<PAGE>

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

              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES AND EXCHANGE ACT OF 1934

                  For the quarterly period ended June 28, 1998

                                       OR

             [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES AND EXCHANGE ACT OF 1934

                 For the transition period from         to

                           Commission File No. 0-3930
                         FRIENDLY ICE CREAM CORPORATION
             (Exact name of registrant as specified in its charter)

Massachusetts                      5812                       04-2053130
 (State of            (Primary Standard Industrial         (I.R.S. Employer
Incorporation)         Classification Code Number)        Identification No.)

                                1855 Boston Road
                         Wilbraham, Massachusetts 01095
                                 (413) 543-2400

          (Address, including zip code, and telephone number, including
             area code, of registrant's principal executive offices)

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

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.



<TABLE>
<CAPTION>

           Class                         Outstanding at August 11, 1998
           -----                         ------------------------------

<S>                                          <C>             
Common Stock, $.01 par value                 7,454,600 shares

</TABLE>


<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

                 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (In thousands)

<TABLE>
<CAPTION>

                                                                       December 28,     June 28,
                                                                          1997            1998
                                                                       ------------  -------------
                                         ASSETS                                       (unaudited)
<S>                                                                    <C>           <C>      
CURRENT ASSETS:
    Cash and cash equivalents                                          $  15,132     $  15,380
    Restricted cash                                                        1,333         1,514
    Trade accounts receivable                                              8,922         8,172
    Inventories                                                           15,671        19,919
    Deferred income taxes                                                  8,831         8,831
    Prepaid expenses and other current assets                              6,400         8,083
                                                                       ---------     ---------
TOTAL CURRENT ASSETS                                                      56,289        61,899

INVESTMENT IN JOINT VENTURE                                                2,970         2,300
PROPERTY AND EQUIPMENT, net                                              283,944       300,763
INTANGIBLES AND DEFERRED COSTS, net                                       25,994        25,103
OTHER ASSETS                                                               2,674         1,223
                                                                       ---------     ---------
TOTAL ASSETS                                                           $ 371,871     $ 391,288
                                                                       ---------     ---------
                                                                       ---------     ---------

                     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
    Current maturities of long-term debt                               $   2,875     $   1,547
    Current maturities of capital lease and finance obligations            1,577         1,801
    Accounts payable                                                      23,951        34,989
    Accrued salaries and benefits                                         13,804        15,549
    Accrued interest payable                                               2,607         2,607
    Insurance reserves                                                     7,248         6,249
    Other accrued expenses                                                20,018        14,706
                                                                       ---------     ---------
TOTAL CURRENT LIABILITIES                                                 72,080        77,448
                                                                       ---------     ---------

DEFERRED INCOME TAXES                                                     42,393        41,764
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities            11,341        10,915
LONG-TERM DEBT, less current maturities                                  299,084       315,739
OTHER LONG-TERM LIABILITIES                                               33,334        32,445

STOCKHOLDERS' EQUITY (DEFICIT):
    Common stock                                                              74            75
    Preferred stock                                                           --            --
    Additional paid-in capital                                           137,175       137,529
    Accumulated deficit                                                 (223,668)     (224,695)
    Cumulative translation adjustment                                         58            68
                                                                       ---------     ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                                     (86,361)      (87,023)
                                                                       ---------     ---------


TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                   $ 371,871     $ 391,288
                                                                       ---------     ---------
                                                                       ---------     ---------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

                                       1

<PAGE>


                 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (Unaudited)
                      (In thousands, except per share data)


<TABLE>
<CAPTION>

                                                                   For the Three Months Ended     For the Six Months Ended
                                                                   --------------------------     ------------------------
                                                                   June 29,         June 28,      June 29,      June 28,
                                                                     1997             1998          1997          1998
                                                                   ---------        ---------     ---------     ---------
       
<S>                                                                <C>              <C>           <C>           <C>      
REVENUES                                                           $ 178,819        $ 178,746     $ 322,828     $ 330,420
       
COSTS AND EXPENSES:       
    Cost of sales                                                     50,660           52,765        92,186        99,006
    Labor and benefits                                                55,372           53,635       104,898       103,887
    Operating expenses                                                39,518           40,298        71,408        73,987
    General and administrative expenses                               11,085           10,630        22,471        22,050
    Stock compensation expense                                          --                129          --             354
    Write-down of property and equipment                                 347               68           347           168
    Depreciation and amortization                                      8,330            8,129        16,401        16,085
                                                                   ---------        ---------     ---------     ---------
       
OPERATING INCOME                                                      13,507           13,092        15,117        14,883
       
Interest expense                                                      11,162            7,986        22,238        15,869
Equity in net loss of joint venture                                      743              354           743           670
                                                                   ---------        ---------     ---------     ---------
       
INCOME (LOSS) BEFORE (PROVISION FOR)      
BENEFIT FROM INCOME TAXES AND CUMULATIVE       
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                               1,602            4,752        (7,864)       (1,656)
       
       
(Provision for) benefit from income taxes                               (657)          (1,806)        3,224           629
                                                                   ---------        ---------     ---------     ---------
       
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN      
ACCOUNTING PRINCIPLE                                                     945            2,946        (4,640)       (1,027)

Cumulative effect of change in accounting principle, net of      
income tax expense of $1,554                                            --               --           2,236           --
                                                                   ---------        ---------     ---------     ---------
NET INCOME (LOSS)                                                  $     945        $   2,946     $  (2,404)    $  (1,027)
                                                                   ---------        ---------     ---------     ---------
                                                                   ---------        ---------     ---------     ---------
       
BASIC NET INCOME (LOSS) PER SHARE:       
    Income (loss) before cumulative effect of change in      
    accounting principle                                           $     .38        $     .40     $   (1.88)    $    (.14)
    Cumulative effect of change in accounting principle, net of      
    income tax expense                                                  --               --             .91          --
                                                                   ---------        ---------     ---------     ---------
    Net income (loss)                                              $     .38        $     .40     $    (.97)    $    (.14)
                                                                   ---------        ---------     ---------     ---------
                                                                   ---------        ---------     ---------     ---------
       
DILUTED NET INCOME (LOSS) PER SHARE:      
    Income (loss) before cumulative effect of change in      
    accounting principle                                           $     .38        $     .39     $   (1.88)    $    (.14)
    Cumulative effect of change in accounting principle, net of      
    income tax expense                                                  --                              .91
                                                                   ---------        ---------     ---------     ---------
    Net income (loss)                                              $     .38        $     .39     $    (.97)    $    (.14)
                                                                   ---------        ---------     ---------     ---------
                                                                   ---------        ---------     ---------     ---------
       
WEIGHTED AVERAGE SHARES:       
       
    Basic                                                              2,473            7,450         2,473         7,447
                                                                   ---------        ---------     ---------     ---------
                                                                   ---------        ---------     ---------     ---------
    Diluted                                                            2,473            7,486         2,473         7,447
                                                                   ---------        ---------     ---------     ---------
                                                                   ---------        ---------     ---------     ---------
</TABLE>


The accompanying notes are an integral part of these condensed consolidated
financial statements.


                                       2

<PAGE>


                         FRIENDLY ICE CREAM CORPORATION

                 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
                         STOCKHOLDERS' EQUITY (DEFICIT)

                                   (Unaudited)

                          (Dollar amounts in thousands)

<TABLE>
<CAPTION>


                                                            
                                   Common Stock             Additional                        Cumulative  
                           ----------------------------      Paid-in          Accumulated     Translation 
                           Shares              Amount        Capital            Deficit       Adjustment       Total
                           ------             ---------      ------             -------       ----------      -------
<S>                         <C>                <C>           <C>               <C>                  <C>       <C>      
Balance,
December 28, 1997           7,441,290          $74           $137,175          $(223,668)          $58        $(86,361)

Net loss                                                                          (1,027)                       (1,027)

Restricted stock
compensation expense
related to new shares
issued                        13,310            1                 15                                                16

Restricted stock
compensation expense
related to original
shares issued                                                    339                                               339

Translation adjustment                                                                              10              10
                            ---------          ----          --------          ---------           ----       -------- 


Balance,
June 28, 1998               7,454,600          $ 75          $137,529          $(224,695)           $68       $(87,023)
                            ---------          ----          --------          ---------           ----       -------- 
                            ---------          ----          --------          ---------           ----       -------- 

</TABLE>



The accompanying notes are an integral part of these condensed consolidated
financial statements.


