<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 November 3, 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 December
5, 2001 was 7,503,098.

<PAGE>


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

                     For the Quarter Ended November 3, 2001
                                      Index
<TABLE>
<CAPTION>
                                                                                                         Page
<S>                                                                                                      <C>
Part I      Financial Information

Item 1      Financial Statements (unaudited):

            Consolidated Balance Sheets as of November 3, 2001 and February 3, 2001                         3

            Consolidated Statements of Operations for the three fiscal months and nine fiscal
               months ended November 3, 2001 and October 28, 2000                                           4

            Consolidated Statements of Cash Flows for the nine fiscal months
               ended November 3, 2001 and October 28, 2000                                                  5

            Notes to Consolidated Financial Statements                                                     6-9

Item 2      Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                                                  10-13

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>
                                                              November 3,  February 3,
                                                                 2001         2001
                                                              -----------  -----------
ASSETS                                                        (Unaudited)
<S>                                                           <C>          <C>
Current assets:
   Cash                                                       $       196  $       281
   Merchandise inventories                                         61,980       55,883
   Prepaid expenses and other                                       2,668        2,086
                                                              -----------  -----------
      Total current assets                                         64,844       58,250

Fixed assets, net                                                  20,686       25,061
Other assets                                                          277          401
                                                              -----------  -----------

      Total assets                                            $    85,807  $    83,712
                                                              ===========  ===========

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
   Debt                                                       $    27,004  $    25,699
   Accounts payable                                                11,444        7,634
   Accrued expenses                                                 9,851        8,407
                                                              -----------  -----------
      Total current liabilities                                    48,299       41,740
                                                              -----------  -----------
Liabilities subject to compromise                                  55,229       55,374
                                                              -----------  -----------
Total liabilities                                                 103,528       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                                            (69,817)     (65,498)
                                                              -----------  -----------

      Total stockholders' deficit                                 (17,721)     (13,402)
                                                              -----------  -----------

      Total liabilities and stockholders' deficit             $    85,807  $    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 Nine fiscal months ended
                                              (Unaudited)   (Unaudited) (Unaudited)  (Unaudited)
                                              ------------------------- ------------------------
                                              November 3,   October 28, November 3,  October 28,
                                                 2001          2000       2001           2000
                                              ----------   -----------  ----------   ----------
<S>                                           <C>          <C>          <C>          <C>
Net sales                                     $   51,480    $   50,778  $  164,729   $  164,646
Cost of sales                                     27,696        27,874      87,533       87,447
                                              ----------   -----------  ----------   ----------
   Gross profit                                   23,784        22,904      77,196       77,199
Selling, general and administrative expenses      24,538        24,790      75,064       76,540
Interest expense                                     666           739       2,117        2,345
                                              ----------   -----------  ----------   ----------
   Income (loss) before reorganization items      (1,420)       (2,625)         15        (1,686)
Reorganization items, net                          1,711         2,863       4,334        6,237
                                              ----------   -----------  ----------   ----------
   Net loss                                   $   (3,131)  $    (5,488) $   (4,319)  $    (7,923)
                                              ==========   ===========  ==========   ==========

Net loss per share - basic and diluted        $    (0.42)  $     (0.73) $    (0.58)  $     (1.06)
                                              ==========   ===========  ==========   ==========


Weighted average shares outstanding -
   basic and 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>
                                                                                     Nine fiscal months ended
                                                                                     ------------------------
                                                                                     November 3,  October 28,
                                                                                        2001          2000
                                                                                     -----------  -----------
                                                                                             (Unaudited)
<S>                                                                                  <C>          <C>
  Cash flows from operating activities:
    Net loss                                                                         $    (4,319) $    (7,923)
    Adjustments to reconcile net loss to net cash provided by (used in) operating
       activities:
         Depreciation and amortization of fixed assets                                     5,194        5,436
         Amortization of deferred financing costs                                            508          404
         Non-cash portion of reorganization items                                          1,447        3,040
         Other                                                                                11           23
         Changes in assets and liabilities:
             Increase in assets:
               Merchandise inventories                                                    (6,097)      (7,980)
               Prepaid expenses and other assets                                            (967)        (497)
             Increase (decrease) in liabilities:
               Accounts payable                                                            3,810        2,640
               Accrued expenses                                                               50         (874)
               Liabilities subject to compromise                                              40          231
                                                                                     -----------   ----------
  Net cash used in operating activities                                                     (323)      (5,500)
                                                                                     -----------   ----------
  Net cash used in investing activities - purchase of fixed assets, net                     (883)      (1,591)
                                                                                     -----------   ----------

