<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 May 5, 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 June 8,
2001 was 7,503,098.

<PAGE>

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

                       For the Quarter Ended May 5, 2001
                                     Index

<TABLE>
<CAPTION>
                                                                                                        Page
<S>                                                                                                     <C>
Part I        Financial Information

Item 1        Financial Statements (Unaudited):

              Consolidated Balance Sheets as of May 5, 2001 and February 3, 2001                           3

              Consolidated Statements of Operations for the three fiscal months ended May 5,
                  2001 and April 29, 2000                                                                  4

              Consolidated Statements of Cash Flows for the three fiscal months
                  Ended May 5, 2001 and April 29, 2000                                                     5

              Notes to Consolidated Financial Statements                                                  6-9

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                                   13

Part II       Other Information                                                                          13-14

              Signatures                                                                                   14
</TABLE>

                                       2
<PAGE>

PART I - FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS

                            FACTORY CARD OUTLET CORP.
                                 AND SUBSIDIARY

                           Consolidated Balance Sheets
                          (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                                                                May 5,           February 3,
                                                                                                 2001                2001
                                                                                         -------------------  ------------------
ASSETS                                                                                        (Unaudited)
<S>                                                                                      <C>                   <C>
Current assets:
   Cash                                                                                  $           557        $          281
   Merchandise inventories                                                                        53,310                55,883
   Prepaid expenses and other                                                                      1,796                 2,086
                                                                                         ---------------        --------------
       Total current assets                                                                       55,663                58,250

Fixed assets, net                                                                                 23,574                25,061
Other assets                                                                                         356                   401
                                                                                         ---------------        --------------

       Total assets                                                                      $        79,593        $       83,712
                                                                                         ===============        ==============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
     Debt                                                                                $        23,557        $       25,699
     Accounts payable                                                                              7,167                 7,634
     Accrued expenses                                                                              9,290                 8,407
                                                                                         ---------------        --------------
       Total current liabilities                                                                  40,014                41,740
                                                                                         ---------------        --------------

Liabilities subject to compromise                                                                 55,341                55,374
                                                                                         ---------------        --------------

Total liabilities                                                                                 95,355                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                                                                           (67,858)              (65,498)
                                                                                         ---------------        --------------

      Total stockholders' deficit                                                                (15,762)              (13,402)
                                                                                         ---------------        --------------

      Total liabilities and stockholders' deficit                                        $        79,593        $       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
                                                                        ---------------------------------------
                                                                               May 5,             April 29,
                                                                                2001                 2000
                                                                        ------------------- -------------------
                                                                            (Unaudited)         (Unaudited)
<S>                                                                     <C>                    <C>
Net sales                                                                $       56,235        $       54,442
Cost of sales                                                                    30,414                28,962
                                                                         --------------        --------------
   Gross profit                                                                  25,821                25,480
Selling, general and administrative expenses                                     25,953                25,359
Interest expense                                                                    824                   848
                                                                         --------------        --------------
   Loss before reorganization items                                                (956)                 (727)
Reorganization items, net                                                         1,404                 2,011
                                                                         --------------        --------------
   Net loss                                                              $       (2,360)       $       (2,738)
                                                                         ==============        ==============


Loss per share - basic and diluted
   Net loss per share - basic and diluted                                $        (0.31)       $        (0.36)
                                                                         ===============       ===============

Weighted average shares outstanding -
   Basic and diluted                                                          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>
                                                                                                 Three fiscal months ended
                                                                                           ------------------------------------
                                                                                                  May 5,          April 29,
                                                                                                   2001              2000
                                                                                           ------------------   ---------------
                                                                                               (Unaudited)       (Unaudited)
  <S>                                                                                      <C>                  <C>
  Cash flows from operating activities:
    Net loss                                                                                 $    (2,360)        $   (2,738)
    Adjustments to reconcile net loss to net cash provided by (used in) operating
    activities:
         Depreciation and amortization of fixed assets                                             1,752              1,903
         Amortization of deferred financing costs                                                    171                213
         Noncash portion of reorganization items                                                     519              1,182
         Changes in assets and liabilities:
            (Increase) decrease in assets:
               Merchandise inventories                                                             2,573              2,448
               Prepaid expenses and other assets                                                     164               (530)
             Increase (decrease) in liabilities:
               Accounts payable                                                                     (468)            (2,401)
               Accrued expenses                                                                      364               (189)
               Liabilities subject to compromise                                                       4                 87
                                                                                              -----------       -----------