                                       3

<PAGE>



                 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (Unaudited)

                                 (In thousands)

<TABLE>
<CAPTION>

                                                                                                          For the Six Months Ended
                                                                                                          ------------------------
                                                                                                           June 29,      June 28,
                                                                                                             1997          1998
                                                                                                           --------      --------
<S>                                                                                                        <C>          <C>     
     CASH FLOWS FROM OPERATING ACTIVITIES:
         Net loss                                                                                          $ (2,404)    $ (1,027)
                                                                                                                        
         Adjustments to reconcile net loss to net cash provided by operating
         activities:
            Cumulative effect of change in accounting principle                                              (2,236)        --
            Stock compensation expense                                                                         --            354
            Depreciation and amortization                                                                    16,401       16,085
            Write-down of property and equipment                                                                347          168
            Deferred income tax benefit                                                                      (3,224)        (629)
            Loss on asset retirements                                                                           777        1,091
            Equity in net loss of joint venture                                                                 743          670
            Changes in operating assets and liabilities:
               Trade accounts receivable                                                                     (1,015)         750
               Inventories                                                                                   (2,345)      (4,248)
               Other assets                                                                                  (3,199)        (543)
               Accounts payable                                                                               5,499       11,038
               Accrued expenses and other long-term liabilities                                                 281       (5,455)
                                                                                                           --------     --------
     NET CASH PROVIDED BY OPERATING ACTIVITIES                                                                9,625       18,254
                                                                                                           --------     --------

     CASH FLOWS FROM INVESTING ACTIVITIES:
         Purchases of property and equipment                                                                 (8,810)     (33,936)
         Proceeds from sales of property and equipment                                                          919        1,402
         Proceeds from sales and maturities of investment securities                                             73         --
         Cash acquired from Restaurant Insurance Corporation, net of cash paid                                  965         --
         Advances to joint venture                                                                           (1,400)        --
                                                                                                           --------     --------
     NET CASH USED IN INVESTING ACTIVITIES                                                                   (8,253)     (32,534)
                                                                                                           --------     --------

     CASH FLOWS FROM FINANCING ACTIVITIES:
         Proceeds from borrowings                                                                            29,191       39,258
         Repayments of debt                                                                                 (28,893)     (23,931)
         Repayments of capital lease and finance obligations                                                 (3,395)        (810)
                                                                                                           --------     --------
     NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                                                     (3,097)      14,517
                                                                                                           --------     --------

     EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                                     (2)          11
                                                                                                           --------     --------
                                                                                                                             
     NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                    (1,727)         248

     CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                          18,626       15,132
                                                                                                           --------     --------

     CASH AND CASH EQUIVALENTS, END OF PERIOD                                                              $ 16,899     $ 15,380
                                                                                                           --------     --------
                                                                                                           --------     --------


     SUPPLEMENTAL DISCLOSURES:
         Interest paid                                                                                     $ 20,063     $ 15,334
         Income taxes paid                                                                                     --            374
         Capital lease obligations incurred                                                                   2,057          608
         Issuance  of  note  payable  in  connection  with  the  acquisition  of  Restaurant  Insurance       
         Corporation                                                                                          1,000         --

</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.


                                       4

<PAGE>


                 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

1.  BASIS OF PRESENTATION

         Interim Financial Information -

         The accompanying financial statements as of June 28, 1998 and for the
periods ended June 29, 1997 and June 28, 1998 are unaudited, but, in the opinion
of management, include all adjustments which are necessary for a fair
presentation of the financial position and the results of operations and cash
flows of Friendly Ice Cream Corporation and subsidiaries (the Company). Such
adjustments consist solely of normal recurring accruals. Operating results for
the three and six month periods ended June 29, 1997 and June 28, 1998 are not
necessarily indicative of the results that may be expected for the entire year
due, in part, to the seasonality of the business. Historically, higher revenues
and profits are experienced during the second and third fiscal quarters. The
Company's Consolidated Financial Statements, including the notes thereto, which
are contained in the 1997 Annual Report on Form 10-K should be read in
conjunction with these Condensed Consolidated Financial Statements.

         Inventories -

         Inventories are stated at the lower of first-in, first-out cost or
market. Inventories at December 28, 1997 and June 28, 1998 were (in thousands):

<TABLE>
<CAPTION>

                                          December 28,              June 28,
                                              1997                    1998
                                           ---------               ---------
<S>                                        <C>                     <C>    
 Raw materials                               $ 2,011                 $ 3,069
 Goods in process                                136                     146
 Finished goods                               13,524                  16,704
                                           ---------               ---------
 Total                                       $15,671                 $19,919
                                           ---------               ---------
                                           ---------               ---------
</TABLE>


2.  STOCK COMPENSATION EXPENSE

         In connection with the Company's recapitalization in November 1997,
312,575 shares of common stock were issued to certain directors and employees
under the Company's restricted stock plan. In 1998, the Company issued an
additional 13,310 shares under the restricted stock plan. The shares vest at
12.5% per year with accelerated vesting of an additional 12.5% per year if
certain performance criteria are met. During the three months and six months
ended June 28, 1998, the Company recorded stock compensation expense of
approximately $129,000 and $354,000, respectively, related to such stock
issuances. The Company is recognizing compensation cost over the estimated
vesting period. There was no stock compensation expense for the same periods of
1997.

3.  EARNINGS PER SHARE

         In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share", which established new standards for computing and presenting
earnings per share. Additionally, on February 4, 1998, the Securities and
Exchange Commission released Staff Accounting Bulletin ("SAB") No. 98 on
computations of earnings per share, which changed the guidance on how common
stock transactions prior to or in connection with an initial public offering are
treated in earnings per share computations. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 and SAB
No. 98 was effective on February 4, 1998. Accordingly, all period earnings per
share data presented have been restated and all earnings per share data
presented are in accordance with SFAS No. 128 and SAB No.
98.

         Basic earnings per share is calculated by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated by dividing income
available to common stockholders by the weighted average number of shares of
common stock and common stock equivalents outstanding during the period. Common
stock equivalents are dilutive stock options that are assumed exercised for
calculation purposes.


                                       5


<PAGE>


         Presented below is the reconciliation between basic earnings per share
and diluted earnings per share for the three months and six months ended June
29, 1997 and June 28, 1998 (in thousands, except per share data).

