<PAGE>

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                                 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 July 29, 2000

                         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
    incorporation or organization)                     Number)

                  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 8, 2000 was 7,503,098.

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<PAGE>

                           Factory Card Outlet Corp.
                (Debtor in possession effective March 23, 1999)

                                   Form 10-Q

                      For the Quarter Ended July 29, 2000
                                     Index

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

 Item 1  Financial Statements (unaudited):
         Consolidated Balance Sheets as of July 29, 2000 and January
         29, 2000......................................................     3
         Consolidated Statements of Operations for the three fiscal
          months and six fiscal months ended July 29, 2000 and July 31,
          1999.........................................................     4
         Consolidated Statements of Cash Flows for the six fiscal
          months ended July 29, 2000 and
          July 31, 1999................................................     5
         Notes to Consolidated Financial Statements....................    6-8

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

 Item 3  Quantitative and Qualitative Disclosures About Market Risk....    13

 Part II Other Information.............................................   13-14

         Signatures....................................................    15
</TABLE>

                                       2
<PAGE>

          PART I--FINANCIAL INFORMATION, ITEM 1, FINANCIAL STATEMENTS

                           FACTORY CARD OUTLET CORP.
                                 AND SUBSIDIARY

                          Consolidated Balance Sheets
              (Dollar amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                                         July 29,   January 29,
                                                           2000        2000
                                                        ----------- -----------
                                                        (Unaudited)
<S>                                                     <C>         <C>
ASSETS
Current assets:
  Cash.................................................  $    187    $  1,713
  Merchandise inventories..............................    55,245      56,142
  Prepaid expenses and other...........................     1,052       1,748
                                                         --------    --------
    Total current assets...............................    56,484      59,603
Fixed assets, net......................................    27,650      30,559
Other assets...........................................       471         641
                                                         --------    --------
    Total assets.......................................  $ 84,605    $ 90,803
                                                         ========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Debt.................................................  $ 18,560    $ 22,869
  Accounts payable.....................................     7,481       9,103
  Accrued expenses.....................................    10,881       8,662
                                                         --------    --------
    Total current liabilities..........................    36,922      40,634
                                                         --------    --------
Liabilities subject to compromise......................    54,821      54,872
Stockholders' equity (deficit):
  Common stock--$.01 par value.
   Voting class--authorized 15,000,000 shares;
    7,503,098 shares issued and outstanding at July 29,
    2000 and January 29, 2000, respectively.
   Non-voting class--authorized 205,000 shares, no
    shares issued or outstanding.......................        75          75
  Additional paid-in capital...........................    52,021      52,021
  Accumulated deficit..................................   (59,234)    (56,799)
                                                         --------    --------
    Total stockholders' (deficit)......................    (7,138)     (4,703)
                                                         --------    --------
    Total liabilities and stockholders' (deficit)......  $ 84,605    $ 90,803
                                                         ========    ========
</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>
                                                            Six fiscal months
                                Three fiscal months ended         ended
                                -------------------------  --------------------
                                  July 29,     July 31,    July 29,   July 31,
                                    2000         1999        2000       1999
                                ------------ ------------  ---------  ---------
                                       (Unaudited)             (Unaudited)
<S>                             <C>          <C>           <C>        <C>
Net sales.....................  $     59,426 $     52,234  $ 113,868  $ 104,767
Cost of sales.................        30,611       26,421     59,573     54,541
                                ------------ ------------  ---------  ---------
  Gross profit................        28,815       25,813     54,295     50,226
Selling, general and
 administrative expenses......        26,392       24,982     51,751     50,750
Interest expense..............           757          582      1,605      1,476
                                ------------ ------------  ---------  ---------
  Income (loss) before
   reorganization items and
   extraordinary item.........         1,666          249        939     (2,000)
Reorganization items, net.....         1,363        2,009      3,374     14,556
                                ------------ ------------  ---------  ---------
  Income (loss) before
   extraordinary item.........           303       (1,760)    (2,435)   (16,556)
Extraordinary item-loss on
 early retirement
 of debt......................           --           --         --       1,292
                                ------------ ------------  ---------  ---------
  Net income (loss)...........  $        303 $     (1,760) $  (2,435) $ (17,848)
                                ============ ============  =========  =========
Income (loss) per share--basic
 & diluted
  Before extraordinary item...  $       0.04 $      (0.23) $   (0.32) $   (2.21)
  Extraordinary item..........           --           --         --       (0.17)
                                ------------ ------------  ---------  ---------
  Net income (loss) per
   share--basic & diluted.....  $       0.04 $      (0.23) $   (0.32) $   (2.38)
                                ============ ============  =========  =========
Weighted average shares
 outstanding--basic/diluted...     7,503,098    7,503,098  7,503,098  7,503,098
                                ============ ============  =========  =========
</TABLE>




