Commission File Number: 333-33751

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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

(Mark One)

|/x/ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|--- | ----------------------------------------------------------------------------------------
|    | FOR THE FISCAL YEAR ENDED AUGUST 25, 2001.                                              
|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|    | FOR THE TRANSITION PERIOD FROM  TO
.                                                    
|    |                                                                                         

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

Illinois

36-0743280(State or other jurisdiction
of incorporation or organization)

(I.R.S. Employer
Identification No.)1137 West Jackson Boulevard,
Chicago, Illinois 60607

Telephone:
(312) 243-2700


(Address and telephone number of the registrant's principal executive office)

Registrant's Telephone Number, Including Area Code: (312) 243-2700

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Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: None

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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 /x/  No / /

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. /x/

As
of December 10, 2001, none of the registrant's Common Stock, par value $.01 per share, was held by non-affiliates of the registrant.

As
of December 10, 2001, the number of shares outstanding of the registrant's Common Stock was 4,210, all of which was held by Fannie May Holdings, Inc.

DOCUMENTS INCORPORATED BY REFERENCENone.

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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                                                          |                         
|PART IV  |                                                                                                                 |                         
|         | Item 14Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                        |                         

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PART I        Item 1Business

As used in this report, "we" or the "Company" refers to Archibald Candy Corporation and "Holdings" refers to Fannie May
Holdings, Inc. The Company is a wholly-owned subsidiary of Holdings.

General

The Company is a manufacturer and marketer of quality boxed chocolates and other confectionery items. Founded in 1921, we manufacture a variety of candies and
operate confectionery retail chains under the Fannie May, Fanny Farmer, Sweet Factory and Laura Secord brand names. As of August 25, 2001, we sold our products through 657 Company-operated
stores and approximately 9,300 third-party retail outlets in 36 states 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 quantity order, mail order and fundraising programs. We believe that consumers widely recognize our products for their quality, freshness and value,
and that the Fannie May, Fanny Farmer, Sweet Factory and Laura Secord brand names are among the strongest in the confectionery industry and offer significant opportunities for growth.

Our
sales for fiscal year 2001 were approximately $249.2 million. Operating income for fiscal 2001, excluding restructuring expense, manufacturing start-up costs
and the write-off of impaired assets totaling $23.6 million, was approximately breakeven. Earnings before interest, income taxes, depreciation and amortization for fiscal 2001,
excluding restructuring expense, manufacturing start-up costs and the write-off of impaired assets, was approximately $18.0 million.

On
December 7, 1998, we acquired Sweet Factory Group, Inc., a leading specialty bulk candy retailer with 190 stores located throughout the United States. On
June 8, 1999, our subsidiary Archibald Candy (Canada) Corporation acquired substantially all of the assets of the Laura Secord retail business of Nestlè Canada Inc. Laura
Secord is the leading retailer of boxed chocolates in Canada, with 178 retail stores and distribution through more than 1,300 third-party retail outlets in Canada.

On
November 15, 2001, Sweet Factory Group, Inc. and its three subsidiaries filed voluntary petitions in the U.S. Bankruptcy Court for the District of Delaware under
Chapter 11 of the U.S. Bankruptcy Code. The Sweet Factory entities are continuing to manage their properties and operate their business as "debtors-in-possession" in accordance
with the U.S. Bankruptcy Code. Through the bankruptcy proceedings, the leases for 90 Sweet Factory stores have been rejected and the employment of approximately 100 full-time and 400
part-time employees has been terminated. Managements expects to reorganize the Sweet Factory business around those stores that it believes may be operated profitably, although no assurance
can be given that this objective will be achieved.

The Industry

The U.S. confectionery industry had 2000 retail sales of approximately $24 billion. The U.S. confectionery 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 25 pounds in 2000. The U.S. confectionery market is
comprised of two broad sectors: chocolates and non-chocolates, which represent 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 1995 to 2000, the pound sales volume in the U.S. chocolate and
non-chocolate sectors grew at the rate of 9.1% and 7.3%, respectively. Within the U.S. chocolate sector, total sales of boxed chocolates were approximately $1.6 billion in 2000. Our
management believes that the Canadian confectionery industry had 2000 retail sales of approximately $1.2 billion.

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Business Strategy

Our business strategy is to grow our core brands and acquire and build other leading brand names in the confectionery industry and to leverage 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 Sweet Factory in December 1998
provided us with a leading name in non-chocolate, bulk candy retail and 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 over three-quarters of the products that we sell under our Fannie May and Fanny Farmer brands and maintain proprietary specifications for a
significant amount of our confectionery products, such as seasonal novelties that we purchase from other sources for resale. Our manufactured products include more than 350 items, including our best
selling Pixie, Mint Meltaway and Trinidad lines. Products sourced from vendors for resale under our Fannie May and Fanny Farmer brands include assorted nuts, hard candy, novelties, ice cream and an
extensive line of gift items. We believe that the superior quality and freshness 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 freshness rather than preservatives to ensure a high-quality product, it is our policy to destroy products not sold
within specified periods.

Our
Sweet Factory stores sell 150 to 200 different candies in a self-serve, pick and mix bulk format. With the exception of novelty, gift, count goods and
pre-packaged items, most of Sweet Factory's products are sold for a single price per pound. For fiscal 2001, bulk products represented 80% of Sweet Factory's retail sales. The majority of
bulk products are non-chocolate items such as gourmet jelly beans, gummi bears, hard candies and licorice. Our Sweet Factory stores also sell nationally branded count goods, gifts and
novelty items. Chocolate items comprise approximately 15% of Sweet Factory's product mix, of which boxed chocolates represent a negligible share. We purchase substantially all of the products that we
sell in our Sweet Factory stores from independent distributors and manufacturers that deliver the products directly to our Sweet Factory stores.

Our
Laura Secord stores sell approximately 150 different candies, including a variety of boxed chocolates and individual chocolate pieces, fudge, ice cream, nuts, dietetic candy and
novelty and other items.



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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 two of our distribution centers. On March 31, 1999, we consolidated Sweet Factory's office, manufacturing and
distribution facilities in San Diego, California with those of our Chicago, Illinois facilities and in August 2000, we consolidated the manufacturing and distribution of Laura Secord products
with our Chicago, Illinois facilities.

The
manufacturing process at our Chicago, Illinois facility 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.



Our
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.

Warehousing and Distribution.We maintain warehousing and distribution facilities in Chicago, Illinois and Bensalem,
Pennsylvania, which facilities have 200,000 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 others. 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

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and freight forwarding companies supply all of our sales channels and other stores, including all of our Sweet Factory and 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. Written specifications are provided to our suppliers and certificates of
analysis must accompany incoming shipments. Blommer Chocolate Company ("Blommer") and Merckens Chocolate Company ("Merckens") are our primary chocolate coating suppliers. We currently have supply
agreements with Blommer through December 31, 2001 and June 28, 2002 on various types of chocolate coatings and through April 1, 2002 with Merckens. In fiscal 2001, we purchased
approximately 50% and 40% of our chocolate coatings from Blommer and Merckens, respectively. All chocolate coatings prepared for us are proprietary and are produced according to our recipes.

We
purchase substantially all of the products that we sell in our Sweet Factory stores from independent distributors and manufacturers on a purchase order basis. 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.

Marketing and Sales

We sell our confectionery products through three channels: (1) Company-operated retail, (2) third-party retail and
(3) non-retail.

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Company-Operated Retail.As of August 25, 2001, we sold our products through 657 Company-operated stores: 225
Fannie May stores, 64 Fanny Farmer stores, 190 Sweet Factory stores and 178 Laura Secord stores. These stores were located in 36 states, the District of Columbia, Puerto Rico, and 9 provinces in
Canada as follows:

|State/Province       |  | Fannie May |  | Fanny Farmer |  | Sweet Factory |  | Laura Secord |  | Total Stores
|-------------------- |  | ---------- |  | ------------ |  | ------------- |  | ------------ |  | ------------
|Illinois             |  | 156        |  |             |  | 5             |  |             |  | 161         
|Ontario              |  |           |  |             |  |              |  | 91           |  | 91          
|California           |  |           |  |             |  | 58            |  |             |  | 58          
|Quebec               |  |           |  |             |  |              |  | 52           |  | 52          
|Florida              |  | 10         |  | 2            |  | 14            |  |             |  | 26          
|Indiana              |  | 24         |  |             |  | 2             |  |             |  | 26          
|Minnesota            |  | 3          |  | 21           |  |              |  |             |  | 24          
|New York             |  |           |  | 15           |  | 7             |  |             |  | 22          
|Michigan             |  | 7          |  | 7            |  | 4             |  |             |  | 18          
|Washington           |  |           |  |             |  | 13            |  |             |  | 13          
|Massachusetts        |  |           |  | 8            |  | 3             |  |             |  | 11          
|Texas                |  |           |  |             |  | 11            |  |             |  | 11          
|Alberta              |  |           |  |             |  |              |  | 10           |  | 10          
|Ohio                 |  |           |  | 3            |  | 7             |  |             |  | 10          
|Pennsylvania         |  | 5          |  |             |  | 4             |  |             |  | 9           
|Virginia             |  | 4          |  |             |  | 5             |  |             |  | 9           
|Wisconsin            |  | 4          |  | 5            |  |              |  |             |  | 9           
|Arizona              |  |           |  |             |  | 8             |  |             |  | 8           
|Manitoba             |  |           |  |             |  |              |  | 7            |  | 7           
|Missouri             |  | 7          |  |             |  |              |  |             |  | 7           
|Nevada               |  |           |  |             |  | 7             |  |             |  | 7           
|Oregon               |  |           |  |             |  | 5             |  |             |  | 5           
|British Columbia     |  |           |  |             |  |              |  | 4            |  | 4           
|Colorado             |  |           |  |             |  | 4             |  |             |  | 4           
|Georgia              |  |           |  |             |  | 4             |  |             |  | 4           
|New Brunswick        |  |           |  |             |  |              |  | 4            |  | 4           
|New Jersey           |  | 1          |  |             |  | 3             |  |             |  | 4           
|Nova Scotia          |  |           |  |             |  |              |  | 4            |  | 4           
|Saskatchewan         |  |           |  |             |  |              |  | 4            |  | 4           
|Hawaii               |  |           |  |             |  | 3             |  |             |  | 3           
|Iowa                 |  | 2          |  | 1            |  |              |  |             |  | 3           
|Connecticut          |  |           |  |             |  | 3             |  |             |  | 3           
|District of Columbia |  | 1          |  |             |  | 2             |  |             |  | 3           
|Louisiana            |  |           |  |             |  | 3             |  |             |  | 3           
|Maryland             |  | 1          |  |             |  | 2             |  |             |  | 3           
|Kentucky             |  |           |  |             |  | 2             |  |             |  | 2           
|Mississippi          |  |           |  |             |  | 2             |  |             |  | 2           
|Newfoundland         |  |           |  |             |  |              |  | 2            |  | 2           
|New Hampshire        |  |           |  | 1            |  | 1             |  |             |  | 2           
|New Mexico           |  |           |  |             |  | 2             |  |             |  | 2           
|Tennessee            |  |           |  |             |  | 2             |  |             |  | 2           
|Alabama              |  |           |  |             |  | 1             |  |             |  | 1           
|Kansas               |  |           |  |             |  | 1             |  |             |  | 1           
|North Dakota         |  |           |  | 1            |  |              |  |             |  | 1           
|South Carolina       |  |           |  |             |  | 1             |  |             |  | 1           
|Utah                 |  |           |  |             |  | 1             |  |             |  | 1           
|                     |  |            |  |              |  |               |  |              |  |             
|                     |  | 225        |  | 64           |  | 190           |  | 178          |  | 657         
|                     |  |            |  |              |  |               |  |              |  |             

In fiscal 2001, sales through our Company-operated stores accounted for $202.2 million, or 81.1%, of our net sales. While our Fannie
May, Fanny Farmer and Sweet Factory stores co-exist in certain states, such stores generally do not compete in the same local markets. Fannie May stores typically are found in strip
centers and shopping malls or as street-front units and stand-alone roadside sites. Fanny Farmer and Sweet Factory stores typically are located in shopping malls. In addition, Sweet Factory has opened
stores in airports, railroad stations, specialty centers and selected street locations and developed

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kiosks in malls, sports venues and other public areas. Our Laura Secord stores typically are located in shopping malls.

Our
Fannie May and Fanny Farmer stores had average annual sales of approximately $315,000 in fiscal 2001 and achieved average annual same store sales growth of 2.4% during the past
five fiscal years. Our Sweet Factory stores had average annual sales of approximately $285,000 in fiscal 2001, although Sweet Factory same store sales have declined since 1997.

We
own 33 Fannie May stores and lease the remainder of our stores. These owned stores typically are in stand-alone roadside structures and tend to be among our highest grossing sales
locations. Our leased stores are in the following locations: 443 in shopping malls, 100 in strip centers, 42 in street-front units and 39 in other locations, including outlets and airports. Lease
terms and rates vary by location with the typical lease providing an average seven-year term with a minimum base rent plus additional rent based on a percentage of sales and common area
charges. Historically, we have been able to renew our store leases upon expiration.

The
size of our Fannie May, Fanny Farmer and Sweet Factory stores, including both leased and Company-owned stores, excluding carts and kiosks, generally ranges from 600 square feet
mall locations to 2,900 square feet stand-alone roadside locations, with an average store size of approximately 825 square feet. 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. Fannie May and Fanny Farmer 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. Sweet Factory's stores are primarily self-serve. We control each store's design, signage and layout to maintain consistency among all
Fannie May, Fanny Farmer and Sweet Factory stores.

Our
Laura Secord Company-operated stores consist of both classic stores and combo stores. Classic stores are traditional Laura Secord stores that offer Laura Secord chocolates,
premium scooped ice cream and other novelty products. As of August 25, 2001, we operated 160 Laura Secord classic stores averaging approximately 765 square feet in size. These stores had
average annual sales of approximately $290,000 in fiscal 2001. We believe there are opportunities to continue to improve the performance of our recently acquired Laura Secord classic stores by
implementing many of the same retail store strategies that improved the operations of our Fannie May and Fanny Farmer stores.

Combo
stores are co-branded Laura Secord and Hallmark 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 it 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. As of August 25, 2001, we operated 18 Laura Secord combo stores averaging approximately 3,400 square feet in size. These stores had average annual sales
of approximately $506,000 for fiscal 2001.

As
a result of management's efforts to improve Company-operated retail store performance and to eliminate weaker store locations, same store sales in our Fannie May and Fanny Farmer
stores increased 5.2%, 4.2%, 0.5%, 4.0% and 0.7% in fiscal 1997, 1998, 1999, 2000 and 2001, respectively.
Since fiscal 1996, we have opened 37 new Fannie May and Fanny Farmer stores and closed 87 Fannie May and Fanny Farmer stores, most of which were unprofitable. Company-operated Fannie May and

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Fanny Farmer store openings and closings for fiscal 1997, 1998, 1999, 2000 and 2001 are set forth below.

|          |              | Fiscal Year Ended
|--------- | ------------ | -----------------
|
|Openings: |              |                  
|          | Fannie May   |                  
|          | Fanny Farmer |                  
|          |              |                  
|          |              | Total            
|          |              |                  
|Closings: |              |                  
|          | Fannie May   |                  
|          | Fanny Farmer |                  
|          |              |                  
|          |              | Total            
|          |              |                  

Our
management plans to continue its emphasis on improving store mix rather than store expansion for the near future.

Third-Party Retail.Through our third-party retail channel, we market our Fannie May, Fanny Farmer and Laura Secord
branded products to approximately 9,300 grocery stores, drug stores, card and gift stores, department stores and other variety stores through our frozen fresh, specialty market and mass market
programs. These programs are designed to make our branded products more readily available to consumers in new and existing markets. Within the mid-priced segment of the 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 frozen fresh and specialty markets programs and position the Fanny Farmer brand at a lower price point for the mass market.

Under
the frozen fresh program, we distribute Fannie May branded frozen products to retailers who then maintain the products in freezer display cases for sale to their customers. We
initiated the frozen fresh 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 frozen fresh 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 frozen fresh sales. These accounts generally purchase Fannie May branded products from us at wholesale prices and
mark-up the product to prices comparable to those for products sold in Company-operated stores. For fiscal 2001, frozen fresh sales accounted for $10.5 million, or 7.7%, of our
Fannie May and Fanny Farmer 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 frozen fresh 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 5,000 outlets, operated mostly by
retail chains, including Target and Albertsons. For fiscal 2001, mass market sales accounted for $3.8 million, or 2.8%, of our Fannie May and Fanny Farmer net sales.

