ | 12,032
|Accounts payable                                                |  |               | 21,822 |                  |   | 16,245
|Accrued expenses                                                |  |               | 8,852  |                  |   | 7,564 
|Current portion of long term debt and capital lease obligations |  |               | 13     |                  |   | 1,646 
|                                                                |  |               |        |                  |   |       
|Total current liabilities                                       |  |               | 41,345 |                  |   | 37,487
|                                                                |  |               |        |                  |   |       
|Long term debt and capital lease obligations                    |  |               | 12     |                  |   | 15    
|Deferred rent liabilities                                       |  |               | 1,793  |                  |   | 1,895 
|                                                                |  |               |        |                  |   |       
|Total liabilities                                               |  |               | 43,150 |                  |   | 39,397
|                                                                |  |              
|Stockholders equity                                            |  |               | 29,277 |                  |   | 28,873
|                                                                |  |               |        |                  |   |       
|Total liabilities and stockholders equity                      |  | $             | 72,427 |                  | $ | 68,270
|                                                                |  |               |        |                  |   |       



See accompanying notes to condensed
consolidated financial statements.



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FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



Condensed Consolidated Statements of Operations

(Unaudited)

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



|                                              |  |                                 |           |                              |   |           |  
|--------------------------------------------- |  | ------------------------------- | --------- | ---------------------------- | - | --------- | -
|                                              |  | ThreeMonths EndedApril 30, 2005 |           | ThreeMonths EndedMay 1, 2004 |  
|Net sales                                     |  | $                               | 55,738    |                              | $ | 56,928    |  
|Cost of sales                                 |  |                                 | 35,439    |                              |   | 36,827    |  
|                                              |  |                                 |           |                              |   |           |  
|Gross profit                                  |  |                                 | 20,299    |                              |   | 20,101    |  
|                                              |  |                                
|Selling, general and administrative expenses  |  |                                 | 18,939    |                              |   | 18,835    |  
|Depreciation and amortization of fixed assets |  |                                 | 581       |                              |   | 583       |  
|Other income                                  |  |                                 |          |                              |   | (55       | )
|Interest expense                              |  |                                 | 169       |                              |   | 231       |  
|                                              |  |                                 |           |                              |   |           |  
|Income before income tax expense              |  |                                 | 610       |                              |   | 507       |  
|Income tax expense                            |  |                                 | 246       |                              |   | 203       |  
|                                              |  |                                 |           |                              |   |           |  
|Net income                                    |  | $                               | 364       |                              | $ | 304       |  
|                                              |  |                                 |           |                              |   |           |  
|Net income per share - basic                  |  | $                               | 0.12      |                              | $ | 0.10      |  
|                                              |  |                                 |           |                              |   |           |  
|Weighted average shares outstanding  basic   |  |                                 | 3,049,486 |                              |   | 2,981,596 |  
|                                              |  |                                 |           |                              |   |           |  
|Net income per share  diluted                |  | $                               | 0.10      |                              | $ | 0.09      |  
|                                              |  |                                 |           |                              |   |           |  
|Weighted average shares outstanding  diluted |  |                                 | 3,513,548 |                              |   | 3,546,835 |  
|                                              |  |                                 |           |                              |   |           |  



See accompanying notes to condensed
consolidated financial statements.



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FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY



Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollar amounts in thousands)



