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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended October 28, 2006

Commission File Number: 21859



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FACTORY CARD & PARTY OUTLET CORP.

(Exact name of registrant as specified in its charter)



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

2727 Diehl Road,

Naperville, IL 60563-2371

(Address of principal executive offices, zip code)

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

Factory Card Outlet Corp.

(Former
Name)



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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in rule 12b-2 of the Exchange Act (Check One).

Large accelerated filer ̈,    accelerated filer ̈,    non-accelerated filer  x.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act):

Yes ̈No  x.

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

The number of shares of the Registrants Common Stock outstanding as of December 9, 2006 was 3,352,220.



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##### Table of Contents

Factory Card & Party Outlet Corp.

Form 10-Q

For the Quarter Ended October 28, 2006

Index



|        |  |                                                                                                                                       |  |      
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | -----
|        |  |                                                                                                                                       |  | Page 
|        |  | Cautionary Statement Regarding Forward-Looking Statements                                                                             |  | 2    
|        |  |                                                                                                                                      
|Part I  |  | Financial Information                                                                                                                 |  |      
|        |  |                                                                                                                                      
|Item 1  |  | Financial Statements:                                                                                                                 |  |      
|        |  |                                                                                                                                      
|        |  | Condensed Consolidated Balance Sheets (Unaudited) as of October 28, 2006 and January 28, 2006                                         |  | 3    
|        |  |                                                                                                                                      
|        |  | Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended October 28, 2006 and October 29, 2005 |  | 4    
|        |  |                                                                                                                                      
|        |  | Condensed Consolidated Statements of Cash Flows (Unaudited) for the three and nine months ended October 28, 2006 and October 29, 2005 |  | 5    
|        |  |                                                                                                                                      
|        |  | Notes to Condensed Consolidated Financial Statements - (Unaudited)                                                                    |  | 6-14 
|        |  |                                                                                                                                      
|Item 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                 |  | 15-22
|        |  |                                                                                                                                      
|Item 3  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                            |  | 22   
|        |  |                                                                                                                                      
|Item 4  |  | Controls and Procedures                                                                                                               |  | 23   
|        |  |                                                                                                                                      
|Part II |  | Other Information                                                                                                                     |  |      
|        |  |                                                                                                                                      
|        |  | Item 1.
Legal Proceedings                                                                                                             |  | 24   
|        |  |                                                                                                                                      
|        |  | Item 1A.
Risk Factors                                                                                                                 |  | 24   
|        |  |                                                                                                                                      
|        |  | Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                                                   |  | 24   
|        |  |                                                                                                                                      
|        |  | Item 3.
Defaults Upon Senior Securities                                                                                               |  | 24   
|        |  |                                                                                                                                      
|        |  | Item 4.
Submission of Matters to a Vote of Security Holders                                                                           |  | 24   
|        |  |                                                                                                                                      
|        |  | Item 5.
Other Information                                                                                                             |  | 24   
|        |  |                                                                                                                                      
|        |  | Item 6.
Exhibits and Reports on Form 8-K                                                                                              |  | 25-29
|        |  |                                                                                                                                      
|        |  | Signatures                                                                                                                            |  | 30   



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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 Factory Card Outlet of America, Ltd. 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 Securities and Exchange Commission 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. On our website, please see
Corporate Information for a link to our Securities and Exchange Commission reports.

Statements made in this Form 10-Q, 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 good only at the time made and are not guarantees of future performance and that actual results and trends in the future may
differ materially. Unless otherwise required by applicable securities laws, the Company assumes no obligation to update its forward-looking statements to reflect subsequent events or circumstances.

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



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



| |  |  | weather and economic conditions;
| | - |  | --------------------------------



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



| |  |  | competition and industry consolidation;
| | - |  | ---------------------------------------



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



| |  |  | results of our exploration of strategic alternatives;
| | - |  | -----------------------------------------------------



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



| |  |  | consumer confidence and consumer spending;
| | - |  | ------------------------------------------



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



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



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



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



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



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



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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(Unaudited)

(Dollar amounts in thousands)



|                                           |  |                 |        |                 |   |       
|------------------------------------------ |  | --------------- | ------ | --------------- | - | ------
|                                           |  | October 28,2006 |        | January 28,2006
|ASSETS                                     |  |                 |        |                 |   |       
|Current assets:                            |  |                 |        |                 |   |       
|Cash                                       |  | $               | 197    |                 | $ | 196   
|Merchandise inventories, net               |  |                 | 46,961 |                 |   | 49,552
|Prepaid expenses and other                 |  |                 | 4,672  |                 |   | 4,606 
|Deferred tax asset, net                    |  |                 | 3,788  |                 |   | 3,728 
|                                           |  |                 |        |                 |   |       
|Total current assets                       |  |                 | 55,618 |                 |   | 58,082
|                                           |  |                
|Fixed assets, net                          |  |                 | 9,709  |                 |   | 10,247
|Other assets                               |  |                 | 88     |                 |   | 104   
|Deferred tax asset, net                    |  |                 | 7,499  |                 |   | 8,869 
|                                           |  |                 |        |                 |   |       
|Total assets                               |  | $               | 72,914 |                 | $ | 77,302
|                                           |  |                 |        |                 |   |       
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                 |        |                 |   |       
|                                           |  |                
|Current liabilities:                       |  |                 |        |                 |   |       
|Line of credit                             |  | $               | 7,321  |                 | $ | 19,532
|Accounts payable                           |  |                 | 21,784 |                 |   | 19,266
|Accrued expenses                           |  |                 | 10,649 |                 |   | 8,579 
|Capital lease obligations                  |  |                 | 5      |                 |   | 15    
|                                           |  |                 |        |                 |   |       
|Total current liabilities                  |  |                 | 39,759 |                 |   | 47,392
|                                           |  |                 |        |                 |   |       
|                                           |  |                
|Deferred rent liabilities                  |  |                 | 1,767  |                 |   | 1,606 
|                                           |  |                 |        |                 |   |       
|                                           |  |                
|Total liabilities                          |  |                 | 41,526 |                 |   | 48,998
|                                           |  |                 |        |                 |   |       
|                                           |  |                
|Stockholders equity                       |  |                 | 31,388 |                 |   | 28,304
|                                           |  |                 |        |                 |   |       
|                                           |  |                
|Total liabilities and stockholders equity |  | $               | 72,914 |                 | $ | 77,302
|                                           |  |                 |        |                 |   |       

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)



|                                                  |  |                                  |           |   |                                  |   |           |                                 |  |                                 |           |  |   |          
|------------------------------------------------- |  | -------------------------------- | --------- | - | -------------------------------- | - | --------- | ------------------------------- |  | ------------------------------- | --------- |  | - | ---------
|                                                  |  | Three monthsendedOctober 28,2006 |           |   | Three monthsendedOctober 29,2005 |   |           | Nine monthsendedOctober 28,2006 |  | Nine monthsendedOctober 29,2005
|Net sales                                         |  | $                                | 57,084    |   |                                  | $ | 56,240    |                                 |  | $                               | 180,399   |  | $ | 174,874  
|Cost of sales                                     |  |                                  | 36,174    |   |                                  |   | 35,883    |                                 |  |                                 | 113,597   |  |   | 110,896  
|Cost of sales greeting card inventory write-down |  |                                  |          |   |                                  |   | 233       |                                 |  |                                 |          |  |   | 233      
|                                                  |  |                                  |           |   |                                  |   |           |                                 |  |                                 |           |  |   |          
|Gross profit                                      |  |                                  | 20,910    |   |                                  |   | 20,124    |                                 |  |                                 | 66,802    |  |   | 63,745   
|                                                  |  |                                  |           |  
|Selling, general and administrative expenses      |  |                                  | 19,882    |   |                                  |   | 21,093    |                                 |  |                                 | 60,339    |  |   | 60,773   
|Depreciation expense                              |  |                                  | 835       |   |                                  |   | 749       |                                 |  |                                 | 2,414     |  |   | 2,005    
|Interest expense                                  |  |                                  | 239       |   |                                  |   | 251       |                                 |  |                                 | 704       |  |   | 548      
|                                                  |  |                                  |           |   |                                  |   |           |                                 |  |                                 |           |  |   |          
|Income(loss) before income taxes                  |  |                                  | (46       | ) |                                  |   | (1,969    | )                               |  |                                 | 3,345     |  |   | 419      
|Income taxes                                      |  |                                  | (29       | ) |                                  |   | (762      | )                               |  |                                 | 1,310     |  |   | 245      
|                                                  |  |                                  |           |   |                                  |   |           |                                 |  |                                 |           |  |   |          
|Net income(loss)                                  |  | $                                | (17       | ) |                                  | $ | (1,207    | )                               |  | $                               | 2,035     |  | $ | 174      
|                                                  |  |                                  |           |   |                                  |   |           |                                 |  |                                 |           |  |   |          
|Earnings(loss) per share:                         |  |                                  |           |   |                                  |   |           |                                 |  |                                 |           |  |   |          
|Net income(loss) per share - basic                |  | $                                | (0.01     | ) |                                  | $ | (0.39     | )                               |  | $                               | 0.63      |  | $ | 0.06     
|                                                  |  |                                  |           |   |                                  |   |           |                                 |  |                                 |           |  |   |          
|                                                  |  |                                  |           |  
|Weighted average shares outstanding  basic       |  |                                  | 3,270,785 |   |                                  |   | 3,079,907 |                                 |  |                                 | 3,209,531 |  |   | 3,068,906
|                                                  |  |                                  |           |   |                                  |   |           |                                 |  |                                 |           |  |   |          
|                                                  |  |                                  |           |  
|Net income(loss) per share  diluted              |  | $                                | (0.01     | ) |                                  | $ | (0.39     | )                               |  | $                               | 0.60      |  | $ | 0.05     
|                                                  |  |                                  |           |   |                                  |   |           |                                 |  |                                 |           |  |   |          
|                                                  |  |                                  |           |  
|Weighted average shares outstanding  diluted     |  |                                  | 3,270,785 |   |                                  |   | 3,079,907 |                                 |  |                                 | 3,401,720 |  |   | 3,449,241
|                                                  |  |                                  |           |   |                                  |   |           |                                 |  |                                 |           |  |   |          

