---

---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-K

(Mark One)

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|- | ----------------------------------------------------------------------------------------
|  | FOR THE FISCAL YEAR ENDED AUGUST 31, 2002.                                              
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  | FOR THE TRANSITION PERIOD FROM  TO
.                                                    

---

Commission
file number:022-28628

ARCHIBALD CANDY CORPORATION(Exact name of registrant as specified in its charter)

Delaware

03-0485115(State or other jurisdiction
of incorporation or organization)

(I.R.S. Employer
Identification No.)1137 West Jackson Boulevard,
Chicago, Illinois(Address of principal executive offices)

60607(Zip Code)


Registrant's
telephone number, including area code:(312) 243-2700

---

Securities
registered pursuant to Section 12(b) of the Act:None

Securities
registered pursuant to Section 12(g) of the Act:None

---

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

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. ý

As
of November 1, 2002, the aggregate market value of the registrant's common stock, par value $.01 per share, held by non-affiliates was $5,790,413.

Indicate
by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes ý    No o

As
of December 1, 2002, the number of shares outstanding of the registrant's common stock was 276,157.

DOCUMENTS
INCORPORATED BY REFERENCE None.

---

---

---

CROSS REFERENCE SHEET  AND  TABLE OF CONTENTS

|         |                                                                                              | Page Number
or Reference
|-------- | -------------------------------------------------------------------------------------------- | ------------------------
|PART I   |                                                                                              |                         
|         | Item 1Business                                                                              |                         
|         | Item 2Properties                                                                            |                         
|         | Item 3Legal Proceedings                                                                     |                         
|         | Item 4Submission of Matters to a Vote of Security Holders                                   |                         
|PART II  |                                                                                              |                         
|         | Item 5Market for the Company's Common Equity and Related Stockholder Matters                |                         
|         | Item 6Selected Financial Data                                                               |                         
|         | Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations |                         
|         | Item 8Financial Statements and Supplementary Data                                           |                         
|         | Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |                         
|PART III |                                                                                              |                         
|         | Item 10Directors and Executive Officers of the Company                                      |                         
|         | Item 11Executive Compensation                                                               |                         
|         | Item 12Security Ownership of Certain Beneficial Owners and Management                       |                         
|         | Item 13Certain Relationships and Related Transactions                                       |                         
|         | Item 14Controls and Procedures                                                              |                         
|PART IV  |                                                                                              |                         
|         | Item 15Exhibits, Financial Statement Schedules, and Reports on Form 8-K                     |                         

---



Part I    Item 1Business

Except as otherwise noted, the words "we," "us," "our," and similar terms, as well as references to "Archibald" or the "Company" refers to
Archibald Candy Corporation, a Delaware corporation and all of its subsidiaries.

General

Founded in 1921, we are a manufacturer and marketer of quality boxed chocolates and other confectionery items under the Fannie May, Fanny Farmer and Laura Secord
brand names. Headquartered in Chicago, Illinois, we market and sell our products through 447 Company-operated stores and approximately 10,000 third-party retail outlets in 17 states and the District
of Columbia in the United States and 9 provinces in Canada. We also sell our Fannie May and Fanny Farmer branded products through a variety of non-retail programs, including our corporate
gift, mail order and fundraising programs. We believe that consumers widely recognize our products for their quality and value, and that the Fannie May, Fanny Farmer and Laura Secord brand names are
among the strongest in the confectionery industry and offer significant opportunities for growth.

Our
sales for fiscal year 2002 were approximately $183.4 million. Operating loss for fiscal 2002 was approximately $7.4 million. Earnings before interest, income taxes,
depreciation and amortization for fiscal 2002 (without taking into account our former Sweet Factory business) was approximately $6.6 million, including a $3.0 million increase in
packaging expense attributed to a provision for slow-moving and obsolete packaging but excluding reorganization costs, and the costs of our disposition of Sweet Factory Group, Inc.
and its subsidiaries.

Recent Developments

Archibald Reorganization.Prior to November 1, 2002, we conducted our business as Archibald Candy Corporation, an
Illinois corporation ("Archibald Illinois"), a wholly-owned subsidiary of Fannie May Holdings, Inc., a Delaware corporation ("Holdings"). On June 12, 2002, Holdings and Archibald
Illinois filed petitions with the United States
Bankruptcy Court for the District of Delaware to commence a consolidated voluntary bankruptcy proceeding under Chapter 11 of the U.S. Bankruptcy Code. While in bankruptcy, Holdings and Archibald
Illinois continued to manage their properties and operate their businesses in accordance with the applicable provisions of the Bankruptcy Code.

In
connection with the bankruptcy proceeding, Holdings and Archibald Illinois filed a Second Amended Joint Plan of Reorganization (the "Archibald Plan"), which was confirmed by the
bankruptcy court on September 25, 2002 and became effective as of November 1, 2002. Pursuant to the Archibald Plan, (i) all of the outstanding equity interests of Holdings and
Archibald Illinois were cancelled; (ii) Holdings merged with and into Archibald Illinois; and (iii) Archibald Illinois merged with and into us. As a result, we acquired all of the assets
of Holdings and Archibald Illinois. As part of the Archibald Plan, we entered into a new $50 million term loan and revolving credit facility with Foothill Capital Corporation, as administrative
agent, to finance our working capital and capital expenditures and to pay the costs of the reorganization. The proceeds of the credit facility also were used, in part, to pay-off the
indebtedness outstanding under Archibald Illinois' debtor-in-possession facility. In addition, pursuant to the Archibald Plan, all of the $170 million outstanding
principal amount of 101/4% senior secured notes due 2004 issued by Archibald Illinois, together with the accrued and unpaid interest thereto, were cancelled and we issued
$50 million of 10% secured subordinated notes due 2007 to the holders of the cancelled notes. Also, pursuant to the Archibald Plan, in consideration of the cancellation of the claims of the
holders of the cancelled notes and certain general unsecured creditors of Archibald Illinois, we issued (or expect to issue upon completion of the Archibald Plan) to such claimants an aggregate of
276,290 shares of our common stock, par value $.01 per share, which represents 100% of our issued and outstanding common stock.

Sweet Factory Bankruptcy and Sale.On December 7, 1998, we acquired Sweet Factory Group, Inc., a Delaware
corporation, a leading specialty bulk candy retailer with 190 stores located throughout the United States. Following the acquisition, Sweet Factory operated as a wholly-owned subsidiary of Archibald
Illinois. On November 15, 2001, Sweet Factory and its three subsidiaries, Sweet Factory, Inc., SF Candy Company and SF Properties, Inc., filed voluntary petitions in the United
States Bankruptcy Court for the District of Delaware under Chapter 11 of the U.S. Bankruptcy Code.

Through
the bankruptcy proceedings, the leases for 90 Sweet Factory stores were rejected and we terminated the employment of approximately 100 full-time and 400
part-time employees. On August 6, 2002, we sold the

1

---

assets of Sweet Factory and its subsidiaries for $6.6 million to RDR Group, a California corporation. The proceeds of the sale were applied to pay off the
debtor-in-possession financing provided by CIT, to pay Archibald Illinois' secured claim, to make cure payments to the landlords under the rejected store leases, to pay
administrative expenses, to make a payment to the holders of Archibald Illinois' senior secured notes due 2004 and to make a payment to Sweet Factory's unsecured creditors' class. On
October 29, 2002, we dissolved Sweet Factory and its subsidiaries.

Subsidiaries.As a result of the Archibald reorganization and the Sweet Factory bankruptcy and sale, we currently have two
wholly-owned subsidiaries, Archibald Candy (Canada) Corporation, a Canadian corporation ("Archibald Canada"), and Laura Secord Holdings Corp., a Delaware corporation ("LSHC"). Archibald Canada was
created in June 1999 to own and operate substantially all of the assets of the Laura Secord retail business, which we acquired from Nestlè Canada Inc. on June 8,
1999. Laura Secord is the leading retailer of boxed chocolates in Canada, with 172 retail stores and distribution through more than 1,300 third-party retail outlets in Canada. We formed LSHC in
October 2002 to hold our equity interest in Archibald Canada.

The Industry

The U.S. confectionery industry had retail sales of approximately $24.1 billion in 2001. The industry is characterized by moderate long-term
growth in consumer demand, with the per capita consumption of candy increasing from approximately 16 pounds in 1980 to over 24 pounds in 2001. The U.S. confectionery market is comprised of two broad
sectors: chocolates and non-chocolates, which in 2001 represented approximately 63% and 37% of the confectionery market, respectively. Non-chocolate products include a wide
range of confectionery items, including jelly beans, gummi bears, hard candies and licorice. From 1996 to 2001, the pound sales volume in the U.S. chocolate and non-chocolate sectors grew
at the rate of 12.0% and 5.7%, respectively. Within the U.S. chocolate sector, total sales of boxed chocolates were approximately $1.7 billion in 2001. Our management believes that the Canadian
confectionery industry had retail sales of approximately $1.2 billion in 2001.

Business Strategy

Our business strategy is to grow our core brands by leveraging these brands through a multi-channeled distribution network. We acquired the Fanny Farmer brand in
fiscal 1992 to complement our existing Fannie May brand. Our acquisition of Laura Secord in June 1999 provided us with the leading retailer of boxed chocolates in Canada. We expect to continue
to grow our brands with a strategy that includes the following key elements:



Products

We manufacture more than 350 chocolate candies and other confectionery items in a variety of packaged forms and market them under the Fannie May, Fanny Farmer and
Laura Secord brand names. During the Christmas, Easter and Valentine's Day holiday seasons, we expand our product offerings, including offering products in packages that are specially designed for the
holidays. Among our principal products in the United States are our best selling Pixie, Mint Meltaway and Trinidad lines. Our principal products in Canada include Secords, French Crisp and Goldie
lines. We also maintain proprietary specifications for a significant amount of our confectionery products, such as seasonal novelties that we purchase from third parties. We also source products for
resale from approved vendors, including assorted nuts, hard candy, novelties, ice cream and an extensive line of gift items. Approximately 67% of our net sales in fiscal 2002 were generated by
products we manufactured at our Chicago, Illinois facility and 33% by products we purchased from third parties.

We
believe that the superior quality of our products differentiates us from many other confectionery manufacturers. We rely on proven recipes, many dating back to the 1920s, for our
traditional chocolates. Because we rely on a high-quality product, it is our policy to destroy products not sold within specified periods.

2

---

Manufacturing Operations

Manufacturing and Production.All of our manufacturing operations are located in Chicago, Illinois where we also maintain our
corporate headquarters as well as cold and dry storage and a distribution center. Following our June 1999 acquisition of Laura Secord, in August 2000, we consolidated the manufacturing
and distribution of Laura Secord products with our Chicago, Illinois facilities. Prior to August 2000, we purchased the majority of the Laura Secord products under a co-pack
agreement with Nestlè Canada.

Our
manufacturing process is split functionally into cooking, enrobing and packaging. Each area is managed by one department head who in turn reports to the plant manager. Additional
departmental detail is shown below.



Warehousing and Distribution.We maintain warehousing and distribution facilities in Chicago, Illinois and Bensalem,
Pennsylvania, which facilities have 125,000 and 17,000 square feet of warehousing and distribution space, respectively. These facilities maintain temperature and sanitation controls in order to
protect the quality of our products. Employees generally fill orders daily to allow weekly deliveries to our Company-operated Fannie May and Fanny Farmer retail locations and on an "as needed" basis
to other locations. Our fleet of 25 trucks services all of our Fannie May and Fanny Farmer stores, with the exception of our Florida, Minnesota and North Dakota store locations. Our trucks are
refrigerated in order to provide appropriate shipping conditions for bulk candy, pre-boxed chocolates and necessary shop supplies. Independent distributors, parcel services and selected
common carriers and freight forwarding companies supply all of our sales channels and other stores, including all of our Laura Secord stores.

Suppliers and Purchasing.Our primary raw materials include chocolate coatings, nutmeats, natural sweeteners, such as corn
syrup and sugar, and dairy products, including sweetened-condensed milk, high-butterfat cream and butter. Procurement strategies for our primary raw materials are determined, implemented
and monitored on a regular basis by our senior management. We believe that our supply of raw materials is adequate to meet our manufacturing requirements.

To
ensure the consistency of our products, we provide written specifications to our suppliers and require that certificates of analysis accompany each incoming shipment. To assure a
continuous supply of certain ingredients, we frequently enter into purchase contracts with a number of reliable suppliers. Because prices for these products may fluctuate, we may benefit if prices
rise during the terms of these contracts, but we may be required to pay above-market prices if prices fall. Historically, the overall cost of raw materials has remained relatively stable despite
susceptibility to fluctuations for specific items.

We
have one or more alternative sources for all essential ingredients of our products and therefore we believe that the loss of any supplier would not have a material adverse effect on
our results of operations. In fiscal 2002, we purchased approximately 55% and 35% of our chocolate coatings from Blommer Chocolate Company and ADM Cocoa, respectively. We currently have supply
agreements with Blommer through February 28, 2003 on various types of chocolate coatings and through February 28, 2003 with ADM Cocoa. All chocolate coatings prepared for us are
proprietary and are produced according to our recipes. We purchase all of the ice cream that we sell in our Laura Secord stores from an affiliate of Nestlè Canada pursuant to our supply
agreement with such affiliate.

3

---

Marketing and Sales

We sell our confectionery products through three channels: (1) Company-operated retail, (2) third-party retail and
(3) non-retail. In fiscal 2002, sales through our Company-operated stores accounted for $142.3 million, or 77.6%, of our net sales. Third-party retail sales accounted for
$23.8 million, or 13.0%, of our net sales in fiscal 2002. Sales though non-retail channels accounted for $17.3 million, or 9.4%, of our net sales in fiscal 2002.

Company-Operated Retail.As of August 31, 2002, we sold our products through 447 Company-operated stores: 218 Fannie
May stores, 57 Fanny Farmer stores, and 172 Laura Secord stores. These stores were located in 17 states, the District of Columbia and 9 provinces in Canada. See "Properties". Although our Fannie May
and Fanny Farmer stores co-exist in certain states, these stores generally do not compete in the same local markets.

Company-operated
stores typically are open seven days per week and employ six to ten people, including a full-time manager and several part-time employees.
Employees are trained to provide customers with customized selections and to weigh and price each purchase accordingly. Customers are served primarily by store staff, although many of the larger
Fannie May and Fanny Farmer stores also have a self-service section with prepacked boxes.

Our
Laura Secord Company-operated stores consist of both classic stores and combo stores. As of August 31, 2002, of our 172 Laura Secord stores, 155 were Laura Secord classic
stores and 17 were Laura Secord combo stores. Classic stores are traditional stores that offer Laura Secord products. Combo stores are co-branded Laura Secord and Hallmark
Cards, Inc. retail stores that sell Laura Secord products and gifts together with Hallmark greeting cards and gifts in a single, integrated unit. The Laura Secord portion of the store resembles
a classic store in that it includes packaged chocolate displays as well as an individual chocolate and ice cream scooping counter area. The Hallmark portion of the floor space is primarily comprised
of display racks of Hallmark greeting cards and related gift items. The combo stores are operated as a joint venture between Laura Secord and Hallmark. Laura Secord sells its products to the combo
stores at wholesale prices and accounts for its interest in the joint venture using equity accounting principles. Laura Secord is responsible for the management of the stores and receives a management
fee for such services. Profits are split evenly between Laura Secord and Hallmark, and each party receives a manufacturer's margin on the products purchased by the joint venture.

Our
Fannie May and Fanny Farmer stores had average annual sales of approximately $310,000 in fiscal 2002. Our Laura Secord classic and combo stores had average annual sales of
approximately $316,000 and $445,000, respectively, in fiscal 2002. Same store sales in our Fannie May and Fanny Farmer stores increased 4.0% and 0.7% in fiscal 2000 and 2001, respectively. In fiscal
2002, same store sales in our Fannie May and Fanny Farmer stores decreased 3.0%. Same store sales in our Laura Secord classic stores increased 7.3% (4.8% in Canadian dollars) in fiscal 2000, decreased
0.3% (increase of 3.5% in Canadian dollars) in fiscal 2001 and decreased 3.6% (0.8% decrease in Canadian dollars) in fiscal 2002. Same store sales in our Laura Secord combo stores increased 5.2% (2.9%
in Canadian dollars) in fiscal 2000, decreased 9.0% (5.4% in Canadian dollars) in fiscal 2001 and decreased 3.5% (0.7% decrease in Canadian dollars) in fiscal 2002. The decrease in our same store
sales in fiscal 2002 was primarily due to a weak retail environment.

4

---

Since
fiscal 1998, we have opened 46 new Company-operated stores and closed 95 Company-operated stores, most of which were unprofitable. Company-operated store openings and closings for
fiscal 1998, 1999, 2000, 2001 and 2002 are set forth below.

|          |                      | Fiscal Year Ended
|--------- | -------------------- | -----------------
|
|Openings: |                      |                  
|          | Fannie May           |                  
|          | Fanny Farmer         |                  
|          | Laura Secord classic |                  
|          | Laura Secord combo   |                  
|          |                      |                  
|          |                      | Total            
|          |                      |                  
|Closings: |                      |                  
|          | Fannie May           |                  
|          | Fanny Farmer         |                  
|          | Laura Secord classic |                  
|          | Laura Secord combo   |                  
|          |                      |                  
|          |                      | Total            
|          |                      |                  

Third-Party Retail.Through our third-party retail channel, we market our Fannie May, Fanny Farmer and Laura Secord branded
products to approximately 10,000 grocery stores, drug stores, card and gift stores and other variety stores through our mass market program. This program is designed to make our branded products more
readily available to consumers in new and existing markets. Within the mid-priced segment of the U.S. boxed chocolate market, our management has implemented a two-tiered
distribution and pricing strategy to differentiate our Fannie May and Fanny Farmer brand names. We utilize the Fannie May brand for our higher price point specialty markets programs and position the
Fanny Farmer brand at a lower price point for the mass market.

Under
the mass market program, we distribute Fannie May branded products to retailers who then maintain the products in freezer display cases for sale to their customers. We initiated
the program under the Fannie May brand name in the early 1950's as a way to market a limited number of our best-selling assortments through
independent retailers on a year-round basis. We have approximately 1,200 accounts, the vast majority of which are in the greater Chicago metropolitan area and include stores operated by
Jewel Foods, Osco Drug and Dominick's, which collectively account for over 60% of our third-party retail sales. For fiscal 2002, Fannie May mass market program sales accounted for $9.9 million,
or 5.4%, of our net sales.

In
fiscal 1996, we established a national mass market program under the Fanny Farmer brand name. This wholesale program is targeted to grocery stores, drug stores and mass merchandisers,
with product availability limited to the peak selling seasons of Christmas, Valentine's Day and Easter. The terms of sale are similar to those terms given to other accounts, but the products for this
program are selected and packaged to meet lower price points typical of the mass market. Under this program, we have obtained approximately 8,000 outlets, operated mostly by retail chains, including
Target and Albertsons. For fiscal 2002, Fanny Farmer mass market program sales accounted for $7.4 million, or 4.0%, of our net sales.

In
November 1998, we began selling Fannie May boxed chocolates through many of Hallmark Cards, Inc.'s approximately 5,000 Gold Crown stores during the holiday seasons. For
fiscal 2002, specialty markets program sales, such as Hallmark's Gold Crown stores, accounted for $1.8 million, or 1.0%, of our net sales. In fiscal 2002, we terminated our agreement with
Hallmark.

We
intend to expand Laura Secord's third-party retail sales through agency accounts and sales to the Laura Secord combo stores. These sales accounted for $4.7 million, or 2.6%, of
our net sales in fiscal 2002.

Non-Retail.Our non-retail channel consists of sales of our Fannie May and Fanny Farmer branded
products through our corporate gift, fundraising and mail order catalog programs. Under the corporate gift program, companies and organizations buy large amounts of prepackaged candy for
gift-giving purposes, awards or consolidate individual orders from employees or members in order to obtain discount pricing. Historically, we have found a high level of repeat sales in
this segment, as corporate gift customers tend to renew or expand on their prior year's order. Our current corporate gift database includes approximately 43,000 customers. The

5

---

corporate gift program is available year-round, but peaks in activity during the Christmas, Valentine's Day and Easter holiday seasons. A corporate gift catalog is distributed at the
beginning of each fiscal year and prior to each holiday season. We also maintain a fundraising program through which we sell our products in connection with fundraising efforts of various
organizations throughout the United States. For fiscal 2002, corporate gift and fundraising sales accounted for $8.9 million, or 4.9%, of our net sales.

In
addition, we sell our Fannie May branded products through a mail order program through which customers can order products through a catalog which has a national circulation of over
3.1 million catalogs annually and a database of over 300,000 customers. We send Fannie May mail order catalogs to established and prospective customers during key selling seasons. Mail order
catalogs also are made available to the general public through our Company-operated retail stores. Customers can also purchase our products over the internet at our web site (www.fanniemay.com). For
fiscal 2002, mail order sales accounted for $8.4 million, or 4.5%, of our net sales.

Competition

We compete with numerous local and national businesses that manufacture, distribute or retail boxed chocolates and other confectionery products. We also compete
with manufacturers, distributors and retailers of other snack food products, including cookies, ice cream and coffee, as well as with gift manufacturers, distributors and retailers, such as florists
and card and gift shops, that offer products at comparable prices to those of our products. We believe that our principal competitive strengths lie in our name and brand name recognition and
reputation for the quality, value, variety and taste of our products and our expertise in merchandising and marketing of boxed chocolates and other confectionery products. We believe we compete
favorably in our markets with respect to value and variety of our products and excel with respect to quality of our products.

Our
Fannie May and Fanny Farmer products generally compete in the quality boxed chocolate market within the United States, which our management believes can be divided into premium,
mid-priced and low-priced segments. The low-priced segment in the United States, which represents the largest share of the boxed chocolate market, is generally
comprised of products retailing for less than $10.00. The primary competitor in this market is Russell Stover Candies, Inc. which sells under the Whitman's Chocolates and Russell Stover brand
names and competes primarily on price for sales to grocery stores, drug stores and discount stores. Although we believe that our Fannie May and Fanny Farmer products compete primarily in the
mid-priced segment, we also compete against Russell Stover Candies and other lower-priced suppliers in certain distribution channels.

The
mid-priced boxed chocolate segment in the United States is generally comprised of products retailing between $10.00 and $20.00. We believe that our Fannie May and Fanny
Farmer products compete primarily in the mid-priced segment. Competitors in the mid-priced segment consist primarily of local confectionery companies against whom we compete
through Company-operated stores on the basis of price and quality. While generally not competing in the same markets as Fannie May and Fanny Farmer, we believe that See's Candies, a subsidiary of
Berkshire Hathaway Inc., is the largest participant in the mid-priced segment.

The
premium boxed chocolate segment in the United States generally is comprised of chocolates retailing in excess of $20.00. The leading participant in this segment is Godiva
Chocolatier, Inc. Other brands in this market include Perugina, Tobler and Lindt. Most of these chocolates are imported from abroad. We compete in the premium segment on the basis of quality
and packaging primarily through third-party retail sales of our Fannie May branded products in card and gift stores.

The
competition for our Laura Secord branded boxed chocolates consists primarily of (1) Purdy's, a private, family-owned Canadian chocolate retailer, which has an estimated 50
stores located primarily in the provinces of British Columbia and Alberta, and (2) Godiva which has an estimated six stores in Canada. In the scooped ice cream segment, we believe that Laura
Secord competes primarily with Baskin Robbins, a scooped ice cream store chain with approximately 270 franchised locations throughout Canada, and numerous independent retailers.

Intellectual Property

We own numerous trademarks and employ other service marks, symbols, slogans, emblems, logos and designs. The names Fannie May, Fanny Farmer and Laura Secord and
product names, including Pixie and Trinidad, are registered trademarks of ours. Our trademarks are material to the sale of our products. Trademarks generally are valid as long as they are in use
and/or their registrations are properly maintained and provided that such trademarks have not been found to have become generic.

6

---

Although
our recipes and processes that we have developed in the manufacturing of our products are proprietary trade secrets, we have not attempted to obtain patent protection for them.

Employees

As of August 31, 2002, we employed 3,662 people, of which 1,495 worked in Fannie May and Fanny Farmer stores, 1,316 worked in Laura Secord stores and the
remainder worked primarily in our Chicago, Illinois headquarters facility and our Bensalem, Pennsylvania warehouse and distribution facility. Of the total number of employees, 197 were salaried.
During periods of high seasonal retail demand in our second and third fiscal quarters, our number of employees typically increases by approximately 1,200 to 1,300, many of whom work
part-time in our Company-operated retail stores and manufacturing facility. As of August 31, 2002, over one-half of our hourly store personnel were employed on a
part-time basis.

As
of August 31, 2002, 970 of our employees were members of one of the various labor unions that represent our employees. We have seven collective bargaining agreements, all of
which expire on or before December 2003. Unionized employees primarily include personnel working in our manufacturing and warehousing facilities and certain employees working at our Fannie May
retail stores located in Cook County, Illinois. None of our Fanny Farmer or Laura Secord retail store employees are represented by labor unions. Our management generally considers our employee
relations to be good.

Seasonality

Our sales and earnings are highly seasonal. Historically, our second and third fiscal quarters have generated the highest sales and profits due to increased
consumer demand during the Christmas, Valentine's Day and Easter holiday seasons. Our sales generally have been lowest during our fourth fiscal quarter, reflecting reduced demand for our products
during the summer months and resulting in an EBITDA loss in this period. In light of the seasonality of our business, results for any interim period are not necessarily indicative of the results that
may be realized for the full year. Our working capital requirements also fluctuate throughout the year based on our inventories in anticipation of sales. Our inventory requirements generally are
highest during the first four months of our fiscal years as we increase our inventories to accommodate anticipated product sales for the Christmas, Valentine's Day and Easter holiday seasons. Our
manufacturing plant currently operates in response to seasonal demands with the busiest seven-month period commencing after Labor Day and running through Easter. There is an annual summer plant
shutdown to allow for comprehensive maintenance and cleaning activities.