|                                                                                 |  |                                         |         |   |                                      |   |         |  
|-------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ------------------------------------ | - | ------- | -
|                                                                                 |  | For the ThreeMonths EndedApril 30, 2005 |         |   | For the ThreeMonths EndedMay 1, 2004 |  
|Cash flows from operating activities:                                            |  |                                         |         |   |                                      |   |         |  
|Net income                                                                       |  | $                                       | 364     |   |                                      | $ | 304     |  
|Adjustments to reconcile net income to net cash flows from operating activities: |  |                                         |         |   |                                      |   |         |  
|Depreciation and amortization of fixed assets                                    |  |                                         | 581     |   |                                      |   | 583     |  
|Amortization of deferred financing costs                                         |  |                                         | 8       |   |                                      |   | 26      |  
|Amortization of deferred compensation                                            |  |                                         | 31      |   |                                      |   | 32      |  
|Loss on disposal of fixed assets                                                 |  |                                         | 4       |   |                                      |   | 6       |  
|Tax benefit of pre-confirmation net operating Losses                             |  |                                         |        |   |                                      |   | 193     |  
|Changes in assets and liabilities:                                               |  |                                         |         |   |                                      |   |         |  
|Merchandise inventories, net                                                     |  |                                         | (3,847  | ) |                                      |   | (2,734  | )
|Prepaid expenses and other assets                                                |  |                                         | (186    | ) |                                      |   | (98     | )
|Accounts payable                                                                 |  |                                         | 5,577   |   |                                      |   | 3,762   |  
|Accrued expenses                                                                 |  |                                         | 1,489   |   |                                      |   | 876     |  
|Deferred rent liabilities                                                        |  |                                         | (102    | ) |                                      |   | (26     | )
|                                                                                 |  |                                         |         |   |                                      |   |         |  
|Net cash flows from operating activities                                         |  |                                         | 3,919   |   |                                      |   | 2,924   |  
|                                                                                 |  |                                         |         |   |                                      |   |         |  
|Net cash flows from investing activities  purchase of fixed assets              |  |                                         | (914    | ) |                                      |   | (560    | )
|                                                                                 |  |                                         |         |   |                                      |   |         |  
|Cash flows from financing activities:                                            |  |                                         |         |   |                                      |   |         |  
|Borrowings  line of credit                                                      |  |                                         | 56,330  |   |                                      |   | 57,896  |  
|Repayment of debt  line of credit                                               |  |                                         | (57,704 | ) |                                      |   | (59,050 | )
|Payment of trade conversion and extended creditor notes payable                  |  |                                         | (1,649  | ) |                                      |   | (1,093  | )
|Payment of capital lease obligations                                             |  |                                         | (3      | ) |                                      |   | (115    | )
|Discount on payment of trade conversion and extended creditor notes payable      |  |                                         |        |   |                                      |   | (55     | )
|Increase in extended creditor note payable                                       |  |                                         | 16      |   |                                      |   | 46      |  
|Cash received from exercise of stock options and warrants                        |  |                                         | 9       |   |                                      |   | 14      |  
|                                                                                 |  |                                         |         |   |                                      |   |         |  
|Net cash flows from financing activities                                         |  |                                         | (3,001  | ) |                                      |   | (2,357  | )
|                                                                                 |  |                                         |         |   |                                      |   |         |  
|Net increase in cash                                                             |  |                                         | 4       |   |                                      |   | 7       |  
|Cash at beginning of period                                                      |  |                                         | 188     |   |                                      |   | 179     |  
|                                                                                 |  |                                         |         |   |                                      |   |         |  
|Cash at end of period                                                            |  | $                                       | 192     |   |                                      | $ | 186     |  
|                                                                                 |  |                                         |         |   |                                      |   |         |  
|Supplemental cash flow information:                                              |  |                                         |         |   |                                      |   |         |  
|Interest paid                                                                    |  | $                                       | 168     |   |                                      | $ | 381     |  
|Alternative minimum taxes paid                                                   |  |                                         | 37      |   |                                      |   |         |  
|Income taxes refunded                                                            |  |                                         |        |   |                                      |   | 3       |  
|Cash paid for reorganization items                                               |  |                                         |        |   |                                      |   | 4       |  
|Supplemental non cash information:                                               |  |                                         |         |   |                                      |   |         |  
|Unearned restricted stock awards                                                 |  |                                         | 115     |   |                                      |   | 243     |  



See accompanying notes to condensed
consolidated financial statements.



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FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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



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



The Company is a chain of company-owned stores offering an extensive selection of party supplies, greeting cards, giftwrap, balloons, everyday and
seasonal merchandise and other special occasion merchandise at everyday value prices. As of June 13, 2005, the Company operated 185 stores in 20 states. The Companys fiscal year ends on the Saturday closest to January 31st.



The condensed consolidated unaudited financial statements include the
accounts of Factory Card & Party Outlet Corp. and its wholly owned subsidiary, Factory Card Outlet of America Ltd. These financial statements have been prepared by management without audit and should be read in conjunction with the consolidated
financial statements and notes for the fiscal year ended January 29, 2005 included in the Companys Annual Report on Form 10-K. The operating results for the interim periods are not necessarily indicative of the results for the year. All
intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal recurring and certain nonrecurring adjustments necessary for
a fair presentation of the interim financial statements.



Management Estimates



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



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



The Company is party to a secured financing facility, dated April 8, 2002, with Wells Fargo Retail Finance, LLC (as amended, the Loan
Agreement). The Loan Agreement, which is a line of credit expiring on April 8, 2007, currently provides up to $30,000 (including $10,000 for letters of credit) to fund working capital needs and for general corporate purposes. Borrowings under
the facility are limited by a percent of inventory levels. At April 30, 2005, the interest rate on the Companys borrowings was 5.75%. Borrowings under the Loan Agreement are secured by substantially all of the Companys assets. Certain
restrictive covenants apply, including achievement of specified operating results and limitations on the incurrence of additional liens and indebtedness, capital expenditures, asset sales and payment of dividends, all of which have been met as of
April 30, 2005 and January 29, 2005.



At April 30, 2005 and
January 29, 2005, the Company has outstanding borrowings under the Loan Agreement of $10,658 and $12,032, respectively.



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



The following table summarizes the components of Long Term Debt and Capital Lease Obligations at April 30, 2005 and January 29, 2005, including the
current portion.



|                                                   |  |               |     |   |                 |   |        |  
|-------------------------------------------------- |  | ------------- | --- | - | --------------- | - | ------ | -
|                                                   |  | April 30,2005 |     |   | January 29,2005 |  
|Discounted value of extended creditor payment      |  |               |    |   |                 |   | 1,634  |  
|Capital leases                                     |  |               | 25  |   |                 |   | 27     |  
|                                                   |  |               |     |   |                 |   |        |  
|Sub total                                          |  |               | 25  |   |                 |   | 1,661  |  
|                                                   |  |               |     |   |                 |   |        |  
|Less current maturities                            |  |               | (13 | ) |                 |   | (1,646 | )
|                                                   |  |               |     |   |                 |   |        |  
|Total long term debt and capital lease obligations |  | $             | 12  |   |                 | $ | 15     |  
|                                                   |  |               |     |   |                 |   |        |  



On April 7, 2005 the
Company paid the remaining balance of the extended creditor payment.



