Document:

Exhibit 10.2
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                               SECURITY AGREEMENT
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         SECURITY AGREEMENT (this "Security Agreement"), dated as of April 9,
2002, among FACTORY CARD & PARTY OUTLET CORP. (f/k/a Factory Card Outlet Corp.),
a Delaware corporation ("FCO") and FACTORY CARD OUTLET OF AMERICA LTD., an
Illinois corporation ("FCOA"; and together with the FCO, sometimes collectively
referred to herein as "Grantors" and individually as "Grantor") in favor of
WILLIAM KAYE, as Collateral Trustee (as defined in the Plan as hereinafter
defined) for the benefit of the holders of the Trade Conversion Notes and the
holders of Allowed General Unsecured Claims. Capitalized terms used and not
otherwise defined in this Security Agreement have their respective meanings set
forth in the Plan. All other terms contained in this Security Agreement, unless
the context indicates otherwise, have the meanings set forth in the Code (as
hereinafter defined).

                              W I T N E S S E T H:
                              --------------------

         WHEREAS, pursuant to the terms of the Grantors' Amended Joint Plan of
Reorganization, dated February 5, 2002, confirmed by order of the United States
Bankruptcy Court for the District of Delaware (as amended, supplemented or
modified from time to time, the "Plan"), the Grantors have executed and
delivered to the Trade Conversion Participants the Trade Conversion Notes;

         WHEREAS, pursuant to the Plan, the Grantors have agreed to grant to the
Collateral Trustee, for the benefit of the holders of the Trade Conversion
Notes, as security for the Trade Conversion Notes, a second priority Lien (as
hereinafter defined) upon all property of the Grantors constituting Collateral
(as hereinafter defined);

         WHEREAS, pursuant to the Plan, each holder of an Allowed General
Unsecured Claim is to receive a Pro Rata Share of the Extended Creditor Payment
Amount;

         WHEREAS, pursuant to the Plan, the Grantors have agreed to grant to the
Collateral Trustee, for the benefit of the holders of Allowed General Unsecured
Claims, as security for the Extended Creditor Payment Obligation, a third
priority Lien upon the Collateral;

         WHEREAS, the Grantors and the Collateral Trustee have entered into the
Collateral Trust Agreement, dated as of the date hereof, pursuant to which the
Collateral Trustee will administer the Collateral for the benefit of the holders
of the Trade Conversion Notes and the holders of General Unsecured Claims;

         WHEREAS, pursuant to the Plan and the terms of the Loan and Security
Agreement, dated on or about the date hereof, by and among the FOCA, as
Borrower, Wells Fargo Retail Finance, LLC, as Agent (the "Agent"), and the other
Senior Lenders (as defined therein) (as the same may now exist or may hereafter
be amended, modified, supplemented, extended, renewed, restated or replaced, the
"Senior Credit Agreement"), the Grantors have granted to the Lender, as security

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for the obligations under the Senior Credit Agreement), a first priority Lien
upon the Collateral; and

         WHEREAS, the Agent, the Collateral Trustee and the Grantors have
entered into a Subordination and Intercreditor Agreement, dated as of the date
hereof, pursuant to which the Liens granted hereunder are subordinate to the
Liens granted to the Senior Lenders as security for the obligations under the
Senior Credit Agreement (as amended, supplemented or otherwise modified, the
"Intercreditor Agreement").

         WHEREAS, this Security Agreement is subject to the terms of the
Intercreditor Agreement, dated on or about the date hereof, between the Lender
and the Collateral Trustee;

         NOW THEREFORE, in consideration of the premises, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Grantors hereby agree with the Collateral Trustee, for the
benefit of the holders of the Trade Conversion Notes and the holders of the
Allowed General Unsecured Claims, as follows:

1. DEFINED TERMS. For the purposes of this Security Agreement, the following
terms have the following meanings:

         "Account Debtor" means any Person who may become obligated to any
Grantor under, with respect to, or on account of, an Account, Chattel Paper or
General Intangibles (including a payment intangible).

         "Accounts" means all "accounts," as such term is defined in the Code,
now owned or hereafter acquired by any Grantor, including (a) all accounts
receivable, other receivables, book debts and other forms of obligations (other
than forms of obligations evidenced by Chattel Paper, or Instruments),
(including any such obligations that may be characterized as an account under
the Code), (b) all of each Grantor's rights in, to and under all purchase orders
or receipts for goods or services, (c) all of each Grantor's rights to any goods
represented by any of the foregoing (including unpaid sellers' rights of
rescission, replevin, reclamation and stoppage in transit and rights to
returned, reclaimed or repossessed goods), (d) all rights to payment due to any
Grantor for property sold, leased, licensed, assigned or otherwise disposed of,
for a policy of insurance issued or to be issued, for a secondary obligation
incurred or to be incurred, for energy provided or to be provided, for the use
or hire of a vessel under a charter or other contract, arising out of the use of
a credit card or charge card, or for services rendered or to be rendered by such
Grantor or in connection with any other transaction (whether or not yet earned
by performance on the part of such Grantor) and (e) all collateral security of
any kind, given by any Account Debtor or any other Person with respect to any of
the foregoing.

         "Chattel Paper" means any "chattel paper," as such term is defined in
the Code, including electronic chattel paper, now owned or hereafter acquired by
any Grantor.

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         "Code" means the Uniform Commercial Code as the same may, from time to
time, be enacted and in effect in the State of New York; provided, that to the
extent that the Code is used to define any term herein and such term is defined
differently in different Articles or Divisions of the Code, the definition of
such term, if any, contained in Article or Division 9 shall govern; provided
further, that in the event that, by reason of mandatory provisions of law, any
or all of the attachment, perfection or priority of, or remedies with respect
to, the Collateral Trustee's Lien on any Collateral is governed by the Uniform
Commercial Code as enacted and in effect in a jurisdiction other than the State
of New York, the term "Code" shall mean the Uniform Commercial Code as enacted
and in effect in such other jurisdiction solely for purposes of the provisions
thereof relating to such attachment, perfection, priority or remedies and for
purposes of definitions related to such provisions.

         "Documents" means all "documents," as such term is defined in the Code,
now owned or hereafter acquired by any Grantor, wherever located.

         "Equipment" means all "equipment," as such term is defined in the Code,
now owned or hereafter acquired by any Grantor, wherever located and, in any
event, including all such Grantor's machinery and equipment, including
processing equipment, conveyors, data processing and computer equipment,
including embedded software and peripheral equipment and office machinery,
furniture, materials handling equipment, tools, attachments, accessories,
automotive equipment, trailers, trucks, forklifts, molds, dies, stamps, motor
vehicles, rolling stock and other equipment of every kind and nature, trade
fixtures and fixtures not forming a part of real property, together with all
additions and accessions thereto, replacements therefor, all parts therefor, all
substitutes for any of the foregoing, fuel therefor, and all manuals, drawings,
instructions, warranties and rights with respect thereto, and all products and
proceeds thereof and condemnation awards and insurance proceeds with respect
thereto.

         "Event of Default" means an Event of Default as defined in the Trade
Conversion Notes.

         "General Intangibles" means all "general intangibles," as such term is
defined in the Code, now owned or hereafter acquired by any Grantor, including
all right, title and interest that such Grantor may now or hereafter have in or
under any contract, all payment intangibles, customer lists, licenses,
copyrights, trademarks, patents, and all applications therefor and reissues,
extensions or renewals thereof, rights in intellectual property, interests in
partnerships, joint ventures and other business associations, licenses, permits,
trade secrets, proprietary or confidential information, inventions (whether or
not patented or patentable), technical information, procedures, designs,
knowledge, know-how, software, data bases, data, skill, expertise, experience,
processes, models, drawings, materials and records, goodwill (including the
goodwill associated with any trademark or trademark license), all rights and
claims in or under insurance policies (including insurance for fire, damage,
loss and casualty, whether covering personal property, real property, tangible
rights or intangible rights, all liability, life, key man and business
interruption insurance, and all unearned premiums), uncertificated securities,

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chooses in action, deposit, checking and other bank accounts, rights to receive
tax refunds and other payments, rights to receive dividends, distributions,
cash, Instruments and other property in respect of or in exchange for pledged
stock and Investment Property, rights of indemnification, all books and records,
correspondence, credit files, invoices and other papers, including without
limitation all tapes, cards, computer runs and other papers and documents in the
possession or under the control of such Grantor or any computer bureau or
service company from time to time acting for such Grantor.

         "Goods" means all "goods" as defined in the Code, now owned or
hereafter acquired by any Grantor, wherever located, including embedded software
to the extent included in "goods" as defined in the Code.

         "Governmental Authority" means any nation or government, any state or
other political subdivision thereof, and any agency, department or other entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.

         "Instruments" means all "instruments," as such term is defined in the
Code, now owned or hereafter acquired by any Grantor, wherever located, and, in
any event, including all certificated securities, all certificates of deposit,
and all promissory notes and other evidences of indebtedness, other than
instruments that constitute, or are a part of a group of writings that
constitute, Chattel Paper.

         "Intellectual Property Security Agreement" means the Intellectual
Property Security Agreement made in favor of the Collateral Trustee by each
applicable Grantor.

         "Inventory" means all "inventory," as such term is defined in the Code,
now owned or hereafter acquired by any Grantor, wherever located, and in any
event including inventory, merchandise, goods and other personal property that
are held by or on behalf of any Grantor for sale or lease or are furnished or
are to be furnished under a contract of service, or that constitute raw
materials, work in process, finished goods, returned goods, or materials or
supplies of any kind, nature or description used or consumed or to be used or
consumed in such Grantor's business or in the processing, production, packaging,
promotion, delivery or shipping of the same, including all supplies and embedded
software.