Regulation

Companies engaged in the manufacturing, packaging and distribution of food products are subject to extensive regulation by various governmental agencies. For
example, our manufacturing and warehousing facilities are subject to inspection by the Food and Drug Administration, Occupational Safety and Health Administration and
various other governmental agencies, and our products must comply with regulations under the Federal Food, Drug and Cosmetic Act and with various comparable state statutes regulating the manufacturing
and marketing of food products. Our product labeling is subject to and complies with the Nutrition Labeling and Education Act of 1990. Failure to comply with one or more regulations could result in
the imposition of sanctions, including the closing of all or a portion of our facilities for an indeterminate period of time. In addition, our Company-owned retail stores are subject to licensing and
regulation by the health, sanitation, safety, building and fire agencies in the state or municipality where located. Difficulties or failures in obtaining or maintaining the required licensing or
approvals could prevent the continued operation of such stores. We believe we are operating in substantial compliance with all applicable laws and regulations.

Backlog of Orders

While at any given time we may experience a backlog of orders, the amount of backlog is not material in respect to our total annual sales, nor are the changes
from time to time significant.

Research and Development

We engage in a variety of research and development activities. These activities principally involve development of new products, improvement in the quality of
existing products, improvement and modernization of production processes, and the development and implementation of new technologies to enhance the quality of

7

---

both current and proposed products. Research and development expenses have not been material with respect to our capital expenditures, earnings or competitive position.

Environmental Considerations

Under various federal, state, provincial and local laws, ordinances and regulations, an owner or operator of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances on, in or migrating from such property. Such liability may be imposed without regard to whether the owner or operator knew of, or was responsible
for, the presence of such hazardous or toxic substances. A number of properties owned by us were formerly operated by others as gasoline stations. We have conducted subsurface investigations at these
owned properties and based on these investigations, we have determined that some contamination exists at certain of these sites. We are unaware of any remediation required with respect to such
contamination that would have a material impact on our financial condition. However, we cannot assure you that no additional remediation will be required at these sites or that no additional
environmental liabilities will arise with respect to these sites.

Financial Information by Geographic Area

Information concerning our geographic segments is contained in Note 18, "Geographic Information" of the notes to the financial statements included in this
report.

Item 2Properties

As of August 31, 2002, we operated 447 stores, consisting of 218 Fannie May stores, 57 Fanny Farmer stores and 172 Laura Secord stores. Of the 218 Fannie
May stores, 33 are owned by us and 185 are leased by us. We lease all of our Fanny Farmer and Laura Secord stores. Lease terms and rates for our leased stores vary by location with the typical lease
providing an average five-year term with a minimum base rent plus additional rent based on a percentage of sales and common area charges. Within four years following August 31,
2002, approximately 74% of our retail store leases are due to expire. We believe that we will be able to renew expiring leases at reasonable rates in the future, but we cannot assure you that we will
be able to do so.

On
August 6, 2002, we sold substantially all of the assets of Sweet Factory and its subsidiaries, including 93 Company-operated stores.

8

---

As
of August 31, 2002, our Company-operated stores are located in 17 states, the District of Columbia and 9 provinces in Canada as follows:

|State/Province       |  | Fannie May |  | Fanny Farmer |  | Laura Secord |  | Total Stores
|-------------------- |  | ---------- |  | ------------ |  | ------------ |  | ------------
|Alberta              |  | 0          |  | 0            |  | 9            |  | 9           
|British Columbia     |  | 0          |  | 0            |  | 4            |  | 4           
|District of Columbia |  | 1          |  | 0            |  | 0            |  | 1           
|Florida              |  | 10         |  | 2            |  | 0            |  | 12          
|Illinois             |  | 151        |  | 0            |  | 0            |  | 151         
|Indiana              |  | 24         |  | 0            |  | 0            |  | 24          
|Iowa                 |  | 2          |  | 1            |  | 0            |  | 3           
|Manitoba             |  | 0          |  | 0            |  | 7            |  | 7           
|Maryland             |  | 1          |  | 0            |  | 0            |  | 1           
|Massachusetts        |  | 0          |  | 7            |  | 0            |  | 7           
|Michigan             |  | 7          |  | 6            |  | 0            |  | 13          
|Minnesota            |  | 2          |  | 19           |  | 0            |  | 21          
|Missouri             |  | 7          |  | 0            |  | 0            |  | 7           
|New Brunswick        |  | 0          |  | 0            |  | 4            |  | 4           
|Newfoundland         |  | 0          |  | 0            |  | 2            |  | 2           
|New Hampshire        |  | 0          |  | 1            |  | 0            |  | 1           
|New Jersey           |  | 1          |  | 0            |  | 0            |  | 1           
|New York             |  | 0          |  | 13           |  | 0            |  | 13          
|North Dakota         |  | 0          |  | 1            |  | 0            |  | 1           
|Nova Scotia          |  | 0          |  | 0            |  | 4            |  | 4           
|Ohio                 |  | 0          |  | 3            |  | 0            |  | 3           
|Ontario              |  | 0          |  | 0            |  | 88           |  | 88          
|Pennsylvania         |  | 5          |  | 0            |  | 0            |  | 5           
|Quebec               |  | 0          |  | 0            |  | 51           |  | 51          
|Saskatchewan         |  | 0          |  | 0            |  | 3            |  | 3           
|Virginia             |  | 3          |  | 0            |  | 0            |  | 3           
|Wisconsin            |  | 4          |  | 4            |  | 0            |  | 8           
|                     |  |            |  |              |  |              |  |             
|                     |  | 218        |  | 57           |  | 172          |  | 447         
|                     |  |            |  |              |  |              |  |             

Fannie
May stores typically are found in strip centers and shopping malls or as street-front units and stand-alone roadside sites. Our Fanny Farmer and Laura Secord stores typically are
located in shopping malls. The size of our Fannie May and Fanny Farmer stores, excluding kiosks, generally ranges from 600 square feet for mall locations to 2,900 square feet for stand-alone roadside
locations, with an average store size of approximately 825 square feet. Our stand-alone roadside structures tend to be among our highest grossing sales locations. Our Laura Secord classic stores
average approximately 765 square feet and our Laura Secord combo stores average approximately 3,400 square feet in size.

In
addition to our Company-operated stores, we have four other principal properties: (1) an approximately 320,000 square foot manufacturing, storage and headquarters facility that
we own in Chicago, Illinois; (2) an approximately 125,000 square foot warehouse and distribution facility that we lease in Chicago, Illinois; (3) an approximately 17,000 square foot
warehouse and distribution facility that we own in Bensalem, Pennsylvania; and (4) an approximately 5,000 square foot office facility that we lease in Toronto, Canada. At our Chicago, Illinois
headquarters facility, approximately 162,000 square feet are used for manufacturing, 118,000 square feet for cold and dry storage and 40,000 square feet for office and administrative functions. The
lease of our Chicago warehouse and distribution facility expires in June 2004. Our management believes that substantially all of our property and equipment is in good condition and that we have
sufficient capacity to meet our current manufacturing and distribution requirements.

Item 3Legal Proceedings

On June 12, 2002, our predecessor companies, Archibald Illinois and Holdings, filed voluntary petitions in the United States Bankruptcy Court for the
District of Delaware for protection under Chapter 11 of the Bankruptcy

9

---

Code. See "BusinessRecent DevelopmentsArchibald Reorganization" for more information regarding the bankruptcy proceeding.

On
November 15, 2001, Sweet Factory and its subsidiaries, all of which were wholly owned subsidiaries of Archibald Illinois, filed voluntary petitions in the United States
Bankruptcy Court for the District of Delaware for protection under Chapter 11 of the Bankruptcy Code. See "BusinessRecent DevelopmentsSweet Factory Bankruptcy and Sale" for
more information regarding the Sweet Factory bankruptcy proceeding.

From
time to time, we are involved in routine litigation incidental to our business. We are not a party to any pending or threatened legal proceeding which we believe would have a
material adverse effect on our results of operations or financial condition. Also, except as otherwise discussed above, we were not a party to any such legal proceeding that terminated during the
fourth quarter of fiscal 2002.

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

On or about August 14, 2002, Robert L. Berger & Associates, Archibald Illinois' balloting agent, sent to all of Archibald Illinois' creditors,
including the holders of Archibald Illinois' 101/4% senior notes due 2004, a solicitation package for voting on the Archibald Plan pursuant to which each creditor could vote to either
reject or accept the
Archibald Plan. The deadline for voting on the Archibald Plan was September 16, 2002. As of the deadline, forty-six ballots were received from the creditors. Of those ballots, 100%
(totaling $91,780,000 in dollar amount) were cast in favor of the Archibald Plan.

10

---



Part II

Item 5Market for the Company's Common Equity and Related Stockholder Matters

Prior to November 1, 2002, Archibald Illinois had 4,210 issued and outstanding shares of common stock, par value $.01, all of which were owned by Holdings.
Prior to November 1, 2002, Holdings had four classes of authorized common stock. There were seven holders of record of Holdings' Class A common stock, no outstanding shares of Holdings'
Class B common stock, twelve holders of record of Holdings' Class C common stock and one holder of record of Holdings' Class D common stock. There was no established trading
market for Archibald Illinois' or Holdings' common stock.

In
connection with the Archibald Plan effective November 1, 2002, Holdings merged with and into Archibald Illinois and Archibald Illinois merged with and into us. Under the terms
of the Archibald Plan, in exchange for extinguishing certain claims against Archibald Illinois and Holdings, we issued to the holders of Archibald Illinois' 101/4% senior secured notes
due 2004 (and, upon completion of the Archibald Plan, we expect to issue to certain general unsecured creditors of Archibald Illinois) an aggregate of 276,290 shares of our common stock, par value
$.01 per share, which represents 100% of our issued and outstanding common stock. As of November 1, 2002, our common stock was held by 31 participants of The Depository Trust Company System.
The issuance of shares of our common stock pursuant to the Archibald Plan was exempt from registration under the Securities Act of 1933, as amended, as a result of the exemption set forth in
Section 1145(a)(1) of the Bankruptcy Code. No person acted as an underwriter of the shares of common stock and except for the extinguishment of claims, we did not receive any cash proceeds or
other cash consideration from the issuance of such common stock. There is no established public trading market for our common stock.

To
date, we have not paid cash dividends on our common stock. Any payment of dividends in the future is dependent upon our financial condition, capital requirements and earnings, as well
as other factors. We currently intend to retain all future earnings, if any, to fund the development and growth of our business and, therefore, do not anticipate paying dividends in the foreseeable
future. Furthermore, our ability to pay dividends in the future is restricted by certain contractual restrictions and restrictions under law. See "Management's Discussion and Analysis of Financial
Condition and Results of OperationsLiquidity and Capital Resources" and Note 14, "Debt" of the notes to the financial statements included in this report for information concerning
such restrictions.

11

---

Item 6Selected Financial Data

The following table presents certain of our historical financial data. The selected historical information as of and for each of the five fiscal years in the
period ended August 31, 2002, was derived from our audited financial statements. You should read the information in this table together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements, including the accompanying notes, appearing elsewhere herein.

|                                |                            | Fiscal Year Ended |       
|------------------------------- | -------------------------- | ----------------- | ------
|
|
|Statement of Operations Data:   |                            |                   |       
|Net sales:                      |                            |                   |       
|                                | Company-operated retail(2) |                   | $     
|                                | Third-party retail(3)      |                   |       
|                                | Non-retail(4)              |                   |       
|                                |                            |                   |       
|                                |                            | Net sales         |       
|                                |                            |                   |       
|Gross profit                    |                            | $                 | 81,776
|Restructuring expense(5)        |                            |                   |      
|Write-off of impaired assets(6) |                            |                   |      
|Operating income (loss)         |                            |                   | 12,539
|Interest expense                |                            |                   | 10,346
|Other income and (expense)      |                            |                   | 1,386 
|Reorganization costs(7)         |                            |                   |      
|Income tax                      |                            |                   | 276   
|Net income (loss)               |                            |                   | 3,303 

|                               |  | As of |         | Pro
Forma(8)
|------------------------------ |  | ----- | ------- | ------------
|
|
|Balance Sheet Data:            |  |       |         |             
|Cash and cash equivalents      |  | $     | 13,081  |             
|Working capital (deficiency)   |  |       | 26,988  |             
|Total assets                   |  |       | 98,089  |             
|Total long-term debt           |  |       | 100,145 |             
|Shareholder's equity (deficit) |  |       | (14,944 | )           

|                                          |                      | Fiscal Year Ended |       
|----------------------------------------- | -------------------- | ----------------- | ------
|
|
|Other Data:                               |                      |                   |       
|EBITDA(9)                                 |                      | $                 | 18,964
|EBITDA, excluding Sweet Factory(10)       |                      |                   | 18,964
|Cash provided by (used in):               |                      |                   |       
|                                          | Operating activities |                   |       
|                                          | Investing activities |                   |       
|                                          | Financing activities |                   |       
|Depreciation and amortization             |                      |                   | 6,233 
|Capital expenditures                      |                      |                   | 4,574 
|Net sales growth (decline)                |                      |                   | 4.1   
|Gross profit as a percentage of net sales |                      |                   | 63.6  
|EBITDA margin(11)                         |                      |                   | 14.8  
|Ratio of earnings to fixed charges(12)    |                      |                   | 1.2   

12

---

|                                                     |                                                   | August 29,
1998(1) |     | August 28,
1999(1) |     | August 26,
2000(1) |     | August 25,
2001(1) |      | August 31,
2002(1) |     
|---------------------------------------------------- | ------------------------------------------------- | ------------------ | --- | ------------------ | --- | ------------------ | --- | ------------------ | ---- | ------------------ | ----
|Store Data:                                          |                                                   |                    |     |                    |     |                    |     |                    |      |                    |     
|Number of Company-operated stores at period end(13): |                                                   |                    |     |                    |     |                    |     |                    |      |                    |     
|                                                     | Fannie May/Fanny Farmer stores                    |                    | 317 |                    | 302 |                    | 297 |                    | 289  |                    | 275 
|                                                     | Sweet Factory stores(14)                          |                    |    |                    | 252 |                    | 232 |                    | 190  |                    |    
|                                                     | Laura Secord stores                               |                    |    |                    | 173 |                    | 176 |                    | 178  |                    | 172 
|                                                     |                                                   |                    |     |                    |     |                    |     |                    |      |                    |     
|Total number of stores                               |                                                   | 317                |     | 727                |     | 705                |     | 657                |      | 447                |     
|                                                     |                                                   |                    |     |                    |     |                    |     |                    |      |                    |     
|Increase (decrease) in same store sales(15):         |                                                   |                    |     |                    |     |                    |     |                    |      |                    |     
|                                                     | Fannie May/Fanny Farmer stores                    |                    | 4.2 | %                  | 0.5 | %                  | 4.0 | %                  | 0.7  | %                  | (3.0
|                                                     | Laura Secord classic stores                       |                    | n/a |                    | n/a |                    | 7.3 | %                  | (0.3 | %)                 | (3.6
|                                                     | Laura Secord classic stores (in Canadian dollars) |                    | n/a |                    | n/a |                    | 4.8 | %                  | 3.5  | %                  | (0.8

---

13

---

Item 7Management's Discussion and Analysis of  Financial Condition and Results of Operations

The following discussion should be read in conjunction with "Selected Financial Data" and the other financial information and data
appearing elsewhere herein. Unless otherwise indicated, all references to stores include retail stores and kiosks, but not carts, and are as of August 31, 2002.

Overview

We are a manufacturer and marketer of quality boxed chocolates and other confectionery items. We manufacture a variety of candies and operate confectionery retail
chains under the Fannie May, Fanny Farmer and Laura Secord brand names. As of August 31, 2002, we sold our products through 447 Company-operated stores and approximately 10,000 third party
retail outlets in 17 states and the District of Columbia in the United States and 9 provinces in Canada. We also sell our Fannie May and Fanny Farmer branded products through a variety of
non-retail programs, including our corporate gift, mail order and fundraising programs.

Historically,
Company-operated retail has represented the most significant distribution channel for our products, accounting for $142.3 million, or 77.6%, of net sales in fiscal
2002. Our third-party retail and non-retail businesses collectively accounted for $41.1 million, or 22.4%, of net sales in fiscal 2002. We are currently focusing on growing sales
and earnings by building on our Fannie May, Fanny Farmer and Laura Secord brand names by increasing points of availability for our products.

Our
costs of sales include costs associated with our manufactured products and costs associated with product purchased from third parties and resold by us. The principal elements of our
manufactured product costs are raw materials, labor and manufacturing overhead. Raw materials consist primarily of chocolate, nutmeats, sweeteners and dairy products, the overall cost of which has
remained relatively stable despite susceptibility to fluctuations for specific items. See "Business-Manufacturing Operations-Suppliers and Purchasing." Labor costs consist primarily of hourly wages
and incentives based on achieving operating efficiencies. Manufacturing overhead generally includes employee fringe benefits, utilities, rents and manufacturing supplies. Historically, we generally
have been able to raise prices of our products equal to or in excess of any increases in cost of sales; however, there can be no assurance that we will be able to continue to do so in the future.

Selling,
general and administrative costs include, but are not limited to: (1) Company-operated retail store operating costs, such as wages, rent and utilities,
(2) expenses associated with third-party retail and non-retail sales, which include, among other things, catalog expenses and direct wages and (3) general overhead expenses,
which consist primarily of non-allocable wages, professional fees and administrative and management overhead.

Recent Developments

On June 12, 2002, our predecessor companies, Archibald Illinois and Holdings, filed voluntary petitions in the United States Bankruptcy Court for the
District of Delaware for protection under Chapter 11 of the Bankruptcy

14

---

Code. See "BusinessRecent DevelopmentsArchibald Reorganization" and "Effect of Bankruptcy FilingsArchibald Illinois and Holdings" for more
information regarding the bankruptcy proceeding.

On
November 15, 2001, Sweet Factory and its subsidiaries, all of which were wholly owned subsidiaries of Archibald Illinois, filed voluntary petitions in the United States
Bankruptcy Court for the District of Delaware for protection under Chapter 11 of the Bankruptcy Code. See "BusinessRecent DevelopmentsSweet Factory Bankruptcy and Sale" and
"Effect of Bankruptcy FilingsSweet Factory" for more information regarding the Sweet Factory bankruptcy proceeding.

Effect of Bankruptcy Filings



On June 12, 2002, Holdings and Archibald Illinois filed petitions with the United States Bankruptcy Court for the District of Delaware to commence a joint
voluntary bankruptcy proceeding under Chapter 11 of the U.S. Bankruptcy Code. While in bankruptcy, Holdings and Archibald Illinois continued to manage their properties and operate their businesses in
accordance with the applicable provisions of the Bankruptcy Code. In connection with the bankruptcy proceeding, Holdings and Archibald Illinois filed the Archibald Plan, which was confirmed by the
bankruptcy court on September 25, 2002 and became effective as of November 1, 2002. Pursuant to the Archibald Plan, (i) all of the outstanding equity interests of Holdings and
Archibald Illinois were cancelled; (ii) Holdings merged with and into Archibald Illinois; and (iii) Archibald Illinois merged with and into us. As a result, we acquired all of the assets
of Holdings and Archibald Illinois. As part of the Archibald Plan, we entered into a new $50 million term loan and revolving credit facility with Foothill Capital Corporation, as administrative
agent, to finance our working capital and capital expenditures and to pay the costs of the reorganization. The proceeds of the credit facility also were used, in part, to pay-off the
indebtedness outstanding under Archibald Illinois' debtor-in-possession facility. In addition, pursuant to the Archibald Plan, all of the $170 million outstanding
principal amount of 101/4% senior secured notes due 2004 issued by Archibald Illinois, together with the accrued and unpaid interest thereon, were cancelled and we issued
$50 million of 10% secured subordinated notes due 2007 to the holders of the cancelled notes. Also, pursuant to the Archibald Plan, in consideration of the cancellation of the claims of the
holders of the cancelled notes and the claims of certain general unsecured creditors of Archibald Illinois, we issued (or expect to issue upon completion of the Archibald Plan) to such claimants an
aggregate of 276,290 shares of our common stock, par value $.01 per share, which represents 100% of our issued and outstanding common stock.

As
a result of the effectiveness of the Archibald Plan, we have adopted "fresh-start" reporting as of November 1, 2002 and created a new reporting entity. "Fresh-start" reporting
has resulted in the recording of assets at reorganization value and liabilities at the present value of amount to be paid.

The
Archibald reorganization has had a material impact on our liquidity. See "Liquidity and Capital Resources" for more information regarding the impact of the Archibald
reorganization on our liquidity.



On November 15, 2001, Sweet Factory and its three subsidiaries, Sweet Factory, Inc., SF Candy Company and SF Properties, Inc., filed
voluntary petitions in the United States Bankruptcy Court for the District of Delaware under Chapter 11 of the U.S. Bankruptcy Code. Through the bankruptcy proceedings, the leases for 90 Sweet Factory
stores were rejected and we terminated the employment of approximately 100 full-time and 400 part-time employees. On August 6, 2002, we sold the assets of Sweet Factory
and its subsidiaries for $6.6 million to RDR Group, a California corporation. The proceeds of the sale were applied to pay off the debtor-in-possession financing
provided by CIT, to pay Archibald Illinois' secured claim, to make cure payments to the landlords under the rejected store leases, to pay administrative expenses, to make a payment to the holders of
Archibald Illinois' senior secured notes due 2004 and to make a payment to Sweet Factory's unsecured creditors' class. On October 29, 2002, we dissolved Sweet Factory and its subsidiaries.

Sweet
Factory and its subsidiaries' financial results are included in our consolidated results through November 15, 2001. Accounting principles generally accepted in the United
States generally require that any entity that files for protection under the U.S. Bankruptcy Code whose financial statements were previously consolidated with those of its parent must be prospectively
deconsolidated from the parent with the investment accounted for using the cost method. The effects on our balance sheet of this deconsolidation and use of the cost method are that: (i) our
investment in Sweet Factory is included as a single amount and (ii) our receivable from Sweet Factory

15

---

is no longer eliminated. The effect on our income statement is that beginning November 15, 2001, Sweet Factory's operating results are not included in the consolidated results. At
November 15, 2001, our investment in Sweet Factory was a negative $17.1 million, and the receivable had a balance of $19.4 million. Because of Sweet Factory's and its
subsidiaries' bankruptcies, we determined that the receivable should be reserved for financial reporting purposes. That write-off was first netted against the negative investment balance,
with the remaining $2.3 million recorded as a non-operating expense. See Note 4, "Bankruptcy FilingSweet Factory" of the notes to the financial statements
included in this report for more information regarding the Sweet Factory bankruptcy.

Results of Operations

The following table and discussion summarize our percentage of net sales, pounds of product sold and average selling price, according to distribution, channel,
and the number of our Company-operated stores, in each case, for the periods indicated. Sweet Factory was deconsolidated for financial reporting purposes beginning November 15, 2001 due to its
bankruptcy filing. Therefore, the percentage of net sales for Company-operated retail stores for the fiscal year ended August 31, 2002 reflects Sweet Factory only for the period of
August 26, 2001 through November 15, 2002 only.

|                                                               |                             | Fiscal Year Ended |      
|-------------------------------------------------------------- | --------------------------- | ----------------- | -----
|
|Percentage of net sales:                                       |                             |                   |      
|Company-operated retail                                        |                             |                   | 83.0 
|Third-party retail                                             |                             |                   | 8.8  
|Non-retail                                                     |                             |                   | 8.2  
|                                                               |                             |                   |      
|                                                               |                             |                   | 100.0
|                                                               |                             |                   |      
|Pounds sold (in millions); Fannie May/Fanny Farmer only:       |                             |                   |      
|Company-operated retail                                        |                             |                   | 8.2  
|Third-party retail                                             |                             |                   | 1.9  
|Non-retail                                                     |                             |                   | 2.3  
|                                                               |                             |                   |      
|                                                               | Total pounds sold           |                   |      
|                                                               |                             |                   |      
|Average selling price per pound; Fannie May/Fanny Farmer only: |                             |                   |      
|Company-operated retail                                        |                             | $                 | 11.47
|Third-party retail                                             |                             |                   | 8.80 
|Non-retail                                                     |                             |                   | 9.12 
|                                                               | Total average selling price |                   |      
|Company-operated stores(at period end)                         |                             |                   | 705  

As
a percentage of net sales, Company-operated retail sales decreased from 83.0% in fiscal 2000 to 77.6% in fiscal 2002. This decrease was primarily due to the deconsolidation of Sweet
Factory as well as a weak retail environment in fiscal 2002. From the end of fiscal 2000 to the end of fiscal 2002, the number of Company-operated stores decreased from 705 to 447, primarily as a
result of the deconsolidation of Sweet Factory and the closing of unprofitable Fannie May, Fanny Farmer and Laura Secord stores. While sales and pounds sold declined in our Fannie May and Fanny Farmer
stores, the average selling price per pound increased from $11.47 to $12.37 from fiscal 2000 to fiscal 2002.

Pounds
sold in our third-party retail sales channel increased from 1.9 million in fiscal 2000 to 2.7 million in fiscal 2001 and decreased to 2.4 million in fiscal
2002. The increase in pounds sold from fiscal 2000 to fiscal 2001 was primarily due to a promotion in the specialty market program in fiscal 2001. The decrease in pounds sold in fiscal 2002 was
primarily due to the promotion in the specialty market program not being repeated, which decrease was partially offset by increased sales under the national mass market program.

Pounds
sold in our non-retail sales channel decreased from 2.3 million in fiscal 2000 to 1.6 million in fiscal 2002 as a result of the loss of a key customer in
our fundraising business.