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



In April 2002, the Company authorized an aggregate of 10,000,000 shares of new Common Stock, par value $0.01 per share. A total of 3,110,225 common shares
were deemed outstanding at April 30, 2005.



In April 2002, the
Company issued 150,000 shares of common stock to certain members of management, which vest ratably over a four-year period. At the date of grant, the market value of the award was recorded in common stock and additional paid-in-capital; an
offsetting amount was recorded as a component of stockholders equity in unearned restricted stock awards. Compensation cost is included in results of operations over the vesting period. Expense relating to outstanding restricted stock awards
for the three months ended April 30, 2005 and May 1, 2004 was $31 and $32, respectively.



In April 2002, the Company adopted a 2002 Stock Option Plan, which authorizes the grant of up to 333,334 stock options to the Companys employees  305,400 options under the 2002 Stock Option Plan at
exercise prices ranging from $2.75 to $22.40 were outstanding at April 30, 2005.



In April 2002, the Company issued four series of new Warrants, Series A through D, granting such holders the right to purchase an aggregate of 306,934 additional shares of the new Common Stock. The Series A Warrants
are exercisable any time prior to April 9, 2006 at a price of $5.50 per share. The Series B Warrants are exercisable at any time prior to April 9, 2008 at a price of $8.00 per share. The Series C Warrants are exercisable any time prior to April 9,
2010 at a price of $8.00 per share. The Series D Warrants are exercisable any time prior to April 9, 2010 at a price of $17.00 per share. At April 30, 2005, Warrants to purchase an aggregate of 264,446 shares of common stock were outstanding.



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##### Table of Contents

On April 23, 2002, the Board of Directors approved the Non-Employee Director Stock Option Plan, which
authorized the grant of up to 300,000 common stock options to non-employee members of the Board of Directors  180,000 options at exercise prices ranging from $2.65 to $11.90 were outstanding at April 30, 2005.



On January 27, 2003, the Board of Directors adopted the 2003 Equity
Incentive Plan whereby 500,000 shares would become available to our employees and officers. The 2003 Equity Incentive Plan was approved by the stockholders at our annual meeting of stockholders on July 16, 2003. Under the 2003 Equity Incentive Plan
 341,285 options were outstanding at April 30, 2005 with exercise prices ranging from $6.38 to $19.00.



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



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



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



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



|                                                                 |  |                                         |           |                                      |   |          
|---------------------------------------------------------------- |  | --------------------------------------- | --------- | ------------------------------------ | - | ---------
|                                                                 |  | For the threemonths endedApril 30, 2005 |           | For the threemonths endedMay 1, 2004
|Net income                                                       |  | $                                       | 364       |                                      | $ | 304      
|Earnings per share  basic                                       |  | $                                       | 0.12      |                                      | $ | 0.10     
|Earnings per share  diluted                                     |  | $                                       | 0.10      |                                      | $ | 0.09     
|Weighted average common shares outstanding                       |  |                                         | 3,049,486 |                                      |   | 2,981,596
|Dilutive effect of stock options and warrants                    |  |                                         | 464,062   |                                      |   | 565,239  
|                                                                 |  |                                         |           |                                      |   |          
|Weighted average common and common equivalent shares outstanding |  |                                         | 3,513,548 |                                      |   | 3,546,835
|                                                                 |  |                                         |           |                                      |   |          



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The dilutive impact of stock options and warrants was calculated using the treasury method.



Options to purchase 178,150 common shares at prices ranging from $11.08
to $22.40 per share and warrants to purchase 60,152 common shares at a price of $17.00 per share were outstanding as of April 30, 2005 but were not included in the calculation of diluted earnings per share for the three months ended April 30, 2005
because the strike price was greater than the average market price per share during the period.



Options to purchase 4,000 common shares at prices ranging from $11.98 to $22.40 per share and warrants to purchase 60,152 common shares at a price of
$17.00 per share were outstanding as of May 1, 2004 but were not included in the calculation of diluted earnings per share for the three months ended May 1, 2004 because the strike price was greater than the average market price per share during the
period.



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



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



|                                                                                                                                     |  |                                         |       |   |                                      |   |     
|------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------- | ----- | - | ------------------------------------ | - | ----
|                                                                                                                                     |  | For the threemonths endedApril 30, 2005 |       |   | For the threemonths endedMay 1, 2004
|Net income as reported                                                                                                               |  | $                                       | 364   |   |                                      | $ | 304 
|Deduct: Total stock-based employee compensation expense determined under fair value basis for all awards, net of related tax
effects |  |                                         | 672   |   |                                      |   | 121 
|                                                                                                                                     |  |                                         |       |   |                                      |   |     
|Pro forma net income (loss)                                                                                                          |  | $                                       | (308  | ) |                                      | $ | 183 
|                                                                                                                                     |  |                                         |       |   |                                      |   |     
|Earnings (loss) per share:                                                                                                           |  |                                         |       |   |                                      |   |     
|Basic-as reported                                                                                                                    |  | $                                       | 0.12  |   |                                      | $ | 0.10
|                                                                                                                                     |  |                                         |       |   |                                      |   |     
|Basic-pro forma                                                                                                                      |  | $                                       | (0.10 | ) |                                      | $ | 0.06
|                                                                                                                                     |  |                                         |       |   |                                      |   |     
|Diluted-as reported                                                                                                                  |  | $                                       | 0.10  |   |                                      | $ | 0.09
|                                                                                                                                     |  |                                         |       |   |                                      |   |     
|Diluted-pro forma                                                                                                                    |  | $                                       | (0.10 | ) |                                      | $ | 0.05
|                                                                                                                                     |  |                                         |       |   |                                      |   |     



