10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For The Fiscal Year Ended January 28, 2006 OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                               to                              

Commission File Number: 21859

FACTORY CARD & PARTY OUTLET CORP.

(Exact name of registrant as specified in our charter)

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

2727 Diehl Road, Naperville, IL 60563-2371

(Address of principal executive offices) (Zip Code)

(630) 579-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class

Common Stock, $.01 par value

Series A Warrants to purchase Common Stock, $.01 par value, exercisable until April 9, 2006

Series B Warrants to purchase Common Stock, $.01 par value, exercisable until April 9, 2008

Series C Warrants to purchase Common Stock, $.01 par value, exercisable until April 9, 2010

Series D Warrants to purchase Common Stock, $.01 par value, exercisable until April 9, 2010

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ¨  No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨  No  x

Indicate by check mark whether the 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 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). Large accelerated filer  ¨, accelerated filer  ¨, non-accelerated filer  x

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes  ¨  No  x

The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of July 30, 2005 was approximately $26,356,760 computed on the basis of the last reported close price per share $8.85 of such stock on the NASDAQ National Market. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 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 March 31, 2006 was 3,188,052.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for Factory Card & Party Outlet Corp.’s 2006 Annual Meeting of Stockholders are incorporated by reference into Part III of the Form 10K.

Factory Card & Party Outlet Corp.

Annual Report on Form 10-K

TABLE OF CONTENTS

	PART I
		Page:
	Cautionary Statements Regarding Forward-Looking Statements
Item 1.	Business	1
Item 1A.	Risk Factors	5
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	11
Item 3.	Legal Proceedings	11
Item 4.	Submission of Matters to a Vote of Security Holders	11
	PART II
Item 5.	Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities	12
Item 6.	Selected Financial Data	12
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosures About Market Risks	23
Item 8.	Financial Statements and Supplementary Data	23
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	23
Item 9A.	Controls and Procedures	24
Item 9B.	Other Information	24
	PART III
Item 10.	Directors and Executive Officers of the Registrant	25
Item 11.	Executive Compensation	25
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	25
Item 13.	Certain Relationships and Related Transactions	25
Item 14.	Principal Accounting Fees and Services	25
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	26
	Signatures	30

CAUTIONARY STATEMENTS 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 SEC reports, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports. On our website, please see “Corporate Information” for a link to our SEC reports.

Statements made in this Form 10-K 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 statements are made a number of times throughout the document and may be identified by forward-looking terminology as “estimate,” “project,” “expect,” “believe,” “may,” “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 only good 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:

Ÿ ability to meet sales plans;

Ÿ weather and economic conditions;

Ÿ dependence on key personnel;

Ÿ competition;

Ÿ ability to anticipate merchandise trends and consumer demand;

Ÿ ability to maintain relationships with suppliers;

Ÿ successful implementation of information systems;

Ÿ successful handling of merchandise logistics;

Ÿ inventory shrinkage;

Ÿ ability to meet future capital needs;

Ÿ seasonality of business;

Ÿ disruption with our imported product;

Ÿ vendor performance;

Ÿ political unrest;

Ÿ consumer confidence and consumer spending;

Ÿ ability to maintain compliance with bank covenants;

Ÿ availability and cost of real estate;

Ÿ adverse developments with respect to litigation;

Ÿ changes in accounting policies and practices;

Ÿ governmental regulations and

Ÿ other factors both referenced and not referenced in this Form 10-K.

PART I

ITEM 1.    BUSINESS

General

Factory Card & Party Outlet Corp. and our subsidiary, Factory Card Outlet of America Ltd., is the largest publicly traded retail party chain in the United States. Factory Card & Party Outlet as of April 14, 2006 currently operates 191 company-owned retail stores in 20 states, offering a wide selection of party supplies, greeting cards, giftwrap, balloons, everyday and seasonal merchandise, and other special occasion merchandise at everyday value prices.

Our fiscal year ends on the 52 or 53 weeks, as applicable, ending the Saturday nearest to January 31^st. Fiscal 2005 is the 52 week period January 30, 2005 to January 28, 2006. Fiscal 2004 is the 52 week period February 1, 2004 to January 29, 2005. Fiscal 2003 is the 52 week period February 2, 2003 to January 31, 2004. In Fiscal 2005, we opened eight new stores and closed four. During Fiscal 2004, we opened eight new stores and closed one, while in Fiscal 2003 we opened six new stores with zero closures. The Fiscal 2005 opening and closure numbers include one store relocation.

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 the most current and sought after merchandise in the Party Solution, Greeting Card, Gift Wrap, Balloon, Seasonal Event and Special Occasion Merchandise arenas.

Industry Overview

Traditionally, the retail party supplies business has been fragmented, with consumers purchasing party-related products from party supply stores and designated departments in drug stores, general mass merchandisers, supermarkets, and department stores of local, regional and national chains. According to industry sources, the market for party and special occasion merchandise, comprised of party supplies, greeting cards, gift-wrap, and related items, was estimated at $36 billion in sales in 2004.

Business Strategy

Our goal is to become the premier specialty retailer of greeting cards and party supplies in the United States through merchandising innovation, value orientation and controlled growth. The key elements of our current strategy are as follows:

Merchandise Offering.    Our 20 years of experience serving the customer’s party and social occasion needs is reflected in the quality and breadth of our merchandise offerings. We provide an easy to shop, value oriented merchandising solution with over 36,000 SKU’s in six major merchandising categories: Party Solutions, Greeting Cards, Gift Wrap, Balloons, Seasonal Events and Special Occasion Merchandise.

Ÿ Party Solutions—For the customer planning a “kids” or adult birthday party, wedding or anniversary, baby or bridal shower, general themed such as luau or seasonal party we carry a variety of licensed and non-licensed patterns with coordinating plates, cups, napkins, table covers, decorations and party favors. As an industry leader we are often first to market with new licensed patterns and constantly looking for new and exciting themes. Completing the party solution category is our extensive selection of solid color paper and plastic tableware, plastic cutlery, serving trays, bowls and foil catering supplies.

Ÿ Greeting Cards—Our greeting card offering, which includes more than 3,000 titles, has long stood for value, selection and quality. That reputation was strengthened with the launch of our new greeting card line in Fiscal 2005. This new program offers a multi-tier pricing strategy with a “value” card line at 49¢ and a “premium” line starting at 99¢. Our customers have reacted positively to this change and we have

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reversed the negative store sales trends in this category in Fiscal 2005. Based on industry data, we believe that on average we sell more greeting card units on a per store basis than any other publicly traded retailer in the United States.

Ÿ Giftwrap—Our extensive product offering includes gift wrap, gift bags, tissue, bows, ribbon and decorative gift boxes. In Fiscal 2005, we dramatically expanded our selection of gift bags to meet the ever-changing needs of our consumers. Our overall offering has evolved to meet the customers needs as well as provide solutions for the value oriented customer and the customer seeking a premium gift wrap solution.

Ÿ Balloons—We offer our customers the largest selection of Mylar and latex balloons in the industry. We continue to be a premier destination for balloons with solutions for both the customer who needs inflated balloons for an occasion or event as well as helium kits for the do-it-yourself customer.

Ÿ Seasonal and Religious Events—In addition to providing solutions for our customer’s everyday party and social occasion needs we also provide a full complement of merchandise offerings for seasonal and religious events including Super Bowl, Valentine’s Day, Mardi Gras, St. Patrick’s Day, Easter, Passover, Graduation, Communion and Confirmation, Mother’s Day, Father’s Day, Fourth of July, Rosh Hashanah, Halloween, Thanksgiving, Christmas, Hanukkah and New Year’s.

Ÿ Other Special Occasion Merchandise—Our major product lines are complimented with other special occasion items in order to provide a complete shopping solution for our customers. These items include candy, candles, picture frames, photo albums, stationery, gifts, decorations and novelty items.

Everyday Value Pricing.    Our strategy of everyday value pricing is designed to provide customers with consistent value on their purchases. To further strengthen our value image we introduced a private label program called Partymania^™ in Fiscal 2005. With the tag line “More Party For Your Dollar,” this new private label program focuses much of our core value priced product under one value oriented brand.

Store Design and Layout.    Our stores are designed to provide our customers with an easy and convenient shopping experience in a fun and festive environment. Our store layouts reflect our merchandising strategy with clearly defined sections for Party Solutions, Greeting Cards, Gift Wrap, Balloons, Seasonal Events and Special Occasion Merchandise.

Marketing.    Our marketing efforts are focused on the two primary objectives of acquiring new customers and keeping current customers.

Multi-page print advertisements are periodically circulated to consumers via newspaper and direct mail. Distributed to wide audiences in the areas surrounding our stores, these vehicles are used primarily to attract new customers. Specialized mailing lists intended to reach specific segments of potential customers are also utilized.

To increase customer loyalty, targeted mailings and e-mails highlighting product offerings and promotions are periodically sent to customers from our ever growing Preferred Customer List. Database marketing has become more prevalent in our overall marketing strategy.

FactoryCard.com.    On September 18, 2005, we received our first online order at our newly redesigned website, FactoryCard.com. The launch of this site marked the beginning of our efforts to lead our industry with a best-of-breed, multi-channel shopping experience. At launch, we offered a large selection of Halloween costumes and accessories, including web-exclusive costumes with prices ranging as high as seven hundred fifty dollars. Our web-store now offers over 2,000 party solution items, and will continue to grow in breadth of selection over time. We believe that our e-commerce operation will allow us to generate increased revenue and more effectively compete against a wide array of online and offline competitors. We intend to accomplish this while leveraging our current distribution, merchandising and marketing competencies.

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Distribution Center and Office Complex.    We operate a modern 340,000 square foot distribution center and corporate office facility located on 39 acres in Naperville, Illinois. With this strategy we provide purchasing, inventory management, store operating and distribution efficiencies that few chains in our industry can match. Our supply chain strategy provides for scheduled, consistent deliveries to our stores, allowing for greater efficiency in labor planning at each store location.

Product Sourcing

We have historically been able to take advantage of volume purchase discounts due to our size and the use of our distribution center. We purchase our inventory from more than 300 vendors worldwide, with the largest supplier, Amscan, Inc., representing approximately 14% and the ten largest suppliers representing approximately 52% of our aggregate purchases in Fiscal 2005. Approximately 9% of our merchandise is directly imported from foreign manufacturers or their agents, principally from the Far East and England.

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. Under the terms of the agreement, Paramount supplies substantially all of the greeting cards sold in our stores. The Agreement imposes certain requirements and obligations relating to, among other things, shelf space, replenishment processes and seasonal returns.

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 ship out from our distribution center.

Except for the definitive agreements with the Premier Greetings division of Paramount Cards Inc. and Amscan Holdings, Inc. we generally do not have long-term contracts with any suppliers, however, we have entered into agreements with certain trade vendors to provide us with favorable payment terms, including extended payment terms and seasonal advances. We believe our well-established relationships with overseas suppliers have historically provided us with an advantage over many of our competitors by enabling us to offer an extensive selection of distinctive products at higher gross margins.

Management Information Systems

We believe that our management information systems are an important factor in supporting our business and enhancing our competitive position in the industry. Over the past four years we have invested significant resources in systems and infrastructure to support our business and increase efficiencies. We use a management information and control system based on the JDA Merchandise Management System software package (“JDA”) which supports the complete range of retail cycle functions in the areas of finance, merchandising and distribution. All stores are linked to our headquarters through personal computers which interface with an IBM AS/400 operating system and provide auto-replenishment of inventory and the ability to enter payroll information and send and receive electronic mail. The stores are also tied into our point-of-sale system (“POS system”). The POS system provides sales information to our stores and central office and is used to enhance merchandise planning and buying programs. In the second half of Fiscal 2005, we integrated JDA’s Portfolio Advanced Replenishment by E3^® suite and JDA’s Seasonal Profiling by Intellect^™ into our existing JDA Merchandise Management System installation. This highly regarded retail system provides sophisticated demand forecasting and functionalities such as seasonal profiling, exception management and promotional sales planning that will enable us to optimize store replenishment while reducing overall inventory.

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Store Locations

As of April 14, 2006, we operated 191 stores in 20 states, all of which are leased. Our store leases typically have an average initial term of 10 years with two five-year renewal options. We currently have plans to open up to seven additional stores in Fiscal 2006. Below is a list of our store locations as of April 14, 2006:

Location	Number of Stores
Delaware (1)
Stanton	1
Florida (9)
Gainesville	1
Jacksonville	1
Cape Coral	1
Port Orange	1
Ormond Beach	1
Tampa	1
Bradenton	1
Lakeland	1
Sanford	1
Illinois (43)
Chicago Metro	35
Bloomington	1
Champaign	1
De Kalb	1
Fairview Heights	1
Moline	1
Peoria	1
Rockford	1
Springfield	1
Indiana (21)
Indianapolis Metro	7
Anderson	1
Bloomington	1
Clarksville	1
Evansville	2
Fort Wayne	1
Highland	1
Kokomo	1
Lafayette	1
Merrillville	1
Michigan City	1
Muncie	1
Mishawaka	1
Richmond	1
Iowa (9)
Des Moines Metro	5
Marion	1
Davenport	1
Dubuque	1
Waterloo	1

Location	Number of Stores
Kentucky (6)
Louisville Metro	3
Lexington	1
Florence	1
Owensboro	1
Maryland (14)
Baltimore Metro	7
Washington, D.C. Metro (MD)	4
Salisbury	1
Rosedale	1
Bowie	1
Michigan (1)
Benton Harbor	1
Minnesota (6)
Minneapolis St. Paul Metro	4
Mankato	1
Rochester	1
Missouri (10)
St. Louis Metro	6
Cape Girardeau	1
Columbia	1
Joplin	1
Springfield	1
Nebraska (5)
Omaha Metro	3
Lincoln	1
Grand Island	1
New York (9)
Buffalo Metro	3
Latham	1
Olean	1
Rochester	3
Dewitt	1
North Carolina (3)
Charlotte	1
Raleigh	1
Winston Salem	1

Location	Number of Stores
Ohio (19)
Cincinnati Metro	3
Cleveland Metro	5
Columbus Metro	4
Akron	2
Beaver Creek	1
Lancaster	1
Mansfield	1
St. Clairsville	1
Wooster	1
Pennsylvania (5)
Erie	1
Hanover	1
State College	1
Wilkes Barre- Scranton	2
South Carolina (2)
Charleston	1
Greenville	1
Tennessee (5)
Chattanooga	2
Memphis	1
Nashville	2
Virginia (7)
Washington D.C. Metro (VA)	1
Fredericksburg	1
Lynchburg	1
Newport News	1
Norfolk	1
Richmond	2
West Virginia (1)
Clarksburg	1
Wisconsin (15)
Milwaukee Metro	7
Appleton	1
Eau Claire	1
Green Bay	1
Janesville	1
Madison	2
Oshkosh	1
Wausau	1
Total	191

New store sites are selected on the basis of several factors including physical location, demographic characteristics of the local market, co-tenants, visibility, population density, traffic counts, proximity to superstore competitors, access to highway and other major roadways and available lease terms. We look for co-tenants that are likely to draw customers whom we would otherwise target within the site’s relevant market.

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Competition

The greeting card, party supply and special occasion industry is highly competitive. We currently compete against a diverse group of retailers, ranging from other party supply and greeting card retailers to designated departments in drug stores, general mass merchandisers, supermarkets, dollar stores and department stores of local, regional and national chains. Major chain competitors in our markets include Party City, Party America and iParty. We also compete with internet and catalog businesses with similar merchandise and product offerings. In addition, a trend toward discounting the cost of party supplies and greeting cards has developed and we may encounter additional competition from new entrants or internet vendors in the future. Our stores compete, among other things, on the basis of convenience of location and store layout, product mix, selection, customer convenience and price.

Trademarks

We have registered trademarks under the name of “Factory Card & Party Outlet^®”, “Factory Card Outlet^®”, and “Partymania^®”. We also have trademarks on the “Factory Card & Party Outlet^®” design and the “Partymania^®” design on the Principal Register of the United States Patent and Trademark Office.

Government Regulation

Each of our stores must comply with regulations adopted by federal agencies and with licensing and other regulations enforced by state and local health, sanitation, safety, fire and other departments. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors, and difficulties or failures in obtaining the required licenses or approvals can delay and sometimes prevent the opening of a new store. In addition, we must comply with the Fair Labor Standards Act and various state laws governing various matters such as minimum wage, overtime and other working conditions. We also must comply with the provisions of the Americans with Disabilities Act of 1990, as amended, which requires generally that employers provide reasonable accommodation for employees with disabilities and that stores be accessible to customers with disabilities.

Employees

We have approximately 2,700 employees as of January 28, 2006, comprising approximately 1,000 full-time and 1,700 part-time employees. The number of store employees increases during peak selling seasons. Our employees are not covered by a collective bargaining agreement. We believe relations with our employees are generally good.

Reorganization

On April 9, 2002, we consummated a joint plan of reorganization under Chapter 11 of the Bankruptcy Code pursuant to a February 5, 2002 order entered by the U.S. Bankruptcy Court for the District of Delaware approving our joint plan of reorganization. We have been operating out of bankruptcy since April 9, 2002. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details.

