Edgar Filing: FRIENDLY ICE CREAM CORP

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

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

For the transition period from to

Commission File No. 001-13579

FRIENDLY ICE CREAM CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Massachusetts		04-2053130
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)
1855 Boston Road
Wilbraham, Massachusetts		01095
(Address of Principal Executive Offices)		(Zip Code)

(413) 731-4000

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of class

Common Stock, $.01 par value
Rights to Purchase Series A Junior
Preferred Stock, $.01 par value

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x

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 the filing requirements for at least the past 90 days. Yes x No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o

Accelerated Filer x

Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on July 2, 2006, based upon the closing sales price of the common stock on the American Stock Exchange, was $53,301,000. For purposes of the foregoing calculation only, all members of the Board of Directors and executive officers of the registrant have been deemed affiliates. The number of shares of common stock outstanding was 8,117,235 as of January 31, 2007.

Documents Incorporated By Reference

Part III of this Form 10-K incorporates information by reference from the registrant’s definitive proxy statement which will be filed no later than 120 days after December 31, 2006.

Introductory Note:

This Amendment No. 1 to Form 10-K for the year ended December 31, 2006 (“Form 10-K/A”) has been filed by Friendly Ice Cream Corporation (the “Company”) solely to amend Item 8, Financial Statements and Supplementary Data, to correct typographical errors in the Consolidated Statement of Cash Flows included on page F-6 of the Company’s Annual Report on Form 10-K filed on March 6, 2007. The amounts reported in the line item “Contribution to defined benefit pension plan” for each of the years ended January 1, 2006 and January 2, 2005 should have been zero, but inadvertently duplicated the amounts reported in the immediately preceding line item under the “Accrued expenses and other long-term liabilities” for the same periods. This inadvertent duplication also impacted the amounts reported for net cash provided by operating activities, net increase (decrease) in cash and cash equivalents, and cash and cash equivalents, end of year, for the years ended January 1, 2006 and January 2, 2005. The Consolidated Statement of Cash Flows has been revised in this Form 10-K/A to reflect that (1) contribution to defined benefit pension plan was $0 for both years ended January 1, 2006 and January 2, 2005, and not $2,422 and $3,253, respectively, (2) net cash provided by operating activities for the years ended January 1, 2006 and January 2, 2005 was $13,995 and $6,609, respectively, and not $11,573 and $3,356, respectively,(3) net increase (decrease) in cash and cash equivalents for the years ended January 1, 2006 and January 2, 2005 was $1,192 and ($12,226), respectively, and not ($1,230) and ($15,479), respectively, and (4) cash and cash equivalents, end of year for the years ended January 1, 2006 and January 2, 2005 was $14,597 and $13,405, respectively, and not $12,175 and $10,152, respectively. This Form 10-K/A does not amend, modify or update any other information.

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, thereunto duly authorized.

				Friendly Ice Cream Corporation
			By:	/s/ PAUL V. HOAGLAND
				Name: Paul V. Hoagland
				Title: Executive Vice President of Administration and Chief Financial Officer
			Date:	March 12, 2007

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2006 and January 1, 2006		F-3
Consolidated Statements of Operations for the Years Ended December 31, 2006, January 1, 2006 and January 2, 2005		F-4
Consolidated Statements of Changes in Stockholders’ Deficit for the Years Ended December 31, 2006, January 1, 2006 and January 2, 2005		F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, January 1, 2006 and January 2, 2005		F-6
Notes to Consolidated Financial Statements		F-7

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Friendly Ice Cream Corporation:

We have audited the accompanying consolidated balance sheets of Friendly Ice Cream Corporation and subsidiaries as of December 31, 2006 and January 1, 2006 and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 Friendly Ice Cream Corporation and subsidiaries at December 31, 2006 and January 1, 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. 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.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Friendly Ice Cream Corporation and subsidiaries internal control over financial reporting as of December 31 2006 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2007 expressed an unqualified opinion thereon.

	/s/ Ernst & Young LLP
Boston, Massachusetts
February 21, 2007

F-2

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	December 31,				January 1,
	2006				2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	25,077		$	14,597
Restricted cash		517			2,549
Accounts receivable, net		11,435			10,757
Inventories		17,059			15,775
Assets held for sale		896			933
Prepaid expenses and other current assets		3,127			5,044
TOTAL CURRENT ASSETS		58,111			49,655
DEFERRED INCOME TAXES		928			—
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization		137,425			143,514
INTANGIBLE ASSETS AND DEFERRED COSTS, net of accumulated amortization of $13,204 and $11,247 at December 31, 2006 and January 1, 2006, respectively		17,783			19,063
OTHER ASSETS		5,920			6,010
TOTAL ASSETS		$	220,167		$	218,242
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt		$	1,563		$	1,426
Current maturities of capital lease and finance obligations		1,541			1,419
Accounts payable		22,247			24,968
Accrued salaries and benefits		8,230			8,212
Accrued interest payable		1,173			1,324
Insurance reserves		11,462			9,002
Restructuring reserves		—			72
Other accrued expenses		22,475			19,866
TOTAL CURRENT LIABILITIES		68,691			66,289
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities		4,682			6,173
LONG-TERM DEBT, less current maturities		222,650			224,894
LIABILITY FOR PENSION BENEFITS		20,302			28,904
OTHER LONG-TERM LIABILITIES.		30,738			33,820
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT:
Common stock, par value $.01 per share; authorized 50,000,000 shares; 8,117,235 and 7,898,591 shares issued and outstanding at December 31, 2006 and January 1, 2006, respectively		81			79
Preferred stock, par value $.01 per share; authorized 1,000,000 shares; no shares issued and outstanding		—			—
Additional paid-in capital		146,398			144,675
Accumulated other comprehensive loss		(23,514		)	(31,785		)
Accumulated deficit		(249,861		)	(254,807		)
TOTAL STOCKHOLDERS’ DEFICIT.		(126,896		)	(141,838		)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT.		$	220,167		$	218,242

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

F-3

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	For the Years Ended
	December 31,				January 1,			January 2,
	2006				2006			2005
								(53 weeks)
REVENUES:
Restaurant		$	395,999		$	400,821		$	431,763
Foodservice		120,055			116,072			112,637
Franchise		15,401			14,454			13,199
TOTAL REVENUES		531,455			531,347			557,599
COSTS AND EXPENSES:
Cost of sales		200,828			205,332			210,477
Labor and benefits		141,148			143,973			158,133
Operating expenses		104,030			105,809			104,681
General and administrative expenses		43,284			38,746			40,006
Pension settlement expense (Note 11)		—			—			2,204
Restructuring expense (Note 9)		—			—			2,627
Gain on litigation settlement (Note 19)		—			—			(3,644		)
Write-downs of property and equipment (Note 5)		719			2,478			91
Depreciation and amortization		22,913			23,435			22,592
Gain on franchise sales of restaurant operations and properties		(3,927		)	(2,658		)	(1,302		)
Loss on disposals of other property and equipment, net		901			1,030			213
OPERATING INCOME		21,559			13,202			21,521
OTHER EXPENSES (INCOME):
Interest expense, net of capitalized interest of $103, $25 and $61 and interest income of $1,097, $682 and $702 for the years ended December 31, 2006, January 1, 2006 and January 2, 2005, respectively		20,491			20,924			22,295
Other (income) expense		(334		)	(130		)	9,235
INCOME (LOSS) BEFORE BENEFIT FROM PROVISION FOR INCOME TAXES		1,402			(7,592		)	(10,009		)
Benefit from (provision for)income taxes		83			(20,002		)	7,145
INCOME (LOSS) FROM CONTINUING OPERATIONS		1,485			(27,594		)	(2,864		)
Income (loss) from discontinued operations, net of income tax effect of ($538), ($232) and $385 for the years ended December 31, 2006, January 1, 2006 and January 2, 2005, respectively.		3,461			335			(553		)
NET INCOME (LOSS)		$	4,946		$	(27,259	)	$	(3,417	)
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations		$	0.19		$	(3.53	)	$	(0.38	)
Income (loss) from discontinued operations		0.44			0.04			(0.07		)
Net income (loss)		$	0.63		$	(3.49	)	$	(0.45	)
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations		$	0.18		$	(3.53	)	$	(0.38	)
Income (loss) from discontinued operations		0.43			0.04			(0.07		)
Net income (loss)		$	0.61		$	(3.49	)	$	(0.45	)
WEIGHTED AVERAGE SHARES:
Basic		7,939			7,802			7,637
Diluted		8,084			7,802			7,637

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

F-4

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(In thousands, except share data)

								Accumulated
					Additional			Other
	Common Stock				Paid-In			Comprehensive				Accumulated
	Shares	Amount			Capital			(Loss) Income				Deficit				Total
BALANCE, DECEMBER 28, 2003.	7,489,478		$	75		$	140,826		$	(19,922	)		$	(224,131	)	$	(103,152	)
Comprehensive (loss) income:
Net loss	—		—			—			—				(3,417		)	(3,417		)
Minimum pension liability (net of income tax benefit of $540)	—		—			—			(777		)		—			(777		)
Net unrealized gains on marketable securities (net of income tax expense of $20)	—		—			—			29				—			29
Total comprehensive loss	—		—			—			(748		)		(3,417		)	(4,165		)
Stock options exercised	223,801		2			976			—				—			978
Income tax benefit of stock options exercised	—		—			818			—				—			818
Stock compensation expense	—		—			495			—				—			495
BALANCE, JANUARY 2, 2005	7,713,279		$	77		$	143,115		$	(20,670	)		$	(227,548	)	$	(105,026	)
Comprehensive loss:
Net loss	—		—			—			—				(27,259		)	(27,259		)
Minimum pension liability (net of income tax benefit of $4,545)	—		—			—			(6,541		)		—			(6,541		)
Deferred tax valuation allowance	—		—			—			(4,545		)		(4,545		)
Net unrealized gains on marketable securities (net of income tax expense of $20)	—		—			—			(29		)		—			(29		)
Total comprehensive loss	—		—			—			(11,115		)		(27,259		)	(38,374		)
Stock options exercised	185,312		2			1,035			—				—			1,037
Income tax benefit of stock options exercised	—		—			450			—				—			450
Stock compensation expense	—		—			75			—				—			75
BALANCE, JANUARY 1, 2006	7,898,591		$	79		$	144,675		$	(31,785	)		$	(254,807	)	$	(141,838	)
Comprehensive income:
Net income	—		—			—			—				4,946			4,946
Defined benefit plan:
Net actuarial gain (Note 11)
(net of income tax benefit of $3,283)	—		—			—			4,724				—			4,724
Deferred tax valuation allowance	—		—			—			3,283				—			3,283
Total comprehensive income	—		—			—			8,007				4,946			12,953

Adjustment to initially apply SFAS No. 158 (net of income tax benefit of $108)	—		—			—			156				—			156
Deferred tax valuation allowance	—		—			—			108				—			108

Stock options exercised	218,644		2			1,141			—				—			1,143
Income tax benefit of stock options exercised	—		—			145			—				—			145
Stock compensation expense	—		—			437			—				—			437
BALANCE, DECEMBER 31, 2006	8,117,235		$	81		$	146,398		$	(23,514	)		$	(249,861	)	$	(126,896	)

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

F-5

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For the Years Ended
	December 31,				January 1,				January 2,
	2006				2006				2005
									(53 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	4,946			$	(27,259	)	$	(3,417	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Stock compensation expense		437				75			495
Depreciation and amortization		22,913				23,435			22,592
Non-cash (income) loss from discontinued operations		(4,359		)		(1,560		)	639
Write-offs of deferred financing costs		—				—			2,445
Write-downs of property and equipment		719				2,478			91
Deferred income tax (benefit) expense		(928		)		17,849			(7,383		)
Tax benefit from exercise of stock options		(145		)		(450		)	(818		)
Gain on disposals of property and equipment, net		(2,828		)		(1,616		)	(1,107		)
Pension settlement expense		—				—			2,204
Changes in operating assets and liabilities:
Accounts receivable		(678		)		(309		)	(64		)
Inventories		(1,284		)		1,770			(1,876		)
Other assets		4,039				(1,428		)	(3,000		)
Accounts payable		(2,721		)		3,432			(939		)
Accrued expenses and other long-term liabilities		3,746				(2,422		)	(3,253		)
Contribution to defined benefit pension plan		(2,150		)		—			—
NET CASH PROVIDED BY OPERATING ACTIVITIES		21,707				13,995			6,609
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(21,670		)		(16,902		)	(19,734		)
Proceeds from sales of property and equipment		13,360				8,245			6,035
Purchases of marketable securities		—				(665		)	(1,130		)
Proceeds from sales of marketable securities		—				1,643			152
NET CASH USED IN INVESTING ACTIVITIES		(8,310		)		(7,679		)	(14,677		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of New Senior Notes		—				—			175,000
Proceeds from borrowings under revolving credit facility		8,000				16,250			26,250
Proceeds from issuance of mortgages		—				9,615			—
Repayments of debt		(10,107		)		(30,521		)	(199,338		)
Payments of deferred financing costs		(675		)		(429		)	(6,650		)
Repayments of capital lease and finance obligations		(1,423		)		(1,526		)	(1,216		)
Stock options exercised		1,143				1,037			978
Tax benefit from exercise of stock options		145				450			818
NET CASH USED IN FINANCING ACTIVITIES		(2,917		)		(5,124		)	(4,158		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		10,480				1,192			(12,226		)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.		14,597				13,405			25,631
CASH AND CASH EQUIVALENTS, END OF YEAR.		$	25,077			$	14,597		$	13,405
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest		$	20,138			$	20,169		$	21,953
Income taxes		60				691			70
Capital lease obligations incurred		54				256			3,445
Capital lease obligations terminated		—				51			—

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

F-6

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS

As of December 31, 2006, Friendly’s operated 316 full-service restaurants and franchised 198 full-service restaurants and seven non-traditional units. The Company manufactures and distributes a full line of premium ice cream dessert products. These products are distributed to Friendly’s restaurants, supermarkets and other retail locations in 12 states. The restaurants offer a wide variety of breakfast, lunch and dinner menu items as well as premium ice cream dessert products. For the years ended December 31, 2006, January 1, 2006 and January 2, 2005, restaurant sales were approximately 75%, 75% and 78%, respectively, of the Company’s total revenues. As of December 31, 2006, January 1, 2006 and January 2, 2005, approximately 94%, 97% and 96%, respectively, of the Company-operated restaurants were located in the Northeast United States.