On April 14, 2005 the
Company approved the accelerated vesting of unvested and out-of-the-money options held by current employees, executive officers and non-employee directors (the Acceleration) that have been granted under the Companys
2002 Stock Option Plan, 2003 Equity Incentive Plan and 2002 Non Employee Directors Stock Option Plan. As a result of the Acceleration, the affected unvested options are those which had exercise prices of greater than $9.64 per share, which was
the closing sales price of the Companys common stock on the NASDAQ National Market on April 14, 2005, the effective date of the Acceleration. Pursuant to the Acceleration, options granted under the Plans to purchase approximately 124,000
shares of the Companys common stock that would otherwise have vested at various times within the next two years became fully vested. As a result of the Companys decision to approve the Acceleration, each option agreement underlying
options subject to the Acceleration is deemed to be amended to reflect the Acceleration as of the effective date, but all other terms and conditions of each such option agreement remain in full force and effect.



9



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##### Table of Contents

The per share weighted average fair value of stock options granted during the three months ended April
30, 2005 and May 1, 2004 was estimated using the Black Scholes Option-Pricing Model with the following weighted average assumptions: expected dividend rate 0.0%, risk free interest rate of 3.39% to 4.50%, volatility of 50% and an expected life of
approximately six to ten years.



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



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



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



One entity had an ownership interest of more than 10% during the three months ended May 1, 2004. Total purchases from that entity were $1,300 during the 3
months ended May 1, 2004 and amounts owed to that entity were $522 at May 1, 2004.



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



On November 16, 2004, Ronald Kirschenbaum filed a lawsuit against the Company in the Circuit Court of Cook County, Illinois County Department, Law
Division, captioned Ronald Kirschenbaum, Jacqueline Kirschenbaum, Jeanette Kirschenbaum and Jessica Kirschenbaum vs. Factory Card & Party Outlet, Corp. and Glen S. Kolakowski. The complaint alleges that the Company was negligent in the hiring
and supervising of a former employee who allegedly pleaded guilty to a Class 4 felony committed while working for the Company. The plaintiffs seek unspecified damages. The parties have agreed to settle this lawsuit, subject to final court approval,
for a payment of $270 to the plaintiffs. The Company expects that the payment will be covered by insurance.



On March 3, 2004, Midwest One Distribution Company filed a lawsuit against the Company in the Circuit Court of the Eighteen Judicial Circuit of DuPage
County, Illinois, captioned Midwest One Distribution Co. vs. Factory Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd. The lawsuit alleges that the Company breached a distribution agreement between the parties that terminated on
January 31, 2004 by failing to pay certain invoices from Midwest One for certain services and/or expenses allegedly performed or incurred by Midwest One. Midwest One seeks damages of approximately $4,800 and an accounting of all distribution
services for which Midwest One was entitled to compensation under the distribution agreement. The parties are currently proceeding with discovery in this lawsuit. No trial date has been set. The Company believes that it has meritorious defenses and
counterclaims and intends to pursue them vigorously.



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



10



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##### Table of Contents

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



Overview



Factory Card & Party Outlet Corp. and our subsidiary, Factory Card Outlet of America Ltd., are a specialty retailer offering a wide selection of party
supplies, greeting cards, giftwrap, balloons, gifts, seasonal merchandise and other special occasion merchandise at everyday value prices. Based on the published number of stores of our competitors as compiled by various business publications and
other publicly available information, we believe we are one of the largest chains of company-owned stores in the party supply, greeting card and special occasion industry. Our fiscal year ends on the 52 or 53 weeks, as applicable, ending the
Saturday nearest to January 31st. Fiscal 2005 is the period January 30, 2005 to January 28, 2006. Fiscal 2004 is the
period February 1, 2004 to January 29, 2005. As of June 13, 2005, we operated 185 stores in 20 states. The following table summarizes store opening and closing activity during the first quarter.



|                    |  |                             |  |            |  
|------------------- |  | --------------------------- |  | ---------- | -
|                    |  | For the three months ended: | 
|                    |  | April 30, 2005              |  | May 1,2004 |  
|Beginning of period |  | 184                         |  | 177        |  
|Openings            |  | 1                           |  | 4          |  
|Closings            |  |                            |  | (1         | )
|                    |  |                             |  |            |  
|End of period       |  | 185                         |  | 180        |  
|                    |  |                             |  |            |  



We have plans to close two stores and
open up to six new stores during the remainder of fiscal 2005.



Greeting
Card Agreement



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



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



Under the terms of the
agreement, substantially all the cards sold will be supplied by Premier Greetings. The terms will allow us to materially reduce our ongoing inventory position of greeting card merchandise. In connection with this program, we recorded a pre-tax
charge of $4,415 in the fourth quarter of fiscal 2004 primarily related to the write down of inventory. We started the roll out of our new greeting card offering on May 9, 2005.



