Document:

SEPARATION AGREEMENT

         This Separation Agreement ("Agreement") between FACTORY CARD OUTLET
CORP., a Delaware corporation (the "Company"), and STEWART M. KASEN (the
"Executive") shall be effective October 8, 1999.

                                    RECITALS
                                    --------

         The Company and Executive desire to provide an orderly and amicable
arrangement with respect to the cessation of Executive's employment as President
and Chief Executive Officer and service as a director of the Company, and to
resolve claims between the parties relating to his employment, the cessation of
his employment, the Company's Severance Pay Plan (the "Severance Plan") (a copy
of which is attached hereto as Exhibit A), and otherwise.

                                    AGREEMENT
                                    ---------

         In consideration of the foregoing recitals, the agreements set forth
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and Executive agree as follows:

           1.        Resignation.
                     -----------

               (a) Executive confirms his resignation as of October 8, 1999 (the
"Separation Date") as President and Chief Executive Officer of the Company, as a
director of the Company, as a director and officer of each subsidiary, if any,
of the Company for which Executive served in such capacity, and any other
position or office with respect to the Company or any of its subsidiaries,
including as a legal representative or trustee of any employee benefit plan or
trust of the Company or any of its subsidiaries. Executive waives any and all
right to perform services in any capacity, including that of an employee,
independent contractor or otherwise, for the Company or any its subsidiaries.

               (b) As a result of his voluntary resignation and the cessation of
his employment, effective on the Separation Date, Executive has ceased to
perform any duties or be entitled to or eligible for any compensation or
benefits except as expressly provided in this Agreement. As outlined below, the
Company offers and Executive accepts the following special severance package.

           2.        Severance Package.
                     -----------------

               (a) Commencing with the first payroll period following the
Separation Date and upon expiration of the seven (7) day revocation period in
accordance with paragraph 8 hereof, and continuing for twelve (12) months (the
"Severance Period") thereafter the Company shall pay Executive an amount equal
to $320,000 annual base salary in bi-weekly in installments of $12,307.70 (the
"Severance Pay") consistent with the Company's ordinary payroll practices.

NY2:\14056773\2\54497.0003

<PAGE>

                     (b)       Bonuses.
                               -------

                               (i) If Executive would have otherwise been
           entitled to receive a Management Incentive Bonus for the fiscal year
           ending January 29, 2000, Executive shall receive a lump-sum payment
           equal to that amount prorated in accordance with the guidelines set
           forth in the Company's "Fiscal Year 1999 Management Incentive
           Program, Officer Group" (Such pro-ration calls for application of a
           fraction the numerator of which is the number of completed months of
           service during the fiscal year and the denominator of which is equal
           to number of months in the fiscal period, which equals .667 for
           Executive). Such amount, if any, shall be paid to Executive
           concurrently with the Company's payment of such bonus for fiscal year
           1999 to other participants in the Management Incentive Bonus Program,
           subject only to the conditions contained in that program.

                               (ii) If Executive would have otherwise been
           entitled to receive a Retention Bonus pursuant to the Company's
           "Retention Bonus Program for Officers" upon the Company's receipt of
           final approval of a Plan of Reorganization from the applicable
           judicial authority, Executive shall receive such Retention Bonus at
           the same time, in the same manner and subject to the same terms and
           conditions as other participants in such plan.

               (c) The Company shall continue Executive's medical insurance
coverage (as in effect immediately prior to the Separation Date) until the
earlier of (i) twelve (12) months or (ii) the first date on which Executive
becomes covered under any other group health plan (as an employee or otherwise)
which does not contain any exclusion or limitation with respect to any
preexisting condition of Executive; provided that each installment of
Executive's Severance Pay shall be reduced by an amount equal to the portion of
the periodic cost for such coverage that was payable by Executive immediately
prior to the Separation Date consistent with the Company's ordinary payroll
practices. As and to the extent provided by the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA"), Executive will be eligible to continue his
health insurance benefits at his own expense for up to eighteen (18) months
following the end of the twelve (12) month Severance Period and, later, to
convert such benefits to an individual policy pursuant to and consistent with
COBRA. Executive will be provided with a separate notice of his COBRA rights at
the end of the Severance Period consistent with and to the extent required by
COBRA.

               (d) The Company will reimburse Executive for any unreimbursed
reasonable business expenses incurred and paid for by Executive prior to the
Separation Date consistent with the Company's policies in effect with respect to
travel, entertainment and other business expenses, and upon Executive's
providing to the Company reasonably acceptable documentation of such expenses
within sixty (60) days after the Separation Date.

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<PAGE>

               (e) Except as expressly provided in this Agreement or in an
employee benefit plan of the Company, Executive shall not be entitled to receive
any severance payments or any other benefits or compensation from the Company.

               (f) To the extent any stock option granted to Executive by the
Company had become exercisable as of the Separation Date, such stock option may
be exercised to the extent allowed under the applicable plan and grant document.
Effective as of the Separation Date, Executive shall not (i) be entitled to
exercise any stock option to the extent that such option had not become
exercisable as of the Separation Date or (ii) eligible to be granted any
additional options.

               (g) Nothing in this Agreement shall preclude the Company from
amending or terminating any employee benefit plan, program or practice at any
time in compliance with applicable law.