         "Investment Property" means all "investment property" as such term is
defined in the Code now owned or hereafter acquired by any Grantor, wherever
located, including (a) all securities, whether certificated or uncertificated,
including stocks, bonds, interests in limited liability companies, partnership
interests, treasuries, certificates of deposit, and mutual fund shares; (b) all
securities entitlements of any Grantor, including the rights of any Grantor to
any securities account and the financial assets held by a securities
intermediary in such securities account and any free credit balance or other
money owing by any securities intermediary with respect to that account; (c) all
securities accounts of any Grantor; (d) all commodity contracts of any Grantor;
and (e) all commodity accounts held by any Grantor.

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         "Letter-of-Credit Rights" means letter-of-credit rights as such term is
defined in the Code, now owned or hereafter acquired by any Grantor, including
rights to payment or performance under a letter of credit, whether or not such
Grantor, as beneficiary, has demanded or is entitled to demand payment or
performance.

         "Lien" means any mortgage or deed of trust, pledge, hypothecation,
assignment, deposit arrangement, lien, charge, claim, security interest,
easement or encumbrance, or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever (including any lease
or title retention agreement, any financing lease having substantially the same
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement perfecting a security interest under the Code or
comparable law of any jurisdiction).

         "Obligations" means, at any time, whether or not due and payable at
such time, all obligations, liabilities and indebtedness, whether matured or
unmatured, of any Grantor arising out of or evidenced by the Trade Conversion
Agreement, any of the Trade Conversion Notes, the Extended Creditor Payment
Obligation, any Collateral Document or the Collateral Trust Agreement, whether
as principal, interest, or expenses, including, without limitation, the
reasonable fees and disbursements of the Collateral Trustee and the reasonable
disbursements of the Committee payable pursuant to this Security Agreement, and
the reasonable fees and disbursements of the respective counsel to the
Collateral Trustee and the Committee and of the accountants to the Committee,
payable pursuant to the Trade Conversion Agreement, any of the Trade Conversion
Notes, the Collateral Trust Agreement or this Security Agreement.

         "Permitted Encumbrances" means (i) Permitted Liens under and as defined
in the Working Capital Facility, (ii) Liens to secure purchase money
obligations, (iii) Liens to secure additional indebtedness for borrowed money in
a principal amount not to exceed $3,000,000, (iv) Liens granted to secure the
Working Capital Facility, (v) Liens granted under this Security Agreement, and
(vi) Liens that would be prior to the Liens in favor of the Collateral Trustee
as a matter of law.

         "Proceeds" means "proceeds," as such term is defined in the Code,
including (a) any and all proceeds of any insurance, indemnity, warranty or
guaranty payable to any Grantor from time to time with respect to any of the
Collateral, (b) any and all payments (in any form whatsoever) made or due and
payable to any Grantor from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any Governmental Authority (or any Person acting under color of
governmental authority), (c) any claim of any Grantor against third parties for
past, present or future infringement or dilution of any trademark or trademark
license, or for injury to the goodwill associated with any trademark or
trademark license, (d) any recoveries by any Grantor against third parties with
respect to any litigation or dispute concerning any of the Collateral including
claims arising out of the loss or nonconformity of, interference with the use
of, defects in, or infringement of rights in, or damage to, Collateral, (e) all
amounts collected on, or distributed on account of, other Collateral, including
dividends, interest, distributions and Instruments with respect to Investment

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Property, and (f) any and all other amounts, rights to payment or other property
acquired upon the sale, lease, license, exchange or other disposition of
Collateral and all rights arising out of Collateral.

         "Software" means all "software" as such term is defined in the Code,
now owned or hereafter acquired by any Grantor, other than software embedded in
any category of goods, including all computer programs and all supporting
information provided in connection with a transaction related to any program.

         "Supporting Obligations" means all supporting obligations as such term
is defined in the Code, including letters of credit and guaranties issued in
support of Accounts, Chattel Paper, Documents, General Intangibles, Instruments,
or Investment Property.

         "Uniform Commercial Code jurisdiction" means any jurisdiction that has
adopted all or substantially all of Article 9 as contained in the 2000 Official
Text of the Uniform Commercial Code, as recommended by the National Conference
of Commissioners on Uniform State Laws and the American Law Institute, together
with any subsequent amendments or modifications to the Official Text.

2.       GRANT OF LIEN.

         (a) To secure the prompt and complete payment, performance and
observance of all of the Obligations, each Grantor hereby grants, assigns,
conveys, mortgages, pledges, hypothecates and transfers to Collateral Trustee a
Lien upon all of its right, title and interest in, to and under all personal
property, whether now owned by or owing to, or hereafter acquired by or arising
in favor of such Grantor (including under any trade names, styles or derivations
thereof), and whether owned or consigned by or to, or leased from or to, such
Grantor, and regardless of where located (all of which being hereinafter
collectively referred to as the "Collateral"), including:

                  (i)      all Accounts;

                  (ii)     all Chattel Paper;

                  (iii)    all Documents;

                  (iv)     all General Intangibles (including payment
                           intangibles and Software);

                  (v)      all Goods (including Inventory and Equipment);

                  (vi)     all Instruments;

                  (vii)    all Investment Property;

                  (viii)   all money, cash or cash equivalents of any Grantor;

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                  (ix)     all Supporting Obligations and Letter-of-Credit
                           Rights of any Grantor; and

                  (x)      to the extent not otherwise included, all Proceeds,
                           tort claims, insurance claims and other rights to
                           payments not otherwise included in the foregoing and
                           products of the foregoing and all accessions to,
                           substitutions and replacements for, and rents and
                           profits of, each of the foregoing.

         (b) In addition, to secure the prompt and complete payment, performance
and observance of the Obligations and in order to induce the Collateral Trustee
as aforesaid, each Grantor hereby grants to the Collateral Trustee a right of
set-off against the property of such Grantor held by the Collateral Trustee,
consisting of property described above in Section 2(a) now or hereafter in the
possession or custody of or in transit to the Collateral Trustee, for any
purpose, including collection or pledge, for the account of such Grantor, or as
to which such Grantor may have any right or power.

3. THE COLLATERAL TRUSTEE'S RIGHTS; LIMITATIONS ON THE COLLATERAL TRUSTEE'S
OBLIGATIONS.

         (a) It is expressly agreed by Grantors that, anything herein to the
contrary notwithstanding, each Grantor shall remain liable under each of its
contracts and each of its licenses to observe and perform all the conditions and
obligations to be observed and performed by it thereunder. The Collateral
Trustee shall not have any obligation or liability under any contract or license
by reason of or arising out of this Security Agreement or the granting herein of
a Lien thereon or the receipt by the Collateral Trustee of any payment relating
to any contract or license pursuant hereto. The Collateral Trustee shall not be
required or obligated in any manner to perform or fulfill any of the obligations
of any Grantor under or pursuant to any contract or license, or to make any
payment, or to make any inquiry as to the nature or the sufficiency of any
payment received by it or the sufficiency of any performance by any party under
any contract or license, or to present or file any claims, or to take any action
to collect or enforce any performance or the payment of any amounts which may
have been assigned to it or to which it may be entitled at any time or times.

         (b) The Collateral Trustee may at any time after an Event of Default
has occurred and is continuing, without prior notice to any Grantor, notify
Account Debtors that payments shall be made directly to the Collateral Trustee.
At any time after an Event of Default has occurred and is continuing, upon the
request of the Collateral Trustee, each Grantor shall so notify Account Debtors
and other Persons obligated on Collateral. Once any such notice has been given
to any Account Debtor or other Person obligated on the Collateral, the affected
Grantor shall not give any contrary instructions to such Account Debtor or other
Person without the Collateral Trustee's prior written consent.

         (c) The Collateral Trustee may at any time, after an Event of Default
has occurred and is continuing, in the Collateral Trustee's own name, in the
name of a nominee of the Collateral Trustee or in the name of any Grantor

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communicate (by mail, telephone, facsimile or otherwise) with Account Debtors,
parties to contracts and obligors in respect of Instruments to verify with such
Persons, to the Collateral Trustee's satisfaction, the existence, amount terms
of, and any other matter relating to, Accounts, Instruments, Chattel Paper
and/or payment intangibles. If an Event of Default shall have occurred and is
continuing, each Grantor, at its own expense, shall deliver to the Collateral
Trustee the results of each physical verification, if any, which such Grantor
may in its discretion have made, or caused any other Person to have made on its
behalf, of all or any portion of its Inventory.

4. REPRESENTATIONS AND WARRANTIES. Each Grantor represents and warrants to the
Collateral Trustee, as of the Effective Date that:

         (a) Each Grantor has rights in and the power to transfer each item of
the Collateral upon which it purports to grant a Lien hereunder free and clear
of any and all Liens other than Permitted Encumbrances.

         (b) No effective security agreement, financing statement, equivalent
security or Lien instrument or continuation statement covering all or any part
of the Collateral is on file or of record in any public office, except such as
may have been filed (i) by any Grantor in favor of the Collateral Trustee
pursuant to this Security Agreement and (ii) in connection with any other
Permitted Encumbrances.

         (c) This Security Agreement is effective to create a valid and
continuing Lien on and, upon the filing of the appropriate financing statements
listed on Schedule I hereto, a perfected Lien in favor of the Collateral Trustee
in the Collateral with respect to which a Lien may be perfected by filing
pursuant to the Code. Such Lien is prior to all other Liens, except (i)
Permitted Encumbrances, and (ii) as provided in the Intercreditor Agreement, and
is enforceable as such as against any and all creditors of and purchasers from
any Grantor (other than purchasers and lessees of Inventory in the ordinary
course of business). All action by any Grantor necessary or desirable to protect
and perfect such Lien on each item of the Collateral has been duly taken.

