<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                   FORM 10-Q


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

                 For The Quarterly Period Ended August 4, 2001

                         Commission File Number: 21859

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

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

                               2727 Diehl Road,
                          Naperville, IL  60563-2371
              --------------------------------------------------
              (Address of principal executive offices, zip code)

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

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

    The number of shares of the Registrant's Common Stock outstanding
                    as of September 13, 2001 was 7,503,098.

<PAGE>

                           Factory Card Outlet Corp.
                (Debtor in possession effective March 23, 1999)
                                   Form 10-Q

                      For the Quarter Ended August 4, 2001

                                     Index
<TABLE>
<CAPTION>
                                                                                                     Page

Part I                                     Financial Information

<S>         <C>                                                                                       <C>
Item 1      Financial Statements (unaudited):

            Consolidated Balance Sheets as of August 4, 2001 and February 3, 2001                        3

            Consolidated Statements of Operations for the three fiscal months and six fiscal
              months ended August 4, 2001 and July 29, 2000                                              4

            Consolidated Statements of Cash Flows for the six fiscal months
              ended August 4, 2001 and July 29, 2000                                                     5

            Notes to Consolidated Financial Statements                                                  6-9

Item 2      Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                                                10-14

Item 3      Quantitative and Qualitative Disclosures About Market Risk                                   14

Part II     Other Information                                                                          14-15

            Signatures                                                                                   15
</TABLE>

                                       2

<PAGE>

PART I - FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS



                           FACTORY CARD OUTLET CORP.
                                AND SUBSIDIARY

                          Consolidated Balance Sheets
              (Dollar amounts in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                                      August 4,              February 3,
                                                                                         2001                    2001
                                                                                      ---------             ------------
<S>                                                                                   <C>                   <C>
ASSETS                                                                               (Unaudited)

Current assets:
   Cash                                                                               $    173                 $    281
   Merchandise inventories                                                              53,858                   55,883
   Prepaid expenses and other                                                            1,090                    2,086
                                                                                      --------                 --------
      Total current assets                                                              55,121                   58,250

Fixed assets, net                                                                       22,050                   25,061
Other assets                                                                               380                      401
                                                                                      --------                 --------

      Total assets                                                                    $ 77,551                 $ 83,712
                                                                                      ========                 ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Debt                                                                               $ 18,997                 $ 25,699
   Accounts payable                                                                      9,965                    7,634
   Accrued expenses                                                                      7,811                    8,407
                                                                                      --------                 --------
      Total current liabilities                                                         36,773                   41,740

Liabilities subject to compromise                                                       55,368                   55,374
                                                                                      --------                 --------

Total liabilities                                                                       92,141                   97,114

Stockholders' deficit:
   Common stock - $.01 par value.  Voting class - authorized  15,000,000 shares;
    7,503,098 shares issued and outstanding.  Non-voting class - authorized
    205,000 shares, no shares issued or outstanding.                                        75                       75


   Additional paid-in capital                                                           52,021                   52,021
   Accumulated deficit                                                                 (66,686)                 (65,498)
                                                                                      --------                 --------

      Total stockholders' deficit                                                      (14,590)                 (13,402)
                                                                                      --------                 --------

      Total liabilities and stockholders' deficit                                     $ 77,551                 $ 83,712
                                                                                      ========                 ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

                           FACTORY CARD OUTLET CORP.
                                AND SUBSIDIARY

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

<TABLE>
<CAPTION>
                                          Three fiscal months ended              Six fiscal months ended
                                                  (Unaudited)                          (Unaudited)
                                        ------------------------------       -------------------------------
                                          August 4,         July 29,           August 4,          July 29,
                                            2001              2000               2001               2000
                                        ------------      ------------       -------------      ------------
<S>                                     <C>              <C>                <C>                <C>
Net sales                                $    57,013       $    59,426         $   113,249       $   113,868
Cost of sales                                 29,423            30,611              59,838            59,573
                                        ------------      ------------       -------------      ------------
   Gross profit                               27,590            28,815              53,411            54,295
Selling, general and
 administrative expenses                      24,573            26,392              50,526            51,751
Interest expense                                 627               757               1,451             1,605
                                        ------------      ------------       -------------      ------------
   Income before reorganization
     items                                     2,390             1,666               1,434               939
Reorganization items, net                      1,218             1,363               2,622             3,374
                                        ------------      ------------       -------------      ------------
   Net income (loss)                     $     1,172       $       303        $     (1,188)      $    (2,435)
                                        ============      ============       =============      ============
Net income (loss) per share -
  basic & diluted                       $       0.16       $      0.04        $      (0.16)      $     (0.32)
                                        ============      ============       =============      ============