<TABLE>
<CAPTION>

                                       For the Three Months Ended                       
                                       --------------------------
                                   Basic                       Diluted                  
                                   -----                       -------
                             June 29, 1997  June 28,1998   June 29,1997  June 28, 1998  
                             -------------  ------------  -------------  -------------

<S>                               <C>           <C>           <C>           <C>  
Net income (loss)
applicable to common
stock                            $  945        $2,946        $  945        $2,946
                                 ------        ------        ------        ------
                                 ------        ------        ------        ------
Average number of
common shares
outstanding during
the period                        2,473         7,450         2,473         7,450

Adjustments:
Exercise of stock options          --            --            --              36
                                 ------        ------        ------        ------

Average number of
shares outstanding                2,473         7,450         2,473         7,486
                                 ------        ------        ------        ------
                                 ------        ------        ------        ------
Net income (loss)
per common share                 $  .38        $  .40        $  .38        $  .39
                                 ------        ------        ------        ------
                                 ------        ------        ------        ------

</TABLE>

<TABLE>
<CAPTION>


                                             For the Six Months Ended
                                             ------------------------
                                         Basic                       Diluted
                                         -----                       -------
                            June 29, 1997  June 28, 1998 June 29, 1997  June 28, 1998
                            -------------  ------------  -------------  -------------

<S>                            <C>           <C>           <C>           <C>     
Net income (loss)
applicable to common
stock                          $(2,404)      $(1,027)      $(2,404)      $(1,027)
                               -------       -------       -------       ------- 
                               -------       -------       -------       ------- 
Average number of
common shares
outstanding during
the period                       2,473         7,447         2,473         7,447

Adjustments:
Exercise of stock options         --            --            --            --
                               -------       -------       -------       ------- 

Average number of
shares outstanding               2,473         7,447         2,473         7,447
                               -------       -------       -------       ------- 
                               -------       -------       -------       ------- 

Net income (loss)
per common share               $  (.97)      $  (.14)      $  (.97)      $  (.14)
                               -------       -------       -------       ------- 
                               -------       -------       -------       ------- 
</TABLE>



4.  RESTAURANT PREOPENING COSTS

         In 1998, the American Institute of Certified Public Accountants 
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs 
of Start-Up Activities". The SOP requires entities to expense as incurred all 
start-up and preopening costs that are not otherwise capitalizable as 
long-lived assets and is effective for fiscal years beginning after December 
15, 1998 with earlier application encouraged.

         Consistent with the practice of many restaurant entities, the Company
defers its restaurant preopening costs and amortizes them over the twelve-month
period following the opening of each respective restaurant beginning in the
first full month of operation. At December 28, 1997 and June 28, 1998, deferred
preopening costs were approximately $363,000 and $321,000, respectively. The
Company will implement the new policy as of the beginning of 1999. The
implementation will involve the recognition of the cumulative effect of the
change in accounting principle required by the new standard as a one-time charge
against earnings, net of any related income tax effect, as of the beginning of
1999.

5.  COMPREHENSIVE INCOME

         In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income (net income (loss) together with other non-owner changes in equity) and
its components in a full set of general purpose financial statements.

         The following table illustrates comprehensive income (loss) (in
thousands):


<TABLE>
<CAPTION>

                                                    For the Three Months Ended         For the Six Months Ended
                                                    --------------------------         ------------------------
                                                  June 29, 1997     June 28, 1998  June 29, 1997   June 28, 1998
                                                 -------------    ------------     -------------  ---------------

<S>                                                   <C>            <C>             <C>             <C>     
 Net income (loss)                                    $   945        $ 2,946         $(2,404)        $(1,027)
                                                      -------        -------         -------         ------- 

 Other comprehensive income (loss), net of tax
       Currency translation effects                         8             (6)             (1)              6
       Unrealized gain on investment                       28           --                28            --
                                                      -------        -------         -------         ------- 
 Other comprehensive income (loss)                         36             (6)             27               6
                                                      -------        -------         -------         ------- 

 Comprehensive income (loss)                          $   981        $ 2,940         $(2,377)        $(1,021)
                                                      -------        -------         -------         ------- 
                                                      -------        -------         -------         ------- 

</TABLE>

6.  PENSION AND OTHER POSTRETIREMENT BENEFITS

         In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits", which becomes effective for
financial statements for fiscal years beginning after December 15, 1997. The
Company is currently evaluating the necessary disclosures associated with the
new pronouncement.

7.  ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES

         In July 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and for Hedging Activities", which becomes effective for financial
statements for fiscal years beginning after June 15, 1999. The statement
requires that every derivative be recorded on the balance sheet as either an
asset or liability measured at its fair value. The statement requires that
changes in the 


                                        6
<PAGE>

derivative's fair value be recognized currently in earnings unless specific
hedge accounts criteria are met. The Company is currently evaluating the impact
of SFAS 133 on its financial reporting practices.

8.  SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

         The Company's Senior Notes are guaranteed by Friendly's Restaurants
Franchise, Inc. The following supplemental financial information sets forth, on
a condensed consolidating basis, balance sheets, statements of operations and
statements of cash flows for Friendly Ice Cream Corporation (the "Parent
Company"), Friendly's Restaurants Franchise, Inc. (the "Guarantor Subsidiary")
and Friendly's International, Inc. ("FII"), Friendly Holding (UK) Limited,
Friendly Ice Cream (UK) Limited and Restaurant Insurance Corporation
(collectively, the "Non-guarantor Subsidiaries"). Investments in subsidiaries
are accounted for by the Parent Company on the equity method for purposes of the
supplemental consolidating presentation. Earnings of the subsidiaries are,
therefore, reflected in the Parent Company's investment accounts and earnings.
The principal elimination entries eliminate the Parent Company's investments in
subsidiaries and intercompany balances and transactions.


               Supplemental Condensed Consolidating Balance Sheet
                             As of December 28, 1997
                                 (In thousands)
<TABLE>
<CAPTION>
                                          Parent    Guarantor   Non-guarantor
                                          Company   Subsidiary  Subsidiaries   Eliminations  Consolidated
                                         --------   ----------  -------------  ------------  ------------
<S>                                      <C>        <C>           <C>           <C>            <C>     
                 Assets
Current assets:
    Cash and cash equivalents            $ 12,239   $    204      $  2,757      $    (68)      $ 15,132
    Restricted cash                          --         --           1,333          --            1,333
    Trade accounts receivable               8,054        130           738          --            8,922
    Inventories                            15,165       --             506          --           15,671
    Deferred income taxes                   8,831       --            --            --            8,831
    Prepaid expenses and other current                                                         
    assets                                  7,096      2,326         7,428       (10,450)         6,400
                                         --------   --------      --------      ---------      --------
Total current assets                       51,385      2,660        12,762       (10,518)        56,289
                                                                                               
Deferred income taxes                        --          479           352          (831)          --
Investment in joint venture                  --         --           2,970          --            2,970
Property and equipment, net               283,749       --             195          --          283,944
Intangibles and deferred costs, net        25,994       --            --            --           25,994
Investments in subsidiaries                 3,769       --            --          (3,769)          --
Other assets                                1,754       --           8,528        (7,608)         2,674
                                         --------   --------      --------      ---------      --------
Total assets                             $366,651   $  3,139      $ 24,807      $(22,726)      $371,871
                                         --------   --------      --------      ---------      --------
                                         --------   --------      --------      ---------      --------
                                                                                            
      Liabilities and Stockholders' Equity (Deficit)

Current liabilities:
    Current maturities of long-term
    obligations                        $   8,852    $     --      $     --      $  (4,400)     $  4,452
    Accounts payable                      23,951          --            --             --        23,951
    Accrued expenses                      36,820         885        12,090         (6,118)       43,677
                                         --------   --------      --------      ---------      --------
Total current liabilities                 69,623         885        12,090        (10,518)       72,080
                                                                                               
Deferred income taxes                     43,224          --            --           (831)       42,393
Long-term obligations, less current                                                            
maturities                               318,033          --            --         (7,608)      310,425
Other liabilities                         22,132       1,409         9,793           --          33,334
Stockholders' equity (deficit)           (86,361)        845         2,924         (3,769)      (86,361)
                                         --------   --------      --------      ---------      --------
Total liabilities and stockholders'                                                            
 equity (deficit)                      $ 366,651    $  3,139      $ 24,807      $ (22,726)     $371,871
                                         --------   --------      --------      ---------      --------
                                         --------   --------      --------      ---------      --------
</TABLE>

                                       7
<PAGE>
          Supplemental Condensed Consolidating Statement of Operations

                    For the Three Months Ended June 29, 1997

                                   (Unaudited)

                                 (In thousands)
<TABLE>
<CAPTION>
                                              Parent       Guarantor   Non-guarantor
                                              Company     Subsidiary    Subsidiaries   Eliminations  Consolidated
                                             --------     ----------   -------------  ------------  ------------
<S>                                          <C>          <C>          <C>            <C>            <C>     