In
fiscal 1997, we announced the roll-out of our specialty markets program through which we market products nationally under the Fannie May brand name to department
stores, card and gift stores and direct mail catalog companies. The product line for this program, which consists of a variety of boxed chocolates and novelty items, is intended to meet unfulfilled
consumer demand in the mid-priced segment of the specialty market. This product line is positioned at higher price points and sold only during the peak seasons of Christmas, Valentine's
Day and Easter. Pursuant to an agreement

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with Hallmark Cards, Inc., we began selling in November 1998 Fannie May boxed chocolates through many of Hallmark's approximately 5,000 Gold Crown stores during the holiday seasons. For
fiscal 2001, specialty markets program sales accounted for $6.5 million, or 4.8%, of our Fannie May and Fanny Farmer net sales.

We
intend to strengthen our third-party retail product line by making certain of Sweet Factory's products available through selected third-party retailers who currently carry our
Fannie May or Fanny Farmer branded products. We also intend to continue to expand Laura Secord's third-party retail sales through agency accounts and sales to the Laura Secord combo stores. These
sales accounted for $5.0 million, or 9.6%, of Laura Secord net sales in fiscal 2001.

Non-Retail.Our non-retail channel consists of sales of our Fannie May and Fanny Farmer branded
products through our quantity order, fundraising and mail order catalog programs. Under the quantity order program, companies and organizations buy large amounts of prepackaged candy for
gift-giving purposes 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 quantity order customers tend to renew or expand on their prior year's order. Our current active quantity order database includes approximately 43,000 customers. The quantity order program
is available year-round, but peaks in activity during the Christmas, Valentine's Day and Easter holiday seasons. A quantity order catalog is distributed at the beginning of each fiscal
year and prior to each holiday season. We also have targeted fundraising organizations throughout the United States for our product offering. For fiscal 2001, quantity order and fundraising sales
accounted for $13.1 million, or 9.7%, of our Fannie May and Fanny Farmer 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
2.1 million catalogs annually and a database of over 350,000 customers and over the internet at our web site (www.fanniemay.com). 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. For fiscal 2001, mail order sales accounted for $8.1 million, or 6.0%, of our Fannie May and Fanny Farmer net sales. We intend to strengthen our non-retail product line by
making some of Sweet Factory's non-chocolate products available through our quantity order, mail order and fundraising programs. We also intend to explore developing non-retail
sales programs to increase the sale of Laura Secord products in Canada.

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 price points comparable to those of our products.

Our
Fannie May and Fanny Farmer products generally compete in the quality boxed chocolate market, 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. We believe that our Fannie May and Fanny Farmer products compete primarily in the
mid-priced segment though we also compete against Russell Stover Candies and other lower-priced suppliers in certain distribution channels.

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The mid-priced boxed chocolate segment in the United States is generally comprised of those chocolates which retail for between $10.00 and $20.00. The competition for our
Fannie May and Fanny Farmer branded products in the mid-priced segment consists 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.

There
are only a few national or regional confectionery retailers that directly compete with our Sweet Factory stores in the bulk candy retail market. The largest (all less than 50
stores) of these competitors are Mr. Bulky, Candy Express, FAO Schweetz and Sweets From Heaven. Sweet Factory also competes with other confectionery retailers, including grocery stores, drug
stores and toy 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, our management believes
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.

Employees

As of August 25, 2001, we employed approximately 5,050 people, of which 1,250 worked in Fannie May stores, 300 worked in Fanny Farmer stores, 1,250
worked in Sweet Factory stores, 1,400 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, 425 were salaried. During periods of high seasonal retail demand in our second and third fiscal
quarters, our number of employees typically increases by approximately 2,400, many of whom work part-time in our Company-operated retail stores. As of August 25, 2001, over
one-half of our hourly store personnel were employed on a part-time basis. As of August 25, 2001, approximately 1,050 of our employees were members of one of the various
labor unions that represent our employees. The Company has seven collective bargaining agreements, all of which expire on or before March 31, 2003. None of our Fanny Farmer, Sweet Factory or
Laura Secord retail store employees are represented by labor unions. Our management generally considers our employee relations to be good.

Intellectual Property

We own numerous trademarks. 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.

Our
Sweet Factory subsidiary has an exclusive license from United Sweet Factory Limited, the owner of the "Sweet Factory" trademark, to operate stores under the "Sweet Factory" name
and design in the United States and Mexico. During fiscal year 2000, Sweet Factory renewed the license for an additional ten-year period, paying a renewal fee of $750,000. Sweet Factory
has the option to extend the license for two additional ten-year periods to the year 2030 by paying a renewal fee of $750,000 for each such additional extension.

9

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Item 2Properties

As of August 25, 2001, we operated 225 Fannie May stores, 64 Fanny Farmer stores, 190 Sweet Factory stores and 178 Laura Secord stores. Of the 225
Fannie May stores, 33 are owned by us and 192 are leased by us. We lease all of our Fanny Farmer, Sweet Factory and Laura Secord stores. Within four years following August 25, 2001,
approximately 68% 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.

In
addition to our Company-operated stores, we have five other principal properties: (1) an approximately 320,000 square foot manufacturing, storage and headquarters facility
that we own in Chicago, Illinois; (2) an approximately 132,000 square foot warehouse and distribution facility that we lease in Chicago, Illinois; (3) an approximately 68,000 square foot
warehouse that we lease in Chicago, Illinois; (4) an approximately 17,000 square foot warehouse and distribution facility that we own in Bensalem, Pennsylvania; and (5) 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 and our Chicago warehouse expires in
June 2002. 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

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, we were not a party to any such legal proceeding that terminated during the fourth quarter of
fiscal 2001.

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

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2001.

10

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

Holdings owns all of our issued and outstanding common stock. There is no established public trading market for our common stock. Holdings has four classes of
authorized common stock, all of which are subject to restrictions on sale and transfer. There is no established public trading market for Holdings' common stock. As of August 25, 2001, 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.

We
did not pay any cash dividend on our common stock in fiscal 1999, 2000 or 2001. However, we funded cash to Holdings to the extent necessary to allow Holdings to pay cash dividends
on its senior preferred stock. Holdings did not pay any cash dividend on Holdings' Common Stock in fiscal 2000 or 2001. Any payment of dividends in the future is dependent upon the financial
condition, capital requirements and earnings of us and Holdings, as well as other factors. Nevertheless, 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 any cash dividends to Holdings in the foreseeable future, except to the extent necessary to allow Holdings to satisfy its dividend and
redemption obligations with respect to its common stock and preferred stock or as required by the tax sharing and management consulting agreement entered into between us and Holdings. See "Certain
Relationships and Related TransactionsTax Sharing and Management Consulting Agreement". Also, we are subject to certain contractual restrictions and restrictions under law with respect to
our payment of dividends. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources" and Note 7, "Debt" of the notes
to the financial statements included in this report for information concerning such restrictions.

11

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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 25, 2001, 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                  |                            | $                 | 78,758
|Operating income (loss)       |                            |                   | 10,801
|Interest expense              |                            |                   | 9,235 
|Other income and (expense)    |                            |                   | 411   
|Income tax                    |                            |                   | 250   
|Net income (loss)(5)          |                            |                   | (1,171

|                             |  | As of |        
|---------------------------- |  | ----- | -------
|
|
|Balance Sheet Data:          |  |       |        
|Cash and cash equivalents    |  | $     | 15,801 
|Working capital (deficiency) |  |       | 23,475 
|Total assets                 |  |       | 95,660 
|Total long-term debt         |  |       | 100,521
|Shareholder's deficit        |  |       | (16,619

|                                          |                      | Fiscal Year Ended |       
|----------------------------------------- | -------------------- | ----------------- | ------
|
|
|Other Data:                               |                      |                   |       
|EBITDA(6)                                 |                      | $                 | 16,868
|Cash provided by (used in):               |                      |                   |       
|                                          | Operating activities |                   |       
|                                          | Investing activities |                   |       
|                                          | Financing activities |                   |       
|Depreciation and amortization             |                      |                   | 5,932 
|Capital expenditures                      |                      |                   | 3,688 
|Net sales growth (decline)                |                      |                   | 4.0   
|Gross profit as a percentage of net sales |                      |                   | 63.8  
|EBITDA margin(7)                          |                      |                   | 13.7  
|Ratio of earnings to fixed charges(8)     |                      |                   |      

12

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|                                                    |                                | August 30,
1997(1) |     | August 29,
1998(1) |     | August 28,
1999(1) |     | August 26,
2000(1) |     | August 25,
2001(1) |    
|--------------------------------------------------- | ------------------------------ | ------------------ | --- | ------------------ | --- | ------------------ | --- | ------------------ | --- | ------------------ | ---
|Store Data:                                         |                                |                    |     |                    |     |                    |     |                    |     |                    |    
|Number of Company-operated stores at period end(9): |                                |                    |     |                    |     |                    |     |                    |     |                    |    
|                                                    | Fannie May/Fanny Farmer stores |                    | 322 |                    | 317 |                    | 302 |                    | 297 |                    | 289
|                                                    | Sweet Factory stores           |                    |    |                    |    |                    | 252 |                    | 232 |                    | 190
|                                                    | Laura Secord stores            |                    |    |                    |    |                    | 173 |                    | 176 |                    | 178
|                                                    |                                |                    |     |                    |     |                    |     |                    |     |                    |    
|Total number of stores                              |                                | 322                |     | 317                |     | 727                |     | 705                |     | 657                |    
|                                                    |                                |                    |     |                    |     |                    |     |                    |     |                    |    
|Increase (decrease) in same store sales(10)         |                                | 5.2                | %   | 4.2                | %   | 0.5                | %   | 1.5                | %   | (1.6               | %) 

---

13

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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, the following discussion relates to the Company on a historical basis, without giving effect to the Sweet Factory and Laura Secord acquisitions
and related financings. Unless otherwise indicated, all references to stores include retail stores and kiosks, but not carts, and are as of August 25, 2001.

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, Sweet Factory and Laura Secord brand names. As of August 25, 2001, we sold our products through 657 Company-operated stores and approximately
9,300 third party retail outlets in 36 states 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 quantity order, mail order and fundraising programs.

Historically,
Company-operated retail has represented the most significant distribution channel for our products, accounting for $202.2 million, or 81.1%, of net sales in
fiscal 2001. Our third-party retail and non-retail businesses collectively accounted for $47.0 million, or 18.9%, of net sales in fiscal 2001. We recently have turned our focus to
growing sales and earnings by (1) building on our Fannie May and Fanny Farmer brand names by increasing points of availability for our products, (2) integrating the Sweet Factory and
Laura Secord brand names and stores with our existing operations and (3) implementing new product and merchandising strategies at Sweet Factory.

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OperationsSuppliers and Purchasing." Labor costs consist primarily of
hourly wages, benefits 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 Fannie May and Fanny Farmer 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.

On
November 15, 2001, Sweet Factory Group, Inc. and its three subsidiaries filed voluntary petitions in the U.S. Bankruptcy Court for the District of Delaware under
Chapter 11 of the U.S. Bankruptcy Code. The Sweet Factory entities are continuing to manage their properties and operate their business as "debtors-in-possession" in accordance
with the U.S. Bankruptcy Code. Through the bankruptcy proceedings, the leases for 90 Sweet Factory stores have been rejected and the employment of approximately 100 full-time and 400
part-time employees has been terminated. Managements expects to reorganize the Sweet Factory business around those stores that it believes may be operated profitably, although no assurance
can be given that this objective will be achieved.

14

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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. Except with respect to pounds sold and average selling price, the table and discussion below reflects the
results of operations of our Sweet Factory and Laura Secord stores only for the periods after December 6, 1998 and June 7, 1999, respectively.

|                                                               |                         | Fiscal Year Ended           |      
|-------------------------------------------------------------- | ----------------------- | --------------------------- | -----
|
|Percentage of net sales:                                       |                         |                             |      
|                                                               | Company-operated retail |                             |      
|                                                               | Third-party retail      |                             |      
|                                                               | Non-retail              |                             |      
|                                                               |                         |                             |      
|                                                               |                         |                             | 100.0
|                                                               |                         |                             |      
|Pounds sold (in millions); Fannie May/Fanny Farmer only:       |                         |                             |      
|                                                               | Company-operated retail |                             |      
|                                                               | Third-party retail      |                             |      
|                                                               | Non-retail              |                             |      
|                                                               |                         |                             |      
|                                                               |                         | Total pounds sold           |      
|                                                               |                         |                             |      
|Average selling price per pound; Fannie May/Fanny Farmer only: |                         |                             |      
|                                                               | Company-operated retail |                             | $    
|                                                               | Third-party retail      |                             |      
|                                                               | Non-retail              |                             |      
|                                                               |                         | Total average selling price |      
|Company-operated stores(at period end)                         |                         |                             | 727  

As
a percentage of net sales, Company-operated retail sales increased from 78.1% in fiscal 1999 to 81.1% in fiscal 2001. This increase was primarily due to our acquisitions in fiscal
year 1999 of Sweet Factory (December 7, 1998) and Laura Secord (June 8, 1999), whose sales are more highly concentrated in the Company-operated retail sales channel than our Fannie May
and Fanny Farmer sales. From the end of fiscal 1999 to the end of fiscal 2001, the number of Company-operated stores decreased from 727 to 657, primarily as a result of closing unprofitable Sweet
Factory stores. While sales and pounds sold declined in our Fannie May and Fanny Farmer stores, the average selling price per pound increased from $11.57 to $12.31 from fiscal 1999 to fiscal 2001.

Pounds
sold in our third-party retail sales channel decreased from 2.8 million in fiscal 1999 to 2.7 million in fiscal 2001. The decrease in pounds sold from fiscal 1999
to fiscal 2001 was primarily due to the decrease in sales to our card and gift business customers under a program launched in fiscal 1999, offset by increased sales under the national mass market
program. The card and gift program received heavy initial promotional support, which was not repeated during fiscal 2000 and 2001.

Pounds
sold in our non-retail sales channel increased from 1.9 million in fiscal 1999 to 2.3 million in fiscal 2001 as a result of additional customers in
our fundraising business. As a percentage of net sales, non-retail sales decreased from 9.4% to 8.5% over the same period, due to the higher concentration of sales in Company-operated
retail sales as a result of the acquisitions of Sweet Factory and Laura Secord. Without giving effect to the Sweet Factory and Laura Secord acquisitions, non-retail sales as a percentage
of net sales increased from 13.9% for fiscal 1999 to 15.6% in fiscal 2001.

15

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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, 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 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 the Company's 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 the Company's acquisition of the Laura Secord
retail business from Nestlè Canada, Inc. At that time, the Company entered into an agreement with Nestlè Canada, pursuant to which Nestlè Canada
agreed to continue to produce for a one-year period substantially all the boxed chocolates and other chocolate confectionery items that are sold in Laura Secord stores. In
September 2000, the Company transitioned the Laura Secord chocolate production to its manufacturing facility in Chicago, Illinois. These costs included start-up costs for cooking
and enrobing, packaging, and warehouse and distribution; product development costs; and other costs. 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 the Company's 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.To improve the profitability of the Sweet Factory business, the Company recorded a restructuring
charge of $5.8 million for the anticipated closing of 79 unprofitable stores. As of August 25, 2001, 41 stores have been closed and the remaining 38 stores will be closed in FY 2002. Of
the $5.8 million charge, $0.7 million is included in cost of sales relating to inventory liquidation costs. Approximately $1.4 million of the $5.8 million charge represents
cash expenditures for lease termination costs and other costs associated with vacating the stores. The remaining charge of $4.4 million is 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, the Company has 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.

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.

16

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Operating Loss.Operating loss was $23.5 million for fiscal 2001, a decrease of $26.7 million form
$3.2 million of operating income for fiscal 2000. The decrease in operating income was due primarily to the restructuring charge for 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.

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.

Fiscal Year Ended August 26, 2000 Compared to Fiscal Year Ended August 28, 1999

The discussion below with respect to the fiscal year ended August 26, 2000 reflects, for the period after December 6, 1998, our acquisition of
Sweet Factory and, for the period after June 7, 1999, our acquisition of Laura Secord.

