<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 December 27, 1997
 
                       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  )
   incorporation or organization)              identification no.

 
                               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 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 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 common stock outstanding at February 2, 1998 was 
7,335,519.


<PAGE>

                                       
                            Factory Card Outlet Corp.

                                  Form 10-Q

                     For the Quarter Ended December 27, 1997 
                                     Index
 
<TABLE>
<CAPTION>
                                                                               PAGE NO.
                                                                               --------
<S>                                                                           <C>
Part I. Financial Information

Item 1. Financial Statements (unaudited):

        Consolidated Balance Sheets as of 
        December 27, 1997 and June 28, 1997..................................      3

        Consolidated Statements of Income for the 
        three fiscal months and six fiscal months 
        December 27, 1997 and December 28, 1996..............................      4

        Consolidated Statements of Cash Flows for the 
        six fiscal months ended December 27, 1997 
        and December 28, 1996................................................      5

        Notes to Consolidated Financial Statements...........................    6-8

Item 2.  Management's Discussion and Analysis of 
         Financial Condition and Results of Operations.......................   9-13

Item 3.  Quantitative and Qualitative Disclosures About Market Risk..........      *

Part II. Other Information...................................................     14

Signatures...................................................................     15

</TABLE>



* Not applicable







                                       2

<PAGE>

PART I - FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS

                           FACTORY CARD OUTLET CORP.
                                AND SUBSIDIARY

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                                  December 27,      June 28,
                                                      1997           1997
                                                  ------------      --------
                                                   (Unaudited)
<S>                                               <C>               <C>
                     ASSETS

Current assets:
  Cash....................................       $    211,084       $    51,180
  Receivables.............................          1,560,382           947,583
  Inventories.............................         74,315,857        55,358,616
  Prepaid expenses........................          1,108,729         1,322,420
  Deferred income taxes...................            592,167           207,333
                                                 ------------      ------------
    Total current assets..................         77,788,219        57,887,132

Fixed assets, net.........................         34,816,236        26,063,766
Other assets..............................          2,228,742         1,750,709
                                                 ------------      ------------
    Total assets..........................       $114,833,197      $ 85,701,607
                                                 ------------      ------------
                                                 ------------      ------------
       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current maturities of long-term
    obligations...........................       $  1,802,026      $  1,138,654
  Accounts payable........................         20,416,169        14,361,283
  Due to related parties..................          3,055,358         3,192,596
  Income taxes payable....................               --             503,544
  Accrued expenses........................          6,590,901         3,091,532
                                                 ------------      ------------
    Total current liabilities.............         31,864,454        22,287,609

Revolving credit note payable.............         22,500,000         3,775,400
Long-term debt............................              7,697            20,602
Capital lease obligations.................          3,026,252         2,755,510
Deferred rent liabilities.................          4,694,003         4,411,584
Deferred income taxes.....................            177,467           177,467
                                                 ------------      ------------
    Total liabilities.....................         62,269,873        33,428,172
                                                 ------------      ------------
Stockholders' equity:
  Common stock - $.01 par value. Voting
    class - authorized 50,000,000 shares;
    7,335,519 shares issued and outstanding
    at December 27, 1997 and 7,231,211
    shares issued and outstanding at
    June 28, 1997. Non-voting class -
    authorized 205,000 shares, no shares
    issued or outstanding.................             73,355            72,312 
  Additional paid-in capital..............         51,161,675        50,950,900
  Retained earnings.......................          1,328,294         1,327,532
  Less: cost of common stock held in
    treasury, 8,697 shares at June 28,
    1997..................................               --             (77,309)
                                                 ------------      ------------
    Total stockholders' equity............         52,563,324        52,273,435
                                                 ------------      ------------
    Total liabilities and stockholders'
      equity..............................       $114,833,197      $ 85,701,607
                                                 ------------      ------------
                                                 ------------      ------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                      3
<PAGE>