Revenues                                     $ 178,619    $    --      $     200      $    --        $ 178,819
Costs and expenses:
    Cost of sales                               50,537         --            123           --           50,660
    Labor and benefits                          55,372         --           --             --           55,372
    Operating  expenses and write-down of
    property and equipment                      40,105         (101)        (139)          --           39,865
    General and administrative expenses         10,704          133          248           --           11,085
    Depreciation and amortization                8,330         --           --             --            8,330
    Interest expense (income)                   11,189         --            (27)          --           11,162
    Equity in net loss of joint venture           --           --            743           --              743
                                             ---------    ----------   -----------    ---------      ---------

Income (loss) before provision for
income taxes and equity in net loss of
consolidated subsidiaries                        2,382          (32)        (748)          --            1,602

Provision for income taxes                        (435)         (45)        (177)          --             (657)
                                             ---------    ----------   -----------    ---------      ---------
Income (loss) before equity in net loss
of consolidated subsidiaries                     1,947          (77)        (925)          --              945

Equity in net loss of consolidated
subsidiaries                                    (1,002)        --           --            1,002           --
                                             ---------    ----------   -----------    ---------      ---------
Net income (loss)                            $     945    $     (77)   $    (925)     $   1,002      $     945
                                             ---------    ----------   -----------    ---------      ---------
                                             ---------    ----------   -----------    ---------      ---------


</TABLE>


                                       8
<PAGE>


          Supplemental Condensed Consolidating Statement of Operations

                     For the Six Months Ended June 29, 1997

                                   (Unaudited)

                                 (In thousands)

<TABLE>
<CAPTION>
                                              Parent      Guarantor  Non-guarantor
                                              Company    Subsidiary   Subsidiaries  Eliminations  Consolidated
                                             --------    ----------  -------------  ------------  ------------


<S>                                          <C>         <C>          <C>           <C>           <C>      
Revenues                                     $ 322,530   $    --      $     298     $    --       $ 322,828
Costs and expenses:                                                                               
    Cost of sales                               91,971        --            215          --          92,186
    Labor and benefits                         104,898        --           --            --         104,898
    Operating expenses and write-down of                                                          
    property and equipment                      71,987        --           (232)         --          71,755
    General and administrative expenses         21,837         142          492          --          22,471
    Depreciation and amortization               16,401        --           --            --          16,401
    Interest expense (income)                   22,268        --            (30)         --          22,238
    Equity in net loss of joint venture           --          --            743          --             743
                                             ---------   ---------    ---------     ---------     ---------
                                                                                                  
Loss before benefit from (provision for)                                                          
income taxes, cumulative effect of                                                                
change in accounting principle and                                                                
equity in net loss of consolidated                                                                
subsidiaries                                    (6,832)       (142)        (890)         --          (7,864)
                                                                                                  
Benefit from (provision for) income taxes        3,343        --           (119)         --           3,224
                                             ---------   ---------    ---------     ---------     ---------
                                         
Loss before cumulative effect of change                                                           
in accounting principle and equity in                                                             
net loss of consolidated subsidiaries           (3,489)       (142)      (1,009)         --          (4,640)
                                                                                                  
Cumulative effect of change in                                                                    
accounting principle                             2,236        --           --            --           2,236
                                             ---------   ---------    ---------     ---------     ---------
                                                                                                  
Loss before equity in net loss of                                                                 
consolidated subsidiaries                       (1,253)       (142)      (1,009)         --          (2,404)
                                                                                                  
Equity in net loss of consolidated                                                                
subsidiaries                                    (1,151)       --           --           1,151          --
                                             ---------   ---------    ---------     ---------     ---------
                                                                                                  
Net loss                                     $  (2,404)  $    (142)   $  (1,009)    $   1,151     $  (2,404)
                                             ---------   ---------    ---------     ---------     --------- 
                                             ---------   ---------    ---------     ---------     --------- 

</TABLE>

                                       9
<PAGE>


          Supplemental Condensed Consolidating Statement of Cash Flows

                     For the Six Months Ended June 29, 1997

                                   (Unaudited)

                                 (In thousands)

<TABLE>
<CAPTION>
                                              Parent      Guarantor  Non-guarantor
                                              Company    Subsidiary   Subsidiaries  Eliminations  Consolidated
                                             --------    ----------  -------------  ------------  ------------

<S>                                           <C>        <C>          <C>           <C>           <C>    
Net cash provided by (used in) operating                                                          
activities                                   $ 10,283    $   (208)   $   (450)      $  --         $  9,625
                                             --------    --------    --------       -------       ----------
                                                                                                  
Cash flows from investing activities:                                                             
     Purchases of property and equipment       (8,767)       --           (43)         --           (8,810)
     Proceeds from sales of property and                                                          
     equipment                                    919        --          --            --              919
     Proceeds  from sales and  maturities                                                         
     of investment securities                                --            73                           73
     Cash (paid) received in acquisition                                                          
     of Restaurant Insurance Corporation       (1,300)       --         2,265          --              965
     Advances to Joint Venture                 (1,400)       --          --            --           (1,400)
     Investments in consolidated                                                                  
     subsidiaries                                (142)       --          --           142             --
                                             --------    --------    --------       -------       ----------
Net cash (used in) provided by investing                                                          
activities                                    (10,690)       --         2,295         142           (8,253)
                                             --------    --------    --------       -------       ----------
Cash flows from financing activities:                                                             
   Contribution of capital                       --           142        --          (142)            --
   Proceeds from borrowings  (advances to                                                         
   parent)                                     30,491        --        (1,300)         --           29,191
   Repayments of obligations                  (32,288)       --          --            --          (32,288)
                                             --------    --------    --------       -------       ----------
Net cash (used in) provided by financing                                                          
activities                                     (1,797)        142      (1,300)       (142)          (3,097)
                                             --------    --------    --------       -------       ----------
                                                                                                  
Effect of exchange rate changes on cash          --          --            (2)         --               (2)
                                             --------    --------    --------       -------       ----------

Net (decrease) increase in cash and cash                                                         
equivalents                                    (2,204)        (66)        543          --           (1,727)
                                                                                                  
Cash and cash  equivalents,  beginning of                                                         
period                                         17,754         268         604          --           18,626
                                             --------    --------    --------       -------       ----------

Cash and cash equivalents, end of period     $ 15,550    $    202    $  1,147     $    --         $ 16,899
                                             --------    --------    --------       -------       ----------
                                             --------    --------    --------       -------       ----------
Supplemental disclosures:                                                                         

   Interest paid                             $ 20,063    $   --      $   --       $    --         $ 20,063
   Capital lease obligations incurred           2,057        --          --            --            2,057
   Issuance of note payable in                                                                    
   connection with the acquisition of                                                             
   Restaurant Insurance Corporation             1,000        --          --            --            1,000

</TABLE>

                                       10
<PAGE>


               Supplemental Condensed Consolidating Balance Sheet

                               As of June 28, 1998

                                   (Unaudited)

                                 (In thousands)

<TABLE>
<CAPTION>
                                              Parent      Guarantor  Non-guarantor
                                              Company    Subsidiary   Subsidiaries  Eliminations  Consolidated
                                             --------    ----------  -------------  ------------  ------------
<S>                                           <C>        <C>          <C>           <C>           <C>    
                 Assets

Current assets:
    Cash and cash equivalents                  $  12,809  $     137   $   2,434          --       $  15,380
    Restricted cash                                 --         --         1,514          --           1,514
    Trade accounts receivable                      7,348        231         593          --           8,172
    Inventories                                   19,394       --           525          --          19,919
    Deferred income taxes                          8,831       --          --            --           8,831
    Prepaid expenses and other current                                                            
    assets                                        11,860      1,698       5,151     $ (10,626)        8,083
                                               ---------  ---------   ---------     ---------     ---------
                                                                                                  
Total current assets                              60,242      2,066      10,217       (10,626)       61,899
                                                                                                  