11



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##### Table of Contents

Critical Accounting Policies and Estimates



Critical Accounting Policies are defined as those that are reflective of significant judgments and estimates and could
potentially result in materially different results under different assumptions and conditions. We have prepared the accompanying financial statements in conformity with accounting principles generally accepted in the United States of America, which
require management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. We have identified
the following critical accounting policies utilized in the preparation of these financial statements.



Revenue Recognition



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



Impairment of Long-Lived Assets



We review each store for impairment indicators annually, considering operating results and cash flows. We are not aware of any impairment indicators for any of our stores at April 30, 2005. Assumptions and estimates used to estimate cash
flows in the evaluation of impairment and the fair values used to determine the impairment are subject to a degree of judgment and complexity. Any changes to the assumptions and estimates resulting from changes in the actual results or market
conditions from those anticipated, may effect the carrying value of long-lived assets and could result in an impairment charge.



Merchandise Inventories



We state merchandise inventories at the lower of average cost or estimated net realizable value utilizing the retail method. We perform periodic
evaluations of the net realizable value of merchandise, including merchandise which is to be discontinued from our ongoing inventory assortment as well as inventory with excess quantities on hand and certain seasonal inventory remaining from past
holidays. Based upon these evaluations, a provision for the excess of inventory cost over the net realizable value is recorded as a reduction to the net inventory balance. At April 30, 2005 and January 29, 2005, we had reserves of $5,572 and $5,893,
respectively. Included in both reserve amounts is the $4,415 for the write-down of inventory related to the new greeting card agreement with Premier Greetings.



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



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##### Table of Contents

Liabilities for Insurance Claims



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



Income Taxes



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



Use of Estimates



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



13



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##### Table of Contents

Results of Operations



The following table sets forth, for the periods indicated, selected statements of operations data expressed as a percentage of net sales and the number of
stores open at the end of each period. The following table is included solely for use in comparative analysis of results of operations and to complement managements discussion and analysis.



|                                              |  |                                 |   |  |                               |  
|--------------------------------------------- |  | ------------------------------- | - |  | ----------------------------- | -
|                                              |  | Three monthsended April 30,2005 |   |  | Three monthsended May 1, 2004 |  
|Net sales                                     |  | 100.0                           | % |  | 100.0                         | %
|Cost of sales                                 |  | 63.6                            |   |  | 64.7                          |  
|                                              |  |                                 |   |  |                               |  
|Gross profit                                  |  | 36.4                            |   |  | 35.3                          |  
|Selling, general and administrative expenses  |  | 34.0                            |   |  | 33.1                          |  
|Depreciation and amortization of fixed assets |  | 1.0                             |   |  | 1.0                           |  
|Other income                                  |  |                                |   |  | (0.1                          | )
|Interest expense                              |  | 0.3                             |   |  | 0.4                           |  
|                                              |  |                                 |   |  |                               |  
|Income before income tax expense              |  | 1.1                             |   |  | 0.9                           |  
|Income tax expense                            |  | 0.4                             |   |  | 0.4                           |  
|                                              |  |                                 |   |  |                               |  
|Net income                                    |  | 0.7                             | % |  | 0.5                           | %
|                                              |  |                                 |   |  |                               |  
|Number of stores open at end of period        |  | 185                             |   |  | 180                           |  



Three Months Ended April 30, 2005
and May 1, 2004



Net Sales. Net sales decreased
$1,190 or 2.1% to $55,738 for the three months ended April 30, 2005 (first quarter of fiscal 2005) from $56,928 for the three months ended May 1, 2004 (first quarter of fiscal 2004). The decrease is the result of a
challenging retail environment. Comparable store sales decreased 4.3% and are defined as sales from those stores open for at least on full year. Except for the balloon category, all categories experienced a decline in comparable store sales.



Gross Profit. Cost of sales includes merchandise,
distribution and store occupancy costs. Gross profit increased $198 or 1.0% to $20,299 for the first quarter of fiscal 2005 from $20,101 for the first quarter of fiscal 2004. As a percentage of net sales, gross profit was 36.4% for the first quarter
of fiscal 2005 compared to 35.3% in the same period in the prior year. Despite a downturn in sales, we were successful in managing merchandise margins through improved mark on percentage while continuing to leverage our freight and distribution
costs and absorbing higher store occupancy costs as we open new stores. As a percent of sales, gross profit, excluding store occupancy costs improved 1.9% from the prior period. Store occupancy increased $300 or 3.9% as a result of additional
stores.



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##### Table of Contents

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 $104 or 0.6% to $18,939 for the first quarter of fiscal 2005 from $18,835 for the first quarter of
fiscal 2004. Store related expenses increased $169 or 1.4% as a result of operating more stores. Other administrative expenses increased $524 or 12.0% while advertising expense decreased $590 or 22.1% as a result less print media distributed in the
first quarter of fiscal 2005 compared to the first quarter of fiscal 2004. As a percentage of net sales, selling, general and administrative expenses increased to 34.0% in the first quarter of fiscal 2005 compared to 33.1% in the first quarter of
fiscal 2004 due to a decrease in sales levels.



Depreciation
expense. Depreciation expense was $581 in the first quarter of fiscal 2005 compared to $583 in the first quarter of fiscal 2004. The fluctuation is attributed to the level of fixed asset additions primarily related to new store openings and
store remodels.