Net Sales.Consolidated net sales for fiscal 2000 were $253.4 million, an increase of $54.9 million, or
27.7%, from $198.5 million for fiscal 1999. The growth in sales was primarily the result of increased Company-operated retail sales resulting from the Sweet Factory and Laura Secord
acquisitions, which accounted for $57.4 million. Net sales for fiscal 2000, without giving effect to the Sweet Factory and Laura Secord acquisitions, were $131.9 million, a decrease of
$2.5 million, or 1.9%, from $134.4 million for fiscal 1999. Consolidated Company-operated retail net sales for fiscal 2000 were $210.4 million, an increase of
$55.4 million, or 35.7%, from $155.0 million for fiscal 1999, primarily as a result of the Sweet Factory and Laura Secord acquisitions. Company-operated retail net sales for fiscal 2000,
without giving effect to the Sweet Factory and Laura Secord acquisitions, were $94.4 million, an increase of $3.0 million, from $91.4 million for fiscal 1999. This increase was
attributable to a 4.0% same store sales increase in our Fannie May/Fanny Farmer stores. Consolidated third-party retail net sales for fiscal 2000 were $22.4 million, a decrease of
$2.4 million, or 9.7%, from $24.8 million for fiscal 1999. This decrease was primarily due to the weakness in sales to our card and gift business customers under a program launched in
fiscal 1999. This program received heavy initial promotional support, which was not repeated during fiscal 2000. Consolidated non-retail net sales were $20.6 million for fiscal
2000, an increase of $1.9 million, or 10.2%, from $18.7 million for fiscal 1999. Increases in the boxed chocolate fundraising business were primarily responsible for the growth in
non-retail sales.

Gross Profit.Consolidated gross profit for fiscal 2000 was $154.9 million, an increase of $30.6 million,
or 24.6%, from $124.3 million for fiscal 1999. The Sweet Factory and Laura Secord acquisitions primarily accounted for this increase. As a percentage of total net sales, consolidated gross
profit decreased to 61.1% for fiscal 2000 from 62.6% for fiscal 1999. Gross profit for fiscal 2000, without giving effect to the Sweet Factory and Laura Secord acquisitions, was $79.7 million,
a decrease of $4.0 million, or 4.8%, from $83.7 million for fiscal 1999. This decrease was due primarily to a decrease in third-party retail sales. Gross profit as a percentage of net
sales, without giving effect to the Sweet Factory and Laura Secord acquisitions, decreased to 60.4% for fiscal 2000 from 62.3% for fiscal 1999 due to a shift in mix towards lower gross margin sales
and increased discounts to customers.

Selling, General and Administrative.Consolidated SG&A expenses for fiscal 2000 were $134.3 million, an increase
of $34.0 million, or 33.9%, from $100.3 million for fiscal 1999. As a percentage of total net sales, consolidated SG&A expenses increased to 53.0% for fiscal 2000 from 50.5% for fiscal
1999. SG&A expenses for fiscal 2000, without giving effect to the Sweet Factory and Laura Secord acquisitions, were $65.0 million, an increase of $1.1 million, or 1.7%, from
$63.9 million for fiscal 1999. This increase in SG&A expenses was due primarily to the growth in our non-retail channel. SG&A expenses as a percentage of net sales, without giving
effect to the Sweet Factory and Laura Secord acquisitions, increased to 49.3% for fiscal 2000 from 47.5% for fiscal 1999.

17

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EBITDA.Consolidated EBITDA was $19.3 million for fiscal 2000, a decrease of $4.4 million, or 18.6%, from
$23.7 million for fiscal 1999. As a percentage of total net sales, consolidated EBITDA was 7.7% for fiscal 2000 as compared to 12.0% for fiscal 1999. EBITDA for fiscal 2000, without giving
effect to the Sweet Factory and Laura Secord acquisitions, was $14.2 million, a decrease of $5.5 million, or 27.9%, from $19.7 million for fiscal 1999. The decrease in EBITDA was
a result of lower third-party retail sales, reduced gross profit margins, and higher operating expenses, as discussed above. EBITDA as a percentage of total net sales for fiscal 2000, without giving
effect to the Sweet Factory and Laura Secord acquisitions, was 10.9% as compared to 14.9% for fiscal 1999.

Operating Income.Consolidated operating income for fiscal 2000 was $3.2 million, a decrease of
$6.3 million, from operating income of $9.5 million for fiscal 1999. Operating income for fiscal 2000, without giving effect to the Sweet Factory and Laura Secord acquisitions, was
$3.6 million, a decrease of $7.3 million from income of $10.9 million for fiscal 1999. This decrease resulted primarily from reduced gross profit margins and higher selling,
general and administrative expenses, as discussed above, an increase in depreciation and amortization and a restructuring charge of $0.8 million related to severance costs associated with a
reduction in our workforce in July 2000.

Net Loss.Consolidated net loss for fiscal 2000 was $15.3 million, an increase of $11.7 million
form a net loss of $3.6 million for fiscal 1999. This increase was due primarily to the decrease in operating income
and additional interest expense primarily associated with the acquisitions of Sweet Factory and Laura Secord.

Effect of Bankruptcy Filing

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. In connection with the bankruptcy
filing, Sweet Factory, Inc. entered into a Post-Petition Credit, Security and Guaranty Agreement (the "Post-Petition Credit Agreement") with The CIT Group/Business
Credit, Inc. and SFG, SF Properties, Inc. and SF Candy Company as guarantors. The agreement is for one year and provides 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, Inc.'s eligible inventory plus a $1.0 million overadvance, subject to certain
reserves. The Post-Petition Credit Agreement is secured by first priority liens on Sweet Factory, Inc.'s accounts receivable and inventory and provides that borrowings thereunder
accrue interest at a variable rate equal to the "prime rate" announced from time to time by J.P. Morgan Chase & Co., plus 1.5%. The Company has guaranteed all obligations of Sweet
Factory, Inc. under the Post-Petition Credit Agreement. Sweet Factory, Inc. is required to pay fees in connection with the Post-Petition Credit Agreement.

SFG
and its subsidiaries' financial results are included in the Company's consolidated results at August 25, 2001. However, accounting principles generally accepted in the
United States would 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 cost method will require the Company to present the net assets of SFG and its subsidiaries at
November 15, 2001 as an investment and not recognize any income or loss from the operations of SFG and its subsidiaries in the Company's results of operations during the pendency of the
bankruptcy proceedings. However, the Company has a receivable from SFG of approximately $19.8 million and a net investment liability of $13.5 million as of August 25, 2001, which
will be subject to periodic reviews for recoverability.

18

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Management has assessed the liquidity position of SFG and its subsidiaries as a result of the bankruptcy filings and available debtor in possession financing and believes that SFG and
its subsidiaries will be able to fund their operating activities and meet their debt requirements until a plan of reorganization is finalized.

The
condensed consolidated financial information set forth below for SFG and its subsidiaries has been prepared on a going concern basis which contemplates continuity of operations,
realization of assets, and liquidation of liabilities in the ordinary course of business. As a result of the bankruptcy filings of
SFG and its subsidiaries and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In
addition, a plan of reorganization, or rejection thereof, could change the amounts reported in the financial statements of SFG and its subsidiaries and cause a material decrease in the carrying amount
of the net investment.

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

|                         |  | For the period ended
August 28, 1999 |        | For the period ended
August 26, 2000 |   | For the year ended
August 25, 2001 |  
|------------------------ |  | ------------------------------------ | ------ | ------------------------------------ | - | ---------------------------------- | -
|Net sales                |  | $                                    | 56,942 |                                      | $ | 69,895                             |  
|Operating loss           |  |                                      | (630   | )                                    |   | (4,038                             | )
|Loss before income taxes |  |                                      | (805   | )                                    |   | (4,086                             | )
|Net loss                 |  |                                      | (849   | )                                    |   | (4,085                             | )

|                                                   |  | August 26, 2000 |        | August 25, 2001 |  
|-------------------------------------------------- |  | --------------- | ------ | --------------- | -
|Current assets                                     |  | $               | 6,111  |                 | $
|Property, plant and equipment                      |  |                 | 17,805 |                 |  
|Other assets                                       |  |                 | 11,024 |                 |  
|                                                   |  |                 |        |                 |  
|Total assets                                       |  | $               | 34,940 |                 | $
|                                                   |  |                 |        |                 |  
|Current liabilities                                |  | $               | 1,384  |                 | $
|Payable to Archibald Candy Corporation             |  |                 | 19,006 |                 |  
|Other liabilities                                  |  |                 | 1,485  |                 |  
|Total stockholder's equity (deficit)               |  |                 | 13,065 |                 |  
|                                                   |  |                 |        |                 |  
|Total liabilities & stockholder's equity (deficit) |  | $               | 34,940 |                 | $
|                                                   |  |                 |        |                 |  

19

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

For the Year Ended
August 28, 1999

For the Year Ended
August 26, 2000

For the Year Ended
August 25, 2001Net sales

$
141,562

$
183,495

$
187,248Operating income


10,095


7,190


3,511Loss before income taxes


(2,647
)

(11,132
)

(14,390
)Net loss


(2,746
)

(11,263
)

(14,505
)


August 26, 2000

August 25, 2001Current assets

$
44,584

$
34,598Property, plant and equipment


35,050


28,699Investment in and amounts due from SFG


32,071


5,811Other assets


70,289


68,330Total assets

$
181,994

$
137,158Current liabilities

$
45,688

$
41,553Other liabilities


170,040


171,209Total stockholder's equity (deficit)


(33,734
)

(75,604
)Total liabilities & stockholder's equity (deficit)

$
181,994

$
137,158


Liquidity and Capital Resources

Our liquidity requirements have arisen principally 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) seasonal borrowings, (2) the proceeds of the offerings of our senior secured
notes, of which $170.0 million is currently outstanding, and (3) cash generated by
operating activities. During fiscal 1999, 2000 and 2001, the net cash generated by (used in) operating activities was $9.7 million, $(0.2) million and $(0.8) million, respectively. In an effort
to improve the Company's working capital, inventories in fiscal 2001 were reduced by $10.3 million.

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 1999, 2000 and 2001 were $7.7 million, $11.1 million and $5.0 million, respectively. Capital expenditures for fiscal 1999
through 2001, excluding the capital expenditures described in the paragraph below, related primarily to (1) the remodeling of existing Fannie May, Fanny Farmer and Sweet Factory stores,
(2) improvements in our management information systems and (3) the remodeling and expansion of our Chicago facilities as a result of the Sweet Factory and Laura Secord acquisitions.
Investing activities in fiscal 2001 also includes the proceeds from the sale of an owned store property of $5.3 million.

In
addition, we spent approximately $9.5 million in fiscal 1999 for various cost savings initiatives undertaken in connection with the consolidation of Sweet Factory's
operations with our existing operations. Such expenditures included, among other things, severance payments to certain employees of Sweet Factory and expenditures to close Sweet Factory's facilities
in San Diego, California and expand our facilities in Chicago, Illinois to integrate Sweet Factory's operations with our current

20

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operations. Also, in fiscal 2000, we paid a $750,000 renewal fee in order to extend our license of the Sweet Factory trademark for the ten-year period beyond the year 2000.

On
June 28, 2001, the Company and its subsidiary, Sweet Factory, Inc., 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 by the Company, in part, to pay all outstanding obligations under its revolving credit facility with Bank One, NA, as
agent (the "Bank One Facility"). The Bank One Facility was then terminated. The CIT Facility provides 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 the Company's eligible accounts receivable and inventory and the Company's owned store locations, which borrowing base components are subject to certain limits, minus the amount of the
overadvance under the Post-Petition Credit Agreement. The Company may advance from time to time up to $5.0 million of the CIT Facility borrowings to Archibald Candy (Canada)
Corporation.

The
CIT Facility is secured by first priority liens on the Company's and Sweet Factory, Inc.'s accounts receivable, and inventory, and the Company's owned store locations, and
the proceeds therefrom. The Company's other subsidiaries, including Archibald Candy (Canada) Corporation, have 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 has guaranteed all obligations under the CIT Facility and granted to the agent
under the CIT Facility a first priority lien on all of its assets, including all the outstanding shares of common stock of the Company.

The
CIT Facility provides that borrowings thereunder accrue interest at a variable rate equal to the "prime rate" announced from time to time by JP Morgan Chase & Co., plus
1.0%. The Company is required to pay fees in connection with the CIT Facility.

In
September 2001, CIT agreed to overadvances under the CIT Facility in an aggregate amount of not more than $3.0 million, which expired on October 3, 2001. On
October 3, 2001, the Company and CIT entered into an Overadvance Agreement and First Amendment to Financing Agreement pursuant to which CIT agreed to provide a $5.0 million overadvance
to the Company, which expires on December 28, 2001. In connection with the Overadvance Agreement and First Amendment to Financing Agreement, those stockholders of Holdings who are (or who are
advised by) affiliates of The Jordan Company entered into a Participation Agreement pursuant to which such stockholders agreed to purchase from CIT a last-out participation in any
overadvance under the CIT Facility. The aggregate amount of the participation is equal to the lesser of (1) $2.5 million or (2) 50% of the amount of the outstanding overadvance,
if any, under the CIT Facility at the time of the participation. The participating stockholders are required to purchase the participation on the earlier of (a) December 28, 2001, or
(b) if all amounts due under the CIT Facility have been accelerated, on the fifth business day following notice by CIT but, in each case, only if any overadvance is outstanding on the purchase
date.

In
connection with the November 15, 2001 bankruptcy filings by our Sweet Factory subsidiaries, the CIT Facility was further amended pursuant to the Second Amendment to allow
such bankruptcy filings, to eliminate Sweet Factory, Inc. as a co-borrower and to remove the inventory and accounts receivable of our Sweet Factory subsidiaries from the borrowing
base. Concurrently with entering into the Second Amendment, CIT and Sweet Factory, Inc. entered into the Post-Petition Credit Agreement. See "Effect of Bankruptcy Filing". The
Company has guaranteed all obligations of Sweet Factory, Inc. under the Post-Petition Credit Agreement.

The
CIT Facility provides that, during December 2001, the Company may not borrow more than certain specified declining amounts and for the period each year from
December 31, until after the Company makes the scheduled interest payment on its senior notes due on the following January 1, the

21

---

Company may have no borrowings. The CIT Facility also provides that during 2002, the Company may not borrow more than certain specified increasing amounts (in each case less than
$30.0 million). The CIT Facility requires that the Company satisfy periodic minimum cash flow and EBITDA covenants and maximum capital expenditure and operating lease covenants. On
December 6, 2001, CIT and the Company entered into the Waiver and Third Amendment to Financing Agreement, pursuant to which the performance targets reflected in the periodic net cash flow and
EBITDA covenants were reduced. The CIT Facility further requires that the Company receive by March 31, 2002, either at least $5.0 million in capital contributions or at least
$8.0 million in net proceeds from a sale-leaseback of the Company's owned store locations. Management is currently exploring options in regard to obtaining such additional capital
or sale of Company-owned store locations.

As
of December 7, 2001, $27.4 million was borrowed under the CIT Facility and $0.1 million of letters of credit was outstanding under the CIT Facility.

In
addition, Holdings has certain dividend and redemption obligations for which the Company must generate the necessary funds. Holdings has the following three classes of preferred
stock: Senior Preferred Stock, Junior Class A PIK Preferred Stock and Junior Class B PIK Preferred Stock. The Senior Preferred Stock was issued in 1991 in the original face amount of
$10.0 million. As of December 10, 2001, 100% of the Senior Preferred Stock was held by the former shareholders of the Company. The Junior Class A PIK Preferred Stock and the
Junior Class B PIK Preferred Stock also were issued in 1991 in the original face amount of $7.0 million and $0.7 million, respectively. As of December 10, 2001, affiliates
of TCW Capital owned approximately 64% of the Junior Class A PIK Preferred Stock and affiliates (or parties advised by such affiliates) of The Jordan Company owned approximately 36% of the
Junior Class A PIK Preferred Stock and approximately 80% of the Junior Class B PIK Preferred Stock.

In
connection with the Company's entering into the CIT Facility, Holdings entered into agreements with the holders of each class of its preferred stock to, among other things, extend
the mandatory redemption dates for such stock. The terms of the Senior Preferred Stock have been amended to, among other things, eliminate the accrual of dividends on such stock after
August 31, 2000 and to change the mandatory redemption date of such stock from a single aggregate redemption payment on August 31, 2001 to a schedule of mandatory redemption payments on
January 15th of each year, commencing in 2002 and ending in 2006. Such annual redemption payments are in the amounts of $3.0 million in each of the years 2002 through 2004,
$2.0 million in 2005 and $2.5 million in 2006. In the event that Holdings fails to make any redemption payment when due, all then remaining redemption payments shall be accelerated and,
if not paid, the holders of its Senior Preferred Stock may elect a director to the Board of Directors of Holdings who shall have 51% of the total voting power of the Board.

The
terms of the Junior Class A PIK Preferred Stock and the Junior Class B Preferred Stock have been amended to extend the mandatory redemption date for each such class
of preferred stock from November 1, 2001 to March 15, 2006. The redemption value of the Junior Class A PIK Preferred Stock and the Junior Class B PIK Preferred Stock on
March 15, 2006 will be approximately $21.2 million and $2.1 million, respectively. The holders of Junior Class A PIK Preferred Stock also have agreed to extend from
January 1, 2000 to June 30, 2003 the date on which they have the right to put to Holdings their common stock. In addition, in the event that Holdings does not redeem all of the common
stock and
preferred stock owned by affiliates of TCW Capital within 90 days of any exercise of this put right, affiliates of TCW Capital have the right to take control of a majority of the voting power
of Holdings' Board of Directors for purposes of effecting a sale of Holdings.