ITEM 1A.    RISK FACTORS

Before you invest in our securities, you should be aware that there are various risks, including those described below. You should consider carefully these risk factors together with all of the other information included or incorporated by reference in this report before you decide your actions with respect to our securities. The following risk factors could adversely affect our revenue, expenses, net income, cash flow, ability to service our indebtedness, and ability to make distributions to our shareholders, any of which could adversely affect the trading price of our publicly traded securities.

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Intense competition in our industry could prevent us from increasing or sustaining our revenues and prevent us from achieving or sustaining profitability.

The greeting card, party supply and special occasion retailing business is highly competitive. Increased competition by existing or future competitors may reduce our sales and cause us to incur another loss. As a result of competition from other specialty party supplies and paper goods retailers, we may need to incur additional marketing and promotional expenses to achieve sales growth in our existing stores. Our stores compete with a variety of smaller and larger retailers, including:

Ÿ specialty party supplies and paper goods retailers, including other party superstores;

Ÿ card shops and designated departments in mass merchandisers;

Ÿ warehouse/merchandise clubs and discount general merchandise chains;

Ÿ toy stores;

Ÿ drug stores;

Ÿ supermarkets;

Ÿ dollar stores;

Ÿ department stores of local, regional and national chains; and

Ÿ internet retailers.

Many of our competitors have substantially greater financial and personnel resources than we do. We may encounter additional competition from new entrants in the future in our existing markets. Our competitors may be able to respond more quickly or adjust prices more effectively to take advantage of new opportunities or customer requirements. Increased competition could result in pricing pressures, reduced sales, reduced margins or failure to achieve or maintain widespread market acceptance, any of which could prevent us from increasing or sustaining our revenues and achieving or sustaining profitability.

Customers’ requirements are likely to evolve, and we will not retain customers or attract new customers if we do not anticipate and meet specific customer requirements and changes in merchandising trends.

Our core operations rely on a stable customer base. Failure to maintain existing customers and obtain new customers may adversely affect our market position.

Our success depends, in part, on our ability to anticipate and respond to changing merchandise trends and consumer demands in a timely manner. Accordingly, any delay or failure by us in identifying and responding to emerging trends could adversely affect consumer acceptance of the merchandise in our stores. If we are required to sell a significant amount of unsold inventory at below average mark-ups over our cost or below cost, such action could have an adverse effect on our financial condition and results of operations.

We make merchandising decisions well in advance of the seasons during which we will sell the merchandise. As a result, if we fail to identify and respond quickly to emerging trends, consumer acceptance of the merchandise in our stores could diminish and we may experience a reduction in revenues. We sell certain licensed products that are in great demand for short time periods, making it difficult to project our inventory needs for these products. Significantly greater or less-than-projected product demand could lead to one or more of the following:

Ÿ lost sales due to insufficient inventory;

Ÿ higher carrying costs associated with slower turning inventory; and

Ÿ reduced or eliminated margins due to mark downs on excess inventory.

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If consumer demand for single-use, disposable party goods were to diminish, the party supplies and paper goods industry and our revenues would be negatively affected. For example, if cost increases in raw materials such as paper, plastic, cardboard or petroleum were to cause our prices to increase significantly, consumers might decide to forgo the convenience associated with single-use, disposable products. Similarly, changes in consumer preferences away from disposable products and in favor of reusable products for environmental or other reasons could reduce the demand for our products.

A downturn in the economy may affect consumer purchases of discretionary items, which could reduce our sales.

In general, our sales represent discretionary spending by our customers. Discretionary spending is affected by many factors, including, among others, general business conditions, interest rates, the availability of consumer credit, taxation and consumer confidence in future economic conditions. Our customers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower or during periods of actual or perceived unfavorable economic conditions. If this occurs, our revenues and profitability will decline. In addition, our sales could be adversely affected by a continued downturn in the economic conditions of the markets in which we operate.

Our business depends on continued good relations with our suppliers.

Our failure to maintain good relationships with our principal suppliers or the loss of our principal suppliers would hurt our business. We purchase our inventory from more than 300 vendors world-wide, with the largest supplier representing approximately 14% and the ten largest suppliers representing approximately 52% of our aggregate purchases in Fiscal 2005. Many of our principal suppliers currently provide us with incentives like volume purchasing allowances and trade discounts. If our suppliers were to reduce or discontinue these incentives, prices from our suppliers would increase and our profitability would be reduced. As is customary in our industry, we generally do not have long-term contracts with any suppliers and any supplier could discontinue selling to us at any time. If a vendor becomes unable or unwilling to ship goods or provide favorable terms, this then could adversely affect our ability to compete and our financial performance. Our arrangements with overseas suppliers are subject to risks of doing business abroad, such as import duties, trade restrictions, work stoppages, political instability and other factors which could have an adverse effect on our business.

On February 5, 2005, we entered into a definitive agreement with the Premier Greetings division of Paramount Cards Inc. Under the terms of the agreement, Paramount supplies substantially all of our greeting cards. As a result of this agreement, we have become more dependent on one supplier for providing greeting cards to our stores. The failure of Paramount to adequately satisfy the needs of our customers or to meet our greeting card volume requirements could have an adverse effect on our business.

On January 26, 2006, we entered into a definitive agreement with Amscan Holdings, Inc. The agreement makes Amscan the Company’s exclusive supplier of solid color paper tableware products. Amscan has previously supplied party merchandise to the company prior to the date of this agreement. In conjunction with the agreement, Amscan ships merchandise to the Naperville distribution center, and the ownership of merchandise transfers to us only after the goods are shipped out of the distribution center. The failure of Amscan to provide product that adequately satisfies the needs of our customers or to meet our volume requirements could have an adverse effect on our business.

We face new competitive threats as a result of Amscan’s acquisition of Party City Corporation.

In December 2005, our largest supplier Amscan Holdings, Inc. reported that it had completed the acquisition of Party City Corporation a direct competitor. Party City Corporation operates approximately 500 stores nationwide many of which are in markets where we compete. Amscan’s status as our largest supplier, and the largest supplier in our industry could adversely affect our ability to compete favorably or operate successfully in a changed marketplace. Price pressures from such new sources of competition, particularly in the event of a strain in our relationship with Amscan, could erode our margins and cause our financial results to suffer.

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We may need to raise additional capital to fund our operations and support our long-term growth strategy.

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 our future performance, which, in turn, is subject to general economic, financial, competitive and other factors that are beyond our control. 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 available on favorable terms or that any sales of assets or additional financing could be obtained or obtained on favorable terms. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop or enhance our products and services, implement our long-term growth strategy, take advantage of future opportunities or respond in a timely manner to competitive pressures.

We are substantially leveraged and our financing facility contains covenants that could adversely affect our business.

Our indebtedness restricts our ability to obtain additional financing in the future, and because we may be more leveraged than some of our competitors, may place us at a competitive disadvantage. These restrictions could adversely affect our ability to finance future operations, potential acquisitions or capital needs or to engage in other business activities that may be in our best interest. Also, our financing facility contains covenants that impose operating and financial restrictions on us and require us to maintain a minimum borrowing base availability or to meet certain financial tests. Our ability to continue to comply with these covenants may be affected by events beyond our control. The breach of any of these covenants would result in a default under our indebtedness, in which case our lender could elect to declare all amounts borrowed thereunder, together with accrued interest, to be due and payable, foreclosure on the assets servicing the debt or cease to provide additional revolving loans or letters of credit which would have a material adverse effect on our business.

The seasonal nature of our business could adversely impact our operations.

Our business is highly seasonal, with operating results varying from quarter to quarter. We have historically experienced higher sales during the second and fourth quarters primarily due to increased demand by customers for our products attributable to special occasions and holiday seasons during these periods. Lower sales than expected by us during these periods, a lack of availability of product, or a general economic downturn in sales could have a material adverse effect on our business, financial condition and results of operations for the full year. In addition, the timing of new store openings, related pre-opening expenses and the amount of revenue contributed by new and existing stores may cause our quarterly results of operations to fluctuate.

We may not be able to profitably grow our business.

In order to profitably grow our business, we need to increase sales in our existing markets and open additional stores. Opening additional stores in existing markets could reduce sales from our stores located in or near those markets and stores opened in new markets may not be profitable. In addition, the opening of new stores could put additional strain on our existing infrastructure and may limit our ability to effectively leverage the costs of the new stores.

We may not be able to effectively execute our long-term growth strategy.

Our long-term growth strategy requires effective planning and management. Once a new geographic market is identified, we must obtain suitable store sites on acceptable terms. Also, the competitive and merchandising challenges we face in new geographic markets may be different from the challenges we face in our existing geographic markets. We may have to adapt to regional tastes and customs and compete against established and

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familiar local businesses with innovative or unique techniques for marketing party supplies and paper goods. Entering new markets may also place significant demands on our management, financial controls, operations and information systems. This may cause us to incur higher costs relating to marketing and operations. Expansion will require an increase in our personnel, particularly store managers and sales associates, to operate our new stores.

If we decide to change the location of the headquarters and distribution center when the lease expires at February 2008, we may experience distractions that could negatively impact operations.

The lease for the Naperville, Illinois distribution center and headquarters expires February 2008. While we do have renewal options for an additional five years, if we decide to relocate the facilities we could experience significant distractions from the management of the business as well as interruptions that could severely impair operations. Due to relocating the distribution center, we could experience some interruption or slow-down in our ability to replenish our stores. As well, the relocation of our management information systems could result in downtime that would impede our operations and potentially cause problems or delays with our financial reporting. Relocating the headquarters might also result in the loss of employees who are unwilling to travel the extra distance which could stress the existing management team.

If we do not comply with the numerous laws and regulations that govern our business, our business could be harmed.

Each of our stores must comply with regulations adopted by Federal agencies and with licensing and other regulations enforced by state and local health, sanitation, safety, fire and other departments. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors, and difficulties or failures in obtaining the required licenses or approvals, can delay and sometimes prevent the opening of a new store. In addition, we comply with the Fair Labor Standards Act and various state laws governing various matters such as minimum wage, overtime and other working conditions. We also comply with the provisions of the Americans with Disabilities Act of 1990, as amended, which requires generally that employers provide reasonable accommodation for employees with disabilities and that stores be accessible to customers with disabilities. However, future violations of such laws, the enactment of stricter laws or regulations or the implementation of more aggressive enforcement policies could adversely affect our operations or financial condition.

If we are unable to hire additional qualified personnel or retain existing personnel, we may not be able to operate our business successfully.

Our success depends upon the efforts of our senior management and other key personnel. The loss of the services of any member of our management team or a key employee, or a failure to timely retain a replacement officer could have a material adverse effect on us. Our future success will also depend in part on attracting and retaining quality employees. Many of our employees are in entry level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling costs is subject to external factors, such as unemployment levels, minimum wage legislation and changing demographics. There can be no assurance that we will be successful in retaining our existing key personnel or in attracting and retaining additional employees we may require. Any difficulties in obtaining, retaining and training qualified personnel could have a material adverse effect on us.

Higher administrative expenses could adversely affect our business and operations.

Higher selling, general and administrative expenses occasioned by the potential need for additional advertising, marketing, administrative or management information systems expenditures could negatively impact our business and operations.

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Interruption or obsolescence of our management information systems could have a negative effect on our competitive ability and our business generally.

We believe that our management information systems are an important factor in supporting our business and enhancing our competitive position in the industry. Over the past three years, we have invested significant resources in systems and infrastructure to support our business and make it more efficient. We use a management information and control system, which is based on the JDA Merchandise Management System software package (“JDA”) and supports the complete range of retail cycle functions in the areas of finance, merchandising and distribution. All stores are linked to our headquarters through personal computers, which interface with an IBM AS/400 and provide auto-replenishment of inventory and the ability to enter payroll information and send and receive electronic mail. These personal computers are also tied into our point-of-sale system (“POS system”). The POS system provides sales information to our stores and central office and is used to enhance merchandise planning and buying programs. In the second half of Fiscal 2005, we integrated JDA’s Portfolio Advanced Replenishment by E3^® suite and JDA’s Seasonal Profiling by Intellect^™ into our existing JDA Merchandise Management System installation. This highly regarded retail system provides sophisticated demand forecasting and functionalities such as seasonal profiling, exception management and promotional sales planning that will enable us to optimize store replenishment while reducing overall inventory. Any obsolescence or continuing interruption in the functioning of these systems could have a negative effect on our ability to compete effectively in the industry and on our business.

Our warrants and stock options may have significant dilutive effects on holders of Common Stock generally.

Pursuant to our bankruptcy plan of reorganization, we issued four series of warrants to holders of our old pre-bankruptcy common stock to purchase up to approximately 10% (subject to certain dilution events) of the Common Stock issued under the bankruptcy plan (assuming exercise of all such warrants). These four series of warrants are exercisable for terms ranging from four to eight years from the issuance date.

We currently have stock option plans pursuant to which we have the authority to issue options to our employees and directors for up to 1,133,334 shares of our Common Stock. As of January 28, 2006, there were options issued to purchase 839,517 shares of our Common Stock outstanding with a weighted average exercise price of $6.22 per share.

The issuance of shares of Common Stock pursuant to the exercise of the four series of warrants, the exercise of stock options, and the anti-dilution rights protection of the warrants issued to management could significantly dilute the holders of Common Stock currently issued and outstanding.

Certain provisions of our charter may prevent or delay a change of control of the Company.

Our certificate of incorporation provides for a classified Board of Directors. Any effort to obtain control of our Board of Directors by causing the election of a majority of the Board of Directors may require more time than would be required without a staggered election structure. Our certificate of incorporation also imposes restrictions on the direct or indirect transferability of our Common Stock, subject to certain exceptions, such that no person or certain groups of persons (x) may acquire or accumulate five percent (5%) or more (as determined under tax law principles governing the application of Section 382 of the Internal Revenue Code of 1986, as amended) of the Common Stock or (y) who, upon implementation of the Plan, owns 5% or more of the Common Stock, may acquire additional Common Stock. These provisions would have the effect of preventing a change of control for the duration of such restrictions. During Fiscal 2005, permission to exceed the 5% threshold was requested by and granted to three independent parties.

Adverse publicity could adversely affect our business.

We generally operate in medium-sized towns and suburban neighborhoods. Adverse publicity or news coverage relating to us could negatively impact our efforts to establish and promote name recognition and a positive image.

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Our stock price may be volatile and could decline.

Our Common Stock has had limited trading activity. We cannot predict the extent to which investor interest in our stock will lead to the development of a more active trading market, how liquid that market might become or whether it will be sustained. The trading price of our Common Stock could be subject to wide fluctuations due to the factors discussed in this risk factors section and elsewhere in this document, including:

Ÿ our operating results failing to meet the expectations of our investors;

Ÿ material announcements by us or our competitors;

Ÿ governmental regulatory action; or

Ÿ adverse changes in general market conditions or economic trends.

In addition, the stock markets in general have experienced extreme price and volume fluctuations. These broad market and industry factors may decrease the market price of our Common Stock, regardless of our actual operating performance.

We do not anticipate paying dividends.

We have not paid dividends on our Common Stock and we do not anticipate paying dividends in the foreseeable future. We intend to retain future earnings, if any, to finance the expansion of our operations and for general corporate purposes, including future acquisitions. In addition, our financing facility prohibits us from paying dividends on our capital stock.

ITEM 1B.    Unresolved Staff Comments

None.

ITEM 2.    PROPERTIES

The initial term of our store leases are typically 10 years and generally allow us to renew for up to two additional five-year terms. The terms of the majority of the leases, including renewal terms, extend beyond year 2008. In addition to our stores, all of which are leased, we also lease a distribution center in Naperville, Illinois, with the initial lease term expiring in February 2008. We have the option to renew the initial term of the lease for an additional period of 5 years. This facility consists of a three-story office building and 340,000 square-foot distribution center that sits on 39 acres of land.

ITEM 3.    LEGAL PROCEEDINGS

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 these 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 were not in compliance with the rules and regulations of these governmental entities could result in the award of damages and/or equitable remedies. Although the outcome cannot be predicted with certainty, we have recorded a $500 reserve with respect to these pending matters.

Additionally, we are from time to time involved in other routine litigation incidental to the conduct of our business. We are not aware of any other material existing or threatening litigation to which we are or may be a party.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

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PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table sets forth the high and low trading prices of our Common Stock as reported on the NASDAQ National Market for the periods indicated.

Fiscal 2005	High		Low
January 30, 2005 to April 30, 2005 [first fiscal quarter]	$	12.24	$	7.00
May 1, 2005 to July 30, 2005 [second fiscal quarter]		9.52		6.55
July 31, 2005 to October 29, 2005 [third fiscal quarter]		9.38		5.58
October 30, 2005 to January 28, 2006 [fourth fiscal quarter]		8.40		6.25
Fiscal 2004	High		Low
February 1, 2004 to May 1, 2004 [first fiscal quarter]	$	13.25	$	10.10
May 2, 2004 to July 31, 2004 [second fiscal quarter]		13.19		9.64
August 1, 2004 to October 30, 2004 [third fiscal quarter]		11.90		8.40
October 31, 2004 to January 29, 2005 [fourth fiscal quarter]		13.05		8.94

On March 31, 2006, the number of holders of record of the Common Stock was approximately 419.