                               FACTORY CARD OUTLET CORP.
                                    AND SUBSIDIARY

                            Consolidated Statements of Income

<TABLE>
<CAPTION>

                                          Three Fiscal Months Ended      Six Fiscal Months Ended
                                        -----------------------------  -----------------------------
                                         December 27,   December 28,    December 27,   December 28,
                                             1997           1996           1997           1996
                                        -------------   -------------  -------------  --------------
                                                 (Unaudited)                    (Unaudited)
<S>                                     <C>             <C>            <C>            <C>
Net sales............................   $  60,302,163   $  37,692,845  $  95,617,667  $   62,724,693
Cost of sales and occupancy..........      37,063,822      23,249,846     60,637,752      40,246,221
                                        -------------   -------------  -------------   -------------
  Gross profit.......................      23,238,341      14,442,999     34,979,915      22,478,472
Selling, general and administrative
  expenses...........................      19,057,934      12,505,973     34,004,887      22,170,814
                                        -------------   -------------  -------------   -------------
  Income from operations.............       4,180,407       1,937,026        975,028         307,658
Interest expense.....................         592,888         571,682        973,754       1,168,980
                                        -------------   -------------  -------------   -------------
  Income (loss) before taxes and
    extraordinary item...............       3,587,519       1,365,344          1,274        (861,322)
Income tax (benefit).................       1,434,392         574,013            512        (361,187)
                                        -------------   -------------  -------------   -------------
  Income (loss) before extraordinary
    item.............................       2,153,127         791,331            762        (500,135)
Extraordinary item - loss on early
  retirement of debt, net of income
  tax benefit of $226,572............            --          (312,886)         --           (312,886)
                                        -------------   -------------  -------------   -------------
  Net income (loss)..................   $   2,153,127   $     478,445  $         762   $    (813,021)
                                        -------------   -------------  -------------   -------------
                                        -------------   -------------  -------------   -------------
Earnings (loss) per share - basic
  Before extraordinary item..........   $        0.30   $        0.17  $        0.00   $       (0.12)
  Extraordinary item.................            --             (0.07)        --               (0.07)
                                        -------------   -------------  -------------   -------------
  Net income (loss)..................   $        0.30   $        0.10  $        0.00   $       (0.19)
                                        -------------   -------------  -------------   -------------
                                        -------------   -------------  -------------   -------------
  Weighted average shares
    outstanding......................       7,260,786       4,548,478      7,249,998       4,308,444
                                        -------------   -------------  -------------   -------------
                                        -------------   -------------  -------------   -------------
Earnings (loss) per share - diluted
  Before extraordinary item..........   $        0.27   $        0.15  $        0.00   $       (0.10)
  Extraordinary item.................           --              (0.06)       --                (0.06)
                                        -------------   -------------  -------------   -------------
  Net income (loss)..................   $        0.27   $        0.09  $        0.00   $       (0.16)
                                        -------------   -------------  -------------   -------------
                                        -------------   -------------  -------------   -------------
  Adjusted weighted average shares
    outstanding......................       7,928,423       5,346,634      7,911,960       5,198,252
                                        -------------   -------------  -------------   -------------
                                        -------------   -------------  -------------   -------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                      4

<PAGE>

                                FACTORY CARD OUTLET CORP.
                                      AND SUBSIDIARY

                           Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                     Six Fiscal Months Ended
                                                                  -----------------------------
                                                                   December 27,    December 28,
                                                                       1997            1996
                                                                  -------------    ------------
                                                                            (Unaudited)
<S>                                                               <C>              <C>
Cash flows from operating activities:
  Net income (loss)............................................   $        762     $   (813,021)
  Adjustments to reconcile net income (loss) to net cash used
    in operating activities:
    Depreciation and amortization of fixed assets..............      2,588,674        1,574,634
    Amortization of deferred financial costs and debt discount.           --            877,077
    Deferred income taxes......................................           --           (592,764)
    Loss on the disposal of equipment and vehicles.............         16,894            1,382
    Compensation expense related to stock options..............         29,502          179,106
    Change in assets and liabilities:
      Decrease (increase) in assets:
        Receivables............................................       (612,799)         285,631
        Inventories............................................    (18,957,241)      (9,782,298)
        Prepaid expenses.......................................        213,691         (372,611)
        Other assets...........................................       (478,033)           1,441
      Increase (decrease) in liabilities:
        Accounts payable.......................................      5,917,648        2,594,511
        Accrued expenses.......................................      3,538,231        2,014,830
        Deferred rent liabilities..............................        282,419          294,926
        Income taxes payable...................................       (888,378)        (348,233)
                                                                  ------------     ------------

Net cash used in operating activities..........................     (8,348,630)      (4,085,389)
                                                                  ------------     ------------

Net cash used in investing activities - purchase of fixed
  assets, net..................................................     (9,322,592)      (4,075,723)
                                                                  ------------     ------------