References herein to “Friendly’s” or the “Company” refer to Friendly Ice Cream Corporation, its predecessor and its consolidated subsidiaries; references herein to “FICC” refer to Friendly Ice Cream Corporation and not its subsidiaries; and as used herein, “Northeast” refers to the Company’s core markets, which include Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont.

Following is a summary of Company-operated and franchised units:

	For the Years Ended
	December 31,			January 1,			January 2,
	2006			2006			2005
Company Units:
Beginning of year		314			347			355
Openings		2			2			4
Acquired from franchisees		11			—			—
Acquired by franchisees		(6	)		(15	)		(27	)
Closings		(5	)		(20	)		(5	)
End of year		316			314			327
Franchised Units:
Beginning of year		213			195			163
Openings		4			6			8
Acquired by franchisees		6			15			27
Acquired from franchisees		(11	)		—			—
Closings		(7	)		(3	)		(3	)
End of year		205			213			195

2. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—

The consolidated financial statements include the accounts of FICC and its wholly owned subsidiaries after elimination of intercompany accounts and transactions.

Reclassifications—

Certain prior year amounts have been reclassified on the statement of cash flows related to the tax benefit from the exercise of stock options to conform with current year presentation.

Fiscal Year—

Friendly’s fiscal year ends on the last Sunday in December, unless that day is earlier than December 27, in which case the fiscal year ends on the following Sunday. The fiscal year ended January 2,

F-7

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

2005 included 53 weeks. All other years presented included 52 weeks. The additional week in 2004 contributed $10,689,000 in total revenues.

Use of Estimates in the Preparation of Financial Statements—

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 reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The critical accounting policies and most significant estimates and assumptions relate to revenue recognition, insurance reserves, recoverability of accounts receivable and notes receivable, pension and post-retirement medical and life insurance benefits expense, asset impairment analysis, income tax valuation allowances and tax contingency reserves. Actual amounts could differ significantly from the estimates.

Revenue Recognition—

The Company’s revenues are derived primarily from the operation of full-service restaurants, the distribution and sale of premium ice cream desserts through retail and institutional locations and franchising. The Company recognizes restaurant revenue upon receipt of payment from the customer and foodservice revenue (product sales to franchisees and retail customers), net of discounts and allowances, upon delivery of product. Reserves for discounts and allowances from retail sales (trade promotions) are estimated and accrued when revenue is recorded based on promotional plans prepared by the Company’s retail sales force. Due to the high volume of trade promotion activity and the difficulty of coordinating trade promotion pricing with its customers, differences between the Company’s accrual and the subsequent settlement amount occur frequently. To address the financial impact of these differences, the Company’s estimating methodology takes these smaller differences into account. The Company believes its methodology has been reasonably reliable in recording trade promotion accruals. The accrual for future trade promotion settlements as of December 31, 2006 and January 1, 2006 and was $5,373,000 and $5,127,000, respectively. A variation of five percent in the 2006 accrual would change retail sales by approximately $269,000. Franchise royalty income, generally calculated as 4% of net sales of franchisees, is recorded monthly based upon the actual sales reported by each franchisee for the month just completed. Franchise fees are recorded as revenue upon completion of all significant services, generally upon opening of the restaurant.

Shipping and Handling Costs—

Costs related to shipping and handling are included in cost of sales in the accompanying consolidated statements of operations for all periods presented.

Insurance Reserves—

The Company is self-insured through retentions or deductibles for the majority of its workers’ compensation, automobile, general liability, employer’s liability, product liability and group health insurance programs. Self-insurance amounts vary up to $500,000 per occurrence. Insurance with third parties, some of which is then reinsured through Restaurant Insurance Corporation (“RIC”), the

F-8

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Company’s wholly owned subsidiary, is in place for claims in excess of these self-insured amounts. RIC reinsures 100% of the risk from $500,000 to $1,000,000 per occurrence through September 2, 2000 for FICC’s workers’ compensation, general liability, employer’s liability and product liability insurance. Subsequent to September 2, 2000, the Company discontinued its use of RIC as a captive insurer for new claims. FICC’s and RIC’s liabilities for estimated incurred losses are actuarially determined and recorded in the accompanying consolidated financial statements on an undiscounted basis. Actual incurred losses may vary from the estimated incurred losses and could have a material effect on the Company’s insurance expense.

Accounts Receivable and Allowance for Doubtful Accounts—

At December 31, 2006 and January 1, 2006, accounts receivable of $11,435,000 and $10,757,000 were net of allowances for doubtful accounts totaling $1,310,000 and $758,000, respectively. Accounts receivable consists primarily of amounts due from the sale of products to franchisees and supermarkets. Accounts receivable also includes amounts related to franchise royalties, rents and other miscellaneous items.

The Company recognizes allowances for doubtful accounts to ensure receivables are not overstated due to uncollectibility. Bad debt reserves are maintained for customers in the aggregate based on a variety of factors, including the length of time receivables are past due, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances change, estimates of the recoverability of receivables would be further adjusted.

Pension and Post-Retirement Medical and Life Insurance Benefits—

The determination of the Company’s obligation and expense for pension and post-retirement medical and life insurance benefits is dependent upon the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among other things, the discount rate, expected long-term rate of return on plan assets and rates of increase in health care costs. In accordance with accounting principles generally accepted in the United States, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in such future periods. Significant differences in actual experience or significant changes in the assumptions may materially affect the future pension and post-retirement medical and life insurance obligations and expense.

Cash and Cash Equivalents—

The Company considers all investments with an original maturity of three months or less when purchased to be cash equivalents.

Restricted Cash—

RIC is required to hold assets in trust whose value is at least equal to certain of RIC’s outstanding estimated insurance claim liabilities. Accordingly, as of December 31, 2006 and January 1, 2006, cash of $517,000 and $899,000, respectively, was restricted.

F-9

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Pursuant to the terms of the Mortgage Financing, the Company may sell properties securing its obligations provided that other properties are substituted in place of the sold properties. The substituted properties must meet certain requirements under the terms of the Mortgage Financing. In August 2005, proceeds of $415,000 and $2,650,000 were received in connection with the sale of two mortgaged properties, of which $400,000 and $1,250,000 of such amounts was placed in escrow pending the inclusion of a substitute property. As of January 1, 2006, these balances were held as collateral and were included in restricted cash on the accompanying consolidated balance sheet as of January 1, 2006. In connection with the Variable Refinancing, the mortgage on one of these properties was released and the remaining $400,000 related to the sale of this property was released from escrow during the first quarter of 2006. A substitute property for the second property was obtained during the second quarter of 2006 in compliance with the substitution agreement. On June 15, 2006, the remaining $1,250,000 was released from escrow.

Inventories—

Inventories are stated at the lower of first-in, first-out cost or market and consisted of the following at December 31, 2006 and January 1, 2006 (in thousands):

	December 31,			January 1,
	2006			2006
Raw materials		$	1,640		$	1,657
Goods in process		158			106
Finished goods		15,261			14,012
Total		$	17,059		$	15,775

Long-Lived Assets—

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews its trademarks and service marks, which were assigned to the Company by Hershey in September 2002, for impairment on a quarterly basis. The Company recognizes impairment has occurred when the carrying value of these marks exceeds the estimated future undiscounted cash flows of the trademarked products. Additionally, the Company reviews long-lived assets related to each restaurant to be held and used in the business quarterly for impairment, or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable. The Company evaluates restaurants using a “two-year history of cash flow” as the primary indicator of potential impairment. Based on the best information available, the Company writes down an impaired restaurant to its estimated fair market value, which becomes its new cost basis. Estimated fair market value is based on the Company’s experience selling similar properties and local market conditions, less costs to sell for properties to be disposed of. In addition, restaurants scheduled for closing are reviewed for impairment and depreciable lives are adjusted. The impairment evaluation is based on the estimated cash flows from continuing use through the expected disposal date and the expected terminal value. SFAS No. 144 requires a long-lived asset to be disposed of other than by sale to be classified as held and used until it is disposed of.

Store closure costs include costs of disposing of the assets as well as other facility-related expenses from previously closed stores. These store closure costs are expensed as incurred. Additionally, at the date

F-10

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

the closure occurs, the Company records a liability for the amount of any remaining operating lease obligations subsequent to the expected closure date, net of estimated sublease income, if any.

SFAS No. 144 requires the results of operations of a component of an entity that is classified as held for sale or that has been disposed of to be reported as discontinued operations in the statement of operations if certain conditions are met. These conditions include commitment to a plan of disposal after the effective date of this statement, elimination of the operations and cash flows of the entity component from the ongoing operations of the Company and no significant continuing involvement in the operations of the entity component after the disposal transaction.

Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, closure costs and sublease income. Accordingly, actual results could vary significantly from estimates.

Property and Equipment—

Property and equipment are carried at cost. Depreciation of property and equipment is computed using the straight-line method over the following estimated useful lives:

Buildings—30 years
Building improvements and leasehold improvements—lesser of lease term or 20 years
Equipment—3 to 10 years

At December 31, 2006 and January 1, 2006, property and equipment included (in thousands):

	December 31,				January 1,
	2006				2006
Land		$	24,796		$	25,960
Buildings and improvements		97,558			98,015
Leasehold improvements		41,405			38,908
Assets under capital leases		12,190			12,272
Equipment		212,801			227,749
Construction in progress		4,982			2,326
Property and equipment		393,732			405,230
Less:
accumulated depreciation and amortization property and equipment		(246,701		)	(253,098		)
accumulated depreciation and amortization assets under capital leases		(9,606		)	(8,618		)
Property and equipment, net		$	137,425		$	143,514

Depreciation expense was $20,958,000, $21,576,000 and $20,780,000 for the years ended December 31, 2006, January 1, 2006 and January 2, 2005, respectively. Additionally, depreciation of $0, $555,000 and $639,000 was included in discontinued operations for the years ended December 31, 2006, January 1, 2006 and January 2, 2005, respectively.

F-11

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Major renewals and betterments are capitalized. Replacements and maintenance and repairs which do not extend the lives of the assets are charged to operations as incurred.

Other Assets—

Other assets included notes receivable of $4,688,000 and $4,401,000, which were net of allowances for doubtful accounts totaling $48,000 and $263,000 as of December 31, 2006 and January 1, 2006, respectively. Also included in other assets as of December 31, 2006 and January 1, 2006 were payments made to fronting insurance carriers of $1,439,000 and $1,556,000, respectively, to establish loss escrow funds.

Other Accrued Expense—

Other accrued expenses consisted of the following at December 31, 2006 and January 1, 2006 (in thousands):

	December 31,			January 1,
	2006			2006
Accrued rent		$	5,178		$	4,739
Gift cards outstanding		4,317			4,280
Accrued bonus		3,635			58
Accrued meals and other taxes		2,241			2,219
Income taxes payable		1,962			2,761
Unearned revenues		1,153			1,205
Accrued advertising		1,150			1,211
Accrued construction costs		918			1,335
Current portion of deferred gains (Note 7)		638			638
All other		1,283			1,420
Total		$	22,475		$	19,866

Income Taxes—

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The Company records deferred tax assets to the extent it believes there will be sufficient future taxable income to utilize those assets prior to their expiration. To the extent deferred tax assets may be unable to be utilized, the Company records a valuation allowance against the potentially unrealizable amount and records a charge against earnings. The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in several different tax jurisdictions. The Company is periodically reviewed by tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions. In evaluating the exposure associated with various filing positions, the Company records estimated reserves for probable exposures.