          See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

                           FACTORY CARD OUTLET CORP.
                                 AND SUBSIDIARY

                     Consolidated Statements of Cash Flows
                         (Dollar amounts in thousands)
<TABLE>
<CAPTION>
                                                           Six fiscal months
                                                                 ended
                                                          --------------------
                                                          July 29,   July 31,
                                                            2000       1999
                                                          ---------  ---------
                                                              (Unaudited)
<S>                                                       <C>        <C>
Cash flows from operating activities:
Net loss................................................  $  (2,435) $ (17,848)
Adjustments to reconcile net loss to net cash provided
 by (used in) operating Activities:
  Depreciation and amortization of fixed assets.........      3,699      3,839
  Amortization of deferred financing costs and debt
   discount.............................................        390        401
  Non cash portion of reorganization items..............      1,621     13,590
  Extraordinary loss on early retirement of debt........        --       1,292
  Other.................................................         (4)        30
  Changes in assets and liabilities:
    (Increase) decrease in assets:
      Refundable income taxes...........................        --         292
      Merchandise inventories...........................        896      5,889
      Prepaid expenses and other assets.................        474     (1,165)
    Increase (decrease) in liabilities:
      Accounts payable..................................     (1,622)   (27,200)
      Accrued expenses..................................        599     (3,485)
      Liabilities subject to compromise.................        186     40,469
                                                          ---------  ---------
Net cash provided by operating activities...............      3,804     16,104
                                                          ---------  ---------
Net cash used in investing activities--purchase of fixed
 assets, net............................................       (799)      (957)
                                                          ---------  ---------
Cash flows from financing activities:
  Borrowings under revolving credit notes and term loan.    115,293    125,977
  Repayment of borrowings under revolving credit notes
   and term loan........................................   (119,603)  (143,253)
  Payment of long-term obligations......................       (221)      (108)
                                                          ---------  ---------
Net cash used in financing activities...................     (4,531)   (17,384)
                                                          ---------  ---------
Net decrease in cash....................................     (1,526)    (2,237)
Cash at beginning of period.............................      1,713      3,597
                                                          ---------  ---------
Cash at end of period...................................  $     187  $   1,360
                                                          =========  =========
Supplemental cash flow information:
  Interest paid.........................................  $   1,213  $   1,519
  Income taxes refunded.................................        --        (292)
</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 January
29, 2000 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(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 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 six fiscal months ended July 29, 2000.
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 November 30, 2000. 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, 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 plans to develop a plan of reorganization for submission to the
Bankruptcy Court.

   In connection therewith, on June 7, 2000 the Company announced that it and
the Creditors' Committee have entered into a non-binding letter of intent with
Saunders, Karp and Megrue ("SKM") (the "Letter of Intent"), a Connecticut
based investment company, regarding a potential transaction which would
provide the Company with sufficient funding to enable it to emerge from
Chapter 11. The Letter of Intent is subject to, among other things, the
completion of due diligence, the execution of definitive documentation and
confirmation of a plan of reorganization that would have to be voted upon by
creditors.

                                       6
<PAGE>

   The Letter of Intent provides for SKM to receive a break-up fee and expense
reimbursement in the event that the Company decides to pursue an alternative
transaction or course of action and restricts the Company's and the Creditors'
Committee's ability to solicit alternative proposals. The Letter of Intent was
approved by the Bankruptcy Court on June 29, 2000. The Company, SKM and the
Creditors' Committee are engaged in ongoing negotiations regarding the terms
of the definitive documentation, including a plan of reorganization.