Deferred income taxes                               --          456         648        (1,104)         --
Investment in joint venture                         --         --         2,300          --           2,300
Property and equipment, net                      300,589       --           174          --         300,763
Intangibles and deferred costs, net               25,103       --          --            --          25,103
Investments in subsidiaries                        3,571       --          --          (3,571)         --
Other assets                                         299       --         8,532        (7,608)        1,223
                                               ---------  ---------   ---------     ---------     ---------
                                                                                                  
Total assets                                   $ 389,804  $   2,522   $  21,871     $ (22,909)    $ 391,288
                                               ---------  ---------   ---------     ---------     ---------
                                               ---------  ---------   ---------     ---------     ---------

      Liabilities and Stockholders'                                                               
       Equity (Deficit)                                                                           

Current liabilities:                                                                              
    Current maturities of long-term                                                               
    obligations                                $   7,748  $    --     $    --       $  (4,400)    $   3,348
    Accounts payable                              34,989       --          --            --          34,989
    Accrued expenses                              35,752        254       9,331        (6,226)       39,111
                                               ---------  ---------   ---------     ---------     ---------
Total current liabilities                         78,489        254       9,331       (10,626)       77,448
Deferred income taxes                             42,868       --          --          (1,104)       41,764
Long-term obligations, less current                                                               
maturities                                       334,262       --          --          (7,608)      326,654
Other liabilities                                 21,208      1,384       9,853          --          32,445
Stockholders' equity (deficit)                   (87,023)       884       2,687        (3,571)      (87,023)
                                               ---------  ---------   ---------     ---------     ---------
Total liabilities and stockholders'                                                               
equity (deficit)                               $ 389,804  $   2,522   $  21,871     $ (22,909)    $ 391,288
                                               ---------  ---------   ---------     ---------     ---------
                                               ---------  ---------   ---------     ---------     ---------

</TABLE>

                                       11
<PAGE>


          Supplemental Condensed Consolidating Statement of Operations

                    For the Three Months Ended June 28, 1998

                                   (Unaudited)

                                 (In thousands)

<TABLE>
<CAPTION>

                                            Parent       Guarantor    Non-guarantor
                                            Company      Subsidiary   Subsidiaries      Eliminations   Consolidated
                                            -------      ----------   ------------      ------------   ------------

<S>                                         <C>          <C>          <C>               <C>            <C>
                                                                                                       
Revenues                                    $ 178,318    $     363    $      65         $    --        $ 178,746
Costs and expenses:                                                                                    
    Cost of sales                              52,702         --             63              --           52,765
    Labor and benefits                         53,635         --           --                --           53,635
    Operating expenses and write-down of                                                               
    property and equipment                     40,386         --            (20)             --           40,366
    General and administrative expenses        10,244          304           82              --           10,630
    Stock compensation expense                    129         --           --                --              129
    Depreciation and amortization               8,119         --             10              --            8,129
    Interest expense (income)                   8,219         --           (233)             --            7,986
    Equity in net loss of joint venture          --           --            354              --              354
                                            ---------    ---------    ---------         ---------      ---------
                                                                                                       
Income (loss) before (provision for)                                                                   
benefit from income taxes and equity in                                                                
net loss of consolidated subsidiaries           4,884           59         (191)             --            4,752
                                                                                                       
(Provision for) benefit from income taxes      (1,831)         (22)          47              --           (1,806)
                                            ---------    ---------    ---------         ---------      ---------
                                                                                                       
                                                                                                       
Income (loss) before equity in net loss                                                                
of consolidated subsidiaries                    3,053           37         (144)             --            2,946
                                                                                                       
Equity in net loss of consolidated                                                                     
subsidiaries                                     (107)        --           --                 107           --
                                            ---------    ---------    ---------         ---------      ---------

Net income (loss)                           $   2,946    $      37    $    (144)        $     107      $   2,946
                                            ---------    ---------    ---------         ---------      ---------
                                            ---------    ---------    ---------         ---------      ---------
</TABLE>

                                       12
<PAGE>


          Supplemental Condensed Consolidating Statement of Operations

                     For the Six Months Ended June 28, 1998

                                   (Unaudited)

                                 (In thousands)
<TABLE>
<CAPTION>

                                             Parent      Guarantor    Non-guarantor
                                             Company     Subsidiary   Subsidiaries    Eliminations   Consolidated
                                             -------     ----------   ------------    ------------   ------------
<S>                                         <C>          <C>          <C>             <C>            <C>
Revenues                                    $ 329,490    $     666    $     264       $              $ 330,420
Costs and expenses:                                                                                   
    Cost of sales                              98,767         --            239            --           99,006
    Labor and benefits                        103,887         --           --              --          103,887
    Operating expenses and write-down of                                                             
    property and equipment                     74,184         --            (29)           --           74,155
    General and administrative expenses        21,266          604          180            --           22,050
    Stock compensation expense                    354         --           --              --              354
    Depreciation and amortization              16,065         --             20            --           16,085
    Interest expense (income)                  16,337         --           (468)           --           15,869
    Equity in net loss of joint venture          --           --            670            --              670
                                            ---------    ---------    ---------       ------------   ---------

(Loss) income before benefit from                                                                    
(provision for) income taxes and equity                                                              
in net loss of consolidated subsidiaries       (1,370)          62         (348)           --           (1,656)
                                                                                                     
Benefit from (provision for) income taxes         552          (23)         100            --              629
                                            ---------    ---------    ---------       ------------   ---------

(Loss) income before equity in net loss                                                              
of consolidated subsidiaries                     (818)          39         (248)           --           (1,027)

Equity in net loss of consolidated                                                                   
subsidiaries                                     (209)        --           --               209           --
                                            ---------    ---------    ---------       ------------   ---------
Net (loss) income                           $  (1,027)   $      39    $    (248)      $     209      $  (1,027)
                                            ---------    ---------    ---------       ------------   ---------
                                            ---------    ---------    ---------       ------------   ---------
</TABLE>


                                       13
<PAGE>


          Supplemental Condensed Consolidating Statement of Cash Flows

                     For the Six Months Ended June 28, 1998

                                   (Unaudited)

                                 (In thousands)

<TABLE>
<CAPTION>

                                           Parent      Guarantor   Non-guarantor
                                           Company     Subsidiary  Subsidiaries     Eliminations    Consolidated
                                           -------     ----------  ------------     ------------    ------------

<S>                                        <C>         <C>         <C>               <C>            <C>     
Net cash provided by (used in) operating
activities                                 $ 18,187    $    (67)   $     66          $     68       $ 18,254
                                           --------    --------    --------          --------       --------
Cash flows from investing activities:                                                               
   Purchases of property and equipment      (33,936)       --          --                --          (33,936)
   Proceeds from sales of property and                                                              
   equipment                                  1,402        --          --                --            1,402
                                           --------    --------    --------          --------       --------
Net cash used in investing activities       (32,534)       --          --                --          (32,534)
                                           --------    --------    --------          --------       --------

Cash flows from financing activities:                                                               

   Dividend received (paid)                     400        --          (400)             --             --
   Proceeds from borrowings                  39,258        --          --                --           39,258
   Repayments of obligations                (24,741)       --          --                --          (24,741)
                                           --------    --------    --------          --------       --------
Net cash provided by (used in) financing                                                            
activities                                   14,917        --          (400)             --           14,517
                                           --------    --------    --------          --------       --------

Effect of exchange rate changes on cash        --          --            11              --               11
                                           --------    --------    --------          --------       --------
                                                                                                    
Net increase (decrease) in cash and cash                                                            
equivalents                                     570         (67)       (323)               68            248
                                                                                                    
Cash and cash equivalents, beginning of                                                             
period                                       12,239         204       2,757               (68)        15,132
                                           --------    --------    --------          --------       --------
                                                                                                    
Cash and cash equivalents, end of period   $ 12,809    $    137    $  2,434          $   --         $ 15,380
                                           --------    --------    --------          --------       --------
                                           --------    --------    --------          --------       --------

Supplemental disclosures:                                                                           
                                                                                                    
     Interest paid (received)              $ 15,859    $   --      $   (525)         $   --         $ 15,334
     Income taxes (received) paid              (771)        810         335              --              374
     Capital lease and finance                                                                      
     obligations incurred                       608        --          --                --              608

</TABLE>

                                       14
<PAGE>



Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 28, 1998 AND 
        JUNE 29, 1997

         The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements of the Company and the notes thereto
included elsewhere herein.