         (d) Each Grantor's name as it appears in official filings in the state
of its incorporation, the type of entity of each Grantor, organizational
identification number issued by each Grantor's state of incorporation or a
statement that no such number has been issued, each Grantor's state of
incorporation, the location of each Grantor's chief executive office, principal
place of business, offices, all warehouses and premises where Collateral is
stored or located, and the locations of its books and records concerning the
Collateral are set forth on Schedule II-A and Schedule II-B, respectively,
hereto. Each Grantor has only one state of incorporation or organization.

         (e) With respect to the Accounts, (i) they represent bona fide sales of
Inventory to Account Debtors in the ordinary course of each Grantor's business,
and (ii) to each Grantor's knowledge, there are no facts, events or occurrences
which in any way impair the validity or enforceability thereof or could
reasonably be expected to reduce the amount payable thereunder as shown on any

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Grantor's books and records. Further with respect to such Accounts the amounts
shown on all invoices and statements are actually and absolutely owing to such
Grantor as indicated thereon and are not in any way contingent.

         (f) With respect to Inventory, (i) such Inventory is located at one of
the applicable Grantor's locations set forth on Schedule II-A and Schedule II-B
hereto, as applicable, and (ii) the applicable Grantor has good, indefeasible
and merchantable title to such Inventory and such Inventory is not subject to
any Lien or security interest or document whatsoever except for the Lien granted
to the Collateral Trustee and except for Permitted Encumbrances.

         (g) No Grantor has any interest in, or title to, trademark except as
set forth in Schedule III hereto. This Security Agreement is effective to create
a valid and continuing Lien on, and upon filing of, the Intellectual Property
Security Agreement with the United State Patent and Trademark Office, perfected
Liens in favor of the Collateral Trustee on each Grantor's Trademarks and such
perfected Liens are enforceable as such as against any and all creditors of and
purchasers from any Grantor. Upon filing of the Intellectual Property Security
Agreement with the United State Patent and Trademark Office and the filing of
appropriate financing statements listed on Schedule I hereto, all action
necessary or desirable to protect and perfect the Collateral Trustee's Lien on
each Grantor's Trademarks shall have been duly taken.

5. COVENANTS. Each Grantor covenants and agrees with the Collateral Trustee that
so long as any of the Obligations shall remain outstanding:

(a)      Further Assurances.

         (i)      At any time and from time to time, upon the written request of
                  the Collateral Trustee and at the sole expense of Grantors,
                  each Grantor shall promptly and duly execute and deliver any
                  and all such further instruments and documents and take such
                  further actions as the Collateral Trustee may deem desirable
                  to obtain the full benefits of this Security Agreement and of
                  the rights and powers herein granted.

         (ii)     Each Grantor hereby irrevocably authorizes the Collateral
                  Trustee at any time and from time to time to file in any
                  filing office in any Uniform Commercial Code jurisdiction any
                  initial financing statements and amendments thereto that
                  indicate the Collateral and contain any other information
                  required by part 5 of Article 9 of the Code for the
                  sufficiency or filing office acceptance of any financing
                  statement or amendment. Each Grantor also ratifies its
                  authorization for the Collateral Trustee to have filed in any
                  Uniform Commercial Code jurisdiction any initial financing
                  statements or amendments thereto if filed prior to the date
                  hereof.

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         (b) Maintenance of Records. Grantors shall keep and maintain, at their
own cost and expense, satisfactory and complete records of the Collateral,
including a record of any and all payments received and any and all credits
granted with respect to the Collateral and all other dealings with the
Collateral. Grantors shall mark their books and records pertaining to the
Collateral to evidence this Security Agreement and the Liens granted hereby.

         (c) Covenants Regarding Trademark Collateral. Grantors shall take all
actions necessary to maintain the registration of each of the Trademarks (now or
hereafter existing), including the filing of applications for renewal,
affidavits of use, affidavits of noncontestability and opposition and
interference and cancellation proceedings, unless the applicable Grantor shall
determine that such Trademark is not material to the conduct of its business.

         (d) Indemnification. In any suit, proceeding or action brought by the
Collateral Trustee relating to any Collateral for any sum owing with respect
thereto or to enforce any rights or claims with respect thereto, each Grantor
will save, indemnify and keep the Collateral Trustee harmless from and against
all expense (including reasonable attorneys' fees and expenses), loss or damage
suffered by reason of any defense, setoff, counterclaim, recoupment or reduction
of liability whatsoever of the Account Debtor or other Person obligated on the
Collateral, arising out of a breach by any Grantor of any obligation thereunder
or arising out of any other agreement, indebtedness or liability at any time
owing to, or in favor of, such obligor or its successors from such Grantor,
except to the extent such expense, loss, or damage is attributable solely to the
gross negligence or willful misconduct of the Collateral Trustee as finally
determined by a court of competent jurisdiction. All such obligations of
Grantors shall be and remain enforceable against and only against Grantors and
shall not be enforceable against the Collateral Trustee.

         (e) Compliance with Agreements Relating to Collateral. In all material
respects, each Grantor will perform and comply with all obligations in respect
of the Collateral and all other agreements to which it is a party or by which it
is bound relating to the Collateral.

         (f) Limitation on Liens on Collateral. No Grantor will create, permit
or suffer to exist, and each Grantor will defend the Collateral against, and
take such other action as is necessary to remove, any Lien on the Collateral
except Permitted Encumbrances (which Permitted Encumbrances specified in clauses
(i), (ii), (iii), (iv) and (vi) of the definition of Permitted Encumbrances may
be prior to the Liens granted hereby), and will defend the right, title and
interest of the Collateral Trustee in and to any of such Grantor's rights under
the Collateral against the claims and demands of all Persons whomsoever.

         (g) Further Identification of Collateral. After the occurrence and
during the continuance of an Event of Default, Grantors will, if so requested by
the Collateral Trustee, furnish to the Collateral Trustee such information with

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respect to the Collateral as the Collateral Trustee from time to time may
reasonably request.

         (h) Receipt of Notice of Default Under Working Capital Facility.
Grantors will notify the Collateral Trustee within three (3) Business Days of
receipt of a notice of an Event of Default under and as defined in the Working
Capital Facility.

6. THE COLLATERAL TRUSTEE'S APPOINTMENT AS ATTORNEY-IN-FACT.

         Each Grantor shall execute and deliver to the Collateral Trustee
together with this Security Agreement a power of attorney (the "Power of
Attorney") substantially in the form attached hereto as Exhibit A. The power of
attorney granted pursuant to the Power of Attorney is a power coupled with an
interest and shall be irrevocable until all Obligations are paid and performed
in full. The powers conferred on the Collateral Trustee under the Power of
Attorney are solely to protect the Collateral Trustee's interests in the
Collateral and shall not impose any duty upon the Collateral Trustee to exercise
any such powers. The Collateral Trustee agrees that (a) except for the powers
granted in clause (h) of the Power of Attorney, he shall not exercise any power
or authority granted under the Power of Attorney unless an Event of Default has
occurred and is continuing, and (b) the Collateral Trustee shall account for any
moneys received by the Collateral Trustee in respect of any foreclosure on or
disposition of Collateral pursuant to the Power of Attorney provided that the
Collateral Trustee shall have no duty as to any Collateral, and the Collateral
Trustee shall be accountable only for amounts that it actually receives as a
result of the exercise of such powers. NONE OF THE COLLATERAL TRUSTEE OR HIS
EMPLOYEES, AGENTS OR REPRESENTATIVES SHALL BE RESPONSIBLE TO ANY GRANTOR FOR ANY
ACT OR FAILURE TO ACT UNDER ANY POWER OF ATTORNEY OR OTHERWISE, EXCEPT IN
RESPECT OF DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT AS FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION, NOR FOR
ANY PUNITIVE EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES.

7. REMEDIES; RIGHTS UPON DEFAULT.

         (a) In addition to all other rights and remedies granted to him under
this Security Agreement, the Collateral Trust Agreement, and under any other
instrument or agreement securing, evidencing or relating to any of the
Obligations, if any Event of Default shall have occurred and be continuing, the
Collateral Trustee may exercise all rights and remedies of a secured party under
the Code. Without limiting the generality of the foregoing, each Grantor
expressly agrees that in any such event the Collateral Trustee, without demand
of performance or other demand, advertisement or notice of any kind (except the
notice specified below of time and place of public or private sale) to or upon
such Grantor or any other Person (all and each of which demands, advertisements
and notices are hereby expressly waived to the maximum extent permitted by the

                                       11
<PAGE>

Code and other applicable law), may forthwith enter upon the premises of such
Grantor where any Collateral is located through self-help, without judicial
process, without first obtaining a final judgment or giving such Grantor or any
other Person notice and opportunity for a hearing on the Collateral Trustee's
claim or action and may collect, receive, assemble, process, appropriate and
realize upon the Collateral, or any part thereof, and may forthwith sell, lease,
license, assign, give an option or options to purchase, or sell or otherwise
dispose of and deliver said Collateral (or contract to do so), or any part
thereof, in one or more parcels at a public or private sale or sales, at any
exchange at such prices as it may deem acceptable, for cash or on credit or for
future delivery without assumption of any credit risk. the Collateral Trustee
shall have the right upon any such public sale or sales and, to the extent
permitted by law, upon any such private sale or sales, to purchase the whole or
any part of said Collateral so sold, free of any right or equity of redemption,
which equity of redemption each Grantor hereby releases. Such sales may be
adjourned and continued from time to time with or without notice. The Collateral
Trustee shall have the right to conduct such sales on any Grantor's premises or
elsewhere and shall have the right to use any Grantor's premises without charge
for such time or times as the Collateral Trustee deems necessary or advisable.