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 nine months endedOctober 28, 2006 |          |   | For thenine months endedOctober 29, 2005 |  
|Cash flows from operating activities:                                            |  |                                           |          |   |                                          |   |          |  
|Net income                                                                       |  | $                                         | 2,035    |   |                                          | $ | 174      |  
|Adjustments to reconcile net income to net cash flows from operating activities: |  |                                           |          |   |                                          |   |          |  
|Depreciation expense                                                             |  |                                           | 2,414    |   |                                          |   | 2,005    |  
|Deferred taxes                                                                   |  |                                           | 1,310    |   |                                          |   | 245      |  
|Loss on disposal of fixed assets                                                 |  |                                           | 43       |   |                                          |   | 43       |  
|Amortization of deferred financing costs                                         |  |                                           | 12       |   |                                          |   | 23       |  
|Amortization of deferred compensation                                            |  |                                           | 376      |   |                                          |   | 114      |  
|Impairment charge on fixed assets                                                |  |                                           | 88       |   |                                          |   | 200      |  
|Changes in assets and liabilities:                                               |  |                                           |          |   |                                          |   |          |  
|Merchandise inventories, net                                                     |  |                                           | 2,591    |   |                                          |   | (8,972   | )
|Prepaid expenses and other assets                                                |  |                                           | (62      | ) |                                          |   | 362      |  
|Accounts payable                                                                 |  |                                           | 2,518    |   |                                          |   | 7,512    |  
|Accrued expenses                                                                 |  |                                           | 2,070    |   |                                          |   | 2,536    |  
|Deferred rent liabilities                                                        |  |                                           | 161      |   |                                          |   | (240     | )
|                                                                                 |  |                                           |          |   |                                          |   |          |  
|Net cash flows from operating activities                                         |  |                                           | 13,556   |   |                                          |   | 4,002    |  
|                                                                                 |  |                                           |          |   |                                          |   |          |  
|Net cash flows from investing activities  purchase of fixed assets              |  |                                           | (2,007   | ) |                                          |   | (4,546   | )
|                                                                                 |  |                                           |          |   |                                          |   |          |  
|Cash flows from financing activities:                                            |  |                                           |          |   |                                          |   |          |  
|Borrowings - line of credit                                                      |  |                                           | 175,747  |   |                                          |   | 183,950  |  
|Repayments  line of credit                                                      |  |                                           | (187,958 | ) |                                          |   | (181,786 | )
|Payment of trade conversion and extended creditor note payable                   |  |                                           |         |   |                                          |   | (1,649   | )
|Payment of capital lease obligations                                             |  |                                           | (10      | ) |                                          |   | (10      | )
|Increase in long term debt                                                       |  |                                           |         |   |                                          |   | 16       |  
|Cash received from exercise of stock options and warrants                        |  |                                           | 673      |   |                                          |   | 29       |  
|                                                                                 |  |                                           |          |   |                                          |   |          |  
|Net cash flows from financing activities                                         |  |                                           | (11,548  | ) |                                          |   | 550      |  
|                                                                                 |  |                                           |          |   |                                          |   |          |  
|Net increase in cash                                                             |  |                                           | 1        |   |                                          |   | 6        |  
|Cash at beginning of period                                                      |  |                                           | 196      |   |                                          |   | 188      |  
|                                                                                 |  |                                           |          |   |                                          |   |          |  
|Cash at end of period                                                            |  | $                                         | 197      |   |                                          | $ | 194      |  
|                                                                                 |  |                                           |          |   |                                          |   |          |  
|Supplemental cash flow information:                                              |  |                                           |          |   |                                          |   |          |  
|Interest paid                                                                    |  | $                                         | 748      |   |                                          | $ | 569      |  
|Alternative minimum taxes paid                                                   |  |                                           | 58       |   |                                          |   | 37       |  

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
|--- | ----------------------------------

As of October 28,
2006, Factory Card & Party Outlet Corp. and its wholly-owned subsidiary, Factory Card Outlet of America Ltd., operated 192 company-owned retail stores in 20 states, offering a wide selection of party supplies, greeting cards, gift wrap,
balloons, everyday and seasonal merchandise and other special occasion merchandise.

The Companys fiscal year ends on the 52 or 53
weeks, as applicable, ending the Saturday nearest to January 31st. Fiscal 2006 is the 53 week period
January 29, 2006 to February 3, 2007. Fiscal 2005 is the 52 week period January 30, 2005 to January 28, 2006.

While the
Companys product offerings can be differentiated among various categories (i.e. Cards, Candy, Gift Wrap, etc.), the Company deems the products to be similar in nature and therefore does not present the categories as segments as per
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 131 Disclosures about Segments of an Enterprise and Related Information, (SFAS No. 131).

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 28, 2006 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 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) | 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). At October 28, 2006, the Loan Agreement, which is a line of credit, provided $35,000 (including $10,000 for letters
of credit) to fund working capital needs and for general corporate purposes. The maturity date on the Loan Agreement is October 31, 2008.

Borrowings under the facility are limited by a percentage of inventory levels. At October 28, 2006, the weighted average interest rate on the Companys borrowings was 6.87%. 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.



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The Companys ability to make scheduled payments of principal of, or to pay the interest on, or to
refinance indebtedness, or to fund planned capital expenditures, will depend upon future performance which, in turn, is subject to general economic, financial, competitive and other factors that are beyond its control. Based upon the Companys
current level of operations and anticipated growth, the Company believes 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 the business will continue to generate sufficient cash flow from operations in the future to service the debt and make
necessary capital expenditures after satisfying certain liabilities arising in the ordinary course of business. If unable to do so, the Company may be required to refinance all or a portion of the 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.



|(3) | Lease Commitments
|--- | -----------------

The Company conducts all of its
activities using leased premises. Stores and office leases generally provide that real estate taxes, insurance, common area maintenance, and operating expenses are the Companys obligations. Certain store leases provide for contingent rentals
based on sales in excess of specified minimums. Contingent rental expense was $17 and $29 for the three months ended at October 28, 2006 and October 29, 2005, respectively, and was $60 and $105 for the nine months ended October 28,
2006 and October 29, 2005, respectively. Rent expenses, excluding real estate taxes, insurance, common area maintenance, charged to operations under operating leases for the three months ended October 28, 2006 and October 29, 2005
were $7,418, and $7,072, respectively, and were $22,071 and $20,769 for the nine months ended October 28, 2006 and October 29, 2005, respectively.



|(4) | Stock Based Compensation
|--- | ------------------------

On January 29, 2006, the
Company adopted SFAS No. 123(R), Share-Based Payments, (SFAS No. 123(R)), using the modified-prospective method. Under this method, stock based compensation expense is recognized for new grants beginning this fiscal year
and for any unvested grants prior to the adoption of SFAS No. 123(R). Prior to fiscal 2006, no compensation expense was recorded in the condensed consolidated statement of operations as the Company accounted for share-based payments to
employees using Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees, (APB No. 25) and the disclosure-only provisions of SFAS No. 123 Accounting for Stock-Based
Compensation as amended by SFAS No. 148, Accounting for Stock Based Compensation  Transition and Disclosure, an Amendment of SFAS No. 123.