F-12

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Due to ever-changing tax laws and income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future. The Company must also make estimates about the sufficiency of taxable income in future periods to offset any deductions related to deferred tax assets currently recorded. Accordingly, the Company believes estimates related to income taxes are critical.

During the fourth quarter of 2005, the Company entered a three-year cumulative loss position and revised its projections of the amount and timing of profitability in future periods. As a result, the Company increased the valuation allowance during the fourth quarter of 2005 by $26,729,000 ($22,184,000 to income tax expense and $4,545,000 to stockholders’ deficit) to reduce the carrying value of deferred tax assets to zero.

As of December 31, 2006 the Company remains in a three-year cumulative loss position and expects to record valuation allowances on future tax benefits until it can sustain an appropriate level of profitability. However, the Company has incurred approximately $1,093,000 of federal tax liabilities for 2005 and 2006 combined. Approximately $928,000 of the $1,093,000 would be available for refund if 2007 resulted in a loss for income tax purposes. As a result, the valuation allowances as of December 31, 2006 of $27,429,000 will reduce the carrying value of net deferred tax assets to $928,000. Should the Company’s future profitability provide sufficient evidence, in accordance with SFAS No. 109, to support the ultimate realization of income tax benefits attributable to net operating loss (“NOL”) and credit carryforwards and other deductible temporary differences, a reduction in the valuation allowance may be recorded and the carrying value of deferred tax assets may be restored, resulting in a non-cash credit to earnings.

Derivative Instruments and Hedging Agreements—

The Company enters into commodity option and/or futures contracts from time to time to manage dairy cost pressures. On September 19, 2005, the Chicago Mercantile Exchange launched the first electronically traded, cash-settled butter futures contract. This new futures contract is designed to meet the needs of food and dairy companies that have exposure to butterfat price risk but do not want to expose themselves to the possibility of being compelled to take physical delivery of butter. The size of the contract is 20,000 pounds of AA butter, versus the traditional butter futures contract, which is 40,000 pounds. The contract is cash settled based upon the U.S. Department of Agriculture’s monthly weighted average price for butter in the United States. With this new type of futures contract, there is no risk of delivery of butter; therefore it offers the Company the ability to hedge the price risk of cream (on a butter basis), without having to take delivery of commodity butter. The Company has evaluated this new hedging instrument and believes it is an attractive way to hedge the price risk related to cream.

The Company’s commodity option contracts and the cash-settled butter futures contracts do not meet hedge accounting criteria as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related amendment, SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” and, accordingly, are marked to market each period with the resulting gains or losses recognized in cost of sales. During 2006, 2005 and 2004, (losses) gains of approximately ($497,000), ($238,000) and $623,000 were included in cost of sales related to these contracts,

F-13

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

respectively. The fair value of the contracts outstanding at December 31, 2006 and January 1, 2006 was $35,000 and $71,000, respectively.

At December 31, 2006, the Company held 70 contracts, four of them for December 2006 and the remainder spread over the first nine months of 2007. These contracts correspond to approximately 20% of the Company’s anticipated cream purchases for the periods represented.

Advertising—

The Company expenses advertising costs as incurred. For the years ended December 31, 2006, January 1, 2006 and January 2, 2005, advertising expenses were $16,801,000, $18,694,000 and $20,734,000, respectively.

Leases and Deferred Straight-Line Rent Payable—

The Company leases many of its restaurant properties. Leases are accounted for under the provisions of SFAS No. 13, “Accounting for Leases,” as amended, which requires that leases be evaluated and classified as operating or capital leases for financial reporting purposes. The lease term used for lease evaluation includes option periods only in instances in which the exercise of the option period can be reasonably assured and failure to exercise such options would result in an economic penalty. Leasehold improvements that are acquired subsequent to the inception of a lease are amortized over the lesser of the useful life of the asset or a term that includes option periods that are reasonably assured at the date of the purchase.

For leases that contain rent escalations, the Company records the total rent payable during the lease term, as determined above, on a straight-line basis over the term of the lease and records the difference between the rents paid and the straight-line rent as a deferred straight-line rent payable.

Certain leases contain provisions that require additional rental payments based upon restaurant sales volume (“contingent rentals”). Contingent rentals are accrued each period as the liabilities are incurred utilizing prorated periodic sales targets.

Lease Guarantees and Contingencies—

Primarily as a result of the Company’s strategy to sell Company-operated restaurants to franchisees, the Company remains liable for certain lease assignments and guarantees. These leases have varying terms, the latest of which expires in 2020. As of December 31, 2006, the potential amount of undiscounted payments the Company could be required to make in the event of non-payment by the primary lessees was $6,648,000. The present value of these potential payments discounted at the Company’s pre-tax cost of debt at December 31, 2006 was $5,041,000. The Company generally has cross-default provisions with franchisees that would put them in default of their franchise agreement in the event of non-payment under the lease. The Company believes these cross-default provisions significantly reduce the risk that the Company will be required to make payments under these leases and, historically, the Company had not been required to make such payments. Accordingly, no liability has been recorded for exposure under such leases at December 31, 2006 and January 1, 2006.

F-14

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Net Income (Loss) Per Share—

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents are dilutive stock options and warrants that are assumed exercised for calculation purposes. The number of common stock options which could dilute basic earnings per share in the future, that were not included in the computation of diluted income (loss) per share because to do so would have been antidilutive, was 151,000, 273,000 and 320,000 for the years ended December 31, 2006, January 1, 2006 and January 2, 2005, respectively.

Presented below is the reconciliation between basic and diluted weighted average shares (in thousands):

	For the Years Ended
	December 31,		January 1,		January 2,
	2006		2006		2005
Basic weighted average number of common shares outstanding during the year		7,939		7,802		7,637
Adjustments:
Assumed exercise of stock options and vesting of restricted stock units		145		—		—
Diluted weighted average number of common shares outstanding during the year		8,084		7,802		7,637

Stock-Based Compensation—

Prior to January 2, 2006, the Company accounted for stock-based compensation for employees under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company had adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and the disclosures required by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” In accordance with APB Opinion No. 25, the Company generally recognized no stock-based compensation cost, as all options granted during that period had an exercise price equal to the market value of the stock on the date of grant. Stock-based compensation cost of $68,000 and $238,000 related to modified option awards was included in net loss for the years ended January 1, 2006 and January 2, 2005, respectively, for the Company’s 1997 Stock Option Plan and the Company’s 2003 Equity Incentive Plan.

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R supersedes APB Opinion No. 25 and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative.

F-15

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

On January 2, 2006 (the first day of its 2006 fiscal year), the Company adopted SFAS No. 123R using the modified prospective method as permitted under SFAS No. 123R. Under this transition method, compensation cost recognized for the year ended December 31, 2006 included: (a) compensation cost for all share-based payments granted prior to but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. In accordance with the modified prospective method of adoption, the Company’s results of operations and financial position for prior periods have not been restated.

Recently Issued Accounting Pronouncements—

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The adoption of FIN 48 is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

3. STOCK BASED COMPENSATION

In 1997, the Board of Directors adopted a restricted stock plan (the “Restricted Stock Plan”), pursuant to which 371,285 shares were authorized for issuance. The Restricted Stock Plan provides for the award of common stock, the vesting of which is subject to conditions and limitations established by the Board of Directors. Such conditions may include continued employment with the Company or the achievement of performance measures. Upon the award of common stock, the participant has the rights of a stockholder, including but not limited to the right to vote such stock and the right to receive any dividends paid on such stock. The Board of Directors, in its sole discretion, may designate employees and persons providing material services to the Company as eligible for participation in the Restricted Stock Plan. In connection with the approval of the 2003 Incentive Plan, discussed elsewhere herein, the shares authorized for issuance under the Restricted Stock Plan were reduced by 156,217 shares of stock.

The issued shares vested on a straight-line basis over eight years or on an accelerated basis if certain performance criteria were met. The Company recorded the fair value of the shares issued at the issuance dates as compensation expense over the estimated vesting periods. During the year ended January 2, 2005, the Company recorded stock compensation expense of $257,000, which was included in general and administrative expenses in the accompanying consolidated statements of operations.

Equity Compensation Plans—

The Company currently grants stock awards under the following equity compensation plans:

1997 Stock Option Plan (“1997 Plan”)— The 1997 Plan was adopted by the Company’s Board of Directors and stockholders in November 1997 and was subsequently amended on March 27, 2000 and

F-16

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. STOCK BASED COMPENSATION (Continued)

October 24, 2001. Under the 1997 Plan, the Company’s Board of Directors may grant options to purchase up to 1,034,970 shares of common stock to employees, executive officers and directors. The 1997 Plan provides for the issuance of nonqualified stock options and incentive stock options (which are intended to satisfy the requirements of Section 422 of the Internal Revenue Code) and stock appreciation rights (“SARs”). The Compensation Committee of the Board of Directors determines the employees who will receive awards under the 1997 Plan and the terms of such awards. The exercise price of a stock option or SAR granted or awarded under the 1997 Plan may not be less than the fair market value of one share of common stock on the date the stock option or SAR is granted.

The 2003 Equity Incentive Plan (the “2003 Incentive Plan”)—On April 9, 2003, the Board of Directors adopted an equity incentive plan, which was approved by shareholders on May 14, 2003. On May 10, 2006, the shareholders approved an amendment to the 2003 Incentive Plan to increase the number of shares of common stock reserved for issuance under the 2003 Incentive Plan from 307,000 to 607,000 shares. The 2003 Incentive Plan provides for the issuance of nonqualified stock options and incentive stock options (which are intended to satisfy the requirements of Section 422 of the Internal Revenue Code), SARs, bonus stock, stock units, performance shares, performance units, restricted stock and restricted stock units. The Compensation Committee of the Board of Directors determines the employees who will receive awards under the 2003 Incentive Plan and the terms of such awards. The exercise price of a stock option or SAR granted or awarded under the 2003 Incentive Plan may not be less than the fair market value of one share of common stock on the date the stock option or SAR is granted.

Outstanding options issued prior to December 20, 2004 are fully vested. Options issued on and subsequent to December 20, 2004 generally vest over three years. Options issued prior to July 24, 2002 expire 10 years from the date of grant. Options issued subsequent to that date have a five year expiration date.

As of December 31, 2006, no SARs had been issued.

Grant-Date Fair Value—

The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair value of options granted during the years ended December 31, 2006, January 1, 2006 and January 2, 2005 were calculated based on the following:

	2006	2005	2004
Options granted	168,409	142,453	160,819
Weighted-average exercise price	$8.44	$9.02	$11.43
Weighted-average grant date fair value	$3.96	$4.28 - $4.70	$5.03 - $7.72
Estimated Weighted Average Assumptions:
Risk free interest rate	4.52%-4.68%	3.58%-4.50%	3.03%-3.87%
Expected life (in years)	4	4-5	4-5
Expected volatility	52.92-54.86%	55.98%-58.16%	71.23%-73.59%
Expected dividend yield	0.00%	0.00%	0.00	%

F-17

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. STOCK BASED COMPENSATION (Continued)

Risk-free interest rate—the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption is used as the risk-free interest rate.

Expected life—the Company uses historical employee exercise and option expiration data to estimate the expected life assumption for the Black-Scholes grant-date valuation. The Company believes that this historical data is currently the best estimate of the expected life of a new option.

Expected volatility—the Company is responsible for estimating volatility and has used historical volatility to estimate the grant-date fair value of stock options. Management considered the guidance in SFAS No. 123R and believes that the historical estimated volatility is materially indicative of expectations about future volatility.

Expected dividend yield—the Company has not paid any dividends in the last five years and currently intends to retain any earnings to finance future growth and, therefore, does not anticipate paying any cash dividends on its common stock in the foreseeable future.

Expense—

The Company used the straight-line attribution method to recognize expense for all options granted. Stock-based compensation is included in general and administrative expenses in the accompanying consolidated statements of operations.

The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. In September 2006, John Cutter, the Company’s former President and Chief Executive Officer, resigned. As of December 31, 2006, the Company adjusted its stock compensation expense to reflect his forfeitures. The Company will apply an annual forfeiture rate to all options outstanding as of December 31, 2006 and future options granted based on an analysis of its historical forfeitures. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

The adoption of SFAS No. 123R on January 2, 2006 resulted in lower income from continuing operations, lower operating income before tax and lower net income of $437,000 for the year ended December 31, 2006. Additionally, the adoption of SFAS No. 123R on January 2, 2006 resulted in lower basic and diluted net income per share of $0.06 and $0.05, respectively. The total income tax benefit recognized in the accompanying consolidated statement of operations for the year ended December 31, 2006 for share-based compensation arrangements was $2,000.

