Celebrate Express 10Q 2008 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended August 31, 2007


o		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 000-50973

CELEBRATE EXPRESS, INC.

(Exact name of registrant as specified in its charter)


Washington (State or other jurisdiction of incorporation or organization)		91-1644428 (I.R.S. Employer Identification No.)

11232 – 120^thAvenue NE Kirkland, Washington (Address of principal executive offices)		98033 (Zip Code)

(425) 250-1061
(Registrant’s telephone number, including area code)

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 for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YESþ NOo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one:

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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

As of September 30, 2007, there were 7,967,255 shares of the registrant’s common stock outstanding.

CELEBRATE EXPRESS, INC.

INDEX


PART I. FINANCIAL INFORMATION			1
Item 1. Financial Statements (unaudited)			1
Balance Sheets at August 31, 2007 and May 31, 2007			2
Statements of Income For the Three Months Ended August 31, 2007 and August 31, 2006			3
Statement of Shareholders’ Equity For the Three Months Ended August 31, 2007			4
Statements of Cash Flows For the Three Months Ended August 31, 2007 and August 31, 2006			5
Notes to Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3. Quantitative and Qualitative Disclosures About Market Risk			13
Item 4. Controls and Procedures			14
PART II. OTHER INFORMATION			14
Item 1. Legal Proceedings			14
Item 1A. Risk Factors			14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			24
Item 6. Exhibits			24
SIGNATURES			26
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

Cautionary Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements that involve many risks and uncertainties. These statements relate to future events and our future performance that are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. In some cases, you can identify forward-looking statements by terms such as “would,” “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “seek,” or “continue,” the negative of these terms or other variations of such terms. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characterizations of future events or circumstances, are forward-looking statements. These statements are only predictions based upon assumptions made that are believed to be reasonable at the time and are subject to risk and uncertainties. Therefore, actual events or results may differ materially and adversely from those expressed in any forward-looking statement. In evaluating these statements, you should specifically consider the risks described under Part II—Item 1A “Risk Factors” and elsewhere in this Form 10-Q. These factors may cause our actual results to differ materially from any forward-looking statements. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CELEBRATE EXPRESS, INC.

BALANCE SHEETS


	August 31, 2007			May 31, 2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	15,139,350		$	21,224,178
Accounts receivable, net		1,652,903			1,490,383
Inventories		14,445,873			9,039,029
Prepaid expenses		4,700,519			3,692,573
Deferred income taxes		247,348			347,019

Total current assets		36,185,993			35,793,182

Fixed assets, net		5,089,866			4,453,476
Deferred income taxes		8,196,467			7,771,657
Other assets, net		101,009			101,186

Total assets	$	49,573,335		$	48,119,501


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,815,558		$	2,751,155
Accrued liabilities		3,108,822			3,648,457
Current portion of capital leases		22,728			—

Total current liabilities		7,947,108			6,399,612

Long-term captial lease obligations		49,439			—
Commitments and contingencies		—			—

Shareholders’ equity:
Common stock, $0.001 par value and additional paid-in capital - authorized, 10,000,000 shares; issued and outstanding, 7,965,816 shares at August 31, 2007; 7,953,724 shares at May 31, 2007		67,555,826			67,122,392
Accumulated deficit		(25,979,038	)		(25,402,503	)


Total shareholders’ equity		41,576,788			41,719,889


Total liabilities and shareholders’ equity	$	49,573,335		$	48,119,501

See notes to financial statements.

CELEBRATE EXPRESS, INC.

STATEMENTS OF OPERATIONS
(unaudited)


	Three months ended
	August 31, 2007			August 31, 2006
Net sales	$	17,561,870		$	19,941,779
Cost of sales (1)		7,962,490			9,943,903

Gross margin		9,599,380			9,997,876

Operating expenses:
Fulfillment (1)		2,369,350			2,979,005
Selling and marketing (1)		5,499,221			5,317,922
General and administrative (1)		2,845,252			2,441,521


Total operating expenses		10,713,823			10,738,448


Loss from operations		(1,114,443	)		(740,572	)

Other income, net;
Interest income, net		241,301			382,943


Net loss before income taxes		(873,142	)		(357,629	)

Income tax benefit		296,607			31,650

Net loss		(576,535	)		(325,979	)

Net loss per share:
Basic	$	(0.07	)	$	(0.04	)

Diluted	$	(0.07	)	$	(0.04	)


Weighted average shares outstanding:
Basic		7,960,608			7,789,480
Diluted		7,960,608			7,789,480


(1) Stock-based compensation is included in the expense line items above in the following amounts:

Cost of Sales	$	1,300		$	9,183
Fulfillment		16,224			13,432
Selling and marketing		46,347			61,323
General and administrative		312,537			195,334

	$	376,408		$	279,272

See notes to financial statements.

CELEBRATE EXPRESS, INC.

STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)


	Common stock and additional							Total
	paid-in-capital				Accumulated			shareholders
	Shares		Amount		deficit			equity
BALANCE—May 31, 2007		7,953,724	$	67,122,392	$	(25,402,503	)	$	41,719,889

Exercise of common stock options and issuance of restricted stock		12,092		44,559					44,559
Tax effect of stock option exercises				12,467					12,467
Stock-based compensation				376,408					376,408
Net income						(576,535	)		(576,535	)


BALANCE—August 31, 2007		7,965,816	$	67,555,826	$	(25,979,038	)	$	41,576,788

See notes to financial statements.

CELEBRATE EXPRESS, INC.

STATEMENTS OF CASH FLOWS
(unaudited)


	Three months ended
	August 31, 2007			August 31, 2006
Cash flows from operating activities:
Net loss	$	(576,535	)	$	(325,979	)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes		(312,672	)		(31,650	)
Depreciation and amortization		442,831			380,064
Stock-based compensation		376,408			279,272
Excess tax benefit from exercise of stock options		(12,467	)		(25,654	)
Loss on disposal of fixed assets		12,187			—
Changes in operating assets and liabilities:
Accounts receivable		(162,520	)		35,582
Inventories		(5,406,844	)		(1,963,371	)
Prepaid expenses and other assets		(1,007,946	)		(1,179,160	)
Accounts payable		2,064,403			794,756
Accrued liabilities		(539,635	)		298,989


Net cash used in operating activities		(5,122,790	)		(1,737,151	)


Cash flows from investing activities:
Payments for purchases of fixed assets		(1,019,064	)		(357,723	)

Net cash used in investing activities		(1,019,064	)		(357,723	)

Cash flows from financing activities:
Proceeds from exercise of stock options		44,559			13,532
Excess tax benefit from exercise of stock options		12,467			25,654


Net cash provided by financing activities		57,026			39,186


Net decrease in cash and cash equivalents		(6,084,828	)		(2,055,688	)

Cash and cash equivalents:
Beginning of period		21,224,178			31,326,804

End of period	$	15,139,350		$	29,271,116


Supplemental disclosures of cash flow information:
Cash paid for interest	$	538		$	—

Supplemental disclosures of noncash financing and investing activities:
Purchase of fixed assets under capital leases	$	72,167		$	—

See notes to financial statements.

1. Organization of Business and Summary of Significant Accounting Policies

Description of Business —Celebrate Express, Inc. (the “Company”), a Washington corporation, is a provider of celebration products for families with young children, via the Internet and catalogs. The Company operates two brands, Birthday Express and Costume Express, which respectively offer children’s party products, and children’s and family costumes and accessories. The Company began winding down the operations of its Storybook Heirlooms brand in the first quarter of fiscal 2007 and completed the wind-down in the fourth quarter of fiscal 2007.

Basis of Presentation —Management has prepared the accompanying financial statements in accordance with the accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities Exchange Commission. The financial information as of August 31, 2007 and for the three-month periods ended August 31, 2007 and August 31, 2006 is unaudited. In the opinion of management, such information contains all adjustments, consisting of normal, recurring accruals, necessary for a fair presentation of the results for such periods. The results of operations for such interim periods are not necessarily indicative of the expected results of operations for the full fiscal year. These financial statements and related notes should be read in connection with the Company’s Notes to Financial Statements contained in the Company’s Annual Report on Form 10-K filed for the year ended May 31, 2007. The balance sheet at May 31, 2007 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

New Accounting Pronouncements —In July 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109,Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted the provisions of FIN 48 on June 1, 2007. The adoption of this statement did not have an impact on our results of operations or financial condition.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements(“FAS 157”). FAS 157 establishes a common definition for fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007. We will apply this guidance beginning June 1, 2008. We do not expect that the adoption of this statement will have a material impact on our results of operations or financial condition.

