<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 September 27, 1997
                                           
                            Commission file number 21859.
                                           
                              FACTORY CARD OUTLET CORP.
   -----------------------------------------------------------------------------
                (Exact name of registrant as specified in its charter)
                                           
                       DELAWARE                                36-3652087
             ----------------------------           --------------------------
              (State or other jurisdiction of        (I.R.S. employer
              incorporation or organization)         identification no.)
                                           
                                  745 Birginal Drive
                             Bensenville, Illinois  60106
   -----------------------------------------------------------------------------
                  (Address of principal executive offices, zip code)
                                           
                                           
Registrant's telephone number, including area code:  (630) 238-0010

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

The number of shares of common stock outstanding at November 3, 1997 was
7,249,235.

<PAGE>

                              Factory Card Outlet Corp.
                                           
                                      Form 10-Q
                                           
                       For the Quarter Ended September 27, 1997
                                        Index
                                           
Part I.  Financial Information                                    Page No.

Item 1.  Financial Statements (unaudited):

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

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

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

    Notes to Consolidated Financial Statements                       6-8

Item 2.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations             9-11

Part II. Other Information                                           12

Signatures                                                           13

                                       2

<PAGE>

PART I - FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS

                           FACTORY CARD OUTLET CORP.
                                AND SUBSIDIARY

                          Consolidated Balance Sheets

<TABLE>
<CAPTION>

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

Current assets:
  Cash.................................................  $    201,358          $    51,180
  Receivables..........................................     1,184,735              947,583
  Inventories..........................................    70,368,206           55,358,616
  Prepaid expenses.....................................     1,408,937            1,322,420
  Deferred income taxes................................     2,026,559              207,333
                                                         ------------          -----------
    Total current assets...............................    75,189,795           57,887,132

Fixed assets, net......................................    30,893,946           26,063,766
Other assets...........................................     2,348,770            1,750,709
                                                         ------------          -----------
    Total assets.......................................  $108,432,511          $85,701,607
                                                         ------------          -----------
                                                         ------------          -----------

          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current maturities of long-term obligations..........  $  1,725,473          $ 1,138,654
  Accounts payable.....................................    21,703,065           14,361,283
  Due to related parties...............................     2,724,905            3,192,596
  Income taxes payable.................................       --                   503,544
  Accrued expenses.....................................     5,906,032            3,091,532
                                                         ------------          -----------
    Total current liabilities..........................    32,059,475           22,287,609

Revolving credit note payable..........................    17,471,400            3,775,400
Long-term debt.........................................        11,052               20,602
Capital lease obligations..............................     3,760,378            2,755,510
Deferred rent liabilities..............................     4,763,839            4,411,584
Deferred income taxes..................................       177,467              177,467
                                                         ------------          -----------
    Total liabilities..................................    58,243,611           33,428,172
                                                         ------------          -----------

Stockholders' equity:
  Common stock - $.01 par value. Voting class -
    authorized 50,000,000 shares: 7,239,195 shares
    issued and outstanding at September 27, 1997 and
    7,231,211 shares issued and outstanding at 
    June 28, 1997. Non-voting class - authorized
    205,000 shares, no shares issued or outstanding....        72,392               72,312
  Additional paid-in capital...........................    50,941,341           50,950,900
  Retained (deficit) earnings..........................      (824,833)           1,327,532
  Less: cost of common stock held in treasury,
     8,697 shares at June 28, 1997.....................       --                   (77,309)
                                                         ------------          -----------
    Total stockholders' equity.........................    50,188,900           52,273,435
                                                         ------------          -----------
    Total liabilities and stockholders' equity.........  $108,432,511          $83,701,607
                                                         ------------          -----------
                                                         ------------          -----------
</TABLE>

                   See accompanying notes to consolidated financial statements.