Other income.Other income recorded in
the first quarter of fiscal 2004 of $55 relates to the debt discount realized when we made a prepayment on the Trade Conversion Note and Extended Creditor Note Payable in the first quarter of fiscal 2004.



Interest Expense. Interest expense was $169 in the first quarter of
fiscal 2005 compared to $231 the first quarter of fiscal 2004. The decrease resulted from lower borrowing levels as we increase our days payable with our vendors.



Income Taxes. Income tax expense was $246 in the first quarter of fiscal 2005 compared to $203 in the first quarter
of fiscal 2004. These amounts represent approximately 40% of our pre tax income for the periods described. Until the benefits of our net operating loss carryforwards are fully utilized, we do not expect to pay federal income tax.



Liquidity and Capital Resources



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



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



|                                     |  |                                  |        |   |                               |   |        |  
|------------------------------------ |  | -------------------------------- | ------ | - | ----------------------------- | - | ------ | -
|                                     |  | FY2005                           |        |   | FY2004                        |  
|                                     |  | Three months endedApril 30, 2005 |        |   | Three months endedMay 1, 2004 |  
|Cash flows from operating activities |  | $                                | 3,919  |   |                               | $ | 2,924  |  
|                                     |  |                                  |        |   |                               |   |        |  
|Cash flows from investing activities |  | $                                | (914   | ) |                               | $ | (560   | )
|                                     |  |                                  |        |   |                               |   |        |  
|Cash flows from financing activities |  | $                                | (3,001 | ) |                               | $ | (2,357 | )
|                                     |  |                                  |        |   |                               |   |        |  



At April 30, 2005 our
working capital was $15,317. Net cash flows from operating activities for the three months ended April 30, 2005 was $3,919 compared to $2,924 of net cash flows from operating activities during the three months ended May 1, 2004. The increase is
related to higher accounts payable balances as we leverage our vendor community and increase our days payable outstanding.



15



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##### Table of Contents

Net cash flows from investing activities during the three months ended April 30, 2005 and the three
months ended May 1, 2004 were ($914) and ($560), respectively. Net cash flows from investing activities were primarily for capital expenditures related to new store openings, computer equipment, store remodeling and warehouse equipment for the
distribution center.



Net cash flows from financing activities
during the three months ended April 30, 2005 was ($3,001) compared to ($2,357) during the three months ended May 1, 2004. Amounts are attributable to the level of borrowings and repayments.



We are party to a secured financing facility, dated April 8, 2002, with Wells
Fargo Retail Finance, LLC (as amended, the Loan Agreement). The Loan Agreement, which is a line of credit expiring on April 8, 2007, currently provides up to $30 million, (including $10 million for letters of credit) to fund working
capital needs and for general corporate purposes. Borrowings under the facility are limited by a percent of inventory levels. At June 13, 2005, the interest rate on our borrowings was 6.0%. 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 as of April 30, 2005.



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



As
of April 30, 2005, we had $10,658 in borrowings outstanding under the Loan Agreement and had utilized approximately $1,100 to issue letters of credit.



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



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



16



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##### Table of Contents

Contractual Obligations



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



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



|                                                                |  |                                                     |       |                   |   |          |  |          |      |                  |   |      |  |   |     
|--------------------------------------------------------------- |  | --------------------------------------------------- | ----- | ----------------- | - | -------- |  | -------- | ---- | ---------------- | - | ---- |  | - | ----
|                                                                |  | Payments due by Period (dollar amounts in millions)
|Contractual Obligations                                         |  | Total                                               |       | Less ThanOne Year |   | 1-3Years |  | 3-5Years |      | Morethan 5 Years
|Debt & Capital Leases (including current portion)               |  | $                                                   | 10.7  |                   | $ | 10.7     |  | $        |     |                  | $ |     |  | $ |    
|                                                                |  |                                                     |       |                   |  
|Operating Leases                                                |  |                                                     | 110.8 |                   |   | 27.6     |  |          | 44.6 |                  |   | 19.6 |  |   | 19.0
|                                                                |  |                                                     |       |                   |  
|Inventory Purchase Commitments (including open purchase orders) |  |                                                     | 19.4  |                   |   | 14.8     |  |          | 3.4  |                  |   | 1.2  |  |   |    
|                                                                |  |                                                     |       |                   |   |          |  |          |      |                  |   |      |  |   |     
|Total                                                           |  | $                                                   | 140.9 |                   |   | 53.1     |  | $        | 48.0 |                  | $ | 20.8 |  | $ | 19.0
|                                                                |  |                                                     |       |                   |   |          |  |          |      |                  |   |      |  |   |     



Off-Balance Sheet Arrangements



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



Seasonality



Our business is highly seasonal, with operating results varying from quarter to quarter. We historically have experienced higher sales during the second
and fourth fiscal quarters due to increased demand by customers for our products attributable to special occasions and holiday seasons during these periods. Our fiscal 2005 quarters are defined as follows: first fiscal quarter is January 30, 2005 to
April 30, 2005, second fiscal quarter is May 1, 2005 to July 30, 2005, third fiscal quarter is July 31, 2005 to October 29, 2005 and fourth fiscal quarter is October 30, 2005 to January 28, 2006. Our fiscal year ends on the 52 or 53 weeks, as
applicable, ending the Saturday nearest to January 31st.