         3.       Restrictive Covenants.
                  ---------------------

               (a) Executive hereby agrees that during the term of the
Employee's employment with the Company and for a period of one (1) calendar year
thereafter (the "Restriction Period"), the Executive will not, singly, jointly,
or as a partner, member, consultant, or agent of any partnership, or as an
agent, consultant, or stockholder of any other corporation or entity, or as an
investor of more than five percent (5%) of the voting stock of any entity, or in
any other capacity, directly, indirectly or otherwise beneficially:

                               (i) Own, manage, operate, join in, control or
           participate in the ownership, management, operation, or control of,
           or work for (as an employee, consultant, independent contractor or
           otherwise), or permit the use of his name by, or provide financial or
           other assistance to, or be connected in any manner with, any of the
           following (each a "Competitive Business"): (1) any retailer located
           anywhere in the Restricted Area (as hereinafter defined) which
           generates thirty-five percent (35%) or more of its gross revenues
           from the sale, anywhere in the Restricted Area, of greeting cards,
           party goods, gift wrap accessories, stationery and/or any other
           products or services which materially reproduce, incorporate or copy
           any of the products or services which are offered or developed for
           marketing by the Company during the term of the Employee's employment
           with the Company ("Competitive Products") or which offers greeting
           cards for sale in the Restricted Area under a "one price" strategy at
           a price per card of $.39 or less or under a "half-off" strategy at a
           price per care of 2/$1.00 or less, or (2) any retailer which
           generates thirty-five percent (35%) or more of its gross revenue from
           the sale of Competitive Products anywhere in the Restricted Area;

                     (ii) Induce or attempt to induce any person who, during the
           term of Executive's employment with the Company, is an employee,
           representative, consultant, agent or supplier of the Company, to
           terminate his, her or its employment or relationship with the Company
           or to violate the terms of any agreement between said representative,
           agent, consultant, employee or supplier and the Company, or hire or
           attempt to hire any employee of the Company who has left the

                                       3
<PAGE>

           employment of the Company within sixty (60) days after the
           termination of such employee's employment with the Company; or

                     (iii) Induce or attempt to induce any person, business or
           entity which is or was a customer of the Company at any time during
           the term preceding the effective date of this Agreement to terminate
           any written or oral agreement or understanding with the Corporation
           or to become a customer of any person, corporation, partnership or
           other entity which engages in any Competitive business.

               (b) For purposes of Section 3(a) hereof, "Restricted Area" means
the United States (and any of its territories), Canada and Mexico.

               (c) If the Employee violates any of the restrictions contained in
Section 3(a) above, the Restriction Period automatically shall be increased by
the period of time from the commencement of any such violation until such time
as the Executive has cured such violation.

               (d) Executive acknowledges and agrees that his employment by the
Company under this Agreement necessarily involves him understanding and having
access to certain trade secrets and other confidential information pertaining to
the business of the Company and any affiliates. Accordingly, Executive agrees
that for a period of two (2) years following the Separation Date, Executive
shall not, without the express written consent of the Board or a person
authorized thereby, directly or indirectly, disclose to any person, corporation
or entity or use or knowingly permit to be so disclosed or used, for the benefit
of any person, corporation or entity, or himself, any material confidential
information obtained by the Executive while in the employ of the Company with
respect to any of the Company or any of the affiliates' products, customers, or
current or future plans, the disclosure of which the Executive knows or should
reasonably believe will be damaging to the Company; provided, that such
confidential information shall not include any information known or available
generally to the public (other than as a result of unauthorized disclosure by
the Executive). This provision is intended only to prevent unauthorized
disclosure of material confidential information and is not intended to preclude
the Executive from securing other employment following the Separation Date
except as subject to such restrictions on such other employment as set forth in
subparagraph (a) of this section.

               (e) Upon the Separation Date:

                     (i) to the extent within his possession or control, the
           Executive shall surrender and deliver to the Company or its
           authorized representative all files, figures, calculations, letters,
           papers, records, proposals, listings, brochures, manuals,
           instruments, drawings, designs, programs, plans or statistics, or any
           copies thereof, any information or instruments derived therefrom, or
           any other similar documents or information f any type or description,
           however such information might be obtained or recorded and on
           whatever medium such information may be contained, arising out of or
           in any way relating to the business of affairs of the Company or any
           affiliate or obtained as a result of or in connection with the
           Executive's employment by the Company or any affiliate; and

                                       4
<PAGE>

                     (ii) the Executive shall not be entitled to retain a copy
           of any document or information referred to in section (i) above; and

                     (iii) Executive shall cease to represent himself as being
           in any way connected with, or interested in the business of, the
           Company or any affiliate.

               (f) Executive agrees and acknowledges that the Company does not
have any adequate remedy at law for the breach or threatened breach by the
Executive of any of the provisions of this Section 3 and agrees that the Company
will be entitled to injunctive relief (without proof of monetary or immediate
damage and without any bond or other security being required) to bar Executive
from such breach or threatened breach in addition to any other remedies which
might be available to the Company at law or in equity. If, at any time,
Executive violates, to any material extent, any of the covenants or agreements
set forth in this Section 3, the Company shall have the right to immediately
terminate all of its obligations to make any further payments under Section 2.

           4.        Releases and Covenants Not To Sue.
                     ---------------------------------

               (a) Executive, for himself, his legal representatives, assigns,
heirs, distributees, devisees, legatees, administrators, personal
representatives and executors (collectively, the "Executive Releasing Parties"),
releases and forever discharges the Company, its present or past subsidiaries
and affiliates, and their respective successors and assigns, and their
respective present or past officers, trustees, directors, shareholders,
employees and agents of each of them (collectively, the "Executive Released
Parties"), from any and all claims, demands, actions, liabilities and other
claims for relief and remuneration whatsoever (including without limitation
attorneys' fees and expenses), whether known or unknown, absolute, contingent or
otherwise (each, a "Claim"), arising or which could have arisen up to and
including the date of his execution of this Agreement, including without
limitation those arising out of or relating to Executive's employment or
cessation and termination of employment, the Severance Plan or any other written
or oral agreement, any change in Executive's employment status, any benefits or
compensation, any tortuous injury, breach of contract, wrongful discharge
(including any claim for constructive discharge), infliction of emotional
distress, slander, libel or defamation of character, and any Claims arising
under Title VII of the Civil Rights Act of 1964 (as amended by the Civil Rights
Act of 1991), the Americans With Disabilities Act, the Rehabilitation Act of
1973, the Equal Pay Act, the Fair Labor Standards Act, the Older Workers
Benefits Protection Act, the Age Discrimination in Employment Act, the Illinois
Human Rights Act, the Illinois Wage Payment and Collection Act, the Employee
Retirement Income Security Act of 1974, or any other federal, state or local
statute, law, ordinance, regulation, rule or executive order, any tort or
contract claims, and any of the claims, matters and issues which could have been
asserted by Executive against the Company or its subsidiaries in any legal,
administrative or other proceeding; provided, however, that the foregoing
release does not apply to (i) any Claim under or based on this Agreement or (ii)
any vested benefit Executive may have as of the Separation Date under any
applicable employee benefit plan of the Company.