Cash flows from financing activities:
  Borrowings under revolving credit note.......................     67,074,500       26,756,737
  Repayment of borrowings under revolving credit note..........    (48,349,900)     (39,883,892)
  Payment of long-term debt and capital lease obligations......     (1,114,237)      (1,472,985)
  Proceeds from issuance of subordinated debentures............           --          2,910,836
  Proceeds from issuance of Series C convertible preferred
    stock......................................................           --          8,671,337
  Proceeds from issuance of common stock.......................           --         20,098,326
  Retirement of subordinated debentures........................           --         (8,000,000)
  Proceeds from exercise of employee stock options.............        220,763           46,250
  Purchase of treasury stock...................................           --           (180,000)
                                                                  ------------     ------------

Net cash provided by financing activities......................     17,831,126        8,946,609
                                                                  ------------     ------------

Net increase in cash...........................................        159,904          785,497
Cash at beginning of period....................................         51,180          202,344
                                                                  ------------     ------------
Cash at end of period..........................................   $    211,084     $    987,841
                                                                  ------------     ------------
                                                                  ------------     ------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                      5
<PAGE>

                                       
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(1) Basis of Presentation
 
The consolidated financial statements included herein include the accounts of 
Factory Card Outlet Corp. and its wholly owned subsidiary, Factory Card 
Outlet of America, Ltd. (the Company). The Company is a chain of company-owned
superstores offering a vast assortment of party supplies, greeting cards, gift 
wrap, and other special occasion merchandise at everyday value prices in 22 
states. These financial statements have been prepared by management without 
audit and should be read in conjunction with the consolidated financial 
statements and notes thereto for the fiscal year ending June 28, 1997. Due to 
the seasonality of the Company's business, the results for the interim periods 
are not necessarily indicative of the results for the year. The accompanying 
consolidated financial statements reflect, in the opinion of management, all 
adjustments necessary for a fair presentation of the interim financial 
statements. In the opinion of management, all such adjustments are of a normal 
and recurring nature.

(2) Management Estimates
 
The preparation of these consolidated financial statements in conformity with 
generally accepted accounting principles 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 expenses during the reporting period and related disclosures. Significant 
estimates made as of and for the three and six month periods ended December 
27, 1997 and December 28, 1996 include provisions for shrinkage, capitalized 
overhead costs related to inventory and markdowns of merchandise inventories. 
Actual results could differ from those estimates.

(3) Fiscal Year
 
In January 1998, the Company will change its fiscal year-end to the Saturday 
closest to January 31 and will use January as its fiscal year-end in the 
future.

(4) Earnings Per Share
 
Earnings per share--basic were computed by dividing net income by the 
weighted average number of common shares outstanding during the period. 
Earnings per share--diluted include the effect of stock options and warrants. 
Stock options issued during the twelve-month period prior to the Company's 
initial public offering have been included in the calculation of earnings per 
share--diluted as if they were outstanding for the periods presented, even if 
antidilutive, using the treasury stock method. The reconciliation of earnings 
per share--basic to earnings per share--diluted is as follows:

<TABLE>
<CAPTION>
                                                                 December 27, 1997                   December 28, 1996
                                                        -----------------------------------  ---------------------------------

                                                                                     Per                                Per
                                                           Income       Shares      Share      Income      Shares      Share
                                                        ------------  ----------  ---------  ----------  ----------  ---------
<S>                                                     <C>           <C>         <C>        <C>         <C>         <C>
For the three fiscal months ended:
Earnings per share--basic:
-------------------------
  Net income..........................................  $  2,153,127   7,260,786  $    0.30  $  478,445   4,548,478  $    0.10
Effect of dilutive securities:
  Stock options.......................................                   591,441                            722,122
  Warrants............................................                    76,196                             76,034
Earnings per share--diluted:
---------------------------
  Net income available to common stockholders and
  assumed conversions.................................  $  2,153,127   7,928,423  $    0.27  $  478,445   5,346,634  $    0.09

