<PAGE>

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


         |X| QUARTERLY REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  For The Quarterly Period Ended July 31, 1999

                         Commission File Number: 21859

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

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

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

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


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


The number of shares of the Registrant's Common Stock outstanding as of
September 3, 1999 was 7,503,098.
<PAGE>

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

                      For the Quarter Ended July 31, 1999
                                     Index


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

Item 1      Financial Statements (unaudited):

            Consolidated Balance Sheets as of July 31, 1999 and January 30, 1999                       3

            Consolidated Statements of Operations for the three fiscal months and six fiscal
              months ended July 31, 1999 and August 1, 1998                                            4

            Consolidated Statements of Cash Flows for the six fiscal months
              ended July 31, 1999 and August 1, 1998                                                   5

            Notes to Consolidated Financial Statements                                                6-8

Item 2      Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                                              9-14

Item 3      Quantitative and Qualitative Disclosures About Market Risk                                15

Part II     Other Information                                                                         15

            Signatures                                                                                16
</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>
                                                                                          July 31,               January 30,
                                                                                            1999                    1999
                                                                                  ---------------------    --------------------
<S>                                                                                 <C>                      <C>
ASSETS                                                                                  (Unaudited)
Current assets
   Cash                                                                             $             1,360      $            3,597
   Merchandise inventories                                                                       51,826                  61,658
   Refundable income taxes                                                                          460                     747
   Prepaid expenses and other                                                                     1,106                     980
                                                                                  ---------------------    --------------------
       Total current assets                                                                      54,752                  66,982

Fixed assets, net                                                                                33,387                  39,585
Other assets                                                                                        903                   1,004
                                                                                  ---------------------    --------------------

       Total assets                                                                 $            89,042      $          107,571
                                                                                  =====================    ====================

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities not subject to compromise
  Current liabilities:
     Accounts payable                                                               $             5,889      $           33,089
     Current maturities of long-term obligations                                                      -                   2,161
     Accrued expenses                                                                             8,853                   8,755
                                                                                  ---------------------    --------------------

       Total current liabilities                                                                 14,742                  44,005
                                                                                  ---------------------    --------------------

  Noncurrent liabilities:
     Revolving credit note payable                                                               13,903                  20,653
     Long-term obligations                                                                            -                   1,670
     Term loan, net of discount                                                                       -                   9,669
     Deferred rent liabilities                                                                    6,773                   7,396
                                                                                  ---------------------    --------------------

      Total  noncurrent liabilities                                                              20,676                  39,388
                                                                                  ---------------------    --------------------

Liabilities subject to compromise                                                                47,275                       -
                                                                                  ---------------------    --------------------

Stockholders' equity:
   Common stock - $.01 par value at July 31, 1999 and January 30, 1999.
     Voting class - authorized  15,000,000 shares; 7,503,098 shares issued and
     outstanding at July 31, 1999 and January 30, 1999, respectively.
     Non-voting class - authorized 205,000 shares, no shares issued or                               75                      75
     outstanding.
   Additional paid-in capital                                                                    52,040                  52,021
   Retained earnings (deficit)                                                                  (45,766)                (27,918)
                                                                                  ---------------------    --------------------

      Total stockholders' equity                                                                  6,349                  24,178
                                                                                  ---------------------    --------------------

      Total liabilities and stockholders' equity                                    $            89,042      $          107,571
                                                                                  =====================    ====================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