  Cash flows from financing activities:

    Borrowings under revolving credit notes                                              174,874      178,775
    Repayment of borrowings under revolving credit notes                                (173,569)    (172,879)
    Payment of long-term obligations                                                        (184)        (340)
                                                                                     -----------   ----------
Net cash provided by financing activities                                                  1,121        5,556
                                                                                     -----------   ----------

Net decrease in cash                                                                         (85)      (1,535)
Cash at beginning of period                                                                  281        1,713
                                                                                     -----------   ----------
  Cash at end of period                                                              $       196   $      178
                                                                                     ===========   ==========


  Supplemental cash flow information:
     Interest paid                                                                   $     1,689   $    1,875
</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. ("FCO") and its wholly owned
         subsidiary, Factory Card Outlet of America Ltd. (collectively with FCO,
         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(EIK) and
         99-686(EIK) (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 in the Consolidated Statements of Operations.
         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 Company has obtained approval from the
         Bankruptcy Court of the extension of its exclusive period to file a
         plan and to solicit acceptances thereof to and including November 30,
         2001 and February 1, 2002, respectively. On November 29, 2001, the
         Company filed a motion requesting Court approval of the extension of
         the exclusive period to file a plan to and including February 19, 2002
         and the exclusive period to solicit acceptances of such plan to and
         including April 19, 2002, and the Company's exclusive right to file a
         plan has been extended until the Court determines the motion. The Court
         is currently scheduled to hear the motion on December 19, 2001. If the
         Court should deny such motion, or if the Company fails to file a plan
         of reorganization during the exclusive period or, after


                                       6

<PAGE>
                                      6

         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.

                  In August, 2001, the Company was compelled to withdraw the
         Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy
         Code Proposed By the Debtors and Factory Card Holdings, Inc. and the
         Official Committee of Unsecured Creditors, dated May 31, 2001 (the
         "Previous Plan"), when the third party plan proponent was unable to
         provide the funds that it was obligated to provide as a condition
         precedent to the effectiveness of the Previous Plan. Upon withdrawal of
         the Previous Plan, the Company and the Official Committee of Unsecured
         Creditors appointed in the Chapter 11 Case (the "Creditors' Committee")
         commenced discussions regarding a stand-alone plan that would be
         premised upon certain creditors providing the Company with favorable
         trade terms and additional liquidity upon the Company's emergence from
         chapter 11. Those discussions have resulted in an agreement in
         principal with the Creditors' Committee regarding the terms of such a
         plan (the "Plan"). Notwithstanding that the distributions to be made to
         general unsecured creditors as contemplated by such agreement in
         principal are substantially less than the full amount of such
         creditors' claims, the agreement contemplates some distributions to
         holders of the Company's common stock. The Company and the Creditors'
         Committee are engaged in discussions with the Official Committee of
         Equity Holders appointed in the Chapter 11 Cases regarding such
         distributions. The Company is also continuing to explore the
         possibility of formulating a plan of reorganization premised upon an
         investment by a third party.

                  The Company is in the process of negotiating and documenting
         the Plan and related agreements and documents. No assurances can be
         given either that these efforts will culminate in the filing of a Plan
         or, if a Plan is filed, what the terms of such filed Plan will be.

                  In June 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 SFAS 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 not
         expected to have a material impact on the financial condition or
         results of operations of the Company.

                  In June 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 such adoption is not expected to have
         a material impact on the financial condition or results of operations
         of the Company.

                  In June 2001, the FASB issued SFAS No. 143, "Accounting
         for Asset Retirement Obligations", which addresses financial accounting
         and reporting for obligations associated with the retirement of
         tangible long-lived assets and the associated asset retirement costs.
         The standard applies to legal obligations associated with the
         retirement of long-lived assets that result from the acquisition,
         construction, development and (or) normal use of the asset. The Company
         is required and plans to adopt the provisions of Statement No. 143 for
         the first quarter ended May 3, 2003. To accomplish this, the Company
         must identify all legal obligations for asset retirement obligations,
         if any, and determine the fair value of these obligations on the date
         of adoption. Because of the effort necessary to comply with the
         adoption of Statement No. 143, it is not practical for management to
         estimate the impact of adopting this Statement at the date of this
         report.