</TABLE>

                                      6
 
<PAGE>

<TABLE>
<CAPTION>
                                                                     December 27, 1997                  December 28, 1996
                                                              ---------------------------------   -------------------------------
                                                                                         Per                               Per 
                                                               Income       Shares      Share      Income     Shares      Share
                                                             -----------  ----------  ---------  ----------  ---------  --------- 
<S>                                                          <C>          <C>         <C>        <C>         <C>        <C> 
For the six fiscal months ended:
Earnings per share--basic:
-------------------------
  Net income...............................................   $     762    7,249,998  $    0.00  $(813,021)   4,308,444  $   (0.19)
Effect of dilutive securities:
  Stock options............................................                  585,766                            813,774
  Warrants.................................................                   76,196                             76,034
Earnings per share--diluted:
---------------------------
  Net income available to 
  common stockholders and 
  assumed conversions......................................   $     762    7,911,960  $    0.00  $(813,021)   5,198,252  $   (0.16)

</TABLE>
 
Options to purchase common stock outstanding during the periods presented 
above that were not included in the computation of diluted earnings per share 
--diluted because the option price was greater than the average market price 
of the common shares were as follows:
 
<TABLE>
<CAPTION>
                                                                             December 27, 1997  December 28, 1996
                                                                             -----------------  -----------------
<S>                                                                          <C>                <C>
For the three fiscal months ended..........................................         78,660             16,000
For the six fiscal months ended............................................         84,660             16,000

</TABLE>
 
(5) Debt
 
Loan and Security Agreement
 
On October 15, 1997, the Company entered into a Loan and Security Agreement 
with its Bank increasing its existing line of credit facility from 
$25,000,000 to the lessor of $35,000,000 or a predetermined advance rate (not 
to exceed 50%) against net inventory as determined by an appraisal. Interest 
is payable at an annual rate equal to the bank's prime rate or, at the 
Company's option, a rate based on the London Interbank offered rate ("LIBOR") 
plus additional basis points (ranging from 125 to 225 points) dependent on 
the Company's effective debt ratio. In addition, a fee of 0.25% per year is 
assessed quarterly on the unused portion of the facility. This agreement 
contains restrictive covenants including, among others, the maintenance of 
minimum ratios of fixed charges to earnings and maximum ratios of liabilities 
to net worth and debt to earnings.
 
    On January 30, 1998, the Company entered into a Loan and Security 
Agreement ("Agreement") with BankBoston Retail Finance Inc. providing a 
$40,000,000 revolving line of credit which can be increased at the Company's 
discretion up to $60,000,000, in $5,000,000 increments. Advances under the 
Agreement, which expires January 31, 2001, are limited based on inventory 
levels subject to certain reserves as defined in the Agreement. Interest is 
accrued at an annual rate equal to the BankBoston, N.A. prime rate or, at the 
Company's option, LIBOR plus additional basis points (175 or 200 basis points) 
dependent on the Company's trailing twelve-month net income. Interest is 
payable monthly or upon the expiration of an advance issued under the 
Company's LIBOR option. A fee of 0.25% per year is assessed monthly on the 
unused portion of the line of credit. Borrowings under the Agreement are 
secured by all of the Company's assets. This Agreement contains one 
restrictive financial covenant requiring a minimum net worth of $42,700,000.
 
Lease Commitments
 
During the six months ended December 27, 1997, financing for additional 
computer equipment was incorporated into an existing master lease agreement 
in the amount of $1.9 million. 

                                      7

<PAGE>

(6) Stockholders' Equity
 
Common and Preferred Stock
 
Effective January 20, 1998, the authorized number of shares of Common Stock, 
par value $.01 per share, decreased from 50,000,000 to 15,000,000 and the 
authorized number of shares of Preferred Stock, par value $.01 per share, 
decreased from 10,000,000 to 1,000,000. This change does not effect the 
Company's outstanding Common Stock.
 
Outside Director Stock Option Plan
 
On November 14, 1997, the Company's shareholders approved the 1997 Outside 
Director Stock Option Plan permitting stock option awards to directors who 
are not employees of the Company. The 1997 Outside Director Stock Option Plan 
is effective as of July 25, 1997 and expires on July 24, 2007. Under the plan, 
options may be granted for the purchase of the Company's common stock at an 
exercise price not less than 100% of the fair market value of a share of 
Common Stock on the date of grant. The number of shares of Common Stock 
reserved in connection with this plan is 250,000, subject to certain 
adjustments. The Company granted 160,000 options on November 14, 1997 to 
eligible directors which become exercisable at the rate of 33 1/3 on July 1, 
1998, November 14, 1999 and November 14, 2000, respectively. 