In
order for Holdings to make the redemption payments on its preferred stock, Holdings must cause the Company, to the extent permitted by the indenture governing the senior notes, the
CIT Facility and law, to advance the necessary funds to Holdings by dividend or otherwise. Such advances, if

22

---

paid, will reduce the funds available for the Company's operations. To the extent that such funds are not available, whether due to the restrictions set forth in the indenture, the CIT Facility or
otherwise, the failure to make required redemption payments (1) would trigger various provisions of Holdings' preferred and common stock, including provisions providing for a change of control
of Holdings' and the Company's Boards of Directors and (2) with respect only to a failure to make required redemptions of the Senior Preferred Stock, could result in defaults under the
indenture and the CIT Facility and an obligation by the Company under the indenture to purchase all of the senior notes.

The
indenture also provides that, except in limited circumstances (including to pay dividends or redeem preferred stock not owned by affiliates of the Jordan Company), we will not,
and will not permit any of our subsidiaries to, make dividend payments or other distributions on our outstanding shares of capital stock unless at the time of such distribution: (a) no default
under the indenture has occurred and is continuing or would occur as a consequence, thereof, (b) immediately after such distribution, we would comply with the interest coverage ratios set forth
in the indenture and (c) such distributions do not exceed an amount determined by reference to a formula consisting primarily of prior distributions and payments, prior income and the proceeds
from the sale of securities. The indenture prohibits the incurrence of additional indebtedness unless, among other things, we comply with minimum interest coverage ratios set forth in the indenture.

In
light of the above debt service and dividend and redemption obligations and the restrictions set forth in our indenture and the CIT Facility, and in order to have sufficient funds
to meet our projected capital expenditures and working capital requirements, we are exploring various alternatives, including new sources of revenue, additional cost reduction initiatives, a further
amendment of the CIT Facility and other sources of capital. While management believes our financing requirements will be met, there can be no assurance that we will be able to accomplish any of these
alternatives or that we will be able to do so on terms favorable to us.

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 2000 and 2001. In the fourth quarter of fiscal year 2000, management identified certain adjustments which
related to previous quarters and has adjusted EBITDA in the prior quarters of fiscal year 2000 to appropriately

23

---

reflect these adjustments. EBITDA in fiscal 2001 excludes restructuring expense, manufacturing start-up costs and the write-off of impaired assets.

|          |  | First
Quarter
Ended
Nov. 27
1999 |        | Secord
Quarter
Ended
Feb. 26,
2000 |   | Third
Quarter
Ended
May 27,
2000 |  | Fourth
Quarter
Ended
Aug. 26,
2000 |        | First
Quarter
Ended
Nov. 25
2000 |   | Secord
Quarter
Ended
Feb. 24,
2001 |   | Third
Quarter
Ended
May 26,
2001 |        | Fourth
Quarter
Ended
Aug. 25,
2001 |  
|--------- |  | -------------------------------- | ------ | ---------------------------------- | - | -------------------------------- |  | ---------------------------------- | ------ | -------------------------------- | - | ---------------------------------- | - | -------------------------------- | ------ | ---------------------------------- | -
|
|Net sales |  | $                                | 54,725 |                                    | $ | 102,309                          |  | $                                  | 56,543 |                                  | $ | 39,813                             |   | $                                | 52,547 |                                    | $
|EBITDA    |  |                                  | (193   | )                                  |   | 25,008                           |  |                                    | (800   | )                                |   | (4,683                             | ) |                                  | 170    |                                    |  

Item 8Financial Statements and Supplementary Data

The audited financial statements of Archibald Candy Corporation 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 2000 and fiscal 2001, 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.

24

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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 our directors and management employees as of August 25, 2001.

|Name              |  | Age |  | Position with the Company                                             
|----------------- |  | --- |  | ----------------------------------------------------------------------
|Thomas H. Quinn   |  | 54  |  | Chairman of the Board and Chief Executive Officer*                    
|Ted A. Shepherd   |  | 42  |  | President and Chief Operating Officer, Director*                      
|Richard J. Anglin |  | 46  |  | Vice President, Chief Financial Officer and Secretary*                
|Alan W. Petrik    |  | 48  |  | Vice PresidentSupply Chain Management                                
|Ricky L. Lelli    |  | 49  |  | Vice PresidentOperations                                             
|Joseph Chipollini |  | 50  |  | Vice PresidentRetail Operations                                      
|Nicholas Podoba   |  | 55  |  | Vice PresidentHuman Resources                                        
|John W. Jordan II |  | 53  |  | Director                                                              
|Adam E. Max       |  | 43  |  | Director, Vice President, Assistant Treasurer and Assistant Secretary*
|Jeffrey J. Rosen  |  | 52  |  | Director*                                                             
|Gregory W. Ward   |  | 27  |  | Director*                                                             

---

Mr. Quinnhas served as our Chairman of the Board and Chief Executive Officer since our acquisition by Holdings in 1991. Since
1988, Mr. Quinn has been President, Chief Operating Officer and a director of Jordan Industries, Inc., a diversified industrial holding company affiliated with The Jordan Company.
Mr. Quinn is a director of AmeriKing, Inc. and a director of other privately held companies.

Mr. Shepherdhas served as our President and Chief Operating Officer since 1996. Mr. Shepherd joined us 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 19 years of general management, sales
and marketing experience in the confectionery industry. Prior to joining us, 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 on October 24, 2000.

Mr. Anglinwas hired in September 2000 as our Vice President, Chief Financial Officer and Secretary. Mr. Anglin
has over 17 years of financial and operational experience in the retail industry. Prior to joining us, 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 Petrikhas served as our Vice President of Supply Chain Management since June 2000. Mr. Petrik has been with us for
22 years and has held various senior management positions with us, including Vice President of Manufacturing and Vice President of Operations.

25

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Mr. Lellihas served as our Vice President of Operations since 1997. Mr. Lelli joined us in 1994 as Director of
Manufacturing. Mr. Lelli has over 25 years of experience in the food processing industry. Prior to joining us, Mr. Lelli worked for five years at The Masterson Company, a
confectionery company, where he served as Vice President of Manufacturing.

Mr. Chipollinihas served as our Vice President of Retail Operations since April 1998. Mr. Chipollini joined us in
April 1995 as East Coast Regional Manager. Prior to joining us, Mr. Chipollini worked for four years at Crystal Brands, where he served as a District Manager.

Mr. Podobahas served as our Vice President of Human Resources since he joined us in October 1998. Mr. Podoba has
over 26 years of experience in human resource management. Prior to joining us, Mr. Podoba worked for seven years at Northwestern Memorial Faculty Foundation, where he served as Director
of Human Resources.

Mr. Jordanhas served as one of our directors since our acquisition by Holdings in 1991. 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., Carmike Cinemas, Inc., AmeriKing, Inc., Winning
Ways, Inc., Motor and Gears, Inc., Rockshox, Inc. and Apparel Ventures, Inc., all of which are affiliates of The Jordan Company, as well as other privately-held
companies.

Mr. Maxhas served as one of our directors since our acquisition by Holdings in 1991. Mr. Max is a managing director of
The Jordan Company, which he joined in 1986. Mr. Max is also a director of Rockshox, Inc.

Mr. Rosenhas served as one of our directors since 1997. Mr. Rosen is a partner in the law firm of Debevoise &
Plimpton, counsel for TCW Capital.

Mr. Wardhas served as one of our directors since 2000. Mr. Ward is an assistant vice president of TCW Capital.

Shareholders Agreement

All holders of Holdings' common stock are party to a shareholder's agreement, which contains provisions relating to our governance and the governance of
Holdings. These provisions provide for, among other things, the election to each of our and Holdings' 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 are the directors nominated by the affiliates of The Jordan Company. Messrs. Rosen and Ward currently are
the directors nominated by the affiliates of TCW Capital. On October 24, 2000, the Boards of Directors of Holdings and us expanded the number of their respective members from five to six and
elected Mr. Shepherd to fill the newly created director position for each Board.

Compensation

We pay each of our directors a quarterly fee of $2,500. We also pay Mr. Quinn a $52,000 consulting fee. See "Certain TransactionsDirector's
Consulting Fee and TCW Affiliates' Expense Reimbursement." We
also reimburse directors for their travel and other expenses incurred in connection with attending meetings of the Board of Directors.

26

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Item 11Executive Compensation

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

Summary Compensation Table

|                     |                                 |      |      | Annual Compensation |         | Long-Term
Compensation
Awards |  
|-------------------- | ------------------------------- | ---- | ---- | ------------------- | ------- | ----------------------------- | -
|
|Thomas H. Quinn      |                                 | 2001 |      | $                   |        |                               | $
|                     | Chairman of the Board and       |      | 2000 |                     |         |                              |  
|                     | Chief Executive Officer         |      | 1999 |                     |         |                              |  
|Ted A. Shepherd      |                                 | 2001 |      |                     | 366,667 |                               |  
|                     | President and                   |      | 2000 |                     |         | 300,000                       |  
|                     | Chief Operating Officer         |      | 1999 |                     |         | 271,667                       |  
|Richard J. Anglin(4) |                                 | 2001 |      |                     | 206,167 |                               |  
|                     | Vice President, Chief Financial |      |      |                     |         |                               |  
|                     | Officer and Secretary           |      |      |                     |         |                               |  

---

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 are
authorized for grant under the SAR Plan representing the economic equivalent of 52.75 shares, or 4.9%, of Holdings' Common Stock, on a fully diluted basis. As of August 25, 2001, 36.6667 SARs
were outstanding under the SAR Plan, with 19 SARs issued to our current employees and the balance held by former employees.

The
SAR Plan is administered under the direction of the Board of Directors of Holdings. The Board selects the employees to receive SARs and the number of SARs subject to each such
grant and determines the exercise of vesting schedule for each SAR granted. Pursuant to the SAR Plan, each SAR entitles the holder to surrender all or a portion thereof to Holdings upon the occurrence
of any "Cash Out Event," as defined in the Plan, for a payment in an amount based upon the value of one share of Holdings' Common Stock, or a percentage thereof, determined with reference to the
applicable Cash Out Event. In some cases, all such payments may be deferred if Holdings is not

27

---

permitted to pay the same by the governing debt documents. The SAR Plan generally defines a Cash Out Event to include:



The
SAR Plan provides that in the event the employment of any holder of an SAR terminates for (1) "Cause," as defined in the SAR Plan, at any time or (2) any other
reason except death or disability within a prescribed period, known as the "vesting period," following the grant of the subject SAR, then all of such holder's rights in such SAR shall automatically
terminate. The SAR Plan further provides that upon any termination of any SAR holder's employment following the vesting period or upon the death or disability of a holder at any time, such holder's
SARs shall be subject to repurchase by Holdings at the option of either Holdings or the holder. The price payable by Holdings in connection with any such repurchase is the amount allocable to such SAR
by which the value of Holdings exceeds the dollar amount of all debt and preferred stock obligations of Holdings. The value of Holdings is to be determined by reference to certain book values and
earnings measures established by the SAR Plan. At Holdings' option, the repurchase amounts may be paid by a note payable over three years.

SAR Grant in Fiscal 2001

The following table sets forth information with respect to SARs granted during fiscal 2001 by Holdings to our executive officers:

|                     |  | SAR Grants in Last Fiscal Year |  |    
|-------------------- |  | ------------------------------ |  | ---
|
|Richard J. Anglin(1) |  | 5.00                           |  | 100

---

Aggregated SAR Exercises in Fiscal Year 2001 and 2001 Fiscal Year-End SAR Values

The following table sets forth information with respect to SAR exercises during fiscal 2001 by our executive officers and the number of shares of Holdings'
Common Stock underlying SARs held by each

28

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of our executive officers and the value of such executive officers' exercisable and unexercisable SARs on August 25, 2001.

|                  |  | Shares
Acquired on
Exercise (#)(1) |  | Value
Realized ($) |  | Number of
Securities
Underlying
Unexercised
SARs at
Fiscal Year-End
Exercisable/
Unexercisable(#) |  | Value of
Unexercised
In-the-Money
SARs at
Fiscal Year-End,
Exercisable/
Unexercisable(#)(2)
|----------------- |  | ---------------------------------- |  | ------------------ |  | ------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------
|Richard J. Anglin |  |                                   |  |                   |  | 0/5                                                                                               |  | $                                                                                          

---

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. The 1998 Stock
Bonus Plan provides for the issuance of the right to acquire shares of Holdings' Class A Common Stock to those management employees who can significantly enhance the long-term
performance of Holdings and its subsidiaries and is intended to provide, in combination with other forms of compensation and benefits, a total compensation program which is competitive with the reward
programs of other similar enterprises. No more than 33 shares of Holdings' Class A Common Stock may be issued under the 1998 Stock Bonus Plan. The 1998 Stock Bonus Plan terminates on
July 1, 2008. The 1998 Stock Bonus Plan is administered under the direction of the Board of Directors of Holdings. The Board determines the management employees to receive shares of Holdings'
Class A Common Stock under the 1998 Stock Bonus Plan, the number of shares to be granted, the consideration, if any, to be paid for such shares and the other terms and conditions of any such
issuances. On August 31, 1999, Holdings issued an additional 6.5 shares of its Class A Common Stock to Mr. Shepherd pursuant to the 1998 Stock Bonus Plan. As of August 25,
2001, Holdings has issued 26.25 shares in aggregate of its Class A Common Stock pursuant to the 1998 Stock Bonus Plan, all of which has been issued to Mr. Shepherd.

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

29

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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 $150,000 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

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Item 12Security Ownership of Certain Beneficial  Owners and Management

Holdings owns all of our issued and outstanding capital stock. The following table sets forth certain information with respect to the beneficial ownership of
the equity securities of Holdings as of August 25, 2001 by (1) each person who is known by us to beneficially own more than 5% of the outstanding shares of any class of Holdings' voting
securities; (2) each of our directors and executive officers who own shares of Holdings' equity securities; and (3) all of our directors and executive officers, as a group, who own
shares of Holdings' equity securities.

|Name(1)                                                            |  | Title of Class(2)             |  | Number
of Shares       |  | Percentage
of Class |   | Percentage of
all Outstanding
Voting
Common Stock |  
|------------------------------------------------------------------ |  | ----------------------------- |  | ---------------------- |  | ------------------- | - | ------------------------------------------------- | -
|TCW Capital(3)                                                     |  | Class A Common                |  | 339.741000             |  | 47.1                | % | 33.1                                              | %
|Jordan Industries, Inc.(4)                                         |  | Class A Common                |  | 151.128000             |  | 20.9                |   | 14.7                                              |  
|JZ Equity Partners PLC(5)                                          |  | Class A Common                |  | 100.752000             |  | 14.0                |   | 9.8                                               |  
|WCT Investment Pte Ltd.(6)                                         |  | Class A Common                |  | 82.573000              |  | 11.4                |   | 8.0                                               |  
|Mezzanine Capital(7)                                               |  | Class A Common                |  | 21.069000              |  | 2.9                 |   | 2.1                                               |  
|Leucadia Investors, Inc.(8)                                        |  | Class C Common                |  | 65.788625              |  | 22.3                |   | 6.4                                               |  
|John W. Jordan II(9)                                               |  | Class A Common
Class C Common |  | 151.128000
43.945960   |  | 21.1
14.9           |   | 14.7
4.3                                          |  
|Thomas H. Quinn(10)                                                |  | Class A Common
Class C Common |  | 151.128000
31.582500   |  | 20.9
10.7           |   | 14.7
3.1                                          |  
|Adam E. Max(11)                                                    |  | Class C Common                |  | 26.315450              |  | 8.9                 |   | 2.6                                               |  
|Ted A. Shepherd(12)                                                |  | Class A Common                |  | 26.250000              |  | 3.6                 |   | 2.6                                               |  
|TCW Special Placements Fund III(7)                                 |  | Class D Common                |  | 10.000000              |  | 100.0               |   | 1.0                                               |  
|All directors and executive officers of Holdings as a group(9)(10) |  | Class A Common
Class C Common |  | 177.378000
101.8439100 |  | 24.6
34.6           |   | 17.3
9.9                                          |  

---

31

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32

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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 will 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 will be paid $48,000 in aggregate per year as
reimbursement of expenses. We believe that the terms of the management consulting agreement are comparable to the terms that we would obtain from disinterested third parties for comparable services.