                                       3


<PAGE>

                           FACTORY CARD OUTLET CORP.
                                AND SUBSIDIARY

                        Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                        Three Fiscal Months Ended
                                                      -----------------------------
                                                       September 27,  September 28,
                                                            1977           1996
                                                       -------------  -------------
                                                                (Unaudited)

<S>                                                    <C>            <C>
Net sales............................................  $35,315,504    $25,031,848
  Cost of sales and occupancy........................   23,573,930     16,996,375
                                                       -----------    -----------
Gross profit.........................................   11,741,574      8,035,473
Selling, general and administrative expenses.........   14,946,953      9,664,842
                                                       -----------    -----------
  Loss from operations...............................   (3,205,379)    (1,629,369)
Interest expense....................................       380,866        597,297
                                                       -----------    -----------
  Loss before taxes..................................   (3,586,245)    (2,226,666)
Income tax benefit                                      (1,433,880)      (935,200)
                                                       -----------    -----------
  Net loss...........................................  $(2,152,365)   $(1,291,466)
                                                       -----------    -----------
                                                       -----------    -----------
  Net loss per common and common equivalent share....  $     (0.27)   $     (0.26)
                                                       -----------    -----------
                                                       -----------    -----------
  Weighted average common and common equivalent
    shares outstanding...............................    7,894,139      5,049,869
                                                       -----------    -----------
                                                       -----------    -----------
</TABLE>

See accompanying notes to consolidated financial statements.

                                       4

<PAGE>

                            FACTORY CARD OUTLET CORP.
                                AND SUBSIDIARY

                     Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                              Three fiscal Months Ended
                                                                          -----------------------------------
                                                                          September 27,         September 28,
                                                                              1997                  1996
                                                                          -------------         -------------
                                                                                      (Unaudited)

<S>                                                                       <C>                   <C>
Cash flows from operating activities:
     Net loss..........................................................   $ (2,152,365)         $ (1,291,466)
     Adjustments to reconcile net income to net cash used in
          operating activities:
          Depreciation and amortization of fixed assets................      1,197,580               752,590
          Amortization of deferred financing costs and debt discount             --                  181,890
          Deferred income taxes........................................     (1,498,821)             (935,200)
          Loss (gain) on the disposal of equipment and vehicles........         16,894                 1,382
          Compensation expense related to stock options................         14,751               164,355
          Change in assets and liabilities:
               Decrease (increase) in assets:
                    Receivables........................................       (237,152)              156,897
                    Inventories........................................    (15,009,590)           (8,806,309)
                    Prepaid expenses...................................        (86,517)             (164,779)
                    Other assets.......................................       (598,061)              (27,558)
               Increase (decrease) in liabilities:
                    Accounts payable...................................      6,874,091             4,362,626
                    Accrued expenses...................................      2,797,839               531,700
                    Deferred rent liabilities..........................        352,255               117,044
                    Income taxes payable...............................       (823,949)             (348,233)
                                                                          -------------         -------------
Net cash used in operating activities..................................     (9,153,045)           (5,305,061)
                                                                          -------------         -------------
Net cash used in investing activities -- purchase of fixed assets, net.     (4,130,237)           (2,046,642)
                                                                          -------------         -------------
Cash flows from financing activities:
     Borrowings under revolving credit note............................     22,683,000            15,536,737
     Repayment of borrowings under revolving credit note...............     (8,987,000)          (19,263,892)
     Payment of long-term debt and capital lease obligations...........       (332,280)             (112,719)
     Proceeds from issuance of subordinated debentures.................           --               2,910,836
     Proceeds from issuance of Series C convertible preferred stock....           --               8,617,083
     Proceeds from exercise of employee stock options..................         14,217                 --
     Sale of treasury stock to employee stock purchase plan............         55,523                 --
                                                                          -------------         -------------
Net cash provided by financing activities..............................     13,433,460             7,488,045
                                                                          -------------         -------------
Net increase in cash...................................................        150,178               136,342
Cash at beginning of period............................................         51,180               202,344
                                                                          -------------         -------------
Cash at end of period..................................................     $  201,358            $  338,686
                                                                          -------------         -------------
                                                                          -------------         -------------
</TABLE>

See accompanying notes to consolidated financial statements.