Weighted average shares
  outstanding - basic/diluted              7,503,098         7,503,098           7,503,098         7,503,098
                                        ============      ============       =============      ============
</TABLE>


See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

                           FACTORY CARD OUTLET CORP.
                                AND SUBSIDIARY

                     Consolidated Statements of Cash Flows
                         (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                            Six fiscal months ended
                                                        -------------------------------
                                                            August 4,       July 29,
                                                              2001            2000
                                                        --------------   --------------
<S>                                                      <C>             <C>
                                                                   (Unaudited)
Cash flows from operating activities:
  Net loss                                                $     (1,188)    $     (2,435)
  Adjustments to reconcile net loss to
   net cash provided by (used in)
   operating activities:
    Depreciation and amortization of fixed assets                3,497            3,699
    Amortization of deferred financing costs
     and debt discount                                             376              390
    Non cash portion of reorganization items                       772            1,621
    Other                                                           10               (4)
    Changes in assets and liabilities:
      (Increase) decrease in assets:
       Merchandise inventories                                   2,025              896
       Prepaid expenses and other assets                           641              474
      Increase (decrease) in liabilities:
       Accounts payable                                          2,331           (1,622)
       Accrued expenses                                         (1,315)             599
       Liabilities subject to compromise                            99              186
                                                        --------------   --------------

Net cash provided by operating activities                        7,248            3,804
                                                        --------------   --------------
Net cash used in investing activities -
 purchase of fixed assets, net                                    (550)            (799)
                                                        --------------   --------------
Cash flows from financing activities:
  Borrowings under revolving credit notes                      112,822          115,293
  Repayment of borrowings under revolving credit notes        (119,524)        (119,603)
  Payment of long-term obligations                                (104)            (221)
                                                        --------------   --------------
Net cash used in financing activities                           (6,806)          (4,531)
                                                        --------------   --------------
Net decrease in cash                                              (108)          (1,526)
Cash at beginning of period                                        281            1,713
                                                        --------------   --------------
Cash at end of period                                     $        173     $        187
                                                        ==============   ==============

Supplemental cash flow information:
  Interest paid                                           $      1,121     $      1,213
</TABLE>

See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

                           FACTORY CARD OUTLET CORP.
                                AND SUBSIDIARY
                  Notes to Consolidated Financial Statements
             (Dollar amounts in thousands, except per share data)
                                  (Unaudited)



(1)  Organization and Basis of Presentation

          The consolidated unaudited financial statements include the accounts
     of Factory Card Outlet Corp. and its wholly owned subsidiary, Factory Card
     Outlet of America Ltd. (collectively the "Company"). The Company is a chain
     of company-owned stores offering an extensive selection of greeting cards,
     giftwrap, balloons, party supplies and other special occasion merchandise
     at everyday value prices. These financial statements have been prepared by
     management without audit and should be read in conjunction with the
     consolidated financial statements and notes for the fiscal year ended
     February 3, 2001 included in the Company's Annual Report on Form 10-K. The
     operating results for the interim periods are not necessarily indicative of
     the results for the year. All intercompany balances and transactions have
     been eliminated in consolidation. In the opinion of management, the
     accompanying consolidated financial statements reflect all normal recurring
     and certain nonrecurring adjustments necessary for a fair presentation of
     the interim financial statements.

          The Company filed voluntary petitions for relief under chapter 11 of
     title 11 of the United States Code (the "Bankruptcy Code") on March 23,
     1999 (the "petition date") under case numbers 99-685(JCA) and 99-686(JCA)
     (the "Chapter 11 Cases"). The Company is currently operating its business
     as debtors in possession under the jurisdiction of the United States
     Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").