In
connection with the June 2001 amendment of the terms of Holdings' Junior Class A PIK Preferred Stock, affiliates of TCW Capital required Holdings to agree to defer
any payment of fees to TJC Management Corp. under the management consulting agreement unless and until all of Holdings' Junior Class A PIK Preferred Stock and Common Stock held by affiliates of
TCW Capital has been redeemed in accordance with the Securities Purchase Agreement. Under the terms of the Securities Purchase Agreement, any deferral of the fees payable to TJC Management Corp. under
the management consulting agreement automatically requires the deferral of the $48,000 payment to affiliates of TCW Capital. Therefore, for fiscal 2001, due to the substantial uncertainty as to when
the fees eventually would be paid to TJC Management Corp. and the $48,000 reimbursement of expenses would be paid to affiliates of TCW Capital, Holdings did not pay or accrue $364,000 to TJC
Management Corp. in management consulting fees or $48,000 to affiliates of TCW Capital in reimbursement of expenses.

33

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Tax Sharing and Management Consulting Agreement

On July 2, 1997, we entered into a tax sharing and management consulting agreement with Holdings, pursuant to which we pay or distribute to Holdings:



We
believe that the terms of the management consulting agreement reveals under the tax sharing and management consulting agreement are comparable under the terms we would obtain from
disinterested third parties for comparable services. In fiscal 2001, because Holdings did not pay or accrue $364,000 in management consulting fees under its management consulting agreement or $48,000
in expense reimbursement to affiliates of TCW Capital, we did not pay or accrue $412,000 to Holdings in management fees and expenses pursuant to our tax sharing and management consulting agreement.

Preferred Stock

As of December 10, 2001, affiliates of TCW Capital owned approximately 64% of Holdings' Junior Class A PIK Preferred Stock and affiliates (or
parties advised by such affiliates) of The Jordan Company owned approximately 36% of Holdings' Junior Class A PIK Preferred Stock and approximately 80% of Holdings' Junior Class B PIK
Preferred Stock.

The
terms of the Junior Class A PIK Preferred Stock and the Junior Class B Preferred Stock have been amended to extend the mandatory redemption date for each such class
of preferred stock from November 1, 2001 to March 15, 2006. The redemption value of the Junior Class A PIK Preferred Stock and the Junior Class B PIK Preferred Stock on
March 15, 2006 will be approximately $21.2 million and $2.1 million, respectively. Affiliates of TCW Capital also have agreed to extend from January 1, 2000 to
June 30, 2003 the date on which they have the right to put to Holdings their common stock. In addition, in the event that Holdings does not redeem all of the common stock and preferred stock
owned by affiliates of TCW Capital within 90 days of any exercise of this put right, affiliates of TCW Capital have the right to take control of a majority of the voting power of Holdings'
Board of Directors for purposes of effecting a sale of Holdings.

Director's Consulting Fee and TCW Affiliates' Expense Reimbursement

In each of fiscal 1999, 2000 and 2001, we paid to Mr. Quinn a consulting fee equal to $52,000 in lieu of a salary in exchange for services rendered to
us. Mr. Quinn consulted with us with respect to our financial and business affairs, our relationships with our lenders and stockholders, and the operation and expansion of our business. Such
fee is expected to continue in the future and is subject

34

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to reasonable increases. Pursuant to the tax sharing and management consulting agreement, affiliates of TCW Capital who are members of our Board of Directors receive $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. However, the TCW Capital amount was not
paid or accrued in Fiscal 2001. See "Management Consulting Agreement".

Shareholders Agreement

The holders of Holdings' common stock are party to a shareholders agreement, which contains provisions relating to the governance of us and Holdings and
restrictions on, and rights in the event of, the transfer of Holdings' Common Stock. Among other things, the shareholders agreement provides that, subject to limited exceptions, (1) the
composition of our and Holdings' Board of Directors shall be
identical and (2) the number of directors on our and Holdings' Board shall be six, with affiliates of The Jordan Company nominating three directors and affiliates of TCW Capital nominating two
directors. On October 24, 2000, the Boards of Directors of Holdings and the Company expanded the number of their respective members from five to six and elected Mr. Shepherd to fill the
newly created director position for each Board. On June 28, 2001, the shareholders agreement was further amended to extend its term until October 30, 2011 and to make certain additional
actions by Holdings and its subsidiaries subject to approval by one of the directors of Holdings designated by affiliates of TCW Capital. The shareholders agreement also provides that upon the
occurrence of some triggering events, unless affiliates of TCW Capital as holders of Holdings' Class D Common Stock have already elected a director with 51% of the voting power of the Board of
Directors of Holdings, Holdings shall not, without the approval of 60% of the outstanding Holdings' Common Stock, other than Holdings' Class B Common Stock:



The
shareholders agreement further provides that without the approval of a director nominated by affiliates of TCW Capital, neither Holdings nor any of its subsidiaries shall:



35

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In
addition, the shareholders agreement restricts the transfer of Holdings' Common Stock by providing, in part, that any subsequent holder of Holdings' Common Stock must agree to be bound by all the
provisions of the shareholders agreement. In the event of a transfer of Holdings' Common Stock other than to a permitted transferee, the shareholders agreement provides each other holder of Holdings'
Common Stock with tag-along rights and preemptive rights.

In
connection with its acquisition in 1992 from affiliates of TCW Capital of shares of Holdings' Class A Common Stock and Junior Class A PIK Preferred Stock, WCT
Investment Pte Ltd. granted an irrevocable proxy to TCW Special Placement Fund III for the purpose of approving or consenting to some actions by Holdings, including mergers,
consolidations, acquisitions or other entities, recapitalizations, issurances of equity securities and modifications of Holdings' business.

Provision of Services to the Company

Jordan Industries, Inc. owns 80% of PAMCO Printed Labels, which supplied approximately $916,000 and $776,000 of labels to us in fiscal 2000 and fiscal
2001, respectively. Mr. Quinn, our 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 our directors, is Chairman of the Board and Chief Executive Officer of Jordan Industries, Inc. We believe that the pricing and services provided by PAMCO are
comparable to those that we would obtain from disinterested third parties for comparable services.

Participation Agreement

In connection with the Overadvance Agreement and First Amendment to Financing Agreement, those stockholders of Holdings who are (or who are advised by)
affiliates of The Jordan Company entered into a Participation Agreement pursuant to which such stockholders agreed to purchase from CIT a last-out participation in any overadvance under
the CIT Facility. The aggregate amount of the participation is equal to the lesser of (1) $2.5 million or (2) 50% of the amount of the outstanding overadvance, if any, under the
CIT Facility at the time of the participation. The participating stockholders are required to purchase the participation on the earlier of (a) December 28, 2001, or (b) if all
amounts due under the CIT Facility have been accelerated, on the fifth business day following notice by CIT, but, in each case, only if any overadvance is outstanding on the purchase date.

36

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PART IV        Item 14Exhibits, Financial Statement Schedules, and Reports on Form 8-K











37

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EXHIBIT INDEX

|Exhibit
Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1            |  | Agreement and Plan of Reorganization dated as of November 24, 1998 by and among the Company, Sweet Factory Acquisition Corp., Sweet Factory Group, Inc., Sweet Factory, Inc., SF Candy Company, SF Properties, Inc. and certain stockholders of Sweet
Factory Group, Inc. party thereto (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on December 22, 1998)                                                    
|2.2            |  | Amendment No. 1 dated as of December 7, 1998 to Agreement and Plan or Reorganization by and among the Company, Sweet Factory Acquisition Corp., Sweet Factory Group, Inc., Sweet Factory, Inc., SF Candy Company, SF Properties, Inc. and Weston Presidio
Offshore Capital C.V., as representative of certain stockholders of Sweet Factory Group, Inc. (incorporated by reference to Exhibit 2.2 to the Company's Registration Statement on Form S-4, File No. 333-71925)
|2.3            |  | Asset Purchase Agreement dated as of May 26, 1999 between Nestlè Canada Inc. and the Company (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on June 23, 1999)                                                                                                                                                                                                                                                   
|3.1            |  | Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company Registration Statement on Form S-1, File No. 333-33751)                                                                                                                                                                                                                                                                                            
|3.2            |  | Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, File No. 333-33751)                                                                                                                                                                                                                                                                                                            
|3.3            |  | Certificate of Incorporation of Sweet Factory Group, Inc. (incorporated by reference to Exhibit 3.3. to the Company's Registration Statement on Form S-4, File No. 333-71925)                                                                                                                                                                                                                                                                                             
|3.4            |  | Restated Certificate of Incorporation of Sweet Factory, Inc. (incorporated by reference to Exhibit 3.4 to the Company's Registration Statement on Form S-4, File No. 333-71925)                                                                                                                                                                                                                                                                                           
|3.5            |  | Certificate of Incorporation of SF Properties, Inc. (incorporated by reference to Exhibit 3.5 to the Company's registration Statement on Form S-4, File No. 333-71925)                                                                                                                                                                                                                                                                                                    
|3.6            |  | Certificate of Incorporation of SF Candy Company (incorporated by reference to Exhibit 3.6 to the Company's Registration Statement on Form S-4, File No. 333-71925)                                                                                                                                                                                                                                                                                                       
|3.7            |  | Articles of Incorporation of Archibald Candy (Canada) Corporation (incorporated by reference to Exhibit 3.7 to the Company's Registration Statement on Form S-4, File No. 333-84685)                                                                                                                                                                                                                                                                                      
|3.8            |  | By-Laws of Sweet Factory Group, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|3.9            |  | By-Laws of Sweet Factory, Inc. (incorporated by reference to Exhibit 3.8 to the Company's Registration Statement on Form S-4, File No. 333-71925)                                                                                                                                                                                                                                                                                                                         
|3.10           |  | By-Laws of SF Properties, Inc. (incorporated by reference to Exhibit 3.9 to the Company's Registration Statement on Form S-4, File No. 333-71925)                                                                                                                                                                                                                                                                                                                         
|3.11           |  | By-Laws of SF Candy Company (incorporated by reference to Exhibit 3.10 to the Company's Registration Statement on Form S-4, File No. 333-71925)                                                                                                                                                                                                                                                                                                                           
|3.12           |  | By-Laws of Archibald Candy (Canada) Corporation (incorporated by reference to Exhibit 3.12 to the Company's Registration Statement on Form S-4, File No. 333-84685)                                                                                                                                                                                                                                                                                                       

38

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|4.1  |  | Form of the Company's 101/4% Series B Senior Secured Notes due 2004 (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1, File No. 333-33751)                                                                                                                                                                     
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.2  |  | Indenture dated as of July 2, 1997 between the Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-1, File No. 333-33751)                                                                                                                                             
|4.3  |  | First Supplemental Indenture dated as of December 7, 1998 among the Company, the Guarantor Subsidiaries and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the SEC on
December 22, 1998)                                                                                
|4.4  |  | Second Supplemental Indenture dated as of June 8, 1999 among the Company, the Guarantor Subsidiaries and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the SEC on June
23, 1999)                                                                                       
|4.5  |  | Third Supplemental Indenture dated as of March 23, 2000 among the Company, the Guarantor Subsidiaries and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.5 to the Company's Form 10-K for the fiscal year ended August 26,
2000)                                                                                                 
|4.6  |  | Fourth Supplemental Indenture dated as of November 14, 2001 among the Company, the Guarantor Subsidiaries and The Bank of New York, as Trustee                                                                                                                                                                                                             
|4.7  |  | Registration Rights Agreement dated as of July 2, 1997 between the Company and Jefferies & Company, Inc. and First Chicago Capital Markets, Inc. (incorporated by reference to Exhibit 4.5 to the Company's Registration Statement on Form S-1,
File No. 333-33751)                                                                                        
|4.8  |  | Second Amended and Restated Pledge and Security Agreement dated as of June 8, 1999 between the Company, the Guarantor Subsidiaries and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.6 to the Company's Registration Statement
on Form S-4, File No. 333-84685)                                                                 
|4.9  |  | Second Amended and Restated Intellectual Property Security Agreement dated as of June 8, 1999 between the Company, the Guarantor Subsidiaries and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.7 to the Company's Registration
Statement on Form S-4, File No. 333-84685)                                                      
|4.10 |  | Amended and Restated Guaranty dated as of June 8, 1999 by each of the Guarantor Subsidiaries (incorporated by reference to Exhibit 4.8 to the Company's Registration Statement on Form S-4, File No. 333-84685)                                                                                                                                            
|4.11 |  | Mortgage, Security Agreement of Leases and Rents, Fixture Filing and Financing Statement dated July 2, 1997 relating to the Company's Chicago, Illinois manufacturing and headquarters facility (incorporated by reference to Exhibit 4.8 to the Company's
Registration Statement on Form S-1, File No. 333-33751)                                         
|4.12 |  | First Amendment to Mortgage, Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement dated as of December 7, 1998 relating to the Company's Chicago, Illinois manufacturing and headquarters facility (incorporated by
reference to Exhibit 4.8 to the Company's Registration Statement on Form S-4, File No. 333-71925)

39

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|4.13 |  | Second Amendment to Mortgage, Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement dated as of June 8, 1999 relating to the Company's Chicago, Illinois manufacturing and headquarters facility (incorporated by
reference to Exhibit 4.11 to the Company's Registration Statement on Form S-4, File No. 333-84685)                                                                          
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.14 |  | Correction of Mortgage, Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement dated as of July 19, 2000 by The Bank of New York, as Trustee, relating to the Company's Chicago, Illinois manufacturing and
headquarters facility (incorporated by reference to Exhibit 4.13 to the Company's Form 10-K for the fiscal year ended August 26, 2000)                                             
|4.15 |  | Open-End Mortgage, Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement dated July 2, 1997 related to the Company's Bensalem, Pennsylvania warehouse and distribution facility (incorporated by reference to Exhibit
4.9 to the Company's Registration Statement on Form S-1, File No. 333-33751)                                                                                            
|4.16 |  | First Amendment to Open-End Mortgage, Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement dated as of December 7, 1998 relating to the Company's Bensalem, Pennsylvania warehouse and distribution facility
(incorporated by reference to Exhibit 4.10 to the Company's Registration Statement on Form S-4, File No. 333-71925)                                                             
|4.17 |  | Second Amendment to Open-End Mortgage, Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement dated as of June 8, 1999 relating to the Company's Bensalem, Pennsylvania warehouse and distribution facility
(incorporated by reference to Exhibit 4.14 to the Company's Registration Statement on Form S-4, File No. 333-84685)                                                                
|4.18 |  | Form of SAR Agreements (incorporated by reference to Exhibit 4.12 to the Company's Registration Statement on Form S-1, File No. 333-33751)                                                                                                                                                                                                                                                                                         
|4.19 |  | 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 the Company's
Registration Statement on Form S-1, File No. 333-33751)                                                                                                                      
|10.1 |  | Indemnification Agreement dated as of July 2, 1997 between the Company and each of its then current directors and executive officers (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, File No.
333-33751)                                                                                                                                                                           
|10.2 |  | Indemnification Agreement dated as of November 1, 1998 between the Company and Brant Binder (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-4, File No. 333-71925)                                                                                                                                                                                                                    
|10.3 |  | Securities Purchase Agreement dated as of October 30, 1991 among Holdings, the Company and the Purchasers (as defined therein), together with First Amendment thereto dated as of September 18, 1992, Second Amendment thereto dated as of August 12, 1994
and Third Amendment thereto dated as of July 2, 1997 (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, File No. 333-33751)
|10.4 |  | Fourth Amendment to Securities Purchase Agreement dated as of October 31, 1998 among Holdings, the Company and the Purchasers (as defined therein) (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-4, File
No. 333-71925)                                                                                                                                                             