                  In August 2001, the FASB issued SFAS No. 144, "Accounting for
          the Impairment or Disposal of Long Lived Assets", which addresses
          financial accounting and reporting for the impairment or disposal of
          long-lived assets and supercedes SFAS No. 121, "Accounting for the
          Impairment of Long-Lived Assets and for Long-Lived Assets to Be
          Disposed Of", although it retains many of the fundamental provisions
          of that Statement. The provisions of SFAS No. 144 are effective for
          fiscal years beginning after December 15, 2001. The Company will adopt
          SFAS No. 144 during the first quarter of fiscal 2002 and such adoption
          is not expected to have a material impact on the financial condition
          or results of operations 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 (the
         "Loan Agreement") dated March 23, 1999 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
         with a minimum threshold of 7.0% (7.0% at November 3, 2001). The Loan
         Agreement expires on the earlier of February 1, 2002 or the date the
         Bankruptcy Court

                                       7

<PAGE>

         confirms a plan of reorganization. Borrowings under the Loan Agreement
         are secured by substantially all of the Company's assets. The Loan
         Agreement contains certain restrictive covenants, including maintenance
         of certain inventory levels, achievement of specified operating results
         and limitations on the incurrence of additional liens and indebtedness,
         capital expenditures, asset sales and payment of dividends, all of
         which have been met or waived.


(3)      Management Estimates

                  The preparation of 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 revenues and expenses during the reporting period
         and related disclosures. Significant estimates made as of and for the
         three and nine fiscal month periods ended November 3, 2001 and October
         28, 2000 include reserves 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
         and 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 upon bankruptcy court approval of the
         reorganization plan.

                  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 nine fiscal
         months ended November 3, 2001, the Company closed two under-performing
         stores and recorded reorganization costs relating to these closings of
         approximately $344. In addition, the Company paid $2,509 to
         professionals and recorded retention bonus accruals for salaried
         associates of $1,394.

                  In the nine fiscal months ended October 28, 2000, the Company
         closed five under-performing stores and recorded reorganization costs
         relating to these closings of approximately $1,177. In addition, the
         Company paid $3,434 to professionals and recorded retention bonus
         accruals for salaried associates of $1,558.

                                       8

<PAGE>

(6)      Income Taxes (Benefit)

                  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 November 3, 2001 and February 3, 2001.


(7)      Loss Per Share

                    Loss per share - basic is computed by dividing net loss by
          the weighted average number of common shares outstanding during the
          period.

<TABLE>
<CAPTION>
                                                              Net                   Per
                                                              loss       Shares    share
                                                            --------   ---------  -------
<S>                                                         <C>        <C>        <C>
           For the three fiscal months ended Nov 3, 2001 -
           Loss per share - basic and diluted:
           ----------------------------------
           Net loss                                         $ (3,131)  7,503,098  $ (0.42)
                                                            --------   ---------  -------

           For the three fiscal months ended Oct 28, 2000 -
           Loss per share - basic and diluted:
           ----------------------------------
           Net loss                                         $ (5,488)  7,503,098  $ (0.73)
                                                            --------   ---------  -------


                                                              Net                   Per
                                                              Loss       Shares    share
                                                            --------   ---------  -------
           For the nine fiscal months ended Nov 3, 2001 -
           Loss per share - basic and diluted:
           ----------------------------------
           Net loss                                         $ (4,319)  7,503,098  $ (0.58)
                                                            --------   ---------  -------

           For the nine fiscal months ended Oct 28, 2000 -
           Loss per share - basic and diluted:
           ----------------------------------
           Net loss                                         $ (7,923)  7,503,098  $ (1.06)
                                                            --------   ---------  -------
</TABLE>