17



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##### Table of Contents

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS



We are subject to market risks from changes in interest rates. As of April 30, 2005, the interest rate on the Companys revolving credit facility, which represents a significant portion of the Companys
outstanding debt, is variable based upon the prime rate. We believe our interest rate risk is minimal as a hypothetical 1.0% increase to the average interest rate under the credit facility applied to the average outstanding balance during the three
months ended April 30, 2005 and the three months ended May 1, 2004 would not have had a material impact on our financial position or results of operations.



ITEM 4 CONTROLS AND PROCEDURES



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



As of June 13, 2005 and as required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.
Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.



During the quarter ended April 30, 2005, there has been no change in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting



PART II - OTHER INFORMATION



Item 1. Legal Proceedings



On
November 16, 2004, Ronald Kirschenbaum filed a lawsuit against us in the Circuit Court of Cook County, Illinois County Department, Law Division, captioned Ronald Kirschenbaum, Jacqueline Kirschenbaum, Jeanette Kirschenbaum and Jessica Kirschenbaum
vs. Factory Card & Party Outlet, Corp. and Glen S. Kolakowski. The complaint against us alleges that we were negligent in the hiring and supervising of a former employee who allegedly pleaded guilty to a Class 4 felony committed while working
for us. The plaintiffs seek unspecified damages. The parties have agreed to settle this lawsuit, subject to final court approval, for a payment of $270 thousand to the plaintiffs. We expect that the payment will be covered by insurance.



On March 3, 2004, Midwest One Distribution Company filed a lawsuit against
us in the Circuit Court of the Eighteen Judicial Circuit of DuPage County, Illinois, captioned Midwest One Distribution Co. vs. Factory Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd. The lawsuit alleges that we breached a
distribution agreement between the parties that terminated on January 31, 2004 by failing to pay certain invoices from Midwest One for certain services and/or expenses allegedly performed or



18



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##### Table of Contents

incurred by Midwest One. Midwest One seeks damages of approximately $4.8 million and an accounting of all distribution
services for which Midwest One was entitled to compensation under the distribution agreement. On April 29, 2004, we answered the complaint by denying all allegations and counterclaiming for breach of contract. We are seeking damages, costs and
attorneys fees. The parties are currently proceeding with discovery in this lawsuit. No trial date has been set. We believe we have meritorious defenses and counterclaims and are pursuing them vigorously.



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



Item 2. Changes in Securities and Use of Proceeds



None.



Item 3. Defaults Upon Senior Securities



None



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



None



Item 5. Other Information



None



Item 6. Exhibits and reports on Form 8-K



(a) Exhibits



|         |  |                                                                                                                                                                 
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1 (1)  |  | Debtors Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated February 5, 2002.                                                  
|         | 
|3.1 (2)  |  | Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp.                                                                          
|         | 
|3.2 (2)  |  | Bylaws of Factory Card & Party Outlet Corp.                                                                                                                     
|         | 
|3.11 (5) |  | Amendment to the Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp. dated July 17, 2003.                                    
|         | 
|3.12 (5) |  | Amendment to the Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp. dated April 6, 2004.                                    
|         | 
|4.1 (2)  |  | Warrant Agreement, dated April 9, 2002, between Factory Card & Party Outlet and Wells Fargo Bank Minnesota, N.A.                                                
|         | 
|4.2 (2)  |  | Form of New Management Warrant, dated April 9, 2002.                                                                                                            
|         | 
|4.3 (2)  |  | Schedule of New Management Warrants (pursuant to Instruction 2 of Item 601).                                                                                    
|         | 
|4.4 (2)  |  | Trade Conversion Note of Factory Card & Party Outlet Corp. and Factory Card Outlet of America Ltd., dated April 9, 2002, for the benefit of CSS Industries, Inc.