  Net cash provided by (used in) operating activities                                              2,719                (25)
                                                                                              -----------       -----------

  Net cash used in investing activities - purchase of fixed assets, net                             (265)              (381)
                                                                                              -----------       -----------

  Cash flows from financing activities:

    Borrowings                                                                                    56,177             55,710
    Repayment of debt                                                                            (58,319)           (56,649)
    Payment of long-term obligations                                                                 (36)               (93)
                                                                                              -----------       -----------

Net cash used in financing activities                                                             (2,178)            (1,032)
                                                                                              -----------       -----------

Net increase (decrease) increase in cash                                                             276             (1,438)
Cash at beginning of period                                                                          281              1,713
                                                                                              -----------       -----------

  Cash at end of period                                                                       $      557         $      275
                                                                                              ===========       ===========

  Supplemental cash flow information:
     Interest paid                                                                            $      644         $      610
</TABLE>

         See accompanying notes to consolidated financial statements.


                                       5
<PAGE>

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


(1)        Organization and Basis of Presentation

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

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

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

                     The Bankruptcy Code provides that the Company has an
           exclusive period during which only it may propose, file and solicit
           acceptances of a plan of reorganization. The exclusive period for the
           Company to propose a plan of reorganization is set to expire on July
           31, 2001. The exclusive period for solicitation of the plan of
           reorganization is set to expire on October 1, 2001. Although the
           Company filed a plan of reorganization prior to the expiration of its
           exclusive filing period, if the Company fails to obtain acceptance of
           such plan from the requisite impaired classes of creditors and equity
           security holders during the exclusive solicitation 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.

                                       6
<PAGE>

                     On February 2, 2001, the Company, the Official Committee of
           Unsecured Creditors (the "Creditors' Committee") and Factory Card
           Holdings, Inc. ("FCH") entered into a letter of intent which provided
           the basic parameters of an FCH investment in the Company and the
           chapter 11 plan of reorganization that would result therefrom.
           Subsequent to the execution of the letter of intent, FCH completed
           its due diligence. The Company, the Creditors' Committee and FCH then
           proceeded to negotiate the specific terms of the definitive
           transaction documents and the plan of reorganization. Those
           negotiations culminated in the execution of that certain Agreement on
           Plan of Reorganization of Factory Card Outlet Corp., dated as of
           March 26, 2001 (the "FCH Agreement"). The FCH Agreement, which is
           subject to, among other things, confirmation of a plan of
           reorganization that would have to be voted upon by creditors,
           provides for an investment of at least $10 million in the Company
           upon its emergence from chapter 11, at least $6 million of which
           would be in the form of equity.

                     The Company, FCH and the Creditors' Committee filed their
           Joint Amended Plan of Reorganization under Chapter 11 of the
           Bankruptcy Code Proposed by the Company, FCH and the Official
           Committee of Unsecured Creditors (the "Plan") on May 31, 2001 and
           their Joint Disclosure Statement of the Company, FCH and the Official
           Committee of Unsecured Creditors pursuant to Section 1125 of the
           Bankruptcy Code (the "Disclosure Statement") on June 1, 2001. The
           Plan provides that general unsecured creditors, whose claims are
           estimated to approximate $44 million, will receive a total cash
           distribution approximating $6 million, of which $5 million will be
           payable over a period of five years. The $5 million distribution will
           be subject to downward adjustment under certain circumstances. An
           additional distribution of up to $5 million will be available in the
           event that FCH were successful in raising proceeds from a public
           offering or other disposition of the Company's assets within a seven
           year period from the Company's emergence from chapter 11. The holders
           of the Company's outstanding common stock will not receive any
           distribution because the Plan will not result in creditors recovering
           the full amount of their claims. Consequently, the existing stock is
           expected to be cancelled.