                                                      5

<PAGE>



 
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                     (Unaudited)
                                           
(1)  Basis of Presentation

The consolidated financial statements included herein include the accounts of
Factory Card Outlet Corp. (the Company) and its wholly owned subsidiary, Factory
Card Outlet of America, Ltd. (FCO).  FCO is a chain of company-owned superstores
offering an extensive selection of party supplies, greeting cards, gift wrap,
and other special occasion merchandise at everyday value prices in 20 states. 
These financial statements have been prepared by management without audit and
should be read in conjunction with the consolidated financial statements and
notes thereto for the fiscal year 1997.  Due to the seasonality of the Company's
business, the results for the interim periods are not necessarily indicative of
the results for the year.  The accompanying consolidated financial statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the interim financial statements.  In the opinion of management,
all such adjustments are of a normal and recurring nature.

(2)  Management Estimates

The preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts  of expenses
during the reported period and related disclosures.  Significant estimates made
as of and for the three month periods ended September 27, 1997 and September 28,
1996 include provisions for shrinkage, capitalized overhead costs related to
inventory and  markdowns of merchandise inventories.  Actual results could
differ from those estimates.

(3)  Earnings Per Share

Earnings per share were computed by dividing net income by the weighted average
number of common shares and common equivalent shares outstanding during the
period.  Common equivalent shares consist of common shares issuable upon the
exercise of warrants and common stock options.  Stock options issued during the
twelve-month period prior to the Company's initial public offering have been
included in the calculation as if they were outstanding for the periods
presented, even if antidilutive, using the treasury stock method.  

(4)  Debt

Loan and Security Agreement 
    
On October 15, 1997, the Company entered into a Loan and Security Agreement with
its Bank increasing its existing line of credit facility from $25,000,000 to the
lessor of $35,000,000 or a predetermined advance rate (not to exceed 50%)
against net inventory as determined by an appraisal.  Interest will be payable
at an annual rate equal to the bank's prime rate or, at the Company's option, a
rate based on LIBOR plus additional basis points (ranging from 125 to 225
points) variable on the Company's effective debt ratio.  In addition, a fee of
0.25% per year will be assessed quarterly on the unused portion of the facility.
This agreement contains restrictive covenants including, among others, the
maintenance of minimum ratios of fixed charges to earnings and maximum ratios of
liabilities to net worth and debt to earnings.            

Lease Commitments

During the three months ended September 27, 1997, financing for additional
computer equipment was incorporated into an existing master lease agreement in
the amount of $1,914,000.  Payments on the additional amounts financed will be
made over the next three years.   

                                       6
<PAGE>

(5)  Supplemental Cash Flow Information

                                              Three Fiscal Months Ended
                                            ----------------------------
                                            September 27,  September 28,
                                                1997           1996
                                            -------------  -------------

    Cash paid during the period ended for:       
           Interest                         $ 330,097      $ 397,277    
           Income taxes                       856,815        371,750
              
    Supplemental disclosure of non-cash financing activities:

    Capital lease obligations incurred, primarily for point of sale computer
    equipment, and notes payable on vehicle purchases were $1,914,000 and
    $86,408 in the three month periods ended September 27, 1997 and September
    28, 1996, respectively.

                                       7

<PAGE>

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

    The following discussion and analysis contains certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995.  Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements.  Such factors include, among others, the
following:  ability to open and operate new stores; weather and economic
conditions; dependence on key personnel; competition; ability to anticipate
merchandise trends and consumer demand; ability to maintain relationships with
suppliers; successful implementation of information systems; consolidation and
relocation of distribution facilities; inventory shrinkage; ability to meet
future capital needs; governmental regulations and other factors both referenced
and not referenced in this Quarterly Report on Form 10-Q.  When used in this
Quarterly Report on Form 10-Q, the words "estimate," "project," "expect,"
"intend," "believe," and similar expressions are intended to identify
forward-looking statements. 

    Due to the importance of the spring and fall selling seasons, the second
and fourth fiscal quarters have historically contributed, and the Company
expects they will continue to contribute, disproportionately to the Company's
profitability for the entire fiscal year.  As a result, the Company's quarterly
results of operations may fluctuate.  In addition, results of a period shorter
than a full year may not be indicative of results expected for the entire year.

    The Company has been notified by Party Express, the party goods division of
Hallmark, that as of November 30, 1997, it will no longer ship party goods,
which include many Disney and Warner Bros. licensed products to Factory Card
Outlet.  The Company believes that this decision will not have a material impact
on its earnings for the next 12 months, but could impact earnings beyond that
time.  The Company is continuing discussions with Hallmark, Disney and Warner
Bros. in an attempt to resolve this situation or to allow Factory Card Outlet to
acquire the licensed product through other sources.  