          The accompanying consolidated financial statements have been prepared
     assuming the Company will continue as a going concern and in accordance
     with the American Institute of Certified Public Accountants Statement of
     Position 90-7, Financial Reporting by Entities in Reorganization under the
     Bankruptcy Code. The commencement of the Chapter 11 Cases and the net
     losses resulting in a net deficit raise substantial doubt about the
     Company's ability to continue as a going concern. As discussed in Note 5,
     the Company has recorded certain reorganization items during the six fiscal
     months ended August 4, 2001. Additional adjustments, some of which could be
     material, may be necessary as a consequence of a plan of reorganization.
     The continuation of the Company's business as a going concern is contingent
     upon, among other things, the ability to (1) formulate a plan of
     reorganization that will be confirmed by the Bankruptcy Court, (2) achieve
     satisfactory levels of future profitable operations, (3) maintain adequate
     financing, and (4) generate sufficient cash from operations to meet future
     obligations.

          The Bankruptcy Code provides that the Company has an exclusive period
     during which only it may propose, file and solicit acceptances of a plan of
     reorganization. The exclusive period for the Company to propose a plan of
     reorganization currently expires on October 31, 2001. If the Company fails
     to file a plan of reorganization during the exclusive period or, after such
     plan has been filed, if the Company fails to obtain acceptance of such plan
     from the requisite impaired classes of creditors and equity security
     holders during the exclusive period, any party in interest, including a
     creditor, an equity security holder, a committee of creditors or equity
     security holders, or an indenture trustee, may file their own plan of
     reorganization for the Company. The Company plans to develop a plan of
     reorganization for submission to the Bankruptcy Court.

          On or about March 26, 2001, the Company, Factory Card Holdings, Inc.
     ("FCH") and the Official Committee of Unsecured Creditors (the "Creditors'
     Committee") entered into that certain

                                       6
<PAGE>

     Agreement on Plan of Reorganization of Factory Card Outlet Corp., dated as
     of March 26, 2001 (the "FCH Agreement"). The FCH Agreement provided for,
     among other things, FCH causing one or more third parties to invest a
     minimum of $10,000 in the Company, $6,000 of which would be invested in the
     form of equity and the balance of which would be invested in the form of
     debt (the "FCH Investment"). The FCH Investment would have enabled the
     Company to consummate the Plan (as defined below) and emerge from chapter
     11. In exchange for the FCH Investment, pursuant to the FCH Agreement, FCH
     was to receive 100% of the new common stock issued by reorganized Factory
     Card.

          Following the execution of the FCH Agreement, the Debtors, FCH and the
     Creditors' Committee proceeded to negotiate and document a plan of
     reorganization. On or about May 31, 2001, the Debtors filed the Amended
     Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the
     "Plan") and on June 1, 2001, the Bankruptcy Court approved the related
     disclosure statement (the "Disclosure Statement") and scheduled a
     confirmation hearing for July 18, 2001 (the "Confirmation Hearing").
     However, on July 13, 2001, FCH informed the Debtors and the Creditors'
     Committee that it could not fulfill its obligation to provide the FCH
     Investment. Consequently, the Debtors concluded that they could not proceed
     with the Confirmation Hearing on July 18, 2001. On August 20, 2001, the
     Debtors and the Creditors' Committee withdrew the Plan.

          Because FCH was unable to fulfill its obligations under the FCH
     Agreement in a timely manner, on or about August 1, 2001, the Debtors and
     the Creditors' Committee effectively terminated the FCH Agreement,
     reserving their respective rights and claims against FCH. Nevertheless,
     since their withdrawal of the Plan, the Debtors have been focused on
     formulating a new plan of reorganization and are continuing to explore all
     other possible plan alternatives.