                     The Court approved the Disclosure Statement relating to its
           Plan of Reorganization on June 1, 2001. The Disclosure Statement,
           along with the Plan and solicitation materials, was sent to impaired
           creditors for their consideration and approval. Votes to accept or
           reject the Plan are required to be received by the balloting agent on
           or before July 11, 2001. Following the solicitation period the
           Bankruptcy Court will consider whether to confirm the plan. The
           confirmation hearing is currently scheduled for July 18, 2001. In
           order to confirm a plan of reorganization, the Bankruptcy Court,
           among other things, is required to find that (1) with respect to each
           impaired class of creditors and equity security holders, each holder
           in such class will, pursuant to the plan, receive at least as much as
           such holder would receive in a liquidation, (2) each impaired class
           of creditors and equity security holders has accepted the plan by the
           requisite vote (except as provided in the following sentence), and
           (3) confirmation of the plan is not likely to be followed by a
           liquidation or a need for further financial reorganization of the
           Company or any successors to the Company unless the plan proposes
           such liquidation or reorganization. If any impaired class of
           creditors or equity security holders does not accept a plan and
           assuming that all of the other requirements of the Bankruptcy Code
           are met, the proponent of the plan may invoke the "cram down"
           provisions of the Bankruptcy Code. Under these provisions, the
           Bankruptcy Court may confirm a plan notwithstanding the non-
           acceptance of the plan by an impaired class of creditors or equity
           security holders if certain requirements of the Bankruptcy Code are
           met with respect to the non-accepting class. As the holders of the
           Company's outstanding common stock will not receive any distribution
           under the Plan and, consequently, will be deemed to have rejected the
           Plan, the Company, FCH and the Creditors' Committee currently intend
           to request confirmation of the Plan under the cram down provisions of
           the Bankruptcy Code.

                                       7
<PAGE>

(2)        Debtor in Possession Facility


                     Subsequent to the commencement of the Chapter 11 Cases, the
           Company entered into a Revolving Credit and Guaranty Agreement in
           March 1999 and subsequent amendments (as amended, the "Loan
           Agreement") which currently provides up to $32,500 (including $10,000
           for letters of credit) to fund working capital needs and for general
           corporate purposes. Borrowings under the facility are limited by
           inventory levels and have an interest rate of 1% over prime (8.50% at
           May 5, 2001). The Loan Agreement expires on the earlier of July 31,
           2001 or the effective date of the Company's plan of reorganization.
           Borrowings under the Loan Agreement are secured by substantially all
           of the Company's assets. Certain restrictive covenants apply,
           including maintenance of certain inventory levels, achievement of
           specified operating results and limitations on the incurrence of
           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 fiscal month periods ended May 5, 2001 and April 29, 2000
           include accruals for store closings and other reorganization items,
           provision for shrinkage, capitalized overhead costs related to
           inventory and the carrying values of inventories. Actual results
           could differ from those estimates.

(4)        Liabilities Subject to Compromise

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

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

 (5)       Reorganization Items

                     Reorganization costs include costs for professional fees
           and other costs related to the Company's reorganization. In the three
           fiscal months ended May 5, 2001 and April 29, 2000, amounts paid to
           professionals totaled $821 and $1,462 respectively.

                                       8
<PAGE>

                     In May 2001 the Company announced that it would close an
           additional two stores. The final day of sales is expected to be July
           7, 2001. Approximate costs to close these stores amount to $410 in
           the aggregate which includes inventory write down, lease termination
           costs, impairment charge of fixed assets and leasehold improvements
           and other miscellaneous closing costs.

(6)        Income Taxes

                     In assessing the realization of deferred tax assets,
           management considers the likelihood that those assets will be
           realized through future taxable income. Because the realization of
           the deferred tax assets may be limited by events involving the
           Chapter 11 Cases or other events related to the ownership of the
           Company, the Company recorded a valuation allowance for the total of
           the net deferred tax assets at May 5, 2001 and February 3, 2001.

(7)        Earnings Per Share

                     The computation of loss per share - basic and diluted are
           shown below.