   Although the Letter of Intent restricts the Company's and the Creditors'
Committee's ability to solicit alternative proposals that might facilitate the
Company's emergence from Chapter 11, it does not restrict them from
considering any proposals that may be submitted to them by third parties on an
unsolicited basis. The Company is currently in the process of evaluating two
unsolicited proposals that it and the Creditors' Committee have received. The
Company continues to retain The Avalon Group as its investment banker.

(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 1% over prime. 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, all of which have been met or waived.

   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 29, 2000
and July 31, 1999 include reserves for store closings and other reorganization
items, provision for shrinkage, capitalized overhead costs related to
inventory and the carrying values of inventories. Actual results could differ
from those estimates.

(4) Liabilities Subject to Compromise

   Liabilities subject to compromise refer to liabilities incurred prior to
the commencement of the Chapter 11 Cases. These liabilities consist primarily
of amounts outstanding for accounts payable, deferred rent obligations,
amounts accrued for rejected leases, 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

   During the six fiscal months ended July 29, 2000, reorganization costs
include costs for professional fees and other costs related to the Company's
reorganization. In April 1999, the Company obtained approval from the
Bankruptcy Court to close and conduct closing sales at 27 stores that were in
markets the Company did not intend to continue to operate in or were
underperforming or unprofitable. During the six fiscal months ended July 31,
1999, the Company recorded a provision for reorganization costs relating to
the 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 closings, 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.

   In August 2000, the Company announced that it would close and conduct
closing sales at five under-performing stores. The costs associated with these
five store closings are not reflected herein.

(6) Income Taxes (Benefit)

   In assessing the realization of deferred tax assets, management considers
the likelihood that those assets will be realized through future taxable
income. Because the realization of the deferred tax assets may be limited by
events involving the Chapter 11 Cases or other events related to the ownership
of the Company, the Company recorded a valuation allowance for the total of
the net deferred tax assets at July 29, 2000 and January 29, 2000.

(7) Earnings Per Share

   In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, earnings per share--basic is computed by dividing net loss by the
weighted average number of common shares outstanding during the period.

<TABLE>
<CAPTION>
                                                    Net                Per
                                                    Loss     Shares   share
                                                  --------  --------- ------
   <S>                                            <C>       <C>       <C>
   For the six fiscal months ended July 29,
    2000--
   Loss per share--basic and diluted:
     Net loss.................................... $ (2,435) 7,503,098 $(0.32)
                                                  --------  --------- ------
   For the six fiscal months ended July 31,
    1999--
   Loss per share--basic and diluted:
     Net loss.................................... $(17,848) 7,503,098 $(2.38)
                                                  --------  --------- ------
</TABLE>

   For the six fiscal months ended July 29, 2000 and 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 (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 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 and other factors both referenced and
not referenced in this Form 10-Q. When used in this Report on Form 10-Q, the
words "estimate," "project," "anticipate," "expect," "intend," "believe," and
similar expressions are intended to identify forward-looking statements.

   In September 1999, the Company announced that it received notification that
the NASDAQ's staff had delisted the Company's common stock from the NASDAQ
National Market effective September 1, 1999. NASDAQ said the determination was
based on the uncertainties concerning the Company's pending Chapter 11 Cases.

   The Company is a chain of company-owned stores offering an extensive
selection of greeting cards, giftwrap, balloons, party supplies and other
special occasion merchandise at everyday value prices. The Company does not
plan to open any additional stores in 2000 and announced in August 2000 that
it would close five under-performing stores in August 2000. As of September 8,
2000, the Company operated 177 stores in 20 states.

                                       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 and the
number of stores open at the end of each period:

<TABLE>
<CAPTION>
                                               Three fiscal     Six fiscal months
                                               months ended           ended
                                             -----------------  ------------------
                                             July 29, July 31,  July 29,  July 31,
                                               2000     1999      2000      1999
                                             -------- --------  --------  --------
<S>                                          <C>      <C>       <C>       <C>
Net sales..................................   100.0%   100.0%    100.0%    100.0%
Cost of sales..............................    51.5     50.6      52.3      52.1
                                              -----    -----     -----     -----
  Gross profit.............................    48.5     49.4      47.7      47.9
Selling, general and administrative
 expenses..................................    44.4     47.8      45.4      48.4
Interest expense...........................     1.3      1.1       1.4       1.4
                                              -----    -----     -----     -----
  Income (loss) before reorganization items
   and extraordinary item..................     2.8      0.5       0.9      (1.9)
Reorganization items, net..................     2.3      3.9       3.0      13.9
                                              -----    -----     -----     -----
  Income (loss) before extraordinary item..     0.5     (3.4)     (2.1)    (15.8)
Extraordinary item-loss on early retirement
 of debt...................................     --       --        --        1.2
                                              -----    -----     -----     -----
  Net income (loss)........................     0.5%    (3.4)%    (2.1)%   (17.0)%
                                              =====    =====     =====     =====
Number of stores open at end of period.....     182      182       182       182
</TABLE>