Fiscal Year Ended August 31, 2002 Compared to Fiscal Year Ended August 25, 2001

Net Sales.Consolidated sales for fiscal 2002 were $183.4 million, a decrease of $65.8 million from
$249.2 million for fiscal 2001. The bankruptcy filing and subsequent deconsolidation of Sweet Factory and its

16

---

subsidiaries accounted for $53.1 million of the decline. Company-operated retail sales, excluding Sweet Factory, for fiscal 2002 were $133.5 million, a decrease of $6.7 million,
or 4.8%, from $140.2 million for fiscal 2001. Same store sales decreased 3.0% for Fannie May/Fanny Farmer and 3.6% (0.8% decrease in Canadian dollars) for Laura Secord, primarily due to a weak
retail environment. In addition, we had 19 fewer stores as of August 31, 2002 as compared to August 25, 2001. These stores were closed primarily because of the stores being unprofitable.
Sales through our third-party retail outlets and non-retail distribution channels decreased $5.9 million to $41.1 million for fiscal 2002, from $47.0 million for
fiscal 2001. The decrease was primarily due to lower fundraising sales and an offered promotion to our card and gift business customers, which was not repeated during the current year, offset by
increased mass market sales.

Gross Profit.Gross profit for fiscal 2002 was $105.7 million, a decrease of $39.4 million from
$145.1 million for fiscal 2001. Gross profit, excluding Sweet Factory and $3.9 million in the prior year associated with costs related to the manufacturing start-up of the
Laura Secord products beginning in September 2000 and the closing of unprofitable Sweet Factory stores, for fiscal 2002 was $100.2 million, a decrease of $10.4 million or 9.4%,
from $110.6 million. The decrease in gross profit dollars was primarily due to lower sales.

Selling, General and Administrative.SG&A expenses were $100.9 million for fiscal 2002, a decrease of
$31.4 million from $132.3 million for fiscal 2001. SG&A expenses, excluding Sweet Factory, were $92.7 million for fiscal 2002, an increase of $1.0 million, or 1.1%, from
$91.7 million for fiscal 2001. The increase was primarily due to a $3.0 million increase in packaging expense attributed to a provision for slow moving and obsolete packaging and
wrapping materials, which was partially offset by expenses associated with the decrease in net sales.

Restructuring Expense.We recorded a restructuring charge of $5.8 million in fiscal 2001 for the anticipated closing
of 67 unprofitable Sweet Factory stores. Of the $5.8 million charge, $0.7 million was included in cost of sales relating to inventory liquidation costs. Approximately $1.4 million
of the $5.8 million charge represented cash expenditures for lease termination costs and other costs associated with vacating the stores. The remaining charge of $4.4 million was
primarily for the write-off of fixed assets and inventory liquidation costs. There were no such expenses recorded in fiscal 2002.

Write-off of Impaired Assets.In connection with the review of the future undiscounted cash flows of the Sweet
Factory business, we deemed it necessary in fiscal 2001 to write-off the remaining goodwill associated with the acquisition of Sweet Factory totaling $10.5 million and
write-off $4.1 million of property, plant and equipment. There were no such expenses recorded in fiscal 2002.

Other (Income) and Expense.Included in other expenses in fiscal 2002 is a charge of $0.7 million associated with the
net write-off (for financial reporting purposes) of a $19.4 million receivable due from the Sweet Factory subsidiaries as a result of the Sweet Factory bankruptcy, after first
offsetting $17.1 million of that write-off against our negative investment balance in Sweet Factory and net proceeds from the sale of Sweet Factory of $1.6 million.

Operating Income (Loss).Operating loss was $7.4 million for fiscal 2002, an improvement of $16.1 million from
operating loss of $23.5 million for fiscal 2001. Operating loss was $4.2 million for fiscal 2002, excluding Sweet Factory, which is a decrease of $10.8 million from operating
income of $6.6 million for fiscal 2001, excluding cost of sales, non-recurring, restructuring expense, write-off of impaired assets and Sweet Factory. The decrease was primarily due
to lower sales and increase in packaging expense described above.

Interest Expense.Interest expense for fiscal 2002 was $15.0 million, a decrease of $4.1 million from
$19.1 million for fiscal 2001. This decrease was primarily due to no longer recording interest expense on the $170 million of senior secured notes due 2004 issued by Archibald Illinois
upon commencement of the Archibald bankruptcy proceedings on June 12, 2002.

Reorganization Costs.On June 12, 2002, our predecessor companies, Archibald Illinois and Holdings, filed petitions in
the United States Bankruptcy Court for the District of Delaware to commence a consolidated voluntary bankruptcy proceeding under Chapter 11 of the United States Bankruptcy Code. In connection with
these proceedings and the corresponding restructuring of our balance sheet, we wrote off $5.3 million of deferred financing fees and we incurred $4.6 million in professional fees and
other expenses associated with these proceedings.

17

---



EBITDA.EBITDA, excluding the effect of the disposition of Sweet Factory of $0.7 million, the Sweet Factory EBITDA
loss of $2.7 million and the reorganization costs of $9.9 million, was $6.6 million for fiscal 2002, as compared to $20.1 million for fiscal 2001, excluding restructuring
expense of $5.1 million, write-off of impaired assets of $14.6 million, non-recurring cost of sales of $3.9 million and the Sweet Factory EBITDA loss of
$2.1 million. This decrease is primarily due to lower sales and the increase in packaging expense described above.

Net Income (Loss).Net loss for fiscal 2002 was $33.2 million, a decrease of $8.3 million from net loss of
$41.5 million for fiscal 2001.

Income Tax.Income tax expense for fiscal 2002 and 2001 was $0.1 million.

Fiscal Year Ended August 25, 2001 Compared to Fiscal Year Ended August 26, 2000

Net Sales.Consolidated sales for fiscal 2001 were $249.2 million, a decrease of $4.2 million, or 1.7% from
$253.4 million for fiscal 2000. This decrease was primarily due to the closing of unprofitable Sweet Factory stores. Sales increased for both Fannie May/Fanny Farmer and Laura Secord.
Company-operated retail sales for fiscal 2001 were $202.2 million, a decrease of $8.2 million, or 3.9%, from $210.4 million for fiscal 2000. This decrease was due primarily to the
closing of Sweet Factory stores and a decline in Sweet Factory same store sales. Same store sales increased 0.7% for Fannie May/Fanny Farmer and decreased 5.5% for Sweet Factory. Laura Secord same
store sales decreased 0.3% in U.S. currency; however, increased by 3.5% in Canadian dollars. Sales through third-party retail outlets and non-retail distribution channels increased
$4.0 million, or 9.3%, to $47.0 million for fiscal 2001 from $43.0 million for fiscal 2000.

Gross Profit.Gross profit for fiscal 2001 was $145.1 million, a decrease of $9.8 million, or 6.3%, from
$154.9 million for fiscal 2000. This decrease in gross profit dollars was due primarily to manufacturing start-up costs of $3.2 million and inventory liquidation costs
relating to the closing of unprofitable Sweet Factory stores totaling $0.7 million (see "Restructuring Expense" discussion below), and an increase in cost of sales for Laura Secord product;
which was partially offset by higher profit margins at the Fannie May/Fanny Farmer retail stores. Manufacturing start-up costs relate to our acquisition of the Laura Secord retail business
from Nestlè Canada, Inc, including the consolidation of the manufacturing and distribution of Laura Secord products with our Chicago, Illinois facilities. Gross profit as a percentage
of net sales, without giving effect to the manufacturing start-up costs of $3.2 million and Sweet Factory
nonrecurring costs of $0.7 million, decreased to 59.8% for fiscal 2001 from 61.1% for fiscal 2000. The decrease in gross profit percentage was due primarily to the increased cost of sales for
Laura Secord product.

Selling, General and Administrative.SG&A expenses were $132.3 million for fiscal 2001, a decrease of
$2.0 million, or 1.5%, from $134.3 million for fiscal 2000. This decrease was due primarily to lower administrative wages associated with a reduction in our workforce and the closing of
unprofitable Sweet Factory stores, partially offset by an increase in healthcare costs. As a percentage of net sales, SG&A expenses were 53.1% for fiscal 2001 compared to 53.0% for fiscal 2000.

Restructuring Expense.We recorded a restructuring charge of $5.8 million in fiscal 2001 for the anticipated closing
of 67 unprofitable Sweet Factory stores. As of August 25, 2001, 41 stores were closed. Of the $5.8 million charge, $0.7 million was included in cost of sales relating to inventory
liquidation costs. Approximately $1.4 million of the $5.8 million charge represented cash expenditures for lease termination costs and other costs associated with vacating the stores.
The remaining charge of $4.4 million was primarily for the write-off of fixed assets and inventory liquidation costs.

Write-off of Impaired Assets.In connection with the review of the future undiscounted cash flows of the Sweet
Factory business, we deemed it necessary to write-off the remaining goodwill associated with the acquisition of Sweet Factory totaling $10.5 million and write-off
$4.1 million of property, plant and equipment.

Operating (Income) Loss.Operating loss was $23.5 million for fiscal 2001, a decrease of $26.7 million from
$3.2 million of operating income for fiscal 2000. The decrease in operating income was due primarily to the restructuring charge for the closing of unprofitable Sweet Factory stores, the
nonrecurring cost of sales, the write-off of impaired Sweet Factory assets and an increase in the cost of sales for Laura Secord product.

Interest Expense.Interest expense was $19.1 million for fiscal 2001, an increase of $0.5 million from
$18.6 million in fiscal 2000. The increase was primarily due to a higher average debt balance under our revolving line of credit in fiscal 2001 as compared to fiscal 2000.

18

---

EBITDA.EBITDA, excluding restructuring expense of $5.1 million, nonrecurring cost of sales of $3.9 million,
and the write-off of impaired assets of $14.6 million, decreased by $1.3 million, or 6.7%, to $18.0 million for fiscal 2001, as compared to $19.3 million for
fiscal 2000.

Net Loss.Net loss for fiscal 2001 was $41.5 million, an increase of $26.2 million from a net loss of
$15.3 million for fiscal 2000. This increase was due primarily to the decrease in operating income and additional interest expense, offset by other income.

Income Tax.Income tax expense for fiscal 2001 and 2000 was $0.1 million.

Liquidity and Capital Resources



The Archibald reorganization and the Sweet Factory bankruptcy and sale have had a material impact on our liquidity. As a result of the Archibald Plan effective as
of November 1, 2002, $170.0 million in principal of Archibald Illinois' 101/4% senior secured notes due 2004 has been extinguished and we have issued and have outstanding
$50.0 million of 10% secured subordinated notes due 2007. We expect this will generate annual interest savings of approximately $12.4 million. In addition, approximately
$13.5 million in mandatory redemption payments that were owed by Holdings on its senior preferred stock have been eliminated and approximately $23.3 million in mandatory redemption
payments that would have been owed by Holdings on its junior preferred stock in March 2006 also have been eliminated. We have also terminated unprofitable store leases and renegotiated certain
leases and contracts with favorable terms, which we expect will generate annual savings of approximately $0.2 million. The cash costs of the Archibald reorganization are expected to total
approximately $6.4 million.

Our
liquidity requirements have arisen principally from the Archibald Illinois and Sweet Factory reorganizations and from various capital expenditures, seasonal and general working
capital requirements and debt service obligations. We have satisfied these requirements during the past three fiscal years primarily with (1) term and revolver borrowings and (2) cash
generated by operating activities. During fiscal 2000, 2001 and 2002, the net cash generated by (used in) operating activities was $(0.2) million, $(0.8) million and $2.9 million, respectively.
In an effort to improve working capital, inventories in fiscal 2001 were reduced by $10.3 million. The increase in net cash provided by operating activities in fiscal 2002 was due primarily to
the non-payment of interest on Archibald Illinois' senior secured notes due 2004.

Inventories
historically have represented our most significant working capital requirement and inventory levels fluctuate significantly during the year. Our ratio of inventories to net
sales is typically highest during the fourth fiscal quarter when we experience lower seasonal demand for our products and begin to build inventories for our key sales periods. See
"Quarterly Results and Seasonality." Receivables have not been a material component of our working capital because sales through our Company-operated stores are made on a cash or credit
card basis.



Our capital expenditures for fiscal 2000, 2001 and 2002 were $11.1 million, $5.0 million and $2.8 million, respectively. Capital expenditures
for fiscal 2000 through 2002 related primarily to the remodeling of existing Fannie May, Fanny Farmer and Laura Secord stores and improvements in our management information systems and in fiscal 2000
also include the remodeling and expansion of our Chicago facilities as a result of the Laura Secord and Sweet Factory acquisitions. Investing activities in fiscal 2001 also includes
$5.3 million of proceeds from the sale of an owned store property and in fiscal 2002 includes $1.6 million of net proceeds from the disposition of Sweet Factory and its subsidiaries.



On June 28, 2001, our predecessor company Archibald Illinois and its subsidiary, Sweet Factory, entered into a revolving credit facility with The CIT
Group/Business Credit, Inc., as agent (the "CIT Facility"). The initial borrowings under the CIT Facility were used, in part, to pay all outstanding obligations under Archibald Illinois'
revolving credit facility with Bank One, NA, as agent, which facility was then terminated. The CIT Facility provided for revolving loans and letter of credit issuances, subject to certain borrowing
conditions, in an aggregate amount at any time not to exceed the lesser of (1) $30.0 million (or specified lower amounts at certain times of

19

---

the year) and (2) a borrowing base comprised of a percentage of eligible accounts receivable and inventory and owned store locations.

The
CIT Facility was secured by first priority liens on Archibald Illinois' and Sweet Factory's accounts receivable, and inventory, and the Company-owned store locations, and the
proceeds therefrom. The subsidiaries of Archibald Illinois and Sweet Factory, including Archibald Canada, guaranteed all obligations under the CIT Facility and granted to the agent under the CIT
Facility a first priority lien on their accounts receivable, inventory, and the proceeds therefrom. In addition, Holdings guaranteed all obligations under the CIT Facility and granted to CIT a first
priority lien on all of its assets, including all the outstanding shares of common stock of Archibald Illinois.

As
of June 14, 2002, there was an aggregate of $13.9 million outstanding under the CIT Facility. On June 14, 2002, proceeds from borrowings under the Archibald DIP
Credit Facility were used to pay all outstanding obligations under the CIT Facility and the CIT Facility was then terminated. See "Management's Discussion and Analysis of Financial Condition and
Results of OperationsLiquidity and Capital ResourcesFinancing ActivitiesArchibald DIP Credit Facility."



In connection with the Sweet Factory Bankruptcy, on November 15, 2001, CIT and Sweet Factory entered into a post-petition credit, security and
guaranty agreement (the "SF DIP Credit Facility"). Archibald Illinois, Holdings and Archibald Canada and Sweet Factory's subsidiaries guaranteed all obligations of Sweet Factory under the SF DIP
Credit Facility. The guaranty by Archibald Illinois was secured by a $1.0 million cash collateral account held by CIT. The SF DIP Credit Facility was for one year and provided for revolving
loans at any time not to exceed the lesser of (1) $2.0 million and (2) a borrowing base comprised of a percentage of Sweet Factory's eligible inventory plus a $1.0 million
overadvance, subject to certain reserves.

As
of August 6, 2002, an aggregate of $0.5 million of revolving loans were outstanding under the SF DIP Credit Facility. Proceeds from the August 6, 2002, sale of
assets of Sweet Factory and its subsidiaries were used to pay all outstanding obligations under the SF DIP Credit Facility and the $1.0 million cash collateral account held by CIT as security
for the Archibald Illinois guaranty was released. The SF DIP Facility was then terminated.



In connection with the Archibald Reorganization, on June 14, 2002, Archibald Illinois entered into a post-petition loan and security agreement
and guaranty (the "Archibald DIP Credit Facility") with Foothill Capital Corporation, as the arranger and administrative agent, the lenders party thereto and Holdings and Archibald Canada, as
guarantors. Under the Archibald DIP Credit Facility, the lenders agreed to make available to Archibald Illinois (a) a $25.0 million revolving credit facility, pursuant to which Archibald
Illinois could borrow up to the lesser of (i) $25.0 million and (ii) a borrowing base comprised of certain percentages of eligible accounts receivable and inventory, subject to
certain reserves, and (b) an aggregate of $20.0 million in term loans. Initial borrowings under the Archibald DIP Credit Facility were used to pay-off in full the CIT
Facility.

As
of November 1, 2002, an aggregate of $30.3 million was outstanding under the Archibald DIP Credit Facility. In connection with the Archibald Plan effective
November 1, 2002, all outstanding amounts under the Archibald DIP Credit Facility were repaid in full from proceeds of the initial borrowings under our New Credit Facility and the Archibald DIP
Credit Facility was terminated. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesFinancing
ActivitiesNew Credit Facility."



On November 1, 2002, we entered into a loan and security agreement and guaranty with the financial institutions signatory thereto and Foothill Capital
Corporation, as administrative agent (the "New Credit Facility"). The New Credit Facility was extended to us in connection with our emergence from bankruptcy and replaced the financing provided
pursuant to the Archibald DIP Credit Facility, which was terminated pursuant to the Archibald Plan.

The
New Credit Facility provides up to $50 million in credit, which is comprised of a revolving loan facility, a term loan A, a term loan B and letter of credit
issuances. Under the revolving loan facility, we may, subject to certain borrowing conditions, incur revolving loans in an amount up to the lesser of (1) $30.0 million and (2) a

20

---

borrowing base comprised of a percentage of eligible accounts receivable and eligible inventory, which borrowing base components are subject to certain limits, minus a reserve of $2.5 million
(as such amount may be reduced in accordance with the provisions of the loan agreement) and minus certain additional reserves which may from time to time be imposed by Foothill. Revolving loans are
due and payable in full on November 1, 2005 (the "Maturity Date").

Subject
to certain conditions, the term loan A will be made available to us from July 1 through December 31 of each calendar year, with any outstanding obligations under
such term loan to be repaid in full on December 31 of each year. Subject to any applicable reserves, in 2002, term loan A shall not exceed the lesser of (1) $10.0 million
and (2) a specified percentage of the value of our equipment and real property. In 2003, term loan A shall not exceed the lesser of (1) $9.0 million and (2) a specified
percentage of the value of our equipment and real property. In 2004, term loan A shall not exceed the lesser of (1) $7.0 million and (2) a specified percentage of the value of our
equipment and real property and between July 1, 2005 and the Maturity Date, term loan A shall not exceed $5.0 million. In addition to the term loan A, on November 1, 2002, term
loan B was extended to us in an amount equal to $10.0 million. The outstanding principal amount of term loan B is due and payable in full on the Maturity Date; provided, that if at any time the
outstanding principal amount of term loan B shall be less than $5.0 million as a result of mandatory or voluntary prepayments, the remaining amount of term loan B shall be immediately due and
payable (subject to certain exceptions).

The
New Credit Facility provides the various interest rates which are applicable to the revolving loans and term loans thereunder. At our election, revolving loan advances will bear
interest at either (a) a variable per annum rate equal to the "prime rate" announced from time to time by Wells Fargo Bank, National Association (the "Prime Rate"), plus 0.50% or (b) a
variable per annum rate equal to the "LIBOR" rate determined by Foothill in accordance with its customary procedures, plus 2.75%. Term loan A bears interest at the Prime Rate, plus 2.0%. Term loan B
bears interest at a per annum rate equal to (A) the greater of (x) the Prime Rate plus 3.0% and (y) 7.75%, plus (B) 4.75% (the "PIK Amount"), which PIK Amount shall be paid
in kind by being added to the principal amount of term loan B. The PIK Amount is subject to reduction in calendar year 2003 if there shall not exist any default or event of default under the New
Credit Facility.

The
New Credit Facility is secured by first priority liens on all of our assets and all of the proceeds therefrom. Our wholly-owned subsidiaries, Laura Secord Holdings Corp. and
Archibald Canada (together, the "Guarantor Subsidiaries") have guaranteed all of our obligations under the New Credit Facility and granted a first priority lien in all of their respective assets and
the proceeds therefrom as security for such guarantees.

The
New Credit Facility contains various business and financial covenants including, among other things, limitations on dividends, redemptions and repurchases of capital stock,
limitations on the incurrence of and payments in respect of indebtedness, limitations on asset dispositions, limitations on capital expenditures and requirements to maintain of certain targeted EBITDA
amounts. The New Credit Facility also requires us to make prepayments of the loans in certain circumstances, including, among other things, from our excess cash flow, as defined, and from proceeds of
certain asset sales, insurance and condemnation proceeds (unless we are permitted to repair or replace the applicable collateral as provided in the loan agreement), and in the event that certain
financial tests are not met. These loan restrictions could restrict corporate activities, including our ability to respond to market conditions, to provide for unanticipated capital expenditures or to
take advantage of business opportunities.



In connection with the Archibald Plan, concurrently with the execution and delivery of the New Credit Facility, pursuant to an Indenture dated November 1,
2002 (the "Indenture") between us, the Guarantor Subsidiaries and BNY Midwest Trust Company, as trustee (the "Trustee"), we issued $50.0 million in aggregate principal amount of our 10% Secured
Subordinated Notes due 2007 (the "Notes") in a transaction exempt from registration under the Securities Act of 1933, as amended. The Notes were issued in replacement of those certain
101/4% senior secured notes totaling $170.0 million due 2004 issued by Archibald Illinois pursuant to the Indenture dated July 2, 1997 (as amended and supplemented)
between Archibald Illinois and The Bank of New York, as trustee, which indenture (and the notes issued thereunder) were terminated pursuant to the Archibald Plan.

Interest
is payable under the Notes at the rate of 10% per annum and interest payments are to be made semi-annually on January 1 and July 1 of each year, and on
the maturity date, commencing on January 1, 2003. On or prior to November 1, 2005, we may elect, in the judgment of our Board of Directors, to make all or a portion of each such interest
payment in cash or by issuing new promissory notes (each a "PIK Note") with a

21

---

principal amount, in each case, equal to the amount of interest that each holder of a Note was due on the interest payment date and which we have elected to pay by issuance of the PIK Note; provided,
however, unless certain conditions are satisfied, the New Credit Facility requires that interest accrued under the Notes be paid by the issuance of PIK Notes.

The
Notes are secured by a second priority lien on all of our assets and all of the proceeds therefrom. The Guarantor Subsidiaries have guaranteed all of our obligations under the
Indenture (including the Notes) and granted a second priority lien in all of their respective assets and the proceeds therefrom as security for such guarantees. The liens in favor of the Trustee are
subordinate to the liens granted by us and the Guarantor Subsidiaries in favor of Foothill under the New Credit Facility. The manner and terms under which the liens granted to the Trustee under the
Indenture are subordinated to the liens in favor of Foothill under the New Credit Facility are as set forth in the Indenture.

The
Indenture contains various business covenants including, among other things, limitations on dividends, redemptions and repurchases of capital stock, limitations on the incurrence of
indebtedness and limitations on asset dispositions. The Indenture also requires us to make an offer to repurchase Notes in certain circumstances, including, among other things, to the extent net cash
proceeds from asset sales exceed a certain threshold amount (but only to the extent such proceeds are not reinvested or used to repay certain other indebtedness). These restrictions could restrict
corporate activities, including our ability to respond to market conditions, to provide for unanticipated capital expenditures or to take advantage of business opportunities.

Critical Accounting Policies and Estimates

Financial Reporting Release No. 60, issued by the Securities and Exchange Commission, requires all registrants to discuss "critical" accounting policies or
methods used in the preparation of financial statements. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations, and
require management's most difficult, subjective or complex judgments, as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Inventories.Inventories are stated at the lower of cost or market. Inventories are valued primarily at either average or
first in, first out (FIFO) cost. Supply inventories are relieved monthly based on an estimated gross margin and adjusted to actual upon the taking of an annual physical inventory at the end of July.
In fiscal 2002, we recorded a reserve for supply inventories of approximately $3.0 million. This reserve relates primarily to the discontinuance of certain product lines for which we had unique
packaging, and other slow-moving and obsolete packaging and supply inventories. We will write-off those items which are deemed obsolete and periodically monitor the inventories
for other potential slow moving and obsolete items.

Inflation

Inflationary factors such as increases in the costs of ingredients, purchased product, labor and corporate overhead may adversely affect our operating profit. In
addition, store operating costs, including most of our retail store leases which require us to pay additional rent based on a percentage of sales as well as taxes, insurance and maintenance expenses,
are subject to inflation. Although our recent results have not been significantly affected by inflation, there can be no assurance that a high rate of inflation in the future would not have an adverse
effect on our operating results.

Quarterly Results and Seasonality

Our sales and earnings are highly seasonal. Historically, our second and third fiscal quarters have generated the highest sales and profits due to increased
consumer demand during the Christmas, Valentine's Day and Easter holiday seasons. Our sales generally have been lowest during the fourth fiscal quarter, reflecting reduced demand for our products
during the summer months and resulting in an EBITDA loss in this period. In light of the seasonality of our business, results for any interim period are not necessarily indicative of the results that
may be realized for the full year. Our working capital requirements also fluctuate throughout the year based on our inventories in anticipation of sales. Such inventory requirements generally are
highest during the first four months of each fiscal year as we increase our raw material and other inventories to accommodate anticipated product sales for the Christmas, Valentine's Day and Easter
holiday seasons.