Under SFAS No. 123(R), the Company will continue to use the Black-Scholes option pricing model to determine the fair value of stock based
compensation. The Black-Scholes model requires the Company to make several assumptions, including the estimated length of time employees will retain their vested stock options before exercising them (expected term) and the estimated
volatility of the Companys common stock price over the expected term. Expected price volatility of the fiscal 2006 grants is based on the daily market rate changes of the Companys stock going back for a period of one year from the date
of grant. The period length was determined based on both managements assessment of stock price volatility that has resulted since the Companys emergence from bankruptcy as well as consideration of the market volatility of a number of the
Companys publicly traded competitors. Expected life for the fiscal 2006 grant of non-qualified stock options was calculated based on the plain vanilla option formula prescribed by Staff Accounting Bulletin No. 107, Share
based payment. The shares granted in fiscal 2006 had a vesting period of three years and a contractual life of 10 years. All non-performance based share awards issued by the Company have graded vesting schedules of three to four



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years. The Black-Scholes model also requires a risk-free interest rate, which is based on the U.S.
Treasury yield curve in effect at the time of the grant, and the dividend yield on the Companys common stock, which is assumed to be zero since the Company does not pay dividends and has no current plans to do so in the future. Changes in
these assumptions can materially affect the estimate of fair value of stock based compensation and consequently, the related expense recognized on the condensed consolidated statement of operations. The Company recognizes stock based compensation
expense on a straight-line basis for awards with graded vesting. Specific information for the various stock plans is included in Note 5 Stockholders Equity.

The fair value of each non-qualified stock option was estimated on the date of grant using the Black-Scholes option pricing model.



|                                                     |  |                    |            |   |                       |   |             |  
|---------------------------------------------------- |  | ------------------ | ---------- | - | --------------------- | - | ----------- | -
|Stock-Based Compensation Valuation Assumptions:      |  | Fiscal 2006 Grants |            |   | Pre-Fiscal2006 Grants |  
|Risk-free interest rate                              |  |                    | 4.57%5.11 | % |                       |   | 3.39% -4.73 | %
|Expected dividend yield                              |  |                    | 0          | % |                       |   | 0           | %
|Expected price volatility                            |  |                    | 41.75%-50  | % |                       |   | 50          | %
|Expected life of non-qualified stock options (years) |  |                    | 6.0        |   |                       |   | 6.0 10.0   |  
|Weighted average grant date fair value               |  | $                  | 4.17       |   |                       | $ | 3.35        |  

The Company recognized stock based compensation expense of $29 and $202 for the three and nine
months ended October 28, 2006, respectively. This expense is included in selling, general and administrative expenses. If the company had not adopted SFAS 123(R), basic earnings per share for the three and nine months ended October 28,
2006 would have increased by $0.01, and $0.04, respectively, and diluted earnings per share would have increased for the three and nine months ended October 28, 2006 by $0.01 and $0.04, respectively.

The results for the three and nine months ended October 29, 2005 have not been restated. If the stock based compensation expense for the
Companys stock option plan had been determined based upon the fair value at the grant date for awards made prior to fiscal 2006 under the plan consistent with the methodology prescribed under SFAS No. 123, the Companys net earnings
per share would have been as follows:



|                                                                                                                                     |  |                                           |        |   |                                          |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------- | ------ | - | ---------------------------------------- | - | ----- | -
|                                                                                                                                     |  | For thethree months endedOctober 29, 2005 |        |   | For thenine months endedOctober 29, 2005 |  
|Net income(loss), as reported                                                                                                        |  | $                                         | (1,207 | ) |                                          | $ | 174   |  
|Deduct: Total stock-based employee compensation expense determined under fair value basis for all awards, net of related tax
effects |  |                                           | 77     |   |                                          |   | 829   |  
|                                                                                                                                     |  |                                           |        |   |                                          |   |       |  
|Pro forma net income(loss)                                                                                                           |  | $                                         | (1,284 | ) |                                          | $ | (655  | )
|                                                                                                                                     |  |                                           |        |   |                                          |   |       |  
|                                                                                                                                     |  |                                          
|Earnings(loss) per share:                                                                                                            |  |                                           |        |   |                                          |   |       |  
|Basic-as reported                                                                                                                    |  | $                                         | (0.39  | ) |                                          | $ | 0.06  |  
|                                                                                                                                     |  |                                           |        |   |                                          |   |       |  
|Basic-pro forma                                                                                                                      |  | $                                         | (0.42  | ) |                                          | $ | (0.21 | )
|                                                                                                                                     |  |                                           |        |   |                                          |   |       |  
|Diluted-as reported                                                                                                                  |  | $                                         | (0.39  | ) |                                          | $ | 0.05  |  
|                                                                                                                                     |  |                                           |        |   |                                          |   |       |  
|Diluted-pro forma                                                                                                                    |  | $                                         | (0.42  | ) |                                          | $ | (0.21 | )
|                                                                                                                                     |  |                                           |        |   |                                          |   |       |  



|(5) | Stockholders Equity
|--- | --------------------

A separate Statement of
Stockholders Equity is not required to be presented for interim periods. Comprehensive income equaled net income for the periods presented.

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 3,352,120 common shares were outstanding at October 28, 2006.



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##### Table of Contents

Nonvested Stock

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. These shares became fully vested during the first quarter of fiscal 2006.
Compensation cost has been included in results of operations and expensed ratably (straight-line) over the vesting period. Expense relating to these outstanding nonvested stock awards for the three months ended October 28, 2006 and
October 29, 2005 was $0 and $31 respectively. Expenses relating to these outstanding nonvested stock awards for the nine months ended October 28, 2006 and October 29, 2005 was $15 and $96, respectively.

In June 2005, the Board of Directors approved a nonvested share award under the 2003 Equity Incentive Plan to the officer group of the Company. A total of
17,000 shares were awarded which vest ratably over three years. Expense recognized for this Plan for the three months ended October 28, 2006 and October 29, 2005 was $10 and $12, respectively. Expense for the nine months ended
October 28, 2006 and October 29, 2005 was $31 and $20 respectively.

In November 2005, the Board of Directors approved a nonvested
share award under the 2003 Equity Incentive Plan to certain members of the officer group of the Company. A total of 4,500 shares were awarded which vest ratably over three years. Expense recognized for this Plan for the three months ended
October 28, 2006 was $3 and for the nine months ended October 28, 2006 was $8.

A summary of the nonvested stock activity during
the nine months ended October 28, 2006 is summarized in the table below:



|                                    |  |         |   |  |                                       |     
|----------------------------------- |  | ------- | - |  | ------------------------------------- | ----
|Nonvested Awards Summary:           |  | Shares  |   |  | Weighted AverageGrant-Date Fair Value
|Outstanding at January 28, 2006     |  | 44,750  |   |  | $                                     | 5.59
|Granted to employees                |  |        |   |  |                                       |    
|Vested, converted                   |  | (30,250 | ) |  |                                       | 4.51
|Terminated or resigned              |  |        |   |  |                                       |    
|                                    |  |         |   |  |                                       |     
|Total outstanding, October 28, 2006 |  | 14,500  |   |  | $                                     | 7.85
|                                    |  |         |   |  |                                       |     

Total nonvested pre-tax stock compensation expense for the three and nine months ended
October 28, 2006 was approximately $13 and $54, respectively. Total unrecognized compensation cost at October 28, 2006 for the Companys nonvested stock is $88, which will be recognized over the weighted average period of the next 1.7
years.

The Companys nonvested stock awards vest over three to four years and are restricted as to the sale or transfer of the shares
prior to vesting. Nonvested stock awards are non-transferable and subject to forfeiture if the holder does not remain continuously employed by the Company during the vesting period. The fair value of the nonvested stock awards is equal to the value
of the Companys stock on the date of grant. The Company subjected the vested and unvested portions of the nonvested stock awards in its dilutive earnings per share calculations.



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##### Table of Contents

Nonvested Performance-based Stock

In February 2006, the Board of Directors approved a nonvested performance-based share award under the 2003 Equity Incentive Plan to the officer group of
the Company. A total of 60,000 shares were awarded with a grant date fair value of $7.99. The performance condition for full or partial vesting will be satisfied if and only to the extent the Company achieves a predetermined return on invested
capital for a rolling 12-consecutive-month period beginning after January 28, 2006 and ending on or before February 9, 2009 or at a time earlier as described in the award agreement. Compensation cost is included in the results of
operations and expensed ratably (straight-line) over the vesting period. Pretax expense recognized for this award for the three and nine months ended October 28, 2006 was $40 and $120 respectively. Based on the guidance set forth in SFAS
123(R), the Company has excluded these performance-based shares from the dilutive earnings per share calculations. Total unrecognized compensation cost of nonvested performance-based stock at October 28, 2006 was $360, which will be recognized
over the next 2.3 years.

A summary of the nonvested performance-based stock activity during the nine months ended October 28, 2006 is
summarized in the table below:



|                                            |  |        |  |                                       |     
|------------------------------------------- |  | ------ |  | ------------------------------------- | ----
|Nonvested Performance-Based Awards Summary: |  | Shares |  | Weighted AverageGrant-Date Fair Value
|Outstanding at January 28, 2006             |  |       |  | $                                     |    
|Granted to employees                        |  | 60,000 |  |                                       | 7.99
|Vested, converted                           |  |       |  |                                       |    
|Terminated or resigned                      |  |       |  |                                       |    
|                                            |  |        |  |                                       |     
|Total outstanding, October 28, 2006         |  | 60,000 |  | $                                     | 7.99
|                                            |  |        |  |                                       |     

Warrants

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 Warrants were
issued to non-employees upon emergence from bankruptcy. The Series A Warrants expired on April 9, 2006. The Series B Warrants are exercisable at any time prior to April 9, 2008 at a price of $8.00 per share. The Series C Warrants are
exercisable any time prior to April 9, 2010 at a price of $8.00 per share. The Series D Warrants are exercisable any time prior to April 9, 2010 at a price of $17.00 per share. At October 28, 2006, Warrants to purchase an aggregate of
208,004 shares common stock were outstanding. Cash proceeds received from the exercise of warrants for the three and nine months ended October 28, 2006 was $2 and $173 respectively.