                           FACTORY CARD OUTLET CORP.
                                AND SUBSIDIARY

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

<TABLE>
<CAPTION>

                                            Three fiscal months ended                      Six fiscal months ended
                                     ------------------------------------------    -----------------------------------------
                                            July 31,            August 1,                July 31,            August 1,
                                              1999                 1998                    1999                 1998
                                     ------------------------------------------    -----------------------------------------
                                                    (Unaudited)                                  (Unaudited)
<S>                                            <C>                    <C>                    <C>                    <C>
Net sales                             $          52,234      $          54,749      $         104,767      $         104,611
Cost of sales                                    26,421                 27,994                 54,541                 52,381
                                      -------------------    -------------------    -------------------    -------------------
   Gross profit                                  25,813                 26,755                 50,226                 52,230
Selling, general and administrative expenses     24,982                 27,168                 50,750                 50,915
Interest expense                                    582                    913                  1,476                  1,694
                                      -------------------    -------------------    -------------------    -------------------
   (Loss) income before reorganization items,
      income taxes and extraordinary item           249                 (1,326)                (2,000)                  (379)
Reorganization items, net                         2,009                      -                 14,556                      -
                                      -------------------    -------------------    -------------------    -------------------
   Loss before income taxes and
       extraordinary item                        (1,760)                (1,326)               (16,556)                  (379)
Income taxes (benefit)                                -                   (530)                     -                   (151)
                                      -------------------    -------------------    -------------------    -------------------
   Loss before extraordinary item                (1,760)                  (796)               (16,556)                  (228)
Extraordinary item-loss on early retirement
     of debt                                          -                      -                  1,292                      -
                                      -------------------    -------------------    -------------------    -------------------
   Net loss                           $          (1,760)     $            (796)     $         (17,848)     $            (228)
                                      ===================    ===================    ===================    ===================



Loss per share -
   Basic/diluted                      $           (0.23)      $          (0.11)     $           (2.38)     $           (0.03)
                                      ===================    ===================    ===================    ===================


Weighted average shares outstanding -
   Basic/diluted                              7,503,098              7,385,196              7,503,098              7,369,791
                                      ===================    ===================    ===================    ===================

 </TABLE>


See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

                           FACTORY CARD OUTLET CORP.
                                AND SUBSIDIARY

                     Consolidated Statements of Cash Flows
                         (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                                                                Six fiscal months ended
                                                                                      ------------------------------------------
                                                                                            July 31,            August 1,
                                                                                              1999                1998
                                                                                      -----------------------------------------
                                                                                                       (Unaudited)
<S>                                                                                      <C>                     <C>
Cash flows from operating activities:
  Net loss                                                                                 $         (17,848)      $   (228)
  Adjustments to reconcile net loss to net cash provided by (used in) operating
  activities:
     Depreciation and amortization of fixed assets                                                     3,839          3,492
     Amortization of deferred financing costs and debt discount                                          401            132
     Reorganization items, net                                                                        13,590             -
     Extraordinary loss on early retirement of debt                                                    1,292             -
     Other                                                                                                30            866
     Changes in assets and liabilities:
       (Increase) decrease in assets:
         Refundable income taxes                                                                         292           (131)
         Merchandise inventories                                                                       5,889        (16,296)
         Prepaid expenses and other assets                                                            (1,165)        (1,234)
        Increase (decrease) in liabilities:
         Accounts payable                                                                            (27,200)        11,337
         Accrued expenses                                                                             (3,485)          (313)
         Deferred rent liabilities                                                                       271          1,277
         Liabilities subject to compromise                                                            40,198              -
                                                                                                --------------  -------------

  Net cash provided by (used in) operating activities                                                 16,104         (1,098)
                                                                                               ----------------  -------------

  Net cash used in investing activities - purchase of fixed assets, net                                 (957)        (6,030)
                                                                                               ----------------  --------------
  Cash flows from financing activities:

    Borrowings under revolving credit notes and term loan                                            125,977         57,158
    Repayment of borrowings under revolving credit notes and term loan                              (143,253)       (49,083)
    Payment of long-term obligations                                                                    (108)          (894)
    Proceeds from exercise of employee stock options                                                      -             138
                                                                                               ---------------   -------------

  Net cash (used in) provided by financing activities                                                (17,384)         7,319
                                                                                               ---------------   --------------
  Net (decrease) increase in cash                                                                     (2,237)           191
  Cash at beginning of period                                                                          3,597             30
                                                                                               ----------------  --------------

  Cash at end of period                                                                       $        1,360     $      221
                                                                                              ================= ================


  Supplemental cash flow information:
   Interest paid                                                                              $        1,519     $    2,345
   Income taxes paid (refunded)                                                                         (292)            93