         Safe Harbor Statement

         Statements contained herein that are not historical facts constitute
"forward looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995. All forward looking statements are subject to
risks and uncertainties which could cause results to differ materially from
those anticipated. These factors include the Company's highly competitive
business environment, weather impact on the Company's businesses, exposure to
commodity prices, risks associated with the food service industry, the ability
to retain and attract new employees, government regulations, the Company's high
geographic concentration in the Northeast and conditions needed to meet
re-imaging and new opening targets. Other factors that may cause actual results
to differ from the forward looking statements contained herein and that may
affect the Company's prospects in general are included in the Company's other
filings with the Securities and Exchange Commission.

         Overview

         Friendly's owns and operates 651 restaurants, franchises 34 restaurants
and 3 cafes and distributes a full line of frozen dessert products. These
products are distributed to Friendly's restaurants and through more than 5,000
supermarkets and other retail locations in 15 states. The restaurants offer a
wide variety of reasonably priced breakfast, lunch and dinner menu items as well
as the frozen dessert products. The Company continues to expand its franchising
program as evidenced by the recent signing of two new franchisees in Myrtle
Beach, South Carolina and Tannersville, Pennsylvania.

                                       15
<PAGE>


         Results of Operations

         The operating results of the Company expressed as a percentage of total
revenues are set forth below:

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                 For the Three         For the Six
                                                  Months Ended         Months Ended
                                               -------------------  -------------------
                                               June 29,   June 28,  June 29,   June 28,
                                                 1997       1998      1997      1998
                                                 ----       ----      ----      ----
<S>                                              <C>       <C>       <C>       <C>
Revenues:
    Restaurant                                    89.8%     87.8%     91.2%     88.4%
    Retail, institutional and other               10.2      10.2       8.8       9.6
    Franchise                                      --        2.0        --       2.0
                                                 ------    ------    -------   -------

Total revenues                                   100.0     100.0     100.0     100.0
                                                 ------    ------    -------   -------

Costs and expenses:
    Cost of sales                                 28.3      29.5      28.5      30.0
    Labor and benefits                            31.0      30.0      32.5      31.4
    Operating expenses                            22.1      22.5      22.1      22.4
    General and administrative expenses            6.2       6.0       7.0       6.7
    Stock compensation expense                      --       0.1        --       0.1
    Non-cash write-downs                           0.2        --       0.1        --
    Depreciation and amortization                  4.7       4.6       5.1       4.9
                                                 ------    ------    -------   -------
Operating income                                   7.5       7.3       4.7       4.5

Interest expense, net                              6.2       4.5       6.9       4.8
Equity in net loss of joint venture                0.4       0.2       0.2       0.2
                                                 ------    ------    -------   -------
Income (loss) before (provision for) benefit
from income taxes and cumulative
 effect of change in accounting
 principle                                         0.9       2.6      (2.4)     (0.5)

(Provision for) benefit from income taxes         (0.4)     (1.0)      1.0       0.2

Cumulative effect of change in accounting
principle, net of income tax expense                 --       --       0.7        --
                                                 ------    ------    -------   -------
Net income (loss)                                  0.5%      1.6%     (0.7)%    (0.3)%
                                                 ------    ------    -------   -------
                                                 ------    ------    -------   -------

</TABLE>

                                       16
<PAGE>


      Revenues:

      Total revenues decreased $0.1 million, or 0.1%, to $178.7 million for the
second quarter ended June 28, 1998 from $178.8 million for the same quarter in
1997. Restaurant revenues decreased $3.5 million, or 2.2%, to $157.0 million for
the second quarter of 1998 from $160.5 million for the same quarter in 1997.
Comparable restaurant revenues increased 3.6%. The decrease in restaurant
revenues was primarily impacted by the closing of 21 under-performing
restaurants, offset by the opening of 6 new restaurants since the end of the
second quarter ended June 29, 1997, and the July 1997 sale of 34 restaurants to
DavCo Restaurants, Inc. ("DavCo") in connection with the commencement of the
Company's franchising program. Second quarter restaurant revenues were also
reduced by $1.0 million due to the close down days associated with the
construction of the Company's re-imaging projects. The sale of 34 units to Davco
resulted in an $8.4 million reduction in restaurant revenues in the second
quarter of 1998 compared to the second quarter of 1997. Retail, institutional
and other revenues decreased by $0.1 million, or 0.5%, to $18.2 million for the
second quarter of 1998 from $18.3 million for the same quarter in 1997. The
decrease was primarily due to a decline in international sales. Franchise
revenue was $3.6 million for the second quarter of 1998. There was no franchise
revenue for the second quarter of 1997. The increase is a result of the
consummation of a long-term agreement on July 14, 1997 granting DavCo exclusive
rights to operate, manage and develop Friendly's full-service restaurants in the
franchising region of Maryland, Delaware, the District of Columbia and northern
Virginia (the "DavCo Agreement").

      Total revenues increased $7.6 million, or 2.4%, to $330.4 million for the
six months ended June 28, 1998 from $322.8 million for the same period in 1997.
Restaurant revenues decreased $2.3 million, or 0.8%, to $292.2 million in 1998
from $294.5 million for the same period in 1997. Comparable restaurant revenues
increased 5.1%. The decrease in restaurant revenues was primarily impacted by
the closing of 21 under-performing restaurants, offset by the opening of 6 new
restaurants since the end of the second quarter ended June 29, 1997, and the
July 1997 sale of 34 restaurants to DavCo in connection with the commencement of
the Company's franchising program. Restaurant revenues were also reduced by $1.9
million due to the close down days associated with the construction of the
Company's re-imaging projects. The sale of the 34 units to DavCo resulted in a
$15.3 million reduction in restaurant revenues in the six months of 1998
compared to the same period in 1997. Retail, institutional and other revenues
increased by $3.4 million, or 12%, to $31.7 million for the six months ended
June 28, 1998 from $28.3 million for the six months ended June 29, 1997. The
increase was primarily due to an increase in retail sales in existing markets,
offset by a decline in international sales. Franchise revenue was $6.6 million
for the six months ended June 28, 1998. There was no franchise revenue for the
six months ended June 29, 1997. The increase is a result of the consummation of
the DavCo agreement described above.

      Cost of sales:

      Cost of sales increased $2.1 million, or 4.1%, to $52.8 million for the
second quarter ended June 28, 1998 from $50.7 million for the same quarter in
1997. Cost of sales as a percentage of total revenues increased to 29.5% for the
second quarter of 1998 from 28.3% for the same quarter in 1997. The higher food
cost as a percentage of total revenue was partly due to the increase in
franchise revenues which carry a higher food cost than restaurant revenues. This
shift increased the cost of sales as a percentage of total revenue by 0.6%. The
remaining 0.6% relates largely to an increase in the cost of cream, the
principal ingredient in ice cream, the introduction of improved kids menu items,
higher produce costs and additional restaurant promotional activity in the 1998
period. Results were significantly impacted by an unprecedented increase in the
cost of dairy raw materials, specifically fresh cream. As of the end of June,
the market price of domestic butter, the benchmark used to determine cream
prices had increased 56% from the end of April, with 34% of the increase
occurring from the end of May. To compensate for this increase, the Company has
increased prices on certain packaged ice cream products, modified promotion
strategies and continues to evaluate ways to manage dairy cost pressures over
the long term.