F-18

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. STOCK BASED COMPENSATION (Continued)

The following table details the effect on net loss and net loss per share had stock-based compensation expense been recorded in fiscal 2005 and fiscal 2004 based on the fair-value method under SFAS No. 123 (in thousands, except per share data). The reported and pro forma net income and net income per share for the year ended December 31, 2006 are the same since stock-based compensation expense was calculated under the provisions of SFAS No. 123R.

	For the Years Ended
	January 1,			January 2,
	2006			2005
Net loss as reported	$	(27,259	)		$	(3,417	)
Add stock-based compensation expense included in reported net loss, net of related income tax effect of $0 and $97, respectively	75				140
Less stock-based compensation expense determined under fair value method for all stock options, net of related income tax benefit of $0 and $752, respectively(a)	(172		)		(1,082		)
Pro forma net loss	$	(27,356	)		$	(4,359	)
Basic and diluted net loss per share, as reported.	$	(3.49	)		$	(0.45	)
Basic and diluted net loss per share, pro forma	$	(3.51	)		$	(0.57	)

(a) On December 20, 2004, the Company’s Board of Directors approved the vesting of all outstanding and unvested options for the Company’s Stock Option Plan and the Company’s 2003 Incentive Plan. This action was taken to reduce, or eliminate to the extent permitted, the transition expense related to outstanding stock option awards under SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). The 259,850 options that were vested included 145,239 options with exercise prices greater than the Company’s closing stock price on the modification date. Under the accounting guidance of APB Opinion No. 25, the accelerated vesting resulted in stock-based compensation cost of $9,400 (net of related income tax benefit of $6,600), which was included in net loss for the year ended January 2, 2005. Additionally, the effect of the accelerated vesting in the Company’s pro-forma disclosure was incremental stock-based compensation of approximately $666,000 (net of related income tax benefit of $463,000). This stock-based compensation expense would otherwise have been recognized in accordance with SFAS No. 123R in the Company’s consolidated statements of operations over the next two fiscal years.

F-19

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. STOCK BASED COMPENSATION (Continued)

Option Activity—

A summary of the activity under the Company’s equity compensation plans as of December 31, 2006 and changes during the three years ended December 31, 2006 is presented below:

				Weighted-
				Average
				Remaining		Weighted-			Aggregate
	Options			Contractual		Average			Intrinsic
	Outstanding			Life in Years		Exercise Price			Value
Options outstanding at December 28, 2003		809,075					$	5.60
Granted		160,819					$	11.43
Cancelled		(9,730	)				$	11.84
Forfeited		(50,697	)				$	8.48
Exercised		(223,801	)				$	4.37
Options outstanding at January 2, 2005		685,666					$	7.06
Granted		142,453					$	9.02
Cancelled		(10,893	)				$	13.01
Forfeited		(10,464	)				$	8.86
Exercised		(185,312	)				$	5.59
Options outstanding at January 1, 2006		621,450					$	7.82
Granted		168,409					$	8.44
Cancelled		(37,021	)				$	12.33
Forfeited		(81,914	)				$	8.38
Exercised		(218,644	)				$	5.23
Options outstanding at December 31, 2006		452,280			3.33		$	8.83	$	2,094,153
Options exercisable at December 31, 2006		277,788			2.91		$	8.87	$	1,133,873

A summary of the status of the Company’s non-vested shares as of December 31, 2006, and changes during the year ended December 31, 2006, is presented below:

				Weighted-
				Average
	Options			Grant Date
	Outstanding			Fair Value
Non-vested options at January 1, 2006		131,989			$	4.68
Granted		168,409			$	3.96
Forfeited		(81,914	)		$	4.15
Vested		(43,992	)		$	4.68
Nonvested options at December 31, 2006		174,492			$	4.01

During the years ended December 31, 2006, January 1, 2006 and January 2, 2005, the total intrinsic value of options exercised (i.e., the difference between the market price at exercise and the price paid by the employee to exercise the options) was $1,100,000, $1,097,000 and $1,989,000, respectively and the total amount of cash received from exercise of stock options was $1,143,000, $1,037,000 and $978,000, respectively.

F-20

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. STOCK BASED COMPENSATION (Continued)

As of December 31, 2006, there was $547,000 of unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted-average period of 2.16 years.

The total fair value of shares vested during the years ended December 31, 2006, January 1, 2006 and January 2, 2005 was $206,000, $0 and $1,519,000, respectively.

Pursuant to a stockholder rights plan (the “Stockholder Rights Plan”) that FICC adopted in 1997, the Board of Directors declared a dividend distribution of one purchase right (a “Right”) for each outstanding share of common stock. The Stockholder Rights Plan provides, in substance, that should any person or group (other than certain management and affiliates) acquire 15% or more of FICC’s common stock, each Right, other than Rights held by the acquiring person or group, would entitle its holder to purchase a specified number of shares of common stock for 50% of their then current market value. Until a 15% acquisition has occurred, the Rights may be redeemed by FICC at any time prior to the termination of the Stockholder Rights Plan.

Restricted Stock Unit Activity—

On December 2, 2005, 30,000 restricted stock units were issued to directors with a weighted average fair value of $8.90 at grant date. On November 1, 2006, 30,000 restricted stock units were issued to directors with a weighted average fair value of $10.61 at grant date. The restricted stock units were issued pursuant to and subject to the terms of the Company’s 2003 Incentive Plan. Subject to the terms of the 2003 Incentive Plan, each restricted stock unit provides the holder with the right to receive one share of Common Stock of the Company when the restrictions lapse or vest. The restricted stock units granted to the directors vest three years after the date of grant if the recipient is a member of the Company’s Board of Directors on such date, subject to accelerated vesting in the event of a change in control or the director’s death, disability or retirement.

During the years ended December 31, 2006 and January 1, 2006, stock-based compensation cost of $106,400 and $7,400, respectively, was recorded related to these units. As of December 31, 2006, there was $471,500 of total unrecognized compensation cost related to unvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 2.38 years.

Pursuant to a long-term incentive plan for fiscal 2006 approved by the Compensation Committee of the Board of Directors under the Company’s 2003 Incentive Plan, the Compensation Committee established target EBITDA levels for the Company for fiscal 2006 and target awards for each officer named below based on a percentage (ranging from 50% to 100%) of each such officer’s base salary.

F-21

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. STOCK BASED COMPENSATION (Continued)

In August 2006, the Compensation Committee approved terms of awards under the long-term incentive for fiscal 2006 which provides that, if the Company meets or exceeds a threshold EBITDA for fiscal 2006, then the officer would be entitled to receive an award payable in shares of Common Stock of the Company. The award value is determined based on the Company’s actual EBITDA for fiscal 2006 compared to projected EBITDA for fiscal 2006 and the percentage (ranging from 50% to 150%) of the officer’s target award applicable to those results (the “2006 Award Value”). The following table sets forth the range of award values each officer was eligible to receive:

Name	Value of Award
John Cutter	$	174,267	To	$	522,801
Paul Hoagland	$	82,028	To	$	246,084
Gregory Pastore	$	34,438	To	$	103,314
Kenneth Green	$	39,698	To	$	119,093
Garrett Ulrich	$	39,865	To	$	119,595

During the year ended December 31, 2006, stock-based compensation of $98,000 was recorded related to the foregoing awards.

On February 28, 2007 the Compensation Committee determined that the Company exceeded the threshold EBITDA for fiscal 2006, and awarded shares of Common Stock under the Company’s 2003 Incentive Plan to each of the officers named below. The number of shares of Common Stock issued to each officer was determined by dividing the officer’s 2006 Award Value by 90% of the closing price of the Company’s Common Stock on the date of grant as reported on the American Stock Exchange. 25% of the shares of Common Stock issued to each officer are fully vested upon issuance. The remaining 75% of the shares of Common Stock will vest in three equal annual installments following issuance if the officer remains employed by the Company. The unvested shares will also fully vest upon a change in control, as provided in the 2003 Incentive Plan.

The following table sets forth each officer’s 2006 Award Value and the number of shares of Common Stock the officer received under the long-term incentive plan for fiscal 2006.

Name	Award Value			Number of Shares
Paul Hoagland		$	188,664		17,469
Gregory Pastore		$	79,207		7,334
Kenneth Green		$	91,304		8,454
Garrett Ulrich		$	91,690		8,490

John Cutter, the Company’s former President and Chief Executive Officer, resigned in September 2006 and did not receive any shares of Common Stock under the long-term incentive plan for fiscal 2006. Accordingly, no expense was recognized related to Mr. Cutter’s awards.

F-22

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. INTANGIBLE ASSETS AND DEFERRED COSTS

Intangible assets and deferred costs as of December 31, 2006 and January 1, 2006 were (in thousands):

	December 31,				January 1,
	2006				2006
1988 Non-Friendly Marks license agreement fee amortized over 40 years on a straight-line basis		$	18,650		$	18,650
Deferred financing costs amortized over the terms of the related loans on an effective yield basis		11,234			10,557
Other		1,103			1,103
Intangible assets and deferred costs		30,987			30,310
Less: accumulated amortization		(13,204		)	(11,247		)
Net		$	17,783		$	19,063

Amortization expense was $1,955,000, $1,859,000 and $1,812,000 for the years ended December 31, 2006, January 1, 2006 and January 2, 2005, respectively.

Future amortization expense related to these intangible assets and deferred costs as of December 31, 2006 was (in thousands):

Year	Amount
2007	$	1,769
2008	1,761
2009	1,751
2010	1,611
2011	1,436
Thereafter.	9,455
Total	$	17,783

Upon the sale of the Company by Hershey Foods Corporation (“Hershey”) in 1988, all of the trademarks and service marks used in the Company’s business at that time which did not contain the word “Friendly” (the “Non-Friendly Marks”) were licensed by Hershey to the Company. The Non-Friendly Marks license agreement fee was being amortized over the term of the agreement, which expired on September 2, 2028. In September 2002, Hershey assigned the Non-Friendly Marks to the Company. The Company will continue to amortize the Non-Friendly Marks license agreement fee over the original term of 40 years. The Company reviews the estimated future cash flows related to each trademarked product on a quarterly basis to determine whether any impairment has occurred. For the years ended December 31, 2006, January 1, 2006 and January 2, 2005, no impairments were recorded.

In February 2004, the Company announced a cash tender offer and consent solicitation for $175,977,000 of its then outstanding 10.5% senior notes. In connection with the tender offer, the Company wrote off unamortized deferred financing costs for the purchase of the 10.5% senior notes in March 2004 and the redemption of the remaining 10.5% senior notes in April 2004 of $1,788,000 and $657,000, respectively. The $2,445,000 was included in other (income) expense in the accompanying consolidated statement of operations for the year ended January 2, 2005. Additionally, the Company incurred $6,374,000 of costs associated with the issuance of new 8.375% senior notes and the amendment to the

F-23

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. INTANGIBLE ASSETS AND DEFERRED COSTS (Continued)

revolving credit facility, which were included in intangible assets and deferred costs in the accompanying consolidated balance sheets as of December 31, 2006 and January 1, 2006. These costs are being amortized over the terms of the 8.375% senior notes and the Credit Facility.

5. ASSET IMPAIRMENT AND DISCONTINUED OPERATIONS

During 2005, the Company disposed of five properties by sale and nine properties other than by sale, including lease terminations. During December 2005, the Company closed seven restaurants and committed to a plan to sell those seven restaurants as well as four restaurants that were closed in 2004. At January 1, 2006, these 11 properties met the criteria for “held for sale” as defined in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” During 2006, the Company sold eight of these 11 properties. Net proceeds from these transactions were $6,855,000. The Company recognized a net gain related to the sales of the assets of $4,359,000. At December 31, 2006, the remaining three properties and one property that closed in 2006 met the criteria for “held for sale” as defined in SFAS No. 144. The carrying values of these four properties of $896,000, and $933,000 as of December 31, 2006 and January 1, 2006, respectively, were reported as assets held for sale in the accompanying consolidated balance sheets. The carrying values of these properties were not adjusted since the carrying values were less than the estimated fair market values less costs to sell.