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. We will apply this guidance beginning June 1, 2008. We do not expect that the adoption of this statement will have a material impact on our results of operations or financial condition.

Use of Estimates –The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates include allowance for sales returns, lower of cost or market adjustments to inventory and deferred income taxes. Actual results could differ from those estimates.

Summary of significant accounting policies –The significant accounting policies used in the preparation of our financial statements are disclosed in our Annual Report on Form 10-K for the year ended May 31, 2007.

2. Inventories

Inventories are stated at the lower of market or weighted-average cost on a first-in first-out basis. The Company writes down inventory for estimated obsolescence or damage for the excess cost of the inventory over estimated market value based upon assumptions about future demand and market conditions.

The components of inventories were as follows:


	August 31, 2007		May 31, 2007
Finished goods	$	14,160,570	$	8,706,354
Raw materials		285,303		332,675

	$	14,445,873	$	9,039,029

3. Income Per Share

Basic net income (loss) per share is based on the weighted-average number of common shares outstanding. Diluted net income (loss) per share is based on the weighted number of common shares and common share equivalents outstanding. Common shares and common share equivalents included in the computation represent shares issuable upon assumed exercise of outstanding stock options, except when the effect of their inclusion would be antidilutive.

The following table sets forth the computation of basic and diluted net income (loss) per share:


	Three Months Ended
	August 31, 2007			August 31, 2006
Net loss	$	(576,535	)	$	(325,979	)
Weighted average common shares outstanding		7,960,608			7,789,480
Basic net loss per share	$	(0.07	)	$	(0.04	)

Common share equivalents:
Dilutive effect of common stock options		—			—

Weighted average common shares and common share equivalents		7,960,608			7,789,480
Diluted net loss per share	$	(0.07	)	$	(0.04	)

The following is a summary of the weighted average securities during the respective periods that have been excluded from the calculation because the effect on net income (loss) would be antidilutive:


	Three Months Ended
	August 31, 2007		August 31, 2006
Restricted stock		2,407		9,824
Common stock options		641,444		458,921

4. Brand Revenues

The following table provides detail of our revenues by brand:


	Three months ended
	August 31, 2007		August 31 ,2006
Birthday Express	$	16,290,678	$	17,947,188
Storybook Heirlooms		—		1,041,444
Costume Express		1,118,716		953,147

Total Brand Revenue	$	17,409,394	$	19,941,779


		In the three-month period ended August 31, 2007, the Company also had approximately $150,000 in other revenue.

5. Stock Based Compensation

Equity Incentive Plan–Our 2004 Amended and Restated Equity Incentive Plan (the “2004 Plan”) permits the grant of options to directors, officers, employees, consultants, and advisors. Options may be either incentive stock options or nonqualified stock options. The 2004 Plan also permits the grant of stock bonuses and rights to purchase restricted stock. There were 501,905 shares remaining for future grant under the Plan as of August 31, 2007. Generally, options vest at the rate of 25% on the first anniversary of the grant and 25% each successive year until fully vested. Options granted under the 2004 Plan are exercisable over a period of time, generally either 7 or 10 years, designated by the Board and are subject to other terms and conditions as determined by the Board. When a stock award expires or is terminated before it is exercised, the shares become available for issuance under the 2004 Plan.

Employee Stock Purchase Plan — Effective in October 2004, the Company adopted an Employee Stock Purchase Plan (the “ESPP”). Eligible employees may purchase common stock for a purchase price per share that is equal to 85% of the fair market value of a share on the offering date for the applicable offering period, or if lower, the fair market value of a share on the applicable purchase date in such a period. During the three months ended August 31, 2007, there were no common stock purchases under the ESPP plan.

Stock Compensation Expense

We account for the 2004 Plan and the ESPP under the recognition and measurement principles of FASB Statement No. 123 (revised 2004),Share-Based Payment(FAS 123R), which requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock-based awards is determined using the Black-Scholes option pricing model using the single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. As required by FAS 123R, management made an estimate of expected forfeitures, and we are recognizing compensation costs only for those equity awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, we will record such amounts retrospectively as an increase or decrease in stock-based compensation in the period we revise the estimates. We consider many factors when estimating expected forfeitures, including historical voluntary termination behavior and actual option forfeitures. Actual results, and future changes in estimates, may differ substantially from our current estimates.

As of August 31, 2007, the total compensation cost related to unvested options and restricted stock units granted to employees totaled $2.8 million, inclusive of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted-average period of 1.5 years and will be adjusted for estimated forfeitures.

Determining Fair Value

We calculate the fair value of our stock options granted to employees using the Black-Scholes option pricing model using the single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The following weighted-average assumptions were used to compute fair value of the stock options granted for the three-month periods ended August 31, 2007 and August 31, 2006:


	Three months ended
	August 31,
	2007			2006
Expected volatility		47.8	%		60.5	%
Expected term (in years)		4.6			5.9
Risk-free interest rate		4.7	%		5.1	%
Expected dividend		0	%		0	%
Weighted-average fair value	$	4.16		$	7.31

Stock Option Activity

Additional information regarding options outstanding as of August 31, 2007 is as follows:


						Weighted-
				Weighted-		average
				average		remaining		Aggregate
				exercise		contractual		Intrinsic Value
	Shares			price		term		(in thousands)
Outstanding at June 1, 2007		717,746		$	12.07
Granted		75,500			9.09
Exercised		(11,923	)		3.74
Cancelled or expired		(32,928	)		12.47

Outstanding at August 31, 2007		748,395			11.89		7.84	$	121

Exercisable at August 31, 2007		249,730			12.18		7.59	$	112

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the market price of our common stock for the shares subject to options that were in-the-money at August 31, 2007.

During fiscal 2006, certain employees were granted restricted stock unit awards pursuant to the Company’s 2004 Amended and Restated Equity Incentive Plan. A total of 10,600 shares were granted and were valued at the closing stock price of $11.98 on the date of grant. In fiscal 2007, an additional 2,000 shares were granted and were valued at the closing stock price of $13.07 on the date of grant. During the quarter ended August 31, 2007, 250 shares vested and 800 shares were forfeited. As of August 31, 2007 there were 2,000 shares outstanding and unvested. There were no additional grants of restricted stock units during the quarter ended August 31, 2007.

6. Income Taxes

We record income taxes using the asset and liability method in accordance with SFAS No. 109,Accounting for Income Taxes. Deferred income taxes are recognized for temporary differences — the differences between the GAAP financial statement carrying amounts of assets and liabilities and those required for use in the tax return. The tax effect of these temporary differences are reported as deferred income tax assets and liabilities on the balance sheet, measured using enacted laws and income tax rates that are currently in effect. A valuation allowance is recorded to reduce deferred tax assets when realization of the tax benefit is unlikely.

As of August 31, 2007, the Company had recorded deferred tax assets of $8.4 million, of which $7.5 million reflects the benefit of $21.9 million in operating loss carryforwards for federal income tax purposes, which expire in varying amounts between 2020 and 2026, if unused. In addition, $1.8 million represents net operating loss carryforwards for state income tax purposes, which are scheduled to expire in varying amounts between 2016 and 2021, if unused. Under the Internal Revenue Code, the amounts of and benefits from net operating loss and tax carryforwards may be impaired or limited in certain circumstances. Events which could cause limitations in the amount of net operating losses that the Company may utilize in any one year, include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. The Company evaluates whether changes in its stock ownership have resulted in annual limitations to the utilization of our deferred tax assets. In addition, realization is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

In June 2006, the FASB issued FASB Interpretation No. 48Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109(“FIN 48”) to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies income tax accounting by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting for interim periods, disclosure and transition, and clearly excludes uncertainty in income taxes from guidance prescribed by FASB No. 5,Accounting for Contingencies. We adopted the provisions of FIN 48, on June 1, 2007. The adoption had no impact on our financial condition or results of operations.

There were no unrecognized tax benefits under FIN 48 as of June 1, 2007 or August 31, 2007.

No interest or penalties were recognized during the three months ended August 31, 2007. The Company has adopted a policy whereby penalties incurred in connection with tax matters will be classified as general and administrative expenses, and interest assessments incurred in connection with tax matters will be classified as interest expense.