          In July 2001, the Financial Accounting Standards Board ("FASB") issued
     SFAS No. 141 "Business Combinations" (SFAS No. 141), which establishes
     financial accounting and reporting for business combinations and supercedes
     APB Opinion No. 16, Business Combinations, and FASB Statement No. 38,
     Accounting for Preacquisition Contingencies of Purchased Enterprises. SFAS
     No. 141 requires that all business combinations be accounted for using one
     method, the purchase method. The provisions of SFAS No. 141 apply to all
     business combinations initiated after June 30, 2001. The adoption of SFAS
     No. 141 is expected to have no material impact on financial reporting and
     related disclosures of the Company.

          In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other
     Intangible Assets" ("SFAS No. 142"), which establishes financial accounting
     and reporting for acquired goodwill and other intangible assets and
     supercedes APB Opinion No. 17, Intangible Assets. The provisions of SFAS
     No. 142 are effective for fiscal years beginning after December 15, 2001.
     The Company will adopt SFAS No. 142 during the first quarter of fiscal 2002
     and is expected to have no material impact on the financial position of the
     Company.


(2)  Debtor in Possession Facility

          Subsequent to the commencement of the Chapter 11 Cases, the Company
     entered into a Revolving Credit and Guaranty Agreement dated March 23, 1999
     and subsequent amendments (as amended, the "Loan Agreement") which provides
     up to $35,000 (including $10,000 for letters of credit) to fund working
     capital needs and for general corporate purposes. Borrowing under the
     facility is limited by inventory levels and has an interest rate of 1% over
     prime (7.75% at August 4, 2001). The Loan Agreement expires on the earlier
     of February 1, 2002 or the date the Bankruptcy Court confirms a plan of
     reorganization. Borrowings under the Loan Agreement are secured by
     substantially all of the Company's assets. Certain restrictive covenants
     apply, including maintenance of certain inventory levels, achievement of
     specified operating results and limitations on the incurrence of

                                       7
<PAGE>

     additional liens and indebtedness, capital expenditures, asset sales and
     payment of dividends, all of which have been met or waived.


(3)  Management Estimates

          The preparation of financial statements in conformity with accounting
     principles generally accepted in the United States of America requires
     management to make estimates and assumptions that affect the reported
     amounts of assets and liabilities at the date of the financial statements
     and the reported amounts of revenues and expenses during the reporting
     period and related disclosures. Significant estimates made as of and for
     the three and six fiscal month periods ended August 4, 2001 and July 29,
     2000 include accruals for store closings and other reorganization items,
     provision for shrinkage, capitalized overhead costs related to inventory
     and the carrying values of inventories. Actual results could differ from
     those estimates.


(4)  Liabilities Subject to Compromise

          Liabilities subject to compromise refer to liabilities incurred prior
     to the commencement of the Chapter 11 Cases. These liabilities consist
     primarily of amounts outstanding for accounts payable, deferred rent
     obligations, amounts accrued for rejected leases, other accrued expenses
     and obligations under capital leases. These amounts represent management's
     best estimate of known or potential claims to be resolved in connection
     with the Chapter 11 Cases. Such claims remain subject to future adjustments
     based on negotiations, actions of the Bankruptcy Court, further
     developments with respect to disputed claims or other events. The terms for
     the satisfaction of these claims will be established in connection with the
     Chapter 11 Cases.

          The Company has received approval from the Bankruptcy Court to pay or
     otherwise honor certain of its prepetition obligations, including
     prepetition wages, employee benefits and reimbursement of employee business
     expenses, costs to transport merchandise, sales and use taxes and
     insurance.


(5)  Reorganization Items

          Reorganization costs include costs for professional fees and other
     costs related to the Company's reorganization. In the six fiscal months
     ended August 4, 2001, amounts paid to professionals totaled $1,419.
     Additionally, the Company closed two under-performing stores in July 2001
     and recorded reorganization costs relating to these store closings of
     approximately $406. In the six fiscal months ended July 29, 2000, amounts
     paid to professionals totaled $2,284.


(6)  Income Taxes

          In assessing the realization of deferred tax assets, management
     considers the likelihood that those assets will be realized through future
     taxable income. Because the realization of the deferred tax assets may be
     limited by events involving the Chapter 11 Cases or other events related to
     the ownership of the Company, the Company recorded a valuation allowance
     for the total of the net deferred tax assets at August 4, 2001 and February
     3, 2001.