The
following table summarizes our net sales and EBITDA by quarter for fiscal 2001 and 2002. EBITDA in fiscal 2001 and 2002 excludes restructuring expense, manufacturing
start-up costs and the write-off of impaired

22

---

assets, the disposition of Sweet Factory and its subsidiaries and reorganization costs. EBITDA, excluding Sweet Factory for any period, equals EBITDA plus negative EBITDA attributed to Sweet
Factory's operations for such period and minus positive EBITDA attributed to Sweet Factory's operations for such period.

|                                |  | First
Quarter
Ended
Nov. 25,
2000 |        | Second
Quarter
Ended
Feb. 24,
2001 |   | Third
Quarter
Ended
May 26,
2001 |  | Fourth
Quarter
Ended
Aug. 25,
2001 |        | First
Quarter
Ended
Nov. 24,
2001 |   | Second
Quarter
Ended
Feb. 23,
2002 |   | Third
Quarter
Ended
May 25,
2002 |        | Fourth
Quarter
Ended
Aug. 31,
2002 |  
|------------------------------- |  | --------------------------------- | ------ | ---------------------------------- | - | -------------------------------- |  | ---------------------------------- | ------ | --------------------------------- | - | ---------------------------------- | - | -------------------------------- | ------ | ---------------------------------- | -
|
|Net sales                       |  | $                                 | 52,547 |                                    | $ | 102,494                          |  | $                                  | 57,901 |                                   | $ | 36,227                             |   | $                                | 42,375 |                                    | $
|EBITDA                          |  |                                   | 170    |                                    |   | 25,748                           |  |                                    | 461    |                                   |   | (8,364                             | ) |                                  | (4,824 | )                                  |  
|EBITDA, excluding Sweet Factory |  |                                   | 1,242  |                                    |   | 25,021                           |  |                                    | 1,506  |                                   |   | (7,608                             | ) |                                  | (2,095 | )                                  |  

Item 7AQuantitative and Qualitative Disclosure of Market Risk

Our operations are not currently subject to market risks of a material nature for interest risks, foreign currency rates, commodity prices or other market price
risks. During fiscal year 2003, we have experienced an increase in the cost of chocolate, our largest raw material, as a result of higher cocoa bean prices, which has been influenced by events in the
Ivory Coast.

The
following is a chart of our cash contractual obligations (in millions) as of August 31, 2002:

|                                   |  | Payments Due by Period
|---------------------------------- |  | ----------------------
|
|Senior Secured Notes               |  | $                     
|Revolving Line of Credit           |  |                       
|Capital Lease Obligations          |  |                       
|Operating Leases                   |  |                       
|Total Contractual Cash Obligations |  |                       

Item 8Financial Statements and Supplementary Data

The audited consolidated financial statements of Archibald Candy Corporation and its subsidiaries are included in this report beginning at page F-1.

Item 9Changes in and Disagreements with Accountants  On Accounting and Financial Disclosures

During fiscal 2001 and fiscal 2002, there has been no change in our accountants or any disagreement between our management and our accountants on any matter of
accounting principles or practices or financial statement disclosures.

23

---



Part III    Item 10Directors and Executive Officers of the Company

Directors and Management Employees

The following table and summary below set forth certain information with respect to the directors and management employees of Archibald Illinois as of
August 31, 2002.

|Name                              |  | Age |  | Position with the Company                                             
|--------------------------------- |  | --- |  | ----------------------------------------------------------------------
|Directors and Executive Officers: |  |     |  |                                                                       
|Thomas H. Quinn                   |  | 55  |  | Chairman of the Board*                                                
|Ted A. Shepherd                   |  | 43  |  | President and Chief Executive Officer, Director*                      
|Richard J. Anglin                 |  | 47  |  | Vice President, Chief Financial Officer and Secretary*                
|John W. Jordan II                 |  | 54  |  | Director*                                                             
|Adam E. Max                       |  | 44  |  | Director, Vice President, Assistant Treasurer and Assistant Secretary*
|Jeffrey J. Rosen                  |  | 53  |  | Director*                                                             
|Gregory W. Ward                   |  | 28  |  | Director*                                                             
|Management Employees:             |  |     |  |                                                                       
|Alan W. Petrik                    |  | 49  |  | Vice PresidentReal Estate                                            
|Peter A. Kapferer                 |  | 41  |  | Vice PresidentOperations                                             
|Joseph Chipollini                 |  | 51  |  | Vice PresidentRetail Operations                                      
|Nicholas Podoba                   |  | 56  |  | Vice PresidentHuman Resources                                        
|Anne Findley                      |  | 38  |  | Vice PresidentMarketing                                              
|G. Andrew Greenawalt              |  | 41  |  | Vice PresidentMaterials Management                                   
|Edward W. Goralski                |  | 36  |  | Controller and Assistant Secretary                                    

---

Mr. Quinnserved as the Chairman of the Board of Archibald Illinois from 1991 until November 1, 2002. Mr. Quinn
served as Archibald Illinois' Chief Executive Officer from 1991 until June 5, 2002. Since 1988, Mr. Quinn has also been the President, Chief Operating Officer and a director of Jordan
Industries, Inc., a diversified industrial holding company affiliated with The Jordan Company. Mr. Quinn also is a director of other affiliates of Jordan Industries, as well as other
privately held companies.

Mr. Shepherdserved as Archibald Illinois' President and Chief Executive Officer from June 5, 2002 until November 1,
2002. Mr. Shepherd served as President and Chief Operating Officer of Archibald Illinois from 1996 until June 5, 2002. Mr. Shepherd joined Archibald Illinois in
December 1993 as Vice President of the Specialty Division and was named Vice President of Sales and Marketing in 1995. Mr. Shepherd has over 20 years of general management, sales
and marketing experience in the confectionery industry. Prior to joining Archibald Illinois, Mr. Shepherd worked for 11 years at Mars, Incorporated and affiliated entities, where he held
a variety of sales, marketing and general management positions. Mr. Shepherd was elected a director of Archibald Illinois on October 24, 2000.

Mr. Anglinwas hired in September 2000 as Archibald Illinois' Vice President, Chief Financial Officer and Secretary and
served in these positions until November 1, 2002. Mr. Anglin has over 18 years of financial and operational experience in the retail industry. Prior to joining Archibald Illinois,
Mr. Anglin worked for two years as Executive Vice President and Chief Financial Officer for Florsheim Group, Inc., two years as Vice President of Store
Operations for Service Merchandise, and six years as Vice President of Operations and Chief Financial Officer for Mark Shale.

Mr. Jordanserved as one of Archibald Illinois' directors from 1991 until November 1, 2002. Mr. Jordan is a managing
director of The Jordan Company, which he founded in 1982. Mr. Jordan is also a director of Jordan Industries, Inc. and other affiliates of The Jordan Company, as well as other
privately-held companies.

Mr. Maxserved as one of Archibald Illinois' directors from 1991 until November 1, 2002. Mr. Max is a managing
director of The Jordan Company, which he joined in 1986.

24

---

Mr. Rosenserved as one of Archibald Illinois' directors from 1997 until November 1, 2002. Mr. Rosen is a partner in
the law firm of Debevoise & Plimpton, counsel for TCW Capital.

Mr. Wardserved as one of Archibald Illinois' directors from December 2002 until November 1, 2002. Mr. Ward is
an assistant vice president of TCW Capital.

Mr. Petrikserved as Archibald Illinois' Vice President of Real Estate until November 1, 2002. He had been with Archibald
Illinois for 23 years and had held various senior management positions including Vice President of Manufacturing and Vice President of Operations.

Mr. Kapfererwas hired in April 2002 as Archibald Illinois' Vice President of Operations and served in that capacity until
November 1, 2002. Prior to joining Archibald Illinois, Mr. Kapferer worked as Vice President and General Manager for Backerhaus Viet Ltd. Prior to that, he was with
Nestlè Canada Inc. for 11 years where he held a variety of manufacturing and operations positions, including Director of Operations for their Birchmount plant.

Mr. Chipolliniserved as Archibald Illinois' Vice President of Retail Operations from April 1998 until November 1,
2002. Mr. Chipollini joined Archibald Illinois in April 1995 as East Coast Regional Manager. Prior to joining Archibald Illinois, Mr. Chipollini worked for four years at Crystal
Brands, where he served as a District Manager.

Mr. Podobawas hired as Archibald Illinois' Vice President of Human Resources in October 1998 and served in that capacity
until November 1, 2002. Mr. Podoba has over 27 years of experience in human resource management. Prior to joining Archibald Illinois, Mr. Podoba worked for seven years at
Northwestern Memorial Faculty Foundation, where he served as Director of Human Resources.

Ms. Findleyserved as Archibald Illinois' Vice President of Marketing from August 2002 until November 2002. Prior to
that, Ms. Findley served in a series of progressive marketing and management roles. Ms. Findley has over 15 years of sales and marketing experience, primarily in the confectionery
industry, and worked as a Category Manager for Amurol Confections, a division of the William Wrigley, Jr. Company, prior to joining Archibald.

Mr. Greenawaltwas hired as Archibald Illinois' Vice President-Materials Management in May 2001 and served in that capacity
until November 1, 2002. Mr. Greenawalt has 19 years of supply chain and operational experience. Prior to joining Archibald Illinois, he led the operations and supply chain team of
an internet food start-up and was Vice President of Operations for Global Material Technologies, an international consumer and automotive products manufacturer. Mr. Greenawalt also
spent over seven years in various supply chain positions with American National Can Corporation.

Mr. Goralskiwas hired as Archibald Illinois' Controller and Assistant Secretary in January 2000 and served in that capacity
until November 1, 2002. Mr. Goralski has 14 years of accounting experience. Prior to joining Archibald Illinois, Mr. Goralski held positions as Director of Accounting and
Manager of Financial Reporting at Montgomery Ward for over two years, Manager of Financial Reporting at BT Office Products International, Inc. for over two years and prior to that spent over
seven years at Ernst & Young LLP in positions of increasing responsibility.

Pursuant
to the Archibald Plan, substantially all of the executive officers of Archibald Illinois became our executive officers, holding substantially the same positions as they held
while officers of Archibald Illinois. Furthermore, in accordance with the Archibald Plan, all of the directors of Archibald Illinois and Holdings resigned effective as of November 1, 2002.
Pursuant to the Archibald Plan, the number of directors on our Board of Directors has been initially set at five members, four of whom were designated by the holders of Archibald Illinois' senior
notes due 2004 that were cancelled in connection with the Archibald Plan. Our Chief Executive Officer was designated as the fifth director and Chairman of the Board.

25

---

The
following table and summary below set forth certain information with respect our directors and management employees as of November 1, 2002 after giving effect to the Archibald
Plan.

|Name                              |  | Age |  | Position with the Company                                                 
|--------------------------------- |  | --- |  | --------------------------------------------------------------------------
|Directors and Executive Officers: |  |     |  |                                                                           
|Ted A. Shepherd                   |  | 43  |  | President, Chief Executive Officer and Secretary, Chairman of the Board   
|Richard J. Anglin                 |  | 47  |  | Vice President, Chief Financial Officer, Treasurer and Assistant Secretary
|Edward H. D'Alelio                |  | 50  |  | Director                                                                  
|David Markus                      |  | 38  |  | Director                                                                  
|Drew McManigle                    |  | 46  |  | Director                                                                  
|Shepherd G. Pryor, IV             |  | 56  |  | Director                                                                  
|Management Employees:             |  |     |  |                                                                           
|Alan W. Petrik                    |  | 49  |  | Vice PresidentReal Estate                                                
|Peter A. Kapferer                 |  | 41  |  | Vice PresidentOperations                                                 
|Joseph Chipollini                 |  | 51  |  | Vice PresidentRetail Operations                                          
|Nicholas Podoba                   |  | 56  |  | Vice PresidentHuman Resources                                            
|Anne Findley                      |  | 38  |  | Vice PresidentMarketing                                                  
|G. Andrew Greenawalt              |  | 41  |  | Vice PresidentMaterials Management                                       
|Edward W. Goralski                |  | 37  |  | Controller and Assistant Secretary                                        

---

Mr. Shepherdwas appointed our President, Chief Executive Officer and Secretary and was elected to serve as the Chairman of our
Board of Directors in connection with the Archibald Plan, effective November 1, 2002. For information regarding Mr. Shepherd's prior business experience, including positions held with
Archibald Illinois and Holdings, see the biographical information above.

Mr. Anglinwas appointed our Vice President, Chief Financial Officer, Treasurer and Assistant Secretary in connection with the
Archibald Plan, effective November 1, 2002. For information regarding Mr. Anglin's prior business experience, including positions held with Archibald Illinois and Holdings, see the
biographical information above.

Mr. D'Aleliowas elected to serve as one of our directors in connection with the Archibald Plan, effective November 1, 2002.
Since 2002, Mr. D'Alelio has served as an Executive in Residence at the School of Management of the University of Massachusetts-Boston. From 1989 until 2002, Mr. D'Alelio was a Managing
Director of Putnam Investments, where he also served as Chief Investment Officer for Taxable Fixed Income and High Yield Investments. In such positions, he was responsible for directing numerous
restructurings and workouts as a lead creditor. Mr. D'Alelio is also a member of the Board of Trustees of the Newman School of Business and the St. Mary's Women & Infants Center in
Dorchester, Massachusetts.

Mr. Markuswas elected to serve as one of our directors in connection with the Archibald Plan, effective November 1, 2002.
Since 2001, Mr. Markus has been a General Partner at Delaware Street Capital, LLC. Prior to that, Mr. Markus was the Senior Vice President at Amroc Investments, LLC from 1998 until 2001.
From 1995 until 1997, Mr. Markus was a Vice President of the Corporate Bond Group at Salomon Brothers, where he covered high-yield and distressed companies in the Paper/Forest
Products, Supermarket, Retail and Textile Apparel sectors. Mr. Markus is a Chartered Financial Analyst.

Mr. McManiglewas elected to serve as one of our directors in connection with the Archibald Plan, effective November 1,
2002. Mr. McManigle is the founder and President of The McManigle Company, a firm that provides business counseling services to clients in a broad range of industries. Mr. McManigle has
over twenty years of experience as a business executive. From 1979 through 1985, he served as President of a closely-held energy service business in West Texas. He has also served as an
interim chief executive officer and member of the board of directors in various engagements.

Mr. Pryorwas elected to serve as one of our directors in connection with the Archibald Plan, effective November 1, 2002.
Mr. Pryor is currently an independent management consultant based in Chicago, Illinois and has broad experience as a senior-level financial services executive, director and management
consultant. From 1995 until 1997, Mr. Pryor was Senior Consultant and Product Manager for Lobue Associates, Inc, where he developed and marketed the firm's credit services area. Prior to
joining Lobue Associates, he served as Senior

26

---

Vice President for Wells Fargo Bank, N.A. in San Francisco and for Wells Fargo Corporate Services, Inc. in Chicago, where he was Midwest Regional Manager from 1986 to 1990. From 1992 to 1995,
Mr. Pryor served as a director of Petrolane, Inc. He also has served on a number of other boards of directors, including, most recently, the boards of Partners Home Care, HCI
Direct, Inc. and the Music Arts School in Highland Park, Illinois.

Mr Petrikwas appointed our Vice PresidentReal Estate in connection with the Archibald Plan, effective November 1,
2002. For information regarding Mr. Petrik's prior business experience, including positions held with Archibald Illinois, see the biographical information above.

Mr. Kapfererwas appointed our Vice PresidentOperations in connection with the Archibald Plan, effective
November 1, 2002. For information regarding Mr. Kapferer's prior business experience, including positions held with Archibald Illinois, see the biographical information above.

Mr. Chipolliniwas appointed our Vice PresidentRetail Operations in connection with the Archibald Plan, effective
November 1, 2002. For information regarding Mr. Chipollini's prior business experience, including positions held with Archibald Illinois, see the biographical information above.

Mr. Podobawas appointed our Vice President of Human Resources in connection with the Archibald Plan, effective November 1,
2002. Mr. Podoba resigned on November 15, 2002. For information regarding Mr. Podoba's prior business experience, including positions held with Archibald Illinois, see the
biographical information above.

Ms. Findleywas appointed our Vice PresidentMarketing in connection with the Archibald Plan, effective
November 1, 2002. For information regarding Ms. Findley's prior business experience, including positions held with Archibald Illinois, see the biographical information above.

Mr. Greenawaltwas appointed our Vice PresidentMaterials Management in connection with the Archibald Plan, effective
November 1, 2002. For information regarding Mr. Greenawalt's prior business experience, including positions held with Archibald Illinois, see the biographical information above.

Mr. Goralskiwas appointed our Controller and Assistant Secretary in connection with the Archibald Plan, effective
November 1, 2002. For information regarding Mr. Goralski's prior business experience, including positions held with Archibald Illinois, see the biographical information above.

Compensation

In fiscal 2000, Archibald Illinois paid each of its directors a quarterly fee of $2,500. No director fees were paid in fiscal 2001 or 2002. Archibald Illinois
also paid Mr. Quinn a $52,000 consulting fee in each of fiscal 2000, 2001 and 2002. See "Certain Transactions-Director's Consulting Fee." Archibald Illinois also reimbursed its directors for
their travel and other expenses incurred in connection with attending meetings of the Board of Directors of Archibald Illinois.

For
fiscal 2003, we expect to pay our directors, other than Mr. Shepherd, an annual fee of $25,000 and to reimburse all of our directors for their travel and other expenses
incurred in connection with attending meetings of our Board of Directors.

27

---

Item 11Executive Compensation

The following table sets forth certain information regarding compensation paid or accrued by us or our predecessor, Archibald Illinois, during each of the three
most recent fiscal years to our chief executive officer and other executive officers:

Summary Compensation Table

|                                                                                       |  |                |  | Annual Compensation |                         | Long-Term
Compensation
Awards
|-------------------------------------------------------------------------------------- |  | -------------- |  | ------------------- | ----------------------- | -----------------------------
|
|Thomas H. Quinn(1)
    Chairman of the Board and
    Chief Executive Officer           |  | 2002
2001
2000 |  | $                   | 

                   |                              
|Ted A. Shepherd(3)
    President and
    Chief Operating Officer                       |  | 2002
2001
2000 |  |                     | 410,164
366,667
300,000 |                              
|Richard J. Anglin(5)
    Vice President, Chief
    Financial Officer
    and Secretary |  | 2002
2001      |  |                     | 230,000
206,167         |                              

---

Pursuant
to the Archibald Plan, substantially all of the executive officers of Archibald Illinois became our executive officers, holding substantially the same positions and at
substantially the same compensation levels as they held and received while officers of Archibald Illinois.

On
June 5, 2002, Mr. Ted A. Shepherd entered into a one year employment agreement with Archibald Illinois, subject to automatic annual renewal periods, pursuant to which
Mr. Shepherd agreed to serve as Archibald Illinois' President and Chief Executive Officer. In connection with the Archibald Plan, Mr. Shepherd continued as our President and Chief
Executive Officer and we assumed the Shepherd Employment Agreement. Under the terms of the agreement, we will pay Mr. Shepherd an annual salary of $430,000. In addition, Mr. Shepherd
received a stay bonus of $150,000 that was payable in installments subject to the confirmation and effectiveness of the Archibald Plan. Mr. Shepherd is entitled to receive an annual bonus based
on our achievement of certain stated EBITDA targets, and, in the event of a sale of substantially all of our assets or a change of control of the Company, Mr. Shepherd is entitled to a payment
calculated as a percentage of the proceeds of the sale less expenses and $100 million. In the event that we elect not to renew the term of Mr. Shepherd's employment, Mr. Shepherd
is entitled to certain severance benefits, including a lump sum payment equal to 18 months' salary, his annual bonus and continuation of health, life and disability insurance.
Mr. Shepherd receives a similar severance package in the event of a sale of substantially all of our assets or a change of control of the Company after which Mr. Shepherd is not retained
or elects to leave. We have further agreed to indemnify Mr. Shepherd against any expenses he may incur in connection with any claims, actions, suits

28

---

or proceeding to which he may be a party by reason of any action taken or failure to act in his capacity as one of our officers. The non-competition provision of the agreement prohibits
Mr. Shepherd from engaging in competition in any geographical area where we do business for a period of 6 months following resignation or termination. The non-solicitation
provision of the agreement prohibits Mr. Shepherd from interfering with the relationships between us and our employees and customers for a period of 6 months following resignation or
termination.

Holdings' Stock Appreciation Rights Plan

The Fannie May Holdings, Inc. Stock Appreciation Rights Plan was adopted by the Board of Directors of Holdings in October, 1991 to afford selected
employees of Holdings and its subsidiaries an opportunity to participate in the potential economic appreciation of Holdings' consolidated common stock equity value. A total of 52.75 SARs were
authorized for grant under the Stock Appreciation Rights Plan representing the economic equivalent of 52.75
shares, or 4.9%, of Holdings' Common Stock, on a fully diluted basis. As of August 31, 2002, 32.6667 SARs were outstanding under the Stock Appreciation Rights Plan, with 15 SARs issued to our
current employees and the balance held by former employees.

In
connection with the Archibald Plan effective November 1, 2002, the Stock Appreciation Rights Plan was terminated and all SARs issued thereunder were cancelled.

SAR Grant in Fiscal 2002

No SARs were granted during fiscal 2002 by Holdings to our executive officers.

Aggregated SAR Exercises in Fiscal Year 2002 and 2002 Fiscal Year-End SAR Values

No SARs were exercised during fiscal 2002. In connection with the Archibald Plan effective November 1, 2002, all SARs granted pursuant to the SAR Plan were
cancelled.

Holdings' 1998 Stock Bonus Plan

The Fannie May Holdings, Inc. 1998 Stock Bonus Plan was adopted by the Board of Directors of Holdings in August 1998 to promote the
long-term success of Holdings and its subsidiaries by strengthening Holdings' ability to attract and retain highly competent management employees and to provide a means to encourage stock
ownership and proprietary interests in Holdings. As of August 31, 2002, Holdings had issued 26.25 shares in aggregate of its Class A Common Stock pursuant to the 1998 Stock Bonus Plan,
all of which was issued to Mr. Shepherd.

In
connection with the Archibald Plan effective November 1, 2002, the 1998 Stock Bonus Plan was terminated and all shares issued thereunder were cancelled.

Archibald 2002 Stock Option Plan

Under the terms of the Archibald Plan, our Board of Directors was required to establish a stock option plan providing for the granting of options for up to five
percent of the aggregate number of our issued and outstanding shares. Accordingly, our Board of Directors has adopted the 2002 Stock Option Plan and reserved an aggregate of 13,815 shares of our
common stock for issuance under the 2002 Stock Option Plan.

The
2002 Stock Option Plan is designed to enhance our long-term profitability by improving our ability to (a) attract and retain directors or employees who are in a
position to make significant contributions to our success, (b) reward such individuals for their contributions and (c) encourage such individuals to take into account our
long-term interests. Participation in the 2002 Stock Option Plan is limited to our directors, officers and employees
who are selected from time to time by the Board of Directors or by a committee appointed by the Board of Directors. The 2002 Stock Option Plan will be administered by our Board of Directors or a
committee of our Board of Directors consisting of at least two directors. Under the 2002 Stock Option Plan, our Board of Directors has exclusive authority to grant awards under the 2002 Stock Option
Plan and to make all interpretations and determinations affecting the 2002 Stock Option Plan. The Board of Directors has the sole discretion, for example, to determine the individuals to be granted
awards, the number of shares of common stock to be subject to each award granted, the exercise price of each award, the conditions with respect to vesting of awards and all other conditions of any
award under the 2002 Stock Option Plan.

No
grants have been made under the 2002 Stock Option Plan.

29

---

Benefit Plans

We sponsor two noncontributory defined benefit pension plans, one for eligible collective bargaining employees and one for eligible non-collective
bargaining employees. Our employees are generally eligible to become participants in the applicable pension plan upon attaining age 21 and completing a 12-month period of service in which
the employee works a minimum of one thousand hours. Participants become vested in their accrued benefits based on a three to seven year graded vesting schedule at the rate of 20% per year after three
years of "vesting service," as defined in the pension plans. We make annual contributions to the pension plans in amounts determined by the actuary for the pension plans.

The
normal retirement age under the pension plans is the later of age 65 or the fifth anniversary of participation for participants who enter the pension plan on or after
September 1, 1988 and age 65 for participants who enter the plan before September 1, 1988. A reduced early retirement benefit is available when a participant has attained age 55 and
completed at least ten years of vesting service. A participant's accrued annual benefit under the applicable pension plan, starting at age 65, is the sum of (1) his accrued annual benefit, if
any, as of August 31, 1992 and (2) .5% of the "compensation," as defined in the pension plans, paid to the participant during each year of "credited service," as defined in the pension
plans, after August 31, 1992. Effective September 1, 1999, employees covered by certain bargaining units in the pension plan for collective bargaining employees have an accrued annual
benefit of (1) 1.5 times accrued annual benefit, if any, as of August 31, 1992 and (2) .75% of the "compensation" paid to the participant during each year of "credited service"
after August 31, 1992. Effective September 1, 2000, employees covered by certain bargaining units in the pension plan for collective bargaining employees have an accrued annual benefit
of .75% of the "compensation" paid to the participant during each year of "credited service" before or after September 1, 2000. Compensation is generally defined in the pension plans as the
total cash remuneration paid for the twelve months ending August 31 of each year, and is limited by federal law to $200,000 per year, as adjusted for cost-of-living
increases.

The
estimated annual benefits payable to our executive officers under the pension plans upon retirement at normal retirement age, assuming continuous service and constant salary to
normal retirement date, is approximately $50,000, in aggregate.

We
also sponsor two defined contribution 401(k) profit sharing plans, one for eligible collective bargaining employees and one for eligible non-collective bargaining
employees. Our non-collective bargaining employees are eligible to make 401(k) contributions to the profit sharing plan for non-collective bargaining employees after they
have attained the age of 21, and are eligible to have employer discretionary profit sharing contributions credited to their profit sharing accounts after they have attained the age of 21 and completed
a 12-month period of service in which they work a minimum of one thousand hours. Our collective bargaining employees are eligible to make 401(k) contributions and have employer
discretionary profit sharing contributions credited to their profit sharing accounts after they have attained the age of 21 and completed a 12-month period of service in which they work a
minimum of one thousand hours. Participants become vested in their employer discretionary profit sharing accounts under the applicable profit sharing plan based on a three to seven year graded vesting
schedule at the rate of 20% per year after three years of "vesting service," as defined in the profit sharing plans. If we make discretionary profit sharing contributions to the plans for a plan year,
the contributions are allocated to the accounts of participants who completed one thousand hours of service in such plan year and were still employed on the last day of the plan year, or who retired,
died or became disabled during such plan year. Discretionary profit sharing contributions are allocated in accordance with a participant's participation units. Participants receive one participation
unit for each full year of vesting service, and one participation unit for each full $100 of compensation, as defined in the profit sharing plans.