(7) Supplemental Cash Flow Information
 
<TABLE>
<CAPTION>
                                                         Three Fiscal Months Ended    Six Fiscal Months Ended
                                                         --------------------------  --------------------------
                                                         December 27,  December 28,  December 27,  December 28,
                                                             1997          1996          1997          1996
                                                         ------------  ------------  ------------  ------------
<S>                                                      <C>           <C>           <C>           <C>
Cash paid during the period ended for:
  Interest.............................................   $  608,723    $  764,263    $  938,820    $1,161,540
  Income taxes.........................................       --               271       856,815       372,021

</TABLE>
 
    Supplemental disclosure of non-cash financing activities:
 
    Capital lease obligations incurred, primarily for point of sale computer 
    equipment, and notes payable on vehicle purchases were $1.9 million in the 
    three and six-month periods ended December 27, 1997 and $1.9 million and 
    $2.0 million in the three and six-months periods ended December 28, 1996, 
    respectively.

                                      8

<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS

    The following discussion and analysis contains certain "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. Such factors 
include, among others, the following: ability to open and operate new stores; 
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; consolidation and relocation of distribution facilities; 
inventory shrinkage; ability to meet future capital needs; governmental 
regulations and other factors both referenced and not referenced in this 
Quarterly Report on Form 10-Q. When used in this Quarterly Report on Form 
10-Q, the words "estimate," "project," "expect," "intend," "believe," and 
similar expressions are intended to identify forward-looking statements.
 
    Due to the importance of the spring and fall selling seasons, the second 
and fourth fiscal quarters have historically contributed, and the Company 
expects they will continue to contribute, disproportionately to the Company's 
profitability for the entire fiscal year. As a result, the Company's 
quarterly results of operations may fluctuate. In addition, results of a 
period shorter than a full year may not be indicative of results expected for 
the entire year.
 
    As of November 30, 1997, Party Express, the party goods division of 
Hallmark Marketing Corporation, has refused to supply party goods, which 
include many Disney and Warner Bros. licensed products, to the Company. The 
Company believes that this decision will not have a material impact on its 
earnings for the next 12 months, but could impact earnings beyond that time. 
The Company is continuing to explore alternatives in an attempt to resolve 
this situation or to allow the Company to acquire the licensed product 
through other sources.
 
RESULTS OF OPERATIONS
 
The following table sets forth, for the periods indicated, selected statement 
of operations data expressed as a percentage of net sales and the number of 
stores open at the end of each such period:
<TABLE>
<CAPTION>
                                             Three Fiscal Months Ended      Six Fiscal Months Ended
                                             -------------------------      -----------------------
                                             Dec. 27,         Dec. 28,      Dec. 27,       Dec. 28,
                                               1997              1996         1997           1996 
                                             --------         --------      --------       --------
<S>                                          <C>               <C>          <C>            <C>
Net sales ..............................       100.0%            100.0%       100.0%         100.0%
Cost of sales and occupancy.............        61.5              61.7         63.4           64.2
                                             --------         --------      --------       --------
  Gross Profit..........................        38.5              38.3         36.6           35.8
Selling, general and administrative   
  expenses..............................        31.6              33.2         35.6           35.3
                                             --------         --------      --------       --------
  Income from operations................         6.9               5.1          1.0            0.5
Interest expense........................         1.0               1.5          1.0            1.9
                                             --------         --------      --------       --------
  Income (loss) before taxes and     
    extraordinary item..................         5.9               3.6          0.0           (1.4)
Income tax (benefit)....................         2.3               1.5          --            (0.6)
                                             --------         --------      --------       --------
  Income (loss) before extraordinary
    item................................         3.6               2.1          0.0%          (0.8)%
Extraordinary item - loss on early  
  retirement of debt, net of       
  income tax benefit....................         --               (0.8)         --            (0.5)
                                             --------         --------      --------       --------
  Net income (loss).....................         3.6%              1.3%         0.0%          (1.3)%
                                             --------         --------      --------       --------
                                             --------         --------      --------       --------
Number of stores open at
  end of period.........................       180               123          180            123
</TABLE>
                                      9
<PAGE>

THREE FISCAL MONTHS ENDED DECEMBER 27,1997 AND DECEMBER 28, 1996
 
    NET SALES.  Net sales increased $22.6 million, or 60.0%, to $60.3 million 
for the three-month period ended December 27, 1997 from $37.7 million for the 
three-month period ended December 28, 1996. The increase resulted from (i) 
net sales of $11.6 million from new stores opened during the six-month period 
ended December 27, 1997, (ii) net sales increase of $6.5 million from stores 
opened prior to July 1997 not included in the comparable store base, and 
(iii) a comparable store sales increase of $4.5 million, or 12.6%. Comparable 
store sales increases were driven by an expanded seasonal merchandise 
selection, primarily during Halloween. The Company includes stores opened 13 
or 14 months after their opening date in the calculation of comparable sales. 
If the opening date of a store falls in the first 14 days of a period, the 
store is included in the comparable store calculation on its 13th month of 
operation; otherwise, a store is included in the comparable store calculation 
in its 14th month of operation.
 