               (b) Executive further agrees on behalf of himself and the
Executive Releasing Parties (i) not to assert any Claim against the Executive

                                       5
<PAGE>

Released Parties which Claim has been released pursuant to Section 4(a) and (ii)
not to file or commence any proceeding in any forum in respect of any such
released Claim. Executive agrees to indemnify and hold harmless each of the
Executive Released Parties in respect of any such Claim or proceeding. If
Executive files or commences any proceeding in respect of such Claim, Executive
shall forfeit, as of the date of the institution of such proceeding, any right
to continue to receive the compensation and benefits provided in Section 2, and
Executive shall forthwith return to the Company all payment and benefit amounts
previously made to him pursuant to this Agreement.

               (c) The Company, for itself and each of its subsidiaries and
their respective assigns, and to the extent it is legally able to do so, for
their respective present or past officers, trustees, directors, shareholders,
employees and agents (in each case solely relating to the scope of their
employment or in their corporate capacities and to the extent such person is
making a claim on behalf of the Company) (the "Company Releasing Parties")
hereby releases and forever discharges Executive from any and all Claims arising
or which could have arisen up to and including the date of the execution of this
Agreement, out of or relating to Executive's employment, cessation of employment
or change in employment status, the termination of prior agreements with him, or
the performance of his duties on behalf of the Company; including any act,
omission, occurrence, or other matters related to such employment, and any of
the claims, matters and issues which could have been asserted by the Company
against Executive in any legal, administrative, or other proceeding; provided,
however, that the foregoing release does not apply to (i) any Claim under or
based on this Agreement, (ii) any act or omission involving fraud; an
intentional tort; willful, reckless or grossly negligent misconduct; criminal
activity; or the receipt by Executive, directly or indirectly, of any financial
or other personal benefit to which he is not entitled, or (iii) any obligation
of Executive with respect to Section 3 of this Agreement.

               (d) The Company further agrees on behalf of itself and the
Company Releasing Parties (i) not to assert any Claim against Executive which
Claim has been released pursuant to Section 4(c) and (ii) not to file or
commence any proceeding in any forum in respect of any such released Claim. The
Company agrees to indemnify and hold harmless Executive in respect of any such
Claim or proceeding.

           5.        No Detrimental Communications.
                     -----------------------------

               (a) Executive will not disclose or cause to be disclosed any
negative, adverse or derogatory comments or information about the Company, about
any product or service provided by the Company, or about the Company's prospects
for the future, except as may be required by legal process.

               (b) The Company will not disclose or cause to be disclosed any
negative, adverse or derogatory comments or information about Executive, except
as may be required by legal process; provided, however, that the Company may (i)
provide factual information regarding the beginning and ending dates of
Executive's employment by the Company and the positions which he held during
such employment and (ii) make all disclosures which, based on the advice of
legal counsel, the Company reasonably believes to be required by securities or
other law.

                                       6
<PAGE>

         6.Further Assistance. For a period of three years after the Separation
Date, Executive shall from time to time provide the Company with such assistance
and cooperation as the Company may from time to time request in connection with
any investigation, claim, dispute, judicial, legislative, administrative or
arbitral proceeding, or litigation (any of the foregoing, a "Proceeding")
arising out of matters within the knowledge of Executive and related to his
position as an employee or director of the Company. Such assistance and
cooperation shall include providing information, declarations or statements to
the Company, meeting with attorneys or other representatives of the Company, and
preparing for and giving truthful testimony in connection with any Proceeding or
related deposition. In any such instance, Executive shall provide such
assistance and cooperation at times and in places mutually convenient for the
Company and Executive and which do not unreasonably interfere with Executive's
business or personal activities. The Company shall (i) pay Executive's
reasonable out-of-pocket costs and expenses in connection with such assistance
and cooperation, whenever provided, and (ii) if after the end of the Severance
Period, the Company shall require Executive to provide more than three days of
assistance or cooperation pursuant to this Section during any calendar month,
the Company shall pay Executive a consulting fee equal to $1,200 for each such
day in excess of three days; provided that clause (ii) of this sentence shall
not apply to any assistance or cooperation provided by Executive pursuant to
this Section during the Severance Period or to any testimony provided by
Executive at any time pursuant to this Section in connection with any Proceeding
or related deposition.

         7.Voluntary Agreement. Executive acknowledges and represents that he
(i) has read this Agreement, (ii) has had the opportunity to consult with legal
counsel prior to executing this Agreement, (iii) understands the legal effect
and binding nature of this Agreement; and (iv) is acting voluntarily and with
full knowledge of his actions in executing this Agreement. Further, Executive
acknowledges that he has been given at least twenty-one (21) days to fully
consider entering into this Agreement before its execution.

         8.Revocation. This Agreement may be revoked by Executive within the
first seven days after his execution of this Agreement, in which case this
Agreement shall not become effective or enforceable and all terms of this
Agreement shall become null and void. Notwithstanding any provision of this
Agreement to the contrary, Executive shall in no event be entitled to any
payment pursuant to this Agreement before the expiration of such seven-day
revocation period. If not revoked during this seven-day revocation period, this
Agreement shall remain in full force and effect.

         9.No Charges or Complaints Filed. Executive represents that he has not
filed any complaints or charges against the Company with any local, state or
federal agency or court. If any such complaint or charge was filed on his
behalf, Executive shall take all reasonable steps necessary to effectuate
withdrawal of such complaint or charge.