The
normal retirement age under the profit sharing plans is age 65. A participant may elect early retirement under the profit sharing plans after he has attained age 55 and completed at
least five years of vesting service. If a participant terminates employment before retirement, he may elect to receive a distribution of his vested profit sharing plan account balances. Distributions
under the profit sharing plans may be made in a lump sum or installments. Participants direct the investment of their plan accounts. Loans are available from the profit sharing plans to participants
who are employees.

30

---

Item 12Security Ownership of Certain Beneficial  Owners and Management

The following table sets forth certain information with respect to the beneficial ownership of our equity securities as of December 1, 2002 based on
information provided to us by each person who is known by us to beneficially own more than 5% of the outstanding shares of any class of our voting securities. As of November 1, 2002, after
giving effect to the Archibald Plan, none of our directors or executive officers own shares of our equity securities. In connection with the Archibald Plan, effective November 1, 2002, all
shares of Holdings' preferred and common stock, and all shares of Archibald Illinois' common stock, were cancelled.

|Name(1)                                |  | Title of Class(2) |  | Number
of Shares |  | Percentage of
Class |  
|-------------------------------------- |  | ----------------- |  | ---------------- |  | ------------------- | -
|Delaware Street Capital LLC(3)         |  | Common            |  | 82,892           |  | 30.0                | %
|Putnam Investments(4)                  |  | Common            |  | 49,042           |  | 17.8                |  
|Credit Suisse Asset Management         |  | Common            |  | 27,764           |  | 10.0                |  
|Merrill Lynch Investment Management(5) |  | Common            |  | 21,750           |  | 7.9                 |  
|Barclays Bank PLC(6)                   |  | Common            |  | 21,119           |  | 7.6                 |  
|Sagamore Hill Capital(7)               |  | Common            |  | 17,869           |  | 6.5                 |  
|Sankaty Advisors LLC                   |  | Common            |  | 14,620           |  | 5.3                 |  

---

31

---

Item 13Certain Relationships and Related Transactions

Management Consulting Agreement

On July 2, 1997, Holdings entered into a five year management consulting agreement with TJC Management Corp., pursuant to which TJC Management Corp. or its
designee would receive a fixed fee for management, consulting and similar services in the amount of $364,000 per annum plus any out-of-pocket expenses and additional fees for
any investment banking services rendered. In addition, affiliates of TCW investors would be paid $48,000 in aggregate per year as reimbursement of expenses. In fiscal 2000, Holdings paid $412,000
under the management consulting agreement. No management consulting fee was incurred in fiscal 2001 or 2002.

In
connection with the Archibald Plan effective November 1, 2002, the management consulting agreement was terminated and we do not owe any amounts under the agreement.

Tax Sharing and Management Consulting Agreement

On July 2, 1997, Archibald Illinois entered into a tax sharing and management consulting agreement with Holdings, pursuant to which it agreed to pay or
distribute to Holdings amounts relating to Archibald Illinois' share of income, franchise and similar taxes as well as certain management, consulting and investment banking fees. Pursuant to the tax
sharing and management consulting agreement, affiliates of TCW Capital who were members of Archibald Illinois' Board of Directors received $48,000 in the aggregate per year as reimbursement of
expenses incurred in performing financial and management consulting services thereunder, including, but not limited to, any travel expense. In fiscal 2000, Archibald Illinois paid or distributed to
Holdings $412,000 under the tax sharing and management consulting agreement. No amounts were paid or distributed by Archibald Illinois to Holdings under the tax sharing and management consulting
agreement in fiscal 2001 or fiscal 2002.

In
connection with the Archibald Plan effective November 1, 2002, the tax sharing and management consulting agreement was terminated and we do not owe any amounts under the
agreement.

Director's Consulting Fee

In each of fiscal 2000, 2001 and 2002, Archibald Illinois paid to Mr. Quinn a consulting fee equal to $52,000 in lieu of a salary in exchange for services
rendered to it. Mr. Quinn provided consulting services with respect to financial and business affairs, relationships with lenders and stockholders, and the operation of Archibald Illinois'
business.

In
connection with the Archibald Plan effective November 1, 2002, Mr. Quinn resigned as a director of Archibald Illinois and the consulting fee arrangement was terminated.

Holdings' Shareholders Agreement

Prior to November 1, 2002, all holders of Holdings' common stock were party to a shareholder's agreement, which contained provisions relating to the
governance of Holdings and Archibald Illinois. These provisions provided for, among other things, the election to Holdings' and Archibald Illinois' Boards of Directors of three directors nominated by
affiliates of The Jordan Company and two directors nominated by affiliates of TCW Capital. Messrs. Jordan, Quinn and Max were the directors nominated by the affiliates of The Jordan Company.
Messrs. Rosen and Ward were the directors nominated by the affiliates of TCW Capital.

In
connection with the Archibald Plan effective November 1, 2002, Holdings' shareholders agreement was terminated.

Provision of Services to the Company

Jordan Industries, Inc. owns 80% of PAMCO Printed Labels, which supplied approximately $776,000 and $873,000 of labels to Archibald Illinois in fiscal 2001
and fiscal 2002, respectively. Mr. Quinn, Archibald Illinois' Chairman of the Board and Chief Executive Officer, is the President, Chief Operating Officer and a director of Jordan
Industries, Inc. Mr. Jordan, one of Archibald Illinois' directors, is Chairman of the Board and Chief Executive Officer of Jordan Industries, Inc. In connection with the Archibald
Plan effective November 1, 2002 Mr. Quinn and Mr. Jordan resigned as directors of Archibald Illinois and no longer serve on our Board of Directors.

32

---

Archibald's Stockholders Agreement

The holders of shares of our common stock are party to a stockholders agreement dated as of November 1, 2002, which provides, among other things, that the
number of the directors constituting our Board of Directors shall initially be five members, and thereafter shall in no event be less than five. Each stockholder is obligated to vote its shares to
elect our Chief Executive Officer as one of our directors. The stockholders agreement provides that any stockholder owning at least 10% of the outstanding shares of our common stock has the right to
appoint an "observer" to attend meetings of our Board of Directors in a non-voting capacity.

In
addition, we must seek the approval of stockholders holding at least 58% of the outstanding shares of our common stock before committing to effect any sale of 50% or more of our
assets, any change of control transaction or any liquidation or bankruptcy. The stockholders agreement also provides for tag-along rights to stockholders with respect to any proposed sale
of at least 35% of our outstanding common stock and drag-along rights with respect to any proposed sale by stockholders owning at least an aggregate of 58% of the shares of our outstanding
common stock. The stockholders agreement grants each stockholder certain preemptive rights with respect to any proposed issuance of shares of our capital stock, options to purchase shares of our
capital stock, or any securities or options to purchase securities convertible into, or exercisable or exchangeable for any shares of our capital stock. Under the terms of the stockholders agreement,
we are permitted, subject to certain conditions, to purchase from any employee investor any or all of the shares of our common stock owned by such employee upon termination of employment.

Registration Rights Agreement

In connection with the Archibald Plan, we entered into a registration rights agreement dated as of November 1, 2002, with Credit Suisse Asset Management,
Delaware Street Capital LLC, Putnam Investments and their respective affiliates, pursuant to which we are obligated to (i) file with the Securities and Exchange Commission on or before
April 30, 2003 a registration statement relating to the offer and sale of the shares of our common stock and our 10% secured subordinated notes due 2007 and (ii) use our best efforts to
cause the registration statement to be effective no later than June 30, 2003 and for three years thereafter. During the period that the registration statement is effective, the stockholders
party to the registration rights agreement may sell any or all of their shares of our common stock or our 10% secured subordinated notes pursuant to the registration statement by providing us with
three (3) business days prior notice.

Additionally,
subject to certain conditions and limitations, we have agreed to permit the holders party to the registration rights agreement to include their shares of our common stock
or our 10% secured subordinated notes in any primary offering pursuant to a registration statement filed with the Securities and Exchange Commission whenever our securities then issued and outstanding
are to be registered under the Securities Act, subject to compliance with certain notice provisions set forth in the registration rights agreement. We may postpone or withdraw any such primary
registration without obligation to any Holder. We are generally required to bear all expenses arising from these registrations. We have further agreed to indemnify, to the fullest extent permitted by
law, each stockholder party to the registration rights agreement and certain of their affiliates against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue
statement of a material fact contained in any registration statement, any prospectus or preliminary prospectus or any amendment thereof or supplement thereto, any omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements therein not misleading or any violation of federal or state blue sky laws. These registration rights are subject to
conditions and limitations, including the right of the underwriters of an offering to limit the number of shares of common stock or notes held by the holders with registration rights to be included in
such registration.

Item 14Controls and Procedures

Evaluation of disclosure controls and procedures

Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days of the filing date of this Annual Report on Form 10-K, our president, chief
executive officer and secretary and our vice president, chief financial officer, treasurer and assistant secretary have concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
Commission's rules and forms and are operating in an effective manner.

Changes in internal controls

There have been no significant changes in our internal controls or in other factors that could significantly affect these internal controls subsequent to the date
of their most recent evaluation.

33

---

Part IV    Item 15Exhibits, Financial Statement Schedules, and Reports on Form 8-K





Current
report on Form 8-K filed with the Securities and Exchange Commission on August 16, 2002

Current
report on Form 8-K filed with the Securities and Exchange Commission on July 9, 2002

Current
report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2002

The
response to this portion of item 15 is is submitted in the response to item 15a of this report.

34

---



INDEX TO EXHIBITS

|Exhibit
Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                          
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1            |  | Second Amended Plan of Liquidation of Sweet Factory Group, Inc., et al., as modified pursuant to Support Agreement dated May 23, 2002 (incorporated by reference to Exhibit 10.6 to Archibald Illinois'
Form 10-Q filed with the SEC on July 15, 2002, File No. 333-33751)                                                                                      
|2.2            |  | Joint Plan of Reorganization dated as of June 12, 2002 by Archibald Illinois and Holdings (incorporated by reference to Exhibit 10.4 to Archibald Illinois' Form 10-Q filed with the SEC on July 15, 2002, File No. 333-33751)                                                                                                                                  
|2.3            |  | Second Amended Joint Plan of Reorganization filed by Archibald Illinois and Holdings on September 23, 2002 with, and confirmed on September 25, 2002 by, the United States Bankruptcy Court for the District of Delaware (incorporated by
reference to Exhibit 99.T3D to Archibald Illinois' Form T-3 filed with the SEC on October 7, 2002, File No. 022-28628)
|2.4            |  | First Amended Disclosure Statement pursuant to Section 1125 of the Bankruptcy Code filed by Archibald Illinois and Holdings on August 7, 2002 with the United States Bankruptcy Court for the District of Delaware (incorporated by reference to
Exhibit 99.TE17 to Archibald Illinois' Form T-3 filed with the SEC on October 7, 2002, File No. 022-28628)     
|2.5            |  | Notice of Effective Date (November 1, 2002) filed by Archibald Illinois and Holdings on November 12, 2002 with the United States Bankruptcy Court for the District of Delaware                                                                                                                                                                                  
|3.1            |  | Certificate of Incorporation of the Company (incorporated by reference to Exhibit 99.T3A to Archibald Illinois' Form T-3 filed with the SEC on October 7, 2002, File No. 022-28628)                                                                                                                                                                             
|3.2            |  | By-Laws of the Company (incorporated by reference to Exhibit 99.T3B to Archibald Illinois' Form T-3 filed with the SEC on October 7, 2002, File No. 022-28628)                                                                                                                                                                                                  
|3.3            |  | Articles of Incorporation of Archibald Candy (Canada) Corporation (incorporated by reference to Exhibit 3.7 to Archibald Illinois' Registration Statement on Form S-4, File No. 333-84685)                                                                                                                                                                      
|3.4            |  | By-Laws of Archibald Candy (Canada) Corporation (incorporated by reference to Exhibit 3.12 to Archibald Illinois' Registration Statement on Form S-4, File No. 333-84685)                                                                                                                                                                                       
|3.5            |  | Certificate of Incorporation of Laura Secord Holdings Corp.                                                                                                                                                                                                                                                                                                     
|3.6            |  | By-Laws of Laura Secord Holdings Corp.                                                                                                                                                                                                                                                                                                                          
|4.1            |  | Stockholders Agreement dated as of November 1, 2002 among the Company and the holders of the Company's common stock                                                                                                                                                                                                                                             
|4.2            |  | Registration Rights Agreement dated as of November 1, 2002 among the Company and certain holders of the Company's common stock                                                                                                                                                                                                                                  
|4.3            |  | Loan and Security Agreement and Guaranty dated as of November 1, 2002 among the Company, Laura Secord Holdings Corp., Archibald Candy (Canada) Corporation, the Lenders from time to time signatory thereto and Foothill Capital Corporation, as the
arranger and administrative agent                                                                          
|4.4            |  | Pledge Agreement dated as of November 1, 2002 by the Company and Laura Secord Holdings Corp. in favor of Foothill Capital Corporation, as administrative agent                                                                                                                                                                                                  
|4.5            |  | Intellectual Property Security Agreement dated as of November 1, 2002 among the Company, Laura Secord Holdings Corp., Archibald Candy (Canada) Corporation and Foothill Capital Corporation, as administrative agent                                                                                                                                            
|4.6            |  | General Security Agreement dated as of November 1, 2002 by Archibald Candy (Canada) Corporation in favor of Foothill Capital Corporation, as administrative agent                                                                                                                                                                                               
|4.7            |  | Guarantee and Indemnity dated as of November 1, 2002 by Archibald Candy (Canada) Corporation in favor of Foothill Capital Corporation, as administrative agent                                                                                                                                                                                                  
|4.8            |  | Movable Hypothec dated as of November 1, 2002 between Archibald Candy (Canada) Corporation and Foothill Capital Corporation, as administrative agent                                                                                                                                                                                                            
|               |  |                                                                                                                                                                                                                                                                                                                                                                 

35

---

|4.9  |  | Indenture dated as of November 1, 2002 among the Company, Laura Secord Holdings Corp., as guarantor, Archibald Candy (Canada) Corporation, as guarantor and BNY Midwest Trust Company, as trustee, with respect to the Company's 10% Secured Subordinated
Notes due 2007                                           
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.10 |  | Security Agreement dated as of November 1, 2002 among the Company, Laura Secord Holdings Corp., Archibald Candy (Canada) Corporation and BNY Midwest Trust Company, as trustee                                                                                                                                     
|4.11 |  | General Security Agreement dated as of November 1, 2002 by Archibald Candy (Canada) Corporation in favor of BNY Midwest Trust Company, as trustee                                                                                                                                                                  
|4.12 |  | Guarantee and Indemnity dated as of November 1, 2002 by Archibald Candy (Canada) Corporation in favor of BNY Midwest Trust Company, as trustee                                                                                                                                                                     
|4.13 |  | Deed of Movable Hypothec dated as of November 1, 2002 between Archibald Candy (Canada) Corporation and BNY Midwest Trust Company, as trustee                                                                                                                                                                       
|10.1 |  | Employment Agreement dated as of June 5, 2002 between the Company (as successor in interest to Archibald Illinois) and Ted Shepherd                                                                                                                                                                                
|10.2 |  | Lease dated April 17, 1997 between Chicago Midway Joint Venture, as landlord, and the Company, as tenant, relating to the Company's Chicago, Illinois warehouse and distribution facility (incorporated by reference to Exhibit 4.13 to Archibald
Illinois' Registration Statement on Form S-1, File No. 333-33751)
|10.3 |  | First Amendment to Lease Agreement between LaSalle Bank National Association, as landlord and the Company, as tenant, relating to the Company's Chicago, Illinois warehouse and distribution facility                                                                                                              
|10.4 |  | Asset Purchase Agreement dated as of June 5, 2002 between RDR Group and Sweet Factory Group, Inc. Sweet Factory, Inc., SF Candy Company and SF Properties, Inc. (incorporated by reference to Exhibit 10.5 to Archibald Illinois' Form 10-Q
filed with the SEC on July 15, 2002, File No. 333-33751)               
|10.5 |  | Archibald 2002 Stock Option Plan                                                                                                                                                                                                                                                                                   
|12.1 |  | Statement re: Computation of Earnings to Fixed Charges                                                                                                                                                                                                                                                             
|21.1 |  | Subsidiaries of the Company                                                                                                                                                                                                                                                                                        
|99.1 |  | Section 906 CEO Certification                                                                                                                                                                                                                                                                                      
|99.2 |  | Section 906 CFO Certification                                                                                                                                                                                                                                                                                      

36

---



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                            |                                                                                                                                            | 
|--------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | 
|ARCHIBALD CANDY CORPORATION |                                                                                                                                            | 
|                            | Report of Independent Auditors                                                                                                             | 
|                            | Consolidated Balance Sheets as of August 25, 2001 and August 31, 2002                                                                      | 
|                            | Consolidated Statements of Operations for the years ended August 26, 2000, August 25, 2001 and August 31, 2002                             | 
|                            | Consolidated Statement of Changes in Shareholder's Equity Deficit for the years ended August 26, 2000, August 25, 2001 and August 31, 2002 | 
|                            | Consolidated Statements of Cash Flows for the years ended August 26, 2000, August 25, 2001 and August 31, 2002                             | 
|                            | Notes to Consolidated Financial Statements                                                                                                 | 

F-1

---



Report of Independent Auditors

Board
of Directors
Archibald Candy Corporation

We
have audited the accompanying consolidated balance sheets of Archibald Candy Corporation as of August 25, 2001 and August 31, 2002, and the related consolidated
statements of operations, changes in shareholder's deficit, and cash flows for the years ended August 26, 2000, August 25, 2001 and August 31, 2002. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion
on these financial statements and schedule based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

As
discussed in Notes 1 and 4 to the consolidated financial statements, the Company filed for Chapter 11 bankruptcy protection on June 12, 2002. At August 31, 2002, the
Company was operating as a debtor-in-possession. The Company emerged from Chapter 11 bankruptcy on November 1, 2002. The consolidated financial statements at
August 31, 2002 do not give effect to any adjustments in the carrying value of assets or the amounts or classification of liabilities that will be recorded upon the adoption of "fresh start"
accounting.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Archibald Candy Corporation as of
August 25, 2001 and August 31, 2002, and the consolidated results of its operations and its cash flows for the years ended August 26, 2000, August 25, 2001 and
August 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ERNST & YOUNG LLP

November 15,
2002
Chicago, Illinois

F-2

---



Archibald Candy Corporation(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)Consolidated Balance Sheets  As of August 25, 2001 and
August 31, 2002

|                                                                                                  |                                              | 2001                                |         | 2002    |  
|------------------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------- | ------- | ------- | -
|
|Assets                                                                                            |                                              |                                     |         |         |  
|Current assets:                                                                                   |                                              |                                     |         |         |  
|                                                                                                  | Cash and cash equivalents                    |                                     | $       | 2,346   |  
|                                                                                                  | Restricted cash                              |                                     |         |        |  
|                                                                                                  | Accounts receivable, net                     |                                     |         | 1,452   |  
|                                                                                                  | Inventories, net                             |                                     |         | 31,840  |  
|                                                                                                  | Prepaid expenses and other current assets    |                                     |         | 3,133   |  
|                                                                                                  |                                              |                                     |         |         |  
|Total current assets                                                                              |                                              |                                     | 38,771  |         |  
|Property, plant, and equipment, net                                                               |                                              |                                     | 34,398  |         |  
|Goodwill, less accumulated amortization of $12,980 ($11,242 in 2001)                              |                                              |                                     | 58,465  |         |  
|Noncompete agreements and other intangibles, less accumulated
amortization of $181 ($282 in 2001) |                                              |                                     | 685     |         |  
|Deferred financing fees, less accumulated amortization of $5,693 in 2001                          |                                              |                                     | 6,224   |         |  
|Investment in joint venture                                                                       |                                              |                                     | 1,988   |         |  
|Other assets                                                                                      |                                              |                                     | 1,580   |         |  
|                                                                                                  |                                              |                                     |         |         |  
|Total assets                                                                                      |                                              | $                                   | 142,111 |         | $
|                                                                                                  |                                              |                                     |         |         |  
|Liabilities and shareholder's deficit                                                             |                                              |                                     |         |         |  
|Current liabilities:                                                                              |                                              |                                     |         |         |  
|                                                                                                  | Revolving line of credit                     |                                     | $       | 19,472  |  
|                                                                                                  | Accounts payable                             |                                     |         | 16,821  |  
|                                                                                                  | Accrued liabilities                          |                                     |         | 3,720   |  
|                                                                                                  | Payroll and related liabilities              |                                     |         | 2,466   |  
|                                                                                                  | Accrued interest                             |                                     |         | 3,002   |  
|                                                                                                  | Restructuring reserve                        |                                     |         | 94      |  
|                                                                                                  | Current portion of capital lease obligations |                                     |         | 47      |  
|                                                                                                  | Liabilities subject to compromise            |                                     |         |        |  
|                                                                                                  |                                              |                                     |         |         |  
|Total current liabilities                                                                         |                                              |                                     | 45,622  |         |  
|Due to affiliate                                                                                  |                                              |                                     | 40      |         |  
|Senior Secured Notes                                                                              |                                              |                                     | 170,000 |         |  
|Deferred rent                                                                                     |                                              |                                     | 885     |         |  
|Pension liability                                                                                 |                                              |                                     | 1,038   |         |  
|Capital lease obligations, less current portion                                                   |                                              |                                     | 130     |         |  
|Shareholder's deficit:                                                                            |                                              |                                     |         |         |  
|                                                                                                  | Common stock, $0.01 par value:               |                                     |         |         |  
|                                                                                                  |                                              | Authorized25,000 shares            |         |         |  
|                                                                                                  |                                              | Issued and outstanding4,210 shares |         |         | 
|                                                                                                  | Additional paid-in-capital                   |                                     |         | 18,700  |  
|                                                                                                  | Accumulated deficit                          |                                     |         | (94,106 | )
|                                                                                                  | Other comprehensive loss                     |                                     |         | (198    | )
|                                                                                                  |                                              |                                     |         |         |  
|Total shareholder's deficit                                                                       |                                              |                                     | (75,604 | )       |  
|                                                                                                  |                                              |                                     |         |         |  
|Total liabilities and shareholder's deficit                                                       |                                              | $                                   | 142,111 |         | $
|                                                                                                  |                                              |                                     |         |         |  

See
accompanying notes.

F-3

---

Archibald Candy Corporation(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)Consolidated Statements of Operations  Years ended
August 26, 2000, August 25, 2001 and August 31, 2002

|                                                       |                                                                    | 2000 |         | 2001   |   | 2002    |        
|------------------------------------------------------ | ------------------------------------------------------------------ | ---- | ------- | ------ | - | ------- | -------
|
|Net sales                                              |                                                                    | $    | 253,390 |        | $ | 249,169 |        
|Cost of sales, excluding depreciation and amortization |                                                                    |      | 98,536  |        |   | 100,160 |        
|Cost of sales, nonrecurring (Note 5)                   |                                                                    |      |        |        |   | 3,883   |        
|                                                       |                                                                    |      |         |        |   |         |        
|                                                       | Total cost of sales                                                |      |         | 98,536 |   |         | 104,043
|                                                       |                                                                    |      |         |        |   |         |        
|Gross profit                                           |                                                                    |      | 154,854 |        |   | 145,126 |        
|Selling, general, and administrative expenses          |                                                                    |      | 134,342 |        |   | 132,283 |        
|Depreciation and amortization expense                  |                                                                    |      | 11,020  |        |   | 12,154  |        
|Amortization of goodwill and other intangibles         |                                                                    |      | 4,846   |        |   | 4,457   |        
|Restructuring expense (Note 6)                         |                                                                    |      | 780     |        |   | 5,079   |        
|Write-off of impaired assets (Note 9)                  |                                                                    |      |        |        |   | 14,593  |        
|Management fees and other fees (credit)                |                                                                    |      | 519     |        |   | (181    | )      
|Share of loss in joint venture                         |                                                                    |      | 195     |        |   | 285     |        
|                                                       |                                                                    |      |         |        |   |         |        
|Operating income (loss)                                |                                                                    |      | 3,152   |        |   | (23,544 | )      
|Other (income) and expense:                            |                                                                    |      |         |        |   |         |        
|                                                       | Interest expense                                                   |      |         | 18,614 |   |         | 19,139 
|                                                       | Interest income                                                    |      |         | (37    | ) |         | (5     
|                                                       | Disposition of Sweet Factory Group, Inc. and subsidiaries (Note 4) |      |         |       |   |         |       
|                                                       | Other income                                                       |      |         | (207   | ) |         | (1,291 
|                                                       |                                                                    |      |         |        |   |         |        
|Loss before reorganization costs and income taxes      |                                                                    |      | (15,218 | )      |   | (41,387 | )      
|Reorganization costs (Note 7)                          |                                                                    |      |        |        |   |        |        
|                                                       |                                                                    |      |         |        |   |         |        
|Loss before income taxes                               |                                                                    |      | (15,218 | )      |   | (41,387 | )      
|Provision for income taxes                             |                                                                    |      | 130     |        |   | 132     |        
|                                                       |                                                                    |      |         |        |   |         |        
|Net loss                                               |                                                                    | $    | (15,348 | )      | $ | (41,519 | )      
|                                                       |                                                                    |      |         |        |   |         |        

See
accompanying notes.