         If any Event of Default shall have occurred and be continuing, each
Grantor further agrees, at the Collateral Trustee's request, to assemble the
Collateral and make it available to the Collateral Trustee at a place or places
designated by the Collateral Trustee which are reasonably convenient to the
Collateral Trustee and such Grantor, whether at such Grantor's premises or
elsewhere. Until the Collateral Trustee is able to effect a sale, lease, or
other disposition of Collateral, the Collateral Trustee shall have the right to
hold or use Collateral, or any part thereof, to the extent that he deems
appropriate for the purpose of preserving Collateral or its value or for any
other purpose deemed appropriate by the Collateral Trustee. The Collateral
Trustee shall have no obligation to any Grantor to maintain or preserve the
rights of such Grantor as against third parties with respect to Collateral while
Collateral is in the possession of the Collateral Trustee. The Collateral
Trustee may, if he so elects, seek the appointment of a receiver or keeper to
take possession of Collateral and to enforce any of the Collateral Trustee's
remedies without prior notice or hearing as to such appointment. The Collateral
Trustee shall apply the net proceeds of any such collection, recovery, receipt,
appropriation, realization or sale to the Obligations as provided in the
Collateral Trust Agreement, and only after so paying over such net proceeds, and
after the payment by the Collateral Trustee of any other amount required by any
provision of law, need the Collateral Trustee account for the surplus, if any,
to any Grantor. To the maximum extent permitted by applicable law, each Grantor
waives all claims, damages, and demands against the Collateral Trustee arising
out of the repossession, retention or sale of the Collateral except such as
arise solely out of the gross negligence or willful misconduct of the Collateral
Trustee as finally determined by a court of competent jurisdiction. Each Grantor
agrees that twenty (20) days prior notice by the Collateral Trustee of the time
and place of any public sale or of the time after which a private sale may take
place is reasonable notification of such matters. Grantors shall remain liable
for any deficiency if the proceeds of any sale or disposition of the Collateral

                                       12
<PAGE>

are insufficient to pay all Obligations, including any attorneys' fees and other
expenses incurred by the Collateral Trustee to collect such deficiency.

         (b) Except as otherwise specifically provided herein, each Grantor
hereby waives presentment, demand, protest or any notice (to the maximum extent
permitted by applicable law) of any kind in connection with this Security
Agreement or any Collateral.

         (c) The Collateral Trustee shall not be required to make any demand
upon, or pursue or exhaust any of his rights or remedies against, any Grantor,
any other obligor, guarantor, pledgor or any other Person with respect to the
payment of the Obligations or to pursue or exhaust any of his rights or remedies
with respect to any Collateral therefor or any direct or indirect guarantee
thereof. The Collateral Trustee shall not be required to marshal the Collateral
or to resort to the Collateral in any particular order, and all of his rights
hereunder shall be cumulative. To the extent it may lawfully do so, each Grantor
absolutely and irrevocably waives and relinquishes the benefit and advantage of,
and covenants not to assert against the Collateral Trustee, any valuation, stay,
appraisement, extension, redemption or similar laws and any and all rights or
defenses it may have as a surety now or hereafter existing which, but for this
provision, might be applicable to the sale of any Collateral made under the
judgment, order or decree of any court, or privately under the power of sale
conferred by this Security Agreement, or otherwise.

8. GRANT OF LICENSE TO USE TRADEMARK COLLATERAL. For the purpose of enabling the
Collateral Trustee to exercise rights and remedies under Section 7 hereof
(including, without limiting the terms of Section 7 hereof, in order to take
possession of, hold, preserve, process, assemble, prepare for sale, market for
sale, sell or otherwise dispose of Collateral) at such time as the Collateral
Trustee shall be lawfully entitled to exercise such rights and remedies, each
Grantor hereby grants to the Collateral Trustee, an irrevocable, nonexclusive
license (exercisable without payment of royalty or other compensation to such
Grantor) to use, license or sublicense any Trademark now owned or hereafter
acquired by such Grantor, and wherever the same may be located, and including in
such license access to all media in which any of the licensed items may be
recorded or stored and to all computer software and programs used for the
compilation or printout thereof.

9. LIMITATION ON THE COLLATERAL TRUSTEE'S DUTY IN RESPECT OF COLLATERAL. The
Collateral Trustee shall use reasonable care with respect to the Collateral in
his possession or under his control. The Collateral Trustee shall not have any
other duty as to any Collateral in his possession or control or in the
possession or control of any agent or nominee of the Collateral Trustee, or any
income thereon or as to the preservation of rights against prior parties or any
other rights pertaining thereto.

10. REINSTATEMENT. This Security Agreement shall remain in full force and effect
and continue to be effective should any petition be filed by or against any
Grantor for liquidation or reorganization, should any Grantor become insolvent
or make an assignment for the benefit of any creditor or creditors or should a
receiver or trustee be appointed for all or any significant part of any
Grantor's assets, and shall continue to be effective or be reinstated, as the

                                       13
<PAGE>

case may be, if at any time payment and performance of the Obligations, or any
part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or
must otherwise be restored or returned by any obligee of the Obligations,
whether as a "voidable preference," "fraudulent conveyance," or otherwise, all
as though such payment or performance had not been made. In the event that any
payment, or any part thereof, is rescinded, reduced, restored or returned, the
Obligations shall be reinstated and deemed reduced only by such amount paid and
not so rescinded, reduced, restored or returned.

11. NOTICES. Except as otherwise provided herein, whenever it is provided herein
that any notice, demand, request, consent, approval, declaration or other
communication shall or may be given to or served upon any of the parties by any
other party, or whenever any of the parties desires to give and serve upon any
other party any communication with respect to this Security Agreement, each such
notice, demand, request, consent, approval, declaration or other communication
shall be in writing and shall be given in the manner, and deemed received, as
provided for in the Collateral Trust Agreement.

12. SEVERABILITY. Whenever possible, each provision of this Security Agreement
shall be interpreted in a manner as to be effective and valid under applicable
law, but if any provision of this Security Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Security Agreement. This Security
Agreement is to be read, construed and applied together with the Trade
Conversion Agreement, the Trade Conversion Notes and Collateral Trust Agreement
which, taken together, set forth the complete understanding and agreement of the
Collateral Trustee and Grantors with respect to the matters referred to herein
and therein.

13. NO WAIVER; AMENDMENT; CUMULATIVE REMEDIES. The Collateral Trustee shall not
by any act, delay, omission or otherwise be deemed to have waived any of his
rights or remedies hereunder, and no waiver shall be valid unless in writing,
signed by the Collateral Trustee and then only to the extent therein set forth.
A waiver by the Collateral Trustee of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy which the
Collateral Trustee would otherwise have had on any future occasion. No failure
to exercise nor any delay in exercising on the part of the Collateral Trustee,
any right, power or privilege hereunder, shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or privilege hereunder
preclude any other or future exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies hereunder provided are
cumulative and may be exercised singly or concurrently, and are not exclusive of
any rights and remedies provided by law. None of the terms or provisions of this
Security Agreement may be waived, altered, modified or amended except by an
instrument in writing, duly executed by the Collateral Trustee and Grantors.

                                       14
<PAGE>

14. LIMITATION BY LAW. All rights, remedies and powers provided in this Security
Agreement may be exercised only to the extent that the exercise thereof does not
violate any applicable provision of law, and all the provisions of this Security
Agreement are intended to be subject to all applicable mandatory provisions of
law that may be controlling and to be limited to the extent necessary so that
they shall not render this Security Agreement invalid, unenforceable, in whole
or in part, or not entitled to be recorded, registered or filed under the
provisions of any applicable law.

15. TERMINATION OF THIS SECURITY AGREEMENT. Subject to Section 10 hereof, this
Security Agreement shall terminate upon the payment and performance in full of
the Obligations.

16. SUCCESSORS AND ASSIGNS. This Security Agreement and all obligations of
Grantors hereunder shall be binding upon the successors and assigns of each
Grantor (including any debtor-in-possession on behalf of such Grantor) and
shall, together with the rights and remedies of the Collateral Trustee
hereunder, inure to the benefit of the Collateral Trustee, all future holders of
any instrument evidencing any of the Obligations and their respective successors
and assigns. No sales of participations, other sales, assignments, transfers or
other dispositions of any agreement governing or instrument evidencing the
Obligations or any portion thereof or interest therein shall in any manner
affect the Lien granted to the Collateral Trustee hereunder. No Grantor may
assign, sell, hypothecate or otherwise transfer any interest in or obligation
under this Security Agreement.

17. COUNTERPARTS. This Security Agreement may be authenticated in any number of
separate counterparts, each of which shall collectively and separately
constitute one and the same agreement. This Security Agreement may be
authenticated by manual signature or facsimile, each of which shall be equally
valid.

18. GOVERNING LAW. THIS SECURITY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE
CONFLICT OF LAW PRINCIPLES THEREOF.