                  For the three and nine fiscal months ended November 3, 2001
         and October 28, 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. All forward-looking statements
     relating to aspects of any plan of reorganization submitted in connection
     with its Chapter 11 Cases 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's
     approval of a 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 Cases; 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 expect to open any
     additional stores in fiscal 2001. As of December 5, 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  Nine fiscal months ended
                                              -------------------------  ------------------------
                                                Nov. 3,       Oct. 28,    Nov. 3.        Oct. 28,
                                                 2001           2000       2001           2000
                                              ---------     -----------  --------       ---------
<S>                                           <C>           <C>          <C>            <C>
Net sales                                       100.0          100.0 %    100.0 %         100.0 %
Cost of sales                                    53.8           54.9       53.1            53.1
                                              ---------     -----------  --------       ---------
   Gross profit                                  46.2           45.1       46.9            46.9
Selling, general and administrative expenses     47.7           48.8       45.6            46.5
Interest expense                                  1.3            1.5        1.3             1.4
                                              ---------     -----------  --------       ---------
   Loss before reorganization items              (2.8)          (5.2)       0.0            (1.0)
Reorganization items, net                         3.3            5.6        2.6             3.8
                                              ---------     -----------  --------       ---------
   Net loss                                      (6.1)         (10.8)%     (2.6)%          (4.8)%
                                              =========     ===========  ========       =========

Number of stores open at end of period            173            177        173             177
</TABLE>

Three Fiscal Months Ended November 3, 2001(fiscal 2001) and October 28,
2000(fiscal 2000)

         Net Sales. Despite operating four fewer stores, net store sales
increased $702, or 1.4%, to $51,480 for the three fiscal month period ended
November 3, 2001 from $50,778 for the three fiscal month period ended October
28, 2000. The increase can be attributed to improved product allocation and
assortment of inventory coupled with a shift in the retail calendar: Halloween
(October 31) fell in the third quarter of fiscal 2001 vs. the fourth quarter of
fiscal 2000. Comparable store sales increased $857, or 1.7% for the same period.
The comparable store sales increase was driven by strong sales in the candy and
basic party categories, offset by a decrease in the card category. No new stores
were opened in fiscal 2001 or fiscal 2000 and a store's sales are excluded from
the calculation of comparable store sales in the fiscal month of the store
closing.

         Gross Profit. Cost of sales includes distribution costs. Gross profit
increased $880 or 3.8% to $23,784 for the three fiscal month period ended
November 3, 2001 from $22,904 for the three fiscal month period ended October
28, 2000. As a percentage of net sales, gross profit was 46.2% for the three
fiscal month period ended November 3, 2001 compared to 45.1% in the same period
in the prior year. This increase was the result of lower inventory shrinkage
partially offset by higher 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 $252 or 1.0%, to $24,538
for the three fiscal month period ended November 3, 2001 from $24,790 for the
three fiscal month period ended October 28, 2000. This decrease resulted
primarily from operating four fewer stores coupled with lower advertising
expense for the three fiscal month period ended November 3, 2001. As a
percentage of net sales, selling, general and administrative expenses decreased
to 47.7% in the three fiscal month period ended November 3, 2001 from 48.8% in
the three fiscal month period ended October 28, 2000. This fluctuation was the
result of a significant reduction in advertising expense in the three fiscal
month period ended November 3, 2001.

         Interest Expense. Interest expense was $666 in the three fiscal month
period ended November 3, 2001 compared to $739 in the three fiscal month period
ended October 28, 2000. The decrease resulted from a lower effective interest
rate.

                                       11

<PAGE>


         Reorganization Items, net. Reorganization items decreased $1,152 or
40.2%, to $1,711 for the three fiscal month period ended November 3, 2001 from
$2,863 for the three fiscal month period ended October 28, 2000. The decrease
was the result of lower store closing costs. There were no store closings in the
three fiscal month period ended November 3, 2001. In the three fiscal month
period ended October 28, 2000, the Company closed five under-performing stores
and recorded reorganization costs associated with such closings of $1,177.

         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 November 3, 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 November 3, 2001 and February 3, 2001.

Nine Fiscal Months Ended November 3, 2001(fiscal 2001) and October 28,
2000(fiscal 2000)

         Net Sales. Net sales increased $83 or 0.05%, to $164,729 for the nine
fiscal month period ended November 3, 2001 from $164,646 for the nine fiscal
month period ended October 28, 2000. Comparable store sales increased $4,086 or
2.5% to $164,729 for the nine fiscal month period ended November 3, 2001 from
$160,642 for the nine fiscal month period ended October 28, 2000. The comparable
store sales increase was driven by significant increases in the candy and basic
party categories, offset by a decrease in the card category. No new stores were
opened in fiscal 2001 or fiscal 2000 and a store's sales are excluded from the
calculation of comparable store sales in the fiscal month of the store closing.