         10. Confidentiality. Executive shall keep confidential the existence of
this Agreement, as well as all of its terms and conditions, and shall not
disclose the existence, terms or conditions of this Agreement to any Person
except to his attorney, accountant, and members of his immediate family who have
agreed to keep confidential the existence, terms and conditions of this
Agreement; and except that Executive may inform any prospective employer that

                                       7
<PAGE>

the reason for his separation from employment with the Company was to pursue
other opportunities. In the event that Executive believes he is compelled by law
to divulge the existence, terms or conditions of this Agreement, he will notify
the Company in writing of the basis for that belief before actually divulging
the information, in order to permit the Company to take steps to protect its
interests. Executive will cooperate with the Company in all reasonable respects
to permit the Company to oppose such disclosure. Executive represents that, as
of the date of this Agreement, he has not disclosed the existence, terms or
conditions of this Agreement, except as permitted by this Section. The Company
shall not disclose the existence, terms or conditions of this Agreement, except
to the extent necessary to further the Company's legitimate business interests
or as may be required by legal process or by applicable law, rule or regulation.

         11. Governing Law; Disputes. This Agreement shall be governed by, and
construed and enforced in accordance with the Employee Retirement Income
Security Act of 1974 ("ERISA") to the extent applicable and, the laws of the
State of Illinois, without giving effect to its conflict or choice of law
provisions. Any action brought to enforce this Agreement may be brought in a
state or federal court of competent jurisdiction located in DuPage County,
Illinois. Executive submits to the jurisdiction of any state court located in
DuPage County, Illinois or any federal court located in the Northern District of
Illinois and waives the defense of an inconvenient forum to the maintenance of
any action in such jurisdiction. Each party agrees that, if any action is
brought to enforce this Agreement in a state court outside of DuPage County,
Illinois or any federal court outside of the Northern District of Illinois, such
party consents to a transfer to a state court located in DuPage County, Illinois
or a federal court located in the Northern District of Illinois, and will accept
service of process and other papers by any method permitted by the rules of the
court to which such action is transferred.

         12. Notices. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
delivered personally, sent by certified, registered or express mail, postage
prepaid, or by overnight delivery service and shall be deemed to have been duly
given when delivered or three days after mailing (in the case of communications
sent by mail), as follows:

           If to the Company:

                     Factory Card Outlet Corp.
                     2727 Diehl Road
                     Naperville, Illinois 60563
                     Attention: Chairman of the Board  or
                                Senior V.P. of Human Resources

           with a copy to:

                     Sonnenschein Nath & Rosenthal
                     8000 Sears Tower
                     Chicago, Illinois  60606
                     Attention: Neal Aizenstein, Esq.

                                       8
<PAGE>

           If to Executive:

                     Stewart M. Kasen
                     60 East Square Lane
                     Richmond, Virginia 23233

Notice may also be given at such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.

         13. Waiver. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by Executive and the Company. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.

         14. Counterparts. This Agreement may be executed in separate
counterparts, each of which when so executed shall be deemed to be an original
but both of which together will constitute one and the same instrument.

         15. Withholding. The Company shall withhold from all benefits and other
amounts due or otherwise payable to Executive hereunder in order to comply with
any federal, state, local or other income or other tax laws requiring
withholding with respect to compensation and benefits provided to Executive
pursuant to this Agreement, or to comply with any personal or voluntary
deduction, including without limitation the employee contribution for any
insurance plan in which Executive participates, or other deductions authorized
by law or that have been requested by Executive during the course of his
employment.

         16. Non-Admission. Nothing contained in this Agreement, nor any actions
taken by any party hereto in connection herewith, shall constitute, be construed
as, or be deemed to be, an admission of fault, liability, or wrongdoing of any
kind whatsoever on the part of any party hereto. The Company asserts that at all
times its treatment of Executive is, was and has been fully consistent with the
requirements of the law and the Company's policies and Executive acknowledges
the Company's assertion.

         17. Validity. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or other authority to be
invalid, void or unenforceable, the remainder of the terms, covenants and
restrictions of this Agreement shall remain in full force and effect and in no
way shall affect, impair or invalidate this Agreement. If any court determines
that any provision of Section 4 of this Agreement or Section 14 of the
Employment Agreement is unenforceable because of the duration or geographical
scope of such provision, such court shall have the power to reduce the duration
or scope of such provision, as the case may be, and, in its reduced form, such
provision shall then be enforceable.

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<PAGE>

         18. Entire Agreement. Except as otherwise expressly provided in this
Agreement, this Agreement contains the entire agreement between the parties
hereto with respect to the transactions contemplated hereby and supersedes all
previous oral and written agreements and all prior or contemporaneous oral
negotiations, commitments and understandings. Neither party has made, and
neither party has relied upon, any representation or warranty in connection with
this Agreement except as expressly set forth herein.

         19. Assignment of Interests. Executive warrants that he has not
assigned, transferred or purported to assign or transfer any claim of Executive
against the Company.

         20. Sections. Except where otherwise indicated by the context, any
reference to a "Section" shall be to a section of this Agreement.

                                       10
<PAGE>

         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
first date set forth above.

                        FACTORY CARD OUTLET CORP.

                        By:
                            ------------------------------------------------

                        EXECUTIVE:

                           /s/ Stewart M. Kasen
                        ----------------------------------
                               Stewart M. Kasen

                       Acknowledged and Approved by

                       Factory Card Outlet Severance Pay Plan
                       Administrative Committee:

                       By:
                          -----------------------------------

                                       11
<PAGE>

                            INDIVIDUAL ACKNOWLEDGMENT

STATE OF ILLINOIS    )
                     ) SS.
COUNTY OF DUPAGE     )

         On the _____ day of _______________, 199__, before me personally
appeared Steward M. Kasen, known to me or proved to me on the basis of
satisfactory evidence to be the individual described in and who acknowledged the
foregoing instrument and swore and acknowledged that he executed the same as his
free act and deed.