(7)  Earnings Per Share

          Earnings per share - basic is computed by dividing net loss by the
     weighted average number

                                       8
<PAGE>

      of common shares outstanding during the period.

<TABLE>
<CAPTION>
                                                         Net                                    Per
                                                         Loss             Shares               Share
                                                       -------           ---------            ------
For the three fiscal months ended August 4, 2001 -
Earnings per share - basic and diluted:
---------------------------------------
<S>                                                    <C>               <C>                  <C>
Net loss                                               $ 1,172           7,503,098            $ 0.16
                                                       -------           ---------            ------

For the three fiscal months ended July 29, 2000 -
Earnings per share - basic and diluted:
---------------------------------------
Net loss                                               $   303           7,503,098            $ 0.04
                                                       -------           ---------            ------

                                                         Net                                    Per
                                                         Loss             Shares               Share
                                                       -------           ---------            ------
For the six fiscal months ended August 4, 2001 -
Loss per share - basic and diluted:
-----------------------------------
Net loss                                               $(1,188)          7,503,098            $(0.16)
                                                       -------           ---------            ------

For the six fiscal months ended July 29, 2000 -
Loss per share - basic and diluted:
-----------------------------------
Net loss                                               $(2,435)          7,503,098            $(0.32)
                                                       -------           ---------            ------
</TABLE>

          For the three and six fiscal months ended August 4, 2001 and July 29,
2000, no options to purchase common stock were included in the computation of
earnings per share - diluted because the effect would be antidilutive.

                                       9

<PAGE>

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

     Certain statements in the following discussion and analysis constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. On March 23, 1999, the
Company filed a petition for reorganization under chapter 11 of title 11 of the
United States Code and is operating as a debtor in possession (the "Chapter 11
Cases"). All forward-looking statements relating to aspects of any plan of
reorganization submitted in connection with the Company's chapter 11 proceedings
are dependent upon, among other things, further improvements in the Company's
store-level operating performance, the formation of an acceptable reorganization
plan and the bankruptcy court approval of the reorganization plan.

     In general, the results, performance or achievements of the Company and its
stores are dependent upon a number of factors including, without limitation, the
following: effects resulting from the commencement and completion of the chapter
11 proceedings; ability to meet sales plans; weather and economic conditions;
dependence on key personnel; competition; ability to anticipate merchandise
trends and consumer demand; ability to maintain relationships with suppliers;
successful implementation of information systems; successful handling of
merchandise logistics; inventory shrinkage; ability to meet future capital
needs; governmental regulations and other factors both referenced and not
referenced in this Form 10-Q. When used in this Report on Form 10-Q, the words
"estimate," "project," "anticipate," "expect," " intend," "believe," and similar
expressions are intended to identify forward-looking statements.

     In September 1999, the Company announced that it received notification that
the NASDAQ's staff had delisted the Company's common stock from the NASDAQ
National Market effective September 1, 1999. NASDAQ said the determination was
based on the uncertainties concerning the Company's pending Chapter 11 Cases.

     The Company is a chain of company-owned stores offering an extensive
selection of greeting cards, giftwrap, balloons, party supplies and other
special occasion merchandise at everyday value prices. The Company closed 2
under-performing stores in July 2001 and does not plan to open any additional
stores in fiscal 2001. As of September 13, 2001, the Company operated 173 stores
in 20 states.