         Gross Profit. Cost of sales includes distribution costs. Gross profit
decreased $3 to $77,196 for the nine fiscal month period ended November 3, 2001
from $77,199 for the nine fiscal month period ended October 28, 2000. As a
percentage of net sales, gross profit was 46.9% for both periods.

         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 $1,476 or 1.9%, to
$75,064 for the nine fiscal month period ended November 3, 2001 from $76,540 for
the nine fiscal month period ended October 28, 2000. This decrease is the result
of lower advertising expense coupled with operating fewer stores: two stores
closed in fiscal 2001 (July 2001) and seven stores closed in fiscal 2000 (five
stores in August 2000 and two in January 2001). As a percentage of net sales,
selling, general and administrative expenses decreased to 45.6% in the nine
fiscal month period ended November 3, 2001 from 46.5% in the nine fiscal month
period ended October 28, 2000. This decrease was the result of a significant
reduction in advertising expense in the nine month period ended November 3,
2001.

         Interest Expense. Interest expense was $2,117 in the nine fiscal month
period ended November 3, 2001 compared to $2,345 in the nine fiscal month period
ended October 28, 2000. The decrease resulted from a lower effective interest
rate.

         Reorganization Items, net. Reorganization items decreased $1,903 or
30.5%, to $4,334 for the nine fiscal month period ended November 3, 2001 from
$6,237 for the nine fiscal month period ended October 28, 2000. The decrease can
be attributed to lower professional fees and store closing costs. During the
nine fiscal month period ended November 3, 2001, the Company recorded
professional fees and store closing costs of $2,509 and $344, respectively, as
compared to $3,434 and $1,177 in the nine fiscal month period ended October 28,
2000.

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         Income Taxes. Management believes that it is more likely than not that
deferred tax assets created by net operating losses for the nine fiscal month
period ended November 3, 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 November 3, 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 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. 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. The Company has recorded certain reorganization items in
the Consolidated Statements of Operations. 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, including an extension of the Loan Agreement, and (4) generate
sufficient cash from operations to meet future obligations.

         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 with a minimum threshold of 7.0% (7.0% at
November 3, 2001). The Loan Agreement expires on the earlier of February 1, 2002
or the date the Bankruptcy Court confirms a plan of reorganization. The Company
is in the process of obtaining an extension to the Loan Agreement. 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 November 3, 2001, the Company had $27,004 of borrowings
outstanding under the Loan Agreement and had utilized approximately $2,284 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 is pursuing 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

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at all.

         At November 3, 2001, the Company's working capital was $16,545. Net
cash used in operations for the nine fiscal month period ended November 3, 2001
was $323 compared to $5,500 of net cash used in operations for the nine fiscal
month period ended October 28, 2000. The decrease is due to a lower net loss of
$3,604 and changes in merchandise inventories and accounts payable offset by a
decrease in the non-cash portion of reorganization items.

         Net cash used in investing activities during the nine fiscal month
period ended November 3, 2001 and October 28, 2000 was $883 and $1,591,
respectively. Net cash used in investing activities was primarily for capital
expenditures for store and distribution center equipment.


         Net cash provided by financing activities during the nine fiscal month
period ended November 3, 2001 was $1,121 compared to $5,556 of net cash provided
by financing activities during the nine fiscal months ended October 28, 2000.
The fluctuation is attributable to the level of borrowings and repayments of
debt.

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

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 Company's revolving credit facilities, which represent
a significant portion of the Company's outstanding debt, is variable (not to
fall below 7.0%) 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.

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         None.


Item 5.  Other Information.

         None.

Item 6.  Exhibits and reports on Form 8-K

         (a)  Exhibits

                  None

         (b)  Reports on 8-K

                  None

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:  December 17, 2001                 By: /s/ William E. Freeman
                                              ----------------------
                                          William E. Freeman
                                          President and Chief Executive Officer

Dated:  December 17, 2001                 By: /s/ James D. Constantine
                                              ------------------------
                                          James D. Constantine
                                          Senior Vice President and Chief
                                          Financial Officer
                                          (principal financial officer)




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