                                        --------------------------------
                                        Notary Public

                                        My commission expires:

                                       12
<PAGE>

                                                                       Exhibit A

                [COPY OF SEVERANCE PAY PLAN TO BE ATTACHED HERE]SEPARATION AGREEMENT

           This Separation Agreement ("Agreement") between FACTORY CARD OUTLET
CORP., a Delaware corporation (the "Company"), and FREDERICK G KRAEGEL (the
"Executive") shall be effective March 3, 2000.

                                    RECITALS
                                    --------

           The Company and Executive desire to provide an orderly and amicable
arrangement with respect to the cessation of Executive's employment as Senior
Vice President and Chief Financial Officer and to resolve claims between parties
relating to his employment and the cessation of his employment.

                                    AGREEMENT
                                    ---------

           In consideration of the foregoing recitals, the agreements set forth
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and Executive agree as follows:

           1.         Resignation.
                      -----------

               (a) Executive confirms his resignation as of March 3, 2000 (the
"Separation Date") as Senior Vice President and Chief Financial Officer, as an
officer of each subsidiary, if any, of the company for which Executive served in
such capacity, and any other position or office with respect to the Company or
any of its subsidiaries, including as a legal representative or trustee of any
employee benefit plan or trust of any capacity, including that of an employee,
independent contractor or otherwise, for the Company or any of its subsidiaries.

               (b) As a result of his voluntary resignation and the cessation of
his employment, effective on the Separation Date, Executive will cease to
perform any duties or be entitled to or eligible for any compensation or
benefits except as expressly provided in this Agreement. As outlined below, the
company offers and Executive accepts the following package.

           2.         Package.
                      -------

               (a) Bonuses.
                   -------

                     (i) If Executive would have otherwise been entitled to
           receive a Management Incentive Bonus for the fiscal year ending
           January 29, 2000, Executive shall receive a lump-sum payment equal to
           that amount prorated in accordance with the guidelines set forth in
           the company's "Fiscal Year 1999 Management Incentive Program, Officer
           Group" (Such pro-ration calls for application of a fraction the
           numerator of which is the number of completed months of service
           during the fiscal year and the denominator of which is equal to
           number of months in the fiscal period, which equals 1.00 for the
           Executive). Such amount, if any, shall be paid to Executive
           concurrently with the Company's payment of such bonus for fiscal year
           1999 to other participants in the Management Incentive Bonus Program,
           subject only to the conditions contained in that program.

<PAGE>

                     (ii) In lieu of any amount which Executive would otherwise
           be entitled to under the Company's "Retention Bonus Program for
           Officers" the Company agrees to pay Executive (i) $20,400 on the
           Separation Date and (ii) subject to Executive compliance with the
           terms of this Agreement, $20,400 upon the payment of retention
           bonuses to the officers of the Company in accordance with the
           "Retention Bonus Program for Officers" following the Company's
           receipt of final approval of a Plan of Reorganization from the
           applicable judicial authority.

               (b) The Company shall continue Executive's medical insurance
coverage (as in effect immediately prior to the Separation Date) until the
earlier of (i) twelve (12) months or (ii) the first date on which Executive
becomes covered under any other group health plan (as an employee or otherwise)
which does not contain any exclusion or limitation with respect to any
preexisting condition of Executive; provided that Executive shall pay an amount
equal to the portion of the periodic cost for such coverage that was payable by
Executive immediately prior to the Separation Date. As and to the extent
provided by the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA"), Executive will be eligible to continue his health insurance benefits
at his own expense for up to eighteen (18) months following the end of the
twelve (12) month Package Period and, later, to convert such benefits to an
individual policy pursuant to and consistent with COBRA. Executive will be
provided with a separate notice of his COBRA rights at the end of the Severance
Period consistent with and to the extent required by COBRA.

               (c) The Company will reimburse Executive for any unreimbursed
reasonable business expenses incurred and paid for by Executive prior to the
Separation Date consistent with the Company's policies in effect with respect to
travel, entertainment and other business expenses, and upon Executive's
providing to the Company reasonably acceptable documentation of such expenses
within sixty (60) days after the Separation Date. The company agrees to extend
the four thousand dollar ($4,000.00) monthly living expense arrangement
currently in force through the end of February.

               (d) Except as expressly provided in this Agreement or in an
employee benefit plan of the Company, Executive shall not be entitled to receive
any severance payments or any other benefits or compensation from the Company.

               (e) To the extent any stock option granted to Executive by the
Company had become exercisable as of the Separation Date, such stock option may
be exercised to the extent allowed under the applicable plan and grant document.
Effective as of the Separation Date, Executive shall not (i) be entitled to
exercise any stock option to the extent that such option had not become
exercisable as of the Separation Date or (ii) eligible to be granted any
additional options.

               (f) Nothing in this Agreement shall preclude the Company from
amending or terminating any employee benefit plan, program or practice at any
time in compliance with applicable law.

           3.         Restrictive Covenants.
                      ---------------------

               (a) Executive hereby agrees that during the term of the

                                     - 2 -
<PAGE>

Employee's employment with the Company and for a period of one (1) calendar year
thereafter (the "Restriction Period"), the Executive will not, singly, jointly,
or as a partner, member, consultant, or agent of any partnership, or as an
agent, consultant, or stockholder of any other corporation or entity, or as an
investor of more than five percent (5%) of the voting stock of any entity, or in
any other capacity, directly, indirectly or otherwise beneficially:

                     (i) Own, manage, operate, join in, control or participate
           in the ownership, management, operation, or control of, or work for
           (as an employee, consultant, independent contractor or otherwise), or
           permit the use of his name by, or provide financial or other
           assistance to, or be connected in any manner with, any of the
           following (each a "Competitive Business"): (1) any retailer located
           anywhere in the Restricted Area (as herinafter defined) which
           generates thirty-five percent (35%) or more of its gross revenues
           from the sale, anywhere in the Restricted Area, of greeting cards,
           party goods, gift wrap accessories, stationery and/or any other
           products or services which materially reproduce , incorporate or copy
           any of the products or services which are offered or developed for
           marketing by the Company during the term of the Employee's employment
           with the Company ("Competitive Products") or which offers greeting
           cards for sale in the Restricted Area under a "one price" strategy at
           a price per card of $.39 or less or under a "half-off" strategy at a
           price per card of 2/$1.00 or less, or (2) any retailer which
           generates thirty-five percent (35%) or more of its gross revenue from
           the sale of Competitive Products anywhere in the restricted Area;