</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 superstores 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
     January 30, 1999 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 Bankruptcy Code (the "Bankruptcy Code") on
     March 23, 1999 (the "petition date") under case numbers 99-685(JJF) and 99-
     686(JJF) (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 doubt about the Company's ability
     to continue as a going concern. As discussed in Note 5, the Company has
     recorded certain reorganization items during the six fiscal months ended
     July 31, 1999. Additional adjustments, some of which could be material, may
     be necessary as a consequence of a plan of reorganization. The continuation
     of the Company's business as a going concern is contingent upon, among
     other things, the ability to (1) formulate a plan of reorganization that
     will be confirmed by the Bankruptcy Court, (2) achieve satisfactory levels
     of future profitable operations, (3) maintain adequate financing, and (4)
     generate sufficient cash from operations to meet future obligations.

          The Bankruptcy Code provides that the Company has an exclusive period
     during which only it may propose, file and solicit acceptances of a plan of
     reorganization. The exclusive period for the Company to propose a plan of
     reorganization currently expires on January 18, 2000. The Company has the
     right to request that the Bankruptcy Court grant an extension of the
     exclusive period. If the Company fails to file a plan of reorganization
     during the exclusive period or, after such plan has been filed, if the
     Company fails to obtain acceptance of such plan from the requisite impaired
     classes of creditors and equity security holders during the exclusive
     period and the exclusive period is not extended, any party in interest,
     including a creditor, an equity security holder, a committee of creditors
     or equity security holders, or an indenture trustee, may file their own
     plan of reorganization for the Company. The Company is in the process of
     developing a plan of reorganization for filing with the Bankruptcy Court.
     However, there can be no assurances given when a plan will be filed or
     that the plan that is ultimately filed will be accepted by creditors or
     confirmed by the Bankruptcy Court.

                                       6
<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 (the "Loan
     Agreement") dated March 23, 1999 which provides up to $50,000 (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 .75% over prime or, at the
     Company's option, 3.75% over the London Interbank Offered Rate. The Loan
     Agreement expires on the earlier of March 23, 2001 or the date the
     Bankruptcy Court confirms a plan of reorganization. Borrowings under the
     Loan Agreement are secured by substantially all of the Company's assets.
     Certain restrictive covenants apply, including maintenance of certain
     inventory levels, achievement of specified operating results and
     limitations on the incurrence of additional liens and indebtedness, capital
     expenditures, asset sales and payment of dividends.

          Proceeds from the Loan Agreement were used in March 1999 to repay all
     borrowings under the Company's previous revolving credit agreement and term
     loan. As a result, the Company recognized an extraordinary loss of $1,292
     associated with the early retirement of the Company's previous revolving
     credit agreement and term loan.

(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 six fiscal month periods ended
     July 31, 1999 and August 1, 1998 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, 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.

                                       7
<PAGE>

(5)  Reorganization Items

          In April 1999, the Company obtained approval from the Bankruptcy Court
     to close and conduct closing sales at 27 stores that are in markets the
     Company does not intend to continue to operate in or are underperforming or
     unprofitable. During the six fiscal months ended July 31, 1999, the Company
     recorded a provision for reorganization costs relating to these store
     closings of approximately $10,428. This provision included the write-down
     of fixed assets, estimated lease rejection claims and the loss on the
     disposition of merchandise inventory.

          In addition to the provision for the store closing, reorganization
     costs for professional fees and other costs related to the Company's
     reorganization were $4,128 in the six fiscal months ended July 31, 1999.

(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 has recorded a valuation
     allowance to fully reserve for the value of the net deferred tax assets at
     July 31, 1999 and January 30, 1999.

(7)  Earnings Per Share

          In accordance with Statement of Financial Accounting Standards
     ("SFAS") No. 128, earnings per share - basic is computed by dividing net
     income by the weighted average number of common shares outstanding during
     the period. Earnings per share - diluted includes the effect of stock
     options and warrants.