Dividends

We have never paid cash dividends on our Common Stock and we do not intend to pay cash dividends in the foreseeable future. We expect earnings will be retained for the continued development of our business. In addition, our financing facility prohibits us from paying dividends on our capital stock. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 6.    SELECTED FINANCIAL DATA

The following table sets forth certain selected historical financial data that was derived from the consolidated financial statements. The selected financial data presented under the captions “Statement of Operations Data” and “Balance Sheet Data” as of January 28, 2006, January 29, 2005, January 31, 2004, February 1, 2003 and April 6, 2002 and for the 52 weeks ended January 28, 2006, the 52 weeks ended January 29, 2005, the 52 weeks ended January 31, 2004, the 43 weeks ended February 1, 2003 and the Nine weeks ended April 6, 2002 are derived from the consolidated financial statements which have been audited by Deloitte & Touche LLP, registered public accounting firm.

The selected financial data presented on the next page under the captions “Statement of Operations Data” and “Balance Sheet Data” as of February 2, 2002 and for the 52-weeks ended February 2, 2002 are derived from the consolidated financial statements which have been audited by KPMG LLP, independent certified public accountants.

The information set forth below should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

(Dollar amounts in thousands, except per share data)

	52 Weeks ended January 28, 2006			52 Weeks ended January 29, 2005			52 Weeks ended January 31, 2004			43 Weeks ended February 1, 2003			9 Weeks ended April 6, 2002			52 Weeks ended Feb. 2, 2002
	Successor			Successor			Successor			Successor			Predecessor			Predecessor
Statement of Operations Data:
Net sales	$	233,131		$	230,148		$	222,635		$	185,699		$	40,837		$	227,943
Cost of sales		149,145			147,970			145,372			122,435			26,991			149,871
Cost of sales-greeting card inventory write-down		233			4,415			—			—			—			—
Gross profit		83,753			77,763			77,263			63,264			13,846			78,072
Selling, general and administrative expenses		81,974			75,074			71,851			55,872			12,212			67,311
Depreciation		2,832			2,406			1,957			1,501			1,030			6,826
Reorganization items		—			(93	)		—			—			(18,840	)		6,653
Other income		—			(63	)		—			—			—			—
Interest expense		804			742			1,182			1,368			374			2,813
Income (loss) before income taxes		(1,857	)		(303	)		2,273			4,523			19,070			(5,531	)
Income tax expense (benefit)		(854	)		(103	)		911			1,981			(360	)		—
Net income (loss)	$	(1,003	)	$	(200	)	$	1,362		$	2,542		$	19,430		$	(5,531	)
Earnings (loss) per share—basic(1)	$	(0.33	)	$	(0.07	)	$	0.47		$	0.89
Weighted average shares outstanding—basic		3,074,034			3,017,284			2,919,115			2,866,420
Earnings (loss) per share—diluted(1)	$	(0.33	)	$	(0.07	)	$	0.40		$	0.86
Weighted average shares outstanding—diluted		3,074,034			3,017,284			3,426,179			2,957,516
Operating Data:
Number of stores:
Stores added		8			8			6			0			0			0
Stores closed		4			1			0			1			0			3
Open at end of period		188			184			177			171			172			172
Comparable store sales increase / (decrease)(2)		(1.1	)%		0.3	%		(2.0	)%		(1.3	)%		8.6	%		5.1	%
Average sales per store(3)	$	1,286		$	1,275		$	1,295		$	1,084		$	237		$	1,316
Balance Sheet Data (end of period):
Working capital	$	10,690		$	16,458		$	15,134		$	15,076		$	10,392		$	17,293
Total assets		77,302			68,270			58,172			60,040			63,311			81,299
Total debt(4)		19,547			13,693			15,597			23,857			32,460			27,903
Total long term debt obligations		—			15			3,699			5,889			6,632			338
Total stockholders’ equity (deficit)		28,304			28,873			17,947			15,154			10,040			(18,933	)

(1) The per share and share information for the Predecessor Company has been omitted as such information is not deemed to be meaningful due to the fresh-start accounting entries booked for the Successor Company and the resulting lack of comparability to Predecessor Company periods. Predecessor Company refers to the Company as it operated until emergence from bankruptcy on April 6, 2002. Successor Company refers to the Company’s operations subsequent to emergence from bankruptcy on April 6, 2002.

(2) Includes stores open 13 or 14 months after their opening date. If the opening date of a store falls in the first 14 days of a period, then it will be included in the comparable store calculation in its 13th month of operation; otherwise, a store is included in the comparable store calculation in its 14th month of operation. A store’s sales are excluded from the calculation of comparable sales in the fiscal month of the store closing.

(3) Includes only stores open during the entire period.

(4) Total debt is defined as total current and long-term debt, including capital lease obligations.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Cautionary Statements Regarding Forward-Looking Statements,” Item 1A. “Risk Factors,” and elsewhere in this Form 10-K.

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 the most current and sought after 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 year ends on the Saturday closest to January 31^st. The following table describes the periods presented in the financial statements and related notes:

Period:	Referred to as:
Results for the 52 weeks ended January 28, 2006—	“Fiscal 2005”
Results for the 52 weeks ended January 29, 2005—	“Fiscal 2004”
Results for the 52 weeks ended January 31, 2004—	“Fiscal 2003”

The table below illustrates store activity over the past three fiscal years. We currently have plans to open up to seven new stores in Fiscal 2006.

Number of Stores	Fiscal 2005	Fiscal 2004	Fiscal 2003
Beginning of Year	184	177	171
Stores Added	8	8	6
Stores Closed	4	1	0
At End of Year	188	184	177

Please note all Company filings with the Securities & Exchange Commission can be viewed by visiting our website under Investor Relations at www.factorycard.com. This website address is intended to be an inactive textual reference only; none of the information contained on our website is part of this report or is incorporated by reference herein.

Fiscal Years

Chapter 11 Proceedings and Reorganization

On March 23, 1999, we filed with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) petitions for reorganization under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). On March 20, 2002, the Bankruptcy Court confirmed our Amended Plan of Reorganization (the “Plan”) that was filed with the Bankruptcy Court on February 5, 2002. On April 9, 2002 (the “Effective Date”), the Plan of Reorganization became effective and we successfully emerged from Chapter 11.

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

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

Ÿ The common stock of Factory Card & Party Outlet Corp. that was outstanding immediately prior to the Plan becoming effective was canceled and 149,106 shares of our new Common Stock were issued to holders of the canceled common stock at a ratio of .019846 shares of new Common Stock for each share of canceled common stock.

Ÿ We issued 2,699,990 shares of the new Common Stock to holders of unsecured claims against us, or “General Unsecured Creditors.”

Ÿ We issued 150,000 shares of the new Common Stock to certain members of our management, vesting ratably over a four-year period, as specified in the Plan, and warrants to purchase an aggregate 62,000 shares of our new Common Stock at a purchase price of $3.76 per share. On June 7, 2002, 25,800 warrants were exercised and the remaining 36,200 warrants expired.

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

Ÿ We adopted an employee stock option plan, the 2002 Stock Option Plan, to provide our eligible employees with the opportunity to purchase an aggregate 333,334 shares of our new Common Stock.

Ÿ We paid $1,000 to the General Unsecured Creditors within 60 days of the Effective Date and agreed to pay the General Unsecured Creditors, three years from emergence an aggregate of $2,600, less any prepayments. Please note this instrument was paid in full during Fiscal 2005.

Ÿ We converted an aggregate of $3,130 post petition accounts payable into long-term convertible secured subordinated notes (the “Trade Conversion Notes”) to seven trade vendors and suppliers (the “Trade Participants”). This obligation is secured by a subordinated lien on certain of our property. The Trade Participants each have the right to convert their Trade Conversion Notes in whole, or in part, into an aggregate of 29.35% of the new Common Stock, at any time between April 9, 2005 (the third anniversary of the Plan’s Effective Date) and April 9, 2006 (the fourth anniversary of such date), subject to adjustments to reflect any prepayments made by us. Please note this instrument was paid in full during Fiscal 2004 and did not result in any dilution of Common Stock.

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

We entered into a secured financing facility with Wells Fargo LLC, which became effective concurrent with the Plan, to repay the outstanding amounts owed under our debtor in possession revolving financing agreement and fund our obligations under the Plan and our ongoing operations following emergence from bankruptcy. Borrowings under this agreement are secured by substantially all of our assets.

Juvenile Party Expansion

In Fiscal 2003, we entered into agreements with Party Express by Hallmark and Designware by American Greetings to sell licensed party tableware and accessories. This new assortment has increased the selection of our

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juvenile party patterns by approximately 30% and increased the selection of licensed party patterns and accessories by more than 150%. We believe this assortment puts us in a favorable position to compete in the expanding market of juvenile party.

Greeting Card Agreement

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

This agreement enabled the repositioning of our greeting card strategy by introducing a multi-tiered pricing program featuring high quality greeting cards retailing at a new low price of 49¢, blended with the introduction of premium greeting cards selling for 99¢. As we replaced our one price strategy, our customers have benefited from a greatly improved greeting card value, enriched by our relationship with Premier Greetings, a company with excellent resources and a recognized leader in the greeting card industry. During the most recent quarter ended January 28, 2006, we generated positive comparative store sales in our card category.

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 ship out from our distribution center.

Critical Accounting Policies

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

Merchandise Inventories

As discussed in Note 1 “Business and Basis of Presentation” in the Notes to the Consolidated Financial Statements, merchandise inventories are stated 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 January 28, 2006 and January 29, 2005, we had reserves of $1,666 and $5,893 respectively, for certain merchandise, which is to be discontinued from our ongoing inventory assortment, as well as inventory with excess quantities on hand, and certain seasonal inventory from past holidays.

We receive vendor allowances principally as a result of meeting defined purchase levels or promoting vendors’ products. Those received as a result of purchase levels are accrued as a reduction of merchandise purchase price over the incentive period and result in a reduction of cost of sales as the merchandise is sold. Those received for promoting vendors’ products are offset against advertising expense and result in a reduction of selling, general and administrative expenses. Markdown allowances reduce cost of goods sold in the period the

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related markdown is taken. Placement allowances are offset against specific incremental expenses incurred in getting the product ready for sale. In September 2002, the Emerging Issues Task Force (“EITF”) issued 02-16 “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”, which addressed the accounting for rebates retailers receive from vendors. Our accounting policies relating to cash received from vendors are consistent with the conclusions reached by the EITF.

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 the fair value of the asset is recognized. The fair market value of assets is determined primarily by market prices of similar assets at the stores.

Due to missing internal sales targets and experience of negative comparable store sales in the current fiscal year, we evaluated our long-lived assets. Based on current and projected performance, we recorded $200 in fixed asset impairments. There were no fixed asset impairments recognized in Fiscal 2004 or Fiscal 2003. After adjusting for the impairment charge, we believe the carrying value of the assets is appropriate.

We capitalize software in accordance with Statement of Position (“SOP”) 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). Our capitalized software is made up of purchased software and the respective licenses, including the many components of JDA, our administrative systems and eCommerce software. The software is depreciated over three years.

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 4 “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.

New Accounting Pronouncements

In October 2005, the FASB issued FASB Staff Position (“FSP”) No. 13-1 “Accounting for Rental Costs Incurred During the Construction Period” (“FSP FAS No. 13-1”) to give guidance to a lessee on determining whether rental costs associated with operating leases may be capitalized during the construction period. Specifically, FSP FAS No. 13-1 stipulates that such costs shall be (1) recognized as rental expense, (2) included

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in income from continuing operations and (3) allocated over the lease term according to the guidance in SFAS No. 13, “Accounting for Leases,” and FASB Technical bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent increases.” The guidance in FSP FAS No. 13-1 is effective for the first reporting period beginning after December 15, 2005. We plan to adopt FSP FAS No. 13-1 in the first fiscal quarter of Fiscal 2006, and we do not expect FSP FAS No. 13-1 to have a material impact on our consolidated balance sheet, statements of operations or cash flows.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”) which provides additional guidance on conditional asset retirement obligations under FASB No. 143 “Accounting for Asset Retirement Obligations”. This standard is effective for fiscal years ended after December 15, 2005. We adopted FIN 47 as of January 28, 2006. Adoption of FIN 47 did not have a material impact on our consolidated balance sheet, statements of operations or cash flows.

In March 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS No. 154 replaces Accounting Principles Board (“APB”) Opinion No. 20 “Accounting Changes” (“APB No. 20”) and FASB Statement No. 3. “Reporting Accounting Changes in Interim Financial Statements.” APB No. 20 allowed a change in accounting principles to be accounted for generally as a cumulative effect adjustment in the current year’s financial statements. SFAS No. 154 states that changes be reported retrospectively and requires the following: (1) The cumulative effect of the change to the new accounting principle on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented. (2) An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial positions) for that period. (3) Financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle. SFAS No. 154 is effective for the fiscal year beginning January 29, 2006. We plan to adopt SFAS No. 154 and we do not expect it to have a material impact on our consolidated balance sheet, statements of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment, a revision of SFAS No. 123, ‘Accounting for Stock Based Compensation’” (“SFAS No. 123(R)”). SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and requires all companies to measure compensation cost for share-based payments, including grants of employee stock options, at fair value and recognize the cost in the statements of operations over the service period of the award. Under SFAS No. 123(R), the pro-forma disclosure in the Notes to Financial Statements previously allowed by SFAS No. 123 will not be an acceptable alternative to recognition of expenses in the financial statements. We adopted SFAS No. 123(R) on January 29, 2006 using the modified prospective method.

Under the adoption of SFAS No. 123(R) we will be required to expense stock options over the vesting period in our statement of operations. In addition, we will need to recognize expense over the remaining vesting period associated with unvested options outstanding as of January 28, 2006. Based upon the stock options outstanding as of January 28, 2006, the stock based employee compensation expense, net of related tax effects, will be approximately $118 in Fiscal 2006. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than an operating cash flow as required under current literature. To the extent we experience tax deductions in excess of recognized compensation costs, our statements of cash flows will show a decrease in net operating cash flows and an increase in net financing cash flows.

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Results of Operations

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

	Fiscal 2005		Fiscal 2004		Fiscal 2003
	52 weeks ended Jan. 28, 2006		52 weeks ended Jan. 29, 2005		52 weeks ended Jan. 31, 2004
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales	64.1		66.2		65.3
Gross profit	35.9		33.8		34.7
Selling, general and administrative expenses	35.2		32.6		32.3
Depreciation expense	1.2		1.0		0.9
Interest expense	0.3		0.3		0.5
Income (loss) before income taxes	(0.8	)	(0.1	)	1.0
Income tax expense (benefit)	(0.4	)	(0.1	)	0.4
Net income (loss)	(0.4	)%	—	%	0.6	%
Number of stores open at end of period	188		184		177

52 Weeks Ended January 28, 2006 (Fiscal 2005) Compared to 52 Weeks Ended January 29, 2005 (Fiscal 2004)

Net Sales.    Net sales increased $2,983 or 1.3%, to $233,131 in Fiscal 2005 from $230,148 in Fiscal 2004. The increase in net sales can be attributed to store count as the weighted average number of stores open in Fiscal 2005 was 186 compared to 180 in Fiscal 2004. The increase in store count was partially offset by a 1.1% decrease in comparable store sales. Comparable store sales are defined as sales from stores open for at lease one full year. The decrease in comparable store sales is a result of a highly competitive retail environment. We experienced declines in our customer count which are partially offset by higher average ticket amounts. We are encouraged by comparable sales performance in our basic party and balloon categories as well as the improving trends of our card category; however, we experienced softness in the other sales categories.

Gross Profit.    Cost of Sales includes merchandise, distribution and occupancy costs. Gross profit increased $5,990 or 7.7% to $83,753 in Fiscal 2005 compared to $77,763 in Fiscal 2004. As a percentage of net sales, gross profit was 35.9% in Fiscal 2005 compared to 33.8% in Fiscal 2004. Gross profit in Fiscal 2004 was adversely affected by a $4,415 inventory write-down related to the new greeting card program. In Fiscal 2005 we managed our merchandise margins effectively and continued to leverage our freight and distribution costs. Gains in merchandise margins and freight and distribution costs were partially offset against higher store occupancy costs. We saw occupancy costs increase $1,710 or a 5.6% as we opened new stores and extended lease terms for stores coming to the end of their lease term. We experienced higher occupancy costs on these renewals due to market rates in real estate. Gross profit as a percent of net sales, excluding store occupancy costs in both years and the greeting card inventory write-downs increased 90 basis points from Fiscal 2004 to Fiscal 2005.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased $6,900 or 9.2%, to $81,974 in Fiscal 2005 from $75,074 in Fiscal 2004. Contributing factors to the increase are as follows:

Ÿ Store related expenses, including payroll related items, store operating expenses and pre-open expenses, increased $3,623. Part of the increase can be attributed to a higher store count coupled with costs surrounding the maintenance of an aging store base. Also, higher energy prices have translated to higher operating costs. Additionally, we invested in store labor to improve customer service, most notably during our Halloween selling season.