F-4

---



Archibald Candy Corporation(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)Consolidated Statement of Changes in Shareholder's Deficit(Dollars in Thousands)

|                           |                                                                             | Common Stock |   |   |   |   |   |        |   |   |         
|-------------------------- | --------------------------------------------------------------------------- | ------------ | - | - | - | - | - | ------ | - | - | --------
|
|Balance at August 28, 1999 |                                                                             | 4,210        |   |   |  |   | $ | 18,700 |   | $ | (37,239 
|Comprehensive loss:        |                                                                             |              |   |   |   |   |   |        |   |   |         
|                           | Net loss                                                                    |              |  |   |   |  |   |        |  |   |         
|                           | Foreign currency translation adjustments                                    |              |  |   |   |  |   |        |  |   |         
|                           |                                                                             |              |   |   |   |   |   |        |   |   |         
|                           |                                                                             | Total        |   |  |   |   |  |        |   |  |         
|                           |                                                                             |              |   |   |   |   |   |        |   |   |         
|Balance at August 26, 2000 |                                                                             | 4,210        |   |   |  |   |   | 18,700 |   |   | (52,587 
|Comprehensive loss:        |                                                                             |              |   |   |   |   |   |        |   |   |         
|                           | Net loss                                                                    |              |  |   |   |  |   |        |  |   |         
|                           | Foreign currency translation adjustments                                    |              |  |   |   |  |   |        |  |   |         
|                           | Excess of additional pension liability
over unrecognized prior service cost |              |  |   |   |  |   |        |  |   |         
|                           |                                                                             |              |   |   |   |   |   |        |   |   |         
|                           |                                                                             | Total        |   |  |   |   |  |        |   |  |         
|                           |                                                                             |              |   |   |   |   |   |        |   |   |         
|Balance at August 25, 2001 |                                                                             | 4,210        |   |   |  |   |   | 18,700 |   |   | (94,106 
|Comprehensive loss         |                                                                             |              |   |   |   |   |   |        |   |   |         
|                           | Net loss                                                                    |              |  |   |   |  |   |        |  |   |         
|                           | Foreign currency translation adjustments                                    |              |  |   |   |  |   |        |  |   |         
|                           | Excess of additional pension liability
over unrecognized prior service cost |              |  |   |   |  |   |        |  |   |         
|                           |                                                                             |              |   |   |   |   |   |        |   |   |         
|                           |                                                                             | Total        |   |  |   |   |  |        |   |  |         
|                           |                                                                             |              |   |   |   |   |   |        |   |   |         
|Balance at August 31, 2002 |                                                                             | 4,210        |   | $ |  |   | $ | 18,700 |   | $ | (127,259
|                           |                                                                             |              |   |   |   |   |   |        |   |   |         

See
accompanying notes.

F-5

---

Archibald Candy Corporation(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)Consolidated Statements of Cash Flows  Years ended
August 26, 2000, August 25, 2001 and August 31, 2002

|                                                                                          |                                              | 2000                                                    |         | 2001   |        | 2002    |       
|----------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------ | ------- | ------
|
|Operating activities                                                                      |                                              |                                                         |         |        |        |         |       
|Net loss                                                                                  |                                              | $                                                       | (15,348 | )      | $      | (41,519 | )     
|Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |                                              |                                                         |         |        |        |         |       
|                                                                                          | Depreciation and amortization                |                                                         |         | 15,866 |        |         | 16,611
|                                                                                          | Share of loss in joint venture               |                                                         |         | 195    |        |         | 285   
|                                                                                          | Reserve for inventory                        |                                                         |         |       |        |         |      
|                                                                                          | Loss on sale of SFG and its subsidiaries     |                                                         |         |       |        |         |      
|                                                                                          | Write-off of deferred financing fees         |                                                         |         |       |        |         |      
|                                                                                          | Restructuring expense                        |                                                         |         |       |        |         | 4,323 
|                                                                                          | Write-off of impaired assets                 |                                                         |         |       |        |         | 14,593
|                                                                                          | Gain on sale of property                     |                                                         |         |       |        |         | (1,664
|                                                                                          | Changes in operating assets and liabilities: |                                                         |         |        |        |         |       
|                                                                                          |                                              | Accounts receivable, net                                |         |        | 2,158  |         |       
|                                                                                          |                                              | Due to affiliate                                        |         |        | (304   | )       |       
|                                                                                          |                                              | Inventories                                             |         |        | (4,233 | )       |       
|                                                                                          |                                              | Prepaid expenses and other current assets               |         |        | (307   | )       |       
|                                                                                          |                                              | Other assets                                            |         |        | (42    | )       |       
|                                                                                          |                                              | Accounts payable, accrued liabilities and deferred rent |         |        | 1,855  |         |       
|                                                                                          |                                              | Restructuring reserve                                   |         |        |       |         |       
|                                                                                          |                                              |                                                         |         |        |        |         |       
|Net cash provided by (used in) operating activities                                       |                                              |                                                         | (160    | )      |        | (841    | )     
|Investing activities                                                                      |                                              |                                                         |         |        |        |         |       
|Net proceeds from sale of SFG and its subsidiaries                                        |                                              |                                                         |        |        |        |        |       
|Purchase of property, plant, and equipment                                                |                                              |                                                         | (11,107 | )      |        | (5,000  | )     
|Proceeds from sale of property                                                            |                                              |                                                         |        |        |        | 5,292   |       
|Acquisitions, net of cash acquired                                                        |                                              |                                                         | (1,922  | )      |        |        |       
|Effect of deconsolidation of SFG and its subsidiaries                                     |                                              |                                                         |        |        |        |        |       
|Sweet Factory license payment                                                             |                                              |                                                         | (750    | )      |        |        |       
|                                                                                          |                                              |                                                         |         |        |        |         |       
|Net cash provided by (used in) investing activities                                       |                                              |                                                         | (13,779 | )      |        | 292     |       
|Financing activities                                                                      |                                              |                                                         |         |        |        |         |       
|Net increase in revolving line of credit                                                  |                                              |                                                         | 10,500  |        |        | 972     |       
|Payments of capital lease obligations                                                     |                                              |                                                         | (275    | )      |        | (82     | )     
|Costs related to loan agreements                                                          |                                              |                                                         | (224    | )      |        | (1,183  | )     
|                                                                                          |                                              |                                                         |         |        |        |         |       
|Net cash provided by (used in) financing activities                                       |                                              |                                                         | 10,001  |        |        | (293    | )     
|Effect of exchange rates on cash                                                          |                                              |                                                         | 150     |        |        | 68      |       
|                                                                                          |                                              |                                                         |         |        |        |         |       
|Net increase (decrease) in cash and cash equivalents                                      |                                              |                                                         | (3,788  | )      |        | (774    | )     
|Cash and cash equivalents at beginning of year                                            |                                              |                                                         | 6,908   |        |        | 3,120   |       
|                                                                                          |                                              |                                                         |         |        |        |         |       
|Cash and cash equivalents at end of year                                                  |                                              | $                                                       | 3,120   |        | $      | 2,346   |       
|                                                                                          |                                              |                                                         |         |        |        |         |       
|Supplemental disclosures of cash flow information:                                        |                                              |                                                         |         |        |        |         |       
|                                                                                          | Cash paid during the year for:               |                                                         |         |        |        |         |       
|                                                                                          |                                              | Interest                                                |         | $      | 18,297 |         | $     
|                                                                                          |                                              |                                                         |         |        |        |         |       
|                                                                                          | Non-cash investing activities:               |                                                         |         |        |        |         |       
|                                                                                          |                                              | Capital leases                                          |         | $      |       |         | $     
|                                                                                          |                                              |                                                         |         |        |        |         |       

See
accompanying notes.

F-6

---



Archibald Candy Corporation(A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)Notes to Consolidated Financial Statements  August 31,
2002(Dollars in Thousands)

1.    Basis of Presentation

Archibald Candy Corporation, an Illinois corporation ("Archibald"), and its subsidiaries (collectively, the "Company") are manufacturers and retailers of boxed
chocolates and other confectionery items. Archibald is a wholly-owned subsidiary of Fannie May Holdings, Inc. ("Holdings"). The Company sells its Fannie May, Fanny Farmer and Laura Secord
candies in 447 Company-operated stores and approximately 10,000 third-party retail outlets as well as through corporate gift, mail-order, and fund-raising programs in the
United States and Canada.

On
June 12, 2002, Archibald and Holdings filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code and on November 1, 2002 its Second Amended Joint
Plan of Reorganization (the "Archibald Plan") became effective (see Note 3 to the Consolidated Financial Statements). Accordingly, the consolidated financial statements of the Company during
the bankruptcy proceedings are presented in accordance with American Institute of Certified Public Accountant's Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7").

The
accompanying consolidated financial statements include the accounts of Archibald and its subsidiary, Archibald Candy (Canada) Corporation. For the periods prior to
November 15, 2001, the consolidated financial statements also include the accounts of Sweet Factory Group, Inc. ("SFG") and its three subsidiaries: Sweet Factory, Inc., SF
Properties, Inc. and SF Candy Companysee Note 4 below. All significant intercompany balances and transactions have been eliminated in consolidation.

The
Company's fiscal year-end is the last Saturday in August. The fiscal years ended August 28, 1999 and August 25, 2001 each had 52 weeks. The fiscal year
ended August 31, 2002 had 53 weeks.

2.    Summary of Significant Accounting Policies

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Restricted Cash

This restricted cash is held in a restricted account for payment of outstanding debt obligations to the holders of Archibald's 101/4% senior
secured notes.

Inventories

Inventories are stated at the lower of cost or market. Inventories are valued primarily at either average or first in, first out (FIFO) cost.

Property, Plant, and Equipment

Property, plant, and equipment are recorded at cost. Depreciation and amortization are determined, for both financial reporting and tax purposes, using the
straight-line method over the estimated useful lives of the assets. Leasehold improvements at various locations are amortized over a predetermined life, considering the term of each lease.

Goodwill

In July 2001, the FASB issued SFAS No. 142, "Accounting for Goodwill and Other Intangibles" ("FAS 142"), effective for fiscal years beginning
after December 15, 2001. In connection with the Company's adoption of fresh-start accounting on November 1, 2002, goodwill will be adjusted to reflect its new basis. Therefore, the
Company has not adjusted its August 31, 2002 balance sheet to address the potential impact of FAS 142.

F-7

---

Intangibles and Deferred Costs

Goodwill and trademarks are amortized on a straight-line basis over a 40-year period. Deferred financing costs are amortized over the
terms of the loans. All deferred financing costs were written off when the Company filed Chapter 11.

Income Taxes

Income taxes are accounted for using the liability method. Under this method, a current tax asset or liability is recognized for the estimated taxes payable or
refundable on tax returns for the current year, and deferred tax assets or liabilities are recognized for the estimated future tax effects attributable to temporary differences and carryforwards using
the enacted rates and laws that will be in effect when the differences are expected to reverse.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

Revenues for retail sales are recognized when the product is sold to the customer. Revenues for third-party and non-retail sales are recognized when
orders are shipped to the customer. Allowances for uncollectible receivables are recorded against revenues as incurred.

Shipping and Handling

Net sales and cost of sales amounts include the freight costs billed to customers and freight costs, respectively. Total freight costs billed to customers for the
fiscal years ended August 26, 2000, August 25, 2001 and August 31, 2002 were $2,074, $2,119 and $2,188, respectively. For the fiscal years ended 2000, 2001 and 2002, freight costs
were $3,209, $3,450, and $3,445, respectively.

Advertising Costs

The Company expenses advertising costs as incurred, except for the costs associated with the development of print advertising which are deferred and expensed upon
first showing. Advertising expense was $5,865, $4,158 and $4,589 for 2000, 2001 and 2002, respectively. At August 25, 2001 and August 31, 2002, the Company had $350 and
$366, respectively, of print advertising costs which are included in prepaids and other current assets in the accompanying balance sheets.

Foreign Currency Translation

The Company's foreign subsidiaries use the local currency as their functional currency. Accordingly, assets and liabilities are translated into the reporting
currency using exchange rates at the balance sheet date and income statement amounts are translated using average exchange rates during the year. Adjustments as a result of translation are classified
as a component of other comprehensive income. Gains and losses resulting from transactions denominated in a currency other than the functional currency are included in income.

Segment Reporting

Based upon the requirements of accounting principles generally accepted in the United States, the Company has determined that it operates in one segment.

3.    ReorganizationArchibald

On June 12, 2002, Holdings and Archibald filed petitions with the United States Bankruptcy Court for the District of Delaware to commence a consolidated
voluntary bankruptcy proceeding under Chapter 11 of the U.S. Bankruptcy Code. While in bankruptcy, Holdings and Archibald continued to manage their properties and operate their businesses in
accordance with the applicable provisions of the Bankruptcy Code. In connection with the bankruptcy proceeding, Holdings and Archibald filed the Archibald Plan, which was confirmed by the bankruptcy
court on September 25, 2002 and became effective as of November 1, 2002. Pursuant to the Archibald Plan, (i) all

F-8

---

of the outstanding equity interests of Holdings and Archibald were cancelled; (ii) Holdings merged with and into Archibald; and (iii) Archibald merged with and into a newly-formed
Delaware corporation, renamed Archibald Candy Corporation ("New Archibald"). As a result, New Archibald acquired all of the assets of Holdings and Archibald. As part of the Archibald Plan, New
Archibald entered into a new $50 million term loan and revolving credit facility with Foothill Capital Corporation, as administrative agent, to finance its working capital and capital
expenditures and to pay the costs of the reorganization. The proceeds of the credit facility also were used, in part, to pay-off the indebtedness outstanding under Archibald's
debtor-in-possession facility. In addition, pursuant to the Archibald Plan, all of the $170 million outstanding principal amount of 101/4% senior secured
notes due 2004 issued by Archibald, together with the accrued and unpaid interest thereto, were cancelled and New Archibald issued $50 million of 10% secured subordinated notes due 2007 to the
holders of the cancelled notes. Also, pursuant to the Archibald Plan, in consideration of the cancellation of the claims of the holders of the cancelled notes and certain general unsecured creditors
of Archibald, New Archibald issued (or expects to issue upon completion of the Archibald Plan) to such claimants an aggregate of 276,290 shares of New Archibald's common stock, par value $.01 per
share, which represents 100% of New Archibald's issued and outstanding common stock.

In
accordance with SOP 90-7, the Company will adopt "fresh-start accounting" as of November 1, 2002, and the Company's emergence from Chapter 11 will
result in a new reporting entity. The pro forma financial statements prepared as of August 31, 2002 do not give effect to any adjustments to the carrying value of assets or amounts and
classifications of liabilities that will be necessary when adopting fresh-start accounting. Under fresh-start
accounting, all assets and liabilities will be recorded at their estimated fair values and the Company's accumulated deficit will be eliminated. The Company has prepared pro forma financial
statements by applying the reorganization and fresh-start reporting adjustments as required by SOP 90-7 to the consolidated balance sheet as of August 31, 2002 giving effect to the
Archibald Plan which was effective November 1, 2002.

In
adopting fresh-start reporting, the Company was required to determine its enterprise value, which represents the fair value of the entity before considering its interest bearing debt.
The financial advisors to the Company determined the Company's enterprise value. As of August 31, 2002, the pro forma enterprise value was $88.2 million and the pro forma reorganization
equity value was $18.2 million. The August 31, 2002 pro forma enterprise value and reorganization equity value will change when fresh-start accounting is applied as of November 1,
2002.

The
adjustments to reflect the adoption of fresh-start accounting, including the adjustments to record (i) inventories, (ii) prepaid expenses and other current assets,
(iii) property, plant and equipment, (iv) other assets, (v) intangible assets, and (vi) pension liability at their fair market values, and (vii) an adjustment to
reduce property, plant and equipment and intangible assets by $7.4 million on a pro-rata basis as a result of the net assets of the Company at fair market value exceeding the reorganization
equity value, have been reflected in the following pro forma consolidated balance sheet reconciliation as of August 31, 2002 as fresh-start adjustments. In addition, the Company's pro forma
consolidated balance sheet was further adjusted to eliminate existing liabilities subject to compromise and equity and to reflect the aforementioned $88.2 million enterprise value.

F-9

---

Below
is a pro forma unaudited balance sheet as of August 31, 2002 showing the adjustments thereto to give effect to the reorganization debt and fresh-start adjustments as if the
emergence from bankruptcy took place on August 31, 2002 (in thousands):

|                                                     |                                              | Actual
August 31, 2002 |          | Reorganization |   | Fresh Start
Adjustments |          | Pro Forma
August 31, 2002
|---------------------------------------------------- | -------------------------------------------- | ---------------------- | -------- | -------------- | - | ----------------------- | -------- | -------------------------
|Assets                                               |                                              |                        |          |                |   |                         |          |                          
|Current Assets:                                      |                                              |                        |          |                |   |                         |          |                          
|                                                     | Cash and cash equivalents                    |                        | $        | 3,356          |   | $                       |         |                          
|                                                     | Restricted cash                              |                        |          | 500            |   |                         | (500     | )(1)                     
|                                                     | Accounts receivable, net                     |                        |          | 1,074          |   |                         |         |                          
|                                                     | Inventories, net                             |                        |          | 27,848         |   |                         |         |                          
|                                                     | Prepaid expenses and other current assets    |                        |          | 2,297          |   |                         |         |                          
|                                                     |                                              |                        |          |                |   |                         |          |                          
|Total current assets                                 |                                              |                        | 35,075   |                |   | (500                    | )        |                          
|Property, plant, equipment, net                      |                                              |                        | 24,862   |                |   |                        |          |                          
|Goodwill                                             |                                              |                        | 56,726   |                |   |                        |          |                          
|Noncompete agreements and other intangibles          |                                              |                        | 36       |                |   |                        |          |                          
|Deferred financing fees                              |                                              |                        |         |                |   | 1,000                   | (4)      |                          
|Investment in joint venture                          |                                              |                        | 2,275    |                |   |                        |          |                          
|Other assets                                         |                                              |                        | 1,520    |                |   |                        |          |                          
|                                                     |                                              |                        |          |                |   |                         |          |                          
|Total Assets                                         |                                              | $                      | 120,494  |                | $ | 500                     |          | $                        
|                                                     |                                              |                        |          |                |   |                         |          |                          
|Liabilities and shareholder's equity (deficit)       |                                              |                        |          |                |   |                         |          |                          
|Current Liabilities:                                 |                                              |                        |          |                |   |                         |          |                          
|                                                     | Revolving line of credit                     |                        | $        | 20,000         |   | $                       | (10,000  | )(3)                     
|                                                     | Accounts payable                             |                        |          | 11,159         |   |                         |         |                          
|                                                     | Accrued liabilities                          |                        |          | 3,399          |   |                         | 3,187    | (1)                      
|                                                     | Payroll and related liabilities              |                        |          | 2,091          |   |                         |         |                          
|                                                     | Accrued interest                             |                        |          | 149            |   |                         |         |                          
|                                                     | Current portion of capital lease obligations |                        |          | 61             |   |                         |         |                          
|                                                     | Liabilities subject to compromise            |                        |          | 190,130        |   |                         | (190,130 | )(1)                     
|                                                     |                                              |                        |          |                |   |                         |          |                          
|Total current liabilities                            |                                              |                        | 226,989  |                |   | (196,943                | )        |                          
|Due to affiliate                                     |                                              |                        | 40       |                |   |                        |          |                          
|Senior secured notes                                 |                                              |                        |         |                |   | 50,000                  | (2)      |                          
|Term loan agreement                                  |                                              |                        |         |                |   | 10,000                  | (3)      |                          
|Pension liability                                    |                                              |                        | 4,285    |                |   |                        |          |                          
|Capital lease obligations, less current portions     |                                              |                        | 100      |                |   |                        |          |                          
|Shareholder's equity (deficit):                      |                                              |                        |          |                |   |                         |          |                          
|                                                     | Common Stock                                 |                        |          |               |   |                         | 3        | (2)                      
|                                                     | Additional paid-in-capital                   |                        |          | 18,700         |   |                         | 18,160   | (2)                      
|                                                     | Accumulated deficit                          |                        |          | (127,259       | ) |                         | 119,280  | (1)(2)                   
|                                                     | Other Comprehensive income (loss)            |                        |          | (2,361         | ) |                         |         |                          
|                                                     |                                              |                        |          |                |   |                         |          |                          
|Total shareholder's equity (deficit)                 |                                              |                        | (110,920 | )              |   | 137,443                 |          |                          
|                                                     |                                              |                        |          |                |   |                         |          |                          
|Total liabilities and shareholder's equity (deficit) |                                              | $                      | 120,494  |                | $ | 500                     |          | $                        
|                                                     |                                              |                        |          |                |   |                         |          |                          

---

F-10

---

The
extraordinary gain to be recognized by the Company prior to emergence from bankruptcy using balances as of August 31, 2002 is estimated as follows (in thousands):

Liabilities subject to compromise:Senior secured notes

$
170,000Accrued interest


16,775Accounts payable


3,355Total


190,130Less:Payments of liabilities subject to compromise


2,687Value of senior secured notes


50,000Value of common stock


18,163Extraordinary gain on debt discharge

$
119,280


4.    Bankruptcy FilingSweet Factory

On November 15, 2001, Sweet Factory Group, Inc. ("SFG") and its three subsidiaries; Sweet Factory, Inc., SF Properties, Inc. and SF
Candy Company, filed voluntary petitions in the U.S. Bankruptcy Court for the District of Delaware ("Bankruptcy Court") under Chapter 11 of the U.S. Bankruptcy Code. On August 6, 2002, the
assets of Sweet Factory and its subsidiaries were sold for $6.6 million to RDR Group, a California corporation. The proceeds of the sale were applied to pay-off the
debtor-in-possession financing provided by CIT, to pay Archibald Illinois' secured claim, to make cure payments to the landlords under the rejected store leases that were
assumed by RDR Group, to pay administrative expenses, to make a payment to the holders of Archibald Illinois' 101/4 senior secured notes and to make a payment to the unsecured
creditors' class. On October 29, 2002, Sweet Factory and its subsidiaries were dissolved.

SFG
and its subsidiaries' financial results are included in the Company's consolidated results through November 15, 2001. Accounting principles generally accepted in the United
States generally require that any entity that files for protection under the U.S. Bankruptcy Code whose financial statements were previously consolidated with those of its parent must be prospectively
deconsolidated from the parent with the investment accounted for using the cost method. The effects on the Company's balance sheet of this deconsolidation and use of the cost method are that:
(i) the Company's investment in SFG is included as a single amount and (ii) the Company's receivable from SFG is no longer eliminated. The effect on the Company's income statement is
that beginning November 15, 2001, the SFG operating results are not included in the consolidated results. At November 15, 2001, the Company's investment in SFG was a negative
$17.1 million, and the receivable had a balance of $19.4 million. Because of SFG's and its subsidiaries' bankruptcies, it was determined that the receivable should be reserved for
financial reporting purposes. That write-off was first netted against the negative investment balance, with the remaining $2.3 million recorded as a non-operating
expense. Upon the sale of SFG and its subsidiaries, Archibald received net proceeds of $1.6 million which has been netted against the $2.3 million write-off in the financial
statements.

F-11

---

Following
are the condensed consolidated statements of operations and balance sheet data for SFG and its subsidiaries (in thousands):

|                                  |  | For the year ended
August 26, 2000 |        | For the year ended
August 25, 2001 |   | For the period of
August 26, 2001
through
November 15, 2001 |   | For the year ended
August 31, 2002 |       
|--------------------------------- |  | ---------------------------------- | ------ | ---------------------------------- | - | ----------------------------------------------------------- | - | ---------------------------------- | ------
|Net sales                         |  | $                                  | 69,895 |                                    | $ | 61,921                                                      |   | $                                  | 8,867 
|Operating income (loss)           |  |                                    | (4,038 | )                                  |   | (27,055                                                     | ) |                                    | (3,172
|Income (loss) before income taxes |  |                                    | (4,086 | )                                  |   | (26,997                                                     | ) |                                    | (3,175
|Net income (loss)                 |  |                                    | (4,085 | )                                  |   | (27,014                                                     | ) |                                    | (3,178

|                                                   |  |  |  | August 25, 2001 |         |   |  | August 31, 2002
|-------------------------------------------------- |  |  |  | --------------- | ------- | - |  | ---------------
|Current assets                                     |  |  |  | $               | 4,174   |   |  |                
|Property, plant and equipment                      |  |  |  |                 | 5,699   |   |  |                
|Other assets                                       |  |  |  |                 | 892     |   |  |                
|                                                   |  |  |  |                 |         |   |  |                
|Total assets                                       |  |  |  | $               | 10,765  |   |  |                
|                                                   |  |  |  |                 |         |   |  |                
|Current liabilities                                |  |  |  | $               | 4,069   |   |  |                
|Payable to Archibald Candy Corporation             |  |  |  |                 | 19,761  |   |  |                
|Other liabilities                                  |  |  |  |                 | 885     |   |  |                
|Total stockholder's equity (deficit)               |  |  |  |                 | (13,950 | ) |  |                
|                                                   |  |  |  |                 |         |   |  |                
|Total liabilities & stockholder's equity (deficit) |  |  |  | $               | 10,765  |   |  |                
|                                                   |  |  |  |                 |         |   |  |                

Following
are the condensed pro forma consolidated statement of operations and balance sheet data for the Company, assuming the deconsolidation of SFG and its subsidiaries (in
thousands):

|                         |  | For the year ended
August 26, 2000 |         | For the year ended
August 25, 2001 |   | For the year ended
August 31, 2002 |   |   |        
|------------------------ |  | ---------------------------------- | ------- | ---------------------------------- | - | ---------------------------------- | - | - | -------
|Net sales                |  | $                                  | 183,495 |                                    | $ | 187,248                            |   | $ | 174,512
|Operating income (loss)  |  |                                    | 7,190   |                                    |   | 3,511                              |   |   | (4,226 
|Loss before income taxes |  |                                    | (11,132 | )                                  |   | (14,390                            | ) |   | (29,867
|Net loss                 |  |                                    | (11,263 | )                                  |   | (14,505                            | ) |   | (29,975

|                                                   |  |  |  | August 25, 2001 |         |   |  | 
|-------------------------------------------------- |  |  |  | --------------- | ------- | - |  | 
|Current assets                                     |  |  |  | $               | 34,598  |   |  | 
|Property, plant and equipment                      |  |  |  |                 | 28,699  |   |  | 
|Investment in and amounts due from SFG             |  |  |  |                 | 5,811   |   |  | 
|Other assets                                       |  |  |  |                 | 68,050  |   |  | 
|                                                   |  |  |  |                 |         |   |  | 
|Total assets                                       |  |  |  | $               | 137,158 |   |  | 
|                                                   |  |  |  |                 |         |   |  | 
|Current liabilities                                |  |  |  | $               | 41,553  |   |  | 
|Other liabilities                                  |  |  |  |                 | 171,209 |   |  | 
|Total stockholder's equity (deficit)               |  |  |  |                 | (75,604 | ) |  | 
|                                                   |  |  |  |                 |         |   |  | 
|Total liabilities & stockholder's equity (deficit) |  |  |  | $               | 137,158 |   |  | 
|                                                   |  |  |  |                 |         |   |  | 

5.    Cost of Sales, Nonrecurring

During fiscal year 2001, cost of sales, nonrecurring includes $3,178 of manufacturing start-up costs as detailed below and $705 of inventory
liquidation costs (see Note 6 below).