          For the three and six fiscal months ended August 1, 1998, 86,203 and
     73,387 options to purchase common stock outstanding during the periods,
     respectively, were not included in the computation of earnings per share -
     diluted because the option price was greater than the average market price
     of the common shares. For the three and six fiscal months ended July 31,
     1999, no options to purchase common stock were included in the computation
     of earnings per share - diluted because the effect would be antidilutive.

                                       8
<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 proceedings are dependent upon, among other
things, further improvements in the Company's store-level operating performance,
the formation of an acceptable reorganization plan and the bankruptcy court
approval of the reorganization plan.

     In general, the results, performance or achievements of the Company and its
stores are dependent upon a number of factors including, without limitation, the
following: effects resulting from the commencement and completion of the chapter
11 proceedings; ability to meet sales plans; weather and economic conditions;
dependence on key personnel; competition; ability to anticipate merchandise
trends and consumer demand; ability to maintain relationships with suppliers;
successful implementation of information systems; successful handling of
merchandise logistics; inventory shrinkage; ability to meet future capital
needs; governmental regulations; ability to complete corrective action necessary
to address Year 2000 issues; 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.

     On September 3, 1999, the Company announced that it received notification
that the NASD's staff has delisted the Company's common stock from the NASDAQ
National Market effective September 1, 1999.  NASD said the determination was
based on the uncertainties concerning the Company's pending Chapter 11 Cases on
the Company's shareholders.  The Company is considering requesting the NASDAQ
Listing and Hearing Review Council to review the delisting decision.

     The Company is a chain of company-owned superstores offering an extensive
selection of greeting cards, giftwrap, balloons, party supplies and other
special occasion merchandise at everyday value prices.  As of September 3, 1999,
the Company operated 182 stores in 21 states.  The Company currently does not
plan to open any additional stores in 1999.

                                       9
<PAGE>

Results of Operations

     The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales:

<TABLE>
<CAPTION>
                                                           Three fiscal months ended                   Six fiscal months ended
                                                         ------------------------------             ------------------------------
                                                         July 31,             August 1,             July 31,             August 1,
                                                           1999                 1998                  1999                 1998
                                                         --------             ---------             --------             ---------
<S>                                                      <C>                  <C>                   <C>                  <C>
Net sales                                                 100.0%                100.0%                100.0%               100.0%
Cost of sales                                              50.6                  51.1                  52.1                 50.1
                                                         --------             ---------             --------             ---------
   Gross profit                                            49.4                  48.9                  47.9                 49.9
Selling, general and administrative expenses               47.8                  49.6                  48.4                 48.7
Interest expense                                            1.1                   1.7                   1.4                  1.6
                                                         --------             ---------             --------             ---------
   (Loss) income before reorganization items,
     income taxes and extraordinary item                    0.5                  (2.4)                 (1.9)                (0.4)
Reorganization items, net                                   3.9                     -                  13.9                    -
                                                         --------             ---------             --------             ---------
   Loss before income taxes and
      Extraordinary item                                   (3.4)                 (2.4)                (15.8)                (0.4)
Income tax (benefit)                                          -                  (1.0)                    -                 (0.2)
                                                         --------             ---------             --------             ---------
   Loss before extraordinary item                          (3.4)                 (1.4)                (15.8)                (0.2)
Extraordinary item-loss on early retirement of debt           -                     -                   1.2                    -
                                                         --------             ---------             --------             ---------
   Net loss                                                (3.4)%                (1.4)%               (17.0)%               (0.2)%
                                                         ========             =========             ========             =========
Number of stores open at end of period                      182                   199                   182                  199
</TABLE>

Three Fiscal Months Ended July 31, 1999 and August 1, 1998

     Net Sales.  Net sales decreased $2,515, or 4.6%, to $52,234 for the three
fiscal month period ended July 31, 1999 from $54,749 for the three fiscal month
period ended August 1, 1998.  The decrease resulted from a net sales decrease of
$4,704 as a result of stores closed during the quarter and a comparable store
sales decrease of $749, or 1.5%, offset by a net sales increase of $2,938 from
stores not included in the comparable store base. Comparable store sales were
impacted by the reduced flow of merchandise resulting from issues associated
with the Company's liquidity and the Chapter 11 Cases. The Company includes
stores opened 13 or 14 months after their opening date in the calculation of
comparable store sales.