In accordance with SFAS No. 144, the results of operations of the eight properties that were disposed of during 2006 and the 14 properties that were disposed of during 2005, and any related net gain on the disposals, as well as the results of operations of three properties held for sale at December 31, 2006 were reported separately as discontinued operations in the accompanying consolidated statements of operations for all years presented. For the years ended December 31, 2006, January 1, 2006 and January 2, 2005, these discontinued results consisted of the following (in thousands):

	For the Years Ended
	December 31,				January 1,				January 2,
	2006				2006				2005
									(53 weeks)
Net sales		$	—			$	10,499			$	16,898
Operating loss		(360		)		(1,548		)		(938		)
Gain on disposals of property and equipment		4,359				2,115				—
Income tax (expense) benefit		(538		)		(232		)		385
Income (loss) from discontinued operations		$	3,461			$	335			$	(553	)

F-24

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. ASSET IMPAIRMENT AND DISCONTINUED OPERATIONS (Continued)

During 2006, the Company disposed of two properties by sale and two properties other than by sale, including lease terminations. Additionally, the Company closed one restaurant and committed to a plan to sell that restaurant. At December 31, 2006, this property met the criteria for “held for sale” as defined in SFAS No. 144. The results of operations and any related gain or loss associated with the disposition of these restaurants were not material and therefore were reported within continuing operations in the accompanying consolidated statements of operations for all years presented.

During 2004, the Company disposed of two properties by sale and one property other than by sale. The results of operations and any related gain or loss associated with the disposition of these restaurants were not material and therefore were reported within continuing operations in 2004.

The table below identifies the components of the “Loss on disposals of other property and equipment, net” as shown in the accompanying consolidated statements of operations (in thousands):

	For the Years Ended
	December 31,				January 1,			January 2,
	2006				2006			2005
Restaurant assets retired due to remodeling		$	863			$	225		$	195
Restaurant equipment assets retired due to replacement		285				200			442
Gain on property held for disposition		—				—			(782		)
(Gain) loss on property not held for disposition		(667		)		118			63
Loss on abandoned capital projects and architectural plans		234				108			—
Gain due to restaurant flood		(53		)		—			—
All other		239				379			295
Loss on disposals of other property and equipment, net		$	901			$	1,030		$	213

During 2006, the Company determined that the carrying values of three operating restaurant properties exceeded their estimated fair values less costs to sell and the carrying values were reduced by an aggregate of $719,000 accordingly.

During the year ended January 1, 2006, the Company determined that the carrying values of six restaurant properties and certain capital inventory used to replace restaurant equipment exceeded their estimated fair values less costs to sell. The carrying values were reduced by an aggregate of $2,478,000.

During the year ended January 2, 2005, the Company determined that the carrying value of a vacant restaurant land parcel and the carrying value of one restaurant property exceeded their estimated fair values less costs to sell. The carrying values were reduced by an aggregate of $91,000.

F-25

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DEBT

Debt at December 31, 2006 and January 1, 2006 consisted of the following (in thousands):

	December 31,				January 1,
	2006				2006
Senior Notes, 8.375%, due June 15, 2012		$	175,000		$	175,000
Revolving credit loans		—			—
Mortgage loans, due January 1, 2007 through January 1, 2022		49,213			51,320
Total debt		224,213			226,320
Less: current portion		(1,563		)	(1,426		)
Total long-term debt		$	222,650		$	224,894

Principal payments due as of December 31, 2006 were as follows (in thousands):

Year	Amount
2007	$	1,563
2008	1,721
2009	1,914
2010	2,847
2011	2,239
Thereafter	213,929
Total	$	224,213

In December 2001, the Company completed a financial restructuring plan which included the repayment of all amounts outstanding under its then existing credit facility and the purchase of approximately $21,273,000 of its 10.5% senior notes with the proceeds from $55,000,000 in long-term mortgage financing (the “Mortgage Financing”) and a $33,700,000 sale and leaseback transaction (the “Sale/Leaseback Financing”).

Interest on $10,000,000 of the original $55,000,000 from the Mortgage Financing is variable (“Variable Mortgages”) and the remaining $45,000,000 of the original $55,000,000 from the Mortgage Financing bears interest at a fixed annual rate of 10.16% (“Fixed Mortgages”). The Fixed Mortgages have a maturity date of January 1, 2022 and are amortized over 20 years.

On December 30, 2005, the Company completed a refinancing of the Variable Mortgages (the “Variable Refinancing”). Under the terms of the loan agreement for the Variable Refinancing, the Company borrowed an aggregate sum of $8,500,000 at a variable interest rate equal to the sum of the 90-day LIBOR rate in effect (5.36% at December 31, 2006) plus 4% on an annual basis. Changes in the interest rate are calculated monthly and recognized annually when the monthly payment amount is adjusted. Changes in the monthly payment amounts owed due to interest rate changes are reflected in the principal balances, which are re-amortized over the remaining life of the mortgages. The loans under the Variable Mortgages have a maturity date of January 1, 2020 and are being amortized over 14 years.

In connection with the Variable Refinancing, the Company incurred direct expenses of $71,300 that were included in the accompanying consolidated statement of operations for the year ended January 1, 2006 and $186,600 of costs that were included in intangible assets and deferred costs in the accompanying

F-26

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DEBT (Continued)

consolidated balance sheets as of December 31, 2006 and January 1, 2006. These costs are being amortized over the term of the Variable Mortgages.

All mortgage financings are subject to annual covenants, including various minimum fixed charge coverage ratios. The Company was in compliance with the covenants for the Variable Mortgages and Fixed Mortgages as of December 31, 2006.

In 2003 and 2004, the Company purchased or redeemed all of its remaining outstanding 10.5% senior notes in a series of transactions. In February 2004, the Company announced a cash tender offer and consent solicitation for $176,000,000 of its 10.5% senior notes which was financed with the proceeds from a $175,000,000 private offering of new 8.375% senior notes (the “Senior Notes”), available cash and its Credit Facility. In March 2004, $127,357,000 of aggregate principal amount of the 10.5% senior notes was purchased at the tender offer and consent solicitation price of 104% of the principal amount and $476,000 of aggregate principal amount of 10.5% senior notes were purchased at the tender offer price of 102% of the principal amount. In April 2004, the remaining $48,144,000 of the 10.5% senior notes was redeemed in accordance with the 10.5% senior notes indenture at 103.5% of the principal amount.

The $175,000,000 of Senior Notes issued in March 2004 are unsecured senior obligations of FICC, guaranteed on an unsecured senior basis by FICC’s Friendly’s Restaurants Franchise, Inc. subsidiary, but are effectively subordinated to all secured indebtedness of FICC, including the indebtedness incurred under the Company’s Credit Facility. The Senior Notes mature on June 15, 2012. Interest on the Senior Notes is payable at 8.375% per annum semi-annually on June 15 and December 15 of each year. The Senior Notes are redeemable, in whole or in part, at any time on or after June 15, 2008 at FICC’s option at redemption prices from 104.188% to 100.00%, based on the redemption date. In addition, at any time prior to June 15, 2007, FICC may redeem, subject to certain conditions, up to 35% of the aggregate principal amount of the Senior Notes with the proceeds of one or more qualified equity offerings, as defined, at a redemption price of 108.375% of the principal amount, plus accrued interest.

The Company has a $35,000,000 Credit Facility which is available for borrowings to provide working capital, for issuances of letters of credit and for other corporate needs. As of December 31, 2006 and January 1, 2006, total letters of credit outstanding were $15,474,000 and $15,974,000, respectively. During 2006 and 2005, there were no drawings against the letters of credit. The revolving credit loans bear interest at the Company’s option at either (a) the base rate plus the applicable margin as in effect from time to time (the “Base Rate”) (10.25% at December 31, 2006) or (b) the Eurodollar rate plus the applicable margin as in effect from time to time (the “Eurodollar Rate”) (9.32% at December 31, 2006). As of

F-27

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DEBT (Continued)

December 31, 2006 and January 1, 2006, there were no revolving credit loans outstanding. As of December 31, 2006 and January 1, 2006, $19,526,000 and $19,026,000, respectively, was available for borrowing.

The Credit Facility has an annual “clean-up” provision which obligates the Company to repay in full any and all outstanding revolving credit loans for a period of not less than 15 consecutive days during the period beginning on or after May 1 and ending on or before June 15 (or the next business day, if, in any year, June 15 is not a business day) of each calendar year, such that immediately following the date of such repayment, the amount of all outstanding revolving credit loans shall be zero.

The Credit Facility includes certain restrictive covenants including limitations on indebtedness, restricted payments such as dividends and stock repurchases, liens, mergers, investments and sales of assets and of subsidiary stock. Additionally, the Credit Facility limits the amount which the Company may spend on capital expenditures, restricts the use of proceeds, as defined, from asset sales and requires that the Company comply with certain financial covenants. The Company was in compliance with the covenants in the Credit Facility as of December 31, 2006.

On August 1, 2006, the Company amended its $35,000,000 Credit Facility to, among other things, (i) extend the maturity date from June 30, 2007 to June 30, 2010, (ii) eliminate the interest coverage requirement and (iii) reduce by 0.50% to 0.75% the applicable margin rates at which the revolving credit loans bear interest to a range of 3.00% to 4.00% (depending on the leverage ratio).

The Company incurred $519,000 of costs associated with this amendment to the $35,000,000 Credit Facility which were deferred and are being amortized over the life of the amended $35,000,000 Credit Facility.

The financial covenant requirements, as defined under the Credit Facility, and actual ratios/amounts as of and for the years ended December 31, 2006 and January 1, 2006 were (dollars in thousands):

	December 31, 2006					January 1, 2006
	Requirement			Actual		Requirement			Actual
Leverage ratio		5.75 to 1		4.46 to 1			5.80 to 1		5.69 to 1
Interest coverage ratio		N/A		N/A			2.00 to 1		2.06 to 1
Fixed charge coverage ratio		1.05 to 1		1.34 to 1			1.05 to 1		1.14 to 1
Capital expenditures(a)		$	26,000	$	21,124		$	25,500	$	17,158
Consolidated EBITDA(b)		$	40,500	$	51,764		$	42,000	$	43,100

(a) The Credit Facility’s definition of capital expenditures differs from the Company’s total capital expenditures.

(b) The Credit Facility’s definition of consolidated EBITDA allows non-cash losses and capitalized interest to be added back to net income (loss) which differs from the Company’s adjusted EBITDA computation presented elsewhere herein.

F-28

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DEBT (Continued)

The fair values of the Company’s long-term debt at December 31, 2006 and January 1, 2006 were as follows (in thousands):

	December 31, 2006				January 1, 2006
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Senior Notes	$	175,000	$	166,075	$	175,000	$	156,625
Revolving credit loans	—		—		—		—
Mortgage loans	49,213		49,213		51,320		51,320
Total	$	224,213	$	215,288	$	226,320	$	207,945

The fair values of the Senior Notes were determined based on the actual trade prices occurring closest to December 31, 2006 and January 1, 2006. Because the mortgage loans are privately held, the Company believes that the carrying value of the mortgage loans as of December 31, 2006 and January 1, 2006 approximated the fair value.

7. LEASES

As of December 31, 2006 and January 1, 2006, the Company operated 316 and 314 restaurants, respectively. These operations were conducted in premises owned or leased as follows:

	December 31,		January 1,
	2006		2006
Land and building owned		77		79
Land leased and building owned		76		70
Land and building leased		163		165
		316		314

Restaurants in shopping centers are generally leased for a term of 10 to 20 years. Leases of freestanding restaurants generally are for a 15 or 20 year lease term and provide for renewal options for three or four five-year renewals at the then current fair market value. Additionally, the Company leases certain equipment over lease terms from three to seven years.

In connection with the Sale/Leaseback Financing in December 2001, the Company sold 44 properties operating as Friendly’s restaurants and entered into a master lease with the buyer to lease the 44 properties for an initial term of 20 years under a triple net lease. There are four five-year renewal options and lease payments are subject to escalator provisions every five years based upon increases in the Consumer Price Index. In accordance with SFAS No. 66, “Accounting for Sales of Real Estate” and SFAS No. 98, “Accounting for Leases”, the Company recognized an aggregate loss of $428,000 on two properties which was included in loss on disposals of other properties and equipment, net in 2001. The aggregate gain of $11,377,000 on the remaining 42 properties was deferred and the unamortized balance of $10,050,000 was included in other accrued expenses and other long-term liabilities. The deferred gain is being amortized straight-line over 20 years.