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Ÿ Net advertising expense increased $138 to $9,580, (advertising expense net of advertising allowances received from our vendors). In Fiscal 2005 we recorded $455 in advertising allowances as a reduction to advertising expense compared to $668 in Fiscal 2004. Gross advertising expense increased as we attempted to drive sales in a highly competitive retail environment. In Fiscal 2005, we made an investment in more direct mail advertising which is more expensive than traditional circular advertising and we also invested for the first time in internet advertising.

Ÿ Other corporate expenses increased $3,139 over Fiscal 2004. We made a significant investment in eCommerce, human resource and training personnel, which has translated to higher payroll costs. Other corporate expenses in Fiscal 2005 included the following: $500 reserved for pending employment practices matter, $350 related to severance costs of the departure of the Chief Financial Officer, $240, net of reserves established in prior years, relating to a dispute settlement with a former freight vendor, and a $200 impairment charge on fixed assets at underperforming stores. Additionally, we have experienced increases in professional fees, insurance costs and corporate governance related expenses.

Depreciation Expense.    Depreciation Expense was $2,832 in Fiscal 2005 compared to $2,406 in Fiscal 2004. The increase is attributable to fixed asset additions for new stores openings and investment in corporate infrastructure.

Interest Expense.    Interest expense was $804 in Fiscal 2005 compared to $742 in Fiscal 2004. This increase is the result of higher levels of borrowing due to fixed assets and inventory purchases related to new stores and the replenishment of card inventory. Additionally, the borrowings were at higher interest rates compared to Fiscal 2004.

Income Tax Expense (Benefit).    We recognized income tax benefit of $854 in Fiscal 2005 compared to income tax benefit of $103 in Fiscal 2004. The amounts are a function of pre-tax income (loss) levels. Until the benefits of our net operating loss carry forwards are fully utilized, we do not expect to pay federal income tax.

52 Weeks Ended January 29, 2005 (Fiscal 2004) Compared to 52 Weeks Ended January 31, 2004

(Fiscal 2003)

Net Sales.    Net sales increased $7,513, or 3.4%, to $230,148 in Fiscal 2004 from $222,635 in Fiscal 2003. Increase in net sales is attributable to the increased number of stores. Comparable store sales which are defined as sales from those stores open for at least one full year increased 0.3% over Fiscal 2003. Positive comparable sales in our balloon, candy and basic party categories were offset by decreases in other categories. Declines in sales were attributable to a highly competitive retail environment.

Gross Profit.    Cost of sales includes merchandise, distribution and occupancy costs. Gross profit increased $500, to $77,763 in Fiscal 2004 from $77,263 in Fiscal 2003. As a percentage of net sales, gross profit was 33.8% in Fiscal 2004 as compared to 34.7% in Fiscal 2003. Included in Fiscal 2004 cost of sales is the $4,415 write-down of greeting card inventory related to the new program, which is planned to roll out in May 2005. With the exception of the greeting card write-down, we were successful in managing merchandise margins by reducing markdown activity and by obtaining a higher mark on percentage on goods available for sale. Additionally, we continue to leverage our freight and distribution costs. As a percentage of sales, freight and distribution costs improved 0.4% from Fiscal 2003. Store occupancy costs increased $1,710 or 5.9% primarily as a result of additional stores.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses include store payroll, advertising, and other store operating and corporate administrative expenses. Selling, general and administrative expenses increased $3,223 or 4.5%, to $75,074 in Fiscal 2004 from $71,851 in Fiscal 2003. Stores related expenses increased $2,692 or 6.0% as a function of operating additional stores while net advertising expenses decreased $773 or 7.6% as we leverage our advertising distribution while opening new stores in existing markets. Other corporate administrative expenses increased $1,305 or 7.9% because of rising payroll and

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insurance costs, professional fees and other corporate governance costs. As a percentage of net sales, selling, general and administrative expenses increased to 32.6% in Fiscal 2004 from 32.3% in Fiscal 2003.

Depreciation Expense.    Depreciation Expense was $2,406 in Fiscal 2004 compared to $1,957 in Fiscal 2003. The increase is attributable to fixed asset additions primarily related to new store openings and remodels.

Reorganization Items.    The $93 of reorganization items represents a reversal of estimated costs accrued which were associated with our emergence from bankruptcy in Fiscal 2002. We do not anticipate any significant reorganization costs in the future.

Interest Expense.    Interest expense was $742 in Fiscal 2004 compared to $1,182 in Fiscal 2003. This decrease resulted from a lower effective interest rate coupled with lower average borrowings as we continue to positively manage our working capital.

Income Tax Expense (Benefit).    We recognized income tax benefit of $103 in Fiscal 2004 compared to income tax expense of $911 in Fiscal 2003. The tax benefit of $103 was a function of our pre-tax loss position. Tax expenses in Fiscal 2003 represent approximately 40% of pre-tax income (loss) for the period described. Until the benefits of our net operating loss carry forwards are fully utilized, we do expect to pay federal income tax.

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 under our credit facility.

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

	Fiscal 2005			Fiscal 2004
Cash flows from Operating activities	$	(765	)	$	4,790
Cash flows from Investing activities	$	(5,115	)	$	(3,025	)
Cash flows from Financing activities	$	5,888		$	(1,756	)

On January 28, 2006, our working capital was $10,690. Net cash flows from operating activities in Fiscal 2005 were ($765) compared to $4,790 during Fiscal 2004. The decrease in cash flows from operating activities can be attributed to performance in a difficult retail environment and to a significant increase in inventory as we replenished our greeting card inventory, invested in Halloween inventory and opened new stores. These factors were offset by increases in accounts payable as we continue to work with our vendor community in obtaining improved payable terms.

Net cash flows from investing activities was ($5,115) in Fiscal 2005 compared to ($3,025) in Fiscal 2004. Fiscal 2005’s net cash flows from investing activities were primarily for capital expenditures for store furniture & fixtures, leasehold improvements, computer equipment including the E3^® Replenishment System, and warehouse equipment for the distribution center. Additionally, we paid approximately $1,200 for furniture, fixtures and leasehold improvements relating to the new store openings and remodels performed during the year. In Fiscal 2006, we plan to spend $4,875 on capital expenditures which we expect to fund with cash from operations.

Net cash flows from financing activities in Fiscal 2005 were $5,888 compared to ($1,756) in Fiscal 2004. The financing amounts are attributable to the level of borrowings and repayments.

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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, at January 28, 2006 provided $30,000 (including $10,000 for letters of credit) to fund working capital needs and for general corporate purposes. We entered into a second amendment to the loan agreement on October 7, 2005. The second amendment, among other things, extended the maturity date to October 31, 2008, reduced the interest rate on LIBOR rate loans, provides for an increase in the maximum revolver limit from $30,000 up to $45,000 (at our request and subject to Wells Fargo Retail Finance, LLC’s agreement), revised the minimum operating covenants and provides for prepayment premiums based on prepayment date and maximum revolver amount. Borrowings under the facility are limited by a percentage of inventory levels. As of February 16, 2006 we increased our line of credit limit to $35,000. At April 14, 2006, the interest rate on our borrowings was approximately 6.41%. Borrowings under the Loan Agreement are secured by substantially all of our assets. Certain restrictive covenants apply, including achievement of specified operating results and limitations on the incurrence of additional liens and indebtedness, capital expenditures, asset sales and payment of dividends, all of which have been met as of January 28, 2006.

As of January 28, 2006, we had $19,532 in borrowings outstanding under the Loan Agreement and we utilized approximately $2,400 to issue letters of credit. We had approximately $4,200 of borrowing availability at January 28, 2006. The weighted average interest rate on borrowings for Fiscal 2005 was 6.53% As of April 14, 2006, we had $15,865 in borrowings outstanding under the Loan Agreement, utilized approximately $1,800 to issue letters of credit and had $10,397 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

As discussed in Note 4 “Lease Commitments” in the Notes to the Consolidated Financial Statements, 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.

The approximate cost of fixed assets held under capital leases included in fixed assets was $1,061 at January 28, 2006 and January 29, 2005. Accumulated depreciation related to such fixed assets was approximately $805 and $611 at January 28, 2006 and January 29, 2005, respectively. Fixed assets held under capital leases consist primarily of technology, office and warehouse equipment.

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

	Payments due by Period
Contractual Obligations	Total		Less Than One Year		1-3 Years		3-5 Years		More than 5 Years
(in millions)
Debt & Capital Leases (*)	$	19.5	$	19.5	$	—	$	—	$	—
Operating Leases (**)		116.4		29.6		41.5		21.8		23.5
Inventory Purchase Commitments (including open purchase orders)		12.9		11.3		1.6		.		—
Total	$	148.8	$	60.4	$	43.1	$	21.8	$	23.5

(*) Interest payments are excluded from the total.

(**) Payments to the landlord covering taxes, maintenance, other common area maintenance items and contingent rental amounts for stores are excluded from the total. Amounts expensed for these items during Fiscal 2005, Fiscal 2004 and Fiscal 2003 were $7.9 million, $7.7 million and $7.5 million, respectively.

Off-Balance Sheet Arrangements

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

Seasonality

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

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We are subject to market risks from changes in interest rates. As of January 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% increase to the average interest rate under the credit facilities applied to the average outstanding balance during the twelve months ended January 28, 2006 and twelve months ended January 29, 2005 would not have had a material impact on our financial position or results of operations.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is submitted as a separate section of this Report commencing on page F-1 and is incorporated by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

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ITEM 9A.    CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (the “SEC”) rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief 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 required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our President & Chief Executive Officer and Vice President, Controller & 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 and Chief Accounting Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended January 28, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

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 we 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 we 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 EEOC and other federal and state governmental entities governing employees and the workplace. In one of these 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 were not in compliance with the rules and regulations of these governmental entities could result in the award of damages and/or equitable remedies. Although the outcome cannot be predicted with certainty, we have recorded a $500 reserve with respect to these pending matters.

As of the date of this Annual Report on Form 10-K, we are not aware of any other material existing or threatening litigation to which we are or may be a party.

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PART III

Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, portions of the information required by Part III of Form 10-K are incorporated by reference from our Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2006 Annual Meeting of Stockholders (the Proxy Statement”).

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning directors, including our audit committee financial expert, appears in our Proxy Statement under “Election of Directors.” This portion of the Proxy Statement is incorporated herein by reference.

Information concerning Executive Officers appears in our Proxy Statement under “Management.” This portion of the Proxy Statement is incorporated herein by reference.

Information concerning Section 16(a) beneficial ownership reporting compliance appears in our Proxy Statement under “Security Ownership of Certain Beneficial Owners and Management.” This portion of the Proxy Statement is incorporated herein by reference.

We have adopted the Standards of Business Conduct, a code of ethics with which every person who works for us is expected to comply. For anyone that would like to receive a copy of our Standards of Business Conduct please contact our Corporate Secretary at: Factory Card & Party Outlet Corp., 2727 Diehl Road, Naperville, Illinois 60563. If any substantive amendments are made to the Standards of Business Conduct or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive Officer or Chief Accounting Officer, we will disclose the nature of such amendment or waiver in a report on Form 8-K.

ITEM 11.    EXECUTIVE COMPENSATION

Information concerning executive compensation appears in our Proxy Statement under “Executive Compensation and Related Information.” This portion of the Proxy Statement is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information concerning the security ownership of certain beneficial owners and management and related stockholder matters appears on our Proxy Statement under “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.” This portion of the Proxy Statement is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information appearing in our Proxy Statement under the heading “Certain Relationships and Related Transactions” is incorporated herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

Information concerning principal accounting fees and services and the audit committee’s pre-approval policies and procedures appear in our Proxy Statement under the heading “Fees Paid to Independent Auditors for Fiscal 2005 and 2004” and is incorporated herein by reference.

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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) List of Documents filed as part of this Report on Form 10-K.

1. The following financial statements are filed as a separate section of this Report commencing on page F-1.

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets as of January 28, 2006 and January 29, 2005.

Consolidated Statements of Operations for the 52 weeks ended January 28, 2006, the 52 weeks ended January 29, 2005 and the 52 weeks ended January 31, 2004.

Consolidated Statements of Stockholders’ Equity for the 52 weeks ended January 28, 2006, the 52 weeks ended January 29, 2005 and the 52 weeks ended January 31, 2004.

Consolidated Statements of Cash Flows for the 52 weeks ended January 28, 2006, the 52 weeks ended January 29, 2005 and the 52 weeks ended January 31, 2004.

Notes to Consolidated Financial Statements.

2. Financial Statement Schedules.

The following financial statement schedule is filed as a separate section of this Report commencing on page S-1.

Condensed Financial Information of Factory Card & Party Outlet Corp.—Balance Sheets as of January 28, 2006 and January 29, 2005.

Condensed Financial Information of Factory Card & Party Outlet Corp.—Statements of Operations for the 52 weeks ended January 28, 2006, the 52 weeks ended January 29, 2005 and the 52 weeks ended January 31, 2004.

Condensed Financial Information of Factory Card & Party Outlet Corp.—Statements of Cash Flows for the 52 weeks ended January 28, 2006, the 52 weeks ended January 29, 2005 and the 52 weeks ended January 31, 2004.

Notes to Condensed Financial Information of Factory Card & Party Outlet Corp.

3. Exhibits.

The exhibits listed in the accompanying Index to Exhibits, which are identified by numbers corresponding to the Exhibit Table of Item 601 of Regulation S-K, are filed with or incorporated by reference as part of this Annual Report on Form 10-K. Unless otherwise indicated, all exhibits are part of Commission File Number 000-21859.

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Exhibit No.		Description
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.
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, 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.

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Exhibit No.		Description
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.
10.18	(11)*	Factory Card & Party Outlet Corp., Form of Stock Option Agreement—Equity Incentive Plan.
10.19	(11)*	Factory Card & Party Outlet Corp., Form of Restricted Stock Agreement—Equity Incentive Plan.
10.20	(11)*	Factory Card & Party Outlet Corp., Summary of Incentive Bonus Agreements.
10.21	(11)*	Factory Card & Party Outlet Corp., Summary of Non-employee Director Compensation.
10.22	(11)*	Factory Card & Party Outlet Corp., Summary of Arrangements with Certain Executives.
10.23	(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.
10.24	(9)*	Waiver and Release of James D. Constantine, CFO, dated as of December 2, 2005.
10.25	(10)*	Amended Employment Agreement, dated as of December 9, 2005, between Factory Card Outlet of America, Ltd. and Timothy F. Gower.
10.26	(10)*	Amended Employment Agreement, dated as of December 9, 2005, between Factory Card Outlet of America, Ltd. and Gary W. Rada.
10.27	(10)*	Employment Agreement, dated as of December 9, 2005, between Factory Card Outlet of America, Ltd. and Jarett A. Misch.
10.28	(10)*	Amended and Restated Executive Severance Plan, dated as of December 9, 2005.
10.29	(11)*	Factory Card & Party Outlet, 2006 Management Incentive Plan.
10.30	**	Primary Supply and Consignment Agreement dated January 26, 2006 between Factory Card & Party Outlet Corp. and Amscan Holdings, Inc.
21		Subsidiaries of the Company.
23.1		Consent of Independent Registered Public Accounting Firm.
31.1		Chief Executive Officer Certification under Section 302 of the Sarbanes-Oxley Act of 2002.
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.

28

(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.

29

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.

FACTORY CARD & PARTY OUTLET CORP.
By:	/s/    GARY W. RADA
	Gary W. Rada President and Chief Executive Officer

Dated: April 17, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/    GARY W. RADA         Gary W. Rada	President and Chief Executive Officer	April 17, 2006
/s/    JARETT A. MISCH         Jarett A. Misch	Vice President, Controller and Chief Accounting Officer	April 17, 2006
/s/    TIMOTHY J. BENSON         Timothy J. Benson	Vice President, Treasurer	April 17, 2006
/s/    RICHARD E. GEORGE         Richard E. George	Non Executive Chairman of the Board	April 17, 2006
/s/    BEN EVANS         Ben Evans	Director	April 17, 2006
/s/    PETER M. HOLMES         Peter M. Holmes	Director	April 17, 2006
/s/    MARTIN MAND         Martin Mand	Director	April 17, 2006
/s/    PATRICK O’BRIEN         Patrick O’Brien	Director	April 17, 2006
/s/    ROBERT S. SANDLER         Robert S. Sandler	Director	April 17, 2006

30

INDEX TO FINANCIAL STATEMENTS

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of January 28, 2006 and January 29, 2005	F-3
Consolidated Statements of Operations for the 52 weeks ended January 28, 2006, the 52 weeks ended January 29, 2005 and the 52 weeks ended January 31, 2004	F-4
Consolidated Statements of Stockholders’ Equity for the 52 weeks ended January 28, 2006, the 52 weeks ended January 29, 2005 and the 52 weeks ended January 31, 2004	F-5
Consolidated Statements of Cash Flows for the 52 weeks ended January 28, 2006, the 52 weeks ended January 29, 2005 and the 52 weeks ended January 31, 2004	F-6
Notes to Consolidated Financial Statements	F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Factory Card & Party Outlet Corp.