     Gross Profit.  Cost of sales includes distribution costs.  Gross profit
decreased $942, or 3.5%, to $25,813 for the three fiscal month period ended July
31, 1999 from $26,755 for the three fiscal month period ended August 1, 1998.
As a percentage of net sales, gross profit was 49.4% for the three fiscal month
period ended July 31, 1999 compared to 48.9% in the same period in the prior
year.  Gross profit as a percentage of net sales increased primarily as a result
of lower distribution costs during the three fiscal months ended July 31, 1999.

     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses include store payroll, store occupancy, advertising,
depreciation, other store operating and corporate administrative expenses.
Store occupancy expenses are included in selling, general and administrative
expenses for all information presented.  Selling, general and administrative
expenses decreased $2,186, or 8.0%, to $24,982 for the three fiscal month period
ended July 31, 1999 from $27,168 for the three fiscal month period ended August
1, 1998.  Approximately $1,280 of this decrease resulted from operating 17 fewer
superstores during the quarter ended July 31, 1999 than the quarter ended August
1, 1998.  During the three fiscal months ended August 1, 1998, the Company
recorded a pre-tax special charge of $655 relating to certain severance and new
store design costs which amounts have been included in selling, general and

                                       10
<PAGE>

administrative expenses.  As a percentage of net sales, selling, general and
administrative expenses decreased to 47.8% in the three fiscal month period
ended July 31, 1999 from 49.6% in the three fiscal month period ended August 1,
1998.

     Interest Expense.  Interest expense was $582 in the three fiscal month
period ended July 31, 1999 compared to $913 in the three fiscal month period
ended August 1, 1998. This decrease resulted primarily from lower borrowing
levels offset partially by a higher effective interest rate.

     Reorganization Items, net.  The Company recognized $2,009 of reorganization
items, net consisting of professional fees and other costs related to the
reorganization of the Company offset by a $710 reduction in the estimated store
closing costs in the three fiscal month period ended July 31, 1999.

     Income Taxes.  The Company's effective income tax rate was 40% during the
three fiscal month period ended August 1, 1998.  Management believes that it is
more likely than not that deferred tax assets created by net operating losses
during the three fiscal month period ended July 31, 1999 will not be realized
through future taxable income.  Therefore, the Company has increased its
valuation allowance, which was established during the fiscal year ended January
30, 1999, to fully reserve the potential tax benefits resulting from these net
operating losses.  As a result, the effective tax rate for the three fiscal
month period ended July 31, 1999 was zero.

Six Fiscal Months Ended July 31, 1999 and August 1, 1998

     Net Sales.  Net sales increased $156, or 0.1%, to $104,767 for the six
fiscal month period ended July 31, 1999 from $104,611 for the six fiscal month
period ended August 1, 1998. The increase resulted from a net sales increase of
$6,822 from stores not included in the comparable store base offset by a net
sales decrease of $4,704 from stores closed during the second quarter and a
comparable store sales decrease of $1,962, or 2.0%. Comparable store sales were
impacted by the reduced flow of merchandise resulting from issues associated
with the Company's liquidity and the Chapter 11 Cases. The Company includes
stores opened 13 or 14 months after their opening date in the calculation of
comparable store sales.

     Gross Profit.  Cost of sales includes distribution costs.  Gross profit
decreased $2,004, or 3.8%, to $50,226 for the six fiscal month period ended July
31, 1999 from $52,230 for the six fiscal month period ended August  1, 1998.  As
a percentage of net sales, gross profit was 47.9% for the six fiscal month
period ended July 31, 1999 compared to 49.9% in the same period in the prior
year.  Gross profit as a percentage of net sales decreased primarily as a result
of higher vendor promotional program monies recorded in the six fiscal months
ended August 1, 1998.