    GROSS PROFIT.  Cost of sales includes merchandise, store occupancy, 
purchasing and distribution costs. Gross profit increased $8.8 million, or 
61.1%, to $23.2 million for the three-month period ended December 27, 1997 
from $14.4 million for the three-month period ended December 28, 1996. As a 
percentage of net sales, gross profit was 38.5% for the three-month period 
ended December 27, 1997 compared to 38.3% for the same period in the prior 
year. Gross profit as a percentage of net sales increased as a result of 
volume rebates from vendors and leveraging of distribution costs.
 
    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and 
administrative expenses include labor, advertising, depreciation, other store 
operating and corporate administrative expenses. Selling, general and 
administrative expenses increased $6.6 million, or 52.8%, to $19.1 million 
for the three-month period ended December 27, 1997 from $12.5 million for the 
three-month period ended December 28, 1996. Approximately $6.0 million of 
this increase resulted from the operation of 57 additional new superstores. 
The remainder of the increase in selling, general and administrative expenses 
resulted primarily from increased advertising expenditures. As a percentage 
of net sales, selling, general and administrative expenses decreased to 31.6% 
in the three-month period ending December 27, 1997 from 33.2% in the 
three-month period ended December 28, 1996.
 
    INTEREST EXPENSE.  Interest expense was $592,900 in the three months 
ended December 27, 1997 compared to $571,700 in the three months ended 
December 28, 1996. This slight increase was due to additional borrowings to 
support the opening of new superstores and increased inventory levels 
partially offset by a reduction in debt from applying proceeds received from 
the Company's initial public offering.
 
    INCOME TAX.  The income tax expense for the three-month period ended 
December 27, 1997 was approximately $860,400 higher than the expense 
recognized during the three-month period ended December 28, 1996 due to a 
higher net income before extraordinary item for the period and a lower 
estimated effective tax rate.
 
    EXTRAORDINARY ITEM.  During December 1996, substantially all debt, 
including subordinated debt, was retired with proceeds from the Company's 
initial public offering. Unamortized financing costs and the remaining debt 
discount associated with the retired subordinated debt were expensed creating 
an extraordinary item of $313,000, net of tax. 

                                     10

<PAGE>

SIX FISCAL MONTHS ENDED DECEMBER 27,1997 AND DECEMBER 28, 1996
 
    NET SALES.  Net sales increased $32.9 million, or 52.5%, to $95.6 million 
for the six-month period ended December 27, 1997 from $62.7 million for the 
six-month period ended December 28, 1996. The increase resulted from (i) net 
sales of $14.3 million from new stores opened during the six-month period, 
(ii) net sales increase of $13.3 million from stores opened prior to July 
1997 not included in the comparable store base, and (iii) a comparable store 
sales increase of $5.3 million, or 9.0%, driven primarily by an expanded 
seasonal merchandise selection, particularly during Halloween.
 
    GROSS PROFIT.  Cost of sales includes merchandise, store occupancy, 
purchasing and distribution costs. Gross profit increased $12.5 million, or 
55.6%, to $35.0 million for the six-month period ended December 27, 1997 from 
$22.5 million for the six-month period ended December 28, 1996. As a 
percentage of net sales, gross profit was 36.6% for the six-month period 
ended December 27, 1997 compared to 35.8% for the same period in the prior 
year. Gross profit as a percentage of net sales increased as a result of 
volume rebates from vendors and the leveraging of distribution costs.
 
    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and 
administrative expenses increased $11.8 million, or 53.2%, to $34.0 million 
for the six-month period ended December 27, 1997 from $22.2 million for the 
six-month period ended December 28, 1996. Approximately $10.6 million of this 
increase resulted from the operation of 57 additional new superstores. The 
remainder of the increase in selling, general and administrative expenses 
resulted primarily from increased advertising expenditures. As a percentage 
of net sales, selling, general and administrative expenses increased to 35.6% 
in the six-month period ending December 27, 1997 from 35.3% in the six-month 
period ended December 28, 1996.
 