<TABLE>
<CAPTION>
                                                                          Net                                   Per
                                                                          loss               Shares            share
                                                                     ---------------     ---------------     -----------
             <S>                                                     <C>                 <C>                 <C>
             For the three fiscal months ended May 5, 2001 -
             Loss per share basic and diluted:
             --------------------------------
             Net loss                                                $  (2,360)            7,503,098         $  (0.31)
                                                                     ---------------     ---------------     -----------

             For the three fiscal months ended April 29, 2000 -
             Loss per share - basic and diluted:
             -----------------------------------
             Net loss                                                $  (2,738)            7,503,098          $ (0.36)
                                                                     ---------------     ---------------     -----------
</TABLE>

                     For the quarters ended May 5, 2001 and April 29, 2000, no
           options to purchase common stock were included in the computation of
           earnings per share - diluted because the effect would be
           antidilutive.



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

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

           In general, the results, performance or achievements of the Company
and its stores are dependent

                                       9
<PAGE>

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. As of June 8, 2001, the
Company operated 175 stores in 20 states. The Company does not intend to open
any additional stores in 2001 and plans to close two stores in July 2001.

                                       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:

                                                    Three fiscal months ended
                                                    -------------------------
                                                     May 5,           April 29,
                                                      2001               2000
                                                      ----               ----

Net sales                                             100.0 %            100.0 %
Cost of sales                                          54.1               53.2
                                                 ----------        -----------
   Gross profit                                        45.9               46.8
Selling, general and administrative expenses           46.2               46.6
Interest expense                                        1.5                1.6
                                                 ----------        -----------
   Loss before reorganization items, net               (1.8)              (1.4)
Reorganization items, net                               2.5                3.7
                                                 ----------        -----------
   Net loss                                            (4.3)%             (5.1)%
                                                 ==========        ===========
Number of stores open at end of period                  175                182

Three Fiscal Months Ended May 5, 2001 and April 29, 2000

           Net Sales. Net sales increased $1,793 or 3.3%, to $56,235 for the
three fiscal month period ended May 5, 2001 from $54,442 for the three fiscal
month period ended April 29, 2000. Comparable store sales increased $2,480 or
4.6%. The increase in net sales was the result of improved flow of merchandise
to the stores. Sales increases in the card, balloon, candy and basic party
categories were partially offset by decreases in the giftwrap, seasonal and gift
categories. The card increase was the result of a price change from 39 cents to
49 cents late in April 2000. The Company includes stores opened 13 or 14 months
after their opening date in the calculation of comparable store 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 in 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 distribution costs. Gross profit
increased $341 or 1.3%, to $25,821 for the three fiscal month period ended May
5, 2001 from $25,480 for the three fiscal month period ended April 29, 2000. As
a percentage of net sales, gross profit was 45.9% for the three fiscal month
period ended May 5, 2001 compared to 46.8% in the same period in the prior year.
The decrease in gross profit as a percentage of net sales can be attributable to
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 increased $594 or 2.3%, to $25,953
for the three fiscal month period ended May 5, 2001 from $25,359 for the three
fiscal month period ended April 29, 2000. This increase resulted primarily from
increases in store utilities and professional services incurred relating to the
execution of store physical inventories. As a percentage of net sales, selling,
general and administrative expenses decreased to 46.2% in the three fiscal month
period ended May 5, 2001 from 46.6% in the three fiscal month period ended April
29, 2000.

           Interest Expense. Interest expense was $824 in the three fiscal month
period ended May 5, 2001 compared to $848 in the three fiscal month period ended
April 29, 2000. This decrease resulted primarily from lower interest rates.

                                       11
<PAGE>

           Reorganization Items, net. Reorganization items decreased $607 or
30.2% to $1,404 for the three fiscal month period ended May 5, 2001 from $2,011
for the three fiscal month period ended April 29, 2000. The decrease can be
attributable to the timing of professional services related to the bankruptcy
proceedings.