      Cost of sales increased $6.8 million, or 7.4%, to $99.0 million for the
six months ended June 28, 1998 from $92.2 million for the same period in 1997.
Cost of sales as a percentage of total revenues increased to 30.0% for the six
months in 1998 from 28.5% for the same period in 1997. The higher food cost as a
percentage of total revenue was partly due to the increases in non-restaurant
sales, which carry a higher food cost compared to restaurant sales. This shift
increased the cost of sales as a percentage of total revenue by 0.9%. The
remaining 0.6% relates largely to an increase in the cost of cream, the
principal ingredient in ice cream, higher produce costs and greater restaurant
promotional activity in the 1998 period. Results were significantly impacted by
an unprecedented increase in the cost of dairy raw materials, specifically fresh
cream. As of the end of June, the market price of domestic butter, the benchmark
used to determine cream prices had increased 56% from the end of April, with 34%
of the increase occurring from the end of May. To compensate for this increase,
the Company has increased prices on certain packaged ice cream products,
modified promotion strategies and continues to evaluate ways to manage dairy
cost pressures over the long term.

      Labor and benefits:

      Labor and benefits decreased $1.8 million, or 3.2%, to $53.6 million for
the second quarter ended June 28, 1998 from $55.4 million for the same quarter
in 1997. Labor and benefits as a percentage of total revenues decreased to 30.0%
for the second quarter in 1998 from 31.0% for the same quarter in 1997. The
decrease was primarily due to the inclusion of franchise revenues in the 1998
period since these revenues have no associated labor and benefits cost and lower
restaurant pension and workers' compensation costs.

                                       17
<PAGE>

      Labor and benefits decreased $1.0 million, or 1%, to $103.9 million for
the six months ended June 28, 1998 from $104.9 million for the same period in
1997. Labor and benefits as a percentage of total revenues decreased to 31.4%
for the six months in 1998 from 32.5% for the same period in 1997. The decrease
was due to an increase in retail, institutional, franchise and other revenues as
a percent of total revenues as these revenues have no associated labor and
benefits cost and lower restaurant pension and workers' compensation costs.

      Operating expenses:

      Operating expenses increased $0.8 million, or 2.0%, to $40.3 million for
the second quarter ended June 28, 1998 from $39.5 million for the same quarter
in 1997. This increase was primarily due to increased trade promotion
expenditures in the retail frozen dessert business driven by competitive
pressures. Despite higher selling expense, retail revenues were relatively the
same in both quarters. Operating expenses as a percentage of total revenues were
22.5% and 22.1% for the second quarter ended June 28, 1998 and June 29, 1997,
respectively.

      Operating expenses increased $2.6 million, or 3.6%, to $74.0 million for
the six months ended June 28, 1998 from $71.4 million for the same period in
1997. This increase was primarily due to higher retail selling expenses which
resulted in higher retail sales. Operating expenses as a percentage of total
revenues were 22.4% and 22.1% for the six months ended June 28, 1998 and June
29, 1997, respectively.

      General and administrative expenses:

      General and administrative expenses were $10.6 million and $11.1 million
for the second quarter ended June 28, 1998 and June 29, 1997, respectively. The
decrease related to a lower bonus provision in the current year and a reduction
in field employees resulting from 49 less restaurants from the end of the second
quarter in 1997. General and administrative expenses as a percentage of total
revenues decreased to 6.0% in the second quarter of 1998 from 6.2% for the same
quarter in 1997.

      General and administrative expenses were $22.0 million and $22.5 million
for the six months ended June 28, 1998 and June 29, 1997, respectively. The
decrease related to a lower bonus provision in the current year and a reduction
in field employees resulting from 49 less restaurants from the end of the second
quarter in 1997. General and administrative expenses as a percentage of total
revenues decreased to 6.7% in the six months of 1998 from 7.0% for the same
period in 1997.

      EBITDA:

      As a result of the above, EBITDA (earnings before interest, taxes,
depreciation and amortization, stock compensation and other non-cash items)
decreased $0.8 million, or 3.6%, to $21.4 million for the second quarter ended
June 28, 1998 from $22.2 million for the same quarter in 1997. EBITDA as a
percentage of total revenues was 12.0% and 12.4% for the second quarter in 1998
and 1997, respectively.

      EBITDA decreased $0.4 million, or 1.3%, to $31.5 million for the six
months ended June 28, 1998 from $31.9 million for the same period in 1997.
EBITDA as a percentage of total revenues was 9.5% and 9.9% for the six months
ended June 28, 1998 and June 29, 1997, respectively.

      Stock compensation expense:

      Stock compensation expense represents stock compensation arising out of
the vesting of certain shares of restricted stock previously issued to
management. Stock compensation expense was $0.1 million and $0.3 million for the
second quarter and six months ended June 28, 1998, respectively. There was no
stock compensation expense for the second quarter and six months ended June 29,
1997.

      Non-cash write-downs on property and equipment:

      Non-cash write-downs on property and equipment were $0.1 million and $0.3
million for the second quarter ended June 28, 1998 and June 29, 1997,
respectively. Non-cash write-downs on property and equipment were $0.2 million
and $0.3 million for the six months ended June 28, 1998 and June 29, 1997,
respectively.

      Depreciation and amortization:

      Depreciation and amortization decreased $0.2 million, or 2.4%, to $8.1
million for the second quarter ended June 28, 1998 from $8.3 million for the
same quarter in 1997. Depreciation and amortization as a percentage of total
revenues decreased to 4.6% for the 

                                       18
<PAGE>

second quarter in 1998 from 4.7% for the same quarter in 1997. The decrease was
due to the closing of 21 restaurants, offset by the opening of 6 new restaurants
and the reimaging of 180 restaurants since the end of the second quarter ended
June 29, 1997.

      Depreciation and amortization decreased $0.3 million, or 1.8%, to $16.1
million for the six months ended June 28, 1998 from $16.4 million for the same
period in 1997. Depreciation and amortization as a percentage of total revenues
decreased to 4.9% for the six months in 1998 from 5.1% for the same period in
1997. The decrease was due to the closing of 21 restaurants, offset by the
opening of 6 new restaurants and the reimaging of 180 restaurants since the end
of the second quarter ended June 29, 1997.

      Interest expense, net:

      Interest expense, net of capitalized interest and interest income,
decreased by $3.2 million, or 28.6%, to $8.0 million for the second quarter
ended June 28, 1998 from $11.2 million for the same quarter in 1997. The
decrease in interest expense was due to the reduction of debt, including capital
lease obligations, and interest rates associated with the Company's
recapitalization in November 1997.

      Interest expense, net of capitalized interest and interest income,
decreased by $6.3 million, or 28.4%, to $15.9 million for the six months ended
June 28, 1998 from $22.2 million for the same period in 1997. The decrease in
interest expense was due to the reduction of debt, including capital lease
obligations, and interest rates associated with the Company's recapitalization
in November 1997.

      Equity in net loss of joint venture:

      The equity in net loss of the China joint venture was $0.4 million and
$0.7 million for the second quarter ended June 28, 1998 and June 29, 1997,
respectively. The equity in net loss of the China joint venture was $0.7 million
for both the six months ended June 28, 1998 and the six months ended June 29,
1997. These losses reflected the Company's 50% share of the China joint
venture's net loss for such periods.

      (Provision for) benefit from income taxes:

      The provision for income taxes was $1.8 million, or 38%, and $0.7 million,
or 41%, for the second quarter ended June 28, 1998 and June 29, 1997,
respectively. The benefit from income taxes was $0.6 million, or 38%, and $3.2
million, or 41%, for the six months ended June 28, 1998 and June 29, 1997,
respectively. The reduction in the effective tax rate is primarily the result of
general business tax credits.

      Cumulative effect of change in accounting principle, net:

      In 1997, the Company revised the method used in determining the
return-on-asset component of annual pension expense. The cumulative effect of
this change was $2.2 million, net of income tax expense of $1.6 million.