Stock Option Plans

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  221,725 options under the 2002 stock option plan at exercise prices ranging from $2.75 to $22.40 were
outstanding at October 28, 2006. Under the plan, stock options may be granted for the purchase of its Common Stock at an exercise price of not less than 100% of the fair market value at the time of grant as determined by the Board of Directors.
The term of each option is also determined by the Board of Directors, but cannot be more than ten years from the date of grant. Options are exercisable in accordance with the Plan and generally vest at the rate of 25% to 33% per year from the
date of grant.

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  198,500 options at exercise prices ranging from $2.65 to $11.90 were outstanding



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##### Table of Contents

at October 28, 2006. Under the Plan, options may be granted for the purchase of its Common Stock at
an exercise price not less than 100% of the fair market value of a share of Common Stock on the date of grant. Options are exercisable in accordance with the Plan and generally vest at the rate of 33% to 50% per year from the date of grant.

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  276,083 options were outstanding at October 28,
2006 with exercise prices ranging from $6.38 to $19.00. Under this plan, 500,000 shares of Common Stock would be available for the settlement of the following types of awards: stock options; stock appreciation awards; nonvested shares; deferred
stock; dividend equivalents; performance units; performance shares; and other stock based awards.

Stock option activity for the nine months
ended October 28, 2006 is as follows:



|                                       |  |                        |   |  |                               |      
|-------------------------------------- |  | ---------------------- | - |  | ----------------------------- | -----
|                                       |  | Number of StockOptions |   |  | WeightedAverageExercise Price
|Outstanding - January 28, 2006         |  | 839,517                |   |  | $                             | 6.22 
|Granted                                |  | 1,000                  |   |  |                               | 8.14 
|Exercised                              |  | (59,216                | ) |  |                               | 3.54 
|Forfeited                              |  | (7,416                 | ) |  |                               | 8.88 
|                                       |  |                        |   |  |                               |      
|Outstanding  April 29, 2006           |  | 773,885                |   |  |                               | 6.40 
|                                       |  |                       
|Granted                                |  | 5,000                  |   |  |                               | 7.67 
|Exercised                              |  | (40,077                | ) |  |                               | 5.49 
|Forfeited                              |  | (16,700                | ) |  |                               | 11.74
|Expired                                |  |                       |   |  |                               |     
|                                       |  |                        |   |  |                               |      
|Outstanding  July 29, 2006            |  | 722,108                |   |  |                               | 6.33 
|                                       |  |                       
|Granted                                |  |                       |   |  |                               |     
|Exercised                              |  | (23,100                | ) |  |                               | 3.05 
|Forfeited                              |  | (2,700                 | ) |  |                               | 7.61 
|Expired                                |  |                       |   |  |                               |     
|                                       |  |                        |   |  |                               |      
|Outstanding October 28, 2006          |  | 696,308                |   |  |                               | 6.44 
|                                       |  |                       
|Exercisable  October 28, 2006         |  | 660,753                |   |  |                               | 6.37 
|                                       |  |                       
|Available for grant  October 28, 2006 |  | 175,203                |   |  |                               |      
|                                       |  |                        |   |  |                               |      

Information regarding outstanding and exercisable options at October 28, 2006 is as follows:



|                         |  |                     |  |                                          |  |                               |       |                   |         |                               |   |      
|------------------------ |  | ------------------- |  | ---------------------------------------- |  | ----------------------------- | ----- | ----------------- | ------- | ----------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                     
|                         |  | NumberOutstanding   |  | Weighted-averageremainingcontractuallife |  | Weighted-averageexerciseprice |       | Numberexercisable |         | Weighted-averageexerciseprice
|Range of Exercise Prices |  |                     |  |                                          |  |                               |       |                   |         |                               |   |      
|October 28, 2006:        |  |                     |  |                                          |  |                               |       |                   |         |                               |   |      
|$ 2.65 to $ 8.30         |  | 542,858             |  | 6.2                                      |  | $                             | 4.86  |                   | 507,571 |                               | $ | 4.66 
|9.31 to 12.44            |  | 150,650             |  | 7.4                                      |  |                               | 11.88 |                   | 150,382 |                               |   | 11.88
|17.55 to 22.40           |  | 2,800               |  | 6.0                                      |  |                               | 20.36 |                   | 2,800   |                               |   | 20.36
|                         |  |                     |  |                                          |  |                               |       |                   |         |                               |   |      
|$ 2.65 to $ 22.40        |  | 696,308             |  | 6.5                                      |  | $                             | 6.44  |                   | 660,753 |                               | $ | 6.37 
|                         |  |                     |  |                                          |  |                               |       |                   |         |                               |   |      



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##### Table of Contents

Total unrecognized compensation cost for stock options as of October 28, 2006 was $118. The
aggregate intrinsic value of options outstanding at October 28, 2006 is $1,340 and the aggregate intrinsic value of exercisable options is $1,327. Cash proceeds received from the exercise of options for the three and nine months ended
October 28, 2006 was $70 and $500, respectively. The total intrinsic value of options exercised through October 28, 2006 was $479. Based on the Companys election of the with and without approach, the realized tax benefit
from stock options for the nine months ended October 28, 2006 was $0.



|(6) | Earnings(Loss) Per Share
|--- | ------------------------

In accordance with SFAS
No. 128 Earnings per Share, earnings per sharebasic was computed by dividing net income(loss) by the weighted average number of common shares outstanding during the period. Earnings(loss) per sharediluted assumes, in
addition to the above, the effect of potentially dilutive securities. The dilutive impact of stock options and warrants is calculated using the treasury method.

The reconciliation of earnings(loss) per share- basic to earnings(loss) per share - diluted for the three months ended October 28, 2006 and October 29, 2005 is as follows (in thousands, except per share
amounts):



|                                                                |  |                                          |           |   |                                          |   |           |  
|--------------------------------------------------------------- |  | ---------------------------------------- | --------- | - | ---------------------------------------- | - | --------- | -
|                                                                |  | For the threemonths endedOctober 28,2006 |           |   | For the threemonths endedOctober 29,2005 |  
|Net income(loss)                                                |  | $                                        | (17       | ) |                                          | $ | (1,207    | )
|Earnings(loss) per share  basic                                |  | $                                        | (0.01     | ) |                                          | $ | (0.39     | )
|Earnings(loss) per share  diluted                              |  | $                                        | (0.01     | ) |                                          | $ | (0.39     | )
|Weighted average shares outstanding - basic                     |  |                                          | 3,270,785 |   |                                          |   | 3,079,907 |  
|Dilutive effect of stock options, warrants and restricted stock |  |                                          |          |   |                                          |   |          |  
|                                                                |  |                                          |           |   |                                          |   |           |  
|Weighted average shares outstanding - diluted                   |  |                                          | 3,270,785 |   |                                          |   | 3,079,907 |  
|                                                                |  |                                          |           |   |                                          |   |           |  

Stock options and warrants with exercise prices below the applicable market price of the
Companys common stock are included in potentially dilutive common shares outstanding if the Company reports net income for a reporting period. However, when the Company incurs a net loss for a reporting period, the inclusion of any such shares
would result in a decrease in loss per share, and therefore all stock options, warrants and restricted stock units are ignored when calculating diluted loss per share. Therefore, the Companys loss per share for both the three months ended
October 28, 2006 and the three months ended October 29, 2005 is the same amount on a basic and diluted basis, respectively. Had the Company reported net income for the three months ended October 28, 2006 and for the three months ended
October 29, 2005, the dilutive effect of stock options and warrants would have been 203,059 and 289,774 shares, respectively.