                     (ii) Induce or attempt to induce any person who, during the
           term of Executive's employment with the Company, is an employee,
           representative, consultant, agent or supplier of the Company, to
           terminate his, her or its employment or relationship with the Company
           or to violate the terms of any agreement between said representative,
           agent, consultant, employee or supplier and the Company, or hire or
           attempt to hire any employee of the Company who has left the
           employment of the Company within sixty (60) days after the
           termination of such employee's employment with the Company; or

                     (iii) Induce or attempt to induce any person, business or
           entity which is or was a customer of the Company at any time during
           the term preceding the effective date of this Agreement to terminate
           any written or oral agreement or understanding with the Corporation
           or to become a customer of any person, corporation, partnership or
           other entity which engages in any Competitive business.

               (b) For purposes of Section 3(a) hereof, "Restricted Area" means
the United States (and any of its territories), Canada and Mexico.

               (c) If the Employee violates any of the restrictions contained in
Section 3(a) above, the Restriction Period automatically shall be increased by
the period of time from the commencement of any such violation until such time
as the Executive has cured such violation.

               (d) Executive acknowledges and agrees that his employment by the
Company under this Agreement necessarily involves him understanding and having
access to certain trade secrets and other confidential information pertaining to
the business of the Company and any affiliates. Accordingly, Executive agrees
that for a period of two (2) years following the Separation Date, Executive

                                     - 3 -
<PAGE>

shall not, without the express written consent of the Board or a person
authorized thereby, directly or indirectly, disclose to any person, corporation
or entity or use or knowingly permit to be so disclosed or used, for the benefit
of any person, corporation or entity, or himself, any material confidential
information obtained by the Executive while in the employ of the Company with
respect to any of the Company or any of the affiliates' products, customers, or
current or future plans, the disclosure of which the Executive knows or should
reasonably believe will be damaging to the Company; provided, that such
confidential information shall not include any information known or available
generally to the public (other than as a result of unauthorized disclosure by
the Executive). this provision is intended only to prevent unauthorized
disclosure of material confidential information and is not intended to preclude
the Executive from securing other employment following the Separation Date
except as subject to such restrictions on such other employment as set forth in
subparagraph (a) of this section.

               (e) Upon the Separation Date:

                     (i) to the extent within his possession or control, the
           Executive shall surrender and deliver to the Company or its
           authorized representative all files, figures, calculations, letters,
           papers, records, proposals, listings, brochures, manuals,
           instruments, drawings, designs, programs, plans or statistics, or any
           copies thereof, any information or instruments derived therefrom, or
           any other similar documents or information of any type or
           description, however such information might be obtained or recorded
           and on whatever medium such information may be contained, arising out
           of or in any way relating to the business of affairs of the Company
           or any affiliate or obtained as a result of or in connection with the
           Executive's employment by the Company or any affiliate; and

                     (ii) the Executive shall not be entitled to retain a copy
           of any document or information referred to in section (I) above; and

                     (iii) Executive shall cease to represent himself as being
           in any way connected with, or interested in the business of, the
           Company or any affiliate.

               (f) Executive agrees and acknowledges that the Company does not
have any adequate remedy at law for the breach or threatened breach by the
Executive of any of the provisions of this Section 3 and agrees that the Company
will be entitled to injunctive relief (without proof of monetary or immediate
damage and without any bond or other security being required) to bar Executive
from such breach or threatened breach in addition to any other remedies which
might be available to the Company at law or in equity. If, at any time,
Executive violates, to any material extent, any of the covenants or agreements
set forth in this Section 3, the Company shall have the right to immediately
terminate all of its obligations to make any further payments under Section 2.

           4.         Releases and Covenants Not To Sue.
                      ----------------------------------

               (a) Executive, for himself, his legal representatives, assigns,
heirs, distributees, devisees, legatees, administrators, personal
representatives and executors (collectively, the "Executive Releasing Parties"),
releases and forever discharges the Company, its present or past subsidiaries
and affiliates, and their respective successors and assigns, and their
respective present or past officers, trustees, directors, shareholders,
employees and agents of each of them (collectively, the "Executive Released

                                     - 4 -
<PAGE>

Parties"), from any and all claims, demands, actions, liabilities and other
claims for relief and remuneration whatsoever (including without limitation
attorneys' fees and expenses), whether known or unknown, absolute, contingent or
otherwise (each, a "Claim"), arising or which could have arisen up to and
including the date of his execution of this Agreement, including without
limitation those arising out of or relating to Executive's employment or
cessation and termination of employment, the Severance Plan or any other written
or oral agreement, any change in executive's employment status, any benefits or
compensation, any tortuous injury, breach of contract, wrongful discharge
(including any claim for constructive discharge), infliction of emotional
distress, slander, libel or defamation of character, and any Claims arising
under Title VII of the Civil rights Act of 1964 ( as amended by the Civil rights
Act of 1991), the Americans With Disabilities Act, the Rehabilitation Act of
1973, the Equal Pay Act, the Fair Labor Standards Act, the Older workers
Benefits Protection Act, the Age Discrimination in employment Act, the Illinois
Human Rights Act, the Illinois Wage Payment and Collection Act, the Employee
Retirement Income Security Act of 1974, or any other federal, state or local
stature, law, ordinance, regulation, rule or executive order, any tort or
contract claims, and any of the claims, matters and issues which could have been
asserted by Executive against the company or its subsidiaries in any legal,
administrative or other proceeding; provided, however, that the foregoing
release does not apply to (I) any Claim under or based on this Agreement or (ii)
any vested benefit Executive may have as of the Separation Date under any
applicable employee benefit plan of the Company.