                                       10

<PAGE>

Results of Operations

     The following table sets forth, for the periods indicated, selected
statements of operations data expressed as a percentage of net sales and the
number of stores open at the end of each period:

<TABLE>
<CAPTION>
                                                         Three fiscal months ended                 Six fiscal months ended
                                                       -----------------------------            ------------------------------
                                                       August 4,            July 29,            August 4,             July 29,
                                                         2001                 2000                2001                  2000
                                                       ---------            --------            ---------             --------
<S>                                                    <C>                   <C>                 <C>                   <C>
Net sales                                               100.0%               100.0%               100.0%               100.0%
Cost of sales                                            51.6                 51.5                 52.8                 52.3
                                                        -----                -----                -----                -----
   Gross profit                                          48.4                 48.5                 47.2                 47.7
Selling, general and administrative expenses             43.1                 44.4                 44.6                 45.4
Interest expense                                          1.1                  1.3                  1.3                  1.4
                                                        -----                -----                -----                -----
   Income before reorganization items                     4.2                  2.8                  1.3                  0.9
Reorganization items, net                                 2.1                  2.3                  2.3                  3.0
                                                        -----                -----                -----                -----
   Net income (loss)                                      2.1%                 0.5%                (1.0)%               (2.1)%
                                                        =====                =====                =====                =====
Number of stores open at end of period                    173                  182                  173                  182
</TABLE>

Three Fiscal Months Ended August 4, 2001 and July 29, 2000

     Net Sales.  Net sales decreased $2,413, or 4.1%, to $57,013 for the three
fiscal month period ended August 4, 2001 from $59,426 for the three fiscal month
period ended July 29, 2000. The net sales decrease can be attributed to the
operation of nine fewer superstores during the three fiscal month period ended
August 4, 2001. The Company closed two under performing stores in July 2001 and
closed five under performing stores in the prior fiscal year. Comparable store
sales increased $785 or 1.3%. This increase was the result of improved product
allocation and assortment of inventory, primarily in the basic party category.

     Gross Profit.  Cost of sales includes distribution costs. Gross profit
decreased $1,225 or 4.2% to $27,590 for the three fiscal month period ended
August 4, 2001 from $28,815 for the three fiscal month period ended July 29,
2000. As a percentage of net sales, gross profit was 48.4% for the three fiscal
month period ended August 4, 2001 compared to 48.5% in the same period in the
prior year.

     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses include store payroll, store occupancy, advertising,
depreciation, other store operating and corporate administrative expenses.
Selling, general and administrative expenses decreased $1,819 or 6.9%, to
$24,573 for the three fiscal month period ended August 4, 2001 from $26,392 for
the three fiscal month period ended July 29, 2000. This decrease resulted
primarily from operating nine fewer superstores during the three fiscal month
period ended August 4, 2001. As a percentage of net sales, selling, general and
administrative expenses decreased to 43.1% in the three fiscal month period
ended August 4, 2001 from 44.4% in the three fiscal month period ended July 29,
2000. This fluctuation was the result of a significant reduction in advertising
expense in the three fiscal months ended August 4, 2001.

     Interest Expense.  Interest expense was $627 in the three fiscal month
period ended August 4, 2001 compared to $757 in the three fiscal month period
ended July 29, 2000. This decrease resulted primarily from lower borrowing
levels coupled with a lower effective interest rate.

     Reorganization Items, net.  Reorganization items decreased $145 or 10.6%,
to $1,218 for the three fiscal month period ended August 4, 2001 from $1,363 for
the three fiscal month period ended July 29, 2000. The fluctuation resulted from
decreases in professional fees partially offset by store expenses relating to
the closure of two stores in July 2001.

     Income Taxes.  Management believes that it is more likely than not that
deferred tax assets created by net operating losses for the three month period
ended August 4, 2001 will not be realized through future

                                      11

<PAGE>

taxable income. Because the realization of the deferred tax assets may be
limited by events involving the Chapter 11 Cases or other events related to the
ownership of the Company, the Company has recorded a valuation allowance to
fully reserve for the value of the net deferred tax assets at August 4, 2001 and
February 3, 2001.


Six Fiscal Months Ended August 4, 2001 and July 29, 2000

     Net Sales.  Net sales decreased $619 or 0.5%, to $113,249 for the six
fiscal month period ended August 4, 2001 from $113,868 for the six fiscal month
period ended July 29, 2000. This decrease can be attributed to the operation of
nine fewer superstores in the current year. Comparable store sales increased
$3,231 or 2.9% to $113,249 for the six months ended August 4, 2001 from $110,018
for the six months ended July 29, 2000.