19. WAIVER OF JURY TRIAL AND SETOFF; CONSENT TO JURISDICTION. (a) In any
litigation in any court with respect to, in connection with, or arising out of
this Security Agreement, the Collateral, or any instrument or document
evidencing any of the Obligations, or the validity, protection, interpretation,
collection or enforcement hereof or thereof, or any other claim or dispute
howsoever arising, between any Grantor on the one hand and the Collateral
Trustee on the other hand, each Grantor, to the fullest extent it may
effectively do so, (i) waives the right to interpose any setoff, recoupment,
counterclaim or cross-claim in connection with any such litigation, irrespective
of the nature of such setoff, recoupment, counterclaim or cross-claim, unless
such setoff, recoupment, counterclaim or cross-claim could not, by reason of any
applicable Federal or State procedural laws, be interposed, pleaded or alleged
in any other action and (ii) WAIVES TRIAL BY JURY IN CONNECTION WITH ANY SUCH
LITIGATION AND ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION

                                       15
<PAGE>

ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER
THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH GRANTOR AGREES THAT THIS SECTION
19(a) IS A SPECIFIC AND MATERIAL ASPECT OF THIS SECURITY AGREEMENT AND
ACKNOWLEDGES THAT THE COLLATERAL TRUSTEE ON BEHALF OF THE HOLDERS OF THE TRADE
CONVERSION NOTES AND THE HOLDERS OF ALLOWED GENERAL UNSECURED CLAIMS WOULD NOT
ENTER INTO THIS SECURITY AGREEMENT IF THIS SECTION 19(a) WERE NOT PART OF THIS
SECURITY AGREEMENT.

(b) Each Grantor hereby irrevocably consents to the non-exclusive jurisdiction
of the courts of the State of Illinois and of any Federal Court located in the
City of Chicago, County of Cook in connection with any action or proceeding
arising out of or relating to this Security Agreement, the Collateral, or any
instrument or document evidencing any of the Obligations. In any such
litigation, each Grantor waives, to the fullest extent it may effectively do so,
personal service of any summons, complaint or other process and agrees that the
service thereof may be made by certified or registered mail directed to the
Grantor at its address for notice determined in accordance with Section 11
hereof. Each Grantor hereby waives, to the fullest extent it may effectively do
so, the defenses of forum non conveniens and improper venue.

20. SECTION TITLES. The Section titles contained in this Security Agreement are
and shall be without substantive meaning or content of any kind whatsoever and
are not a part of the agreement between the parties hereto.

21. NO STRICT CONSTRUCTION. The parties hereto have participated jointly in the
negotiation and drafting of this Security Agreement. In the event an ambiguity
or question of intent or interpretation arises, this Security Agreement shall be
construed as if drafted jointly by the parties hereto and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Security Agreement.

22. ADVICE OF COUNSEL. Each of the parties represents to each other party hereto
that it has discussed this Security Agreement and, specifically, the provisions
of Section 18 and Section 19, with its counsel.

23. SECURITY AGREEMENT SUBJECT TO INTERCREDITOR AGREEMENT. This Security
Agreement and the rights and remedies of the Collateral Trustee hereunder are
subject to the terms and conditions of the Intercreditor Agreement.

                                       16
<PAGE>

         IN WITNESS WHEREOF, each of the Grantors has caused this Security
Agreement to be executed and delivered by its duly authorized officer as of the
date first set forth above.

                            FACTORY CARD & PARTY OUTLET CORP.
                            (f/k/a Factory Card Outlet Corp.)

                            By:  /s/ James D. Constantine
                                 ----------------------------------------------

                            Title:  Executive Vice President
                                    -------------------------------------------

                            FACTORY CARD OUTLET OF AMERICA LTD.

                            By:  /s/ James D. Constantine
                                 ----------------------------------------------

                            Title:  Executive Vice President
                                    -------------------------------------------

                            /s/ William Kaye
                            ---------------------------------------------------
                            WILLIAM KAYE

                                       17
<PAGE>

                                   SCHEDULE I
                                       TO
                               SECURITY AGREEMENT

                              FILING JURISDICTIONS
                              --------------------

FACTORY CARD & PARTY OUTLET                 FACTORY CARD OUTLET OF
---------------------------                 -----------------------------------
CORP. (f/k/a Factory Card Outlet Corp.)     AMERICA LTD.
---------------------------------------     ------------

Delaware                                    Illinois

<PAGE>

                                  SCHEDULE II-A
                                       TO
                               SECURITY AGREEMENT

                  SCHEDULE OF OFFICES, LOCATIONS OF COLLATERAL
                    AND RECORDS CONCERNING THE COLLATERAL OF
                        FACTORY CARD & PARTY OUTLET CORP.
                        (F/K/A FACTORY CARD OUTLET CORP.)
                        ---------------------------------

1.       Grantor's official name: Factory Card & Party Outlet Corp.

2.       Type of entity: For Profit.

3.       Organizational identification number issued by Grantor's state of
         incorporation or a statement that no such number has been issued: No
         organization identification number has been issued from the state of
         Delaware.

4.       State or Incorporation or Organization of Factory Card & Party Outlet
         Corp. (f/k/a Factory Card Outlet Corp.).: State of Incorporation is
         Delaware.

5.       Chief Executive Office and principal place of business of Factory Card
         & Party Outlet Corp. (f/k/a Factory Card Outlet Corp.).:

Chief Executive Office is:

Factory Card Outlet
2727 Diehl Road
Naperville, IL  60563

6.       Corporate Offices of Factory Card & Party Outlet Corp. (f/k/a Factory
         Card Outlet Corp.).: See #5.

7.       Warehouses: See #5.

8.       Other Premises at which Collateral is Stored or Located: See #5.

9.       Locations of Records Concerning Collateral: See #5.

<PAGE>

                                  SCHEDULE II-B
                                       TO
                               SECURITY AGREEMENT

                  SCHEDULE OF OFFICES, LOCATIONS OF COLLATERAL
                    AND RECORDS CONCERNING THE COLLATERAL OF
                       FACTORY CARD OUTLET OF AMERICA LTD.
                       -----------------------------------

1.       Grantor's official name: Factory Card Outlet of America Ltd.

2.       Type of entity: For Profit.

3.       Organizational identification number issued by Grantor's state of
         incorporation or a statement that no such number has been issued:
         2320-1126

4.       State or Incorporation or Organization of Factory Card Outlet of
         America Ltd: Illinois

5.       Chief Executive Office and principal place of business of Factory Card
         Outlet of America Ltd:

         Chief Executive Office is:

         Factory Card Outlet
         2727 Diehl Road
         Naperville, IL  60563

6.       Corporate Offices of Factory Card Outlet of America Ltd : See #5.

7.       Warehouses: See #5.

8.       Other Premises at which Collateral is Stored or Located: See #5.

9.       Locations of Records Concerning Collateral: See #5.

<PAGE>

                                  SCHEDULE III
                                       TO
                               SECURITY AGREEMENT

                                   TRADEMARKS
                                   ----------

                              Mark                Application/Registration No.
-------------------------------------------------------------------------------
FACTORY CARD OUTLET1                                        2,093,234
PARTY MANIA1                                                1,834,213
PARTY MANIA (AND DESIGN)1                                   1,834,212
FACTORY CARD & PARTY OUTLET1&2                             76/380,142
FACTORY CARD & PARTY OUTLET (AND DESIGN)1&2                76/380,143

KEY:
----

1) The Registrant for these registrations is Factory Card Outlet
of America, Ltd. (an Illinois Corporation) not Factory Card
Outlet Corp.

2) Filed 3/8/2002 with Patent and Trademark Office

<PAGE>

                                    EXHIBIT A

                                POWER OF ATTORNEY

         This Power of Attorney is executed and delivered by
______________________, a __________, corporation ("Grantor") to WILLIAM KAYE
(hereinafter referred to as "Attorney"), as the Collateral Trustee, under a
Collateral Trust Agreement, Trade Conversion Notes and a Security Agreement,
each dated as of April 9, 2002, and other related documents (the "Creditor
Documents"). No person to whom this Power of Attorney is presented, as authority
for Attorney to take any action or actions contemplated hereby, shall be
required to inquire into or seek confirmation from Grantor as to the authority
of Attorney to take any action described below, or as to the existence of or
fulfillment of any condition to this Power of Attorney, which is intended to
grant to Attorney unconditionally the authority to take and perform the actions
contemplated herein, and Grantor irrevocable waives any right to commence any
suit or action, in law or equity, against any person or entity which acts in
reliance upon or acknowledges the authority granted under this Power of
Attorney. The power of attorney granted hereby is coupled with an interest, and
may not be revoked or canceled by Grantor without Attorney's written consent.

         Grantor hereby irrevocably constitutes and appoints Attorney (and all
officers, employees or agents designated by Attorney), with full power of
substitution, as Grantor's true and lawful attorney-in-fact with full
irrevocable power and authority in the place and stead of Grantor and in the
name of Grantor or in its own name, from time to time in Attorney's discretion,
to take any and all appropriate action and to execute and deliver any and all
documents and instruments which may be necessary or desirable to accomplish the
purposes of the Creditor Documents and, without limiting the generality of the
foregoing, Grantor hereby grants to Attorney the power and right, on behalf of
Grantor, without notice to or assent by Grantor, and at any time, to do the
following: (a) change the mailing address of Grantor, open a post office box on
behalf of Grantor, open mail for Grantor, and ask, demand, collect, give
acquittances and receipts for, take possession of, endorse any invoices, freight
or express bills, bills of lading, storage or warehouse receipts, drafts against
debtors, assignments, verifications, and notices in connection with any property
of Grantor; (b) effect any repairs to any asset of Grantor, or continue or
obtain any insurance and pay all or any part of the premiums therefor and costs
thereof, and make, settle and adjust all claims under such policies of
insurance, and make all determinations and decisions with respect to such
policies; (c) pay or discharge any taxes, liens, security interests, or other
encumbrances levied or placed on or threatened against Grantor or its property;
(d) defend any suit, action or proceeding brought against Grantor if Grantor
does not defend such suit, action or proceeding or if Attorney believes that
Grantor is not pursuing such defense in a manner that will maximize the recovery
to Attorney, and settle, compromise or adjust any suit, action, or proceeding
described above and, in connection therewith, give such discharges or releases
as Attorney may deem appropriate; (e) file or prosecute any claim, litigation,
suit or proceeding in any court of competent jurisdiction or before any
arbitrator, or take any other action otherwise deemed appropriate by Attorney