    INTEREST EXPENSE.  Interest expense was $974,000 in the six months ended 
December 27, 1997 compared to $1.2 million in the six months ended December 
28, 1996. This decrease resulted from a reduction in debt from applying 
proceeds received from the Company's initial public offering partially offset 
by the increased borrowing to support the opening of new superstores and 
increased inventory levels.
 
    INCOME TAX.  Income tax expense of $500 was recognized for the six-month 
period ended December 27, 1997 compared to an income tax benefit of $361,200 
recognized during the six-month period ended December 28, 1996 as a result of 
the net income before extraordinary item for the period compared to the net 
loss in the prior year.
 
    EXTRAORDINARY ITEM.  During December 1996, substantially all debt, 
including subordinated debt, was retired with proceeds from the Company's 
initial public offering. Unamortized financing costs and the remaining debt 
discount associated with the retired subordinated debt were expensed creating 
an extraordinary item of $313,000, net of tax.

                                      11

<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
 
    The Company's cash needs are primarily for working capital to support its 
opening of new superstores and for opening the new distribution center. In 
recent years, the Company has financed its expanding operations primarily 
through proceeds from its initial public offering effective on December 13, 
1996, borrowings under the Business Loan Agreement between the Company and 
Bank One, Chicago, NA (Bank One), proceeds from issuance of convertible 
preferred stock and subordinated debentures and internally generated funds.
 
    At December 28, 1997 and December 27, 1996, the Company's working capital 
was $45.9 million and $35.6 million, respectively. Net cash used in 
operations for the six months ended December 27, 1997 and December 28, 1996 
was $8.3 million and $4.1 million, respectively. In these two periods, $19.0 
million and $9.8 million, respectively, of cash from operations was used to 
increase inventory levels to support both new and existing stores.
 
    Net cash used in investing activities during the six months ended 
December 27, 1997 and December 28, 1996 was $9.3 million and $4.1 million, 
respectively. These investments were primarily a result of opening new 
superstores, expanding existing stores and investing in equipment for the new 
distribution center. During the six months ended December 27, 1997 and 
December 28, 1996, the Company spent $8.2 million and $2.9 million, 
respectively, for capital expenditures for new superstores.
 
    Net cash provided by financing activities during the six months ended 
December 27, 1997 and December 28, 1996 was $17.8 million and $8.9 million, 
respectively. At December 28, 1997 and December 27, 1996, the outstanding 
balance under the Company's Business Loan Agreement with Bank One was $22.5 
million and $3.8 million, respectively.

    On January 30, 1998, the Company entered into a Loan and Security 
Agreement ("Agreement") with BankBoston Retail Finance Inc. providing a 
$40,000,000 revolving line of credit which can be increased at the Company's 
discretion up to $60,000,000, in $5,000,000 increments. Advances under the 
Agreement, which expires January 31, 2001, are limited based on inventory 
levels subject to certain reserves as defined in the Agreement. Interest is 
accrued at an annual rate equal to the BankBoston, N.A. prime rate or, at the 
Company's option, LIBOR plus additional basis points (175 or 200 basis 
points) dependent on the Company's trailing twelve-month net income. Interest 
is payable monthly or upon the expiration of an advance issued under the 
Company's LIBOR option. A fee of 0.25% per year is assessed monthly on the 
unused portion of the line of credit. Borrowings under the Agreement are 
secured by all of the Company's assets. This Agreement contains one 
restrictive financial covenant requiring a minimum net worth of $42,700,000.

    On October 15, 1997, the Company entered into a Loan and Security 
Agreement with Bank One increasing its existing line of credit facility from 
$25.0 million to the lesser of $35.0 million or a predetermined advance rate 
(not to exceed 50%) against net inventory as determined by an appraisal. 
Interest is payable at an annual rate equal to Bank One's prime rate or, at 
the Company's option, a rate based on LIBOR plus additional basis points 
(ranging from 125 to 225 basis points) variable on the Company's effective 
debt ratio. In addition, a fee of 0.25% per year is assessed quarterly on the 
unused portion of the facility. This agreement contains restrictive covenants 
including, among others, the maintenance of minimum ratios of fixed charges 
to earnings and maximum ratios of liabilities to net worth and debt to 
earnings.