     Gross Profit.  Cost of sales includes distribution costs. Gross profit
decreased $884 or 1.6% to $53,411 for the six fiscal month period ended
August 4, 2001 from $54,295 for the six fiscal month period ended July 29, 2000.
As a percentage of net sales, gross profit was 47.2% for the six fiscal month
period ended August 4, 2001 compared to 47.7% in the same period in the prior
year. This decrease can be attributed to higher freight and distribution costs.

     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses include store payroll, store occupancy, advertising,
depreciation, other store operating and corporate administrative expenses.
Selling, general and administrative expenses decreased $1,225 or 2.4%, to
$50,526 for the six fiscal month period ended August 4, 2001 from $51,751 for
the six fiscal month period ended July 29, 2000. As a percentage of net sales,
selling, general and administrative expenses decreased to 44.6% in the six
fiscal month period ended August 4, 2001 from 45.4% in the six fiscal month
period ended July 29, 2000. These fluctuations can be attributed to the
operation of nine fewer superstores and a reduction in advertising expense in
the six fiscal months ended August 4, 2001.

     Interest Expense.  Interest expense was $1,451 in the six fiscal month
period ended August 4, 2001 compared to $1,605 in the six fiscal month period
ended July 29, 2000. This decrease resulted primarily from a lower effective
interest rate.

     Reorganization Items, net.  Reorganization items decreased $752 or 22.3%,
to $2,622 for the six fiscal month period ended August 4, 2001 from $3,374 for
the six fiscal month period ended July 29, 2000. This decrease is the result of
lower amounts incurred by professionals relating to the Company's
reorganization.

     Income Taxes.  Management believes that it is more likely than not that
deferred tax assets created by net operating losses for the six fiscal month
period ended August 4, 2001 will not be realized through future taxable income.
Because the realization of the deferred tax assets may be limited by events
involving the Chapter 11 Cases or other events related to the ownership of the
Company, the Company has recorded a valuation allowance to fully reserve for the
value of the net deferred tax assets at August 4, 2001 and February 3, 2001.


Liquidity and Capital Resources

     On March 23, 1999, the Company filed the Chapter 11 Cases to address
certain operational and liquidity disruptions. The Company's liquidity position
for the remainder of fiscal 2001 will be impacted primarily by the success of
initiatives undertaken to improve store level cash flows and the effects of the
Chapter 11 Cases. The Company's uses of capital for the remainder of fiscal 2001
are expected to include working capital for operating expenses and satisfaction
of current liabilities, expenditures related to maintaining and refurbishing
existing stores, interest payments on outstanding borrowings and costs
associated

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<PAGE>

with the Chapter 11 Cases. The Company's long-term liquidity and the adequacy of
the Company's capital resources cannot be determined until a plan of
reorganization has been developed and confirmed in connection with the Chapter
11 Cases.

     As a debtor in possession under the Bankruptcy Code, actions to collect
prepetition indebtedness are stayed and certain contractual obligations may not
be enforced against the Company. With the approval of the Bankruptcy Court,
certain of these obligations may be paid prior to the confirmation of the
reorganization plan. To date, the Company has received approval to pay customary
prepetition obligations associated with the daily operation of its business,
including employee wages and other obligations. The Company has not completed
its review of all of its prepetition contracts and leases for assumption or
rejection. The ultimate amount of, and settlement terms for, such liabilities
are subject to an approved plan of reorganization and, accordingly, the timing
and form of settlement are not presently determinable.

     Subsequent to the commencement of the Chapter 11 Cases, the Company entered
into the Loan Agreement which provides up to $35,000 (including $10,000 for
letters of credit) to fund working capital needs and for general corporate
purposes. Borrowing under the facility is limited by inventory levels and has an
interest rate of 1% over prime (7.75% at August 4, 2001). The Loan Agreement
expires on the earlier of February 1, 2002 or the date the Bankruptcy Court
confirms a plan of reorganization. The lenders under the Loan Agreement were
granted a security interest in substantially all of the Company's assets as
security for the Company's obligations under the Loan Agreement. All obligations
under the Loan Agreement are afforded "super-priority" administrative expense
status in the Chapter 11 Cases. The Company intends to use amounts borrowed
under the Loan Agreement for its ongoing working capital needs and for other
general corporate purposes.