<PAGE>

for the purpose of collecting any and all such moneys due to Grantor whenever
payable and to enforce any other right in respect of Grantor's property; (f)
cause the certified public accountants then engaged by Grantor to prepare and
deliver to Attorney at any time and from time to time, promptly upon Attorney's
request, the following reports: (i) a reconciliation of all accounts, (ii) an
aging of all accounts, (iii) trial balances, (iv) test verifications of such
accounts as Attorney may request, and (v) the results of each physical
verification of inventory; (g) communicate in its own name with any party to any
contract with regard to the assignment of the right, title and interest of such
Grantor in and under any such contracts and other matters relating thereto; (h)
to file such financing statements with respect to the Security Agreement,
without Grantor's signature, or to file a photocopy of the Security Agreement in
substitution for a financing statement, as the Collateral Trustee may deem
appropriate; and (i) execute, in connection with any sale provided for in any
Creditor Document, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral and to otherwise direct
such sale or resale, all as though Attorney were the absolute owner of the
property of Grantor for all purposes, and to do, at Attorney's option and
Grantor's expense, at any time or from time to time, all acts and other things
that Attorney reasonably deems necessary to perfect, preserve, or realize upon
Grantor's property or assets and Attorney's Liens thereon, all as fully and
effectively as Grantor might do. Grantor hereby ratifies, to the extent
permitted by law, all that said Attorney shall lawfully do or cause to be done
by virtue hereof.

         IN WITNESS WHEREOF, this Power of Attorney is executed by Grantor, and
Grantor has caused its seal to be affixed pursuant to the authority of its board
of directors this ______ day of ___________, 2002.

                                    GRANTOR:

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

                                    Title:
                                            -----------------------------------

                                       2
<PAGE>

                            NOTARY PUBLIC CERTIFICATE

         STATE OF                           )
                                            )ss:
         COUNTY OF                          )

         On this _____ day of ______________, 2002 ____________________________,
who is personally known to me appeared before me in his/her capacity as the
______________________ of [Grantor] ("Grantor") and executed on behalf of
Grantor the Power of Attorney in favor of WILLIAM KAYE, as Collateral Trustee,
to which this Certificate is attached.

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

                                       3Exhibit 10.3
                                                                    ------------

                            FACTORY CARD OUTLET CORP.
                            2002 STOCK INCENTIVE PLAN

<PAGE>

                            FACTORY CARD OUTLET CORP.
                            2002 STOCK INCENTIVE PLAN

The Plan. Factory Card Outlet Corp. (the "Company") hereby establishes the
Factory Card Outlet Corp. 2002 Stock Incentive Plan (the "Plan") as set forth in
this document, as it may be amended from time to time. The Options granted to a
Participant pursuant to Section 6 hereof are not intended to be Incentive Stock
Options. The Plan is effective as of the Effective Date.

         Section 1. Purpose. The purposes of the Plan are to encourage employees
of the Company and its Affiliates to acquire a proprietary and vested interest
in the growth and performance of the Company and to increase their incentive to
contribute to the Company's future success and prosperity, thus enhancing the
value of the Company for the benefit of shareholders, and enhancing the ability
of the Company and its Affiliates to attract and retain individuals of
exceptional talent upon whom, in large measure, the sustained progress, growth
and profitability of the Company depends.

         Section 2. Definitions. As used in the Plan, the following terms shall
have the meanings set forth below:

         (a) "Affiliate" shall mean (i) any Person that directly, or through one
or more intermediaries, controls, or is controlled by, or is under common
control with, the Company or (ii) any entity in which the Company has a
significant equity interest, as determined by the Committee.

         (b) "Board" shall mean the Board of Directors of the Company.

         (c) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.

         (d) "Committee" shall mean the Compensation Committee of the Board.

         (e) "Company" shall mean Factory Card Outlet Corp.

         (f) "Effective Date" means [___________,2002], the date this Plan is
adopted by the Board.

         (g) "Employee" shall mean any employee of the Company or of any
Affiliate.

         (h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

         (i) "Fair Market Value" shall mean, with respect to a Share, (i) the
closing price of the Shares on the NASDAQ Stock Market's National Market, or any
other national stock exchange on which the Shares are then traded, or if no such

<PAGE>

reported sale of Shares shall have occurred on such date, on the next preceding
date on which there was such a reported sale; or (ii) if the Shares are not
listed for trading on a national securities exchange or authorized for quotation
on the NASDAQ Stock Market's National Market, the average of the closing bid and
asked prices as reported by the National Association of Securities Dealers
Automated Quotation System or, if no such prices shall have been reported for
such date, on the next preceding date for which such prices were so reported; or
(iii) if the Stock is neither listed on a national securities exchange nor
quoted in the National Market System of the National Association of Securities
Dealers Automated Quotation System on a last sale basis, the amount determined
by the Committee to be the fair market value based upon a good faith attempt to
value the Stock accurately and computed in accordance with applicable
regulations of the Internal Revenue Service.

         (j) "Mature Shares" shall mean Shares to which the holder thereof has
good title, free and clear of all liens and encumbrances, and which such holder
either (i) has held for at least six months or (ii) has purchased on the open
market.

         (k) "Option" shall mean any right granted to a Participant under the
Plan allowing such Participant to purchase Shares at such price or prices and
during such period or periods as the Committee shall determine. The Options
granted to a Participant pursuant to Section 6 hereof are not intended to be
Incentive Stock Options.

         (l) "Option Agreement" shall mean the written agreement, contract, or
other instrument or document by which every Option shall be evidenced.

         (m) "Optionee" shall mean any Participant to whom an Option has been
granted under the Plan.

         (n) "Option Price" shall mean the per share purchase price of Shares
subject to an Option.

         (o) "Participant" shall mean an Employee who is selected by the
Committee to receive an Option under the Plan.

         (p) "Permitted Transferee" shall mean any member of the Immediate
Family of the Participant, any trust of which all of the primary beneficiaries
are the Participant or members of the Immediate Family of a Participant, or any
partnership of which all of the partners are the Participant or members of the
Immediate Family of the Participant. For purposes of this definition, the
"Immediate Family" of the Participant consists of the Participant's spouse,
children, stepchildren, grandchildren, parents, stepparents, siblings,
grandparents, nieces and nephews.

         (q) "Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, or
government or political subdivision thereof.

                                      -2-
<PAGE>

         (r) "Shares" shall mean shares of the common stock of the Company.

         Section 3. Administration.

         (a) General. The Plan shall be administered by the Committee. A
majority of the members of the Committee may determine its actions and fix the
time and place of its meetings. The Committee may appoint agents (who may be
employees of the Company) to assist in the administration of the Plan, and may
authorize such persons to execute agreements or other documents on its behalf.
The Committee may employ such legal counsel, consultants and agents as it may
deem desirable for the administration of the Plan, and may rely upon any opinion
received from any such counsel or consultant and any computation received from
any such consultant or agent. All expenses incurred in the administration of the
Plan, including for the engagement of any counsel, consultant or agent, shall be
paid by the Company. No member of the Committee shall be liable for any action
or determination made with respect to the Plan or any Option.

         (b) Power and Authority of Committee. The Committee shall have full
power and authority, in its sole discretion subject to the provisions of the
Plan, to:

                  (i) determine the Employees of the Company and its Affiliates
         to whom Options may from rime to time be granted hereunder;

                  (ii) determine the type or types of Option to be granted to
         each Participant hereunder;

                  (iii) determine the number of Shares or other amount to be
         covered by each Option granted hereunder, subject to the limitations of
         Section 4;

                  (iv) determine the terms and conditions, not inconsistent with
         the provisions of the Plan, of any Option granted hereunder;

                  (v) determine whether, to what extent and under what
         circumstances Options may be settled in cash, Shares or other property
         or canceled or suspended;

                  (vi) determine whether, to what extent and under what
         circumstances cash, Shares and other property and other amounts payable
         with respect to an Option under this Plan shall be deferred either
         automatically or at the election of the Participant;

                  (vii) determine the existence or nonexistence of any fact or
         status relevant to Options or the rights of Participants thereunder,
         including without limitation whether a Termination of Employment occurs
         by reason of cause, retirement, death or disability;

                  (viii) construe and interpret the Plan, any Option Agreement,
         and any other instrument or agreement entered into under the Plan;

                                      -3-
<PAGE>

                  (ix) adjust performance Option criteria or the terms and
         conditions of other Options in recognition of unusual or nonrecurring
         events affecting the Company or its financial statements or changes in
         applicable laws, regulations or accounting principles;1

                  (x) make such other determinations and waive such requirements
         as may be required or permitted by Sections 6, 7, 8, 9, 10, 11 and 12
         or other provisions of the Plan;

                  (xi) administer the Plan and establish such rules and
         regulations, approve and prescribe such forms, and appoint such agents
         as it shall deem appropriate for the proper administration of the Plan;

                  (xii) correct any defect, supply any omission or reconcile any
         inconsistency in the Plan or any Option in the manner and to the extent
         it shall deem desirable to carry it into effect;

                  (xiii) make any other determination and take any other action
         that the Committee deems necessary or desirable for administration of
         the Plan.

In making such determinations, the Committee may take into consideration the
value of the services rendered by the respective individuals, their present and
potential contributions to the success of the Company and its Affiliates and
such other factors which the Committee may deem relevant in accomplishing the
purposes of the Plan. The Committee's determinations under the Plan need not be
uniform. The Committee may make such determinations selectively among persons
who receive, or are eligible to receive, Options (whether or not such persons
are similarly situated). Decisions of the Committee shall be final, conclusive
and binding upon all Persons, including the Company, any Participant, any
stockholder, and any employee of the Company or of any Affiliate.