    In December 1996, the Company completed an initial public offering of 
2,550,000 shares of its common stock. An additional 394,050 shares of common 
stock were sold as a result of the exercise by the underwriters of an 
over-allotment option in January 1997. The net proceeds of the offering, 
which were $22.9 million after deducting associated expenses, were used to 
retire all outstanding subordinated debentures, a term loan and the 
outstanding borrowings under the revolving credit facility.

                                     12

<PAGE>
 
    In October 1996, the Company entered into two capital lease agreements 
for point-of-sale (POS) computer equipment and related software having a 
total cost of $2.1 million. During February 1997, financing for $2.4 million 
of additional computer equipment was incorporated into one of the leases. 
During July and August 1997, financing for $1.9 million of additional POS and 
other computer equipment was also incorporated. These leases have terms of 
four and five years.
 
    The Company does not intend to pay cash dividends in the foreseeable 
future and under the new Loan and Security Agreement is restricted from 
paying dividends on its capital stock. The Company believes that its cash 
generated from operations and its borrowing capacity under the new line of 
credit facility will be adequate to fund its cash requirements for at least 
the next 12 months.

                                      13

<PAGE>
 
PART II--OTHER INFORMATION
 
ITEM 2. Changes in Securities.
 
        On November 14, 1997, the Company granted 160,000 options to eligible
        directors under the 1997 Outside Director Stock Option Plan. These 
        options were granted based on an exemption from registration under 
        Rule 701 of the Securities Act of 1933, as amended.

ITEM 4. Submission of Matters to a Vote of Security Holders.
 
        The Company's Annual Meeting of Stockholders was held on 
        November 14, 1997. The matters voted upon at the Annual Meeting were:
 
<TABLE>
<CAPTION>
                                                                                  Broker
                                               For      Against    Withheld      Non-Votes     Abstentions
                                            ---------  --------    ---------  ---------------  -----------
<S>                                         <C>        <C>         <C>        <C>              <C> 
        1.  Election of Directors
            Stewart M. Kasen..............  5,772,232     --         12,257        --             --
            Michael I. Barach.............  5,772,232     --         12,257        --             --
            Dr. Robert C. Blattberg.......  5,772,432     --         12,057        --             --
            Bart A. Brown, Jr.............  5,772,532     --         11,957        --             --
            Charles R. Cumello............  5,772,232     --         12,257        --             --
            Richard A. Doppelt............  5,772,432     --         12,057        --             --
            William E. Freeman............  5,772,182     --         12,307        --             --
            J. Bayard Kelly...............  5,771,482     --         13,007        --             --
            James L. Nouss, Jr............  5,272,932     --         11,557        --             --
            
         2. Approval of the Amendment
            to the Amended and Restated
            Certificate of Incorporation
            of the Company................  4,609,932     35,540        --          1,129,007      10,010

         3. Approval of the 1997 Outside 
            Director Stock Option Plan....  5,135,139    616,620        --             12,950      19,780

         4. Ratification of KPMG Peat
            Marwick LLP as the 
            Company's independent 
            auditors......................  5,753,450     21,999        --             --           9,040

</TABLE>
 
ITEM 6. Exhibits and Reports of Form 8-K
 
       (a) Exhibits. 

            3.1  Amended and Restated Certificate of Incorporation of the
                 Company, as amended. 

           10.11 Loan and Security Agreement dated January 30, 1998 among 
                 Factory Card Outlet of America, Ltd. and BankBoston 
                    Retail Finance Inc.

           10.12 1997 Outside Director Stock Option Plan. (1)
 
           27.1  FINANCIAL DATA SCHEDULE.
  
       (b) No reports on Form 8-K were filed during the quarter ended 
           December 27, 1997. 

_______________

(1) Previously filed as an exhibit to the Company's Registration Statement on 
Form S-8 Number 333-45461, dated February 3, 1998 and incorporated by 
reference.

                                     14

<PAGE>
 

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.
 
<TABLE>
<S>                        <C>  
Dated: February 9, 1998    By: __________________________
                               Charles R. Cumello,
                               President and Chief Executive Officer
 
Dated: February 9, 1998    By: __________________________
                               Glen J. Franchi,
                               Executive Vice President and Treasurer
                               (Principal financial officer)
 
Dated: February 9, 1998    By: __________________________
                               Thomas W. Stoltz,
                               Vice President - Finance
                               (Principal accounting officer)

</TABLE>
 
                                       15