                     (b) Executive further agrees on behalf of himself and the
           Executive Releasing Parties (i) not to assert any Claim against the
           Executive Released Parties which Claim has been released pursuant to
           Section 4(a) and (ii) not to file or commence any proceeding in any
           forum in respect of any such released Claim. Executive agrees to
           indemnify and hold harmless each of the Executive Released Parties in
           respect of any such Claim or proceeding. If Executive files or
           commences any proceeding in respect of such claim, Executive shall
           forfeit, as of the date of the institution of such proceeding, any
           right to continue to receive the compensation and benefits provided
           in Section 2, and Executive shall forthwith return to the Company all
           payment and benefit amounts previously mad to him pursuant to this
           Agreement.

                     (c) The Company, for itself and each of its subsidiaries
           and their respective assigns, and to the extent it is legally able to
           do so, for their respective present or past officers, trustees,
           directors, shareholders, employees and agents (in each case solely
           relating to the scope of their employment or in their corporate
           capacities and to the extent such person is making a claim on behalf
           of the company)(the "Company Releasing Parties") hereby releases and
           forever discharges Executive from any and all Claims arising or which
           could have arisen up to and including the date of the execution of
           this Agreement, out of or relating to Executive's employment,
           cessation of employment or change in employment status, the
           termination of prior agreements with him or the performance of his
           duties on behalf of the Company; including any act, omission,
           occurrence, or other matters related to such employment, and any of
           the claims, matters and issues which could have been asserted by the
           Company against Executive in any legal, administrative, or other
           proceeding; provided, however, that the foregoing release does not
           apply to (i) any Claim under or based on this Agreement, (ii) any act
           or omission involving fraud; and intentional tort; willful, reckless

                                     - 5 -
<PAGE>

           or grossly negligent misconduct; criminal activity; or the receipt by
           Executive, directly or indirectly, of any financial or other personal
           benefit to which he is not entitled, or (iii) any obligation of
           Executive with respect to Section 3 of this Agreement.

                     (d) The Company further agrees on behalf of itself and the
           Company Releasing Parties (i) not to assert any Claim against
           Executive which Claim has been released pursuant to Section 4(c) and
           (ii) not to file or commence any proceeding in any forum in respect
           of any such released Claim. the Company agrees to indemnify and hold
           harmless Executive in respect of any such Claim or proceeding.

           5.         No Detrimental Communication.
                      -----------------------------

               (a) Executive will not disclose or cause to be disclosed any
negative, adverse or derogatory comments or information about the Company, about
any product or service provided by the Company, or about the Company's prospects
for the future, except as may be required by legal process. Without limiting the
generality of the foregoing, Executive agrees that, without the prior written
consent of the Company, he will not engage in discussions with or provide any
information or data relating directly or indirectly to the Company to any person
or entity which (i) is considering a potential acquisition of an equity interest
in, or substantial portion of the business or assets of, the Company or any of
its subsidiaries or (ii) has provided financing to, or is considering financing,
the Company or any of its subsidiaries.

               (b) The Company will not disclose or cause to be disclosed any
negative, adverse or derogatory comments or information about Executive, except
as may be required by legal process; provided, however, that the Company may (I)
provide factual information regarding the beginning and ending dates of
executive's employment by the Company and the positions which he held during
such employment and (ii) make all disclosures which, based on the advice of
legal counsel, the Company reasonably believes to be required by securities or
other law.

           6. Further Assistance. For a period of three years after the
Separation Date, Executive shall from time to time provide the Company with such
assistance and cooperation as the Company may from time to time request in
connection with any investigation, claim, dispute, judicial, legislative,
administrative or arbitral proceeding, or litigation (any of the foregoing, a
"Proceeding") arising out of matters within the knowledge of Executive and
related to his position as an employee or director of the Company. such
assistance and cooperation shall include providing information, declarations or
statements to the Company, meeting with attorneys or other representatives of
the Company, and preparing for and giving truthful testimony in connection with
any Proceeding or related deposition. In any such instance, Executive shall
provide such assistance and cooperation at times and in places mutually
convenient for the Company and Executive and which do not unreasonable interfere
with Executive's business or personal activities. the company shall (i) pay
Executive's reasonable out-of-pocket costs and expenses in connection with such
assistance and cooperation, whenever provided, and (ii) if the Company shall
require Executive to provide than assistance or cooperation pursuant to this
Section, the Company shall pay Executive a consulting fee equal to $1,200 for
each such day; provide that clause (ii) of this sentence shall not apply to any
testimony provided by Executive at any time pursuant to this Section in
connection with any Proceeding or related deposition.

                                     - 6 -
<PAGE>

           7. Voluntary Agreement. Executive acknowledges and represents that he
(i) has red this Agreement, (ii) has had the opportunity to consult with legal
counsel prior to executing this Agreement, (iii) understands the legal effect
and binding nature of this Agreement; and (iv) is acting voluntarily and with
full knowledge of his actions in executing this Agreement. Further, Executive
acknowledges that he has been given at least twenty-one (21) days to fully
consider entering into this Agreement before its execution.

           8. Revocation. This Agreement may be revoked by Executive within the
first seven days after his execution of this Agreement, in which case this
Agreement shall not become effective or enforceable and all terms of this
Agreement shall become null and void. Notwithstanding any provision of this
Agreement to the contrary, Executive shall in no event be entitled to any
payment pursuant to the Agreement before the expriation of such seven-day
revocation period. If not revoked during this seven-day revocation period, this
Agreement shall remain in full force and effect.

           9. No Charges or Complaints Filed. Executive represents that he has
not filed any complaints or charges against the Company with any local, state or
federal agency or court. If any such complaint or charge was filed on his
behalf, Executive shall take all reasonable steps necessary to effectuate
withdrawal of such complaint or charge.