         Section 4. Shares Subject to the Plan.

         (a) Aggregate Limit. Subject to adjustment as provided in Section 12(h)
a total of one hundred sixty-six thousand six hundred sixty-seven (166,667)
Shares, approximately ten percent (10%) of the shares of the Company) are
reserved for grant pursuant to Options under the Plan. Any Shares issued
hereunder may consist, in whole or in part, of authorized and unissued Shares or
treasury Shares. Shares shall be charged against the foregoing limit upon the
grant of each Option but if such Shares are thereafter forfeited or such Option
otherwise terminates without the issuance of such Shares or of other
consideration in lieu of such Shares, the Shares so forfeited or related to the
terminated portion of such Option shall be restored to the foregoing limit and
shall again be available for Options under the Plan. If Shares are applied to
pay the Option Price upon exercise of an Option or to pay federal, state and
local taxes upon exercise of an Option or other receipt of payment under an

                                      -4-
<PAGE>

Option, the Shares so applied shall be added to the foregoing limit and shall be
available for Options under the Plan.

         (b) Individual Annual Limits. The maximum number of Shares with respect
to which Options may be granted during a calendar year to any Participant is one
hundred sixty-six thousand six hundred sixty-seven (166,667) Shares.

         Section 5. Eligibility. The Committee may grant Options to any Employee
(excluding any member of the Committee). An Employee may be granted more than
one Option, but only on the terms and subject to the restrictions hereinafter
set forth.

         Section 6. Stock Options.

         (a) Issuance. The Committee may grant Options hereunder to Participants
either alone or in addition to other Options granted under the Plan.

         (b) Option Agreements. Any Option granted to a Participant under the
Plan shall be evidenced by an Option Agreement in such form as the Committee may
from time to time approve. The Committee [may]2 require that any Participant
shall, as consideration for the grant of the Option, agree in writing to remain
in the employ of the Company or of one of Affiliates, at the pleasure of the
Company or of such Affiliate, for at least one (1) year from the date of the
granting of such Option or until earlier termination of the Participant's
employment effected or approved by the Company or by such Affiliate, in which
event if the Participant violates such agreement, any Options still held by such
person at the time of such violation shall automatically terminate. The
Committee may waive this requirement in the case of any Participant. Any Option
shall also be subject to the following terms and conditions and to such
additional terms and conditions, not inconsistent with the provisions of the
Plan, as the Committee shall deem desirable.

         (c) Date of Granting of Options. The date of grant of Options shall be
the date designated by the Committee as the date of grant, provided that in no
event shall the date of grant be earlier than the date on which the Committee
approves the grant.

         (d) Option Price. The Option Price per Share shall be determined by the
Committee in its sole discretion; provided that the Option Price shall not be
less than 100% of the Fair Market Value of a Share on the date of the grant of
the Option. The proceeds received by the Company from the sale of Shares subject
to an Option shall be added to the general funds of the Company and used for its
corporate purposes.

                                      -5-
<PAGE>

         (e) Option Period. The term of each Option shall be fixed by the
Committee in its sole discretion and set forth in the Option Agreement, provided
that the Option shall not be exercisable after the expiration of ten years from
the date the Option was granted.

         (f) Exercisability. Options shall be exercisable either in full or in
installments at such time or times as determined by the Committee at or
subsequent to grant, and set forth in the Option Agreement; provided that the
Committee may in its sole discretion subsequent to grant waive any restriction
on the exercise of an Option.3

         (g) Method of Exercise. An Option shall be exercised by the delivery to
the Company (or an agent of the Company) during the period in which such Option
is exercisable of written notice of exercise in a form acceptable to the
Committee for a specific number of Shares subject to the Option and payment in
full of the Option Price of such specific number of Shares. Payment for the
Shares with respect to which an Option is exercised may be made by any one or
more of the following means:

                  (i) cash, negotiable personal check or electronic funds
         transfer;

                  (ii) the Committee in its sole discretion may permit payment
         through tender of Mature Shares, valued at their Fair Market Value on
         the date of exercise; provided that the Committee may impose whatever
         restrictions it deems necessary or desirable with respect to such
         method of payment;

                  (iii) the Committee in its sole discretion may permit payment
         by submitting acceptable certification to the Committee of the
         ownership of Mature Shares, valued at their Fair Market Value on the
         date of exercise; in which event the Shares issued to the Optionee for
         the portion of any Option so exercised by shall not exceed the number
         of Shares covered by such portion of the Option less the number of
         Shares for which proof of ownership is submitted in full or partial
         payment; or

                  (iv) the Committee in its sole discretion may permit payment
         through the sale of the Shares acquired on exercise of the Option
         through a broker-dealer to whom the Optionee has submitted an
         irrevocable notice of exercise and irrevocable instructions to deliver
         promptly to the Company the amount of sale or loan proceeds sufficient
         to pay for such Shares, together with, if requested by the Committee,
         the amount of federal, state, local or foreign withholding taxes
         payable by Optionee by reason of such exercise.

         (h) Form of Settlement. In its sole discretion, the Committee may
provide, at the time of grant, that the Shares to be issued upon an Option's
exercise shall be in the form of Restricted Stock or other similar securities,
or may reserve the right so to provide after the time of grant.

                                      -6-
<PAGE>

         (i) Discretionary Share Withholding. The Committee in its sole
discretion may provide that when taxes are to be withheld in connection with any
Option (the date on which such exercise occurs or such restrictions lapse
hereinafter referred to as the "Tax Date"), the Optionee may elect to make
payment for the withholding of federal, state and local taxes, including Social
Security and Medicare ("FICA") taxes, up to the Optionee's marginal tax rate, by
one or both of the following methods:

                  (i) delivering part or all of the payment in previously-owned
         Mature Shares (which shall be valued at their Fair Market Value on the
         Tax Date);

                  (ii) requesting the Company to withhold from those Shares that
         would otherwise be received upon exercise of the Option, a number of
         Shares having a Fair Market Value on the Tax Date equal to the amount
         to be withheld.

The Committee in its sole discretion may provide that the amount of tax
withholding to be satisfied by withholding Shares from the Option exercise shall
be the minimum amount of taxes, including FICA taxes, required to be withheld
under federal, state and local law, or shall be the entire amount of taxes,
including FICA taxes, required to be paid by Optionee under federal, stare and
local law. An election by Optionee under this subsection is irrevocable. Any
fractional share amount and any additional withholding not paid by the
withholding or surrender of Shares must be paid in cash. If no timely election
is made, cash must be delivered to satisfy all tax withholding requirements.

         Section 7. Termination of Employment. Except as otherwise provided in
this Section or the applicable Option Agreement, all Options not vested shall
terminate upon a Participant's Termination of Employment. For purposes of this
Section, a Participant's Termination of Employment occurs on the last day on
which the Participant performs services for the Company or an Affiliate as an
employee; or if earlier on the date on which an Affiliate which employs the
Participant ceases to be an Affiliate (unless the Participant continues to be
employed by the Company or an Affiliate which continues to be an Affiliate).

         (a) Except as otherwise provided in this Section, upon a Participant's
Termination of Employment, all Options not vested and exercisable immediately
before such Termination of Employment shall terminate and no Option may be
exercised after such Termination of Employment.

         (b) If Termination of Employment occurs for a reason other than
retirement, death, disability or cause, Options which were vested and
exercisable immediately before such Termination of Employment shall remain
exercisable for a period of 90 days following such Termination of Employment
(but not for more than ten years from the grant date of the Option) and shall
then terminate.

         (c) If Termination of Employment occurs by reason of retirement, death
or disability, Options which were vested and exercisable immediately before such

                                      -7-
<PAGE>

Termination of Employment shall remain exercisable for a period of one year
following such Termination of Employment (but not for more than ten years from
the grant date of the Option) and shall then terminate.

         (d) Waiver by Committee. Notwithstanding the foregoing provisions of
this Section, the Committee may in its sole discretion as to all or part of any
Option as to any Participant, at the time the Option is granted or thereafter,
determine that Options shall become exercisable or vested upon a Termination of
Employment, determine that Options shall continue to become exercisable or
vested in full or in installments after Termination of Employment, extend the
period for exercise of Options (but not beyond ten years from the date of grant
of the Option), or provide that any Performance Option shall in whole or in part
not be forfeited upon such Termination of Employment.

         Section 8. Transferability of Options.

         (a) No Option shall be transferable by the Participant otherwise than
upon death by will or under the applicable laws of descent and distribution;
except that a Participant may, by written instrument in a manner specified by
the Committee in the Option Agreement or thereafter, designate in writing a
beneficiary to exercise an Option or otherwise receive payment under any Option
after the death of the Participant. The Committee in its sole discretion may
authorize the transfer of a Nonstatutory Stock Option for no consideration to a
Permitted Transferee.

         (b) Following the transfer of an Option to a Permitted Transferee, the
Permitted Transferee shall have all of the rights and obligations of the
Participant to whom the Option was granted and such Participant shall not retain
any rights with respect to the transferred Option, except that (i) the payment
of any tax attributable to the exercise of the Option shall remain the
obligation of the Participant, and (ii) the period during which the Option shall
become exercisable or remain exercisable under this Section 8 shall depend on
the employment status of the original Optionee.

         (c) If for any reason an Option is exercised by a person other than the
original Participant, or payment or distribution under any other Option is to be
made to a person other than the original Participant, the person exercising or
receiving payment or distribution under such Option shall, as a condition to
such exercise or receipt, supply the Committee with such evidence as the
Committee may reasonably require to establish the identity of such person and
such person's right to exercise or receive payment or distribution under such
Option.