Naperville, Illinois

We have audited the accompanying consolidated balance sheets of Factory Card & Party Outlet Corp. and subsidiary (“the Company”) as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the 52 weeks ended January 28, 2006, January 29, 2005 and January 31, 2004. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Factory Card & Party Outlet Corp. and subsidiary as of January 28, 2006 and January 29, 2005, and the results of their operations and their cash flows for the 52 weeks ended January 28, 2006, January 29, 2005 and January 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

April 17, 2006

F-2

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

	January 28, 2006			January 29, 2005
A S S E T S
Current assets:
Cash	$	196		$	188
Merchandise inventories, net		49,552			43,653
Prepaid expenses and other		4,606			4,577
Deferred tax asset, net		3,728			5,527
Total current assets		58,082			53,945
Fixed assets, net		10,247			8,164
Other assets		104			170
Deferred tax asset, net		8,869			5,991
Total assets	$	77,302		$	68,270
L I A B I L I T I E S    A N D    S T O C K H O L D E R S’     E Q U I T Y
Current liabilities:
Line of credit	$	19,532		$	12,032
Accounts payable		19,266			16,245
Accrued expenses		8,579			7,564
Current portion of long term debt and capital lease obligations		15			1,646
Total current liabilities		47,392			37,487
Long term debt and capital lease obligations		—			15
Deferred rent liabilities		1,606			1,895
Total liabilities		48,998			39,397
Stockholders’ equity:
Common stock, $.01 par value. Authorized 10,000,000 shares; 3,138,252 and 3,109,041 shares issued and outstanding at January 28, 2006 and January 29, 2005, respectively		31			31
Unearned restricted stock awards		(142	)		(148	)
Additional paid-in capital		25,714			25,286
Accumulated earnings		2,701			3,704
Total stockholders’ equity		28,304			28,873
Total liabilities and stockholders’ equity	$	77,302		$	68,270

See accompanying notes to consolidated financial statements.

F-3

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollar amounts in thousands, except per share data)

	For the 52 weeks ended January 28, 2006			For the 52 weeks ended January 29, 2005			For the 52 weeks ended January 31, 2004
Net sales	$	233,131		$	230,148		$	222,635
Cost of sales		149,145			147,970			145,372
Cost of sales-greeting card inventory write-down		233			4,415			—
Gross profit		83,753			77,763			77,263
Selling, general and administrative expenses		81,974			75,074			71,851
Depreciation expense		2,832			2,406			1,957
Reorganization items		—			(93	)		—
Other income		—			(63	)		—
Interest expense		804			742			1,182
Income (loss) before income taxes		(1,857	)		(303	)		2,273
Income tax expense (benefit)		(854	)		(103	)		911
Net income (loss)	$	(1,003	)	$	(200	)	$	1,362
Net income (loss) per share—basic	$	(0.33	)	$	(0.07	)	$	0.47
Weighted average shares outstanding—basic		3,074,034			3,017,284			2,919,115
Net income (loss) per share—diluted	$	(0.33	)	$	(0.07	)	$	0.40
Weighted average shares outstanding—diluted		3,074,034			3,017,284			3,426,179

See accompanying notes to consolidated financial statements.

F-4

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollar amounts in thousands)

	Common Stock				Additional Paid-in Capital			Unearned Restricted Stock Awards			Accumulated Earnings			Total Stockholders’ Equity
	Shares		Amount
Balance at February 1, 2003	3,021,820		$	30	$	13,028		$	(446	)	$	2,542		$	15,154
Adjustment to new shares issued	3,076			—		—			—			—			—
Right certificates	2,286			—		—			—			—			—
Exercise of stock options and stock warrants	57,650			1		337			—			—			338
Compensation cost—restricted stock awards	—			—		—			131			—			131
Forfeited restricted stock	(10,750	)		—		(40	)		40			—			—
Utilization of pre bankruptcy net operating losses	—			—		962			—			—			962
Net income	—			—		—			—			1,362			1,362
Balance at January 31, 2004	3,074,082		$	31	$	14,287		$	(275	)	$	3,904		$	17,947
Right certificates	708			—		—			—			—			—
Exercise of stock options and stock warrants	34,251			—		148			—			—			148
Compensation cost—restricted stock awards	—			—		—			127			—			127
Recognition of pre bankruptcy deferred tax assets	—			—		10,851			—			—			10,851
Net loss	—			—		—			—			(200	)		(200	)
Balance at January 29, 2005	3,109,041		$	31	$	25,286		$	(148	)	$	3,704		$	28,873
Right certificates	186			—		—			—			—			—
Exercise of stock options and stock warrants	8,525			—		34			—			—			34
Compensation cost—restricted stock awards	—			—		—			175			—			175
Forfeited Restricted Stock	(1,000	)		—		(4	)		4			—			—
Issuance of Restricted Stock	21,500			—		173			(173	)		—			—
Tax benefit related to non-qualified stock options exercised						225									225
Net loss	—			—		—			—			(1,003	)		(1,003	)
Balance at January 28, 2006	3,138,252		$	31	$	25,714		$	(142	)	$	2,701		$	28,304

See accompanying notes to consolidated financial statements.

F-5

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

	For the 52 weeks ended January 28, 2006			For the 52 weeks ended January 29, 2005			For the 52 weeks ended January 31, 2004
Cash flows from operating activities:
Net income (loss)	$	(1,003	)	$	(200	)	$	1,362
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Impairment charge on fixed assets		200			—			—
Depreciation expense		2,832			2,406			1,957
Deferred taxes		(854	)		(240	)		911
Amortization of deferred financing costs and unearned compensation		202			199			331
Non cash portion of reorganization items		—			93			—
Loss on disposal of fixed assets		55			6			—
Changes in assets and liabilities:
Merchandise inventories, net		(5,899	)		2,014			2,523
Prepaid expenses and other assets		10			(471	)		(71	)
Accounts payable		2,966			316			2,964
Accrued expenses		1,015			497			509
Deferred rent obligation		(289	)		170			126
Net cash flows from operating activities		(765	)		4,790			10,612
Net cash flows from investing activities—purchase of fixed assets		(5,115	)		(3,025	)		(2,708	)
Cash flows from financing activities:
Borrowings—line of credit		252,268			244,348			227,024
Repayment—line of credit		(244,768	)		(242,079	)		(234,789	)
Payment of long term obligations		(1,662	)		(4,313	)		(440	)
Increase (decrease) in long term debt		16			160			(54	)
Discount on payment of trade conversion and extended creditor notes		—			(20	)		—
Cash received from exercise of stock options and warrants		34			148			338
Net cash flows from financing activities		5,888			(1,756	)		(7,921	)
Net increase (decrease) in cash		8			9			(17	)
Cash at beginning of period		188			179			196
Cash at end of period	$	196		$	188		$	179
Supplemental cash flow information:
Interest paid	$	891		$	812		$	796
Alternative minimum taxes paid		37			—			45
Supplemental non cash information:
Unearned restricted stock awards		142			148			275

See accompanying notes to consolidated financial statements.

F-6

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(1)    Business and Basis of Presentation

Basis of Presentation and Organization

As of January 28, 2006, Factory Card & Party Outlet Corp. and its subsidiary, Factory Card Outlet of America Ltd., operated 188 company-owned retail stores in 20 states, offering a wide selection of party supplies, greeting cards, giftwrap, balloons, everyday and seasonal merchandise, and other special occasion merchandise. The consolidated financial statements include the accounts of Factory Card & Party Outlet Corp. and its wholly owned subsidiary, Factory Card Outlet of America Ltd. All intercompany balances and transactions have been eliminated in consolidation.

Use of 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.

Fiscal Years

The Company’s fiscal year ends on the Saturday closest to January 31st. The following table describes the periods presented in the financial statements and related notes thereto:

Period:	Referred to as:
Results for the 52 weeks ended January 28, 2006—	“Fiscal 2005”
Results for the 52 weeks ended January 29, 2005—	“Fiscal 2004”
Results for the 52 weeks ended January 31, 2004—	“Fiscal 2003”

Revenue Recognition

Revenues include the selling price of party goods sold, net of returns and discounts, and are recognized at the point of sale. The Company estimates returns based upon historical return rates and such amounts have not been significant.

While the Company’s product offerings can be differentiated among the various categories (i.e. cards, candy, giftwrap, etc.), the Company deems the products to be similar in nature and therefore does not present the categories as “segments” as per the 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”).

Merchandise Inventories

Merchandise inventories are stated at the lower of average cost or estimated net realizable value utilizing the retail method.

At January 28, 2006 and January 29, 2005, the Company had reserves of $1,666, and $5,893 respectively, for certain merchandise, which is to be discontinued from the ongoing inventory assortment, as well as inventory with excess quantities on hand, and certain seasonal inventory remaining from past holidays.

F-7

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Cooperative Advertising, Markdown Reimbursement and Placement Fees

The Company receives vendor allowances principally as a result of meeting defined purchase levels or promoting vendors’ products. Those received as a result of purchase levels are accrued as a reduction of merchandise purchase price and result in a reduction of cost of sales as the merchandise is sold. Those received for promoting vendors’ products are offset against specific advertising expense relating to the promotion and result in a reduction of selling, general and administrative expenses. Markdown allowances reduce cost of goods sold in the period the related markdown is taken. Placement allowances are offset against specific, incremental expenses incurred in getting the product ready for sale. The Company’s accounting policies relating to cash received from vendors are consistent with the conclusions reached by Emerging Issues Task Force (“EITF”) 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” which was issued in September 2002.

Long-Lived Assets

Fixed asset additions are recorded at cost. Depreciation is computed on a straight-line basis over three to ten years for fixtures and equipment and over the initial term of the lease for leasehold improvements. Depreciation related to capital leases is also included in depreciation.

The Company evaluates 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, the Company estimates 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 the fair market value of the asset is recognized. The fair market value of assets is determined primarily by market prices of similar assets at the stores.

Due to missing internal sales targets and experiencing negative comparable store sales in the current fiscal year, the Company evaluated its long-lived assets. Based on current and projected performance, the Company recorded $200 in fixed asset impairments in Fiscal 2005. There were no fixed asset impairments recognized in Fiscal 2004 or Fiscal 2003. After adjusting for the impairment charge, the Company believes the carrying value of the assets is appropriate.

The Company capitalizes software in accordance with Statement of Position (“SOP”) 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). Capitalized software is made up of purchased software and the respective licenses, including the many components of JDA, administrative systems and eCommerce software. The software is depreciated over three years.

Self-Insured Liabilities

In Fiscal 2003, the Company switched from a guaranteed cost policy for workers compensation insurance to a self-insurance policy with stop-loss limitations. Self-insurance liabilities are recorded based upon the expected development of claims less the amount of benefit payments made on such claims.

Income Taxes

The Company files a consolidated federal income tax return. In accordance with SFAS No. 109 “Accounting for Income Taxes,” 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

F-8

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

Deferred Rent Liabilities

Certain operating leases provide for scheduled increases in base rentals over their terms. For these leases, the Company recognizes the total rental amounts expected to be paid over the lease terms (starting at date of possession) on a straight-line basis and, accordingly, has established corresponding deferred rent liabilities for the differences between the amounts recognized and the amounts paid. The Company also receives certain lease incentives. These allowances have been deferred and are amortized on a straight-line basis over the initial term of a lease as a reduction of rent expense.

Advertising Expenses

Advertising costs are made up of print advertising which is expensed on the “drop date” or the date the ads are distributed, and other media advertising that is expensed as incurred. Advertising costs, net of cooperative advertising payments received, were $9,580, $9,442 and $10,215 for Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively. Advertising cooperative payments received were $455, $668 and $470 for Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively.

Store Pre-opening Expenses

The Company expenses store pre-opening expenses as incurred. These expenses include labor, advertising and supply costs incurred up to the store’s grand opening.

Earnings 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 per share–diluted assumes, in addition to the above, the effect of potentially dilutive securities.

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

	Fiscal 2005			Fiscal 2004			Fiscal 2003
Net income (loss)	$	(1,003	)	$	(200	)	$	1,362
Earnings (loss) per share—basic	$	(0.33	)	$	(0.07	)	$	0.47
Earnings (loss) per share—diluted	$	(0.33	)	$	(0.07	)	$	0.40
Weighted average common shares outstanding		3,074,034			3,017,284			2,919,115
Dilutive effect of stock options and warrants		—			—			507,064
Weighted average common and common equivalent shares outstanding		3,074,034			3,017,284			3,426,179

The dilutive impact of stock options and warrants was calculated using the treasury method. 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. Therefore, if the Company reports net income, its earnings per share would be lower on a diluted basis. 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 and warrants are considered anti-dilutive and thus excluded from the earnings per share calculation. Therefore, the Company’s net loss per share for Fiscal 2005 is the same amount on a basic and diluted basis, respectively. Had the Company reported net income in

F-9

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fiscal 2005, the number of diluted shares would have increased by 353,267 shares. Additionally, options to purchase 175,050 common shares at prices ranging from $9.31 to $22.40 per share and warrants to purchase 60,150 common shares at a price of $17.00 per share were outstanding as of January 28, 2006 but were not included in the calculation of diluted earnings per share in Fiscal 2005 because the strike price was greater than average market price per share during the period.

In Fiscal 2004, the Company also reported a net loss for the period; therefore, the number of shares outstanding used to calculate basic and diluted earnings per share is the same. Had the Company reported net income in Fiscal 2004, the diluted number of shares would have increased by 510,474 shares. Additionally, options to purchase 176,350 common shares at prices ranging from $11.00 to $22.40 per share and warrants to purchase 60,152 common shares at a price of $17.00 per share were outstanding as of January 29, 2005 but were not included in the calculation of diluted earnings per share in Fiscal 2004 because the strike price was greater than the average market price per share during the period.

In Fiscal 2003, options to purchase 2,800 common shares at prices ranging from $10.50 to $22.40 per share and warrants to purchase 60,152 common shares at a price of $17.00 per share were outstanding as of January 31, 2004 but were not included in the calculation of diluted earnings per share in Fiscal 2003 because the strike price was greater than the average market price per share during the period.

Stock-Based Compensation

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

	Fiscal 2005			Fiscal 2004			Fiscal 2003
Net income (loss), as reported	$	(1,003	)	$	(200	)	$	1,362
Deduct: Total stock-based employee compensation expense determined under fair value basis for all awards, net of related tax effects		908			566			345
Pro forma net income (loss)	$	(1,911	)	$	(766	)	$	1,017
Earnings (loss) per share:
Basic—as reported	$	(0.33	)	$	(0.07	)	$	0.47
Basic—pro forma	$	(0.62	)	$	(0.25	)	$	0.35
Diluted—as reported	$	(0.33	)	$	(0.07	)	$	0.40
Diluted—pro forma	$	(0.62	)	$	(0.25	)	$	0.30

The per share weighted average fair value of stock options granted during Fiscal 2005 was estimated using the Black-Scholes Options-Pricing model with the following weighted average assumptions: expected dividend rate 0.0%, risk free interest rate of 4.0% to 4.5%, volatility of 50% and an expected life of 6 years. Assumptions used in Fiscal 2004 were: expected dividend rate 0.0%, risk free interest rate of 3.390% to 4.730%, volatility of 50% and an expected life of approximately 10 years. Assumptions used in Fiscal 2003 were: expected dividend rate 0.0%, risk free interest rate of 3.120% to 4.360%, volatility of 50% and an expected life of approximately 10 years.

F-10

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Warrants

On April 9, 2002, the Company issued four series of Warrants, Series A through D, to tendering holders of canceled common stock, granting such holders the right to purchase an aggregate of 306,934 additional shares of Common Stock. The Series A Warrants were exercisable any time prior to April 9, 2006 at a price of $5.50 per share. The Series B Warrants are exercisable at any time prior to April 9, 2008 at a price of $8.00 per share. The Series C Warrants are exercisable any time prior to April 9, 2010 at a price of $8.00 per share. The Series D Warrants are exercisable at any time prior to April 9, 2010 at a price of $17.00 per share. At January 28, 2006, the total number of warrants outstanding was 264,438.

Comprehensive Income

Comprehensive income equaled net income for the periods presented as the Company does not have any currency translation adjustments, minimum pension liability adjustments or SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” adjustments.

(2)    Fixed Assets

The components of fixed assets, net are as follows:

	January 28, 2006			January 29, 2005
Furniture and equipment	$	12,445		$	8,753
Leasehold improvements		5,893			5,273
Total fixed assets		18,338			14,026
Less accumulated depreciation and amortization		(8,091	)		(5,862	)
Fixed assets, net	$	10,247		$	8,164

In Fiscal 2005, Fiscal 2004, and Fiscal 2003 depreciation expense was $2,832, $2,406 and $1,957, respectively.