     The Loan Agreement contains certain restrictive covenants, which, among
other things, require the Company to maintain certain inventory levels and
achieve specified operating results. The restrictive covenants also limit the
Company's capital expenditures, asset sales and dividends and the ability of the
Company to grant liens and incur additional indebtedness. All such covenants
have been met or waived.

     As of August 4, 2001, the Company had $18,997 of borrowings outstanding
under the Loan Agreement and had utilized approximately $2,789 under the Loan
Agreement to issue letters of credit. The Company believes that its cash flow
from operations, borrowings under the Loan Agreement, adequate trade terms and
the continued support of its vendors will provide it with sufficient liquidity
to conduct its operations while the Chapter 11 Cases are pending. The Company
will be exploring opportunities to obtain long-term financing to support the
Company's business plan after it emerges from Chapter 11; however, there can be
no assurance that the Company will be able to obtain such financing with
satisfactory terms, if at all.

     At August 4, 2001 and July 29, 2000, the Company's working capital was
$18,348 and $19,562, respectively. Net cash provided by operations for the six
fiscal month period ended August 4, 2001 was $7,248 compared to $3,804 of net
cash provided by operations for the six fiscal month period ended July 29, 2000.
The fluctuation was a result of decreases in inventory balances and increases in
accounts payable balances partially offset by decreases in accrued expenses.

     Net cash used in investing activities during the six fiscal month periods
ended August 4, 2001 and July 29, 2000 was $550 and $799, respectively. Net cash
used in investing activities was for capital expenditures for store and
distribution center equipment.

     Net cash used in financing activities during the six fiscal month period
ended August 4, 2001 was $6,806 compared to $4,531 of net cash used in financing
activities during the six fiscal months ended July 29, 2000. Amounts are
attributable to the level of borrowings and repayments.

     The Company does not intend to pay cash dividends in the foreseeable future
and under its current Loan Agreement is restricted from paying dividends on its
capital stock.

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<PAGE>

ITEM 3    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

     The Company is subject to market risks from changes in interest rates. The
interest rate on the Loan Agreement, which represents a significant portion of
the Company's outstanding debt, is variable based on the prime rate.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

     The Company commenced the Chapter 11 Cases on March 23, 1999. Additional
information relating to the Chapter 11 Cases is set forth in Part 1, Item 1 of
the Company's Annual Report on Form 10-K under the caption "Proceedings under
Chapter 11 of the Bankruptcy Code" and in Note 1 of the Notes to Consolidated
Financial Statements contained herein. Such information is incorporated herein
by reference.

     Several claims and cases have been filed by creditors of the Company
relating to unpaid amounts due to such creditors. Payment of these amounts is
now stayed in the Chapter 11 Cases. The Company is also from time to time
involved in routine litigation, other than bankruptcy cases, incidental to the
conduct of its business. As of the date of this Quarterly Report on Form 10-Q,
the Company is aware of no material existing or threatened litigation to which
it is or may be a party.

Item 2.   Changes in Securities.

     None.

Item 3.   Defaults Upon Senior Securities.

     None.

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

     None.

Item 5.   Other Information.

     None.

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<PAGE>

Item 6.   Exhibits and reports on Form 8-K

          (a)  Exhibits

                    None

          (b)  Reports on 8-K

                    Current report on Form 8-K on August 21, 2001 to report no
                    further obligations due Factory Card Holdings, Inc. and the
                    ninth amendment to the Debtor in Possession Loan and
                    Security Agreement dated March 23, 1999



SIGNATURES

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


                           FACTORY CARD OUTLET CORP.

Dated:  September 13, 2001     By: /s/ William E. Freeman
                                   ----------------------
                               William E. Freeman
                               President and Chief Executive Officer


Dated:  September 13, 2001     By: /s/ James D. Constantine
                                   ------------------------
                               James D. Constantine
                               Senior Vice President and Chief Financial Officer

                                      15