         (d) No Option shall be assigned, negotiated or pledged in any way
(whether by operation of law or otherwise) except as permitted by Section 8(a),
and no Option shall be subject to execution, attachment or similar process.

                                      -8-
<PAGE>

         Section 9. Change in Control.

         (a) In order to maintain the Participants' rights in the event of any
Change in Control of the Company, as hereinafter defined, the Committee, as
constituted before such Change in Control, may, in its sole discretion, as to
any Option, either at the time an Option is made hereunder or any time
thereafter, take any one or more of the following actions: (i) provide for the
acceleration of any time periods relating to the exercise or realization of any
such Option so that such Option may be exercised or realized in full on or
before a date fixed by the Committee; (ii) provide for the purchase of any such
Option with or without the Participant's consent for an amount of cash equal to
the amount that could have been attained upon the exercise of such Option or
realization of the Participant's rights had such Option been currently
exercisable or payable or exercisable or payable during a stipulated period
prior to the Change of Control; (iii) make such adjustment to any such Option
then outstanding as the Committee deems appropriate to reflect such Change in
Control; or (iv) cause any such Option then outstanding to be assumed, or new
rights substituted therefor, by the acquiring or surviving corporation after
such Change in Control. The Committee may, in its discretion, include such
further provisions and limitations respecting a Change in Control in any Option
Agreement as it may deem equitable and in the best interests of the Company.

         (b) A "Change in Control" shall be deemed to have occurred if:

                  (i) for any reason at any time less than seventy-five percent
         (75%) of the members of the Board shall be individuals who fall into
         any of the following categories: (A) individuals who were members of
         the Board on the Effective Date; or (B) individuals whose election, or
         nomination for election by the Company's stockholders (other than an
         election or nomination of an individual (an "Excluded Individual")
         whose initial assumption of office is in connection with an actual or
         threatened "election contest" relating to the election of the directors
         of the Company (as such term is used in Rule 14a-11 under the Exchange
         Act), a "tender officer" (as such term is used in Section 14(d) of the
         Exchange Act) or a proposed transaction described in (iii) below) was
         approved by a vote of at least seventy-five percent (75%) of the
         members of the Board then still in office who were members of the Board
         on the Effective Date; or (C) individuals (other than Excluded
         Individuals) whose election, or nomination for election, by the
         Company's stockholders, was approved by a vote of at least seventy-five
         percent (75%) of the members of the Board then still in office who were
         elected in the manner described in (A) or (B) above; or

                  (ii) any "person" (as such term is used in Sections 13(d) and
         14(d)(2) of the Exchange Act) or "group" (as such term is defined in
         Sections 3(a)(9) and 13(d)(3) of the Exchange Act) shall have become
         after the Effective Date, according to a public announcement or filing,
         the "beneficial owner (as defined in Rule 13d-3 under the Exchange
         Act), directly or indirectly, of securities of the Company representing
         thirty percent (30%) or more (calculated in accordance with Rule 13d-3)

                                      -9-
<PAGE>

         of the combined voting power of the Company's then outstanding voting
         securities; or

                  (iii) the stockholders of the Company shall have approved a
         merger, consolidation or dissolution of the Company, or a sale, lease,
         exchange or disposition of all or substantially all of the Company's
         assets, if persons who were the beneficial owners of the combined
         voting power of the Company's voting Securities immediately before any
         such merger, consolidation, dissolution, sale, lease, exchange or
         disposition do not immediately thereafter beneficially own, directly or
         indirectly, in substantially the same proportions, more than 60% of the
         combined voting power of the corporation resulting from any such
         transaction.

         (c) Notwithstanding any other provision of the Plan to the contrary,
(i) in the event that the consummation of a Change in Control is contingent on
using pooling of interests accounting methodology, the Committee may take any
action necessary to preserve the use of pooling of interests accounting; and
(ii) if the Committee determines, in its discretion exercised prior to a sale or
merger of the Company (whether or not in connection with a Change in Control)
that in the Committee's judgment is reasonably likely to occur, that the
exercise of Options would preclude the use of pooling-of-interests accounting
("pooling") after the consummation of such sale or merger and that such
preclusion of pooling would have a material adverse effect on such sale or
merger, the Committee may (A) unilaterally cancel such Options prior to the sale
or merger in consideration for reasonably equivalent value, (B) cause the
Company to pay the benefit attributable to such Options in the form of Shares if
the Committee determines that such payment would not cause the transaction to
become ineligible for pooling, (C) defer the payment, distribution or exercise
date of any Option, or (D) substitute another form of Option of reasonably
equivalent value; in each case to the extent that the Committee determines that
such cancellation, payment, deferral or substitution would not cause the
transaction to become ineligible for pooling; and only in each case to the
minimum extent reasonably necessary to cause the transaction to become eligible
for pooling.

         Section 10. Amendments and Termination.

         (a) The Board may amend, alter or discontinue the Plan, but no
amendment, alteration, or discontinuation shall be made that would impair the
rights of a Participant under an Option theretofore granted without the
Participant's consent except as required to comply with securities, tax or other
laws.

         (b) The Committee may amend the terms of any Option theretofore
granted, prospectively or retroactively, but no such amendment shall adversely
affect the rights of any Participant without the Participant's consent, except
as provided in subsection 9(c) or subsection 11(h) or except as required to
comply with securities, tax or other laws. The Committee may also substitute new
Options for Options previously granted to Participants, including without
limitation previously granted Options having higher Option prices.

                                      -10-
<PAGE>

         Section 11. General Provisions.

         (a) The term of each Option shall be for such period of months or years
from the date of its grant as may be determined by the Committee; provided that
in no event shall the term of any Option exceed a period of ten (10) years from
the date of its grant.

         (b) No Employee or Participant shall have any claim to be granted any
Option under the Plan and there is no obligation for uniformity of treatment of
Employees or Participants under the Plan.

         (c) The prospective recipient of any Option under the Plan shall not,
with respect to such Option, be deemed to have become a Participant, or to have
any rights with respect to such Option, until and unless the Committee shall
have executed an Option Agreement evidencing the Option and delivered a fully
executed copy thereof to the Participant.

         (d) Nothing contained in the Plan or in any Option Agreement shall
confer upon any Participant any right with respect to continuance of employment
by the Company or its Affiliates, nor interfere in any way with the right of the
Company or its Affiliates to terminate the Participant's employment or change
the Participant's compensation at any time.

         (e) All certificates for Shares delivered under the Plan pursuant to
any Option shall be subject to such stock-transfer orders and other restrictions
as the Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Shares are then listed, and any applicable Federal or state securities
law, and the Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.

         (f) Receipt of an Option shall not entitle any Participant (or
Permitted Transferee) to any rights as a shareholder of the Company unless and
until such Option has been exercised.

         (g) Except as otherwise required in any applicable Option Agreement or
by the terms of the Plan, recipients of Options under the Plan shall not be
required to make any payment or provide consideration other than the rendering
of services.

         (h) In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, spin-off or other change in
corporate structure affecting the Shares, such adjustment shall be made in the
aggregate number and class of Shares which may be delivered under the Plan, in
the number, class and option price of Shares subject to outstanding Options
granted under the Plan, and in the value of, or number or class of Shares
subject to, Options granted under the Plan as may be determined to be
appropriate by the Committee, in its sole discretion, provided that the number
of Shares subject to any Option shall always be a whole number. The grant of

                                      -11-
<PAGE>

Options stock pursuant to the Plan shall not affect in any way the right or
power of the Company to make adjustments, reclassifications, reorganizations or
changes in its capital or business structure or to merge or to consolidate or to
dissolve, liquidate, or sell or transfer all or any part of its business or
assets.

         (i) The Company shall be authorized to withhold from any Option granted
or payment due under the Plan or any other amount owing from the Company to the
Participant (whether or not for payment of compensation) the amount of
withholding taxes due with respect to an Option or payment hereunder and to take
such other action as may be necessary in the opinion of the Company to satisfy
all obligations for the payment of such taxes. The Company shall also be
authorized to accept the delivery of shares by a Participant in payment for the
withholding of federal, state and local taxes up to the Participant's marginal
tax rates.

         (j) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements.

         (k) The validity, construction, and effect of the Plan and any rules
and regulations relating to the Plan shall be determined in accordance with the
laws of the State of Delaware and applicable Federal law.

         (l) If any provision of this Plan is or becomes or is deemed invalid,
illegal or unenforceable in any jurisdiction, or would disqualify the Plan or
any Option under any law deemed applicable by the Committee, such provision
shall be construed or deemed amended to conform to applicable laws or if it
cannot be construed or deemed amended without, in the determination of the
Committee, materially altering the intent of the Plan, it shall be stricken and
the remainder of the Plan shall remain in full force and effect.

         (m) All obligations of the Company under the Plan with respect to
Options granted hereunder shall be binding on any successor to the Company.
Successor is the result of a direct or indirect merger, consolidation, or
otherwise of all the business of the Company.

         (n) The adoption of this Plan shall not be construed to amend or
terminate any of the Company's other equity incentive plans or any outstanding
option or other Option thereunder; and the aggregate number of Shares available
under Section 4 of the Plan shall not be increased or reduced by Shares
available under any such plan as of the Effective Date.

            [THE REMAINDER OF THIS PAGE IS LEFT INTNETIONALLY BLANK]

                                      -12-
<PAGE>

Section 12. Term of Plan. No Option or other award shall be granted pursuant to
the Plan after 10 years from the Effective Date, but any Option theretofore
granted may extend beyond that date.

         This Plan is adopted this ___ day of __________________, 2002. In
witness whereof, the Company has caused this Plan to be executed by a duly
authorized officer.

                                     FACTORY CARD OUTLET CORP.

                                     By:  ________________________________

                                     Its:  ________________________________

                                      -13-

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