                                                           
RESULTS OF OPERATIONS                                                     

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


                                                 Three Fiscal Months Ended
                                              --------------------------------
                                              September 27,      September 28,
                                                  1997               1996
                                              ------------       -------------

Net sales...................................       100.0%             100.0%
Cost of sales and occupancy.................        66.8               67.9
                                              ------------       -------------
  Gross Profit..............................        33.2               32.1
Selling, general and administrative 
  expenses..................................        42.3               38.6
                                              ------------       -------------
  Loss from operations......................        (9.1)              (6.5)
Interest expense............................         1.1                2.4
                                              ------------       -------------
  Loss before taxes.........................       (10.2)              (8.9)
Income tax benefit..........................        (4.1)              (3.7)
                                              ------------       -------------
  Net loss..................................        (6.1)%             (5.2)%
                                              ------------       -------------
                                              ------------       -------------
Number of stores open at end of period          162               112


                                       8

<PAGE>

THREE FISCAL MONTHS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996

    NET SALES.  Net sales increased $10.3 million, or 41.2%, to $35.3 million
for the three-month period ended September 27, 1997 from $25.0 million for the
three-month period ended September 28, 1996.  The increase resulted from (i) net
sales of $2.7 million from new stores opened during the three-month period, (ii)
net sales increase of $6.7 million from stores opened prior to July 1997 not
included in the comparable store base, and (iii) a comparable store sales
increase of $877,000, or 3.6%.  The Company substantially reduced the number of
non mall-sponsored sidewalk sale events due to their unprofitability; this
change reduced comparable store sales.  The Company includes stores opened 13 or
14 months after their opening date in the calculation of comparable sales.  If
the opening date of a store falls in the first 14 days of a period, the store is
included in the comparable store calculation on its 13th month of operation;
otherwise, a store is included in the comparable store calculation in its 14th
month of operation.

    GROSS PROFIT.  Cost of sales includes merchandise, store occupancy,
purchasing and distribution costs.  Gross profit increased $3.7 million, or
46.3%, to $11.7 million for the three-month period ended September 27, 1997 from
$8.0 million for the three-month period ended September 28, 1996.  As a
percentage of net sales, gross profit was 33.2% for the three-month period ended
September 27, 1997 compared to 32.1% for the same period in the prior year. 
Gross profit as a percentage of net sales increased as a result of volume
rebates from vendors, a lower shrinkage reserve and the leveraging of
distribution costs offset by higher freight costs associated with new markets
and higher occupancy costs related to the increased number of new stores opened
during the quarter.  

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses include labor, advertising, depreciation, other store
operating and corporate administrative expenses.  Selling, general and
administrative expenses increased $5.2 million, or 53.6%, to $14.9 million for
the three-month period ended September 27, 1997 from $9.7 million for the
three-month period ended September 28, 1996.  Approximately $4.6 million of this
increase resulted from the operation of 53 additional new superstores.  The
remainder of the increase in selling, general and administrative expenses
resulted primarily from higher salaries, benefits and travel costs for
additional field and corporate management and administrative personnel along
with higher professional fees and recruiting and relocation costs.  As a
percentage of sales, net selling, general and administrative expenses increased
to 42.3% in the three-month period ending September 27, 1997 from 38.6% in the
three-month period ended September 28, 1996.

    INTEREST EXPENSE.  Interest expense was $380,900 in the three months ended
September 27, 1997 compared to $597,300 in the three months ended September 28,
1996.  This decrease resulted from reduction in debt from applying proceeds
received from the Company's initial public offering partially offset by the
increased borrowing to support the opening of new superstores and increased
inventory levels.  

    INCOME TAX.  The income tax benefit recognized for the three-month period
ended September 27, 1997 was approximately $499,000 higher than the benefit
recognized during the three-month period ended September 28, 1996 due to a
higher net loss before taxes for the period.  