F-29

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. LEASES (Continued)

Future minimum lease payments and amounts to be received as lessor or sublessor under noncancelable leases with an original term in excess of one year as of December 31, 2006 were (in thousands):

	Commitments
			Capital
			Lease and				Operating
	Operating		Finance				Lease
Year	Leases		Obligations				Receivables
2007	$	18,966		$	2,091			$	2,723
2008	17,357			2,051				2,604
2009	15,985			1,022				2,613
2010	14,090			444				2,414
2011	12,451			398				2,048
Thereafter	26,602			2,089				22,204
Total future minimum lease payments	$	105,451		8,095				$	34,606
Less amounts representing interest				(1,872		)
Present value of minimum lease payments				6,223
Less current maturities of capital lease and finance obligations				(1,541		)
Long-term maturities of capital lease and finance obligations				$	4,682

Capital lease and finance obligations reflected in the accompanying consolidated balance sheets have effective interest rates ranging from 6.00% to 12.00% and are payable in monthly installments through 2016. Maturities of such obligations as of December 31, 2006 were (in thousands):

Year	Amount
2007		$	1,541
2008		1,666
2009		793
2010		258
2011		235
Thereafter		1,730
Total		$	6,223

F-30

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. LEASES (Continued)

Rent expense included in the accompanying consolidated statements of operations for operating leases was (in thousands):

	For the Years Ended
	December 31,			January 1,			January 2,
	2006			2006			2005
Minimum rentals		$	20,251		$	19,847		$	20,668
Contingent rentals		736			815			968
Total		$	20,987		$	20,662		$	21,636

8. INCOME TAXES

The benefit from (provision for) income taxes for the years ended December 31, 2006, January 1, 2006 and January 2, 2005 were as follows (in thousands):

	For the Years Ended
	December 31,				January 1,			January 2,
	2006				2006			2005
Current (provision) benefit:
Federal		$	(1,134	)	$	(726	)		$	837
State		(228		)	(213		)		(89		)
Increase in tax accruals		(21		)	(1,446		)		(601		)
Total current (provision) benefit		$	(1,383	)	$	(2,385	)		$	147
Deferred benefit (provision):
Federal		$	928		$	(17,212	)		$	3,662
State		—			(637		)		964
Reversal of tax accruals		—			—				2,757
Total deferred benefit (provision)		$	928		$	(17,849	)		$	7,383
Income tax provision (benefit) allocated to discontinued operations		$	538		$	232			$	(385	)
Total benefit from (provision for) income taxes		$	83		$	(20,002	)		$	7,145

F-31

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INCOME TAXES (Continued)

A reconciliation of the benefit from (provision for) income taxes that would result from applying the federal statutory rate to income tax provision follows (in thousands):

	For the Years Ended
	December 31,				January 1,			January 2,
	2006				2006			2005
Statutory federal income tax		$	(491	)	$	2,657			$	3,503
State income taxes net of federal benefit		(84		)	456				601
Effect of change in valuation allowance		797			(22,184		)		12
Effect of expired state NOL carryforwards		(1,781		)	—				—
Effect of the present value of Medicare Subsidies		197			—				—
Tax credits		1,268			372				896
Nondeductible expenses		(98		)	(130		)		(226		)
Adjustment of income tax accruals		(21		)	(1,446		)		2,157
Other		296			273				202
Benefit from (provision for) income taxes		$	83		$	(20,002	)		$	7,145

Deferred tax assets and liabilities are determined as the difference between the financial statement and tax bases of the assets and liabilities multiplied by the enacted tax rates in effect for the year in which the differences are expected to reverse. Significant deferred tax assets (liabilities) at December 31, 2006 and January 1, 2006 were as follows (in thousands):

	December 31,				January 1,
	2006				2006
Property and equipment		$	(10,015	)	$	(13,788	)
Net operating loss carryforwards		1,684			3,732
Insurance reserves		13,041			12,690
Inventories		237			285
Pension		8,323			11,850
Intangible assets		(4,142		)	(4,333		)
Tax credit carryforwards		10,808			11,958
Deferred gain		3,669			3,930
Other		4,752			5,820
Net deferred tax asset		28,357			32,144
Valuation allowance		(27,429		)	(32,144		)
Net deferred tax asset		$	928		$	—
Total deferred tax assets		$	43,296		$	50,932
Total deferred tax liabilities		(14,939		)	(18,788		)
Valuation allowance		(27,429		)	(32,144		)
Net deferred tax asset		$	928		$	—

As of December 31, 2006, the Company had approximately $28,357,000 of net deferred tax assets relating to net operating loss carryforwards, tax credit carryforwards and other temporary differences that

F-32

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INCOME TAXES (Continued)

are available to reduce income taxes in future years. SFAS No. 109 “Accounting for Income Taxes” requires that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the company operates, length of carryback and carryforward periods, and projections of future operating results. Where there are cumulative losses in recent years, SFAS No. 109 creates a strong presumption that a valuation allowance is needed. The presumption can be overcome in very limited circumstances.

As of January 1, 2006, the Company had approximately $32,144,000 of net deferred tax assets relating to net operating loss carryforwards, tax credit carryforwards and other temporary differences that were available to reduce income taxes in future years.

During the fourth quarter of 2005, the Company entered a three-year cumulative loss position and revised its projections of the amount and timing of profitability in future periods. As a result, the Company increased its valuation allowance by approximately $26,729,000 ($22,184,000 to income tax expense and $4,545,000 to stockholders’ deficit) to reduce the carrying value of net deferred tax assets to zero.

As of December 31, 2006 the Company remains in a three-year cumulative loss position and expects to record valuation allowances on future tax benefits until it can sustain an appropriate level of profitability. However, the Company has incurred approximately $1,093,000 of federal tax liabilities for 2005 and 2006 combined. Approximately $928,000 of the $1,093,000 would be available for refund if 2007 resulted in a loss for income tax purposes. As a result, the valuation allowances as of December 31, 2006 of $27,429,000 will reduce the carrying value of net deferred tax assets to $928,000. Should the Company’s future profitability provide sufficient evidence, in accordance with SFAS No. 109, to support the ultimate realization of income tax benefits attributable to NOL and credit carryforwards and other deductible temporary differences, a reduction in the valuation allowance may be recorded and the carrying value of deferred tax assets may be restored, resulting in a non-cash credit to earnings.

The income tax provision for the year ended December 31, 2006 included a decrease in the valuation allowance of $797,000.

The income tax provision for the year ended January 1, 2006 included the above referenced increase in the valuation allowance of $22,184,000 and an increase in income tax accruals of $1,446,000 related to ongoing tax audits and other tax matters. The increase in the valuation allowance and the increase in income tax accruals accounted for 292.1% and 19.0%, respectively, of the Company’s effective tax rate of 263.5%.

During the year ended December 31, 2006, the Company generated federal taxable income of approximately $12,025,000. During the year ended January 1, 2006, the Company generated federal taxable income of approximately $926,000. The Company had aggregate state NOL carryforwards, the tax effect of which was approximately $1,684,000 and $3,732,000 as of December 31, 2006 and January 1, 2006, respectively. The state NOL carryforwards expire between 2007 and 2025. The tax effect of state NOL carryforwrds expired by the end of 2006 without being used was approximately $1,745,000. That portion of the valuation allowance specifically allocated to these state NOLs was reduced accordingly.

As of December 31, 2006 and January 1, 2006, the Company had federal general business credit carryforwards of $7,757,000 and $9,535,000, respectively, which expire between 2020 and 2026. The

F-33

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INCOME TAXES (Continued)

Company had $3,051,000 and $2,721,000 of state tax credit carryforwards as of December 31, 2006 and January 1, 2006, respectively, which either expire between 2007 and 2011 or have no expiration date.

Taxes payable were reduced or refundable taxes, credit carryforwards and state loss carryforwards were increased by an aggregate of $145,000 and $450,000 in 2006 and 2005, respectively, as a result of stock options exercised.

9. RESTRUCTURINGS

During March 2004, the Company recorded a pre-tax restructuring charge of $2,627,000 for severance and outplacement services associated with reduction in force actions taken during the first quarter of 2004 that reduced headcount by approximately 20 permanent positions.

On October 10, 2001, the Company eliminated approximately 70 positions at corporate headquarters. In addition, approximately 30 positions in the restaurant construction and fabrication areas were eliminated by December 30, 2001. The purpose of the reduction was to streamline functions and reduce redundancy among its business segments.

In March 2000, the Company’s Board of Directors approved a restructuring plan that provided for the immediate closing of 81 restaurants at the end of March 2000 and the disposition of an additional 70 restaurants over the next 24 months.

The Company reduced the restructuring reserves by $400,000 and $1,900,000 during the years ended December 29, 2002 and December 30, 2001, respectively, since the reserve exceeded estimated remaining payments.

The following represents the reserve and activity associated with the March 2004, October 2001 and March 2000 restructurings (in thousands):

	For the Year Ended December 31, 2006
	Restructuring										Restructuring
	Reserve as of						Costs Paid				Reserve as of
	January 1, 2006			Expense			and Reclassified				December 31, 2006
Severance pay		$	72		$	—		$	(72	)		$	—
Total		$	72		$	—		$	(72	)		$	—

	For the Year Ended January 1, 2006
	Restructuring										Restructuring
	Reserve as of						Costs Paid				Reserve as of
	January 2, 2005			Expense			and Reclassified				January 1, 2006
Rent		$	92		$	—		$	(92	)		$	—
Severance pay		952			—			(880		)		72
Other		34			—			(34		)		—
Total		$	1,078		$	—		$	(1,006	)		$	72

10. FRANCHISE TRANSACTIONS

During 2006, the Company completed three transactions in which three existing franchisees purchased five existing Company-operated restaurants and agreed to develop a total of 10 new restaurants in future years. Gross proceeds from these transactions were $3,130,000, of which $300,000 was for franchise and

F-34

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. FRANCHISE TRANSACTIONS (Continued)

development fees and $2,830,000 was for the sale of certain assets and leasehold rights. During the year ended December 31, 2006, the Company recorded $150,000 of franchise fee revenue for the initial locations acquired by franchisees and deferred $150,000 related to future development. The $150,000 will be recognized into income as restaurants are opened. In addition, the Company recognized a gain of $2,106,000 related to the sale of assets.

During 2006, three franchisees operating restaurants under options to purchase elected to exercise their options. In doing so, they purchased eight existing restaurants and agreed to develop a total of 10 new restaurants in future years. Gross proceeds from these transactions were $2,224,000, of which $315,000 was for franchise and development fees and $1,909,000 was for the sale of certain assets and leasehold rights. During the year ended December 31, 2006, the Company recorded $265,000 of franchise fee revenue for the initial locations acquired by franchisees and deferred $50,000 related to future development. The $50,000 will be recognized into income as restaurants are opened. In addition, the Company recognized a gain of $1,622,000 related to the sale of assets.

During 2005, the Company completed four transactions in which four existing franchisees purchased nine existing Company-operated restaurants and agreed to develop a total of 10 new restaurants in future years. Gross proceeds from these transactions were $4,102,000, of which $295,000 was for franchise and development fees and $3,807,000 was for the sale of certain assets and leasehold rights. During the year ended January 1, 2006, the Company recorded $210,000 of franchise fee revenue for the initial locations acquired by franchisees and deferred $85,000 related to future development. The $85,000 will be recognized into income as restaurants are opened. In addition, the Company recognized a gain of $2,712,000 related to the sale of assets.

During 2004, two franchisees operating restaurants under options to purchase elected to exercise their options. In doing so, they purchased six existing restaurants and committed to develop a total of five new restaurants over the next six years with an option to open an additional five restaurants in the following five years. Gross proceeds from these transactions were $1,360,000, of which $275,000 was for franchise and development fees and $1,085,000 was for the sale of certain assets and leasehold rights. During the year ended January 2, 2005, the Company recorded $200,000 of franchise fee revenue for the initial locations acquired by these franchisees and deferred $75,000 related to future development. The $75,000 will be recognized into income as restaurants are opened. In addition, the Company recognized a gain of $542,000 related to the sale of assets.

On September 9, 2004, the Company entered into an agreement granting NL Ark Development, Inc. (“NL Ark”) certain limited exclusive rights to operate and develop Friendly’s Restaurants in designated areas within Palm Beach County, Florida. NL Ark has committed to open five new Friendly’s Restaurants over the next five years. The Company received development fees of $80,000, which represent one-half of future franchise fees. The $80,000 will be recognized into income as restaurants are opened.

On January 15, 2004, the Company entered into an agreement granting Central Florida Restaurants LLC (“Central Florida”) certain limited exclusive rights to operate and develop Friendly’s full-service restaurants in designated areas within the Orlando, Florida market (the “Central Florida Agreement”). Pursuant to the Central Florida Agreement, Central Florida purchased certain equipment assets, lease and sublease rights and franchise rights in 10 existing Friendly’s restaurants and committed to open an additional 10 restaurants over the six years following the date of the agreement with an option for 15 more restaurants in the following five years. Gross proceeds from the sale were approximately $3,150,000 of

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FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. FRANCHISE TRANSACTIONS (Continued)

which $310,000 was for franchise fees for the initial 10 restaurants. In 2004, the Company recorded $310,000 as franchise fee revenue and recognized a gain of approximately $679,000 related to the sale of the assets for the 10 locations. During the year ended January 1, 2006, Central Florida opened two new restaurants. In December 2006, Central Florida defaulted under its leases and franchise agreements and peaceably surrendered 11 restaurants to the Company and closed one restaurant. The Company is currently operating the 11 restaurants for a limited period of time while the parties seek a substitute franchisee to take over the operations at these restaurants. If the properties are not franchised, the Company, at its option, may acquire or close the restaurants. The Company and Central Florida’s lenders and landlord have entered into agreements pursuant to which the Company has agreed to make recurring monthly rent and loan payments and the lenders and landlord have agreed not to interfere with the Company operations while it operates the restaurants. Except for the Company’s agreement to make certain payments while it is operating the restaurants, the Company has not assumed any of Central Florida’s obligations to its lender.