           Income Taxes. Management believes that it is more likely than not
that deferred tax assets created by net operating loses for the three month
period ended May 5, 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 May 5, 2001 and February 2, 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 FCH Agreement dated March 26, 2001, which is subject to, among
other things, confirmation of a plan of reorganization, provides for an
investment of at least $10 million in the Company upon its emergence from
Chapter 11, at least $6 million of which would be in the form of equity.

           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 a Revolving Credit and Guaranty Agreement and subsequent amendments
dated March 23, 1999. The Loan Agreement originally provided the Company with a
revolving line of credit for loans and letters of credit in an aggregate amount
not to exceed $50 million, including the ability to issue up to $10 million of
letters of credit, to be used for its ongoing working capital needs and for
general corporate purposes. However, as $50 million was in excess of the
Company's working capital needs, the aggregate amount of the loan was reduced to
$32.5 million by an amendment dated March 19, 2001. The amendment also extended
the term of the loan from March 23, 2001 to the earlier of July 31, 2001 or the
effective date of the Company's plan of reorganization. The lenders under the
Loan Agreement were granted a security interest in substantially all of the
Company's assets as security for the Company's obligations under the Loan
Agreement. All obligations under the Loan Agreement are afforded
"super-priority" administrative expense status in the Chapter 11 Cases. The
Company intends to use amounts borrowed under the Loan Agreement for its ongoing
working capital needs and for other general corporate purposes.

           The Loan Agreement contains certain restrictive covenants, which,
among other things, require the Company to maintain certain inventory levels and
achieve specified operating results. The restrictive covenants also limit the
Company's capital expenditures, asset sales and dividends and the ability of the
Company to grant liens and incur additional indebtedness. All such covenants
have been met or waived at May 5, 2001.

                                       12
<PAGE>

           As of May 5, 2001, the Company had $23,557 of borrowings outstanding
under the Loan Agreement and had utilized approximately $402 under the Loan
Agreement to issue letters of credit. The Company believes that its cash flow
from operations, borrowings under the Loan Agreement, adequate trade terms and
the continued support of its vendors will provide it with sufficient liquidity
to conduct its operations while the Chapter 11 Cases are pending. The Company
will be exploring opportunities to obtain long-term financing to support the
Company's business plan after it emerges from chapter 11; however, there can be
no assurance that the Company will be able to obtain such financing with
satisfactory terms, if at all.

           At May 5, 2001 and February 3, 2001, the Company's working capital
was $15,649 and $16,510 respectively. Net cash provided by operating activities
for the three fiscal month period ended May 5, 2001 was $2,719 compared to $25
of net cash used during the three fiscal month period ended April 29, 2000. The
increase is primarily due to more favorable trade vendor terms negotiated by the
Company, which resulted in an increase in accounts payable balances.

           Net cash used in investing activities during the three fiscal month
period ended May 5, 2001 and April 29, 2000 was $265 and $381, respectively. Net
cash used in investing activities was primarily for capital expenditures for
store equipment and equipment for the distribution center.

           Net cash used in financing activities during the three fiscal month
period ended May 5, 2001 was $2,178 compared to $1,032 of net cash used in
financing activities during the three fiscal months ended April 29, 2000.
Amounts are attributable to the level of borrowings and repayments.

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



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
represents a significant portion of the Company's outstanding debt, is variable
based on the prime rate.

PART II - OTHER INFORMATION

Item 1.    Legal Proceedings.

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

           Several claims and cases have been filed by creditors of the Company
relating to unpaid amounts due to such creditors. Payment of these amounts are
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.

                                       13
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Item 6.    Exhibits and reports on Form 8-K

           (a) Exhibits

               99.1  Press release of the Company issued June 5, 2001

           (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:  June 15, 2001                     By: /s/ William E. Freeman
                                              --------------------------
                                                  William E. Freeman
                                                  President and Chief
                                                  Executive Officer


Dated:  June 15, 2001                     By: /s/ James D. Constantine
                                              --------------------------
                                                  James D. Constantine
                                                  Senior Vice President
                                                  and Chief Financial Officer

                                       14
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EXHIBIT INDEX

           Exhibits

                   99.1  Press release of the Company issued June 5, 2001

                                       15