Three Fiscal Months Ended July 29, 2000 and July 31, 1999

   Net Sales. Net sales and comparable store sales increased $7,192, or 13.8%,
to $59,426 for the three fiscal month period ended July 29, 2000 from $52,234
for the three fiscal month period ended July 31, 1999. Prior year sales were
negatively impacted by reduced flow of merchandise resulting from issues
associated with the Company's liquidity and Chapter 11 Cases. All product
categories in the three months ended July 29, 2000, except candy, showed
improvement over the prior year quarter ended July 31, 1999. 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. Due to the
timing of store openings, 182 stores were included in comparable sales for the
three fiscal months ended July 29, 2000 and the three fiscal month period
ended July 31, 1999.

   Gross Profit. Cost of sales includes distribution costs. Gross profit
increased $3,002 or 11.6% to $28,815 for the three fiscal month period ended
July 29, 2000 from $25,813 for the three fiscal month period ended July 31,
1999. As a percentage of net sales, gross profit was 48.5% for the three
fiscal month period ended July 29, 2000 compared to 49.4% in the same period
in the prior year. Gross profit as a percentage of net sales decreased as a
result of higher anticipated inventory shrink during the three fiscal months
ended July 29, 2000.

   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 $1,410 or 5.6%, to
$26,392 for the three fiscal month period ended July 29, 2000 from $24,982 for
the three fiscal month period ended July 31, 1999. This increase resulted
primarily from higher store operating expenses coupled with an increase in
advertising expense. As a percentage of net sales, selling, general and
administrative expenses decreased to 44.4% in the three fiscal month period
ended July 29, 2000 from 47.8% in the three fiscal month period ended July 31,
1999.

   Interest Expense. Interest expense was $757 in the three fiscal month
period ended July 29, 2000 compared to $582 in the three fiscal month period
ended July 31, 1999. This increase resulted primarily from higher borrowing
levels coupled by a higher effective interest rate.


                                      10
<PAGE>

   Reorganization Items, net. Reorganization items decreased $646 or 32.2%, to
$1,363 for the three fiscal month period ended July 29, 2000 from $2,009 for
the three fiscal month period ended July 31, 1999. The fluctuation resulted
from a decrease in professional fees related to the reorganization of the
Company.

   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 July 29, 2000 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 July 29, 2000 and January 29,
2000.

Six Fiscal Months Ended July 29, 2000 and July 31, 1999

   Net Sales. Net sales increased $9,101 or 8.7%, to $113,868 for the six
fiscal month period ended July 29, 2000 from $104,767 for the six fiscal month
period ended July 31, 1999. Prior year sales were negatively impacted by the
reduced flow of merchandise resulting from issues associated with the
Company's liquidity and the Chapter 11 Cases. Comparable store sales increased
$12,933 or 12.8% to $113,868 for the six months ended July 29, 2000 from
$100,936 for the six months ended July 31, 1999. 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
increased $4,069 or 8.1%, to $54,295 for the six fiscal month period ended
July 29, 2000 from $50,226 for the six fiscal month period ended July 31,
1999. As a percentage of net sales, gross profit was 47.7% for the six fiscal
month period ended July 29, 2000 compared to 47.9% in the same period in the
prior year.

   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 $1,001 or 2.0%, to
$51,751 for the six fiscal month period ended July 29, 2000 from $50,750 for
the six fiscal month period ended July 31, 1999. As a percentage of net sales,
selling, general and administrative expenses decreased to 45.4% in the six
fiscal month period ended July 29, 2000 from 48.4% in the six fiscal month
period ended July 31, 1999.