40

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|10.5  |  | Fifth Amendment to Securities Purchase Agreement dated as of May 31, 1999 among Holdings, the Company and the Purchasers (as defined therein) (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-4, File No.
333-84685)                      
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.6  |  | Sixth Amendment to Securities Purchase Agreement dated as of June 28, 2001 among Holdings, the Company and the Purchasers (as defined therein)                                                                                                                                         
|10.7  |  | Waiver and Consent to Securities Purchase Agreement dated as of October 2, 2001 by Holdings, the Company and the Purchasers (as defined therein)                                                                                                                                       
|10.8  |  | Waiver and Consent to Securities Purchase Agreement dated as of November 14, 2001 by Holdings, the Company and the Purchasers (as defined therein)                                                                                                                                     
|10.9  |  | Shareholders Agreement dated as of October 30, 1991 among the holders of the Company's common stock, together with First Amendment thereto dated as of July 2, 1997 (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-1, File No. 333-33751)
|10.10 |  | Second Amendment to Shareholders Agreement dated as of July 31, 2000 among the holders of the Company's common stock (incorporated by reference to Exhibit 10.7 to the Company's Form 10-K for the fiscal year ended August 26, 2000)                                                  
|10.11 |  | Third Amendment to Shareholders Agreement dated as of June 28, 2001 among the Company, Holdings and the holders of Holdings' common stock                                                                                                                                              
|10.12 |  | Tax Sharing and Management Consulting Agreement dated as of July 2, 1997 between the Company and Holdings (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, File No. 333-33751)                                                          
|10.13 |  | Management Consulting Agreement between Holdings and TJC Management Corp. dated as of July 2, 1997 (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1, File No. 333-33751)                                                                 
|10.14 |  | Supply Agreement dated February 11, 1997 between the Company and Nestlè Food Company (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1, File No. 333-33751)                                                                               
|10.15 |  | Supply Agreement dated June 24, 1997 between the Company and ADM Cocoa (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1, File No. 333-33751)                                                                                             
|10.16 |  | Supply Agreement dated January 22, 1997 between the Company and Grace Cocoa Chocolate Americas (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1, File No. 333-33751)                                                                     
|10.17 |  | Supply Agreement dated September 5, 1996 between the Company and The Western Sugar Company (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1, File No. 333-33751)                                                                         
|10.18 |  | Supply Agreement dated March 25, 1997 between the Company and Cerestar USA, Inc. (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1, File No. 333-33751)                                                                                  
|10.19 |  | Fannie May Holdings, Inc. 1998 Stock Bonus Plan (incorporated by reference Exhibit 10.11 to the Company's Form 10-K for the fiscal year ended August 28, 1999)                                                                                                                         

41

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|10.20 |  | Executive Subscription Agreement dated as of September 30, 1998 between Holdings and Ted A. Shepherd (incorporated by reference to Exhibit 10.12 to the Company's Form 10-K for the fiscal year ended August 28, 1999)                                                                     
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.21 |  | Co-Pack Agreement dated as of June 8, 1999 between Nestlè Canada Inc. and the Company (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on June 23, 1999)                                                                          
|10.22 |  | Supply Agreement dated as of June 8, 1999 between Nestlè Canada Inc. and the Company (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on June 23, 1999)                                                                           
|10.23 |  | Executive Subscription Agreement dated as of August 31, 1999 between Holdings and Ted A. Shepherd (incorporated by reference to Exhibit 10.18 to the Company's Form 10-K for the fiscal year ended August 28, 1999)                                                                        
|10.24 |  | Financing Agreement dated as of June 28, 2001 among the Company, Sweet Factory, Inc. and The CIT Group/Business Credit, Inc.                                                                                                                                                               
|10.25 |  | Overadvance Agreement and First Amendment to Financing Agreement dated as of October 3, 2001 among the Company, Sweet Factory, Inc. and The CIT Group/Business Credit, Inc.                                                                                                                
|10.26 |  | Participation Agreement dated as of October 3, 2001 between The CIT Group/Business Credit, Inc. and certain stockholders of Holdings                                                                                                                                                       
|10.27 |  | Second Amendment and Waiver Agreement dated as of November 14, 2001 among the Company, Sweet Factory, Inc. and The CIT Group/Business Credit, Inc.                                                                                                                                         
|10.28 |  | Post-Petition Credit, Security and Guaranty Agreement dated as of November 15, 2001 between Sweet Factory, Inc. and The CIT Group/Business Credit, Inc., with Sweet Factory Group, Inc., SF Properties, Inc. and SF Candy Company, as
Guarantors                                           
|10.29 |  | Guaranty of Payment dated as of November 15, 2001 by the Company in favor of The CIT Group/Business Credit, Inc. with respect to the Post-Petition Credit, Security and Guaranty Agreement                                                                                                 
|10.30 |  | Certificate of Incorporation of Fannie May Holdings, Inc. (together with amendments thereto)                                                                                                                                                                                               
|10.31 |  | Amended and Restated Certificate of Designation of 5% Senior Preferred Stock of Holdings filed with the Secretary of State of Delaware on June 28, 2001                                                                                                                                    
|10.32 |  | Senior Preferred Amendment Agreement dated as of June 28, 2001 by and among Holdings and each of the Holders (as defined therein)                                                                                                                                                          
|10.33 |  | Certificate of Designation of Junior Class A PIK Preferred Stock of Holdings filed with the Secretary of State of the State of Delaware on October 28, 1991, together with the Certificate of Amendment thereto filed with the Secretary of State of the
State of Delaware on June 28, 2001
|10.34 |  | Certificate of Designation of Junior Class B PIK Preferred Stock of Holdings filed with the Secretary of State of the State of Delaware on October 28, 1991, together with the Certificate of Amendment thereto filed with the Secretary of State of the
State of Delaware on June 28, 2001
|12.1  |  | Statement re: Computation of Earnings to Fixed Charges                                                                                                                                                                                                                                     
|21.1  |  | Subsidiaries of the Company                                                                                                                                                                                                                                                                

42

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|ARCHIBALD CANDY CORPORATION                |                                                                                                                                      |    
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------ | ---
|                                           | Report of Independent Auditors                                                                                                       |    
|                                           | Consolidated Balance Sheets as of August 26, 2000 and August 25, 2001                                                                |    
|                                           | Consolidated Statements of Operations for the years ended August 28, 1999, August 26, 2000, and August 25, 2001                      |    
|                                           | Consolidated Statement of Changes in Shareholder's Deficit for the years ended
August 28, 1999, August 26, 2000, and August 25, 2001 |    
|                                           | Consolidated Statements of Cash Flows for the years ended August 28, 1999, August 26, 2000, and August 25, 2001                      |    
|Notes to Consolidated Financial Statements |                                                                                                                                      | F-7

F1

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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 26, 2000 and August 25, 2001, and the related consolidated
statements of operations, changes in shareholder's deficit, and cash flows for the years ended August 28, 1999, August 26, 2000, and August 25, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14(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.

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 26, 2000 and August 25, 2001, and the consolidated results of its operations and its cash flows for the years ended August 28, 1999, August 26, 2000, and
August 25, 2001, 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 21,
2001, Except
for Note 10, as to which the date
is December 6, 2001
Chicago, Illinois

F2

---



Archibald Candy Corporation        (A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)        Consolidated Balance Sheets        As of August 26,
2000 and August 25, 2001

|                                                                                                  |                                              | 2000                                |         | 2001    |  
|------------------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------- | ------- | ------- | -
|
|Assets                                                                                            |                                              |                                     |         |         |  
|Current assets:                                                                                   |                                              |                                     |         |         |  
|                                                                                                  | Cash and cash equivalents                    |                                     | $       | 3,120   |  
|                                                                                                  | Accounts receivable, net                     |                                     |         | 1,433   |  
|                                                                                                  | Inventories                                  |                                     |         | 42,787  |  
|                                                                                                  | Prepaid expenses and other current assets    |                                     |         | 3,355   |  
|                                                                                                  |                                              |                                     |         |         |  
|Total current assets                                                                              |                                              |                                     | 50,695  |         |  
|Property, plant, and equipment, net                                                               |                                              |                                     | 52,149  |         |  
|Goodwill, less accumulated amortization of $11,242 ($9,967 in 2000)                               |                                              |                                     | 70,938  |         |  
|Noncompete agreements and other intangibles, less accumulated amortization of $282 ($188 in 2000) |                                              |                                     | 778     |         |  
|Deferred financing fees, less accumulated amortization of $5,693 ($4,212 in 2000)                 |                                              |                                     | 7,252   |         |  
|Investment in joint venture                                                                       |                                              |                                     | 1,737   |         |  
|Other assets                                                                                      |                                              |                                     | 1,314   |         |  
|                                                                                                  |                                              |                                     |         |         |  
|Total assets                                                                                      |                                              | $                                   | 184,863 |         | $
|                                                                                                  |                                              |                                     |         |         |  
|Liabilities and shareholder's equity (deficit)                                                    |                                              |                                     |         |         |  
|Current liabilities:                                                                              |                                              |                                     |         |         |  
|                                                                                                  | Revolving line of credit                     |                                     | $       | 18,500  |  
|                                                                                                  | Accounts payable                             |                                     |         | 17,130  |  
|                                                                                                  | Accrued liabilities                          |                                     |         | 4,989   |  
|                                                                                                  | Payroll and related liabilities              |                                     |         | 3,141   |  
|                                                                                                  | Accrued interest                             |                                     |         | 3,263   |  
|                                                                                                  | Restructuring reserve                        |                                     |         |        |  
|                                                                                                  | Current portion of capital lease obligations |                                     |         | 49      |  
|                                                                                                  |                                              |                                     |         |         |  
|Total current liabilities                                                                         |                                              |                                     | 47,072  |         |  
|Due to affiliate                                                                                  |                                              |                                     | 40      |         |  
|Long-term debt                                                                                    |                                              |                                     | 170,000 |         |  
|Deferred rent                                                                                     |                                              |                                     | 1,474   |         |  
|Pension liability                                                                                 |                                              |                                     |        |         |  
|Capital lease obligations, less current portion                                                   |                                              |                                     | 11      |         |  
|Shareholder's equity (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                          |                                     |         | (52,587 | )
|                                                                                                  | Other comprehensive income (loss)            |                                     |         | 153     |  
|                                                                                                  |                                              |                                     |         |         |  
|Total shareholder's deficit                                                                       |                                              |                                     | (33,734 | )       |  
|                                                                                                  |                                              |                                     |         |         |  
|Total liabilities and shareholder's deficit                                                       |                                              | $                                   | 184,863 |         | $
|                                                                                                  |                                              |                                     |         |         |  

See accompanying notes.

F3

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Archibald Candy Corporation        (A Wholly Owned Subsidiary of Fannie May Holdings, Inc.)        Consolidated Statements of Operations        Years ended
August 28, 1999, August 26, 2000 and August 25, 2001

|                                                       |                     | 1999 |         | 2000   |   | 2001    |       
|------------------------------------------------------ | ------------------- | ---- | ------- | ------ | - | ------- | ------
|
|Net sales                                              |                     | $    | 198,504 |        | $ | 253,390 |       
|Cost of sales, excluding depreciation and amortization |                     |      | 74,199  |        |   | 98,536  |       
|Cost of sales, nonrecurring(1)                         |                     |      |        |        |   |        |       
|                                                       |                     |      |         |        |   |         |       
|                                                       | Total cost of sales |      |         | 74,199 |   |         | 98,536
|                                                       |                     |      |         |        |   |         |       
|Gross profit                                           |                     |      | 124,305 |        |   | 154,854 |       
|Selling, general, and administrative expenses          |                     |      | 100,330 |        |   | 134,342 |       
|Depreciation and amortization expense                  |                     |      | 10,513  |        |   | 11,020  |       
|Amortization of goodwill and other intangibles         |                     |      | 3,442   |        |   | 4,846   |       
|Restructuring expense                                  |                     |      |        |        |   | 780     |       
|Write-off of impaired assets                           |                     |      |        |        |   |        |       
|Management fees and other fees (credit)                |                     |      | 525     |        |   | 519     |       
|Share of loss in joint venture                         |                     |      | 30      |        |   | 195     |       
|                                                       |                     |      |         |        |   |         |       
|Operating income (loss)                                |                     |      | 9,465   |        |   | 3,152   |       
|Other (income) and expense:                            |                     |      |         |        |   |         |       
|                                                       | Interest expense    |      |         | 13,831 |   |         | 18,614
|                                                       | Interest income     |      |         | (658   | ) |         | (37   
|                                                       | Other income        |      |         | (256   | ) |         | (207  
|                                                       |                     |      |         |        |   |         |       
|Loss before income taxes                               |                     |      | (3,452  | )      |   | (15,218 | )     
|Provision for income taxes                             |                     |      | 143     |        |   | 130     |       
|                                                       |                     |      |         |        |   |         |       
|Net loss                                               |                     | $    | (3,595  | )      | $ | (15,348 | )     
|                                                       |                     |      |         |        |   |         |       

---

See
accompanying notes.

F4

---



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

|                           |                                                                             | Common Stock |   |   |   |   |   |        |   |   |        
|-------------------------- | --------------------------------------------------------------------------- | ------------ | - | - | - | - | - | ------ | - | - | -------
|
|Balance at August 29, 1998 |                                                                             | 4,210        |   | $ |  |   | $ | 18,700 |   | $ | (33,644
|Comprehensive loss:        |                                                                             |              |   |   |   |   |   |        |   |   |        
|                           | Net loss                                                                    |              |  |   |   |  |   |        |  |   |        
|                           | Foreign currency translation adjustments                                    |              |  |   |   |  |   |        |  |   |        
|                           |                                                                             |              |   |   |   |   |   |        |   |   |        
|                           |                                                                             | Total        |   |  |   |   |  |        |   |  |        
|                           |                                                                             |              |   |   |   |   |   |        |   |   |        
|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
|                           |                                                                             |              |   |   |   |   |   |        |   |   |        

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 28, 1999, August 26, 2000 and August 25, 2001

|                                                                                          |                                              | 1999                                                    |         | 2000   |        | 2001    |       
|----------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------ | ------- | ------
|
|Operating activities                                                                      |                                              |                                                         |         |        |        |         |       
|Net loss                                                                                  |                                              | $                                                       | (3,595  | )      | $      | (15,348 | )     
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                              |                                                         |         |        |        |         |       
|                                                                                          | Depreciation and amortization                |                                                         |         | 13,955 |        |         | 15,866
|                                                                                          | Share of loss in joint venture               |                                                         |         | 30     |        |         | 195   
|                                                                                          | Restructuring expense                        |                                                         |         |       |        |         |      
|                                                                                          | Write-off of impaired assets                 |                                                         |         |       |        |         |      
|                                                                                          | Gain on sale of property                     |                                                         |         |       |        |         |      
|                                                                                          | Changes in operating assets and liabilities: |                                                         |         |        |        |         |       
|                                                                                          |                                              | Accounts receivable, net                                |         |        | (1,550 | )       |       
|                                                                                          |                                              | Due to affiliate                                        |         |        | (260   | )       |       
|                                                                                          |                                              | Inventories                                             |         |        | (6,489 | )       |       
|                                                                                          |                                              | Prepaid expenses and other current assets               |         |        | (486   | )       |       
|                                                                                          |                                              | Other assets                                            |         |        | (401   | )       |       
|                                                                                          |                                              | Accounts payable, accrued liabilities and deferred rent |         |        | 8,490  |         |       
|                                                                                          |                                              | Restructuring reserve                                   |         |        |       |         |       
|                                                                                          |                                              |                                                         |         |        |        |         |       
|Net cash provided by (used in) operating activities                                       |                                              |                                                         | 9,694   |        |        | (160    | )     
|Investing activities                                                                      |                                              |                                                         |         |        |        |         |       
|Purchase of property, plant, and equipment                                                |                                              |                                                         | (7,703  | )      |        | (11,107 | )     
|Proceeds from sale of property                                                            |                                              |                                                         |        |        |        |        |       
|Acquisitions, net of cash acquired                                                        |                                              |                                                         | (78,924 | )      |        | (1,922  | )     
|Sweet Factory license payment                                                             |                                              |                                                         |        |        |        | (750    | )     
|                                                                                          |                                              |                                                         |         |        |        |         |       
|Net cash provided by (used in) investing activities                                       |                                              |                                                         | (86,627 | )      |        | (13,779 | )     
|Financing activities                                                                      |                                              |                                                         |         |        |        |         |       
|Proceeds from long-term debt                                                              |                                              |                                                         | 70,000  |        |        |        |       
|Net increase in revolving line of credit                                                  |                                              |                                                         | 8,000   |        |        | 10,500  |       
|Payments of capital lease obligations                                                     |                                              |                                                         | (123    | )      |        | (275    | )     
|Costs related to loan agreements                                                          |                                              |                                                         | (7,120  | )      |        | (224    | )     
|                                                                                          |                                              |                                                         |         |        |        |         |       
|Net cash provided by (used in) financing activities                                       |                                              |                                                         | 70,757  |        |        | 10,001  |       
|Effect of exchange rates on cash                                                          |                                              |                                                         | 3       |        |        | 150     |       
|                                                                                          |                                              |                                                         |         |        |        |         |       
|Net decrease in cash and cash equivalents                                                 |                                              |                                                         | (6,173  | )      |        | (3,788  | )     
|Cash and cash equivalents at beginning of year                                            |                                              |                                                         | 13,081  |        |        | 6,908   |       
|                                                                                          |                                              |                                                         |         |        |        |         |       
|Cash and cash equivalents at end of year                                                  |                                              | $                                                       | 6,908   |        | $      | 3,120   |       
|                                                                                          |                                              |                                                         |         |        |        |         |       
|Supplemental disclosures of cash flow information:                                        |                                              |                                                         |         |        |        |         |       
|                                                                                          | Cash paid during the year for:               |                                                         |         |        |        |         |       
|                                                                                          |                                              | Interest                                                |         | $      | 11,948 |         | $     
|                                                                                          |                                              |                                                         |         |        |        |         |       
|                                                                                          |                                              | 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 25, 2001        (Dollars in Thousands)

1. Description of Business Acquisitions and Basis of Presentation

Archibald Candy Corporation (Archibald) and its subsidiaries (collectively, the Company) are manufacturers and retailers of boxed chocolates and other
confectionery items. The Company sells its Fannie May, Fanny Farmer, Sweet Factory, and Laura Secord candies in 657 Company-operated stores and approximately 9,300 third-party retail outlets as well
as through quantity order, mail-order, and fund-raising programs in the United States and Canada.