11. PENSION PLAN

Certain of the employees of the Company are covered by a non-contributory defined benefit cash balance pension plan. Plan benefits are based on years of service and participant compensation during their years of employment.

Under the cash balance plan, a nominal account for each participant was established. Through 2003, the Company made an annual contribution to each participant’s account based on current wages and years of service. Each account earns a specified rate of interest, which is adjusted annually. Plan expenses may also be paid from the assets of the plan.

In 1997, pension benefits were reduced to certain employees. In 1998, death benefits were increased. In 2002, pension benefits that were reduced in 1997 were restored to certain employees. Also in 2002, pension benefits were reduced to all employees, to be effective in 2003.

In November 2003, the Company announced that effective December 31, 2003, all benefits accrued under the pension plan would be frozen at the level attained on that date. The benefits accrued through December 31, 2003 were not reduced. As a result, the Company recognized a one-time pension curtailment gain of $8,113,000 in 2003 equal to the unamortized balances as of December 31, 2003 from all plan changes made prior to that date. Cash balance accounts continue to be credited with interest after December 31, 2003.

During 2004, lump-sum cash payments to participants exceeded the interest cost component of net periodic pension cost. As a result of the unusual settlement volume, the Company recorded additional pension expense of $2,204,000 during the year ended January 2, 2005.

In October 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”), which requires an entity to: (a) recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status, (b) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year, and (c) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. The requirement to recognize the funded status of a defined benefit postretirement plan and the disclosure requirements are effective for the Company’s 2006 fiscal year.

F-36

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. PENSION PLAN (Continued)

Because the Company’s cash balance pension plan was frozen effective December 31, 2003, the projected benefit obligation and the accumulated benefit obligation are the same resulting in no incremental effect of applying SFAS No. 158.

For the years ended December 31, 2006 and January 1, 2006, the reconciliation of the projected benefit obligation was (in thousands):

	December 31,				January 1,
	2006				2006
Beginning of year benefit obligation		$	119,949		$	110,042
Interest cost		6,783			6,684
Assumption changes		(3,900		)	5,151
Actuarial loss		760			4,693
Disbursements		(7,977		)	(6,621		)
End of year benefit obligation		$	115,615		$	119,949

The reconciliation of the fair value of assets of the plan as of December 31, 2006 and January 1, 2006 was (in thousands):

	December 31,				January 1,
	2006				2006
Beginning of year fair value of assets		$	91,045		$	92,510
Actual return on plan assets (net of expenses)		10,095			5,156
Employer contributions		2,150			—
Disbursements		(7,977		)	(6,621		)
End of year fair value of assets		$	95,313		$	91,045

The funded status of the plan as of December 31, 2006 and January 1, 2006 was (in thousands):

	December 31,				January 1,
	2006				2006
Accumulated benefit obligation		$	115,615		$	119,949
Fair value of plan assets		95,313			91,045
Funded status		(20,302		)	(28,904		)

F-37

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. PENSION PLAN (Continued)

The components of net periodic pension cost and other amounts recognized in other comprehensive income for the years ended December 31, 2006, January 1, 2006 and January 2, 2005 were (in thousands):

	December 31,				January 1,				January 2,
	2006				2006				2005
Net Periodic Pension Cost:
Interest cost		$	6,783			$	6,684			$	6,604
Expected return on assets		(7,930		)		(8,288		)		(9,391		)
Net amortization:
Unrecognized prior service benefit		—				—				—
Unrecognized net actuarial loss		2,702				1,890				671
Periodic pension cost (benefit) before adjustments		1,555				286				(2,116		)
Settlement expense		—				—				2,204
Net periodic pension cost		$	1,555			$	286			$	88
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Net actuarial gain		$	(5,305	)
Recognized actuarial gain		(2,702		)
Total recognized in other comprehensive income (before tax effect)		$	(8,007	)
Total recognized in net pension cost and other comprehensive income (before tax effect)		$	(6,452	)

Items not yet recognized as a component of net periodic pension cost of $38,162,000 consisted of net actuarial losses. The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic pension cost during 2007 is $2,443,000.

A summary of the Company’s key actuarial assumptions used to determine benefit obligations as of December 31, 2006 and January 1, 2006 follows:

	December 31, 2006			January 1, 2006
Discount rate		6.00	%		5.75	%
Salary increase rate		N/A			N/A
Expected long-term rate of return		8.75	%		8.75	%

A summary of the Company’s key actuarial assumptions used to determine net periodic pension cost for the years ended December 31, 2006, January 1, 2006 and January 2, 2005 follows:

	December 31, 2006			January 1, 2006			January 2, 2005
Discount rate		5.75	%		6.00	%		6.25	%
Salary increase rate		N/A			N/A			N/A
Expected long-term rate of return		8.75	%		8.75	%		9.00	%

F-38

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. PENSION PLAN (Continued)

The Company determines its expected long-term rate of return based on its expectations of future returns for the pension plan’s investments based on target allocations of the pension plan’s investments. Additionally, the Company considers historical returns on comparable equity, fixed income and real estate investments and adjusts its estimates as deemed appropriate. As of December 31, 2006, point estimates of the Company’s long-term target allocation to equity (57.5%), fixed income (32.0%), real estate (10.0%) and other (0.5%) is expected to provide real rates of return of 7.23%, 2.21%, 1.90% and 1.50%, respectively. In addition, the long-term inflation assumption was 3.75%. The resulting weighted expected long-term rate of return on plan assets was 8.75%.

The Company’s pension plan weighted average asset allocations at December 31, 2006 and January 1, 2006 by asset category were as follows:

	December 31,			January 1,
Asset Category	2006			2006
Equity securities		69	%		66	%
Debt securities		18	%		21	%
Real estate		12	%		12	%
Other		1	%		1	%
Total		100	%		100	%

The Company actively manages its pension plan assets utilizing a registered investment advisor as recognized under the Investment Advisors Act of 1940, as amended. Oversight of the investment advisor is provided by the Company’s Qualified Benefit Plans Committee (“QBPC”). The plan’s trustee and investment advisor monitors transactions and performance monthly and the QBPC reviews performance monthly with a complete review of plan assets on a quarterly basis. Monthly, cash is withdrawn from the pension fund to meet benefit requirements. This provides the investment advisor with an opportunity to rebalance on a limited scale. If larger scale rebalancing is required, it is performed on an as needed basis.

The Company believes that a moderately aggressive risk posture is appropriate for the plan and is consistent with the actuarially-determined cash payment requirements. Accordingly, the investment of plan assets is governed by the Investment Policy of the Company’s retirement program which reflects two primary objectives: 1) achieving investment results that will contribute to the proper funding of the plan, and 2) receiving from its investment advisor performance that is above the average market return. Asset mix guidelines exist within the Investment Policy that target equities at 30-80% of the portfolio, fixed income at 10-60% and real estate at 10%. It is expected that over long periods of time, these asset allocation parameters will enable the plan to meet or exceed actuarial assumptions.

The investment guidelines prohibit certain types of transactions, including the purchase of securities on margin, short-sale transactions, the purchase of letter stock or other non-registered securities, securities lending and any other investments or investment strategies disallowed by ERISA or related regulations.

Equity securities of the plan did not include any investment in the Company’s common stock at December 31, 2006 or January 1, 2006.

In August 2006, the Pension Protection Act of 2006 (the “Act”) was signed into law. The Act clarified funding rules and rates for determining deficit reduction. As a result, the Company contributed $2,150,000 to the Company’s defined benefit cash balance pension plan during the year ended December 31, 2006.

F-39

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. PENSION PLAN (Continued)

The Company does not anticipate a contribution in 2007. Funding requirements for subsequent years are uncertain and will significantly depend on whether the plan’s actuary changes any assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plan, and any legislative or regulatory changes affecting plan funding requirements. For tax planning, financial planning, cash flow management or cost reduction purposes the Company may increase, accelerate, decrease or delay contributions to the plan to the extent permitted by law. Currently, the Company expects to contribute approximately $3,500,000 in 2008.

The following benefit payments, excluding any lump sum distributions, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

Year	Amount
2007	$	3,841
2008	4,164
2009	4,540
2010	4,945
2011	4,949
2012 - 2016	36,548
Total	$	58,987

12. POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS

The Company provides medical and life insurance benefits to certain groups of employees upon retirement. Eligible employees may continue their coverage if they are receiving a pension benefit, are at least 55 years of age and have completed ten years of service. The plan requires contributions for medical coverage from participants who retired after September 1, 1989. Medical coverage may continue until age 65. Life insurance benefits are contributory for participants who retired after July 1, 2002. Medical benefits under the plan are provided through the Company’s general assets.

The Company uses a December 31 measurement date for the plan.

F-40

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS (Continued)

The incremental effect of applying SFAS No. 158 for the year ended December 31, 2006 was (in thousands):

	Before								After
	Application of								Application of
	SFAS No. 158				Adjustments				SFAS No. 158
Benefit obligation		$	(7,155	)		$	264			$	(6,891	)
Deferred income taxes		28,465				(108		)		28,357
Valuation allowance		(27,537		)		108				(27,429		)
Current liabilities		(68,098		)		(593		)		(68,691		)
Noncurrent liabilities		(279,229		)		857				(278,372		)
Accumulated other comprehensive income		23,778				(264		)		23,514
Total stockholders’ deficit		127,160				(264		)		126,896

The Company accrues the cost of postretirement medical and life insurance benefits over the years employees provide services to the date of their full eligibility for such benefits. The reconciliation of the accumulated benefit obligation for the years ended December 31, 2006 and January 1, 2006 was as follows (in thousands):

	December 31,				January 1,
	2006				2006
Beginning of year benefit obligation		$	6,850			$	7,985
Service cost		150				162
Interest cost		386				407
Plan participants’ contributions		176				208
MMA Retiree drug subsidy		56				—
Actuarial loss (gain)		42				(1,243		)
Disbursements		(769		)		(669		)
End of year benefit obligation		$	6,891			$	6,850

The reconciliation of the funded status of the plan as of December 31, 2006 and January 1, 2006 included the following components (in thousands):

	December 31,				January 1,
	2006				2006
Accumulated benefit obligation		$	(6,891	)		$	(6,850	)
Fair value of plan assets		—				—
Funded status		(6,891		)		(6,850		)

F-41

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS (Continued)

The components of net postretirement medical and life insurance benefit cost and other amounts recognized in other comprehensive income for the years ended December 31, 2006, January 1, 2006 and January 2, 2005 were (in thousands):

	December 31,				January 1,				January 2,
	2006				2006				2005
Net Benefit Cost:
Service cost		$	150			$	162			$	141
Interest cost		386				407				456
Recognized actuarial loss		24				35				70
Net amortization of unrecognized prior service benefit		(142		)		(142		)		(142		)
Net benefit cost		$	418			$	462			$	525
Other Changes in Benefit Obligations Recognized in Other Comprehensive Income:
Net actuarial loss		$	956
Prior service credit.		(1,220		)
Total recognized in accumulated other comprehensive income (before tax effect).		$	(264	)
Total recognized in net pension cost and other comprehensive income (before tax effect).		$	154

The estimated net loss and prior service credit for the postretirement medical and life insurance benefit plan that will be amortized from accumulated other comprehensive income into net postretirement medical and life insurance benefit cost during 2007 are $16,000 and $142,000, respectively.