                                       9

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

    The Company's cash needs are primarily for working capital to support its
opening of new superstores and for opening the new administrative distribution
center.  In recent years, the Company has financed its expanding operations
primarily through proceeds from its initial public offering effective on
December 13, 1996, borrowings under the Business Loan Agreement between the
Company and Bank One, Chicago, NA (Bank One), proceeds from issuance of
convertible preferred stock and subordinated debentures and internally generated
funds. 

    At September 28, 1997 and September 27, 1996, the Company's working capital
was $43.1 million and $30.0 million, respectively.  Net cash used in operations
for the three months ended September 27, 1997 and September 28, 1996 was $9.2
million and $5.3 million, respectively.  In these two periods, $15.0 million and
$8.8 million, respectively, of cash from operations was used to increase
inventory levels to support both new and existing stores.

    Net cash used in investing activities during the three months ended
September 27, 1997 and September 28, 1996 was $4.1 million and $2.0 million,
respectively.  These investments were primarily a result of opening new
superstores and investing in information systems.  During the three months ended
September 27, 1997 and September 28, 1996, the Company spent $3.6 million and
$1.3 million, respectively, for capital expenditures for new superstores.  

    Net cash provided by financing activities during the three months ended
September 27, 1997 and September 28, 1996 was $13.4 million and $7.5 million,
respectively.  At September 28, 1997 and September 27, 1996, the outstanding
balance under the Company's Business Loan Agreement with Bank One was $17.5
million and $9.2 million, respectively.    

    On November 1, 1996, the Company entered into the Business Loan Agreement
with Bank One, which provides for a line of credit facility and allows for
borrowings by the Company in an amount not to exceed the lesser of $25 million
or 50% of merchandise inventories at cost.  The line of credit facility expires
on October 1, 1998.  Borrowings outstanding under the line of credit facility
bear interest on the average daily outstanding balance, paid monthly, at Bank
One's prime rate or, at the Company's option, at 2.75% over the London Interbank
Offered Rate (LIBOR).  The Company is required to pay an annual commitment fee
of 0.25% on the unused portion of the line of credit facility (except that if
the unused portion exceeds $20.0 million the fee increases to 0.40% on the
unused portion) and to comply with certain covenants.  The line of credit
facility is secured by a senior lien on substantially all of the Company's
assets.

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

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

    In October 1996, the Company entered into two capital lease agreements for
point-of-sale (POS) computer equipment and related software having a total cost
of $2.1 million.  During February 1997, financing for $2.4 million of additional
computer equipment was incorporated into one of the leases.  During July and
August 1997, 

                                       10

<PAGE>

financing for $1.9 million of additional POS and other computer equipment was 
also incorporated.   These leases have terms of four and five years.  

    The Company does not intend to pay cash dividends in the foreseeable future
and under its Loan and Security Agreement is restricted from paying dividends on
its capital stock.  The Company believes that its cash generated from operations
and its borrowing capacity under the proposed line of credit facility will be
adequate to fund its cash requirements for at least the next 12 months. 

                                       11
<PAGE>

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.
    
         None.
 
Item 2.  Changes in Securities.

         Information with respect to changes in securities is set forth in the
         Company's Registration Statement on the Form S-1 (Registration No.
         333-13827) dated December 12, 1996, together with the Exhibits
         thereto, which is hereby incorporated by reference herein.

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

         (a)  Exhibits.
    
              3.1  Amended and Restated Certificate of Incorporation of the
                   Company. (1)

              3.2  Amended and Restated Bylaws of the Company. (2)

              4.1  Specimen of the Company's common stock certificate. (1)
          
             10.7  Loan and Security Agreement dated October 15, 1997 among the
                   Company, FCO and Bank One, Illinois, NA.          

             27.1  Financial Data Schedule.

         (b)  No reports on Form 8-K were filed during the quarter ended
              September 27, 1997.





__________________________________

(1) Previously filed as an exhibit to the Company's Registration Statement on
    Form S-1 (Registration No. 333-13827), dated December 12, 1996, and
    incorporated by reference. 

(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the fiscal year ended June 28, 1997, and incorporated by reference.  

                                       12

<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:  November ____, 1997  By:  __________________________
                                  Charles R. Cumello,
                                  President


Dated:  November ____, 1997  By:  __________________________
                                  Glen J. Franchi, 
                                  Executive Vice President and Treasurer
                                  (principal financial officer)



                                       13