     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses include store payroll, store occupancy, advertising,
depreciation, other store operating and corporate administrative expenses.
Store occupancy expenses are included in selling, general and administrative
expenses for all information presented. Selling, general and administrative
expenses decreased $165, or 0.3%, to $50,750 for the six fiscal month period
ended July 31, 1999 from $50,915 for the six fiscal month period ended August 1,
1998.  During the six fiscal months ended August 1, 1998, the Company recorded a
pre-tax special charge of $655 relating to certain severance and new store
design costs which amounts have been included in selling, general and
administrative expenses.  As a percentage of net sales, selling, general and
administrative expenses decreased to 48.4% in the six fiscal month period ended
July 31, 1999 from 48.7% in the six fiscal month period ended August 1, 1998.

     Interest Expense.  Interest expense was $1,476 in the six fiscal month
period ended July 31, 1999 compared to $1,694 in the six fiscal month period
ended August 1, 1998. This decrease resulted primarily from lower borrowing
levels offset partially by a higher effective interest rate.

                                       11
<PAGE>

     Reorganization Items, net.  The Company has recognized $14,556 of
reorganization items, net consisting of a provision for the write down of fixed
assets, estimated lease rejection claims and the loss on the disposition of
merchandise inventory related to 27 store closings, professional fees, and other
costs related to the reorganization of the Company for the six fiscal month
period ended July 31, 1999.

     Income Taxes.  The Company's effective income tax rate was 40% during the
six fiscal month period ended August 1, 1998. Management believes that it is
more likely than not that deferred tax assets created by losses during the six
fiscal month period ended July 31, 1999 will not be realized through future
taxable income. Therefore, the Company has increased its valuation allowance,
which was established during the fiscal year ended January 30, 1999, to fully
reserve the potential tax benefits resulting from these losses. As a result, the
effective tax rate for the six fiscal month period ended July 31, 1999 was zero.

Year 2000 Readiness Disclosure

     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a temporary
inability to process transactions or engage in similar normal business
activities. The Company has initiated a Year 2000 program designed to identify
and correct any concerns which may be identified.

     The Year 2000 program was developed with the help of independent
consultants and consists of teams identifying and evaluating Year 2000 issues
and remediating systems that are not Year 2000 compliant. The Company's program
to identify and evaluate Year 2000 readiness includes inventorying and testing
systems that are commonly thought of as information technology (IT), such as
computer networks, as well as systems that are not commonly thought of as IT
systems, such as timeclocks and the telephone system. IT systems with non-
compliant code are being modified or replaced with systems that are Year 2000
compliant. Similar actions are being taken with respect to non-IT systems. The
teams are also investigating the Year 2000 readiness of suppliers and other
third parties, which includes surveying their Year 2000 remediation programs,
and developing contingency plans where necessary.

     Key IT and non-IT systems have been inventoried and assessed for compliance
and detailed plans have been developed for required system modifications or
replacements, including remediation and testing activities.  As of June 30,
1999, remediation has been completed and all IT and non-IT systems have been
tested and certified as Year 2000 ready and have been moved into production
status.

     Incremental costs directly related to Year 2000 issues which includes
equipment and software replacements, reprogramming, systems testing, and outside
consulting services, are estimated to be in the range of $1,000 to $1,100, of
which approximately $1,000 has been spent through July  31, 1999.  This estimate
assumes that the Company will not incur significant Year 2000 related costs on
behalf of its suppliers or other third parties.

     Due to some uncertainty inherent in the Year 2000 issue, including
uncertainty regarding the readiness of suppliers, the Company cannot yet
complete a comprehensive analysis of the most likely worst case Year 2000
scenario. However as of July 31, 1999, the Company has completed its Year 2000
readiness review of critical suppliers and has developed a contingency plan
outline. This plan includes, but is not limited to, developing emergency backup
and recovery procedures, manual processes, alternative systems and work around
procedures, identifying alternative suppliers and developing alternative plans
to engage in business activities with suppliers should they not be Year 2000
compliant. Contingency plans will be reviewed continually up through the date
change to Year 2000.

                                       12
<PAGE>

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 1999 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 1999
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.