      Net income (loss):

      Net income was $2.9 million and $0.9 million for the six months ended June
28, 1998 and June 29, 1997, respectively. Net loss was $1.0 million and $2.4
million for the six months ended June 28, 1998 and June 29, 1997, respectively.

         Liquidity and Capital Resources

         The Company's primary sources of liquidity and capital resources are
cash generated from operations and borrowings under its revolving credit
facility. Net cash provided by operating activities was $18.3 million in the six
months ended June 28, 1998 compared to $9.6 million in the same period of 1997.
During the six months ended June 28, 1998, inventories increased by
approximately $4.2 million in preparation for restaurant promotional campaigns
and anticipated increases in retail sales. Accounts payable increased
approximately $11.0 million for the six months ended June 28, 1998. The increase
was primarily due to payables of $5.0 million at June 28, 1998 related to a new
store and costs associated with the Company's Focus 2000 reimaging project. Also
contributing to the increase is the volume and timing of activity associated
with the summer months. Accrued expenses decreased $5.5 million, of which
approximately $1.9 million was due to expenses paid in the early part of 1998
related to the Company's recapitalization accruals from December 28, 1997. The
decrease was also impacted by the recognition of premium income of $2.1 million,
which had been deferred as of December 28, 1997. Additionally, there were
approximately $1.0 million of store construction and maintenance accruals at
December 28, 1997 which have been paid in the six months ended June 28, 1998.
Available borrowings under the revolving credit facility were $28.0 million as
of June 28, 1998.

                                       19
<PAGE>

         Additional sources of liquidity consist of capital and operating leases
for financing leased restaurant locations (in malls and shopping centers and
land or building leases), restaurant equipment, manufacturing equipment,
distribution vehicles and computer equipment. Additionally, sales of
under-performing existing restaurant properties and other assets (to the extent
the Company's and its subsidiaries' debt instruments, if any, permit) are
sources of cash. The amounts of debt financing that the Company will be able to
incur under capital leases and for property and casualty insurance financing and
the amount of asset sales by the Company are limited by the terms of its credit
facility and Senior Notes.

         Net cash used in investing activities was $32.5 million in the six
months ended June 28, 1998 and $8.3 million in the same period of 1997. Capital
expenditures were approximately $33.9 million in the six months of 1998 and $8.8
million in the same period of 1997. The increase in capital expenditures was
primarily due to the reimaging of 137 restaurants in 1998. Proceeds from the
sale of property and equipment were $1.4 million and $0.9 million in 1998 and
1997, respectively.

         Net cash provided by financing activities was $14.5 million in the six
months ended June 28, 1998 compared to net cash used in financing activities of
$3.1 million in the same period of 1997 primarily related to the funding of
costs associated with the reimaging of 137 restaurants in 1998.

         The Company had a working capital deficit of $15.5 million as of June
28, 1998. The Company is able to operate with a substantial working capital
deficit because (i) restaurant operations are conducted primarily on a cash (and
cash equivalent) basis with a low level of accounts receivable, (ii) rapid
turnover allows a limited investment in inventories and (iii) cash from sales is
usually received before related expenses for food, supplies and payroll are
paid.

         The Company's credit facility imposes significant operating and
financial restrictions on the Company's ability to, among other things, incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
pay dividends and engage in certain transactions with affiliates. The credit
facility limits the amount which the Company may spend on capital expenditures
and requires the Company to comply with certain financial covenants.

         The Company anticipates requiring capital in the future principally to
maintain existing restaurant and plant facilities, to continue to renovate and
re-image existing restaurants, to convert restaurants and to construct new
restaurants. Capital expenditures for 1998 are anticipated to be $49.8 million
in the aggregate, of which $41.2 million will be spent on restaurant operations.
The Company's actual 1998 capital expenditures may vary from the estimated
amounts set forth herein.

         The Company has developed a plan to ensure its systems are compliant
with the requirements to process transactions in the year 2000. The majority of
the Company's internal information systems are in the process of being replaced
with fully-compliant new systems. The total cost of the software and
implementation is estimated to be $4 - $6 million which will be capitalized as
incurred. The new system implementation is expected to be completed by December
1999. The costs of the Year 2000 project and the date on which the Company plans
to complete Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.

         The Company believes that the combination of the funds anticipated to
be generated from operating activities and borrowing availability under the
revolving credit facility will be sufficient to meet the Company's anticipated
operating and capital requirements for the foreseeable future.

         Seasonality

         Due to the seasonality of frozen dessert consumption, and the effect
from time to time of weather on patronage in its restaurants, the Company's
revenues and EBITDA are typically higher in its second and third quarters.

         Geographic Concentration

         Approximately 86% of the Company-owned restaurants are located, and
substantially all of its retail sales are generated, in the Northeast. As a
result, a severe or prolonged economic recession or changes in demographic mix,
employment levels, population density, weather, real estate market conditions or
other factors specific to this geographic region may adversely affect the
Company more than certain of its competitors which are more geographically
diverse.

                                       20
<PAGE>


                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         From time to time the Company is named as a defendant in legal actions
arising in the ordinary course of its business. The Company is not party to any
pending legal proceedings other than routine litigation incidental to its
business. The Company does not believe that the resolutions of these claims
should have a material adverse effect on the Company's financial condition or
results of operations.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) An annual meeting of Company's shareholders was held on May 12, 1998.

(b) Not applicable.

(c)  The election of two nominees for director of the Company was voted upon at
     the meeting. The number of affirmative votes and the number of votes
     withheld with respect to such approval is as follows:
<TABLE>
<CAPTION>

       Nominee                 Affirmative Votes                  Votes Withheld
       -------                 -----------------                  --------------
<S>                                <C>                               <C>    
Michael J. Daly                    5,723,623                         386,545
Burton J. Manning                  5,724,832                         385,336
</TABLE>

     The results of the voting to ratify the appointment of Arthur Andersen LLP
     to audit the accounts of the Company and its subsidiaries for 1998 are as
     follows:
<TABLE>
<CAPTION>

         For                        Against                          Abstain
         ---                        -------                          -------
<S>                                  <C>                              <C>  
      6,104,510                      2,360                            3,298
</TABLE>

     There were no matters voted upon at the Company's annual meeting to which
broker non-votes applied.

Item 5.  OTHER BUSINESS

Notice to Shareholders of By-Law Amendments

         Pursuant to Massachusetts General Laws Annotated, Chapter 156B Sec.17,
the Company is providing notice to its shareholders that its By-laws were
amended at a meeting of the Company's Board of Directors on July 29, 1998. The
amendments relate to advance notice requirements of Company shareholders
interested in presenting a proposal for consideration at the Company's annual
meeting of shareholders. The amendments provide that such notice must be
received by the Company's Clerk 120 days in advance of the annual meeting.

Shareholder Proposals for 1999 Annual Meeting

         Pursuant to the requirements of the Securities and Exchange Commission
("SEC"), notice is hereby provided that Company shareholders interest in
presenting shareholder proposals at the Company's annual meeting in 1999 must
comply with the procedures described in the Company's By-laws, as amended on
July 29, 1998 (see summary which will require that among other things, notice of
any shareholder proposal to be presented at the Company's 1999 annual meeting
must be received by the Clerk of the Company no later than ninety (90) days in
advance of such meeting provided that, unless at least one hundred twenty (120)
days advance notice of the meeting date is given, such notice shall be timely if
received at least ninety (90) days in advance of the anniversary of the prior
year's meeting.

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     27.1  Financial Data Schedule

(b) No report on Form 8-K was filed during the three months and six months ended
June 28, 1998.

                                       21
<PAGE>


                                   SIGNATURES

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

                         FRIENDLY ICE CREAM CORPORATION

                         By: /s/  George G. Roller
                            ------------------------
                             Name:  George G. Roller
                            Title: Vice President, Finance
                                   Chief Financial Officer
                                   And Treasurer


                                       22