   Interest Expense. Interest expense was $1,605 in the six fiscal month
period ended July 29, 2000 compared to $1,476 in the six fiscal month period
ended July 31, 1999. This increase resulted primarily from higher borrowing
levels coupled with a higher effective interest rate.

   Reorganization Items, net. Reorganization items decreased $11,182 or 76.8%,
to $3,374 for the six fiscal month period ended July 29, 2000 from $14,556 for
the six fiscal month period ended July 31, 1999. During the six fiscal months
ended July 31, 1999, the Company recorded a provision for reorganization costs
of $10,428 relating to the closing of 27 stores in April 1999. No expense was
recorded for store closings for the six months ended July 29, 2000.

   Income Taxes. Management believes that it is more likely than not that
deferred tax assets created by net operating losses for the six fiscal month
period ended July 29, 2000 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 July 29, 2000 and January 29,
2000.

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 2000 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

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Company's uses of capital for the remainder of fiscal 2000 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 closed five additional stores in August 2000. 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. All such
covenants have been met or waived.

   As of July 29, 2000, the Company had $18,560 of borrowings outstanding
under the Loan Agreement and had utilized approximately $2,300 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 July 29, 2000 and July 31, 1999, the Company's working capital was
$19,562 and $26,107, respectively. Net cash provided by operations for the six
fiscal month period ended July 29, 2000 was $3,804 compared to $16,104 of net
cash provided by for the six fiscal month period ended July 31, 1999. The
decrease was a result of the non-cash portion of reorganization costs
associated with the 27 store closings recorded in the six months ended July
31, 1999.

   Net cash used in investing activities during the six fiscal month periods
ended July 29, 2000 and July 31, 1999 was $799 and $957, respectively. Net
cash used in investing activities was primarily for capital expenditures for
store and distribution center equipment.

   Net cash used in financing activities during the six fiscal month period
ended July 29, 2000 was $4,531 compared to $17,384 of net cash used in
financing activities during the six fiscal months ended July 31, 1999. 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.

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   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 represent 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.

   On June 7, 2000 the Company announced that it and the Creditors' Committee
have entered into a non-binding Letter of Intent with Saunders, Karp and
Megrue ("SKM") (the "Letter of Intent"), a Connecticut based investment
company, regarding a potential transaction which would provide the Company
with sufficient funding to enable it to emerge from Chapter 11. The Letter of
Intent is subject to, among other things, the completion of due diligence, the
execution of definitive documentation and confirmation of a plan of
reorganization that would have to be voted upon by creditors.

   The Letter of Intent provides for SKM to receive a break-up fee and expense
reimbursement in the event that the Company decides to pursue an alternative
transaction or course of action and restricts the Company's and the Creditors'
Committee's ability to solicit alternative proposals. The Letter of Intent was
approved by the Bankruptcy Court on June 29, 2000. The Company, SKM and the
Creditors' Committee are engaged in ongoing negotiations regarding the terms
of the definitive documentation, including a plan of reorganization.

   Although the Letter of Intent restricts the Company's and the Creditors'
Committee's ability to solicit alternative proposals that might facilitate the
Company's emergence from Chapter 11, it does not restrict them from
considering any proposals that may be submitted to them by third parties on an
unsolicited basis. The Company is currently in the process of evaluating two
unsolicited proposals that it and the Creditors' Committee have received. The
Company continues to retain The Avalon Group as its investment banker.

   Several claims and cases have been filed by creditors of the Company
relating to unpaid amounts due to such creditors. Payment of these amounts is
now stayed in the Chapter 11 Cases. The Company is also from time to time
involved in routine litigation, other than bankruptcy cases, incidental to the
conduct of its business. As of the date of this Quarterly Report on Form 10-Q,
the Company is aware of no material existing or threatened litigation to which
it is or may be a party.

Item 2. Changes in Securities.

   None.

Item 3. Defaults Upon Senior Securities.

   None.

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

   None.

Item 5. Other Information.

   None.

Item 6. Exhibits and reports on Form 8-K

   None.

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                                   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.

                                          By: _________________________________
                                                    William E. Freeman
                                              President and Chief Executive
                                                         Officer
   Dated: September 18, 2000

                                          By: _________________________________
                                                   James D. Constantine
                                             Senior Vice President and Chief
                                                    Financial Officer
                                              (principal financial officer)
   Dated: September 18, 2000

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