On
June 8, 1999, the Company acquired the Laura Secord retail business from Nestlè Canada, Inc. At that time the Company also entered into an agreement with
Nestlè, pursuant to which Nestlè agreed to continue to produce for a one-year period substantially all the boxed chocolates and other chocolate confectionery
items that

F-12

---

are sold in Laura Secord stores. In September 2000, the Company transitioned the Laura Secord chocolate production to its manufacturing facility in Chicago, Illinois. Below is a summary of the
costs associated with this transition (in thousands):

Production start-up for cooking and enrobing

$
1,602Packaging start-up


584Warehouse and distribution start-up


725Product development


164Other


103$
3,178


6.    Restructuring Expense

During 2001 in connection with the review of the profitability of its Sweet Factory stores, the Company decided to close 67 stores. The Company recorded a charge
of $5,784 associated with these store closings, of which $705 is included in cost of sales related to inventory liquidation costs and $1,445 of the charge represents cash expenditures. The components
of the charges are as follows (in thousands):

Charge to
Earnings

Cash Paid

Non-Cash

Reserve as of
Aug 25, 2001Impairment of fixed assets

$
3,821

$


$
(3,821
)
$
Lease termination costs


1,066


(1,057
)




9Inventory liquidation costs


705





(631
)

74Deferred rent


(187
)




129


(58
)Other costs


379


(310
)




69$
5,784

$
(1,367
)
$
(4,323
)
$
94


Lease
termination costs represent payments to landlords for early termination of leases. Inventory liquidation costs represent markdowns to sell inventory below cost and dispose unsold
inventory. Deferred rent represents the reversal of a liability recorded for future rent expense. Other costs primarily include legal fees, severance and fixed asset removal costs.

The
remaining balance of $94 was paid in fiscal 2002.

7.    Reorganization Costs

On June 12, 2002, Archibald and Holdings filed petitions in the United States Bankruptcy Court for the District of Delaware to commence a consolidated
voluntary bankruptcy proceeding under Chapter 11 of the United States Bankruptcy Code. In connection with these proceedings and the corresponding restructuring of the Company's balance sheet,
Archibald wrote off $5.3 million of deferred financing fees and incurred $4.6 million in professional fees and other expenses associated with these proceedings.

8.    Liabilities Subject to Compromise

The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are identified below. All amounts below may be
subject to future adjustment depending on Bankruptcy Court action, further developments with respect to disputed claims, determination as to the value of any collateral securing claims, or other
events.

August 31,
2002Accounts payable and accrued expenses

$
3,355Senior Secured Notes


170,000Accrued interest


16,775$
190,130


F-13

---

As
part of the Chapter 11 reorganization process, the Company attempted to notify all known or potential creditors of the Chapter 11 filing for the purpose of identifying all
pre-petition claims against the Company. Generally, creditors whose claims arose prior to the Petition Date had until August 30, 2002 ("Bar Date") to file claims or be barred from
asserting claims in the future. Claims arising from rejection of executory contracts and leases by the Company and claims related to certain other items were permitted to be filed by other dates set
by the Bankruptcy Court. Differences between amounts shown by the debtors and claims filed by creditors are being investigated and will either be amicably resolved or adjudicated.

As
a result of the bankruptcy filing, no principal or interest payments will be made on any pre-petition debt. Contractual interest expense not recorded on certain pre-petition debt
totaled $3,854 for the period from June 12, 2002 to August 31, 2002.

9.    Write-off of Impaired Assets

In connection with an impairment review of the long-lived assets of the Sweet Factory business in 2001, the Company recorded a charge to
write-off the remaining goodwill associated with the acquisition of Sweet Factory totaling $10.5 million and $4.1 million of Sweet Factory's property, plant and equipment.

10.  Inventories

Inventories at August 25, 2001 and August 31, 2002, are comprised of the following:

2001

2002Raw materials

$
12,901

$
9,145Work-in process


225


134Finished goods


18,714


18,569$
31,840

$
27,848


11.  Property, Plant, and Equipment

Property, plant, and equipment at August 25, 2001 and August 31, 2002, are comprised of the following:

2001

2002Land

$
2,039

$
2,039Machinery and equipment


31,304


32,146Buildings and improvements


15,603


16,214Furniture and fixtures


6,466


4,098Leasehold improvements


33,191


25,56888,603


80,065Less: Accumulated depreciation


(54,205
)

(55,203
)$
34,398

$
24,862


Depreciation
expense for the years ended August 26, 2000, August 25, 2001 and August 31, 2002 was $10,058, $11,358 and $6,858, respectively.

12.  Benefit Plans

The Company maintains noncontributory pension plans for substantially all employees. The Company intends to fund pension costs in amounts not less than amounts
required by the Employee Retirement Income Security Act of 1974.

F-14

---

The net periodic pension cost recognized as expense for the years ended August 26, 2000, August 25, 2001 and August 31, 2002, consists of the following:

2000

2001

2002Service cost

$
507


593

$
724Interest cost


501


527


611Return on plan assets


(664
)

(663
)

(676
)Other


(15
)

11


84$
329

$
468

$
743


The
following table sets forth the changes in benefit obligation for the years ended August 26, 2000, August 25, 2001 and August 31, 2002:

|                                        |  | 2000 |       | 2001 |   | 2002  |  
|--------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|Benefit obligation at beginning of year |  | $    | 5,309 |      | $ | 6,527 |  
|Service cost                            |  |      | 507   |      |   | 593   |  
|Interest cost                           |  |      | 501   |      |   | 527   |  
|Actuarial (gain) loss                   |  |      | 37    |      |   | 580   |  
|Plan amendments                         |  |      | 1,020 |      |   |      |  
|Benefits paid                           |  |      | (847  | )    |   | (790  | )
|                                        |  |      |       |      |   |       |  
|Benefit obligation at end of year       |  | $    | 6,527 |      | $ | 7,437 |  
|                                        |  |      |       |      |   |       |  

The
following table sets forth the changes in plan assets for the years ended August 26, 2000, August 25, 2001 and August 31, 2002:

|                                               |  | 2000 |       | 2001 |   | 2002   |  
|---------------------------------------------- |  | ---- | ----- | ---- | - | ------ | -
|Fair value of plan assets at beginning of year |  | $    | 7,327 |      | $ | 7,527  |  
|Actual return (loss) on plan assets            |  |      | 997   |      |   | (1,705 | )
|Employee contributions                         |  |      | 50    |      |   | 387    |  
|Benefits paid                                  |  |      | (847  | )    |   | (790   | )
|                                               |  |      |       |      |   |        |  
|Fair value of plan assets at end of year       |  | $    | 7,527 |      | $ | 5,419  |  
|                                               |  |      |       |      |   |        |  

The
following table reconciles the plans' funded status at August 25, 2001 and August 31, 2002:

|                                         |  | 2001 |        | 2002 |  
|---------------------------------------- |  | ---- | ------ | ---- | -
|Funded status at year-end                |  | $    | (2,018 | )    | $
|Unrecognized prior service cost          |  |      | 860    |      |  
|Unrecognized (gain) loss                 |  |      | 1,400  |      |  
|                                         |  |      |        |      |  
|Net amount recognized at the end of year |  | $    | 242    |      | $
|                                         |  |      |        |      |  

The
following table provides the amounts recognized in the statement of financial position at August 25, 2001 and August 31, 2002:

|                                     |  | 2001 |        | 2002 |  
|------------------------------------ |  | ---- | ------ | ---- | -
|Prepaid benefit cost                 |  | $    |       |      | $
|Accrued benefit liability            |  |      | (1,038 | )    |  
|Intangible asset                     |  |      | 861    |      |  
|Accumulated other comprehensive loss |  |      | 419    |      |  
|                                     |  |      |        |      |  
|Net amount recognized at end of year |  | $    | 242    |      | $
|                                     |  |      |        |      |  

F-15

---

The
assumptions used in determining the present value of benefits were:

|                                  |  | 2001 |   | 2002 |  
|--------------------------------- |  | ---- | - | ---- | -
|Discount rate                     |  | 7.5  | % | 7.0  | %
|Expected rate of return on assets |  | 9.0  |   | 9.0  |  
|Rate of increase in compensation  |  | 3.5  |   | 3.5  |  

The
Company also maintains 401(k) and profit-sharing trust plans for substantially all employees. The Company contributes to the Plans a discretionary amount as approved by the Board of
Directors. In 2001 and 2002, the total Company expense related to the Plans was $0.

Substantially,
all of the Company's Canadian employees participate in a multi-employer defined benefit pension plan. The Company's expense related to this plan was $207, $183 and $180,
in 2000, 2001 and 2002, respectively.

13.  Leases

The Company leases the majority of its retail stores under operating leases. Rent expense for the years ended August 26, 2000, August 25, 2001 and
August 31, 2002 consisted of the following:

|                                  |  | 2000 |        | 2001 |   | 2002  
|--------------------------------- |  | ---- | ------ | ---- | - | ------
|Fixed minimum                     |  | $    | 24,195 |      | $ | 22,807
|Rent based on percentage of sales |  |      | 578    |      |   | 732   
|                                  |  |      |        |      |   |       
|                                  |  | $    | 24,773 |      | $ | 23,539
|                                  |  |      |        |      |   |       

Future
minimum lease payments required under the noncancelable leases having lease terms in excess of one year at August 31, 2002, are as follows:

|           |  | Operating |        | Capital |  
|---------- |  | --------- | ------ | ------- | -
|2003       |  | $         | 10,395 |         | $
|2004       |  |           | 8,380  |         |  
|2005       |  |           | 6,316  |         |  
|2006       |  |           | 4,526  |         |  
|2007       |  |           | 3,304  |         |  
|Thereafter |  |           | 7,003  |         |  
|           |  |           |        |         |  
|           |  |           | 39,924 |         |  
|Interest   |  |           |       |         |  
|           |  |           |        |         |  
|           |  | $         | 39,924 |         | $
|           |  |           |        |         |  

14.  Debt



On June 28, 2001, Archibald and its subsidiary, Sweet Factory, entered into a revolving credit facility with The CIT Group/Business Credit, Inc., as
agent (the "CIT Facility"). The initial borrowings under the CIT Facility were used, in part, to pay all outstanding obligations under Archibald's revolving credit facility with Bank One, NA, as
agent, which facility was then terminated. The CIT Facility provided for revolving loans and letter of credit issuances, subject to certain borrowing conditions, in an aggregate amount at any time not
to exceed the lesser of (1) $30.0 million (or specified lower amounts at certain times of the year) and (2) a borrowing base comprised of a percentage of eligible accounts
receivable and inventory and owned store locations.

The
CIT Facility was secured by first priority liens on Archibald's and Sweet Factory's accounts receivable, and inventory, and the Company-owned store locations, and the proceeds
therefrom. The subsidiaries of Archibald's and Sweet Factory, including Archibald Candy (Canada) Corporation, a Canadian corporation ("Archibald Canada"), guaranteed all obligations under the CIT
Facility and granted to the agent under the CIT Facility a first priority lien on their accounts receivable, inventory, and the proceeds therefrom. In addition, Holdings guaranteed all obligations
under the CIT Facility and granted to CIT a first priority lien on all of its assets, including all the outstanding shares of common stock of Archibald.

F-16

---

As
of June 14, 2002, there was an aggregate of $13.9 million outstanding under the CIT Facility. On June 14, 2002, proceeds from borrowings under the Archibald DIP
Credit Facility were used to pay all outstanding obligations under the CIT Facility and the CIT Facility was then terminated.



In connection with the Sweet Factory Bankruptcy, on November 15, 2001, CIT and Sweet Factory entered into a post-petition credit, security and
guaranty agreement (the "SF DIP Credit Facility"). Archibald, Holdings and Archibald Canada and Sweet Factory's subsidiaries guaranteed all obligations of Sweet Factory under the SF DIP Credit
Facility. The guaranty by Archibald was secured by a $1.0 million cash collateral account held by CIT. The SF DIP Credit Facility was for one year and provided for revolving loans at any time
not to exceed the lesser of (1) $2.0 million and (2) a borrowing base comprised of a percentage of Sweet Factory's eligible inventory plus a $1.0 million overadvance,
subject to certain reserves.

F-17

---

As of August 6, 2002, an aggregate of $0.5 million of revolving loans were outstanding under the SF DIP Credit Facility. Proceeds from the August 6, 2002, sale of
assets of Sweet Factory and its subsidiaries were used to pay all outstanding obligations under the SF DIP Credit Facility and the $1.0 million cash collateral account held by CIT as security
for the Archibald guaranty was released. The SF DIP Facility was then terminated.



In connection with the Archibald Reorganization, on June 14, 2002, Archibald entered into a post-petition loan and security agreement and
guaranty (the "Archibald DIP Credit Facility") with Foothill Capital Corporation, as the arranger and administrative agent, the lenders party thereto and Holdings and Archibald Canada, as guarantors.
Under the Archibald DIP Credit Facility, the lenders agreed to make available to Archibald (a) a $25.0 million revolving credit facility, pursuant to which Archibald could borrow up to
the lesser of (i) $25.0 million and (ii) a borrowing base comprised of certain percentages of eligible accounts receivable and inventory, subject to certain reserves, and
(b) an aggregate of $20.0 million in term loans. Initial borrowings under the Archibald DIP Credit Facility were used to pay-off in full the CIT Facility. As of
August 31, 2002, $20.0 million of borrowings and $0.2 million of letters of credit were outstanding under the Archibald DIP Credit Facility.

As
of November 1, 2002, an aggregate of $30.3 million was outstanding under the Archibald DIP Credit Facility. In connection with the Archibald Plan effective
November 1, 2002, all outstanding amounts under the Archibald DIP Credit Facility were repaid in full from proceeds of the initial borrowings under New Archibald's New Credit Facility and the
Archibald DIP Credit Facility was terminated.



On November 1, 2002, New Archibald entered into a loan and security agreement and guaranty with the financial institutions signatory thereto and Foothill
Capital Corporation, as administrative agent (the "New Credit Facility"). The New Credit Facility was extended to New Archibald in connection with its emergence from bankruptcy and replaced the
financing provided pursuant to the Archibald DIP Credit Facility, which was terminated pursuant to the Archibald Plan.

The
New Credit Facility provides up to $50 million in credit, which is comprised of a revolving loan facility, a term loan A, a term loan B and letter of credit issuances. Under
the revolving loan facility, New Archibald may, subject to certain borrowing conditions, incur revolving loans in an amount up to the lesser of (1) $30.0 million and (2) a
borrowing base comprised of a percentage of eligible accounts receivable and eligible inventory, which borrowing base components are subject to certain limits, minus a reserve of $2.5 million
(as such amount may be reduced in accordance with the provisions of the loan agreement) and minus certain additional reserves which may from time to time be imposed by Foothill. Revolving loans are
due and payable in full on November 1, 2005 (the "Maturity Date").

Subject
to certain conditions, the term loan A will be made available to New Archibald from July 1 through December 31 of each calendar year, with any outstanding
obligations under such term loan to be repaid in full on December 31 of each year. Subject to any applicable reserves, in 2002, term loan A shall not exceed the lesser of
(1) $10.0 million and (2) a specified percentage of the value of New Archibald's equipment and real property. In 2003, term loan A shall not exceed the lesser of
(1) $9.0 million and (2) a specified percentage of the value of New Archibald's equipment and real property. In 2004, term loan A shall not exceed the lesser of
(1) $7.0 million and (2) a specified percentage of the value of New Archibald's equipment and real property and between July 1, 2005 and the Maturity Date, term loan A
shall not exceed $5.0 million. In addition to the term loan A, on November 1, 2002, term loan B was extended to New Archibald in an amount equal to $10.0 million. The outstanding
principal amount of term loan B is due and payable in full on the Maturity Date; provided, that if at any time the outstanding principal amount of term loan B shall be less than $5.0 million as
a result of mandatory or voluntary prepayments, the remaining amount of term loan B shall be immediately due and payable (subject to certain exceptions).

The
New Credit Facility provides the various interest rates which are applicable to the revolving loans and term loans thereunder. At New Archibald's election, revolving loan advances
will bear interest at either (a) a variable per annum rate equal to the "prime rate" announced from time to time by Wells Fargo Bank, National Association (the "Prime Rate"), plus 0.50% or
(b) a variable per annum rate equal to the "LIBOR" rate determined by Foothill in accordance with its customary procedures, plus 2.75%. Term loan A bears interest at the Prime Rate, plus 2.0%.
Term loan B bears interest at a per annum rate equal to (A) the greater of (x) the Prime

F-18

---

Rate plus 3.0% and (y) 7.75%, plus (B) 4.75% (the "PIK Amount"), which PIK Amount shall be paid in kind by being added to the principal amount of term loan B. The PIK Amount is subject
to reduction in calendar year 2003 if there shall not exist any default or event of default under the New Credit Facility.

The
New Credit Facility is secured by first priority liens on all of New Archibald's assets and all of the proceeds therefrom. New Archibald's wholly-owned subsidiaries, Laura Secord
Holdings Corp. and Archibald Canada (together, the "Guarantor Subsidiaries") have guaranteed all of New Archibald's obligations under the New Credit Facility and granted a first priority lien in all
of their respective assets and the proceeds therefrom as security for such guarantees.

The
New Credit Facility contains various business and financial covenants including, among other things, limitations on dividends, redemptions and repurchases of capital stock,
limitations on the incurrence of and payments in respect of indebtedness, limitations on asset dispositions, limitations on capital expenditures and requirements to maintain of certain targeted EBITDA
amounts. The New Credit Facility also requires New Archibald to make prepayments of the loans in certain circumstances, including, among other things, from New Archibald's excess cash flow, as
defined, and from proceeds of certain asset sales, insurance and condemnation proceeds (unless New Archibald is permitted to repair or replace the applicable collateral as provided in the loan
agreement), and in the event that certain financial tests are not met. These loan restrictions could restrict corporate activities, including New Archibald's ability to respond to market conditions,
to provide for unanticipated capital expenditures or to take advantage of business opportunities.



In connection with the Archibald Plan, concurrently with the execution and delivery of the New Credit Facility, pursuant to an Indenture dated November 1,
2002 (the "Indenture") between New Archibald, the Guarantor Subsidiaries and BNY Midwest Trust Company, as trustee (the "Trustee"), New Archibald issued $50.0 million in aggregate principal
amount of New Archibald's 10% Secured Subordinated Notes due 2007 (the "Notes") in a transaction exempt from registration under the Securities Act of 1933, as amended. The Notes were issued in
replacement of those certain 101/4% senior secured notes totaling $170.0 million due 2004 issued by Archibald pursuant to the Indenture dated July 2, 1997 (as amended and
supplemented) between Archibald and The Bank of New York, as trustee, which indenture (and the notes issued thereunder) were terminated pursuant to the Archibald Plan.

Interest
is payable under the Notes at the rate of 10% per annum and interest payments are to be made semi-annually on January 1 and July 1 of each year, and on
the maturity date, commencing on January 1, 2003. On or prior to November 1, 2005, we may elect, in the judgment of our Board of Directors, to make all or a portion of each such interest
payment in cash or by issuing new promissory notes (each a "PIK Note") with a principal amount, in each case, equal to the amount of interest that each holder of a Note was due on the interest payment
date and which we have elected to pay by issuance of the PIK Note; provided, however, unless certain conditions are satisfied, the New Credit Facility requires that interest accrued under the Notes be
paid by the issuance of PIK Notes.

The
Notes are secured by a second priority lien on all of New Archibald's assets and all of the proceeds therefrom. The Guarantor Subsidiaries have guaranteed all of New Archibald's
obligations under the Indenture (including the Notes) and granted a second priority lien in all of their respective assets and the proceeds therefrom as security for such guarantees. The liens in
favor of the Trustee are subordinate to the liens granted by New Archibald and the Guarantor Subsidiaries in favor of Foothill under the New Credit Facility. The manner and terms under which the liens
granted to the Trustee under the Indenture are subordinated to the liens in favor of Foothill under the New Credit Facility are as set forth in the Indenture.

The
Indenture contains various business covenants including, among other things, limitations on dividends, redemptions and repurchases of capital stock, limitations on the incurrence of
indebtedness and limitations on asset dispositions. The Indenture also requires New Archibald to make an offer to repurchase Notes in certain circumstances, including, among other things, to the
extent net cash proceeds from asset sales exceed a certain threshold amount (but only to the extent such proceeds are not reinvested or used to repay certain other indebtedness). These restrictions
could restrict corporate activities, including New Archibald's ability to respond to market conditions, to provide for unanticipated capital expenditures or to take advantage of business
opportunities.

F-19

---

15.  Contingencies

Under various federal, state, provincial and local laws, ordinances and regulations, an owner or operator of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances on, in or migrating from such property. Such liability may be imposed without regard to whether the owner or operator knew of, or was responsible
for, the presence of such hazardous or toxic substances. A number of properties owned by us were formerly operated by others as gasoline stations. We have conducted subsurface investigations at these
owned properties and based on these investigations, we have determined that some contamination exists at certain of these sites. We are unaware of any remediation required with respect to such
contamination that would have a material impact on our financial condition. However, we cannot assure you that no additional remediation will be required at these sites or that no additional
environmental liabilities will arise with respect to these sites. No accrual has been recorded as of August 31, 2002 in the financial statements.

16.  Income Taxes

The provision for income taxes consists of the following for the years ended August 26, 2000, August 25, 2001 and August 31, 2002:

|         |  | 2000 |     | 2001 |   | 2002
|-------- |  | ---- | --- | ---- | - | ----
|Current: |  |      |     |      |   |     
|Federal  |  | $    | 68  |      | $ |    
|State    |  |      | 62  |      |   | 15  
|Foreign  |  |      |    |      |   | 117 
|         |  |      |     |      |   |     
|         |  | $    | 130 |      | $ | 132 
|         |  |      |     |      |   |     

Deferred
taxes consist of the following at August 26, 2000 and August 25, 2001:

|                    |                                                 | 2001 |         | 2002   |  
|------------------- | ----------------------------------------------- | ---- | ------- | ------ | -
|Assets:             |                                                 |      |         |        |  
|                    | Net operating loss and AMT credit carryforwards |      | $       | 24,038 |  
|                    | Property, plant and equipment                   |      |         | 5,475  |  
|                    | Other                                           |      |         | 1,050  |  
|                    |                                                 |      |         |        |  
|Total assets        |                                                 |      | 30,563  |        |  
|Liabilities:        |                                                 |      |         |        |  
|                    | Pension and other                               |      |         | 246    |  
|                    |                                                 |      |         |        |  
|Total liabilities   |                                                 |      | 246     |        |  
|                    |                                                 |      |         |        |  
|                    |                                                 |      | 30,317  |        |  
|Valuation allowance |                                                 |      | (30,317 | )      |  
|                    |                                                 |      |         |        |  
|                    |                                                 | $    |        |        | $
|                    |                                                 |      |         |        |  

The
Company files a consolidated income tax return with Holdings. The provision for income taxes has been determined as if the Company had filed a separate income tax return and includes
the benefit of its net operating loss (NOL) carryforward. In accordance with its tax-sharing agreement with Holdings, beginning in fiscal 1998, Archibald must compute an amount both with
and without the benefit of its NOL carryforward as of August 30, 1997, and remit any excess liability to Holdings.

F-20

---

The
provision for income taxes differs from the amount of income tax expense computed by applying the United States federal income tax rate to the loss before income taxes. A
reconciliation of the differences for the years ended August 26, 2000, August 25, 2001 and August 31, 2002, is as follows:

|                                    |                                        | 2000 |        | 2001  |   | 2002    |      
|----------------------------------- | -------------------------------------- | ---- | ------ | ----- | - | ------- | -----
|Computed statutory tax benefit      |                                        | $    | (5,174 | )     | $ | (14,116 | )    
|Increase (decrease) resulting from: |                                        |      |        |       |   |         |      
|                                    | Amortization of goodwill               |      |        | 533   |   |         | 534  
|                                    | Benefit of current losses not recorded |      |        | 4,699 |   |         | 9,982
|                                    | Asset impairment                       |      |        |      |   |         | 3,536
|                                    | State taxes, net of federal benefit    |      |        | 62    |   |         | 15   
|                                    | Foreign taxes                          |      |        |      |   |         | 117  
|                                    | Other items, net                       |      |        | 10    |   |         | 64   
|                                    |                                        |      |        |       |   |         |      
|Provision for income taxes          |                                        | $    | 130    |       | $ | 132     |      
|                                    |                                        |      |        |       |   |         |      

At
August 31, 2002, the Company had net operating loss carryforwards for federal income tax purposes of approximately $113 million (including Sweet Factory carryforwards of
approximately $40 million). The losses previously generated and the reorganization discussed below creates uncertainty as to realization of benefits, therefore, the deferred tax assets have
been offset by a valuation allowance. The valuation allowance increased by
$22,025 and $10,433 during 2002 and 2001, respectively. In addition, the Company has also reserved for alternative minimum tax credit carryforwards for U.S. income tax purposes of approximately
$1.5 million that have an unlimited carryforward period.