Tax years that remain open for examination by federal and state taxing authorities include the years ending May 31, 2004, 2005, 2006, and 2007. In addition, tax years from May 31, 1998 through May 31, 2003 may be subject to examination to the extent that the Company utilizes the NOLs from those years in its current year or future years’ tax returns.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this quarterly report on Form 10-Q and our annual report of Form 10-K filed for our fiscal year ended May 31, 2007. All statements in the following discussion that are not reports of historical information or descriptions of current accounting policy are forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation “Risk Factors” set forth in Part II—Item 1A of this Form 10-Q and the audited financial statements and the notes thereto and disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Financial Statements,” and “Notes to Financial Statements,” included in annual report of Form 10-K filed for our fiscal year ended May 31, 2007.

Overview

Celebrate Express is a leading provider of celebration products serving families with young children via the Internet and catalogs. We offer a broad assortment of proprietary and third party children’s party products and children’s and family costumes, complemented by a wide variety of accessories. Our centralized inventory management maximizes product availability and allows us to customize our product assortment to meet specific customer needs. We have designed our business infrastructure to share distribution, customer support, marketing, and technology resources across our brands. Our goal is to help busy families celebrate the special moments in their lives.

We review our operations based on our financial results and various non-financial measures. We focus on several financial factors including net sales per order, gross margin, growth in net sales and the percentage of our sales generated by repeat customers. Among the key non-financial measures upon which we focus in reviewing performance are the frequency of purchase by our customers and the number of new customers added to our database.

To date, we have derived our revenue primarily from the sale of party related products from our Celebrate Express website and catalogs. For the three months ended August 31, 2007, we generated $17.6 million in net sales, a decrease of 11.9% from $19.9 million in the three months ended August 31, 2006. Our gross margin as a percentage of sales increased to 54.7% in the three months ended August 31, 2007 from 50.1% in the three months ended August 31, 2006. For the three months ended August 31, 2007, our net loss before income taxes was $873,000, compared with a net loss before income taxes of $358,000 in the three months ended August 31, 2006.

Comparison of Three Months Ended August 31, 2007 and August 31, 2006

Net Sales

Our net sales are comprised of product sales and shipping revenue. Net sales decreased 11.9% to $17.6 million in the three months ended August 31, 2007 from $19.9 million in the three months ended August 31, 2006. Total advertising spending for both online and offline direct marketing efforts such as catalog mailings, paid search and affiliate spending was $4.5 million during the first quarter of fiscal 2008. Advertising spending for the first quarter of fiscal 2007 was also $4.5 million. The decrease in net sales in the three months ended August 31, 2007 over the same period in fiscal 2007 reflects a reduction of approximately 10% in the number of orders shipped, which decreased to approximately 222,000 orders in the three months ended August 31, 2007 from approximately 247,000 orders in the three months ended August 31, 2006. Net sales per order for the three months ended August 31, 2007 was $78.40, compared with net sales per order of $80.80 for the three months ending August 31, 2006. We added approximately 119,000 new customers to our database during the first quarter, compared with 133,000 new customers added in the same quarter last year, a decrease of 10%. Revenue from our repeat customers represented approximately 45% of revenue during the three months ended August 31, 2007 and during the three months ended August 31, 2006. Birthday Express net sales decreased to $16.3 million in the first quarter of fiscal 2008 from $17.9 million in the first quarter of fiscal 2007, a decrease of $1.6 million, or approximately 9%. This decrease was primarily due to a reduction in Birthday Express catalog circulation of roughly 17% from the prior year, as the Company focused on reducing unprofitable mailings and reevaluated breakeven points in light of catalog postage cost increases. Costume Express net sales increased to $1.1 million in the first quarter of fiscal 2008 from $953,000 in the first quarter of fiscal 2007, an increase of $166,000 or approximately 17%. The increase in Costume Express revenue is due primarily to increased direct marketing efforts in the first quarter of fiscal 2008. Storybook Heirlooms revenue also decreased by $1.0 million from the same quarter last year due to the wind-down of the brand, which was completed in the fourth quarter of fiscal 2007.

Gross Margin

Our gross margin consists of net sales less cost of sales. Our cost of sales consists primarily of product costs, costs associated with our in-house production facility, including wages and depreciation, design and production costs for our apparel and costume brands, inbound and outbound shipping costs, and packaging materials for outbound shipments. Gross margin decreased 4.0% to $9.6 million in the three months ended August 31, 2007 from $10.0 million in the three months ended August 31, 2006. Our gross margin as a percentage of net sales was 54.7% in the three months ended August 31, 2007, compared with 50.1% in the three months ended August 31, 2006. Year-over-year improvements in gross margin as a percentage of net sales for the quarter just ended were driven by a shift in the mix of our revenue away from the Storybook brand, which had a lower gross margin than the continuing brands, an increase in shipping margins based on improvements in our distribution operations resulting in fewer expedited, higher cost shipments, and higher merchandise margins in the Costume Express brand. We also recorded approximately $150,000 in advertising revenue during the first quarter of fiscal 2008 generated from web advertising sources with no corresponding cost of goods sold. No advertising revenue was recorded in the first quarter of fiscal 2007. Our gross margin includes the cost of shipping packages to our customers. We have been subject to increases in these outbound shipping costs as a result of increases in fuel surcharges and rates charged by our third party carriers. Further increases in these costs will have an impact on our gross margin. Our gross margin may fluctuate from quarter to quarter due to the mix of products sold, as well as the potential introduction of new brands.

Fulfillment

Our fulfillment expenses consist primarily of labor and other operating costs associated with our customer support center and distribution center in Greensboro, North Carolina. Our fulfillment expenses decreased 20.5% to $2.4 million in the three months ended August 31, 2007 from $3.0 million in the three months ended August 31, 2006. As a percentage of net sales, these expenses decreased to 13.5% in the three months ended August 31, 2007 from 14.9% in the three months ended August 31, 2006. This quarter-over-quarter decrease was due to a continued reduction in distribution center and customer service labor costs as a percentage of revenue, which was driven by continued operational process improvements as well as the increase in web orders as a percentage of total revenue. We reduced fulfillment labor and related costs by 24.2% in the first quarter from the same period in the prior year, while we shipped 10% fewer orders over the same timeframe.

Selling and Marketing

Our selling and marketing expenses consist primarily of advertising costs, wages and related payroll benefits for our internal marketing and merchandising staff. Advertising costs include online marketing efforts, print advertising and other direct marketing strategies. Online advertising costs are generally expensed as incurred. Prepaid direct marketing expenses consist of third-party costs including paper, printing and mailing costs and are capitalized and amortized over their expected period of future benefit, which is generally from 90 to 120 days. Selling and marketing costs increased 3.4% to $5.5 million in the three months ended August 31, 2007 from $5.3 million in the three months ended August 31, 2006. As a percentage of net sales, selling and marketing expenses increased to 31.3% in the three months ended August 31, 2007 from 26.7% in the three months ended August 31, 2006. The change as a percentage of net sales is due to multiple factors. The hiring of key executives and other personnel in the selling and marketing area, combined with a reduction in revenue caused the staffing and other internal costs to increase as a percentage of revenue. In addition, advertising costs as a percentage of revenue increased due to significantly higher catalog postage costs as well as lower response rates in the August Costume Express mailing than during the same period in the prior year. We have experienced increases, and are potentially subject to further increases, in our online paid search costs, paper prices and postage rates. We expect that marketing will continue to be our largest operating expense line item and will increase in absolute dollars as we seek to expand sales and prospecting to new customers.

General and Administrative

Our general and administrative expenses consist primarily of wages and related payroll benefits for our administrative and technology employees. These expenses also include credit card fees, legal and accounting professional fees, insurance, network fees, depreciation, bad debt expense, and other general corporate expenses. General and administrative expenses increased 16.5% to $2.8 million in the three months ended August 31, 2007 from $2.4 million in the three months ended August 31, 2006. As a percentage of net sales, our general and administrative expenses increased to 16.2% in the three months ended August 31, 2007 from 12.2% in the three months ended August 31, 2006. Stock compensation expense for general and administrative employees increased $117,000 in the current quarter, compared with the same quarter of the prior year. Professional fees, insurance premiums and other related costs increased $121,000 in the three months ended August 31, 2007, compared with the three months ended August 31, 2006. Also included in the current quarter were approximately $84,000 in final costs associated with the closure of our Kirkland customer service and print manufacturing operations. We expect general and administrative expenses to increase in absolute dollars in future periods primarily as a result of costs related to Sarbanes-Oxley compliance and other accounting and legal costs, and the continued recording of stock-based compensation under FAS 123R.