(3)    Line of Credit and Capital Lease Obligations

The Company is party to a secured financing facility, dated April 8, 2002, with Wells Fargo Retail Finance, LLC (as amended, the “Loan Agreement”). The Loan Agreement, which is a line of credit, as of January 28, 2006 provides $30,000 (including $10,000 for letters of credit) to fund working capital needs and for general corporate purposes. A second amendment was entered into on October 7, 2005. The second amendment among other things, extended the maturity date to October 31, 2008, reduced the interest rate on LIBOR rate loans, provides for a potential increase in the maximum revolver limit from $30,000 up to $45,000 (at the Company’s request and subject to Wells Fargo Retail Finance, LLC’s agreement), revised the minimum operating covenants and provides for prepayment premiums of the maximum revolver amount. As of February 16, 2006, the Company increased its line of credit limit to $35,000.

Borrowings under the facility are limited by a percentage of inventory levels. At January 28, 2006, the interest rate on the Company’s borrowings was 6.30%. Borrowings under the Loan Agreement are secured by substantially all of the Company’s assets. Certain restrictive covenants apply, including achievement of specified operating results and limitations on the incurrence of additional liens and indebtedness, capital expenditures, asset sales and payment of dividends, all of which have been met as of January 28, 2006 and January 29, 2005.

F-11

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At January 28, 2006 and January 29, 2005, the Company had outstanding borrowings under the Loan Agreement of $19,532 and $12,032, respectively. Of the amounts outstanding, letters of credit were approximately $2,400 and $1,700 for Fiscal 2005 and Fiscal 2004, respectively.

Due to the fact there are certain restrictions on the Company’s assets and the Company has guaranteed the Loan Agreement between its subsidiary and Wells Fargo Retail Finance, LLC, the Company is required to file Condensed Financial Information of Factory Card & Party Outlet Corp. on pages S-1 through S-5.

The Company’s ability to make scheduled payments of principal, to pay the interest on, 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 beyond the Company’s control. Based on the 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 to meet anticipated requirements for capital expenditures, working capital, interest payments and scheduled principal payments for the next twelve months. There can be no assurance that the business will continue to generate sufficient cash flow from operations in the future to service 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 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.

The following table summarizes the components of the Line of Credit and Capital Lease Obligations at January 28, 2006 and January 29, 2005, including the current portion.

	January 28, 2006			January 29, 2005
Wells Fargo Retail Finance, LLC line of credit agreement	$	19,532		$	12,032
Discounted value of extended creditor payment		—			1,634
Capital leases		15			27
Sub total		19,547			13,693
Less current maturities		(19,547	)		(13,678	)
Total long term debt	$	—		$	15

(4)    Lease Commitments

The Company conducts all of its activities using leased premises. Store and office leases generally provide that real estate taxes, insurance, common area maintenance, and operating expenses are the Company’s obligations. Certain store leases also provide for contingent rentals based on sales in excess of specified minimums. Contingent rental expense / (income) was ($93) in Fiscal 2005, $186 for Fiscal 2004 and $209 for Fiscal 2003.

The approximate cost of fixed assets held under capital leases included in fixed assets was $1,061 at both January 28, 2006 and January 29, 2005. Accumulated depreciation related to such fixed assets was approximately $806 and $611 at January 28, 2006 and January 29, 2005, respectively. Fixed assets held under capital leases consist primarily of technology, office and warehouse equipment.

F-12

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following is a schedule of future lease payments for capital and operating leases with initial or remaining terms in excess of one year as of January 28, 2006.

	Capital Leases			Operating leases
Fiscal year:
2006	$	16		$	29,617
2007		—			25,038
2008		—			16,489
2009		—			12,584
Thereafter		—			32,680
Total payments		16		$	116,408
Less amount representing interest		(1	)
Present value of payments	$	15

Rent expense charged to operations under operating leases for Fiscal 2005, Fiscal 2004 and Fiscal 2003 was $27,695, $26,259 and $24,873, respectively.

(5)    Income Taxes

The provisions for income taxes consisted of the following:

	Current		Deferred			Valuation Allowance			Total
Fiscal 2005
Federal	$	—	$	(772	)	$	—		$	(772	)
State		—		(82	)		—			(82	)
	$	—	$	(854	)	$	—		$	(854	)
Fiscal 2004
Federal	$	129	$	(183	)	$	(37	)	$	(91	)
State		8		(20	)		—			(12	)
	$	137	$	(203	)	$	(37	)	$	(103	)
Fiscal 2003
Federal	$	3	$	815			—		$	818
State		—		93			—			93
	$	3	$	908			—		$	911

F-13

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Income tax expense (benefit) differs from the amounts computed by applying the federal income tax rate of 34% to income (loss) before income taxes as a result of the following:

	52 weeks ended January 28, 2006		52 weeks ended January 29, 2005		52 weeks ended January 31, 2004
Statutory federal rate	(34.0	)%	(34.0	)%	34.0	%
Increase (decrease) in income taxes resulting from:
Change in valuation allowance on post emergence deferred tax assets	—		(12.2	)	1.8
State and local income taxes, net of federal income taxes	(4.4	)	(2.5	)	4.1
Permanent items	2.3		15.7		0.2
Other, net	(9.9	)	(0.9	)	—
Effective income tax rate	(46.0	)%	(33.9	)%	40.1	%

Deferred income taxes reflect the net tax effect of operating loss and alternative minimum tax credit carry forwards along with the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:

	January 28, 2006		January 29, 2005
Deferred tax assets related to:
Alternative minimum tax credit carry forward	$	439	$	466
Deferred rent liabilities		623		731
Accrued expenses		1,304		1,107
Contingent note		—		702
Merchandise inventories		2,453		3,818
Fixed assets		1,206		1,242
Net operating loss carry forwards		6,606		3,621
Total deferred tax assets		12,631		11,687
Deferred tax liabilities		34		169
Deferred tax asset, net	$	12,597	$	11,518

In assessing the realizability of deferred tax assets, the Company considers whether or not it is more likely than not that some portion of the deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At January 28, 2006, the Company has determined that based upon the evidence that it is more likely than not that the remaining net deferred tax assets will be realized. As a result, the Company has not recorded a valuation allowance on its deferred tax assets as of January 28, 2006.

At January 28, 2006, the Company has net operating loss (“NOL”) carry forwards for federal and state tax purposes of approximately $17,000, which will expire from 2020 to 2026. In addition to the NOL carry forwards, the Company also has Alternative Minimum Tax carry forwards of $439, which have no expiration. The utilization of NOL carry forwards may be significantly limited by future events related to direct and/or indirect ownership changes of the Company.

F-14

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(6)    Employee Benefit Plans

2002 Stock Option Plan

As provided in the Plan of Reorganization, the Company adopted a stock option plan, which authorized the grant of up to 333,334 stock options to its employees. 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.

2002 Non Employee Stock Option Plan

The Company adopted a non-employee Stock Option Plan, which authorized the grant of up to 300,000 Common Stock options to non-employee members of the Board of Directors. 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.

2003 Equity Incentive Plan

The Company adopted the 2003 Equity Incentive Plan on January 27, 2003. Stockholders approved the plan on July 16, 2003. 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; restricted shares; deferred stock; dividend equivalents; performance units; performance shares; and other stock based awards.

All stock option activity is as follows:

	Number of Stock Options		Weighted Average Exercise Price
Outstanding—February 1, 2003	470,000		$	3.63
Granted	287,000			5.97
Exercised	(23,200	)		3.76
Forfeited	(31,650	)		4.22
Outstanding—January 31, 2004	702,150		$	4.55
Granted	178,000			11.87
Exercised	(26,897	)		4.00
Forfeited	(24,235	)		6.30
Outstanding—January 29, 2005	829,018		$	6.11
Granted	38,800			8.60
Exercised	(7,833	)		3.69
Forfeited	(20,468	)		7.32
Outstanding—January 28, 2006	839,517		$	6.22
Exercisable—January 28, 2006	693,730		$	6.30
Available for grant—January 28, 2006	214,387

F-15

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

	Options Outstanding				Options Exercisable
	Number Outstanding	Weighted- average remaining contractual life	Weighted- average exercise price		Number exercisable	Weighted- average exercise price
Range of Exercise Prices
January 28, 2006:
$2.65 to $8.30	664,467	6.0	$	4.69	519,214	$	4.38
9.31 to 12.44	172,250	7.3		11.87	171,716		11.88
17.55 to 22.40	2,800	7.8		20.36	2,800		20.36
$2.65 to $22.40	839,517	6.3	$	6.22	693,730	$	6.30

Restricted Stock Awards

In April 2002, the Company issued 150,000 shares of the new Common Stock to certain members of management, which vest ratably over a four-year period.

In June 2005, the Board of Directors approved a restricted 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.

In November 2005, the Board of Directors approved a restricted 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.

At the date of the grant, the market value of the restricted stock award is recorded in common stock and additional paid-in capital; an offsetting amount is recorded as a component of stockholders’ equity in unearned restricted stock awards. Compensation cost is included in results of operations over the vesting period. Expense relating to the vesting of restricted stock for the 52-weeks ended January 28, 2006, the 52-weeks ended January 29, 2005 and the 52-weeks ended January 31, 2004 was $175, $127 and $131, respectively.

Incentive Savings Plan

The Incentive Savings Plan (the “ISP Plan”) is a defined contribution plan sponsored by the Company for all eligible employees. Participants in the ISP Plan may elect to have compensation deferred by up to the maximum percentage allowable not to exceed the limits of Internal Revenue Code (“IRC”) Sections 401(k), 402(g), 404 and 415, as defined in the ISP Plan. Additional amendments were made to the ISP Plan January 31, 2005 which changed the eligibility requirements, set a participant maximum contribution of income at 50% of the employee’s pre-tax annual salary and allows for eligible participants age 50 years and over to defer an additional $4,000 to the ISP Plan. The Company makes discretionary matching contributions to the ISP Plan at the rate of 33% of the first 6% of the participant’s contribution. In Fiscal 2005, the Company’s discretionary matching contributions to the ISP Plan were $235 compared to $207 in Fiscal 2004 and $189 in Fiscal 2003. The ISP Plan also allows for a discretionary base contribution to be made by the Company only if the Company has current or accumulated net profits. No discretionary base contributions have been made by the Company to date.

Deferred Compensation Plan

In January 2003, the Company’s Board of Directors approved a Supplemental Incentive Savings Plan (the “Supplemental Plan”). The Supplemental Plan is intended to be an un-funded deferred compensation arrangement for a select group of management or highly compensated employees. The Supplemental Plan is

F-16

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

intended to restore eligible participants the benefits to which they would have been entitled under the Company’s ISP Plan but were limited because of Internal Revenue Code rules and regulations. Contributions to the plan for Fiscal 2005, Fiscal 2004 and Fiscal 2003 were $7, $15, and $10, respectively.

(7)    Fair Value of Financial Instruments

The Company’s financial instruments at January 28, 2006 and January 29, 2005 include accounts payable and debt. The Company has assumed that the carrying value of trade accounts payable approximates fair value because of the short period in which these liabilities are settled. The Company believes the carrying value of the debt approximates fair value due to the variable rate of interest on this instrument.

(8)    New Accounting Pronouncements

In October 2005, the FASB issued FASB Staff Position (“FSP”) No. 13-1 “Accounting for Rental Costs Incurred During the Construction Period” (“FSP FAS No. 13-1”) to give guidance to a lessee on determining whether rental costs associated with operating leases may be capitalized during the construction period. Specifically, FSP FAS No. 13-1 stipulates that such costs shall be (1) recognized as rental expense, (2) included in income from continuing operations and (3) allocated over the lease term according to the guidance in SFAS No. 13, “Accounting for Leases,” and FASB Technical bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent increases.” The guidance in FSP FAS No. 13-1 is effective for the first reporting period beginning after December 15, 2005. The Company will adopt FSP FAS No. 13-1 in the first fiscal quarter of fiscal 2006. The Company does not expect that FSP FAS No. 13-1 will have a material impact on the Company’s consolidated balance sheet, statements of operations or cash flows.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”) which provides additional guidance on conditional asset retirement obligations under FASB No. 143, and “Accounting for Asset Retirement Obligations”. This standard is effective for fiscal years ending after December 15, 2005. The Company has adopted FIN 47 as of January 28, 2006. Adoption of FIN 47 did not have a material impact on the Company’s consolidated balance sheet, statements of operations or cash flows.

In March 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS No.154 replaces Accounting Principles Board (APB) Opinion No. 20 “Accounting Changes” (“APB No. 20”) and FASB Statement No. 3. “Reporting Accounting Changes in Interim Financial Statements.” APB No. 20 allowed a change in accounting principles to be accounted for generally as a cumulative effect adjustment in the current year’s financial statements. SFAS No. 154 states the change be reported retrospectively and requires the following: (1) The cumulative effect of the change to the new accounting principle on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented. (2) An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial positions) for that period. (3) Financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company has adopted FAS No. 154 and has determined that it did not have a material impact on the Company’s consolidated balance sheet, statements of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock Based Compensation,” (“SFAS No. 123(R)”). SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and requires all companies to measure compensation cost for

F-17

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

share-based payments, including grants of employee stock options, at fair value and recognize the cost in the statements of operations over the service period of the award. Under SFAS No. 123(R), the pro-forma disclosure in the Notes to Financial Statements previously allowed by SFAS No. 123 will not be an acceptable alternative to recognition of expenses in the financial statements. The Company adopted SFAS No. 123(R) on January 29, 2006 using the modified prospective method.

Under the adoption of SFAS No. 123(R) the Company will be required to expense stock options over the vesting period in its statement of operations. In addition, the Company will need to recognize expense over the remaining vesting period associated with unvested options outstanding as of January 28, 2006. Based upon the stock options outstanding as of January 28, 2006, the stock based employee compensation expense, net of related tax effects, will be approximately $118 in Fiscal 2006. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than an operating cash flow as required under current literature. To the extent the Company experiences tax deductions in excess of recognized compensation costs, the statements of cash flows will show a decrease in net operating cash flows and an increase in net financing cash flows.

(9)    Related-party Transactions

Related-party transactions are those between the Company and shareholders with an ownership interest of greater than 5%. During Fiscal 2005, the Company did not have transactions with related parties (as defined). During Fiscal 2004 and 2003 there was one vendor that qualified as a related party. Purchases in Fiscal 2004 were $4,029 and amounts owed were $339 at January 29, 2005. Purchases in Fiscal 2003 were $3,063 and amounts owed were $106 at January 31, 2004.

(10)    Contingencies

The Company may be subject to certain legal proceedings and claims from time to time that are incidental to the ordinary course of business. When it has been determined that it is probable that the Company will be obligated to pay and the amount can be reasonably estimated a liability is recorded and if material disclosure of the related facts is made in the footnotes to the financial statements. If the Company determines that an obligation is reasonably possible and, if material, the Company will 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.

From time to time the Company is 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 these 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 was not in compliance with the rules and regulations of these governmental entities could result in the award of damages and/or equitable remedies. Although the outcome cannot be predicted with certainty, the Company has recorded a $500 reserve with respect to these pending matters.

As of the date of this Annual Report on Form 10-K, the Company is not aware of any other material existing or threatening litigation to which it is or may be a party.

F-18

FACTORY CARD & PARTY OUTLET CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(11)    Quarterly Financial Information (unaudited)

Following is a summary of unaudited quarterly information:

	First Quarter		Second Quarter		Third Quarter			Fourth Quarter
Fiscal 2005:	13 weeks ended April 30, 2005		13 weeks ended July 30, 2005		13 weeks ended October 29, 2005			13 weeks ended January 28, 2006
Total sales	$	55,738	$	62,896	$	56,240			58,257
Cost of Sales		35,439		39,574		36,116			38,249
Gross profit		20,299		23,322		20,124			20,008
Selling, general and administrative expenses		18,939		20,741		21,093			21,201
Depreciation		581		675		749			827
Interest expense		169		128		251			256
Income (loss) before income taxes		610		1,778		(1,969	)		(2,276	)
Income tax expense (benefit)		246		761		(762	)		(1,099	)
Net income (loss)	$	364	$	1,017	$	(1,207	)		(1,177	)
Earnings (loss) per share—basic	$	0.12	$	0.33	$	(0.39	)	$	(0.38	)
Earnings (loss) per share—diluted	$	0.10	$	0.30	$	(0.39	)	$	(0.38	)

	First Quarter			Second Quarter		Third Quarter		Fourth Quarter
Fiscal 2004:	13 weeks ended May 1, 2004			13 weeks ended July 31, 2004		13 weeks ended October 30, 2004		13 weeks ended January 29, 2005
Total sales	$	56,928		$	62,162	$	53,735	$	57,323
Cost of sales		36,827			39,028		34,216		42,314
Gross profit		20,101			23,134		19,519		15,009
Selling, general and administrative expenses		18,835			18,967		17,860		19,412
Depreciation		583			631		681		511
Reorganization items		—			—		—		(93	)
Other (income) expense		(55	)		25		—		(33	)
Interest expense		231			168		187		156
Income (loss) before income taxes		507			3,343		791		(4,944	)
Income tax expense (benefit)		203			1,337		319		(1,962	)
Net income (loss)	$	304		$	2,006	$	472	$	(2,982	)
Earnings (loss) per share—basic	$	0.10		$	0.66	$	0.16	$	(0.98	)
Earnings (loss) per share—diluted	$	0.09		$	0.56	$	0.14	$	(0.98	)

F-19

Schedule I

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY

CONDENSED FINANCIAL INFORMATION OF FACTORY CARD & PARTY OUTLET CORP.