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##### Table of Contents

The reconciliation of earnings per share - basic to earnings per share - diluted for the nine months
ended October 28, 2006 and October 29, 2005 is as follows (in thousands, except per share amounts):



|                                                                |  |                                         |           |                                         |   |          
|--------------------------------------------------------------- |  | --------------------------------------- | --------- | --------------------------------------- | - | ---------
|                                                                |  | For the ninemonths endedOctober 28,2006 |           | For the ninemonths endedOctober 29,2005
|Net income                                                      |  | $                                       | 2,035     |                                         | $ | 174      
|Earnings per share  basic                                      |  | $                                       | 0.63      |                                         | $ | 0.06     
|Earnings per share  diluted                                    |  | $                                       | 0.60      |                                         | $ | 0.05     
|Weighted average shares outstanding  basic                     |  |                                         | 3,209,531 |                                         |   | 3,068,906
|Dilutive effect of stock options, warrants and restricted stock |  |                                         | 192,189   |                                         |   | 380,335  
|                                                                |  |                                         |           |                                         |   |          
|Weighted average shares outstanding - diluted                   |  |                                         | 3,401,720 |                                         |   | 3,449,241
|                                                                |  |                                         |           |                                         |   |          

Options and warrants to purchase 397,454 common shares at a price ranging from $8.00 to
$22.40 per share were not considered in the calculation of diluted earnings per share for the nine months ended October 28, 2006, because the strike price was greater than the average market price per share during the period.



|(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. There are
no valuation allowances on the Companys deferred tax assets as of October 28, 2006 or January 29, 2006. The Company paid alternative minimum tax during the nine months ended October 28, 2006 due to its estimate of taxable income
levels.



|(8) | Legal Proceedings
|--- | -----------------

The Company is or may be subject to
certain legal proceedings and claims from time to time that are incidental to the ordinary course of business. The Company will record a liability when it has been determined that it is probable that the Company will be obligated to pay and the
amount can be reasonably estimated, and the Company will disclose the related facts in the footnotes to the financial statements, if material. If the Company determines that an obligation is reasonably possible it will, if material, disclose the
nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of loss can be made.

The
Company is from time to time named in charges filed with the Equal Employment Opportunity Commission (EEOC) and other federal and state governmental entities governing employees and the workplace. In one of those matters, the EEOC issued
a determination on February 28, 2006 that there is reasonable cause to believe that certain employees were subject to verbal harassment in violation of applicable laws. A determination that the Company is not in compliance with the rules and
regulations of these governmental entities could result in the award of damages and/or equitable remedies. Based on its best estimate of probable loss, a $400 reserve is recorded in accrued expenses as of October 28, 2006.

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 we are or
may be a party.



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##### Table of Contents

|(9) | Reclassifications
|--- | -----------------

Certain items in the 2005 financial
statements have been reclassified to conform to the 2006 presentation.



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

In September 2006, FASB
issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157), which establishes a framework for reporting fair value and expands disclosures about fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this standard on its
condensed consolidated balance sheets, statement of operations and cash flows.

In June 2006, FASB issued FASB Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income Taxes, (FIN 48) which clarifies the accounting for uncertainty in income tax recognized in an entitys financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained
earnings. The Company is currently evaluating the impact of adopting FIN 48 on its condensed consolidated balance sheets, statement of operations and cash flows.



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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 stores provide our customers with value solutions for all their party and social occasion
needs in a one-stop, festive environment. As a leader in the market place, our stores, which average approximately 11,500 square feet, carry merchandise in the party solution, greeting card, gift wrap, balloon, seasonal event and special occasion
merchandise arenas. 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 years end on the 52 or 53 weeks, as applicable, ending the Saturday nearest to
January 31st. Fiscal 2006 is the 53 week period January 29, 2006 to February 3, 2007. Fiscal 2005 is
the 52 week period January 30, 2005 to January 28, 2006. The following table summarizes store opening and closing activity during the nine months of fiscal 2006.



|                    |  |                            |   |  |                           |   |  |                 |   |  |                 |  
|------------------- |  | -------------------------- | - |  | ------------------------- | - |  | --------------- | - |  | --------------- | -
|                    |  | For the three months ended |   |  | For the nine months ended |  
|                    |  | October 28,2006            |   |  | October 29,2005           |   |  | October 28,2006 |   |  | October 29,2005 |  
|Beginning of period |  | 192                        |   |  | 186                       |   |  | 188             |   |  | 184             |  
|Openings            |  | 1                          |   |  | 4                         |   |  | 7               |   |  | 7               |  
|Closings            |  | (1                         | ) |  | (1                        | ) |  | (3              | ) |  | (2              | )
|                    |  |                            |   |  |                           |   |  |                 |   |  |                 |  
|End of period       |  | 192                        |   |  | 189                       |   |  | 192             |   |  | 189             |  
|                    |  |                            |   |  |                           |   |  |                 |   |  |                 |  

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. In late July 2006,
Paramount decided to close its operations and a receiver was appointed for Paramounts assets. On August 29, 2006, the Ontario Superior Court of Justice in Bankruptcy and Insolvency approved the sale by Paramount of substantially all
of its assets and property to Hallmark Cards Incorporated. During the third quarter, we negotiated with Hallmark as well as Paramounts receiver to procure greeting cards at favorable costs. These purchases positively impacted our greeting card
margins during the quarter. We anticipate the sell-through of this product will continue to positively impact our greeting card margins for the next six to nine months. We are managing our greeting card program through our distribution center
utilizing inventory currently in our supply chain which will meet customer demands through the upcoming 2006 holiday season and into the first quarter of fiscal 2007. Additionally, we are currently in discussions with other vendors with respect
to the supply of greeting cards for 2007 and beyond.

Party Supply Agreement

On January 26, 2006, we entered into a definitive agreement with Amscan Holdings, Inc. to be our exclusive supplier of solid color paper tableware products. In conjunction with the agreement, Amscan ships all
sourced merchandise to our centralized distribution center. The agreement also provides that the ownership of merchandise will not transfer over until the goods are shipped out of our distribution center.



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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.

Merchandise Inventories

We state
merchandise inventories at the lower of average cost or estimated net realizable value utilizing the retail method. We perform periodic evaluations of the net realizable value of merchandise, including merchandise which is to be discontinued from
our ongoing inventory assortment as well as inventory with excess quantities on hand and certain seasonal inventory remaining from past holidays. Based upon these evaluations, a provision for the excess of inventory cost over the net realizable
value is recorded as a reduction to the net inventory balance. At October 28, 2006 and January 28, 2006, we had reserves of $1,627 and $1,666, respectively.

Vendor Rebates

We receive vendor allowances principally as a result of meeting defined purchase levels or promoting
vendors products. Those received as a result of purchase levels are accrued as a reduction of merchandise purchase price and resulting 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. Our accounting policies relating to cash received from vendors are consistent with the conclusions reached by FASB Emerging Issue
Task Force (EITF) Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor (EITF 02-16), which was issued in September 2002. Advertising cooperative
payments were $34 and $74 for the three months ended October 28, 2006 and October 29, 2005, respectively. For the nine months ended October 28, 2006 and October 29, 2005, advertising cooperative payments were $266 and $294,
respectively.

Accounting for Long-Lived Assets

We
perform an impairment evaluation for our long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (SFAS No. 144). Long lived assets are evaluated for
recoverability in accordance with SFAS No. 144 whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, we estimate the future cash flows expected to result from the
use of the asset and eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over
fair value of the asset is recognized. During the three months ended October 28, 2006 there were no impairments to fixed assets. Through the nine months ended October 28, 2006 we have recorded fixed asset impairment of $88. During the
three months ended October 29, 2005 we recorded a fixed asset impairment of $200, which was the only impairment recorded through the nine months ended October 29, 2005.



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##### Table of Contents

Lease Accounting

We
lease all of the premises in which we operate. The leases are accounted for in accordance with SFAS No. 13, Accounting for Leases (SFAS No. 13). Certain leases provide for scheduled increases in base rentals over
their terms. For these leases we recognize the total rental amounts expected to be paid over the lease terms (starting at the date of possession) on a straight-line basis and, accordingly, establish corresponding deferred rent liabilities for the
difference between the amounts recognized and the amounts paid. We also receive certain lease incentives which are deferred and amortized on a straight-line basis over the initial term of a lease as a reduction of rent expense. Certain leases
provide for contingent rentals based on sales in excess of specified minimums. Additional information is found in Note 3 Lease Commitments.

Income
Taxes

We account for income taxes in accordance with the SFAS No. 109, Accounting for Income Taxes, (SFAS No. 109).
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.

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.