     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.  As permitted under
the Bankruptcy Code, the Company has received Bankruptcy Court approval to
reject 13 real estate leases for stores that were never opened and to close and
conduct closing sales at 27 stores.  These closing sales were completed in July
1999.  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.

     The Company is a party to a Revolving Credit and Guaranty Agreement (the
"Loan Agreement") dated as of March 23, 1999 which was entered into subsequent
to the commencement of the Chapter 11 Cases and will terminate upon the earlier
of the confirmation of a plan of reorganization in the Chapter 11 Cases or March
23, 2001.  The Loan Agreement provides the Company with a revolving line of
credit for loans and letters of credit in an aggregate amount not to exceed
$50,000 outstanding at any one time, including a sublimit of $10,000 for the
issuance of letters of credit.  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.

     As of July 31, 1999, the Company had $13,903 of borrowings outstanding
under the Loan Agreement and had utilized approximately $7,580 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.

                                       13
<PAGE>

     At July 31, 1999 and August 1, 1998, the Company's working capital was
$40,010 and $55,594, respectively. Net cash provided by operations for the six
fiscal month period ended July 31, 1999 was $16,104 compared to $1,098 of net
cash used for the six fiscal month period ended August 1, 1998. During the six
fiscal month period ended July 31, 1999, $5,889 of cash from operations was
provided by a reduction in the inventory levels compared to the six fiscal month
period ended August 1, 1998 in which $16,296 of cash from operations was used to
increase inventory levels to support new and existing stores.

     Net cash used in investing activities during the six fiscal month periods
ended July 31, 1999 and August 1, 1998 was $957 and $6,030, respectively.
During the six fiscal month period ended August 1, 1998, net cash used in
investing activities was primarily for capital expenditures for new superstores
and equipment for the new distribution center.

     Net cash used in financing activities during the six fiscal month period
ended July 31, 1999 was $17,384 compared to $7,319 of net cash provided by
financing activities during the six fiscal months ended August 1, 1998. At
August 1, 1998, the outstanding balance under the Company's previous borrowing
arrangements was $37,280. During March 1999 the Company used $24,732 of
borrowings under the Loan Agreement to pay the outstanding balances under the
Company's previous revolving credit agreement and term loan.

     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.

                                       14
<PAGE>

ITEM 3     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

     The Company is subject to market risks from changes in interest rates. The
interest rate on the Company's revolving credit facilities, which represent a
significant portion of the Company's outstanding debt, is variable based on the
prime rate or, at the Company's option, the London Interbank Offered 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. If it is determined that the liabilities subject to compromise in
the Chapter 11 Cases exceed the fair value of the net assets, unsecured claims
may be satisfied at less than 100% of their face value and the equity interests
of the Company's stockholders would be substantially (if not completely)
diluted. It is not possible at this time to predict the actual recovery, if any,
to which creditors and stockholders may be entitled.

     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 incidental to the conduct of its business. As of
the date of this Quarterly Report on Form 10-Q, the Company is aware of no
material existing or threatened litigation to which it is or may be a party.

Item 2.  Changes in Securities.

         None.

Item 3.  Defaults Upon Senior Securities.

         None.

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

         None.

Item 5.  Other Information.

         None.

Item 6.  Exhibits and reports of Form 8-K

         None.

                                       15
<PAGE>

SIGNATURES

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


                           FACTORY CARD OUTLET CORP.

Dated:  September 14, 1999    By:  /s/ Stewart M. Kasen
                                  ----------------------------------
                              Stewart M. Kasen
                              Chairman of the Board,
                              President and Chief Executive Officer


Dated:  September 14, 1999    By:  /s/ Frederick G. Kraegel
                                  ----------------------------------
                              Frederick G. Kraegel
                              Senior Vice President and
                              Chief Financial Officer
                              (principal financial officer)


Dated:  September 14, 1999    By:  /s/ Diana B. Kanas
                                  -----------------------------------
                              Diana B. Kanas
                              Vice President and Controller
                              (principal accounting officer)

                                       16