           10. Confidentiality. Executive shall keep confidential the existence
of this Agreement, as well as all of its terms and conditions, and shall not
disclose the existence, terms or conditions of this Agreement to any Person
except to his attorney, accountant, and members of his immediate family who have
agreed to keep confidential the existence, terms and conditions of this
Agreement; and except that Executive may inform any prospective employer that
the reason for his separation from employment with the Company was to pursue
other opportunities. In the event that Executive believes he is compelled by law
to divulge the existence, terms or conditions of this Agreement, he will notify
the Company in writing of the basis for that belief before actually divulging
the information, in order to permit the Company to take steps to protect its
interests. Executive will cooperate with the Company in all reasonable respects
to permit the Company to oppose such disclosure. Executive represents that, as
of the date of this Agreement, he has not disclosed the existence, terms or
conditions of this Agreement, except as permitted by this Section. The Company
shall not disclose the existence, terms or conditions of this Agreement, except
to the extent necessary to further the Company's legitimate business interests
or as may be required by legal process or by applicable law, rule or regulation.

           11. Governing Law: Disputes. This Agreement shall be governed by, and
construed and enforced in accordance with the Employee Retirement Income
Security Act of 1974 ("ERISA") to the extent applicable and, the laws of the
State of Illinois, without giving effect to its conflict or choice of law
provisions. Any action brought to enforce this Agreement may be brought in a
state or federal curt of competent jurisdiction located in DuPage County,
Illinois. Executive submits to the jurisdiction of any state court located in
DuPage Count, Illinois or any federal court located in the Northern District of
Illinois and waives the defense of an inconvenient forum to the maintenance of
any action in such jurisdiction. Each party agrees that, if any action is
brought to enforce this Agreement in a state court outside of DuPage County,
Illinois or any federal court outside of the Northern District of Illinois, such
party consents to a transfer to a state court located in DuPage county, Illinois
or a federal court located in the Northern District of Illinois, and will accept
service of process and other papers by any method permitted by the rules of the
court to which such action is transferred.

                                     - 7 -
<PAGE>

           12. Notices. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
delivered personally, sent by certified, registered or express mail, postage
prepaid, or by overnight delivery service and shall be deemed to have been duly
given when delivered or three days after mailing (in the case of communications
sent by mail), as follows:

If to the Company:

                     Factory Card Outlet Corp.
                     2727 Diehl road
                     Naperville, Illinois 60563
                     Attention:  Chairman of the Board or
                                      V.P. of Human Resources

with a copy to:

                     Sonnenschein Nath & Rosenthal
                     8000 Sears Tower
                     Chicago, Illinois 60606
                     Attention:  Neal Aizenstein, Esq.

If to Executive:

                     Frederick G. Kraegel
                     9 Dilton Ct.
                     Richmond, Virginia 23233

Notice may also be given at such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.

           13. Waiver. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by Executive and the Company. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.

           14. Counterparts. This Agreement may be executed in separate
counterparts, each of which when so executed shall be deemed to be an original
but both of which together will constitute one and the same instrument.

                                     - 8 -
<PAGE>

           15. Withholding. The Company shall withhold from all benefits and
other amounts due or otherwise payable to Executive hereunder in order to comply
with any federal, state, local or other income or other tax laws requiring
withholding with respect to compensation and benefits provided to Executive
pursuant to this Agreement, or to comply with any personal or voluntary
deduction, including without limitation the employee contribution for any
insurance plan in which Executive participates, or other deductions authorized
by law or that have been requested by Executive during the course of his
employment.

           16. Non-Admission. Nothing contained in this Agreement, nor any
actions taken by any party hereto in connection herewith, shall constitute, be
construed as, or be deemed to be, an admission of fault, liability, or
wrongdoing of any kind whatsoever on the part of any party hereto. The Company
asserts that at all times its treatment of Executive is, was and has been fully
consistent with the requirements of the law and the Company's policies and
Executive acknowledges the Company's assertion.

           17. Validity. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or other authority to be
invalid, void or unenforceable, the remainder of the terms, covenants and
restrictions of this Agreement shall remain in full force and effect and in no
way shall affect, impair or invalidate this Agreement. If any court determines
that any provision of Section 4 of this Agreement or Section 14 of the
Employment Agreement is unenforceable because of the duration or geographical
scope of such provision, such court shall have the power to reduce the duration
or scope of such provision, as the case may be, and, in its reduced form, such
provision shall then be enforceable.

           18. Entire Agreement. Except as otherwise expressly provided in this
Agreement, this Agreement contains the entire agreement between the parties
hereto with respect to the transactions contemplated hereby and supercedes all
previous oral and written agreements and all prior or contemporaneous oral
negotiations, commitments and understandings. Neither party has mad, and neither
party has relied upon, any representation or warranty in connection with this
Agreement except as expressly set forth herein.

           19. Assignment of Interests. Executive warrants that he has not
assigned, transferred or purported to assign or transfer any claim of Executive
against the Company.

           20. Sections. Except where otherwise indicated by the context, any
reference to a "Section" shall be to a section of this Agreement.

                                     - 9 -
<PAGE>

           IN WITNESS WHEREOF, the parties have executed this Agreement as of
the first date set forth above.

                             FACTORY CARD OUTLET CORP.

                             By:  /s/ William E. Freeman
                                ---------------------------------
                                      William E. Freeman

                             EXECUTIVE:

                                    /s/ Frederick G. Kraegel
                             ------------------------------------
                                        Frederick G. Kraegel

                             Witness:

                                   /s/  William A. Beyerl
                             ------------------------------------
                                        William A. Beyerl

                                     - 10 -
<PAGE>

                                           INDIVIDUAL ACKNOWLEDGEMENT

STATE OF ILLINOIS    )
                     ) SS.
COUNTY OF DU PAGE    )

           On the 24 day of January, 2000, before me personally appeared
Frederick G. Kraegel, known to me or proved to me on the basis of satisfactory
evidence to be the individual described in and who acknowledged the foregoing
instrument and swore and acknowledged that he executed the same as his free act
and deed.

                             /s/ Carol A. Travis
                             --------------------------------------
                             Notary Public

                             Carol A. Travis, Notary

                             My commission expires: July 23, 2002

                                     - 11 -

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