Other Income, Net

Other Income declined to $241,000 in the three months ended August 31, 2007, from $383,000 in the three months ended August 31, 2006. This change is due to a reduction in interest income resulting from a decrease in the cash balance. The reduction in cash is largely due to the approximately $9.9 million dividend paid in April 2007.

Income Taxes

In the three months ended August 31, 2007, we recognized an income tax benefit of $297,000 on a net loss before taxes of $873,000, an effective tax rate of 34.0%. In the three months ended August 31, 2006, we recognized an income tax benefit of $32,000 based on a net loss before taxes of $358,000, an effective tax rate of 8.9%. In arriving at the current 34.0% effective tax rate, we considered a variety of factors, including estimated annual pre-tax results, the U.S. federal rate of 35%, estimated annual nondeductible expenses and estimated state income taxes. We evaluate our tax rate each quarter and make adjustments when necessary. Our final effective tax rate for the full year may be materially different than our current estimate and is highly dependent upon the level of pre-tax income or loss, the magnitude of any nondeductible expenses in relation to that pre-tax amount and various other factors.

Liquidity and Capital Resources

As of August 31, 2007 we had working capital of $28.2 million, including cash and cash equivalents of $15.1 million. We believe that our current cash and cash equivalents, as well as cash flows from operations, will be sufficient to continue our operations and meet our capital needs for the foreseeable future.

Net cash used in operating activities was ($5.1 million) and ($1.7 million) for the three months ended August 31, 2007 and 2006, respectively. Net cash used in operating activities in the first quarter of fiscal 2008 can be attributed to an increase in inventory of $5.4 million during the first quarter. This increase in inventory was primarily due to higher Costume Express inventory balances in anticipation of higher demand in the second fiscal quarter during the Halloween season. Additionally, prepaid expenses increased $1.0 million during the first quarter of fiscal 2007, due primarily to an increase in prepaid catalog and related costs. These increases were partially offset by a related increase in accounts payable of approximately $2.1 million. Net cash used in operating activities in the first quarter of fiscal 2007 was also attributed primarily to an increase in inventory and prepaid expenses.

Net cash used in investing activities was ($1.0 million) and ($358,000) for the three months ended August 31, 2007 and 2006, respectively. Cash used in investing activities in the first quarters of fiscal 2008 and 2007 was used for capital expenditures. Approximately $750,000 of this activity in the current quarter is due to costs related to in-process software development projects capitalized under Statement of Position (SOP) 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Useand the associated hardware purchases. We anticipate that our capital expenditures for the full fiscal year ending May 31, 2008 will range from $4.0 million to $5.5 million. These expenditures will include, but not be limited to, investments to upgrade our phone system, data center and website.

Net cash provided by financing activities was $57,000 and $39,000 for the three months ended August 31, 2007 and 2006, respectively. Cash provided by financing activities in the first quarter of fiscal 2008 and fiscal 2007 was due to proceeds from the exercise of stock options and the tax benefit associated with option exercises.

The following table summarizes our contractual obligations as of August 31, 2007 and the effect these obligations are expected to have on our liquidity and cash flows in future periods, revised to incorporate the amended operating lease agreement as reported on Form 8-K dated October 10, 2007:


	Payments Due by Period
	Total		Less than 1 year		1-3 years		3-5 years
	(in thousands)
Description of Contractual Obligations:
Capital lease obligations	$	72	$	23	$	49	$	—
Operating lease obligations	$	1,292	$	643	$	644	$	5

Total	$	1,364	$	666	$	693	$	5

Critical Accounting Policies

Certain of our accounting policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed to be applicable and reasonable under the circumstances. The use of judgment in determining such estimates and assumptions is, by nature, subject to a degree of uncertainty. Accordingly, actual results could differ from the estimates made. The critical accounting policies used in the preparation of our financial statements are reported in the Management’s Discussion and Analysis section of our Annual Report on Form 10-K for the year ended May 31, 2007.

New accounting pronouncements- In July 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109,Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted the provisions of FIN 48 on June 1, 2007. The adoption of this statement did not have an impact on our results of operations or financial condition.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly rated securities. As of August 31, 2007 we held short-term investments that have a maturity date of three months or less at the time of purchase, and consist primarily of money market accounts and commercial paper. Because of the short-term nature of our investments, we believe that our exposure to market rate fluctuations on those investments is minimal. On August 31, 2007, we had no long-term or short-term bank debt outstanding.

Foreign Currency Risk

Our revenue, expense and capital expenditures are transacted in U.S. dollars. We do source a portion of our product inventories from foreign vendors, primarily manufacturers in China. If the value of the U.S. dollar declines relative to the Chinese yuan, these foreign currency fluctuations could result in an increase in the cost of merchandise sourced from China through price increases. As a result of such fluctuations, we may experience fluctuations in our operating results on an annual or quarterly basis.

Item 4. Controls and Procedures.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on their evaluation, our certifying officers concluded that these disclosure controls and procedures are effective in providing reasonable assurance that the information required to be disclosed by us in our periodic reports filed with the Securities and Exchange Commission (“SEC”) is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and SEC reports.

We believe that a system of internal controls, no matter how well designed and operated, is based in part upon certain assumptions about the likelihood of future events, and therefore can only provide reasonable, not absolute, assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

We have reviewed our internal controls over financial reporting and have made no changes during the quarter ended August 31, 2007 that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not aware of any pending legal proceedings (other than routine litigation that is incidental to the business).

Item 1A. Risk Factors.

Factors That May Affect Future Operating Results

You should carefully consider the risks described below together with all of the other information included in this report. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline and you may lose all or part of your investment.

We have incurred net losses in recent quarters and may not be able to return to or sustain profitability in the future.

In the three-month periods ended August 31, 2007, May 31, 2007, February 28, 2007, August 31, 2006, May 31, 2006 and February 28, 2006 we had net losses of $577,000, $62,000, $137,000, $326,000, $324,000 and $398,000, respectively. Though we were profitable in the twelve-month period ended May 31, 2007, we have had a history of losses. We may incur losses again in future fiscal years, especially if we introduce new brands or products, make investments in our systems or infrastructure, or continue to have difficulties in our distribution center. We expect our operating expenses to increase in the future, as we, among other things:

	•		expand into new product categories;

	•		continue with our marketing efforts to build our brand names;

	•		expand our customer base;

	•		upgrade our operational and financial systems, procedures and controls;

	•		invest in and upgrade our distribution center; and

	•		retain existing personnel and hire additional personnel, including senior management.

We may not be able to generate the required sales from our current or new product categories or reduce fulfillment and other operating expenses sufficiently to sustain or increase profitability. If we have a shortfall in sales without a corresponding reduction to our expenses, our operating results will suffer. It is possible that results of operations may be below the expectations of public market analysts and investors, which could cause the trading price of our common stock to fall.

If we do not successfully expand sales into other product categories beyond party goods, we may not be able to achieve our desired revenue growth.

We were incorporated and began selling party products through our direct marketing catalog in June 1994 and on our www.BirthdayExpress.com website in April 1996. In September 2003, we launched our www.CostumeExpress.com website and catalog for Costume Express, a provider of children’s and family costumes. We have historically derived more than 75% of our annual revenues from the sale of party products and accessories to families with young children under our Birthday Express brand. In order to achieve the desired growth in our sales and business, we will need to expand into new product categories. Challenges that may affect our ability to expand into new product categories include our ability to:

	•		improve the efficiency of our distribution center;

	•		successfully design, produce and market new products;

	•		identify and introduce new product categories;

	•		maintain our gross margins with respect to new product categories;

	•		provide a satisfactory mix of merchandise that is responsive to the needs of our customers;

	•		broaden consumer awareness of our existing and future brands;

	•		manage our selling, marketing and fulfillment costs; and

	•		manage our dual-channel direct marketing model.

Furthermore, we have not demonstrated the ability to expand into other product categories through acquisitions. In April 2001, we acquired certain assets of Storybook Inc., a direct marketer of girls’ specialty and special occasion apparel. In February 2002, we re-launched the Storybook Heirlooms brand and the website www.Storybook.com. Revenue growth from the Storybook Heirlooms brand, however, did not meet management expectations, which was a significant factor in our decision in June 2006 to wind-down the brand.

In addition, we may experience a higher degree of seasonality in our business as we expand our brands or expand into new brands or product categories that have seasonal significance. If we are unsuccessful in addressing these risks and uncertainties, our business, financial condition and results of operations may be harmed.

The loss of our senior management or other key personnel could harm our current and future operations and prospects.