The
accompanying consolidated financial statements include the accounts of Archibald and its subsidiaries, Sweet Factory Group, Inc. and subsidiaries and Archibald Candy
(Canada) Corporation. All significant intercompany balances and transactions have been eliminated.

On
December 7, 1998, Archibald acquired all of the capital stock of Sweet Factory Group, Inc. for $27 million and the assumption of approximately
$10 million in debt. On June 8, 1999, Archibald's newly-incorporated subsidiary, Archibald Candy (Canada) Corporation, a Canadian company, acquired certain assets and liabilities from
Laura Secord, Inc. for approximately $44 million. Both acquisitions were accounted for under the purchase method. The following summarizes the purchase price allocation and cash paid:

Book value of assets acquired

$
43,933Goodwill and other intangibles


44,714Liabilities assumed


(7,801
)Cash paid

$
80,846


Based
on unaudited data, the following table presents selected financial information for the Company and its subsidiaries on a pro forma basis, assuming the companies had been
consolidated since August 31, 1997:

Year ended
August 28,
1999Net sales

$
257,585Net loss


(3,485
)


The
pro forma results are not necessarily indicative of future operations or the actual results that would have occurred had the acquisitions been made August 31, 1997.

The
Company's fiscal year-end is the last Saturday in August. The fiscal years ended August 28, 1999, August 26, 2000, and August 25, 2001 each had 52
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.

F7

---

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.

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.

The
Company evaluates whether indicators of impairment of long-lived assets, including goodwill, are present, and if such indicators are present, the Company determines
whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than their carrying amounts. If so, the Company would recognize an impairment loss based on the
excess of the carrying amount of the assets over their fair value (see Note 5).

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.

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 $3,807, $5,865, and $4,158 for 1999, 2000, and 2001, respectively. At August 26, 2000 and August 25, 2001, the Company had $272 and $350,
respectively, of print advertising costs which are included in prepaids and other current assets in the accompanying balance sheets.

F8

---

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.

Reclassifications

Certain amounts in the 1999 and 2000 financial statements have been reclassified to conform with the 2001 presentation. Net sales and cost of sales amounts
have been increased to reflect the reclassification of freight costs billed to customers and freight costs, respectively. Previously, such billings were recorded net of the related costs in selling,
general, and administrative expenses.

3. Cost of Sales, Nonrecurring

Cost of sales, nonrecurring includes $3,178 of manufacturing start-up costs as detailed below and $705 of inventory liquidation costs (see
Note 4 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 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


F9

---

4. Restructuring Expense

In connection with the review of the profitability of its Sweet Factory stores, the Company has decided to close 67 stores. As of August 25, 2001, 40 of
these stores have been closed. 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, 2001 |       
|--------------------------- |  | ------------------ | ----- | --------- | - | -------- | - | -------------------------- | ------
|Impairment of fixed assets  |  | $                  | 3,821 |           | $ |         |   | $                          | (3,821
|Lease termination costs     |  |                    | 1,066 |           |   | (1,057   | ) |                            |      
|Inventory liquidation costs |  |                    | 705   |           |   |         |   |                            | (631  
|Deferred rent               |  |                    | (187  | )         |   |         |   |                            | 129   
|Other costs                 |  |                    | 379   |           |   | (310     | ) |                            |      
|                            |  |                    |       |           |   |          |   |                            |       
|                            |  | $                  | 5,784 |           | $ | (1,367   | ) | $                          | (4,323
|                            |  |                    |       |           |   |          |   |                            |       

Lease
termination costs represent payments to landlords for early termination of leases. Inventory liquidation costs represents 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.

5. Write-off of Impaired Assets

In connection with an impairment review of the long-lived assets of the Sweet Factory business, the Company has 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.

6. Inventories

Inventories at August 26, 2000 and August 25, 2001, are comprised of the following:

2000

2001Raw materials

$
14,492

$
12,901Work-in process


304


225Finished goods


27,991


18,714$
42,787

$
31,840


F10

---

7. Property, Plant, and Equipment

Property, plant, and equipment at August 26, 2000 and August 25, 2001, are comprised of the following:

2000

2001Land

$
3,539

$
2,039Machinery and equipment


30,267


31,304Construction in progress


1,229


11Buildings and improvements


18,234


15,603Furniture and fixtures


10,552


6,466Leasehold improvements


40,903


33,180104,724


88,603Less: Accumulated depreciation


(52,575
)

(54,205
)$
52,149

$
34,398


8. 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.

The
net periodic pension cost recognized as expense for the years ended August 28, 1999, August 26, 2000, and August 25, 2001, consists of the following:

1999

2000

2001Service cost

$
446

$
507


593Interest cost


414


501


527Return on plan assets


(572
)

(664
)

(663
)Other


36


(15
)

11$
324

$
329

$
468


F11

---

The
following table sets forth the changes in benefit obligation for the years ended August 28, 1999, August 26, 2000, and August 25, 2001:

1999

2000

2001Benefit obligation at beginning of year

$
6,287

$
5,309

$
6,527Service cost


446


507


593Interest cost


414


501


527Actuarial (gain) loss


(1,267
)

37


580Plan amendments





1,020


Benefits paid


(571
)

(847
)

(790
)Benefit obligation at end of year

$
5,309

$
6,527

$
7,437


The
following table sets forth the changes in plan assets for the years ended August 28, 1999, August 26, 2000 and August 25, 2001:

1999

2000

2001Fair value of plan assets at beginning of year

$
6,420

$
7,327

$
7,527Actual return (loss) on plan assets


1,478


997


(1,705
)Employee contributions





50


387Benefits paid


(571
)

(847
)

(790
)Fair value of plan assets at end of year

$
7,327

$
7,527

$
5,419


The
following table reconciles the plans' funded status at August 26, 2000 and August 25, 2001:

2000

2001Funded status at year-end

$
1,000

$
(2,018
)Unrecognized prior service cost


942


860Unrecognized (gain) loss


(1,619
)

1,400Net amount recognized at the end of year

$
323

$
242


The
following table provides the amounts recognized in the statement of financial position at August 26, 2000 and August 25, 2001:

2000

2001Prepaid benefit cost

$
323

$
Accrued benefit liability





(1,038
)Intangible asset





861Accumulated other comprehensive income





419Net amount recognized at end of year

$
323

$
242


F12

---

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

2000

2001Discount rate

8.0
%
7.5
%Expected rate of return on assets

9.0

9.0Rate of increase in compensation

4.0

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 1999 and 2000, the total Company expense related to the Plans was $75.

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 $34, $207 and $183,
in 1999, 2000, and 2001, respectively.

9. Leases

The Company leases the majority of its retail stores under operating leases. Rent expense for the years ended August 28, 1999, August 26, 2000
and August 25, 2001 consisted of the following:

1999

2000

2001Fixed minimum

$
17,428

$
24,195

$
22,807Rent based on percentage of sales


627


578


732$
18,055

$
24,773

$
23,539


Future
minimum lease payments required under the noncancelable leases having lease terms in excess of one year at August 25, 2001, are as follows:

Operating

Capital2002

$
20,915

$
592003


17,744


592004


13,422


592005


9,957


262006


7,534


Thereafter


12,406


81,978


203Interest





(26
)$
81,978

$
177


F13

---

10. Debt

At August 26, 2000 and August 25, 2001, the Company had $170 million of senior secured notes.

On
July 2, 1997, the Company sold $100 million in face amount of senior secured notes through a private offering and retired its existing debt (excluding capital leases)
and related accrued interest. In 1999, Archibald sold an additional $70 million of senior secured notes to finance two acquisitions (Note 1). The Company has exchanged these notes for
new senior secured notes which have been registered under the Securities Act of 1933. These new notes are substantially identical (including principal amount, interest rate, maturity, security, and
ranking) to the form and terms of the old notes for which they were exchanged.

The
senior secured notes bear interest at 10.25% and mature on July 1, 2004. Interest is payable semiannually on January 1 and July 1. The notes are secured by
certain of the Company's equipment, fixtures, and general intangibles and mortgages on certain real property. The indenture contains covenants that limit the ability of the Company to:
(i) incur additional indebtedness or create liens, (ii) sell certain assets, (iii) merge, consolidate, or sell substantially all of the Company's assets, (iv) make
restricted payments such as dividends, purchases of its capital stock, or make payments on behalf of Fannie May Holdings, Inc. (Holdings), and (v) conduct transactions with affiliates.

The
Company may redeem the senior secured notes, in whole or in part, at a redemption price of 105.125% beginning July 1, 2001, 102.563% in the year beginning July 1,
2002, and 100%, beginning July 1, 2003. During the term of the indenture, in the event of a change in control, whereby there is a sale or transfer of substantially all of the Company's assets
or stock, a merger, consolidation, or certain changes in the Board of Directors, the Company is required to repurchase all of the senior secured notes at a purchase price of 101%.

On
June 28, 2001, the Company and its subsidiary, Sweet Factory, Inc., 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 by the Company, in part, to pay all outstanding obligations under its revolving credit facility with Bank One, NA, as
agent (the "Bank One Facility"). The Bank One Facility was then terminated. The CIT Facility provides 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 the Company's eligible accounts receivable and inventory and the Company's owned store locations, which borrowing base components are subject to certain limits, minus the amount of the
overadvance under the Post-Petition Credit Agreement. The Company may advance from time to time up to $5.0 million of the CIT Facility borrowings to Archibald Candy (Canada)
Corporation.

The
CIT Facility is secured by first priority liens on the Company's and Sweet Factory, Inc.'s accounts receivable, and inventory, and the Company's owned store locations, and
the proceeds therefrom. The Company's other subsidiaries, including Archibald Candy (Canada) Corporation, have 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 has guaranteed all obligations under the CIT Facility and granted to the agent
under the CIT Facility a

F14

---

first priority lien on all of its assets, including all the outstanding shares of common stock of the Company.

The
CIT Facility provides that borrowings thereunder accrue interest at a variable rate equal to the "prime rate" announced from time to time by JP Morgan Chase & Co., plus
1.0%. The Company is required to pay fees in connection with the CIT Facility.

In
September 2001, CIT agreed to overadvances under the CIT Facility in an aggregate amount of not more than $3.0 million, which expired on October 3, 2001. On
October 3, 2001, the Company and CIT entered into an Overadvance Agreement and First Amendment to Financing Agreement pursuant to which CIT agreed to provide a $5.0 million overadvance
to the Company, which expires on December 28, 2001. In connection with the Overadvance Agreement and First Amendment to Financing Agreement, those stockholders of Holdings who are (or who are
advised by) affiliates of The Jordan Company entered into a Participation Agreement pursuant to which such stockholders agreed to purchase from CIT a last-out participation in any
overadvance under the CIT Facility. The aggregate amount of the participation is equal to the lesser of (1) $2.5 million or (2) 50% of the amount of the outstanding overadvance,
if any, under the CIT Facility at the time of the participation. The participating stockholders are required to purchase the participation on the earlier of (a) December 28, 2001, or
(b) if all amounts due under the CIT Facility have been accelerated, on the fifth business day following notice by CIT but, in each case, only if any overadvance is outstanding on the purchase
date.

In
connection with the November 15, 2001 bankruptcy filings by our Sweet Factory subsidiaries, the CIT Facility was further amended pursuant to the Second Amendment to allow
such bankruptcy filings, to eliminate Sweet Factory, Inc. as a co-borrower and to remove the inventory and accounts receivable of our Sweet Factory subsidiaries from the borrowing
base. Concurrently with entering into the Second Amendment, CIT and Sweet Factory, Inc. entered into the Post-Petition Credit Agreement. See "Effect of Bankruptcy Filing". The
Company has guaranteed all obligations of Sweet Factory, Inc. under the Post-Petition Credit Agreement.

The
CIT Facility provides that, during December 2001, the Company may not borrow more than certain specified declining amounts and for the period each year from
December 31, until after the Company makes the scheduled interest payment on its senior notes due on the following January 1, the Company may have no borrowings. The CIT Facility also
provides that during 2002, the Company may not borrow more than certain specified increasing amounts (in each case less than $30.0 million). The CIT Facility requires that the Company satisfy
periodic minimum cash flow and EBITDA covenants and maximum capital expenditure and operating lease covenants. On December 6, 2001, CIT and the Company entered into the Waiver and Third
Amendment to Financing Agreement, pursuant to which the performance targets reflected in the periodic net cash flow and EBITDA covenants were reduced. The CIT Facility further requires that the
Company receive by March 31, 2002, either at least $5.0 million in capital contributions or at least $8.0 million in net proceeds from a sale-leaseback of the
Company's owned store locations. Management is currently exploring options in regard to obtaining such additional capital or sale of Company-owned store locations.

F15

---

As of August 25, 2001, $19.5 million was borrowed under the CIT Facility and $0.1 million of letters of credit was outstanding under the CIT Facility.

The
carrying amounts reported on the balance sheet for debt at August 25, 2001 approximates fair value. At August 25, 2001, the fair value of the senior secured notes
was approximately $112.2 million and the carrying amount of the remainder of the debt approximates fair value.

11. Liquidity and Financial Condition

Holdings has certain dividend and redemption obligations for which the Company must generate the necessary funds. Holdings has the following three classes of
preferred stock: Senior Preferred Stock, Junior Class A PIK Preferred Stock and Junior Class B PIK Preferred Stock. The Senior Preferred Stock was issued in 1991 in the original face
amount of $10.0 million. As of August 25, 2001, 100% of the Senior Preferred Stock was held by the former shareholders of the Company. The Junior Class A PIK Preferred Stock and
the Junior Class B PIK Preferred Stock also were issued in 1991 in the original face amount of $7.0 million and $0.7 million, respectively. As of August 25, 2001,
affiliates of TCW Capital owned approximately 64% of the Junior Class A PIK Preferred Stock and affiliates (or parties advised by such affiliates) of The Jordan Company owned approximately 36%
of the Junior Class A PIK Preferred Stock and approximately 80% of the Junior Class B PIK Preferred Stock. In connection with the Company's entering into the CIT Facility, Holdings
entered into agreements with the holders of each class of its preferred stock to, among other things, extend the mandatory redemption dates for such stock. The terms of the Senior Preferred Stock have
been amended to, among other things, eliminate the accrual of dividends on such stock after August 31, 2000 and to change the mandatory redemption date of such stock from a single aggregate
redemption payment on August 31, 2001 to a schedule of mandatory redemption payments on January 15th of each year, commencing in 2002 and ending in 2006. Such annual redemption payments
are in the amounts of $3.0 million in each of the
years 2002 through 2004, $2.0 million in 2005 and $2.5 million in 2006. In the event that Holdings fails to make any redemption payment when due, all then remaining redemption payments
shall be accelerated and, if not paid, the holders of its Senior Preferred Stock may elect a director to the Board of Directors of Holdings who shall have 51% of the total voting power of the Board.

The
terms of the Junior Class A PIK Preferred Stock and the Junior Class B Preferred Stock have been amended to extend the mandatory redemption date for each such class
of preferred stock from November 1, 2001 to March 15, 2006. The redemption value of the Junior Class A PIK Preferred Stock and the Junior Class B PIK Preferred Stock on
March 15, 2006 will be approximately $21.2 million and $2.1 million, respectively. The holders of Junior Class A PIK Preferred Stock also have agreed to extend from
January 1, 2000 to June 30, 2003 the date on which they have the right to put to Holdings their common stock. In addition, in the event that Holdings does not redeem all of the common
stock and preferred stock owned by affiliates of TCW Capital within 90 days of any exercise of this put right, affiliates of TCW Capital have the right to take control of a majority of the
voting power of Holdings' Board of Directors for purposes of effecting a sale of Holdings.