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                                                                    
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.5 (2)     |  | Schedule of Trade Conversion Notes (pursuant to Instruction 2 of Item 601).                                                                                                                                                                                                                                        
|            | 
|4.6 (2)     |  | Trade Conversion Agreement, dated as of April 9, 2002, among Factory Card & Party Outlet Corp., Factory Card Outlet of America, Ltd., Amscan, Inc., Creative Expressions Group, Inc.,
Images and Editions Limited, Unique Industries, Inc., CSS Industries, Inc., P.S. Greetings, Inc., and Maryland Plastics, Inc.
|            | 
|10.1 (2)    |  | Loan and Security Agreement dated as of April 9, 2002, among Factory Card Outlet of America, Ltd., as borrower, the lenders thereto as Wells Fargo Retail Finance, LLC, as arranger, collateral
agent and administrative agent.                                                                                    
|            | 
|10.2 (5)    |  | First Amendment dated April 9, 2004, to the Loan and Security Agreement, among Factory Card Outlet of America, Ltd., as borrower, the lenders thereto as Well Fargo Retail Finance, LLC, as
arranger, collateral agent and administrative agent.                                                                   
|            | 
|10.3 (2)    |  | Security Agreement, dated April 9, 2002, among Factory Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd., in favor of William Kaye, as Collateral
Trustee.                                                                                                                                        
|            | 
|10.4 (2)*   |  | Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.                                                                                                                                                                                                                                                       
|            | 
|10.5 (2)    |  | Trade Vendor Supply Agreement, dated April 9, 2002, between Factory Card & Party Outlet Corp., Factory Card Outlet of America, Ltd. and Maryland Plastics.                                                                                                                                                         
|            | 
|10.6 (2)    |  | Schedule of Trade Vendor Supply Agreements (pursuant to Instruction 2 of Item 601).                                                                                                                                                                                                                                
|            | 
|10.7 (2)*   |  | Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd. and James D. Constantine.                                                                                                                                                                                            
|            | 
|10.8 (5)*   |  | Employment Agreement, dated as of December 23, 2005, between Factory Card Outlet of America, Ltd. and Timothy F. Gower.                                                                                                                                                                                            
|            | 
|10.9 (5)*   |  | Employment Agreement, dated as of December 23, 2005, between Factory Card Outlet of America, Ltd. and Gary W. Rada.                                                                                                                                                                                                
|            | 
|10.10 (3)*  |  | Factory Card & Party Outlet Corp. 2002 Non-Employee Directors Stock Option Plan.                                                                                                                                                                                                                                   
|            | 
|10.11 (3)*  |  | First Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.                                                                                                                                                                                                                                
|            | 
|10.12 (3)*  |  | Second Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Option Plan.                                                                                                                                                                                                                                  
|            | 
|10.13 (4)   |  | Factory Card & Party Outlet Corp. 2003 Equity Incentive Plan.                                                                                                                                                                                                                                                      
|            | 
|10.14 *     |  | Factory Card & Party Outlet Corp. Executive Severance Plan, as amended.                                                                                                                                                                                                                                            
|            | 
|10.15 (6)** |  | Primary Supply and Consignment Agreement dated February 5, 2005 between Factory Card Outlet of America, Ltd. and Paramount Cards, Inc.                                                                                                                                                                             
|            | 
|10.16*      |  | Form of Stock Option Agreement under The Factory Card & Party Outlet Corp. 2002 Stock Option Plan.                                                                                                                                                                                                                 
|            | 
|10.17*      |  | Form of Stock Option Agreement under The Factory Card & Party Outlet Corp. 2002 Non-Employee Directors Stock Option Plan.                                                                                                                                                                                          



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##### Table of Contents

|       |  |                                                                                                           
|------ |  | ----------------------------------------------------------------------------------------------------------
|10.18* |  | Form of Stock Option Agreement under The Factory Card & Party Outlet Corp. 2003 Equity Incentive Plan.    
|       | 
|10.19* |  | Form of Restricted Stock Agreement under The Factory Card & Party Outlet Corp. 2003 Equity Incentive Plan.
|       | 
|10.20* |  | Summary of Incentive Bonus Agreements                                                                     
|       | 
|10.21* |  | Summary of Non-Employee Director Compensation                                                             
|       | 
|10.22* |  | Summary of Arrangements with Certain Executives                                                           
|       | 
|21     |  | Subsidiaries of the Company.                                                                              
|       | 
|23.1   |  | Report of Independent Registered Public Accounting Firm.                                                  
|       | 
|23.2   |  | Awareness Letter from Deloitte & Touche, LLP.                                                             
|       | 
|31.1   |  | Chief Executive Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002.                
|       | 
|31.2   |  | Chief Financial Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002.                
|       | 
|32.1   |  | Chief Executive Officer Certification of Periodic Report under Section 906 of Sarbanes-Oxley Act of 2002. 
|       | 
|32.2   |  | Chief Financial Officer Certification of Periodic Report under Section 906 of Sarbanes-Oxley Act of 2002. 

---

Notes



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

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

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

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

|(5) | Incorporated by reference to the Companys Current Report on Form 10-K filed on April 26, 2005.
|--- | -----------------------------------------------------------------------------------------------

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



|Notes | 
|----- | 



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



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##### Table of Contents

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



(b) Reports on 8-K.



Current Report on Form 8-K filed
on February 3, 2005 announcing sales results for January 2005.



Current Report on Form 8-K filed on February 9, 2005 announcing entering into a definitive agreement with Paramount Cards pursuant to which Paramount will be the Companys primary supplier of everyday and seasonal greeting cards.



Current Report on Form 8-K filed on March 8, 2005 announcing
sales results for February 2005.



Current Report on Form 8-K
filed on April 8, 2005 announcing sales results for March 2005 and announcing fourth quarter results will be released April 15, 2005.



Current Report on Form 8-K filed on April 18, 2005 announcing fourth quarter and full year operating results for fiscal 2004.



Current Report on Form 8-K filed on April 19, 2005 announcing the approval
of accelerated vesting of unvested and out-of-the-money options held by current employees, executive officers and non-employee directors that have been granted under the Companys 2002 Stock Option Plan, 2003 Equity Incentive Plan
and 2002 Non Employee Directors Stock Option Plan.



22



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##### Table of Contents

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 13, 2005 |  | By:                               |  | /s/ Gary W. Rada                                                       
|                     |  |                                   |  | Gary W. Rada                                                           
|                     |  |                                   |  | President and Chief Executive Officer                                  
|                     |  |                                  
|Dated: June 13, 2005 |  | By:                               |  | /s/ James D. Constantine                                               
|                     |  |                                   |  | James D. Constantine                                                   
|                     |  |                                   |  | Executive Vice President and Chief Financial and Administrative Officer
|                     |  |                                   |  | [Principal Accounting Officer]                                         



23