Our performance is substantially dependent on the services of our senior management and other key personnel, particularly, Kevin Green, our president and chief executive officer. Several of our former officers terminated their employment with Celebrate Express in the recent past, including the departure of our vice president of finance and secretary effective October 12, 2007. These departures have had, and may continue to have, an adverse impact on our operations and financial results. In fiscal 2007 we hired a vice president of merchandising, vice president of marketing, vice president of operations and vice president of information technology. We are also currently engaged in a search for a replacement for our vice president of finance. We cannot assure you that we will find a qualified candidate in a timely manner, or that these new senior executives will successfully integrate with the company.

Our performance also depends on our ability to retain and motivate our officers and key employees. We do not have employment agreements with our senior executives or other key personnel except Kevin Green. The loss of the services of Mr. Green or any of our other senior executives or key employees for any reason could harm our business, financial condition and operating results. Our future success also depends on our ability to identify, attract, hire, train, retain, and motivate senior management and other technical, managerial, editorial, merchandising, marketing, and customer support personnel. Competition for such personnel is intense and we cannot assure you that we will be able to successfully attract, assimilate or retain sufficiently qualified personnel.

We must compete with other party goods and costume retailers and mass merchandisers on the selection, quality and price of our products, and failure to do so successfully could negatively affect our stock price.

In order to meet our strategic goals, we must successfully offer, on a continuous basis, a broad selection of appealing products to families with young children. To successfully compete against other party goods retailers, costume retailers and mass merchandisers, our product offerings must be affordable, high-quality, innovative and attractive to a wide range of consumers whose preferences may change from time to time. We cannot predict with certainty that we will be successful in offering products that meet these requirements. If consumers do not find our products attractive or our products otherwise become less popular with consumers, we may see increased merchandise returns, inventory write-downs and increased costs. Any shortcomings in our merchandise strategy could adversely affect our operating results and cash flows.

Children’s tastes change and are often difficult to predict, and any failure by us to correctly identify and react appropriately to these changing preferences could hurt our sales and gross margins and render a portion of our inventory obsolete.

Our failure to anticipate, identify or react appropriately to changes in consumer demand could lead to excess inventories and significant markdowns or a shortage of products and lost sales. Our strategy, relations with our customers and margins are dependent, in part, on our identification and regular introduction of new designs that are appealing to our customers, especially children. We cannot assure you that we will be able to identify, obtain or license popular third-party designs or that our design personnel will be able to timely identify and introduce appealing designs in sufficient volume to support our strategy and operations.

We must also anticipate changes in the tastes and preferences of consumers in order to compete for their business successfully. In particular, our ability to anticipate changes in the tastes and preferences of children, which change often and quickly, is crucial to our success, and we could misinterpret or fail to identify trends on a timely basis. Further, product orders must be placed with suppliers before we receive orders from our customers, and the demand for specific products can change between the time the products are ordered by us and the date we receive them. If we underestimate consumer demand, we may disappoint customers and lose potential sales to our competitors. If we overestimate consumer acceptance of our products, we may be required to take significant inventory markdowns or sell our products at discounted prices, which could reduce our sales and gross margins.

If we fail to promote and maintain our brands effectively, we may not be able to compete successfully with better-known competitors.

Building and maintaining recognition of our brands by families with young children is critical to expanding our customer base and competing successfully against other party goods retailers and mass merchandisers with greater brand recognition. In order to continue building consumer recognition of our brands, we will need to increase our financial commitment to creating and maintaining brand awareness in a manner targeted at families with young children. We cannot be certain that our marketing efforts will attract new customers, enable us to retain existing customers, or encourage repeat purchases. If these efforts are not successful, our sales may not grow to desired levels, or could even decline.

If we do not successfully maintain and expand our customer and prospect databases our sales volume could suffer and our marketing costs could increase.

We depend on our proprietary customer and prospect databases to facilitate repeat sales and attract new customers. If we fail to keep these databases current, or if the information in these databases is damaged or destroyed, our sales could stagnate or even decline. If we do not expand our databases of customers and prospects, or if we fail to enhance and refine our techniques for segmenting this information to maximize its usefulness, our sales volume could suffer and our marketing costs could increase. In addition, if federal or state governments enact privacy legislation resulting in the increased regulation of mailing lists, we could experience increased costs in complying with new regulations concerning the solicitation of consents or be unable to achieve the desired database and sales volume growth.

Our operating results could suffer if we are unable to successfully manage the costs of our catalog and email marketing efforts or if our catalogs and emails fail to produce sales at satisfactory levels.

Our catalogs and emails have been an important tool for the acquisition and retention of customers. We believe that the success of our catalogs and emails as a cost-effective marketing tool depends on the following factors:

	•		effective management of costs associated with the production and distribution of our catalogs;

	•		achievement of adequate response rates to our emails and catalog mailings;

	•		displaying a mix of merchandise in our catalogs and emails that is attractive to our customers;

	•		timely delivery of catalog mailings to our customers;

	•		maintaining adequate delivery rates of emails to our customers’ inboxes;

	•		managing our email campaigns to avoid classification as SPAM by significant email service providers.

Catalog production and mailings entail substantial paper, printing, postage and labor costs. Increases in the costs of producing and distributing our catalogs, including increases in postage rates, or paper, photography or printing costs, may reduce the margin on sales derived from our catalogs. As we incur nearly all of the costs associated with our catalogs prior to mailing, we are unable to adjust the costs incurred in connection with a particular mailing to reflect the actual performance of the catalog. In addition, response rates to our mailings and, as a result, sales generated by each mailing are affected by factors such as consumer preferences, economic conditions, the timing and mix of our catalog mailings, the timely delivery of these mailings by the postal system, and changes in our merchandise assortment, some of which are outside of our control. A significant increase in the costs associated with producing or distributing our catalogs, or failure of our catalogs to produce sales at satisfactory levels, could have a negative effect on our operating results.

Capacity constraints, systems failures or security breaches could prevent access to our website, which could lower our sales and harm our reputation.

Our service goals of performance, reliability and availability require that we have adequate capacity in our computer systems to cope with the volume of customers on our website. As our operations grow in size and scope, we will need to improve and upgrade our systems and infrastructure to maintain or improve the efficiency of our operations as well as to offer customers enhanced services, capacity, features and functionality. The expansion and/or upgrade of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of our business increases and with no assurance of a corresponding increase in sales. If we cannot expand and/or upgrade our systems in a timely or efficient manner, we could experience increased costs, disruptions in service, slower response times, lower customer satisfaction and delays in the introduction of new products and services. Any of these problems could impair our reputation, damage our brands and cause our sales to decline.

Our ability to provide high-quality service depends on the efficient and uninterrupted operation of our computer and communications systems. Our systems and operations are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses, design defects, vandalism, denial-of-service attacks and similar events. Our website has experienced system interruptions from time to time and could experience periodic system interruptions in the future. We do not have a formal disaster recovery plan or alternate providers of web hosting services, and a power outage at our data center could mean the temporary loss of the use of our website. Our business interruption insurance may not adequately compensate us for the associated losses. Any system failure or security breach that causes an interruption in service or decreases the responsiveness of our customer support center or website could impair our reputation, damage our brands and cause a decrease in sales.

If we are unable to provide satisfactory telephone-based customer support, we could lose customers.

Our ability to provide satisfactory levels of customer support also depends, to a large degree, on the efficient and uninterrupted operation of our customer support centers. Any material disruption or slowdown in our telephone order processing systems resulting from capacity constraints, labor disputes, telephone or Internet failures, power or service outages, natural disasters or other events could make it difficult or impossible to provide adequate telephone-based customer support. Further, we may be unable to attract and retain an adequate number of competent customer support representatives, which is essential in creating a favorable customer experience. If we are unable to continually provide adequate staffing for our customer support operations, our reputation could be seriously harmed. In addition, we cannot assure you that call volumes will not exceed our present system capacities. If this occurs, we could experience delays in accepting orders, responding to customer inquiries and addressing customer concerns. Also, we may be required to expand our customer support center in the near future. We cannot assure you that we will be able to find additional suitable facilities on acceptable terms or at all, which could seriously hinder our ability to provide satisfactory levels of customer support. Because our success depends in large part on keeping our customers satisfied, any failure to provide satisfactory levels of customer support would likely impair our reputation and we could lose customers.

Failure to successfully manage our fulfillment and distribution operations could cause us to incur increased costs or lose customers.