17



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|                                             |  |                                  |    |  |                                  |    |  |                                 |   |  |                                 |  
|-------------------------------------------- |  | -------------------------------- | -- |  | -------------------------------- | -- |  | ------------------------------- | - |  | ------------------------------- | -
|                                             |  | Three monthsendedOctober 28,2006 |    |  | Three monthsendedOctober 29,2005 |    |  | Nine monthsendedOctober 28,2006 |   |  | Nine monthsendedOctober 29,2005 |  
|Net sales                                    |  | 100.0                            | %  |  | 100.0                            | %  |  | 100.0                           | % |  | 100.0                           | %
|Cost of sales                                |  | 63.4                             |    |  | 64.2                             |    |  | 63.0                            |   |  | 63.5                            |  
|                                             |  |                                  |    |  |                                  |    |  |                                 |   |  |                                 |  
|Gross profit                                 |  | 36.6                             |    |  | 35.8                             |    |  | 37.0                            |   |  | 36.5                            |  
|Selling, general and administrative expenses |  | 34.8                             |    |  | 37.5                             |    |  | 33.5                            |   |  | 34.8                            |  
|Depreciation expense                         |  | 1.5                              |    |  | 1.3                              |    |  | 1.3                             |   |  | 1.1                             |  
|Interest expense                             |  | 0.4                              |    |  | 0.4                              |    |  | 0.4                             |   |  | 0.3                             |  
|                                             |  |                                  |    |  |                                  |    |  |                                 |   |  |                                 |  
|Income(loss) before income taxes             |  | (0.1                             | )  |  | (3.4                             | )  |  | 1.8                             |   |  | 0.3                             |  
|Income taxes                                 |  | (0.1                             | )  |  | (1.4                             | )  |  | 0.7                             |   |  | 0.1                             |  
|                                             |  |                                  |    |  |                                  |    |  |                                 |   |  |                                 |  
|Net income(loss)                             |  | (0.0                             | )% |  | (2.0                             | )% |  | 1.1                             | % |  | 0.2                             | %
|                                             |  |                                  |    |  |                                  |    |  |                                 |   |  |                                 |  
|Number of stores open at end of period       |  | 192                              |    |  | 189                              |    |  | 192                             |   |  | 189                             |  

Three Months Ended October 28, 2006 and October 29, 2005

Net sales. Net sales increased $844 or 1.5% to $57,084 for the three months ended October 28, 2006 (third quarter of fiscal 2006) from $56,240 for
the three months ended October 29, 2005 (third quarter of fiscal 2005). The increase is attributed to an increase in store count coupled with an increase in comparable store sales of 0.1%. Comparable store sales are defined as sales
from those stores open for at least one full year. Seasonal sales in October fell short of expectations as we operated in a competitive retail environment.

Gross profit. Cost of sales includes merchandise, distribution and store occupancy costs. Gross profit increased $786 or 3.9%, to $20,910 for the third quarter of fiscal 2006 from $20,124 for the third quarter of fiscal 2005. As a
percent of sales, gross profit was 36.6% for the third quarter of fiscal 2006 compared to 35.8% for the third quarter of fiscal 2005. Gross profit increased both as a function of higher sales volume and better merchandise margins. We leveraged
merchandise margins as we experienced favorable mark-up on merchandise available for sale. Greeting card margins were favorably impacted by last years greeting card reserve adjustment coupled with the aforementioned opportunistic purchase of
greeting cards from Paramounts receiver and Hallmark Cards Incorporated. Total favorable impact on greeting card margins in the third quarter of fiscal year 2006 was approximately $475. As a percent of net sales, total merchandise margins
improved 192 basis points. The leverage on merchandise margins was partially offset by continued de-leverage of store occupancy costs. Store occupancy costs increased $636 or 7.7% as we operate new stores and renewed existing leases.

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 decreased $1,211 or 5.7% to $19,882 for the third quarter of fiscal 2006 from $21,093 for the third quarter of fiscal 2005. Major contributors to the fluctuation are the
following:



| |  |  | Store related expenses decreased $875 or 6.4% as we more effectively managed store payroll and other store-related expenses as compared to the third quarter of fiscal 2005.
Additionally, we opened three fewer new stores during the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net advertising expense increased $229 or 11.2%. During the third quarter of fiscal 2006 we increased our direct mail advertising, which is continuing our shift from mass market
circulars which were used in the third quarter of fiscal 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other corporate expenses decreased by $565 or 10.7%. The decrease is primarily the result of a fixed asset impairment and a legal settlement with a former freight vendor recorded in
the third quarter of fiscal 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a percentage of net sales, selling, general and administrative expenses were 34.8% in the third quarter
of



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fiscal 2006 compared to 37.5% in the third quarter of fiscal 2005. Overall, the improvement in leverage was primarily due
to the decrease in store payroll expenses along with the aforementioned corporate expenses experienced in the third quarter of fiscal 2005.

Depreciation expense. Depreciation expense was $835 in the third quarter of fiscal 2006 compared to $749 in the third quarter of fiscal 2005. The 11.5% increase is attributed to fixed asset additions primarily for new stores and
inventory management systems. Since October 2005 we opened seven new stores and closed four.

Interest expense. Interest expense was $239 in the
third quarter of fiscal 2006 compared to $251 in the third quarter of fiscal 2005. The decrease resulted primarily from lower borrowing levels due to decreases in inventory purchases partially offset by an increase in our effective interest rate.
The effective interest rate on our line of credit borrowings was 7.50% for the third quarter of fiscal 2006 compared to 6.55% during the third quarter of fiscal 2005.

Income taxes. Income tax benefit was $29 in the third quarter of fiscal 2006 compared to $762 in the third quarter of fiscal 2005. The decrease is a function of lower loss levels in the third quarter of fiscal
2006. Until the benefits of our net operating loss carry forwards are fully utilized, we do not expect to pay federal income taxes with the exception of alternative minimum taxes.

Nine Months Ended October 28, 2006 and October 29, 2005

Net sales. Net sales increased $5,525 or
3.2% to $180,399 for the nine months ended October 28, 2006 from $174,874 for the nine months ended October 29, 2005. The increase in net sales can be attributed to an increase in store count coupled with a 0.9% increase in comparable
store sales. Our weighted average number of stores open during the nine months ended October 28, 2006 was 191 compared to 185 for the nine months ended October 29, 2005. We continue to operate in a challenging and competitive retail
environment. Comparable store sales are defined as sales from those stores open for at least one full year.

Gross profit. Cost of sales includes
merchandise, distribution and store occupancy costs. Gross profit increased $3,057 or 4.8%, to $66,802 for the nine months ended October 28, 2006 from $63,745 for the nine months ended October 29, 2005. Gross profit increased primarily as
a function of higher sales volume. As a percent of sales, gross profit was 37.0% for the nine months ended October 28, 2006 compared to 36.5% for the nine months ended October 29, 2005. This improvement can be attributed to better
merchandise margins most notably in greeting cards which have been positively impacted by the aforementioned opportunistic greeting card purchase and the prior year reserve adjustment. As a percent of net sales, total merchandise margins improved
130 basis points. Store occupancy costs, however, continue to rise as we opened new stores and renewed existing leases. Store occupancy costs increased $2,027 or 8.3% for the nine months ended October 28, 2006 compared to the nine months ended
October 29, 2005.

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 decreased $434 or 0.7% to $60,339 for the nine months October 28, 2006 from $60,773 for the nine months ended
October 29, 2005. Major contributors to the decrease are the following:



| |  |  | Despite an increase in store count and a 3.2% increase in net sales, store related expenses decreased $94 or 0.2%. The decrease can be primarily attributed to aggressively managing
store payroll and other variable store related expenses coupled with a reduction in store remodels.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Net advertising expense decreased $476 or 6.5%. This savings is due to our movement away from mass market circulars toward more targeted direct mail advertising.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other corporate expenses increased $136 or 0.9%. The increase is primarily the result of payroll- related costs including stock compensation expenses related to the adoption of SFAS
123(R).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a percentage of net sales, selling, general and administrative expense was 33.5% for the nine months ended October 28, 2006
compared to 34.8% for the nine months ended October 29, 2005. This improvement was due to the decrease of net advertising expense, better leverage of store related expenses and the reduction of the one-time items experienced in the nine months
ended October 29, 2005.

Depreciation expense. Depreciation expense was $2,414 for the nine months ended October 28, 2006 compared to
$2,005 for the nine months ended October 28, 2005. The increase is attributed to fixed asset additions acquired primarily for new store openings and inventory management. Since October 2005 we opened seven new stores and closed four.

Interest expense. Interest expense was $704 for the nine months ended October 28, 2006 compared to $548 for the nine months ended
October 29, 2005. The increase primarily resulted from higher average borrowing levels as we opened new stores earlier in the year coupled with an increase in our effective interest rate. The effective interest rate on our line of credit
borrowings was 6.87% for the nine months ended October 28, 2006 compared to 6.13% for the nine months ended October 29, 2005.

Income
taxes. Income taxes were $1,310 for the nine months ended October 28, 2006 compared to $245 for the nine months ended October 29, 2005. The increase is a function of income levels for the nine months ended October 28, 2006. Until
the benefits of our net operating loss carry forwards are fully utilized, we do not expect to pay federal income taxes with the exception of alternative minimum taxes.

Liquidity and Capital Resources

Our uses of capital for fiscal 2006 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 borrowings from our credit facility.

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



|                                     |  |                                   |         |   |                                   |   |        |  
|------------------------------------ |  | --------------------------------- | ------- | - | --------------------------------- | - | ------ | -
|                                     |  | Fiscal 2006                       |         |   | Fiscal 2005                       |  
|                                     |  | Nine months endedOctober 28, 2006 |         |   | Nine months endedOctober 29, 2005 |  
|Cash flows from operating activities |  | $                                 | 13,556  |   |                                   | $ | 4,002  |  
|                                     |  |                                   |         |   |                                   |   |        |  
|Cash flows from investing activities |  | $                                 | (2,007  | ) |                                   | $ | (4,546 | )
|                                     |  |                                   |         |   |                                   |   |        |  
|Cash flows from financing activities |  | $                                 | (11,548 | ) |                                   | $ | 550    |  
|                                     |  |                                   |         |   |                                   |   |        |  

At October 28, 2006 our working capital was $15,859. Net cash provided by operating activities for the nine
months ended October 28, 2006 was $13,556 compared to $4,002 of net cash provided by operating activities for the nine months ended October 29, 2005. The increase in cash flows from operating activities can be attributed to increased
income levels coupled with decreases in inventory balances and increases in accounts payable balances as we better manage our working capital.