BALANCE SHEETS

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

	January 28, 2006			January 29, 2005
A S S E T S
Investment in subsidiary	$	28,304		$	28,873
Total assets	$	28,304		$	28,873
S T O C K H O L D E R S’    E Q U I T Y
Common stock, $0.01 par value. Voting class-authorized 10,000,000 shares: 3,138,252 and 3,109,041 shares issued and outstanding at January 28, 2006 and January 29, 2005, respectively	$	31		$	31
Unearned restricted stock awards		(142	)		(148	)
Additional paid-in capital		25,714			25,286
Accumulated earnings		2,701			3,704
Total stockholders’ equity	$	28,304		$	28,873

See accompanying notes to condensed financial information.

S-1

Schedule I

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY

CONDENSED FINANCIAL INFORMATION OF FACTORY CARD & PARTY OUTLET CORP.

STATEMENTS OF OPERATIONS

(Dollar amounts in thousands)

	For the 52 weeks ended January 28, 2006			For the 52 weeks ended January 29, 2005			For the 52 weeks ended January 31, 2004
Equity in net income (loss) of subsidiary	$	(1,003	)	$	(200	)	$	1,362
Net income (loss)	$	(1,003	)	$	(200	)	$	1,362

See accompanying notes to condensed financial information.

S-2

Schedule I

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY

CONDENSED FINANCIAL INFORMATION OF FACTORY CARD & PARTY OUTLET CORP.

STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

	For the 52 weeks ended January 28, 2006			For the 52 weeks ended January 29, 2005			For the 52 weeks ended January 31, 2004
Cash flows from operating activities:
Net income (loss)	$	(1,003	)	$	(200	)	$	1,362
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Amortization of deferred compensation		175			127			131
Decrease (increase) in investment in subsidiary		794			(10,926	)		(2,793	)
Tax benefit of pre-confirmation operating losses		—			10,851			962
Net cash flows from operating activities		(34	)		(148	)		(338	)
Cash flows from investing activities:
Net cash flows from investing activities		—			—			—
Cash flows from financing activities:
Cash received from exercise of management stock options and warrants		34			148			338
Net cash flows from financing activities		34			148			338
Net increase (decrease) in cash		—			—			—
Cash at end of period	$	—		$	—		$	—
Supplemental cash flow information:
Unearned restricted stock awards	$	142		$	148		$	275

See accompanying notes to condensed financial information.

S-3

FACTORY CARD & PARTY OUTLET CORP.

AND SUBSIDIARY

NOTES TO CONDENSED FINANCIAL INFORMATION OF FACTORY CARD &

PARTY OUTLET CORP.

(Dollar amounts in thousands)

(1)    Basis of Accounting

The condensed financial information of Factory Card & Party Outlet Corp. (“the Company”) has been prepared pursuant to Securities and Exchange Commission rules and regulations and should be read in conjunction with the Consolidated Financial Statements and Notes thereto of Factory Card & Party Outlet Corp. and Subsidiary as of January 28, 2006, January 29, 2005 and January 31, 2004, for the 52 weeks ended January 28, 2006, 52 weeks ended January 29, 2005, and 52 weeks ended January 31, 2004. The Company’s Condensed Financial Information has been prepared on an unconsolidated basis. The Company’s investment in subsidiary is recorded on the equity basis. Due to the fact that there are certain restrictions on the Company’s assets and the Company has guaranteed the Loan Agreement between our subsidiary and Wells Fargo Retail Finance, LLC, the Company is required to file Condensed Financial Information of Factory Card & Party Outlet Corp.

(2)    Guarantees

The Company has guaranteed the credit and debt agreements between its subsidiary and various lenders. For information related to the agreements, see Note 3 of the Notes to Consolidated Financial Statements.

S-4

EX-10.30

CONFIDENTIAL TREATMENT REQUESTED

Exhibit 10.30

The registrant has submitted a confidential treatment request for portions of this document. The redacted portions, which are indicated by an “*”, have been filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Exchange Act of 1934, as amended, and other applicable rules.

SUPPLY AND CONSIGNMENT AGREEMENT

This Supply and Consignment Agreement (the “Agreement”) is dated as of January 26, 2006, by and between Amscan Holdings, Inc., a Delaware corporation (“Amscan”), and Factory Card Outlet of America, Ltd., an Illinois corporation (“Factory Card”). Amscan and Factory Card are sometimes referred to herein collectively as the “Parties”.

In consideration of the mutual promises herein contained and for all valuable consideration, the Parties hereby agree to be legally bound as follows:

1. Definitions:

For purposes of this Agreement, the following terms shall have the meanings set forth below:

A. “affiliate” has the meaning provided in Rule 12b-2 under the Securities Exchange Act of 1934, as amended.

B. “Conversion Date” shall mean a date as soon as practicable after the date hereof, and in any event before *, mutually agreed to by the Parties after taking into account the preparation of the Warehouse for the consignment of everyday Party Goods. After the Conversion Date, all everyday Party Goods shipped to the Warehouse after such date shall be consigned inventory of Amscan.

C. “everyday Party Goods” means Party Goods that do not specifically relate to any of the Seasons listed on Exhibit B.

D. “Party Goods” means all party goods, including without limitation paper and plastic tableware, accessories and novelties, distributed by Amscan or its affiliates, including (i) all such goods currently stocked by Factory Card and (ii) any new goods either developed or acquired by Amscan or its affiliates after the date hereof. Notwithstanding anything set forth herein, “party goods” for the purposes of this Agreement shall not include metallic and/or latex balloons.

E. “Person” means any entity, individual or group of individuals, including without limitation, any corporation, limited liability company, syndicate or partnership.

F. “seasonal Party Goods” means Party Goods that specifically relate to one of the Seasons listed on Exhibit B.

G. “Solid Color Goods” means the solid color paper tableware and plastic tablecovers listed on Exhibit A hereto.

H. “Warehouse” means Factory Card’s warehouse located at 2727 Diehl Road, Naperville, Illinois 60563-2371 and any other warehouse facilities specified in writing by Factory Card to Amscan.

2. Supply:

A. During the Term, and subject to the terms and conditions set forth herein, Amscan shall supply Factory Card with the Party Goods as are ordered by Factory Card pursuant to Section 2.D. hereof.

B. Except as provided below, Factory Card agrees that, during the Term, and subject to the terms and conditions set forth herein, Amscan shall be the exclusive supplier of Solid Color Goods for all stores

CONFIDENTIAL TREATMENT REQUESTED

which Factory Card currently owns or directly operates and for such additional stores which Factory Card shall open as new stores, excluding any franchised stores and stores acquired from third party operators (to the extent existing contracts prohibit such an arrangement); provided that, within thirty days after opening any franchised store or any store acquired from third party operators, Factory Card and Amscan shall meet to attempt to negotiate in good faith an additional supply agreement covering such stores on terms mutually satisfactory to the Parties. The foregoing sentence shall not prohibit Factory Card from: (i) obtaining PartyMania branded tablecovers or banquet rolls from any Person; or (ii) obtaining any Solid Color Goods from any Person to the extent that Amscan is unable to fill an order from Factory Card for such Solid Color Goods. Amscan shall be deemed “unable to fill an order,” if Amscan is unable to fill at least * of Solid Color Goods orders with * of submission of such orders by Factory Card.

C. Factory Card will manage all aspects of the replenishment process and will place orders for Party Goods in its discretion based upon sales data collected through Factory Card’s store-level POS system and shipment data from the Warehouse.

D. Amscan agrees that, except as expressly set forth in this Agreement, the order and supply by Amscan of the Party Goods pursuant to this Agreement shall be subject to the terms and conditions set forth in the Factory Card Vendor Compliance Manual.

E. From and after the Conversion Date, Amscan will maintain an inventory level of everyday Party Goods in the Warehouse so that, on an average daily basis each week, the quotient obtained by dividing (i) the aggregate number of skus or designs included in the everyday Party Goods line that are not out of stock in the Warehouse by (ii) the aggregate number of skus or designs included in the everyday Party Goods line that are required for display in Factory Card’s stores at such time (the “Stock Rate”) is *. Factory Card will compute the Stock Rate on an average daily basis and transmit it weekly to Amscan. Notwithstanding the foregoing, Amscan shall not be deemed to have failed to maintain * Stock Rate (i) if Amscan has maintained * fill rate against invoices submitted by Factory Card or (ii) where the failure to maintain the Stock Rate is the result of any errors, omissions or delays in ordering by Factory Card in connection with its management of the replenishment process.

F. In the event that the Stock Rate at any time or from time to time after the Conversion Date and during the Term is * for *, then Factory Card shall receive a credit equal to * for * that the Stock Rate is * during * until the Stock Rate for such * returns to *; provided that if the Stock Rate during any such subsequent * is *, then the credit for such * shall equal * for * that the Stock Rate *.

For example, if the Stock Rate is * during *, Factory Card shall receive a credit of * for * and * for *. Factory Card would again be entitled to additional credits in the event that the Stock Rate in * after * is *.

3. Pricing/Allowances/Credits:

A. During the Term, Solid Color Products sold by Amscan to Factory Card in accordance with the provisions of this Agreement will be invoiced at the prices set forth on Exhibit A. These prices shall not be increased during the Term.

B. From the date hereof until *, Party Goods (other than Solid Color Products) sold by Amscan to Factory Card in accordance with the provisions of this Agreement will be invoiced as follows: (i) with respect to such Party Goods listed on Exhibit C, the price will be the lower of (x) the price * or (y) the * for such Party Goods; and (ii) with respect to all other Party Goods covered by this Section 3.B, the price will be *, as *. Amscan will endeavor to avoid any price increases after *. In the event that it becomes necessary to increase the price of any Party Good covered by this Section 3.B, Amscan shall give Factory Card * prior written notice of such increase and, if the increase (together with any prior increases during the Term) exceeds * of the price paid by Factory Card on the date hereof, such

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CONFIDENTIAL TREATMENT REQUESTED

increase shall not become effective until * after such written notice; provided that, with respect to the Party Goods listed on Exhibit C, the price will in no event be higher than the Party City everyday contract price for such Party Goods.

C. During the Term, Amscan shall issue to Factory Card a * allowance * of each year, in an amount equal to the product of (x) * times (y) the number of open Factory Card stores receiving Party Goods ordered pursuant to this Agreement on such date. Factory Card shall feature Amscan Party Goods in such advertising.

D. Amscan shall issue to Factory Card on a * basis a * allowance in an amount equal to the product of (x) * times (y) the * of all Party Goods * shipped for delivery during such month by Factory Card to its stores.

E. Amscan shall give Factory Card an allowance for all new Amscan Party Goods that are brought into Factory Card’s planogram sets. The allowance shall be equal to *. Factory Card agrees to provide to Amscan a report that shows inventory levels of the replaced product, together with the dead net cost (including all rebates and discounts) per sku to calculate the allowance.

F. Amscan shall issue to Factory Card a credit for * of Party Goods ordered by Factory Card in connection with the opening of a new store.

G. Amscan shall supply to Factory Card an initial load in order of one case as a free fill for each Party Good that is made available through Factory Card’s E-Commerce program.

H. During the Term, Amscan agrees that all * beverage and luncheon napkins as well as * plates will be supplied, at no additional cost to Factory Card, in cartons designed to be perforated so they can be case stacked at the store level.

4. Consignment:

A. Commencing on the Conversion Date, all everyday Party Goods supplied by Amscan on or after such date shall be shipped by Amscan at its own cost and transit risk, to the Warehouse as consigned inventory. Amscan shall retain full ownership of all consigned inventory until sold to Factory Card in accordance with the provisions of this Agreement. Factory Card shall hold all such consigned everyday Party Goods as consignee for Amscan until Factory Card ships such Party Goods to a Factory Card store. Payments for everyday Party Goods shipped by Amscan on and after the Conversion Date shall be due to Amscan in accordance with Section 5.B.

B. In connection with the consignment hereunder, Factory Card represents and warrants that Exhibit D hereto sets forth all secured creditors of Factory Card.

5. Payment Terms:

A. Payment for all everyday Party Goods, including Solid Color Goods, shipped by Amscan to the Warehouse prior to the Conversion Date shall be *.

B. Payment for everyday Party Goods, including Solid Color Goods, shipped by Amscan to the Warehouse on or after the Conversion Date, shall be * from the date Factory Card ships such Goods from the Warehouse to its stores. For billing purposes, everyday Party Goods shall be deemed sold by Amscan to Factory Card at the moment Factory Card ships such everyday Party Goods from the Warehouse to its stores. Factory Card shall use optical scanners and its existing conveyer belt system to record inventory picked from its warehouse bins. At the beginning of each week, Factory Card will transmit the complete details of each order shipped during the previous week. The transmission will serve as the basis for the everyday Party Goods invoices created by Amscan which will be transmitted to Factory Card.

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CONFIDENTIAL TREATMENT REQUESTED

C. Payment for seasonal Party Goods, whether supplied before or after the Conversion Date, shall be as set forth on Exhibit B hereto.

6. Maintenance of Consigned Inventory:

A. Factory Card will receive all shipments from Amscan in accordance with normal receiving and inspection procedures. Factory Card shall exercise reasonable care for the everyday Party Goods while they are in its possession as consigned inventory. Factory Card shall exercise normal and reasonable care in connection with Party Goods stored in its warehouse.

B. Amscan shall furnish a consignment invoice/sheet with each shipment of everyday Party Goods to Factory Card, showing the quantity of such Party Goods shipped by item and the price thereof. Factory Card shall, at its expense, keep accurate daily records of all everyday Party Goods delivered hereunder to its stores, including, without limitation, the date everyday Party Goods were removed from the Warehouse, the stock number and amount of everyday Party Goods removed, the store to which the everyday Party Goods were delivered, and the picking sheet/invoice regarding each such transaction. Factory Card shall send copies of the weekly sales records to Amscan at the end of each week. Factory Card, and an Amscan’ representative if Amscan decides to utilize such representative, shall take a physical inventory of the everyday Party Goods on hand on an annual basis, and such inventory shall be made available to Amscan. In addition, Factory Card shall permit Amscan, or its agents or representatives, at its own expense, to inspect and/or take physical inventories of the everyday Party Goods at any time during Factory Card’s regular business hours upon at least 3 business days prior written notice to Factory Card.

C. Factory Card, as Consignee, hereby authorizes Amscan to file a UCC Financing Statement naming Factory Card, as Consignee, and Amscan, as Consignor, in the jurisdictions deemed necessary by Amscan to reflect the consignment created by this Agreement without obtaining any signature or additional consent of Factory Card. Factory Card additionally authorizes the filing of continuation statements so long as this Agreement remains in effect by Amscan without Factory Card’s signature or additional consent. Amscan shall retain title to all consigned everyday Party Goods as provided herein, and this Agreement shall be a true consignment in all respects, not a consignment intended as security. Factory Card agrees to cooperate with Amscan in the filing of any other information statements or documentation reasonably required by Amscan to reflect Amscan’s ownership of the consigned everyday Party Goods.

D. Amscan agrees that, upon the reasonable written request of Factory Card, it will at its own cost and transit risk, promptly remove from the Warehouse any everyday Party Goods that Factory Card, in its sole discretion, determines will not be shipped to any of its stores.

E. Factory Card shall (i) maintain the current insurance coverages as previously provided to Amscan (or comparable replacement coverages) during the Term, (ii) name Amscan as an additional loss payee to the extent of the full replacement cost of everyday Party Goods consigned to Factory Card during the Term and (iii) upon request of Amscan, provide appropriate certificates or other evidence of such loss insurance. Amscan shall provide Factory Card with a certificate of insurance as evidence of commercial general liability insurance for coverage equal to * or greater. Such coverages will remain in effect during the Term.

7. Term of Agreement; Termination:

A. The term of this Agreement shall begin upon January 1, 2006 and end upon * (the “Term”). This Agreement may be terminated only in accordance with the following:

i. Either Party hereto may terminate this Agreement upon written notice to the other Party if the other Party hereto becomes the subject of a voluntary or involuntary petition in bankruptcy or any

4

CONFIDENTIAL TREATMENT REQUESTED

proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, which petition or proceeding is not dismissed with prejudice within sixty (60) days after filing.

ii. Either Party hereto may terminate this Agreement upon written notice to the other Party if the other Party breaches any express material term or condition of this Agreement and fails to cure that breach within thirty (30) days after receiving written notice of the breach. In the event that Factory Card gives written notice to Amscan of any good faith dispute with respect to any invoice(s) (which notice shall include specific details regarding each disputed invoice(s)) within fifteen days after receipt by Factory Card of written notice from Amscan of non-payment of such invoice(s), then the failure by Factory Card to pay such disputed amount shall not be deemed to be a breach of this Agreement; provided that either Party may immediately submit the dispute to arbitration pursuant to Section 10 hereof.

iii. Factory Card may terminate this Agreement upon written notice to Amscan if the Stock Rate at any time after the Conversion Date and during the Term is * at *.

iv. Amscan may, on * and with the written consent of Factory Card, which consent shall not be unreasonably withheld, remove “slow moving” consigned Party Goods from the Factory Card warehouse for shipment to other customers from time to time, on notice to Factory Card. In such event, the removal of such slow moving inventory shall not be deemed to reduce the Stock Rate.