Our fulfillment and distribution operations are located in Greensboro, North Carolina. These operations are critical to the cost-effective and efficient fulfillment and shipment of customer orders. We are making modifications to our distribution center to accommodate more streamlined distribution procedures. We have incurred higher than anticipated costs in implementing these procedures, as well as higher fulfillment costs related to our transition to a more automated order picking process. As a result, fulfillment costs were 13.5% of net sales in the first quarter of fiscal 2008 and 14.9% of net sales in the first quarter of fiscal 2007. These increased costs contributed significantly to our net losses in previous quarters. We have also observed some erosion in the repeat buying rates of our customers, which we attribute partially to the distribution center problems we have experienced over the past year. If we are unable to successfully manage our fulfillment operations, including further process improvements planned in fiscal 2008, we may experience higher than anticipated costs, hurt our reputation and discourage repeat sales.

Increased product returns, or a failure by us to accurately predict the level of product returns, could harm our business.

As part of our customer support commitment, we maintain a product return policy that allows recipients to return most items received from us with which they are dissatisfied. We make allowances for product returns in our financial statements based on historical return rates. We cannot assure you that actual product returns will not significantly exceed our allowances for returns. In addition, because our allowances are based on historical return rates, we cannot assure you that the introduction of new merchandise within existing or new product categories, increased sales over the Internet, changes in the habits of our customers or other factors will not cause actual returns to exceed return allowances, perhaps significantly. Any increase in product returns above our allowances could have a negative impact on our financial results and may, in turn, cause our stock price to decline.

We may not be able to compete successfully against current and future competitors.

We operate in several competitive markets including party goods and children’s and family costumes. Our primary competition comes from traditional retailers that offer a variety of products in the party goods and children’s and family costume markets. We believe our primary competition in party goods and costumes is from mass merchandisers such as Target and Wal-Mart, party goods superstores such as Party City and Party America, and online retailers such as Oriental Trading and Buy Costumes. We also compete in these markets with a variety of other companies including: traditional card and gift specialty retailers; supermarkets and drugstores; and catalog retailers of novelty items.

Competitors can enter our market with little difficulty and can launch new websites or catalogs at a relatively low cost. Many of these current and potential competitors may have the ability to devote substantially more resources to marketing, customer support, product development and order fulfillment operations than we can. Some of our suppliers also may choose to compete with us directly and may in the future choose not to supply products to us. In addition, larger or more well-financed entities have acquired and may in the future acquire, invest in or form joint ventures with our competitors. Some of our competitors may be able to secure products from suppliers on more favorable terms, fulfill orders more efficiently or adopt more aggressive pricing than we can. If we are unable to compete effectively in our markets, our business, financial condition and operating results may suffer.

We depend on search engines to attract customers to our website, and losing these customers would adversely affect our revenues and financial results.

Many consumers access our website by clicking through search results displayed by Internet search engines. Internet search engines typically provide two types of search results, algorithmic listings and purchased listings. Algorithmic listings cannot be purchased, and instead are determined and displayed solely by a set of formulas utilized by the search engine. Purchased listings can be bought by advertisers in order to attract users to their websites. We rely on both algorithmic and purchased listings to attract and direct consumers to our website. Search engines revise their algorithms from time to time in an attempt to optimize their search results. If one or more of the search engines on which we rely for algorithmic listings were to modify its algorithms, resulting in fewer consumers clicking through to our website, we would need to increase our marketing expenditures, which would adversely affect our financial results. In addition, the rates for purchased listings have significantly increased. If one or more of the search engines on which we rely for purchased listings modifies or terminates its relationship with us or if the rates for purchased listings continues to rise, our online marketing expenses as a percentage of revenue could rise, we could lose customers, we could be forced to look for other advertising avenues and traffic to our website could decrease.

Because we do not have long-term contracts for third-party products, we may not have continued access to popular products.

Our business depends significantly on the use of third-party proprietary products and our future success is contingent upon the continued availability of these products. We do not have long-term arrangements with any vendor or distributor that would guarantee the availability of third-party proprietary products and, as a result, we do not have a predictable or guaranteed supply of these products. We cannot assure you we will have access to any third-party products in sufficient quantities. If we are unable to provide our customers with continued access to popular or exclusive third-party products, our sales could decline.

If we are unable to maintain or acquire licenses to intellectual property, we may have fewer proprietary products and our sales may decline.

Many of our proprietary products are based on or incorporate intellectual property and other character or story rights licensed from third parties. These license agreements are limited in scope, typically have a two- or three-year term and lack renewal rights. We may not be able to renew key licenses when they expire or include new products in existing licenses. Moreover, most of these licenses may be terminated immediately if we breach their terms. If we are unable to maintain these licenses and obtain additional licenses with significant commercial value, or maintain them at reasonable costs, we will be unable to increase our revenue in the future unless we offset the loss of the products that depend on these licenses with an increase in sales of our independently created proprietary products.

Because we do not have long-term contracts with our suppliers, we may not have continued access to necessary materials and our sales may suffer.

Our financial performance depends on our ability to purchase our products in sufficient quantities at competitive prices. We purchase our products from over 250 foreign and domestic manufacturers and distributors. We have no long-term purchase contracts with any of these suppliers, and therefore, have no contractual assurances of continued supply, access to products or favorable pricing. Any vendor could increase prices or discontinue selling to us at any time. The lack of long-term contracts also exposes us to increased risks associated with changes in local economic conditions, trade issues and foreign currency fluctuations. In the first quarter of fiscal 2008 ended August 31, 2007, products supplied by our ten largest suppliers represented approximately 54.7% of inventory purchases, with our largest supplier representing 17.9%. If we are unable to maintain these supplier relationships, our ability to offer high-quality, favorably-priced products to our customers may be impaired, and our sales and gross margins could decline.

Our reliance on smaller or independent vendors and suppliers and manufacturers located abroad exposes us to various risks including disruption in product supply.

Some of our smaller vendors have limited resources, production capacities and operating histories, which means that they may not be able to timely produce sufficient quantities of certain products demanded by our customers. In addition, our relationships with independent foreign suppliers and manufacturers are also subject to a number of risks, including:

	•		work stoppages;

	•		transportation delays and interruptions;

	•		political instability;

	•		foreign currency fluctuations;

	•		changing economic conditions;

	•		an increased likelihood of counterfeit, knock-off or gray market goods;

	•		product liability claims;

	•		expropriation, nationalization, imposition of tariffs, import and export controls and other non-tariff barriers, including quotas and restrictions on the transfer of funds;

	•		environmental regulation; and

	•		other changes in governmental policies.

Because of these factors, we may be subject to liability claims or may not be able to acquire desired products in sufficient quantities on terms acceptable to us. Any inability to acquire suitable products, the loss of one or more key vendors, or the settlement or outcome of a product liability suit could have a negative effect on our sales and operating results. We may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of lesser quality or more expensive than those we currently purchase. We cannot be certain that such factors will not prevent us from procuring manufactured products in a cost-effective or timely manner.

We may face product liability claims that are costly and create adverse publicity.

If any of the products that we sell causes harm or damages to any of our customers or other individuals, we could be vulnerable to product liability claims. We have in the past recalled, and may in the future recall, products that we sold. Although we maintain insurance against product liability claims, our coverage may be inadequate to cover any liabilities we may incur. We work with experts to test some of our products for safety compliance, but our tests may not identify all potential product defects before products are sold. Even if we successfully defend ourselves against product liability claims, we could be forced to spend a substantial amount of money in litigation expenses, our management could be required to spend valuable time in the defense against these claims, we could be required to remove products from inventory, and we could suffer adverse publicity about the safety and fitness of our products, any of which could harm our business.

Failure of third parties to deliver our products efficiently and in a timely manner could cause us to lose customers.

We rely upon other parties for product shipments to and from our Greensboro, North Carolina fulfillment and distribution center. It is possible that events beyond our control, such as strikes, trucking shortages, the imposition of tariffs, rail disruption, or other disruption, could affect the ability of these parties to deliver inventory items to our facilities or merchandise to our customers. The failure of these parties to deliver goods to or from our facilities could result in delays in fulfillment of customer orders. Because our customer orders are often time-sensitive, delays by our third-party shipment providers could hurt our reputation and our ability to obtain repeat orders.

Fluctuations in commodity prices may increase our operating costs and make our expenses difficult to predict.

We are vulnerable to fluctuations in commodity prices, particularly the price of paper stock. Paper goods comprise a significant portion of our total inventory. In addition, a portion of our marketing expenditures are related to our direct marketing efforts which include our paper catalogs. If the price of paper increases significantly, we may be unable to pass the additional costs on to our customers, which could hurt our profitability. In addition, fluctuations in commodity prices could make it difficult for us to accurately forecast our expenses.