Net cash
used in investing activities for the nine months ended October 28, 2006 and the nine months ended October 29, 2005 was $2,007 and $4,546, respectively. Net cash used in investing activities during the nine months ended October 28,
2006 was for capital expenditures related to new store openings $865, warehouse



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equipment for the distribution center $349, existing store and service support center upkeep $554 and computer equipment
and software $239. This is comparable to the nine months ended October 29, 2005 when in addition to new store fixtures of approximately $1,100, we also acquired the replenishment system software for $700 and replaced our stores bargain
basket fixtures for $600.

Net cash used in financing activities for the nine months ended October 28, 2006 was $11,548 compared to $550 of net cash
provided for the nine months ended October 29, 2005. Fluctuations are attributable mostly to the level of borrowings and repayments. Additionally, we received cash from the exercise of stock options and warrants of $673 in the nine months ended
October 28, 2006 compared to $29 in the nine months ended October 29, 2005.

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 October 31, 2008, currently provides up to $35,000, (including $10,000 for letters of credit) to
fund working capital needs and for general corporate purposes. The maturity date on the Loan Agreement is October 31, 2008. Borrowings under the facility are limited by a percentage of inventory levels, and are secured by substantially all of
our assets.

As of October 28, 2006, we had $7,321 in borrowings outstanding under the Loan Agreement and had utilized approximately $2,273 to issue
letters of credit. As of December 6, 2006, we had $6,163 in borrowings outstanding under the Loan Agreement, utilized approximately $2,313 to issue letters of credit and had $17,817 available for future cash borrowings.

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

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

Contractual Obligations

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



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To facilitate an understanding of our contractual obligations as of October 28, 2006, 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 (1) (including current portion)           |  | $                                                   | 7.3   |                   | $ | 7.3      |  | $        |     |                  | $ |     |  | $ |    
|Operating Leases(2)(3)                                          |  |                                                     | 131.7 |                   |   | 27.9     |  |          | 40.8 |                  |   | 25.9 |  |   | 37.1
|Inventory Purchase Commitments (including open purchase orders) |  |                                                     | 16.6  |                   |   | 13.7     |  |          | 2.9  |                  |   |     |  |   |    
|                                                                |  |                                                     |       |                   |   |          |  |          |      |                  |   |      |  |   |     
|Total                                                           |  | $                                                   | 155.6 |                   | $ | 48.9     |  | $        | 43.7 |                  | $ | 25.9 |  | $ | 37.1
|                                                                |  |                                                     |       |                   |   |          |  |          |      |                  |   |      |  |   |     

---

|(1) | Interest payments are excluded from total.
|--- | ------------------------------------------

|(2) | Payments to the landlord covering taxes, maintenance, other common area maintenance items and contingent rental amounts for stores are excluded from total. Amounts expensed for
these items during the three and nine months ended October 28, 2006 totaled $2.3 million and $6.7 million, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes lease renewal of headquarters / distribution center in Naperville, IL through 2018.
|--- | --------------------------------------------------------------------------------------------

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 2006 quarters are defined as follows: first fiscal quarter is January 29, 2006 to
April 29, 2006, second fiscal quarter is April 30, 2006 to July 29, 2006, third fiscal quarter is July 30, 2006 to October 28, 2006 and fourth fiscal quarter is October 29, 2006 to February 3, 2007. Our fiscal year
ends on the 52 or 53 weeks, as applicable, ending the Saturday nearest to January 31st. Fiscal 2006 will be a
53-week period while fiscal 2005 was a 52-week period.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risks from changes in interest rates. As of October 28, 2006, the interest rate on the
Companys revolving credit facilities, which represents a significant portion of the Companys outstanding debt, is variable based upon the prime and LIBOR rates. We believe our interest rate risk is minimal as a hypothetical 1.0% increase
to the average interest rate under the credit facilities applied to the average outstanding balance during the nine months ended October 28, 2006 and the nine months ended October 29, 2005 would not have had a material impact on our
financial position or results of operations.



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ITEM 4. CONTROLS AND PROCEDURES

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

As of December 12, 2006 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 Accounting 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 Accounting Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

During the quarter ended October 28, 2006, 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.



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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are or may be subject to certain legal proceedings and claims from time to time that are
incidental to the ordinary course of business. We will record a liability when it has been determined that it is probable that the Company will be obligated to pay and the amount can be reasonably estimated, and we will disclose the related facts in
the footnotes to the financial statements, if material. If we determine that an obligation is reasonably possible it will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that
no estimate of loss can be made.

We are from time to time named in charges filed with the Equal Employment Opportunity Commission (EEOC) and
other federal and state governmental entities governing employees and the workplace. In one of those matters, the EEOC issued a determination on February 28, 2006 that there is reasonable cause to believe that certain employees were subject to
verbal harassment in violation of applicable laws. A determination that we are not in compliance with the rules and regulations of these governmental entities could result in the award of damages and/or equitable remedies. Based on our best estimate
of probable loss, a $400 reserve is recorded in accrued expenses as of October 28, 2006.

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 1A.Risk Factors

Except as set forth below, we have not identified any material changes from risk factors as previously
disclosed in Form 10-K filed on April 19, 2006. As discussed in Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations, we are currently in discussions with Hallmark and other vendors with
respect to the supply of greeting cards. Although we are managing our greeting card program through our distribution center utilizing inventory currently in our supply chain, our failure to secure sourcing of greeting cards on terms acceptable to us
could adversely affect our ability to compete and our financial performance.

We have announced our intent to explore strategic alternatives, but no
transaction may occur. Also, if one is undertaken, we cannot be certain of its potential terms or timing.

Item 2. Unregistered Sales of Equity 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.



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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits



|        |  |                                                                                                                                                                                                                                                                                                                    
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1(1)  |  | Debtors Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated February 5, 2002.                                                                                                                                                                                                     
|        | 
|3.1(2)  |  | Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp.                                                                                                                                                                                                                             
|        | 
|3.2(4)  |  | Amended Bylaws of Factory Card & Party Outlet Corp.                                                                                                                                                                                                                                                                
|        | 
|3.3(7)  |  | Amendment to and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp, dated July 17, 2003.                                                                                                                                                                                                   
|        | 
|3.4(7)  |  | Amendment to and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp, dated April 6, 2004.                                                                                                                                                                                                   
|        | 
|3.5(12) |  | Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp, dated February 6, 2006.                                                                                                                                                                                                     
|        | 
|3.6(15) |  | Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp, dated May 2, 2006.                                                                                                                                                                                                          
|        | 
|3.7(16) |  | Amended and Restated Certificate of Incorporation of Factory Card & Party Outlet Corp, dated June 9, 2006.                                                                                                                                                                                                         
|        | 
|3.6(17) |  | Material modification to the rights of the stockholders of Factory Card & Party Outlet Corp, dated June 28, 2006.                                                                                                                                                                                                  
|        | 
|4.1(2)  |  | Warrant Agreement, dated April 9, 2002, between Factory Card & Party Outlet Corp. and Wells Fargo Bank Minnesota, N.A.                                                                                                                                                                                             
|        | 
|4.2(2)  |  | Form of New Management Warrant, dated April 9, 2002.                                                                                                                                                                                                                                                               
|        | 
|4.3(2)  |  | Schedule of New Management Warrants (pursuant to Instruction 2 of Item 601).                                                                                                                                                                                                                                       
|        | 
|4.4(2)  |  | Trade Conversion Note of Factory Card & Party Outlet Corp. and Factory Card Outlet of America Ltd., dated April 9, 2002, for the benefit of CSS Industries, Inc.                                                                                                                                                   
|        | 
|4.5(2)  |  | Schedule of Trade Conversion Notes (pursuant to Instruction 2 of Item 601).                                                                                                                                                                                                                                        
|        | 
|4.6(2)  |  | Trade Conversion Agreement, dated as of April 9, 2002, among Factory Card & Party Outlet Corp., Factory Card Outlet of America, Ltd., Amscan, Inc., Creative Expressions Group, Inc., Images
and Editions Limited, Unique Industries, Inc., CSS Industries, Inc., P.S. Greetings, Inc., and Maryland Plastics, Inc.
|        | 
|10.1(2) |  | Loan and Security Agreement dated as of April 9, 2002, among Factory Card Outlet of America, Ltd., as borrower, the lenders thereto as Wells Fargo Retail Finance, LLC, as arranger, collateral
agent and administrative agent.                                                                                    
|        | 
|10.2(7) |  | First Amendment dated April 9, 2004, to the Loan and Security Agreement,                                                                                                                                                                                                                                           