B. Except as set forth herein, any termination or expiration of this Agreement shall be without prejudice to any right which shall have accrued to the benefit of any Party and shall not relieve any Party of any obligation which has accrued prior to the effective date of such termination or expiration (including, without limitation, any credits and/or allowances in accordance with the provisions of this Agreement), which obligations shall remain in full force and effect for the period provided therein or, if no period is provided therein, then such obligations shall remain in full force and effect indefinitely (provided that to the extent that a Party is entitled to a credit at a time when it does not owe any amounts to the other Party pursuant to this Agreement, then such Party shall be entitled to receive a payment from the other Party in an amount equal to the credit). Except as expressly stated otherwise herein, the remedies hereunder are cumulative, and nothing in this Agreement shall prevent any Party, in the case of a breach, from not terminating this Agreement and seeking to enforce its rights hereunder.

C. Upon any termination or expiration of this Agreement in accordance with the provisions hereof: (i) Amscan shall, at its expense, promptly make arrangements to pick up all of everyday Party Goods remaining in the Warehouse; and (ii) Factory Card and its affiliates shall be permitted to use the Amscan Proprietary Marks (as defined in Section 11) for * after such termination or expiration in connection with the advertising, promotion and sale of any remaining Party Goods in stores.

D. Upon any termination or expiration of this Agreement in accordance with the provisions hereof, the provisions in Sections 9 and 10 shall survive such termination or expiration.

5

CONFIDENTIAL TREATMENT REQUESTED

8. Notices:

Any and all notices required hereunder shall be in writing and shall be (a) sent by certified, first-class mail, postage prepaid, (b) sent by national overnight courier or (c) delivered by facsimile (with the original promptly sent by any of the foregoing manners), to the addresses or facsimile numbers of the other Parties as set forth below. The effective date of any notice hereunder shall be the date of receipt by the receiving Party:

If to Amscan:	Amscan Holdings, Inc. 80 Grasslands Road Elmsford, New York 10523 Facsimile: (914) 345-2056 Attention: James M. Harrison and Kurzman Eisenberg Corbin Lever & Goodman, LLP One North Broadway White Plains, New York 10601 (914) 285-9855 Attention: Joel S. Lever, Esq.
If to Factory Card:	Factory Card Outlet of America, Ltd. 2727 Diehl Road Naperville, IL 60563 Attn: Chief Executive Officer Fax: 630-579-2637 with copies to: Vice President and General Merchandise Manager and Sonnenschein Nath & Rosenthal LLP 8000 Sears Tower Chicago, Illinois 60606 Facsimile: 312-876-7934 Attention: Neal Aizenstein, Esq.

9. Governing Law:

This Agreement and all sales transactions pursuant hereto shall be governed by and construed in accordance with the internal laws of the State of Illinois.

10. Arbitration:

Except as expressly set forth in this Agreement, all disagreements, disputes, controversies and claims arising out of this Agreement, shall be submitted to and resolved by arbitration in either Chicago, Illinois, or Westchester County, New York before a commercial panel of three arbitrators in accordance with and pursuant to the Commercial Arbitration Rules of the American Arbitration Association, as then in effect. The arbitrators shall be selected by mutual agreement of the Parties, or if no agreement can be reached, the arbitrators shall be selected by the American Arbitration Association. Each of the arbitrators shall be licensed attorneys with at least fifteen (15) years experience in the negotiation and performance of commercial contracts. The discovery period shall last no more than thirty (30) days after the arbitrators shall declare the discovery period commenced, and each Party may conduct no more than three (3) depositions. The arbitrators shall issue a

6

CONFIDENTIAL TREATMENT REQUESTED

written reasoned opinion in support of their award. The arbitrators shall award reimbursement of attorneys’ and other experts’ fees and disbursements and other costs of arbitration to the prevailing party, in such manner as arbitrators shall deem appropriate. In addition, the losing party shall reimburse the prevailing party for any attorneys’ fees and disbursements and court costs incurred by the prevailing party in successfully seeking any preliminary equitable relief or judicially enforcing any arbitration award. The determination of any such panel of arbitrators shall be final and binding on the parties. The service of any notice, process, motion or other document in connection with an arbitration proceeding or for the enforcement of any arbitration award may be made as set forth in Section 8 (other than by telecopier). The provisions of this Section shall not be deemed to preclude any party hereto from seeking preliminary injunctive or other equitable relief to protect or enforce its rights hereunder pending arbitration, or to prohibit any court from making preliminary findings of fact in connection with granting or denying such preliminary injunctive relief pending arbitration, or to preclude any party hereto from seeking permanent injunctive or other equitable relief after and in accordance with the decision of the arbitrators. Nothing herein shall be construed to mean that any decision of the arbitrator is subject to judicial review or appeal, and the parties hereto hereby waive any and all rights of judicial appeal or review, on any ground whatsoever.

11. Press Releases; Use of Amscan Proprietary Marks:

A. Press Releases. No press release, publicity or other form of public written disclosure related to this Agreement shall be permitted by either Party to be published or otherwise disclosed unless the other Party has indicated its consent to the form of the release in writing, except for any disclosure as is deemed necessary, in the reasonable judgment of the responsible Party, to comply with national, federal or state laws or regulations with respect to regulatory reporting or disclosure obligations.

B. Use of Amscan Proprietary Marks. Amscan grants to Factory Card and its affiliates during the Term a non-exclusive royalty-free right and license to use the trademarks, service marks and logos owned by Amscan or its affiliates (the “Amscan Proprietary Marks”) in connection with any advertising or promotional materials relating to the sale of Party Goods contemplated herein or as otherwise approved by Amscan, which approval shall not be unreasonably withheld. The license granted hereunder shall not constitute an abandonment of, and/or transfer of any ownership right in, any Amscan Proprietary Mark for any reason.

12. Confidential Information:

A. Confidential Information Defined. “Confidential Information” shall mean each Party’s business, technical, engineering, manufacturing, marketing, sales, customer, financial and other information relating to such party or any of its affiliates or their respective businesses that constitutes trade secrets or know-how or is otherwise proprietary or not generally known to the public or other information which the disclosing party otherwise informs the receiving party is confidential whether by so indicating on such information or otherwise, and shall include any such information received by a receiving party prior to or following execution of this Agreement. Confidential Information shall include information in any form, whether written, graphic, electronic, physical or other form and may include raw data, graphs, charts, drawings, models, samples, hardware, photographs, software or electronic code.

B. Loss of Status. Confidential Information shall not include information, data, knowledge and know-how that, as shown by written records, (i) is known to the receiving party prior to disclosure to such party; (ii) is in the public domain prior to disclosure to such party; (iii) enters the public domain through no violation of this Agreement after disclosure to such party; or (iv) the receiving party independently develops without reliance on Confidential Information.

C. Disclosures. Each Party shall keep the Confidential Information communicated to it by the other Party confidential and shall not disclose such information or provisions to any third party without the prior written approval of the other Party, except that either Party may disclose such provisions to the extent

7

CONFIDENTIAL TREATMENT REQUESTED

required by law or other demand under lawful process; provided the receiving Party gives the disclosing Party prompt notice prior to any disclosure required by demand under lawful process to allow the disclosing Party to make a reasonable effort to obtain a protective order or otherwise protect the confidentiality of such information. Notwithstanding the foregoing, a receiving Party may disclose Confidential Information of the disclosing Party (i) to its officers, directors, employees, contractors, affiliates and representatives and to third parties to whom such disclosure is necessary in connection with performance of this Agreement provided that such recipient is notified of the confidential nature of such Confidential Information and agrees to abide by the applicable terms of this Section 12 with respect to such Confidential Information or (ii) as required to enforce or exercise the receiving party’s rights under this Agreement. Nothing contained herein shall be deemed to grant either Party, either expressed or implied, a license or other right or interest in the Confidential Information of the other or in any trademark or other similar property of the other, except as expressly provided hereunder.

D. Return of Confidential Information. A receiving Party shall not make or retain or permit to be made or retained any copies of any of the disclosing Party’s Confidential Information, except as may be necessary in connection with the receiving Party’s performance under this Agreement. A receiving Party shall return to the disclosing Party all Confidential Information of the disclosing Party and all copies and other duplicates and reproductions thereof (i) within ten (10) days following request by the disclosing Party of the return thereof; (ii) immediately, in the event that the receiving party’s use of the Confidential Information is no longer necessary in connection with this Agreement; or (iii) upon expiration or termination of this Agreement.

E. Remedies. Each Party acknowledges and agrees that a breach by it of the applicable provisions of this Section 12 could result in irreparable damages to the other Party, for which an adequate legal remedy may not exist. Accordingly, each Party agrees and acknowledges that in the event of a breach by it of any of the applicable provisions of this Section 12, the other Party shall be entitled to specific performance, temporary and/or permanent injunctive relief or any other equitable remedy (without the need to post a bond or surety in connection therewith), in addition to any other remedy to which such party may be entitled at law or in equity.

13. True Consignment:

A. If, despite the express intent of the parties hereto that the delivery of the consigned inventory to Factory Card constitutes a true consignment, the delivery of the inventory to the Factory Card deemed to be consignment intended as security rather than a true consignment, this Agreement shall constitute a written security agreement between the parties and Factory Card hereby grants to Amscan a purchase money security interest in all consigned inventory and the proceeds thereof either heretofore or hereafter delivered to Factory Card by Amscan.

B. In the event that Factory Card breaches any material term of this Agreement, Amscan shall be entitled to all remedies available to a consignor (or a secured party, in the event the delivery of the consigned inventory to Factory Card is deemed a consignment intended as security) under any applicable local law or the Uniform Commercial Code.

14. Miscellaneous:

A. Independent Contractors. Each Party acknowledges that the relationship between the Parties pursuant to this Agreement is that of independent contractors. No provision of this Agreement shall be construed to (i) constitute the Parties as partners, joint venturers or participants in a joint undertaking, or (ii) give any Party the power to direct and control the day-to-day activities of the other. Further, no employees of any Party shall be deemed or treated as employees of another Party, and each Party shall be solely responsible for any and all payroll, employment and related taxes, and withholding applicable to its own employees.

8

CONFIDENTIAL TREATMENT REQUESTED

B. Waiver. Any waiver of breach or default pursuant to this Agreement shall not be a waiver of any other subsequent default. Failure or delay by either Party to enforce any term or condition of this Agreement shall not constitute a waiver of such term or condition.

C. Conflicts in Provisions. In the event of any apparent conflicts or inconsistencies between this Agreement and any Exhibits hereto, to the extent possible such provisions shall be interpreted so as to make them consistent, and if such is not possible, the provisions of this Agreement shall prevail.

D. Headings. The Section headings herein are for reference and convenience only and shall not enter into the interpretation hereof.

E. Severability. To the extent that any provision of this Agreement is found by a court of competent jurisdiction to be invalid or unenforceable, that provision notwithstanding, the remaining provisions of this Agreement shall remain in full force and effect and such invalid or unenforceable provision shall be deleted.

F. Assignment: This Agreement shall be binding upon the successors and assigns of the Parties and the name of a Party appearing herein shall be deemed to include the names of its successors and assigns. No Party may assign, delegate or transfer all or any of its respective rights or obligations under this Agreement without the prior written consent of the other Party which consent will not be unreasonably withheld, delayed or conditioned. Notwithstanding the foregoing, either Party may assign, delegate or transfer this Agreement or any of its respective rights or obligations to (a) its affiliate, so long as the assigning Party unconditionally guarantees the obligations of such affiliate or (b) any successor of the assigning Party’s business in the event of a merger, acquisition or consolidation involving such Party or its affiliates.

G. Amendment. No alternation, waiver, cancellation, or any other change or modification in any term or condition of this Agreement, or any agreement contemplated to be negotiated or reached pursuant to the terms of this Agreement, shall be valid or binding on either Party unless made in writing and signed by duly authorized representatives of both Parties.

H. Approvals and Similar Actions. Wherever agreement, approval, acceptance, consent or similar action by either Party hereto is required by any provision of this Agreement, such action shall not be unreasonably delayed or withheld.

I. Entire Agreement. This Agreement, together with the Exhibits hereto and Factory Card’s Vendor Compliance Manual, constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersedes any previous agreements and understandings, whether oral or written, between the Parties hereto with respect to the subject matter hereof.

J. Taxes. Any and all taxes, exercises, assessments, levies, imports, duties, costs, charges and penalties, which may be assessed, levied, demanded or imposed by any governmental authority in connection with this Agreement shall be paid by the Party upon which they are imposed and shall be the sole obligation of such Party.

K. Property Taxes. Amscan will pay all personal property taxes, if any, associated with Amscan’ ownership of consigned inventory of everyday Party Goods located in the Warehouse.

L. Construction. This Agreement is the result of negotiation between the Parties and their respective counsel. This Agreement will be interpreted fairly in accordance with its terms and conditions and without any strict construction in favor of either Party. Any ambiguity shall not be interpreted against the drafting Party.

M. Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original, but all of which taken together will constitute one and the same instrument.

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CONFIDENTIAL TREATMENT REQUESTED

IN WITNESS WHEREOF the Parties have executed this Agreement in the corporate name by their officers duly authorized as of the day and year first above written.

Factory Card Outlet of America, Ltd.

By:

Print Name:

Title:

Amscan Holdings, Inc.

By:

Print Name:

Title:

10

Exhibit A

Solid Color Goods

ITEM NUMBER	DESCRIPTION	* NET COST
*	*	*

Exhibit B

Amscan Term codes that are to be applied to Seasonal and Everyday orders via EDI. Please use the invoice due date column in accordance with placing your seasonal orders In using this code it will help identify what season your order is and apply all the necessary discounts.

Everyday Terms	Description	TERM CODE
	*	G
*Spring / Summer Terms		TERM CODE	Invoice Due Dates
*	*	I	*
		I
		I
		I
		E
		E
		E
		E
		D
		D
		D
		D
*Fall / Winter Terms		TERM CODE	Due Dates
*	*	H	*
		H
		H
		C
		C
		C
		C

Exhibit C

[To Come]

Exhibit D

Wells Fargo Retail Finance II, LLC

One Boston Place, 18^th Floor

Boston, MA 02108

Attn: Mr. Robert Chakarian

EX-21

EXHIBIT 21

LIST OF SUBSIDIARIES OF THE REGISTRANT

Factory Card Outlet of America, Ltd.

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-92248, 333-98549, and 333-108222 on Form S-8 of our report dated April 17, 2006, relating to the financial statements and financial statement schedules of Factory Card & Party Outlet Corp. and subsidiary, appearing in this Annual Report on Form 10-K of Factory Card & Party Outlet Corp. and subsidiary for the 52 weeks ended January 28, 2006.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

April 17, 2006

EX-31.1

EXHIBIT 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION UNDER SECTION 302 OF THE

SARBANES-OXLEY ACT

I, Gary W. Rada, of Factory Card & Party Outlet Corp., certify that:

1.  I have reviewed this annual report Form 10-K of Factory Card & Party Outlet Corp;

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

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

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

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

b)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

c)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing equivalent functions):

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 17, 2006

/s/    GARY W. RADA        

President & Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CHIEF ACCOUNTING OFFICER CERTIFICATION UNDER SECTION 302 OF THE

SARBANES-OXLEY ACT

I, Jarett A. Misch, of Factory Card & Party Outlet Corp., certify that:

1.  I have reviewed this annual report Form 10-K of Factory Card & Party Outlet Corp;

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

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

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

a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

c)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing equivalent functions) :

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 17, 2006

/s/    JARETT A. MISCH        

Vice President,

Controller & Chief Accounting Officer

EX-32.1

EXHIBIT 32.1

CHIEF EXECUTIVE OFFICER CERTIFICATION OF PERIODIC REPORT UNDER

SECTION 906 OF THE SARBANES-OXLEY ACT

I, Gary W. Rada, of Factory Card & Party Outlet Corp. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1) the Annual Report on Form 10-K of the Company for the year ended January 28, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: April 17, 2006

/s/    GARY W. RADA        

Gary W. Rada

President & Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CHIEF ACCOUNTING OFFICER CERTIFICATION OF PERIODIC REPORT UNDER

SECTION 906 OF THE SARBANES-OXLEY ACT

I, Jarett A. Misch, of Factory Card & Party Outlet Corp. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1)  the Annual Report on Form 10-K of the Company for the year ended January 28, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: April 17, 2006

/s/    JARETT A. MISCH        

Jarett A. Misch

Vice President,

Controller and Chief Accounting Officer