Implementation
of the Sweet Factory reorganization plan resulted in the Sweet Factory subsidiaries recognizing cancellation of indebtedness income ("CODI") of approximately
$3.5 million, which required the Company to reduce its net operating loss carryforwards, by the amount of the CODI it realized. In addition, implementation of the reorganization plan resulted
in the Company liquidating its Sweet Factory subsidiaries in October 2002. This liquidation will result in the loss of all of Sweet Factory's tax attributes, including its net operating losses
of approximately $40 Million.

Implementation
of the Company's reorganization plan, which took place in November 2002, resulted in the Company realizing CODI. All the CODI will be excluded from taxable income.
However the Company will be required to reduce certain of its tax attributes, including net operating loss carryforwards, by an amount not to exceed the CODI it realized. The Company is currently in
the process of determining the amount of CODI and the corresponding reduction of net operating loss carryforwards and tax attributes. As a result of the reorganization, it is anticipated that the
Company's net operating loss carryforwards will be eliminated at the end of fiscal 2003.

17.  Related Party Transactions

The Board of Directors, which included members appointed by parties affiliated with either The Jordan Company or TCW Capital, was paid $50 for directors' fees in
1999 and 2000. No Board of Directors' fees were paid in 2001 and 2002. A former member of the Board of Directors affiliated with The Jordan Company earned $52 as a consulting fee during 2000, 2001 and
2002. Consulting fees of $13 were accrued at August 31, 2002. Principally all of the common and preferred shareholders of Holdings, prior to emergence from bankruptcy, are affiliated with The
Jordan Company or TCW Capital.

The
Company paid $412 to Holdings in management consulting fees in 2000. No management consulting fee expense was incurred in 2001 and 2002.

The
accompanying financial statements reflect all of the Company's costs of doing business. There are no costs incurred by Holdings on behalf of the Company.

18.  Guarantor Subsidiaries

The Company's obligations under its senior secured notes due 2004 were fully and unconditionally guaranteed on a senior secured, joint and several basis by each
of the Company's subsidiaries (collectively, the Guarantor Subsidiaries). None of the Company's subsidiaries was subject to any restrictions on its ability to pay dividends or make distributions to
the Company. The following condensed consolidating financial data illustrates the composition of the Company and its subsidiaries. Separate financial statements of the respective Guarantor
Subsidiaries have not been provided because the Company's management determined that such additional information would not be useful in assessing the financial composition of the Guarantor
Subsidiaries.

F-21

---



Condensed Consolidating Balance Sheet  August 31, 2002

|                                                     |                                   | Archibald Candy
Corporation |          | Guarantor
Subsidiaries |   | Eliminations |       | Consolidated |        
|---------------------------------------------------- | --------------------------------- | --------------------------- | -------- | ---------------------- | - | ------------ | ----- | ------------ | -------
|Assets                                               |                                   |                             |          |                        |   |              |       |              |        
|Current assets:                                      |                                   |                             |          |                        |   |              |       |              |        
|                                                     | Cash and cash equivalents         |                             | $        | 2,521                  |   | $            | 835   |              | $      
|                                                     | Restricted cash                   |                             |          | 500                    |   |              |      |              |        
|                                                     | Accounts receivables, net         |                             |          | 1,021                  |   |              | 53    |              |        
|                                                     | Inventories, net                  |                             |          | 24,886                 |   |              | 2,962 |              |        
|                                                     | Prepaids and other current assets |                             |          | 1,953                  |   |              | 344   |              |        
|                                                     |                                   |                             |          |                        |   |              |       |              |        
|Total current assets                                 |                                   |                             | 30,881   |                        |   | 4,194        |       |              |       
|Property, plant, and equipment, net                  |                                   |                             | 16,290   |                        |   | 8,572        |       |              |       
|Intercompany                                         |                                   |                             | 8,789    |                        |   | 514          |       |              | (9,303 
|Investment in subsidiaries                           |                                   |                             | 2,527    |                        |   |             |       |              | (2,527 
|Other assets                                         |                                   |                             | 58,268   |                        |   | 2,289        |       |              |       
|                                                     |                                   |                             |          |                        |   |              |       |              |        
|Total assets                                         |                                   | $                           | 116,755  |                        | $ | 15,569       |       | $            | (11,830
|                                                     |                                   |                             |          |                        |   |              |       |              |        
|Liabilities and shareholder's equity (deficit)       |                                   |                             |          |                        |   |              |       |              |        
|Current liabilities:                                 |                                   |                             |          |                        |   |              |       |              |        
|                                                     | Revolving line of credit          |                             | $        | 20,000                 |   | $            |      |              | $      
|                                                     | Liabilities subject to compromise |                             |          | 190,130                |   |              |      |              |        
|                                                     | Accounts payable                  |                             |          | 9,485                  |   |              | 1,674 |              |        
|                                                     | Other current liabilities         |                             |          | 4,502                  |   |              | 1,198 |              |        
|                                                     |                                   |                             |          |                        |   |              |       |              |        
|Total current liabilities                            |                                   |                             | 224,117  |                        |   | 2,872        |       |              |       
|Long-term debt, less current portion                 |                                   |                             |         |                        |   | 9,303        |       |              | (9,303 
|Other noncurrent liabilities                         |                                   |                             | 4,425    |                        |   |             |       |              |       
|Total shareholder's equity (deficit)                 |                                   |                             | (111,787 | )                      |   | 3,394        |       |              | (2,527 
|                                                     |                                   |                             |          |                        |   |              |       |              |        
|Total liabilities and shareholder's equity (deficit) |                                   | $                           | 116,755  |                        | $ | 15,569       |       | $            | (11,830
|                                                     |                                   |                             |          |                        |   |              |       |              |        

F-22

---

Condensed Consolidating Balance Sheet  August 25, 2001

|                                                     |                                   | Archibald Candy
Corporation |         | Guarantor
Subsidiaries |   | Eliminations |       | Consolidated |       
|---------------------------------------------------- | --------------------------------- | --------------------------- | ------- | ---------------------- | - | ------------ | ----- | ------------ | ------
|Assets                                               |                                   |                             |         |                        |   |              |       |              |       
|Current assets:                                      |                                   |                             |         |                        |   |              |       |              |       
|                                                     | Cash and cash equivalents         |                             | $       | 1,116                  |   | $            | 1,230 |              | $     
|                                                     | Accounts receivables, net         |                             |         | 1,350                  |   |              | 102   |              |       
|                                                     | Inventories                       |                             |         | 26,415                 |   |              | 5,425 |              |       
|                                                     | Prepaids and other current assets |                             |         | 2,213                  |   |              | 920   |              |       
|                                                     |                                   |                             |         |                        |   |              |       |              |       
|Total current assets                                 |                                   |                             | 31,094  |                        |   | 7,677        |       |              |      
|Property, plant, and equipment, net                  |                                   |                             | 19,551  |                        |   | 14,847       |       |              |      
|Intercompany                                         |                                   |                             | 19,031  |                        |   | (19,031      | )     |              |      
|Investment in subsidiaries                           |                                   |                             | (2,008  | )                      |   |             |       |              | 2,008 
|Other assets                                         |                                   |                             | 66,049  |                        |   | 2,893        |       |              |      
|                                                     |                                   |                             |         |                        |   |              |       |              |       
|Total assets                                         |                                   | $                           | 133,717 |                        | $ | 6,386        |       | $            | 2,008 
|                                                     |                                   |                             |         |                        |   |              |       |              |       
|Liabilities and shareholder's equity (deficit)       |                                   |                             |         |                        |   |              |       |              |       
|Current liabilities:                                 |                                   |                             |         |                        |   |              |       |              |       
|                                                     | Revolving line of credit          |                             | $       | 19,472                 |   | $            |      |              | $     
|                                                     | Accounts payable                  |                             |         | 11,469                 |   |              | 5,352 |              |       
|                                                     | Other current liabilities         |                             |         | 7,392                  |   |              | 1,937 |              |       
|                                                     |                                   |                             |         |                        |   |              |       |              |       
|Total current liabilities                            |                                   |                             | 38,333  |                        |   | 7,289        |       |              |      
|Long-term debt, less current portion                 |                                   |                             | 170,130 |                        |   | 9,303        |       |              | (9,303
|Other noncurrent liabilities                         |                                   |                             | 1,078   |                        |   | 885          |       |              |      
|Total shareholder's equity (deficit)                 |                                   |                             | (75,824 | )                      |   | (11,091      | )     |              | 11,311
|                                                     |                                   |                             |         |                        |   |              |       |              |       
|Total liabilities and shareholder's equity (deficit) |                                   | $                           | 133,717 |                        | $ | 6,386        |       | $            | 2,008 
|                                                     |                                   |                             |         |                        |   |              |       |              |       

F-23

---

Condensed Consolidating Statement of Operations  Year ended August 31, 2002

|                                                                                       |                     | Archibald Candy
Corporation |         | Guarantor
Subsidiaries |   | Eliminations |        | Consolidated |       
|-------------------------------------------------------------------------------------- | ------------------- | --------------------------- | ------- | ---------------------- | - | ------------ | ------ | ------------ | ------
|Net sales                                                                              |                     | $                           | 124,571 |                        | $ | 58,808       |        | $            |      
|Cost of sales, excluding depreciation and amortization                                 |                     |                             | 50,822  |                        |   | 26,820       |        |              |      
|Cost of sales, nonrecurring                                                            |                     |                             |        |                        |   |             |        |              |      
|                                                                                       |                     |                             |         |                        |   |              |        |              |       
|                                                                                       | Total cost of sales |                             |         | 50,822                 |   |              | 26,820 |              |       
|Selling, general, and administrative expenses, excluding depreciation and amortization |                     |                             | 69,350  |                        |   | 31,570       |        |              |      
|Depreciation, amortization, and other intangibles                                      |                     |                             | 9,203   |                        |   | 1,981        |        |              |      
|Restructuring expense                                                                  |                     |                             |        |                        |   |             |        |              |      
|Other expense                                                                          |                     |                             | 303     |                        |   | 728          |        |              |      
|                                                                                       |                     |                             |         |                        |   |              |        |              |       
|Operating income (loss)                                                                |                     |                             | (5,107  | )                      |   | (2,291       | )      |              |      
|Interest expense, net                                                                  |                     |                             | 14,245  |                        |   | 783          |        |              |      
|Disposition of Sweet Factory Group, Inc. and Subsidiaries                              |                     |                             | 741     |                        |   |             |        |              |      
|Other income and expense                                                               |                     |                             | (204    | )                      |   | 160          |        |              |      
|Equity interest in losses of subsidiaries                                              |                     |                             | 3,289   |                        |   |             |        |              | (3,289
|                                                                                       |                     |                             |         |                        |   |              |        |              |       
|Income (loss) before reorganization costs and income taxes                             |                     |                             | (23,178 | )                      |   | (3,234       | )      |              | 3,289 
|Reorganization costs                                                                   |                     |                             | 9,919   |                        |   |             |        |              |      
|                                                                                       |                     |                             |         |                        |   |              |        |              |       
|Loss before income taxes                                                               |                     |                             | (33,097 | )                      |   | (3,234       | )      |              | 3,289 
|Provision for income taxes                                                             |                     |                             | 56      |                        |   | 55           |        |              |      
|                                                                                       |                     |                             |         |                        |   |              |        |              |       
|Net income (loss)                                                                      |                     | $                           | (33,153 | )                      | $ | (3,289       | )      | $            | (3,289
|                                                                                       |                     |                             |         |                        |   |              |        |              |       

Condensed Consolidating Statement of Operations  Year ended August 25, 2001

|                                                                                       |                     | Archibald Candy
Corporation |         | Guarantor
Subsidiaries |   | Eliminations |        | Consolidated |        
|-------------------------------------------------------------------------------------- | ------------------- | --------------------------- | ------- | ---------------------- | - | ------------ | ------ | ------------ | -------
|Net sales                                                                              |                     | $                           | 135,509 |                        | $ | 113,660      |        | $            |       
|Cost of sales, excluding depreciation and amortization                                 |                     |                             | 52,342  |                        |   | 47,818       |        |              |       
|Cost of sales, nonrecurring                                                            |                     |                             | 2,373   |                        |   | 1,510        |        |              |       
|                                                                                       |                     |                             |         |                        |   |              |        |              |        
|                                                                                       | Total cost of sales |                             |         | 54,715                 |   |              | 49,328 |              |        
|Selling, general, and administrative expenses, excluding depreciation and amortization |                     |                             | 68,647  |                        |   | 63,636       |        |              |       
|Depreciation, amortization, and other                                                  |                     |                             | 10,343  |                        |   | 26,044       |        |              |       
|                                                                                       |                     |                             |         |                        |   |              |        |              |        
|Operating income (loss)                                                                |                     |                             | 1,804   |                        |   | (25,348      | )      |              |       
|Interest expense, net                                                                  |                     |                             | 18,175  |                        |   | 959          |        |              |       
|Other income and expense                                                               |                     |                             | (1,745  | )                      |   | 454          |        |              |       
|Equity interest in losses of subsidiaries                                              |                     |                             | 26,778  |                        |   |             |        |              | (26,778
|                                                                                       |                     |                             |         |                        |   |              |        |              |        
|Income (loss) before income taxes                                                      |                     |                             | (41,404 | )                      |   | (26,761      | )      |              | 26,778 
|Provision for income taxes                                                             |                     |                             | 115     |                        |   | 17           |        |              |       
|                                                                                       |                     |                             |         |                        |   |              |        |              |        
|Net income (loss)                                                                      |                     | $                           | (41,519 | )                      | $ | (26,778      | )      | $            | 26,778 
|                                                                                       |                     |                             |         |                        |   |              |        |              |        

F-24

---

Condensed Consolidating Statement of Operations  Year ended August 26, 2000

|                                                                                       |  | Archibald Candy
Corporation |         | Guarantor
Subsidiaries |   | Eliminations |   | Consolidated |       
|-------------------------------------------------------------------------------------- |  | --------------------------- | ------- | ---------------------- | - | ------------ | - | ------------ | ------
|Net sales                                                                              |  | $                           | 135,570 |                        | $ | 121,460      |   | $            | (3,640
|Cost of sales, excluding depreciation                                                  |  |                             | 52,010  |                        |   | 50,216       |   |              | (3,690
|Selling, general, and administrative expenses, excluding depreciation and amortization |  |                             | 66,537  |                        |   | 67,805       |   |              |      
|Depreciation, amortization, and other                                                  |  |                             | 11,242  |                        |   | 6,118        |   |              |      
|                                                                                       |  |                             |         |                        |   |              |   |              |       
|Operating income (loss)                                                                |  |                             | 5,781   |                        |   | (2,679       | ) |              | 50    
|Interest expense, net                                                                  |  |                             | 17,603  |                        |   | 974          |   |              |      
|Other income and expense                                                               |  |                             | (151    | )                      |   | (56          | ) |              |      
|Equity interest in losses of subsidiaries                                              |  |                             | 3,596   |                        |   |             |   |              | (3,596
|                                                                                       |  |                             |         |                        |   |              |   |              |       
|Income (loss) before income taxes                                                      |  |                             | (15,267 | )                      |   | (3,597       | ) |              | 3,646 
|Provision (benefit) for income taxes                                                   |  |                             | 131     |                        |   | (1           | ) |              |      
|                                                                                       |  |                             |         |                        |   |              |   |              |       
|Net income (loss)                                                                      |  | $                           | (15,398 | )                      | $ | (3,596       | ) | $            | 3,646 
|                                                                                       |  |                             |         |                        |   |              |   |              |       

Condensed Consolidating Statement of Cash Flow  Year ended August 31, 2002

|                                                      |  | Archibald Candy
Corporation |        | Guarantor
Subsidiaries |   | Eliminations |   | Consolidated |  
|----------------------------------------------------- |  | --------------------------- | ------ | ---------------------- | - | ------------ | - | ------------ | -
|Operating activities                                  |  |                             |        |                        |   |              |   |              |  
|Cash flows provided by (used in) operating activities |  | $                           | 2,124  |                        | $ | 776          |   | $            | 
|Investing activities                                  |  |                             |        |                        |   |              |   |              |  
|Purchase of property and equipment                    |  |                             | (1,758 | )                      |   | (941         | ) |              | 
|Proceeds from sale of property                        |  |                             | 1,520  |                        |   |             |   |              | 
|Effect of deconsolidation of SFG and its subsidiaries |  |                             | (336   | )                      |   |             |   |              | 
|                                                      |  |                             |        |                        |   |              |   |              |  
|Net cash provided by (used in) investing activities   |  |                             | (574   | )                      |   | (941         | ) |              | 
|Financing activities                                  |  |                             |        |                        |   |              |   |              |  
|Net increase in revolving line of credit              |  |                             | 528    |                        |   |             |   |              | 
|Intercompany advances                                 |  |                             |       |                        |   |             |   |              | 
|Other                                                 |  |                             | (1,049 | )                      |   |             |   |              | 
|                                                      |  |                             |        |                        |   |              |   |              |  
|Net cash provided by (used in) financing activities   |  |                             | (521   | )                      |   |             |   |              | 
|                                                      |  |                             |        |                        |   |              |   |              |  
|Effect of exchange rates on cash                      |  |                             |       |                        |   | 646          |   |              | 
|Net decrease in cash and cash equivalents             |  |                             | 1,029  |                        |   | 481          |   |              | 
|Cash and cash equivalents at beginning of year        |  |                             | 1,116  |                        |   | 1,230        |   |              | 
|                                                      |  |                             |        |                        |   |              |   |              |  
|Cash and cash equivalents at end of year              |  | $                           | 2,145  |                        | $ | 1,711        |   | $            | 
|                                                      |  |                             |        |                        |   |              |   |              |  

F-25

---

Condensed Consolidating Statement of Cash Flows  Year ended August 25, 2001

|                                                      |  | Archibald Candy
Corporation |        | Guarantor
Subsidiaries |   | Eliminations |   | Consolidated |  
|----------------------------------------------------- |  | --------------------------- | ------ | ---------------------- | - | ------------ | - | ------------ | -
|Operating activities                                  |  |                             |        |                        |   |              |   |              |  
|Cash flows provided by (used in) operating activities |  | $                           | (4,449 | )                      | $ | 3,572        |   | $            | 
|Investing activities                                  |  |                             |        |                        |   |              |   |              |  
|Purchase of property and equipment                    |  |                             | (3,343 | )                      |   | (1,621       | ) |              | 
|Proceeds from sale of property                        |  |                             | 5,292  |                        |   |             |   |              | 
|                                                      |  |                             |        |                        |   |              |   |              |  
|Net cash provided by (used in) investing activities   |  |                             | 1,949  |                        |   | (1,621       | ) |              | 
|Financing activities                                  |  |                             |        |                        |   |              |   |              |  
|Net increase in revolving line of credit              |  |                             | 972    |                        |   |             |   |              | 
|Intercompany advances                                 |  |                             | 3,069  |                        |   | (3,069       | ) |              | 
|Other                                                 |  |                             | (1,225 | )                      |   | 28           |   |              | 
|                                                      |  |                             |        |                        |   |              |   |              |  
|Net cash provided by (used in) financing activities   |  |                             | 2,816  |                        |   | (3,041       | ) |              | 
|                                                      |  |                             |        |                        |   |              |   |              |  
|Net increase (decrease) in cash and cash equivalents  |  |                             | 316    |                        |   | (1,090       | ) |              | 
|Cash and cash equivalents at beginning of year        |  |                             | 800    |                        |   | 2,320        |   |              | 
|                                                      |  |                             |        |                        |   |              |   |              |  
|Cash and cash equivalents at end of year              |  | $                           | 1,116  |                        | $ | 1,230        |   | $            | 
|                                                      |  |                             |        |                        |   |              |   |              |  

Condensed Consolidating Statement of Cash Flows  Year ended August 26, 2000

|                                                      |  | Archibald Candy
Corporation |        | Guarantor
Subsidiaries |   | Eliminations |   | Consolidated |  
|----------------------------------------------------- |  | --------------------------- | ------ | ---------------------- | - | ------------ | - | ------------ | -
|Operating activities                                  |  |                             |        |                        |   |              |   |              |  
|Cash flows provided by (used in) operating activities |  | $                           | (5,545 | )                      | $ | 5,385        |   | $            | 
|Investing activities                                  |  |                             |        |                        |   |              |   |              |  
|Purchase of property and equipment                    |  |                             | (8,395 | )                      |   | (2,712       | ) |              | 
|Sweet Factory license payment                         |  |                             |       |                        |   | (750         | ) |              | 
|Acquisitions, net of cash acquired                    |  |                             | 3,337  |                        |   | (5,259       | ) |              | 
|                                                      |  |                             |        |                        |   |              |   |              |  
|Net cash used in investing activities                 |  |                             | (5,058 | )                      |   | (8,721       | ) |              | 
|Financing activities                                  |  |                             |        |                        |   |              |   |              |  
|Net increase in revolving line of credit              |  |                             | 10,500 |                        |   |             |   |              | 
|Intercompany advances                                 |  |                             | (1,163 | )                      |   | 1,163        |   |              | 
|Other                                                 |  |                             | (224   | )                      |   | (125         | ) |              | 
|                                                      |  |                             |        |                        |   |              |   |              |  
|Net cash provided by (used in) financing activities   |  |                             | 9,113  |                        |   | 1,038        |   |              | 
|                                                      |  |                             |        |                        |   |              |   |              |  
|Net decrease in cash and cash equivalents             |  |                             | (1,490 | )                      |   | (2,298       | ) |              | 
|Cash and cash equivalents at beginning of year        |  |                             | 2,290  |                        |   | 4,618        |   |              | 
|                                                      |  |                             |        |                        |   |              |   |              |  
|Cash and cash equivalents at end of year              |  | $                           | 800    |                        | $ | 2,320        |   | $            | 
|                                                      |  |                             |        |                        |   |              |   |              |  

18. Geographic Information

|                   |  | FY 2000 |         | FY 2001 |   | FY 2002
|------------------ |  | ------- | ------- | ------- | - | -------
|
|United States      |  | $       | 201,825 |         | $ | 122,859
|Canada             |  |         | 51,565  |         |   | 11,309 
|                   |  |         |         |         |   |        
|Consolidated total |  | $       | 253,390 |         | $ | 134,168
|                   |  |         |         |         |   |        

---



F-26

---



Schedule I

Archibald Candy Corporation  Valuation and Qualifying Accounts

|                              |                                 | Balance at
the Beginning
of the Period |   | Charged to
Cost and
Expense |   | Deductions |       | Balance at
the End of
the Period
|----------------------------- | ------------------------------- | -------------------------------------- | - | --------------------------- | - | ---------- | ----- | --------------------------------
|Accounts                      |                                 |                                        |   |                             |   |            |       |                                 
|2000:                         |                                 |                                        |   |                             |   |            |       |                                 
|Reserve for package inventory |                                 | $                                      |  |                             | $ |           |       | $                               
|2001:                         |                                 |                                        |   |                             |   |            |       |                                 
|                              | Reserve for package inventory   |                                        | $ |                            |   | $          |      |                                 
|2002:                         |                                 |                                        |   |                             |   |            |       |                                 
|                              | Reserve for package inventory   |                                        | $ |                            |   | $          | 3,038 |                                 
|Accounts                      |                                 |                                        |   |                             |   |            |       |                                 
|2000:                         |                                 |                                        |   |                             |   |            |       |                                 
|                              | Allowance for doubtful accounts |                                        | $ | 121                         |   | $          | 160   |                                 
|2001:                         |                                 |                                        |   |                             |   |            |       |                                 
|                              | Allowance for doubtful accounts |                                        | $ | 250                         |   | $          | 71    |                                 
|2002:                         |                                 |                                        |   |                             |   |            |       |                                 
|                              | Allowance for doubtful accounts |                                        | $ | 247                         |   | $          | (38   | )                               

F-27

---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereto duly authorized, on December 16, 2002.

| |  | ARCHIBALD CANDY CORPORATION
| |  | ---------------------------
| |  | By:                        

Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated.

|Signature                                     |  | Title                                                                                                                   |  | Date             
|--------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | -----------------
|                                              |  |                                                                                                                         |  |                  
|/s/TED A. SHEPHERDTed A. Shepherd             |  | President, Chief Executive Officer and Secretary
(Principal Executive Officer) and Chairman of the Board                |  | December 16, 2002
|/s/RICHARD J. ANGLINRichard J. Anglin         |  | Vice President, Chief Financial Officer, Treasurer and
Assistant Secretary
(Principal Financial and Accounting Officer) |  | December 16, 2002
|/s/EDWARD H. D'ALELIOEdward H. D'Alelio       |  | Director                                                                                                                |  | December 16, 2002
|/s/DAVID MARKUSDavid Markus                   |  | Director                                                                                                                |  | December 16, 2002
|/s/DREW MCMANIGLEDrew McManigle               |  | Director                                                                                                                |  | December 16, 2002
|/s/SHEPHERD G. PRYOR, IVShepherd G. Pryor, IV |  | Director                                                                                                                |  | December 16, 2002

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.

Registrant
has not sent to any of its security holders any of the following: (1) any annual report to security holders covering the Registrant's last fiscal year or (2) any
proxy statement, form of proxy or other proxy soliciting materials.

---

Certifications

I,
Ted A. Shepherd, certify that:





|Date: December 16, 2002 |  |  |                                                                                   
|----------------------- |  |  | ----------------------------------------------------------------------------------
|                        |  |  | /s/TED A. SHEPHERDTed A. Shepherd President, Chief Executive Officer and Secretary

---

Certifications

I,
Richard J. Anglin, certify that:





|Date: December 16, 2002 |  |  |                                                                                                                 
|----------------------- |  |  | ----------------------------------------------------------------------------------------------------------------
|                        |  |  | /s/RICHARD J. ANGLINRichard J. Anglin Vice President, Chief Financial Officer, Treasurer and Assistant
Secretary

---

QuickLinks