F16

---

In order for Holdings to make the redemption payments on its preferred stock, Holdings must cause the Company, to the extent permitted by the indenture governing the senior notes, the
CIT Facility and law, to advance the necessary funds to Holdings by dividend or otherwise. Such advances, if paid, will reduce the funds available for the Company's operations. To the extent that such
funds are not available, whether due to the restrictions set forth in the indenture, the CIT Facility or otherwise, the failure to make required redemption payments (1) would trigger various
provisions of Holdings' preferred and common stock, including provisions providing for a change of control of Holdings' and the Company's Boards of Directors and (2) with respect only to a
failure to make required redemptions of the Senior Preferred Stock, could result in defaults under the indenture and the CIT Facility and an obligation by the Company under the indenture to purchase
all of the senior notes.

The
indenture also provides that, except in limited circumstances (including to pay dividends or redeem preferred stock not owned by affiliates of the Jordan Company), the Company
will not, and will not permit any of its subsidiaries to, make dividend payments or other distributions on its outstanding shares of capital stock unless at the time of such distribution:
(a) no default under the indenture has occurred and is continuing or would occur as a consequence, thereof, (b) immediately after such distribution, the Company would comply with the
interest coverage ratios set forth in the indenture and (c) such distributions do not exceed an amount determined by reference to a formula consisting primarily of prior distributions and
payments, prior income and the proceeds from the sale of securities. The indenture prohibits the incurrence of additional indebtedness unless, among other things, the Company comply with minimum
interest coverage ratios set forth in the indenture.

In
light of the above debt service and dividend and redemption obligations and the restrictions set forth in the Company's indenture and CIT Facility, and in order to have sufficient
funds to meet the Company's projected capital expenditures and working capital requirements, the Company is exploring various alternatives, including new sources of revenue, additional cost reduction
initiatives, a further amendment of the CIT Facility and other sources of capital. While management believes the Company's financing requirements will be met, there can be no assurance that the
Company will be able to accomplish any of these alternatives or be able to do so on favorable terms.

12. Income Taxes

The provision for income taxes consists of the following for the years ended August 28, 1999, August 26, 2000 and August 25, 2001:

1999

2000

2001Current:Federal

$
50

$
68

$
State


93


62


15Foreign








117$
143

$
130

$
132


F17

---

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

2000

2001Assets:Net operating loss and AMT credit carryforwards

$
14,744

$
24,038Property, plant and equipment


3,147


5,475Other


2,503


1,050Total assets


20,394


30,563Liabilities:Pension and other


510


246Total liabilities


510


24619,884


30,317Valuation allowance


(19,884
)

(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. Payments under this agreement will be recorded as an equity
distribution to Holdings.

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 income (loss) before income taxes. A
reconciliation of the differences for the years ended August 28, 1999, August 26, 2000 and August 25, 2001, is as follows:

1999

2000

2001Computed statutory tax provision (benefit)

$
(1,174
)
$
(5,174
)
$
(14,116
)Increase (decrease) resulting from:Amortization of goodwill


459


533


534Benefit of current losses not recorded


695


4,699


9,982Alternative minimum tax


50





Asset impairment








3,536State taxes, net of federal benefit


61


62


15Foreign taxes








117Other items, net


52


10


64Provision for income taxes

$
143

$
130

$
132


F18

---

At
August 25, 2001, the Company had net operating loss carryforwards for federal income tax purposes of approximately $53 million and net operating loss carryforwards in
Canada of approximately $2.2 million. The valuation allowance increased by $10,433 and $9,154 during 2001 and 2000, respectively. Pursuant to the tax sharing agreement, $16 million of
these carryforwards are available to reduce Holdings' future taxable income and expire in varying amounts between 2006 and 2021.

13. Related Party Transactions

The Board of Directors, which includes 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. A member of the Board of Directors affiliated with The Jordan Company earned $52 as a consulting fee during 1999, 2000, and 2001.
Consulting fees of $13 were accrued at August 25, 2001. Principally all of the common and preferred shareholders of Holdings are affiliated with The Jordan Company or TCW Capital.

On
July 2, 1997, the Company entered into a new tax sharing and management consulting agreement with Holdings. Under this agreement, the Company will pay $412 annually to
Holdings in management consulting fees. Management consulting fee expense was $412 in 1999 and 2000. No management consulting fee expense was incurred in 2001. In connection with the fiscal 1999
acquisitions and related financing, the Company paid management fees of $1,450 to Holdings, which paid such amount of an affiliate of The Jordan Company.

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.

14. Guarantor Subsidiaries

The Company's obligations under its senior secured notes due 2004 are 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 is 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19

---

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20

---

Condensed Consolidating Balance Sheet
August 26, 2000

|                                                     |                                   | Archibald Candy
Corporation |         | Guarantor
Subsidiaries |   | Eliminations |       | Consolidated |        
|---------------------------------------------------- | --------------------------------- | --------------------------- | ------- | ---------------------- | - | ------------ | ----- | ------------ | -------
|Assets                                               |                                   |                             |         |                        |   |              |       |              |        
|Current assets:                                      |                                   |                             |         |                        |   |              |       |              |        
|                                                     | Cash and cash equivalents         |                             | $       | 800                    |   | $            | 2,320 |              | $      
|                                                     | Accounts receivables, net         |                             |         | 1,114                  |   |              | 319   |              |        
|                                                     | Inventories                       |                             |         | 35,925                 |   |              | 6,862 |              |        
|                                                     | Prepaids and other current assets |                             |         | 2,194                  |   |              | 1,161 |              |        
|                                                     |                                   |                             |         |                        |   |              |       |              |        
|Total current assets:                                |                                   |                             | 40,033  |                        |   | 10,662       |       |              |       
|Property, plant, and equipment, net                  |                                   |                             | 25,492  |                        |   | 26,657       |       |              |       
|Intercompany                                         |                                   |                             | 31,403  |                        |   | (31,403      | )     |              |       
|Investment in subsidiaries                           |                                   |                             | 12,367  |                        |   |             |       |              | (12,367
|Other assets                                         |                                   |                             | 68,538  |                        |   | 13,481       |       |              |       
|                                                     |                                   |                             |         |                        |   |              |       |              |        
|Total assets                                         |                                   | $                           | 177,833 |                        | $ | 19,397       |       | $            | (12,367
|                                                     |                                   |                             |         |                        |   |              |       |              |        
|Liabilities and shareholder's equity (deficit)       |                                   |                             |         |                        |   |              |       |              |        
|Current liabilities:                                 |                                   |                             |         |                        |   |              |       |              |        
|                                                     | Revolving line of credit          |                             | $       | 18,500                 |   | $            |      |              | $      
|                                                     | Accounts payable                  |                             |         | 14,589                 |   |              | 2,541 |              |        
|                                                     | Other current liabilities         |                             |         | 8,591                  |   |              | 2,851 |              |        
|                                                     |                                   |                             |         |                        |   |              |       |              |        
|Total current liabilities                            |                                   |                             | 41,680  |                        |   | 5,392        |       |              |       
|Long-term debt, less current portion                 |                                   |                             | 170,000 |                        |   | 11           |       |              |       
|Other noncurrent liabilities                         |                                   |                             | 40      |                        |   | 1,474        |       |              |       
|Total shareholder's equity (deficit)                 |                                   |                             | (33,887 | )                      |   | 12,520       |       |              | (12,367
|                                                     |                                   |                             |         |                        |   |              |       |              |        
|Total liabilities and shareholder's equity (deficit) |                                   | $                           | 177,833 |                        | $ | 19,397       |       | $            | (12,367
|                                                     |                                   |                             |         |                        |   |              |       |              |        

F21

---

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 
|                                                                                       |  |                             |         |                        |   |              |   |              |        

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 |  |                             | 66,737  |                        |   | 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 
|                                                                                       |  |                             |         |                        |   |              |   |              |       

F22

---

Condensed Consolidating Statement of Operations
Year ended August 28, 1999

|                                                                                       |  | Archibald Candy
Corporation |         | Guarantor
Subsidiaries |   | Eliminations |   | Consolidated |       
|-------------------------------------------------------------------------------------- |  | --------------------------- | ------- | ---------------------- | - | ------------ | - | ------------ | ------
|Net sales                                                                              |  | $                           | 134,404 |                        | $ | 64,100       |   | $            |      
|Cost of sales, excluding depreciation                                                  |  |                             | 50,746  |                        |   | 23,553       |   |              | (100  
|Selling, general, and administrative expenses, excluding depreciation and amortization |  |                             | 63,936  |                        |   | 36,394       |   |              |      
|Depreciation, amortization, and other                                                  |  |                             | 8,861   |                        |   | 5,649        |   |              |      
|                                                                                       |  |                             |         |                        |   |              |   |              |       
|Operating income (loss)                                                                |  |                             | 10,861  |                        |   | (1,496       | ) |              | 100   
|Interest expense, net                                                                  |  |                             | 12,801  |                        |   | 372          |   |              |      
|Other income and expense                                                               |  |                             | (532    | )                      |   | 126          |   |              | 150   
|Equity interest in losses of subsidiaries                                              |  |                             | 2,038   |                        |   |             |   |              | (2,038
|                                                                                       |  |                             |         |                        |   |              |   |              |       
|Income (loss) before income taxes                                                      |  |                             | (3,446  | )                      |   | (1,994       | ) |              | 1,988 
|Provision for income taxes                                                             |  |                             | 99      |                        |   | 44           |   |              |      
|                                                                                       |  |                             |         |                        |   |              |   |              |       
|Net income (loss)                                                                      |  | $                           | (3,545  | )                      | $ | (2,038       | ) | $            | 1,988 
|                                                                                       |  |                             |         |                        |   |              |   |              |       

F23

---

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        |   | $            | 
|                                                      |  |                             |        |                        |   |              |   |              |  

F24

---

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        |   | $            | 
|                                                      |  |                             |        |                        |   |              |   |              |  

F25

---

Condensed Consolidating Statement of Cash Flows
Year ended August 28, 1999

|                                                     |  | Archibald Candy
Corporation |         | Guarantor
Subsidiaries |   | Eliminations |   | Consolidated |  
|---------------------------------------------------- |  | --------------------------- | ------- | ---------------------- | - | ------------ | - | ------------ | -
|Operating activities                                 |  |                             |         |                        |   |              |   |              |  
|Cash flows provided by operating activities          |  | $                           | 8,315   |                        | $ | 1,379        |   | $            | 
|Investing activities                                 |  |                             |         |                        |   |              |   |              |  
|Purchase of property and equipment                   |  |                             | (6,449  | )                      |   | (1,254       | ) |              | 
|Acquisitions, net of cash acquired                   |  |                             | (78,924 | )                      |   |             |   |              | 
|                                                     |  |                             |         |                        |   |              |   |              |  
|Net cash used in investing activities                |  |                             | (85,373 | )                      |   | (1,254       | ) |              | 
|Financing activities                                 |  |                             |         |                        |   |              |   |              |  
|Proceeds from long-term debt                         |  |                             | 70,000  |                        |   |             |   |              | 
|Net increase in revolving line of credit             |  |                             | 8,000   |                        |   |             |   |              | 
|Intercompany advances                                |  |                             | (4,883  | )                      |   | 4,883        |   |              | 
|Other                                                |  |                             | (6,850  | )                      |   | (390         | ) |              | 
|                                                     |  |                             |         |                        |   |              |   |              |  
|Net cash provided by financing activities            |  |                             | 66,267  |                        |   | 4,493        |   |              | 
|                                                     |  |                             |         |                        |   |              |   |              |  
|Net increase (decrease) in cash and cash Equivalents |  |                             | (10,791 | )                      |   | 4,618        |   |              | 
|Cash and cash equivalents at beginning of year       |  |                             | 13,081  |                        |   |             |   |              | 
|                                                     |  |                             |         |                        |   |              |   |              |  
|Cash and cash equivalents at end of year             |  | $                           | 2,290   |                        | $ | 4,618        |   | $            | 
|                                                     |  |                             |         |                        |   |              |   |              |  

15. Geographic Information

FY 2000

FY 2001Revenues(a)

Long-Lived
Assets

Revenues(a)

Long-Lived
AssetsUnited States

$
201,825

$
122,859

$
197,430

$
92,191Canada


51,565


11,309


51,739


11,149Consolidated total

$
253,390

$
134,168

$
249,169

$
103,340


---

16. Subsequent Event

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. In connection with the bankruptcy
filing, Sweet Factory, Inc. entered into a

F26

---

Post-Petition Credit, Security and Guaranty Agreement (the "Post-Petition Credit Agreement") with The CIT Group/Business Credit, Inc. and SFG, SF Properties, Inc.
and SF Candy Company as guarantors. The agreement is for one year and provides 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, Inc.'s eligible inventory plus a $1.0 million overadvance, subject to certain reserves. The Post-Petition Credit Agreement is
secured by first priority liens on Sweet Factory, Inc.'s accounts receivable and inventory and provides that borrowings thereunder accrue interest at a variable rate equal to the "prime rate"
announced from time to time by J.P. Morgan Chase & Co., plus 1.5%. The Company has guaranteed all obligations of Sweet Factory, Inc. under the Post-Petition Credit Agreement.
Sweet Factory, Inc. is required to pay fees in connection with the Post-Petition Credit Agreement.

SFG
and its subsidiaries' financial results are included in the Company's consolidated results at August 25, 2001. However, accounting principles generally accepted in the
United States would 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 cost method will require the Company to present the net assets of SFG and its subsidiaries at
November 15, 2001 as an investment and not recognize any income or loss from the operations of SFG and its subsidiaries in the Company's results of operations during the pendency of the
bankruptcy proceedings. However, the Company has a receivable from SFG of approximately $19.8 million and a net investment liability of $13.5 million as of August 25, 2001, which
will be subject to periodic reviews for recoverability.

Management
has assessed the liquidity position of SFG and its subsidiaries as a result of the bankruptcy filings and available debtor in possession financing and believes that SFG and
its subsidiaries will be able to fund their operating activities and meet their debt requirements until a plan of reorganization is finalized.

The
condensed consolidated financial information set forth below for SFG and its subsidiaries has been prepared on a going concern basis which contemplates continuity of operations,
realization of assets, and liquidation of liabilities in the ordinary course of business. As a result of the bankruptcy filings of SFG and its subsidiaries and related events, there is no assurance
that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, a plan of reorganization, or rejection thereof, could
change the amounts reported in the financial statements of SFG and its subsidiaries and cause a material decrease in the carrying amount of the net investment.

F27

---

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

For the period ended
August 28, 1999

For the period ended
August 26, 2000

For the year ended
August 25, 2001Net sales

$
56,942

$
69,895

$
61,921Operating loss


(630
)

(4,038
)

(27,055
)Loss before income taxes


(805
)

(4,086
)

(26,997
)Net loss


(849
)

(4,085
)

(27,014
)


August 26, 2000

August 25, 2001Current assets

$
6,111

$
4,174Property, plant and equipment


17,805


5,699Other assets


11,024


892Total assets

$
34,940

$
10,765Current liabilities

$
1,384

$
4,069Payable to Archibald Candy Corporation


19,006


19,761Other liabilities


1,485


885Total stockholder's equity (deficit)


13,065


(13,950
)Total liabilities & stockholder's equity (deficit)

$
34,940

$
10,765


F28

---

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

For the Year Ended
August 28, 1999

For the Year Ended
August 26, 2000

For the Year Ended
August 25, 2001Net sales

$
141,562

$
183,495

$
187,248Operating income


10,095


7,190


3,511Loss before income taxes


(2,647
)

(11,132
)

(14,390
)Net loss


(2,746
)

(11,263
)

(14,505
)


August 26, 2000

August 25, 2001Current assets

$
44,584

$
34,598Property, plant and equipment


35,050


28,699Investment in and amounts due from SFG


32,071


5,811Other assets


70,289


68,330Total assets

$
181,994

$
137,158Current liabilities

$
45,688

$
41,553Other liabilities


170,040


171,209Total stockholder's equity (deficit)


(33,734
)

(75,604
)Total liabilities & stockholder's equity (deficit)

$
181,994

$
137,158


F29

---

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 10, 2000.

| |  | 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/THOMAS H. QUINNThomas H. Quinn     |  | Chairman of the Board and Chief Executive Officer                                                  |  | December 10, 2001
|/s/TED A. SHEPHERDTed A. Shepherd     |  | President and Chief Operating Officer, Director (Principal Executive Officer) and Director         |  | December 10, 2001
|/s/RICHARD J. ANGLINRichard J. Anglin |  | Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) |  | December 10, 2001
|/s/JOHN W. JORDAN IIJohn W. Jordan II |  | Director                                                                                           |  | December 10, 2001
|/s/ADAM E. MAXAdam E. Max             |  | Director                                                                                           |  | December 10, 2001
|/s/JEFFREY J. ROSENJeffrey J. Rosen   |  | Director                                                                                           |  | December 10, 2001
|/s/GREGORY W. WARDGregory W. Ward     |  | Director                                                                                           |  | December 10, 2001

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.

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