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##### Table of Contents

|           |  |                                                                                                                                                                            
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |  | among Factory Card Outlet of America, Ltd., as borrower, the lenders thereto as Well Fargo Retail Finance, LLC, as arranger, collateral agent and administrative agent.    
|           | 
|10.3(2)    |  | Security Agreement, dated April 9, 2002, among Factory Card & Party Outlet Corp. and Factory Card Outlet of America, Ltd., in favor of William Kaye, as Collateral Trustee.
|           | 
|10.4(2)    |  | Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.                                                                                                               
|           | 
|10.5(2)    |  | Trade Vendor Supply Agreement, dated April 9, 2002, between Factory Card & Party Outlet Corp., Factory Card Outlet of America, Ltd. and Maryland Plastics.                 
|           | 
|10.6(2)    |  | Schedule of Trade Vendor Supply Agreements (pursuant to Instruction 2 of Item 601).                                                                                        
|           | 
|10.7(2)*   |  | Employment Agreement, dated as of April 9, 2002, between Factory Card Outlet of America, Ltd. and James D. Constantine.                                                    
|           | 
|10.8(5)*   |  | Employment Agreement, dated as of December 23, 2004, between Factory Card Outlet of America, Ltd. and Timothy F. Gower.                                                    
|           | 
|10.9(5)*   |  | Employment Agreement, dated as of December 23, 2004, between Factory Card Outlet of America, Ltd. and Gary W. Rada.                                                        
|           | 
|10.10(3)*  |  | Factory Card & Party Outlet Corp. 2002 Non-Employee Directors Stock Option Plan.                                                                                           
|           | 
|10.11(3)*  |  | First Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Incentive Plan.                                                                                        
|           | 
|10.12(3)*  |  | Second Amendment to the Factory Card & Party Outlet Corp. 2002 Stock Option Plan.                                                                                          
|           | 
|10.13(4)*  |  | Factory Card & Party Outlet Corp. 2003 Equity Incentive Plan.                                                                                                              
|           | 
|10.14(11)  |  | Factory Card & Party Outlet Corp. Form of Stock Option Agreement  2002 Stock Option Plan.                                                                                 
|           | 
|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(11)* |  | Factory Card & Party Outlet Corp., Form of Stock Option Agreement  2002 Non-Employee Directors Stock Option Plan.                                                         
|           | 
|10.17(11)* |  | Factory Card & Party Outlet Corp., Form of Stock Option Agreement - Equity Incentive Plan.                                                                                 
|           | 
|10.18(11)* |  | Factory Card & Party Outlet Corp., Form of Restricted Stock Agreement - Equity Incentive Plan.                                                                             
|           | 
|10.19(11)* |  | Factory Card & Party Outlet Corp., Summary of Incentive Bonus Agreements.                                                                                                  



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|           |  |                                                                                                                                                                                                                                                                                                           
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.20(11)* |  | Factory Card & Party Outlet Corp., Summary of Non-employee Director Compensation.                                                                                                                                                                                                                         
|           | 
|10.21(11)* |  | Factory Card & Party Outlet Corp., Summary of Arrangements with Certain Executives.                                                                                                                                                                                                                       
|           | 
|10.22(8)   |  | Second Amendment dated October 7, 2005, 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.                                                       
|           | 
|10.23(9)*  |  | Waiver and Release of James D. Constantine, CFO, dated as of December 2, 2005.                                                                                                                                                                                                                            
|           | 
|10.24(10)* |  | Amended Employment Agreement, dated as of December 9, 2005, between Factory Card Outlet of America, Ltd. and Timothy F. Gower.                                                                                                                                                                            
|           | 
|10.25(10)* |  | Amended Employment Agreement, dated as of December 9, 2005, between Factory Card Outlet of America, Ltd. and Gary W. Rada.                                                                                                                                                                                
|           | 
|10.26(10)* |  | Employment Agreement, dated as of December 9, 2005, between Factory Card Outlet of America, Ltd. and Jarett A. Misch.                                                                                                                                                                                     
|           | 
|10.27(10)* |  | Amended and Restated Executive Severance Plan, dated as of December 9, 2005.                                                                                                                                                                                                                              
|           | 
|10.28(11)* |  | Factory Card & Party Outlet, 2006 Management Incentive Plan.                                                                                                                                                                                                                                              
|           | 
|10.29(13)  |  | Primary Supply and Consignment Agreement dated January 26, 2006 between Factory Card & Party Outlet Corp. and Amscan Holdings, Inc.                                                                                                                                                                       
|           | 
|10.30(14)  |  | Agreement by and among Cramer Rosenthal McGlynn, LLC, a Delaware limited liability company (CRM LLC) and Cramer Rosenthal McGlynn, Inc., a New York corporation (CRM Inc.
and together with CRM LLC, CRM), on the one hand, and Factory Card & Party Outlet Corp. on the other dated April 18, 2006.
|           | 
|10.31(19)  |  | Industrial Building Lease dated October 28, 1996 between CenterPoint Realty Services Corporation and Factory Card Outlet of America Ltd.                                                                                                                                                                  
|           | 
|10.32(19)  |  | Lease Amendment dated as of January 31, 1998 by and between CenterPoint Realty Services Corporation and Factory Card Outlet of America Ltd.                                                                                                                                                               
|           | 
|10.33(19)  |  | Second Lease Amendment dated as of November 30, 2006 by and between CJF1 LLC and Factory Card Outlet of America Ltd.                                                                                                                                                                                      
|           | 
|16.1(18)   |  | Letter on change in certifying accountant, dated as of October 23, 2006.                                                                                                                                                                                                                                  
|           | 
|21         |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                              
|           | 
|31.1       |  | Chief Executive Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                



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|     |  |                                                                                                           
|---- |  | ----------------------------------------------------------------------------------------------------------
|     | 
|31.2 |  | Chief Accounting 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 Accounting Officer Certification of Periodic Report under Section 906 of Sarbanes-Oxley Act of 2002.



|      |  |                                                                                                                                                                                                                                  
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Notes |  |                                                                                                                                                                                                                                  
|*     |  | Management contracts or compensatory plans or arrangements.                                                                                                                                                                      
|      | 
|**    |  | The Company has submitted, to the Securities and Exchange Commission (the Commission), a request for confidential treatment for portions of this document. The redacted material has
been filed separately with the Commission.
|      | 
|(1)   |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on March 25, 2002.                                                                                                                                
|      | 
|(2)   |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on April 23, 2002.                                                                                                                                
|      | 
|(3)   |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q as filed on June 18, 2002.                                                                                                                              
|      | 
|(4)   |  | Incorporated by reference to the Companys Annual Report on Form 10-K as filed on May 2, 2003.                                                                                                                                   
|      | 
|(5)   |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on December 23, 2004.                                                                                                                             
|      | 
|(6)   |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on February 7, 2005.                                                                                                                              
|      | 
|(7)   |  | Incorporated by reference to the Companys Current Report on Form 10-K as filed on April 21, 2004.                                                                                                                               
|      | 
|(8)   |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on October 17, 2005.                                                                                                                              
|      | 
|(9)   |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on December 2, 2005.                                                                                                                              
|      | 
|(10)  |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on December 9, 2005.                                                                                                                              
|      | 
|(11)  |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q as filed on June 14, 2005.                                                                                                                              
|      | 
|(12)  |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on February 6, 2006.                                                                                                                              



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##### Table of Contents

|     |  |                                                                                                    
|---- |  | ---------------------------------------------------------------------------------------------------
|     | 
|(13) |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on January 26, 2006.
|     | 
|(14) |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on April 20, 2006.  
|     | 
|(15) |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on May 2, 2006.     
|     | 
|(16) |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on June 9, 2006.    
|     | 
|(17) |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on June 28, 2006.   
|     | 
|(18) |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on October 26, 2006.
|     | 
|(19) |  | Incorporated by reference to the Companys Current Report on Form 8-K as filed on December 8, 2006.

(b) Reports on 8-K

Current Report on Form 8-K filed on August 4, 2006 announcing sales results for July 2006.

Current Report on Form 8-K
filed on August 31, 2006 announcing sales results for August 2006 and announcing second quarter results will be released September 12, 2006.

Current Report on Form 8-K filed on October 10, 2006 announcing sales results for September 2006.

Current Report on Form 8-K filed on
October 26, 2006 announcing a change in the Companys certifying accountant.



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SIGNATURES

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



|                         |  |                                   |  |                                                        
|------------------------ |  | --------------------------------- |  | -------------------------------------------------------
|                         |  | FACTORY CARD & PARTY OUTLET CORP.
|                         |  |                                  
|Dated: December 12, 2006 |  | By:                               |  | /s/ Gary W. Rada                                       
|                         |  |                                   |  | Gary W. Rada                                           
|                         |  |                                   |  | President and Chief Executive Officer                  
|                         |  |                                  
|Dated: December 12, 2006 |  | By:                               |  | /s/ Jarett A. Misch                                    
|                         |  |                                   |  | Jarett A. Misch                                        
|                         |  |                                   |  | Vice President, Controller and Chief Accounting Officer
|                         |  |                                   |  | [Principal Accounting Officer]                         



30