We may consider acquisitions as part of our growth strategy, and failure to adequately evaluate or integrate any acquisitions could harm our business.

We have limited experience in acquiring other businesses. In April 2001, we acquired the assets of Storybook Inc. Integration expenses were higher than anticipated and despite considerable effort and time spent, revenue growth from the Storybook brand did not meet management expectations. In June of 2006, we announced the wind-down of the Storybook brand which was completed in the fourth quarter of fiscal 2007. We may consider opportunities to acquire other products and businesses that could enhance or complement our current products and services or expand the breadth of our product categories or customer base. Potential and completed acquisitions involve numerous risks, including unanticipated costs associated with the acquisition and risks associated with entering product categories in which we have no or limited prior experience. If we fail to properly evaluate and execute future acquisitions, our management team may be distracted from our day-to-day operations, our business may be disrupted, and our operating results may suffer.

Our business involves the extensive use of intellectual property, and related claims against us could be costly or force us to abandon popular products.

Third parties have asserted, and may in the future assert, that our business or the products we make or use infringe upon their rights. We cannot predict whether third parties will assert claims of infringement against us, or whether any past or future assertions or prosecutions of infringement will harm our business. If we are forced to defend against any such claims, whether they are with or without merit and even if they are determined in our favor, we may face costly litigation, diversion of the attention of our technical and management personnel and product shipment delays. As a result of any infringement dispute, we may have to develop non-infringing products or enter into royalty or licensing agreements, which may be on unfavorable terms. If there is a successful claim of infringement against us, and we are unable to develop non-infringing products or license the infringed or similar product on a timely basis or at all, we will need to drop the infringed product from our offerings and our sales could suffer.

If the protection of our trademarks and proprietary rights is inadequate, our brands and reputation could be impaired and we could lose customers.

The steps we take to protect our proprietary rights may be inadequate. We regard our copyrights, service marks, trademarks, trade dress, trade secrets and similar intellectual property as critical to our success. We rely on trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our proprietary rights. Birthday Express and BirthdayExpress.com are registered with the United States Patent and Trademark office, and we have filed federal trademark applications for Costume Express and Celebrate Express. We cannot be certain we will be able to obtain registration for our filed trademarks or for trademarks we submit applications for in the future. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which we will sell our products and services. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights and our brands and reputation could be impaired and we could lose customers.

If we cannot maintain and protect our existing domain names or acquire suitable new domain names as needed, we may not be able to successfully build our brands.

We may be unable to acquire or maintain Internet domain names relating to our brands in the United States and other countries in which we may conduct business. As a result, we may be unable to prevent third parties from acquiring and using domain names relating to our brands. Such use could damage our brands and reputation and divert customers away from our website. We currently hold various relevant domain names, including www.CelebrateExpress.com, www.BirthdayExpress.com, and www.CostumeExpress.com. The acquisition and maintenance of domain names generally is regulated by governmental agencies. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names, any of which may affect our ability to maintain the domain names we need for our business. If we cannot prevent others from using similar domain names we may be unable to successfully build our brands.

Temporary or permanent disruption at our fulfillment facility could prevent timely shipment of customer orders and hurt our sales.

We assemble, package, and ship our orders, and process all product returns, at our Greensboro, North Carolina fulfillment and distribution facility. In the future, we may be unable to fulfill our customers’ orders at this facility in a timely manner, or at all, due to a number of factors, including:

	•		a failure to maintain or renew our existing lease agreement;

	•		a power, telecommunications or other systems failure;

	•		an employee strike or other labor stoppage;

	•		terrorist attacks, acts of war or break-ins;

	•		a disruption in the transportation infrastructure including air traffic and roads; or

	•		fire, flood, hurricane or other disaster.

In the event that we are temporarily unable to timely fulfill our customers’ orders through our Greensboro facility, we will either upgrade the shipping or attempt to re-ship the orders from another source. However, we cannot guarantee that we will be able to fulfill all orders or that we will be able to deliver the affected orders in a timely manner. This could result in increased fulfillment costs or a decrease in sales, as well as the potential loss of repeat orders from affected customers. In addition, if operations at our Greensboro facility become permanently disrupted due to any of the above or other factors, we may not be able to secure a replacement fulfillment and distribution facility on terms acceptable to us or at all. We do not currently maintain back-up power systems at our Greensboro facility, nor do we have a formal disaster recovery plan and our business interruption insurance may be insufficient to compensate us for losses that occur in the event operations at our fulfillment and distribution center are interrupted.

We may incur significant costs or experience product availability delays in complying with regulations applicable to the sale of our manufactured products.

We use a variety of water-based inks, paper and coatings in the manufacture of our paper party products. We are required to maintain our manufacturing operations in compliance with United States federal, state and local laws and regulations, including but not limited to rules and regulations associated with consumer protection and safety, the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, the Food and Drug Administration and the Occupational Safety and Health Administration, or OSHA. Changes in laws and regulations applicable to our business could significantly increase our costs of goods sold and we may not be able to pass these increases on to our customers. If we fail to comply with current laws and regulations applicable to our business, or to pass annual inspections of our facilities by regulatory bodies, we could be subject to fines and penalties or even interruptions of our operations. In addition, failure to comply with applicable laws and regulations could subject us to the risk of private lawsuits and damages.

If use of the Internet, particularly with respect to online commerce, does not continue to increase as rapidly as we anticipate, our sales may not grow to desired levels.

For the quarter ended August 31, 2007, our online sales represented approximately 81% of our total sales. Our future sales and profits are substantially dependent upon the continued use of the Internet as an effective medium of business and communication by our customers. Internet use may not continue to develop at historical rates and consumers may not continue to use the Internet and other online services as a medium for commerce. Highly-publicized failures of some online retailers in meeting consumer demands could result in consumer reluctance to adopt the Internet as a means for commerce, and thereby damage our reputation and brands and reduce our revenues and results of operations.

In addition, the Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons, including:

	•		actual or perceived lack of security of information or privacy protection;

	•		possible disruptions, computer viruses or other damage to the Internet servers or to users’ computers; and

	•		excessive governmental regulation.

If the Internet fails to continue growing as a commercial marketplace, our sales may not increase as much as desired by our shareholders, or at all.

Risks related to the Internet, including security and reliability issues, are largely outside our control and may hurt our reputation or sales.

Our online business is subject to numerous risks, many of which are outside our control. In addition to changing consumer preferences and buying trends relating to Internet usage, we are vulnerable to additional risks and uncertainties associated with the Internet. These risks include changes in required technology interfaces, website downtime or slowdowns and other technical failures or human errors, changes in applicable federal and state regulation, security breaches, and consumer privacy concerns. Our failure to respond successfully to these risks and uncertainties might adversely affect the sales through our online business, as well as damage our reputation and increase our selling and marketing and general and administrative expenses. In addition, our success will depend, in large part, upon third parties maintaining the Internet infrastructure to provide a reliable network backbone with the speed, data capacity, security and hardware necessary for reliable Internet access and services. Our business, which relies on a graphically-rich website that requires the transmission of substantial data, is also significantly dependent upon the availability and adoption of broadband Internet access and other high-speed Internet connectivity technologies. Any significant reliability, data capacity or connectivity problems experienced by the Internet or its users could harm our sales and profitability.

Government regulation of database use in direct marketing and Internet and online commerce is evolving. Unfavorable changes in these regulations could substantially harm our business and results of operations.

We are subject to general business regulations and laws, as well as regulations and laws that specifically govern database use in direct marketing and Internet and online commerce. Existing and future regulations and laws may impede the growth of database direct marketing, Internet or other online services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, email restrictions, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and services. It is not clear how existing laws and regulations governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to database direct marketing, the Internet and online commerce. Unfavorable resolution of these issues may slow the growth of database direct marketing, online commerce and, in turn, our business.

Our failure to protect confidential information of our customers and our network against security breaches could damage our reputation and brands and subject us to legal liability.

A significant barrier to online commerce and communications is the secure transmission of confidential information over public networks. Currently, a majority of our sales are billed to our customers’ credit card accounts directly. We rely on encryption and authentication technology licensed from third parties to effect secure transmission of confidential information, including credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology we use to protect customer transaction data. Any compromise of our security could damage our reputation and brands and expose us to a risk of lost sales, or litigation and possible legal liability. In addition, anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches.

Our failure to address risks associated with credit card fraud and bad debt could damage our reputation, brands and results of operations.

Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. We do not currently carry insurance against this risk. To date, we have experienced minimal losses from credit card fraud, but we face the risk of significant losses from this type of fraud as our net sales increase. We have also instituted a promotional offer which allows customers to purchase products from us with the associated billing to their credit card occurring on a predetermined date in the future, generally within 90 days of the purchase date. We are currently assuming the credit risk associated with the delayed collection of funds for this customer offer. Losses incurred from fraudulent transactions or bad debt associated with the extension of credit to our customers could impair our results of operations. In addition, any failure to adequately control fraudulent credit card transactions could damage our reputation and brands, and reduce our sales.

Our sales may decrease if we are required to collect taxes on purchases.

We do not collect or have imposed upon us sales, use or other taxes related to the products we sell, except for certain corporate-level taxes and sales taxes with respect to purchases by customers located in the states of North Carolina and Washington. However, one or more states may seek to impose sales, use or other tax collection obligations on us in the future. A successful assertion by one or more states that we should be collecting sales, use or other taxes on the sale of our products could result in substantial tax liabilities and penalties in connection with past sales. In addition, if we are required to collect these taxes we will lose one of our current cost advantages, which may decrease our ability to compete with traditional retailers and substantially harm our sales.

We have based our policies for sales and use tax collection on our interpretation of certain decisions of the U.S. Supreme Court that restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made through catalogs or over the Internet. However, implementation of the restrictions imposed by these Supreme Court decisions is subject to interpretation by state and local taxing authorities. While we believe that these Supreme Court decisions currently restrict state and local taxing authorities outside the states of North Carolina and Washington from requiring us to collect sales and use taxes from purchasers located within their jurisdictions, taxing authorities outside of North Carolina and Washington could disagree with our interpretation of these decisions. Moreover, a number of states, as well as the U.S. Congress, have been considering various initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales. If any state or local taxing jurisdiction were to disagree with our interpretation of the Supreme Court’s current position regarding state and local taxation of Internet sales, or if any of these initiatives were to address the Supreme Court’s constitutional concerns and result in a reversal of its current position, we could be required to collect sales and use taxes from purchasers located in states other than North Carolina and Washington. The imposition of additional tax obligations on our business by state and local governments could create significant administration burdens for us, decrease our future sales and harm our cash flow and operating results.

Failure to rapidly respond to technological change could result in our services or systems becoming obsolete.

As the Internet and online commerce industries evolve, we may be required to license emerging technologies useful to our business, enhance our existing services, develop new services and technologies that address the increasingly sophisticated and varied needs of our prospective customers and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We may not be able to successfully implement these new services and technologies or adapt our website, telephone and transaction-processing systems to customer requirements or emerging industry standards. Some of our computer systems use antiquated software that is no longer supported by the vendor. If we were to encounter problems with these systems it could be costly and time consuming to correct, and may disrupt operations. If we fail to respond to these issues in a timely manner, we may lose existing customers and be unable to attract sufficient numbers of new customers.

Future sales of our common stock may depress our stock price.

If our shareholders sell substantial amounts of common stock in the public market, or if the market perceives that these sales may occur, the market price of our common stock may decline. We have registered all shares of common stock that we may issue under our employee benefits plans. As a result, these shares can be freely sold in the public market upon issuance, subject to restrictions under the securities laws. The holders of a significant portion of our common stock have rights, subject to some conditions, to require us to file registration statements covering the resale of their shares or to include their shares in registration statements that we may file for ourselves or other shareholders. These registration rights of our shareholders could impair our ability to raise capital by depressing the price at which we could sell our common stock.

Our directors, executive officers and significant shareholders hold a substantial portion of our stock, which may lead to conflicts with other shareholders over corporate transactions and other corporate matters.

Our directors and current beneficial holders of 5% or more of our outstanding common stock own a significant portion of our stock. These individuals, acting together, are able to control or influence significantly all matters requiring shareholder approval, including the election of directors and significant corporate transactions such as mergers or other business combinations. This control may delay, deter or prevent a third-party from acquiring or merging with us and limit the ability of smaller shareholders to influence corporate matters.

We will need to implement additional finance and accounting systems, procedures and controls as we grow our business and organization and to satisfy new reporting requirements.

As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, including expanded disclosures and accelerated reporting requirements and more complex accounting rules. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and other requirements will increase our costs and require additional management time and resources. We may need to continue to implement additional finance and accounting systems, procedures and controls to satisfy new reporting requirements. If our internal controls over financial reporting are determined to be ineffective, investors could lose confidence in the reliability of our internal controls over financial reporting, which could adversely affect our stock price.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On October 19, 2004, the Company’s registration statement on Form S-1 (Registration No. 333-117459) was declared effective for the Company’s initial public offering. Net proceeds to the Company after all expenses was approximately $34 million. From the effective date of the registration statement through August 31, 2007, the Company has used the net proceeds from the offering for repayment of the Company’s $5.0 million term loan. On April 26, 2007 approximately $9.9 million was paid to shareholders in the form of a one time special dividend. The remaining proceeds from the offering are invested in commercial paper and money market securities.

Item 6. Exhibits.


Exhibit No.		Description
3.1(1)		Amended and Restated Articles of Incorporation of Celebrate Express, Inc.

3.2(2)		Articles of Amendment of the Amended and Restated Articles of Incorporation of Celebrate Express, Inc. (Series A Participating Preferred Stock).

3.3(1)		Amended and Restated Bylaws of the Celebrate Express, Inc.

3.4(3)		Amendments to Sections 2.1, 2,2 and 3.3 of the Amended and Restated Bylaws of Celebrate Express, Inc.

3.5(4)		Amendments to Sections 3.9 and 11.1 of the Amended and Restated Bylaws of Celebrate Express, Inc.

4.1(1)		Specimen Common Stock Certificate.

4.2(1)		Amended and Restated Investor’s Rights Agreement dated November 15, 2001, by and among Celebrate Express, Inc. and the investors named therein.

4.3(2)		Preferred Shares Rights Agreement, dated July 25, 2005.


Exhibit No.		Description
4.4(2)		Form of Preferred Shares Rights Certificate.

31.1		Certification of Chief Executive Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Certification of Principal Financial Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1		Certification of Chief Executive Officer Required Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.

32.2		Certification of Principal Financial Officer Required Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.


(1)		Incorporated by reference to Registrant’s Registration Statement on Form S-1 (File No. 333-117459), as amended, initially filed with the Securities and Exchange Commission on July 16, 2004.

(2)		Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 25, 2006.

(3)		Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2006.

(4)		Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 2006.

SIGNATURES

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


	CELEBRATE EXPRESS, INC.
Date: October 11, 2007	By:	/s/ Kevin A. Green
		Kevin A. Green
		Chief Executive Officer and President (Principal Executive Officer)


Date: October 11, 2007	By:	/s/ Darin L. White
		Darin L. White
		Vice President, Finance (Principal Financial and Accounting Officer)

EXHIBIT INDEX


Exhibit No.		Description
3.1(1)		Amended and Restated Articles of Incorporation of Celebrate Express, Inc.

3.2(2)		Articles of Amendment of the Amended and Restated Articles of Incorporation of Celebrate Express, Inc. (Series A Participating Preferred Stock).

3.3(1)		Amended and Restated Bylaws of the Celebrate Express, Inc.

3.4(3)		Amendments to Sections 2.1, 2,2 and 3.3 of the Amended and Restated Bylaws of Celebrate Express, Inc.

3.5(4)		Amendments to Sections 3.9 and 11.1 of the Amended and Restated Bylaws of Celebrate Express, Inc.

4.1(1)		Specimen Common Stock Certificate.

4.2(1)		Amended and Restated Investor’s Rights Agreement dated November 15, 2001, by and among Celebrate Express, Inc. and the investors named therein.

4.3(2)		Preferred Shares Rights Agreement, dated July 25, 2005.

4.4(2)		Form of Preferred Shares Rights Certificate.

31.1		Certification of Chief Executive Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Certification of Principal Financial Officer Required Under Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1		Certification of Chief Executive Officer Required Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.

32.2		Certification of Principal Financial Officer Required Under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.


(1)		Incorporated by reference to Registrant’s Registration Statement on Form S-1 (File No. 333-117459), as amended, initially filed with the Securities and Exchange Commission on July 16, 2004.

(2)		Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 25, 2006.

(3)		Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2006.

(4)		Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 2006.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman V good

Celebrate Express (BDAY) Inactive 10-Q2008 Q2 Quarterly report

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