A summary of the Company’s key actuarial assumptions used to determine benefit obligations as of December 31, 2006 and January 1, 2006 follows:

	December 31, 2006			January 1, 2006
Discount rate		6.00	%		5.75	%
Salary increase rate		N/A			N/A
Medical cost trend:
First year		9.00	%		8.50	%
Ultimate		4.75	%		4.75	%
Years to reach ultimate		5			3

F-42

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS (Continued)

A summary of the Company’s key actuarial assumptions used to determine net periodic benefit cost for the years ended December 31, 2006, January 1, 2006 and January 2, 2005 follows:

	December 31, 2006			January 1, 2006			January 2, 2005
Discount rate		5.75	%		6.00	%		6.25	%
Salary increase rate		N/A			N/A			N/A
Medical cost trend:
First year		8.50	%		9.50	%		8.50	%
Ultimate		4.75	%		5.50	%		5.50	%
Years to reach ultimate		2			3			3

Assumed health care cost trends have a significant effect on the amounts reported for health care plans. A one-percentage-point change in the assumed health care cost trend rate would have the following effects:

	One Percentage Point Increase			One Percentage Point Decrease
Effect on total of service and interest cost		$	45,502		$	(39,408	)
Effect on accumulated benefit obligation		$	425,076		$	(376,103	)

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

	Payments net
	of Medicare D			Medicare D
Year	Subsidies			Subsidies
2007		$	666		$	56
2008		665			55
2009		656			54
2010		640			52
2011		631			49
2012 - 2016		2,899			188
Total		$	6,157		$	454

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”), which introduced a Medicare prescription drug benefit, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit, was enacted. On May 19, 2004, the FASB issued Financial Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”) to discuss certain accounting and disclosure issues raised by the Act. FSP 106-2 addresses accounting for the federal subsidy for the sponsors of single employer postretirement health care plans and disclosure requirements for plans for which the employer has not yet been able to determine actuarial equivalency. Except for certain nonpublic entities, FSP 106-2 became effective for the first interim or annual period beginning after June 15, 2004 (the quarter ended September 26, 2004 for the Company).

F-43

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS (Continued)

Based on regulations issued by the Centers for Medicare & Medicaid Services, the Company has concluded that, for certain participants, the benefits provided are at least actuarially equivalent to benefits available through Medicare Part D. The accumulated benefit obligation of the Company’s postretirement medical and life insurance plan at January 1, 2006 decreased by $900,000 due to the effect of the federal subsidy and the net periodic benefit cost for 2005 was reduced by $99,900.

13. OTHER RETIREMENT BENEFIT PLANS

The Company’s Employee Savings and Investment Plan (the “Plan”) covers all eligible employees and is intended to be qualified under Sections 401(a) and 401(k) of the Internal Revenue Code. For the years ended December 31, 2006, January 1, 2006 and January 2, 2005, the Company made matching contributions in an amount equal to 75% of the sum of the participants’ contributions that do not exceed 6% of the participant’s compensation for employees above the position of secondary management, as defined in the Plan. All employee contributions are fully vested. Company contributions are vested at the completion of three years of service or at retirement, death, disability or termination at age 65 or over, as defined by the Plan. Company contributions and administrative expenses for the Plan were $838,000, $866,000 and $972,000 for the years ended December 31, 2006, January 1, 2006 and January 2, 2005, respectively.

14. INSURANCE RESERVES

At December 31, 2006 and January 1, 2006 insurance reserves of approximately $32,488,000 and $32,097,000, respectively, had been recorded. Insurance reserves at December 31, 2006 and January 1, 2006 included RIC’s reserves for the Company’s insurance liabilities of approximately $6,371,000 and $7,461,000, respectively. Reserves also included accruals related to post employment benefits and postretirement medical and life insurance benefits. While management believes these reserves were adequate, it is reasonably possible that the ultimate liabilities may exceed such estimates.

Classification of the reserves was as follows (in thousands):

	December 31,			January 1,
	2006			2006
Current		$	11,462		$	9,002
Long-term		21,026			23,095
Total		$	32,488		$	32,097

Following is a summary of the activity in the insurance reserves for the years ended December 31, 2006, January 1, 2006 and January 2, 2005 (in thousands):

	December 31,				January 1,			January 2,
	2006				2006			2005
Beginning balance		$	32,097		$	32,435		$	30,952
Provision		10,623			11,023			12,621
Payments		(10,232		)	(11,361		)	(11,138		)
Ending balance		$	32,488		$	32,097		$	32,435

F-44

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. INSURANCE RESERVES (Continued)

The provision for insurance reserves each year was actuarially determined and reflected amounts for the current year as well as revisions in estimates to open reserves for prior years. Payments included amounts paid on open claims for all years.

15. RELATED PARTY TRANSACTIONS

While FICC’s Chairman of the Board was an officer of The Restaurant Company (“TRC”), FICC entered into a sublease for certain land, building and equipment from a subsidiary of TRC. For the years ended December 31, 2006, January 1, 2006 and January 2, 2005, rent expense related to the sublease was approximately $71,000, $70,000 and $69,000, respectively.

The Company purchased certain food products used in the normal course of business from a division of TRC at cost plus a mark-up. For the years ended December 31, 2006, January 1, 2006 and January 2, 2005, purchases were approximately $360,000, $353,000 and $340,000, respectively.

On May 22, 2006, The Ice Cream Company (“TICC”) purchased, at fair market value, certain assets and leasehold rights for three existing Company-operated restaurants located in Lancaster and York, Pennsylvania. At closing, TICC was also granted an exclusive right to develop six new Friendly’s restaurants in Lancaster, Chester and Montgomery counties, Pennsylvania by April 2012. Gross proceeds from this transaction were $1,725,000, of which $90,000 was for initial franchise fees, $90,000 was for development fees and $1,545,000 was for the sale of certain assets and leasehold rights at the three existing restaurants. During the year ended December 31, 2006, the Company recorded $90,000 as franchise fee revenue and recognized a gain of $1,146,000 related to the sale of the assets.

The owners of TICC are family members of the Company’s Chairman of the Board of Directors. Prior to the closing of this transaction on May 22, 2006, TICC operated three Friendly’s restaurants under franchise agreements with Friendly’s Restaurants Franchise, Inc. (“FRFI”), a subsidiary of Friendly’s. The terms of the franchise agreements with TICC are identical in all material respects to the terms generally offered to unrelated franchisees of FRFI in the ordinary course of Friendly’s business.

TICC purchases from Friendly’s certain food products used in the normal course of its franchise business. During 2006, 2005 and 2004, TICC paid Friendly’s $3,405,000, $2,110,000 and $2,080,000, respectively, for franchise royalty fees, marketing fees, food purchases and miscellaneous other products and services.

During August 2003, Friendly’s entered into a single restaurant franchise agreement with Treats of Huntersville LLC (“Treats”). The owner of Treats is a family member of the Company’s Chairman of the Board of Directors. The transaction was a standard agreement in compliance with the terms and conditions of the Uniform Franchise Offering Circular allowing Treats to operate one location. The location, which was initially opened by a former franchisee but closed in July 2002, was reopened by Treats in August 2003.

Treats purchases from Friendly’s certain food products used in the normal course of its franchise business. During 2006, 2005 and 2004, Treats paid Friendly’s $439,000, $428,000 and $422,000, respectively, for franchise royalty fees, marketing fees, food purchases and miscellaneous other products and services.

F-45

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. COMMITMENTS AND CONTINGENCIES

The Company is a party to various legal proceedings arising in the ordinary course of business which management believes, after consultation with legal counsel, will not have a material adverse effect on the Company’s consolidated financial position or future operating results.

On February 25, 2003, S. Prestley Blake (“Blake”), holder of approximately 12% of the Company’s outstanding common stock, sued Friendly’s and its Chairman in a purported derivative action in Hampden Superior Court, Massachusetts. The suit alleges breach of fiduciary duty and misappropriation of corporate assets in that Friendly’s paid certain expenses relating to a corporate jet and the Chairman’s use of that jet and use of an office in Illinois. The suit seeks to require the Chairman to reimburse Friendly’s and for Friendly’s to pay Blake’s attorneys’ fees. Friendly’s and its Chairman have denied Blake’s allegations and are vigorously defending the lawsuit.

On June 27, 2005, Mr. Blake sent a demand letter to the Company’s Board of Directors demanding that its Board of Directors address his concerns and beliefs that are subject to the litigation filed on February 25, 2003. On July 14, 2005, the Company’s Board of Directors formed a special litigation committee consisting solely of independent directors (the “Committee”) to investigate the concerns and beliefs raised in Blake’s demand letter dated June 27, 2005. The Committee issued its report on October 24, 2005 and a supplemental report on November 30, 2005. Based on its findings, the Committee filed a motion to dismiss the claims made by Mr. Blake. On May 24, 2006, the Court denied the Committee’s motion to dismiss and allowed the joinder, as defendants, of current Board members Steven L. Ezzes, Michael J. Daly and Burton J. Manning, and former Board member Charles A. Ledsinger, Jr., and The Restaurant Company, The Restaurant Holding Corporation and TRC Realty, LLC.

On July 26, 2006, director defendants Michael J. Daly, Steven L. Ezzes, and Burton J. Manning, and former director defendant Charles A. Ledsinger, Jr., filed motions to dismiss the claims brought against them for failure to state a claim on the grounds that both the exculpatory provision in the Company’s Restated Articles of Organization and the business judgment rule barred the plaintiff’s claims. On December 20, 2006, the Court granted the directors’ motion and dismissed from the Blake litigation director defendants Michael J. Daly, Steven L. Ezzes, Burton J. Manning and former director defendant Charles A. Ledsinger, Jr. The Court has set a deadline for fact discovery of May 31, 2007, with a trial, if necessary, to begin on January 7, 2008. Friendly’s and its Chairman have denied Blake’s allegations and are vigorously defending the lawsuit.

As of December 31, 2006, the Company had commitments to purchase approximately $111,390,000 of raw materials, food products and supplies used in the normal course of business. The majority of the commitments cover periods of one to 12 months. Most of these commitments are noncancelable.

On February 7, 2007, the Company entered into a 10 year contract to purchase approximately $340,000 in liquid nitrogen annually.

17. SEGMENT REPORTING

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s operating segments include restaurant, foodservice and franchise. The revenues from these segments include both sales to unaffiliated customers and intersegment sales, which generally are accounted for on a basis consistent with

F-46

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. SEGMENT REPORTING (Continued)

sales to unaffiliated customers. Intersegment sales and other intersegment transactions have been eliminated in the accompanying consolidated financial statements.

The Company’s restaurants target families with children and adults who desire a reasonably-priced meal in a full-service setting. The Company’s menu offers a broad selection of freshly-prepared foods which appeal to customers throughout all dayparts. The menu currently features over 100 items comprised of a broad selection of breakfast, lunch, dinner and afternoon and evening snack items. Foodservice operations manufactures premium ice cream dessert products and distributes such manufactured products and purchased finished goods to Company-operated and franchised restaurants. Additionally, it sells premium ice cream dessert products to distributors and retail locations. The Company’s franchise segment includes a royalty based on franchise restaurant revenue. In addition, the Company receives rental income from various franchised restaurants. The Company does not allocate general and administrative expenses associated with its headquarters operations to any business segment. These costs include expenses of the following functions: legal, accounting, personnel not directly related to a segment, information systems and other headquarter activities.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that the financial results for the foodservice operating segment, prior to intersegment eliminations, have been prepared using a management approach, which is consistent with the basis and manner in which the Company’s management internally reviews financial information. Using this approach, the Company evaluates performance based on stand-alone operating segment income (loss) before income taxes and generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices.

Adjusted EBITDA represents net income (loss) from continuing operations before (i) (provision for) benefit from income taxes, (ii) interest expense, net, (iii) depreciation and amortization, (iv) write-downs of property and equipment, (v) net periodic pension cost and (vi) other non-cash items. Adjusted EBITDA is a non-GAAP financial measure. The Company has included information concerning adjusted EBITDA in this Form 10-K because the Company’s management incentive plan pays bonuses based on achieving operating segment adjusted EBITDA targets and the Company believes that such information is used by certain investors as one measure of a company’s historical ability to service debt. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, earnings (loss) from continuing operations or other traditional indications of the Company’s operating performance.

During the year ended December 31, 2006, the Company stopped the allocation of one financial department to the restaurant segment as it was determined that this department should be reported with general and administrative corporate expenses. Adjusted EBITDA and income (loss) from continuing operations before (provision for) benefit from income taxes have been restated to remove the costs associated with this department of $0.2 million for both years ended January 1, 2006 and January 2, 2005.

F-47

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. SEGMENT REPORTING (Continued)

	For the Years Ended
	December 31,				January 1,			January 2,
	2006				2006			2005
								(53 weeks)
	(in thousands)
Revenues:
Restaurant		$	395,999		$	400,821		$	431,763
Foodservice		235,782			238,099			245,484
Franchise		15,401			14,454			13,199
Total		$	647,182		$	653,374		$	690,446
Intersegment revenues:
Restaurant		$	—		$	—		$	—
Foodservice		(115,727		)	(122,027		)	(132,847		)
Franchise.		—			—			—
Total.		$	(115,727	)	$	(122,027	)	$	(132,847	)
External revenues:
Restaurant		$	395,999		$	400,821		$	431,763
Foodservice		120,055			116,072			112,637
Franchise		15,401			14,454			13,199
Total		$	531,455		$	531,347		$	557,599

F-48

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. SEGMENT REPORTING (Continued)

	For the Years Ended
	December 31,				January 1,			January 2,
	2006				2006			2005
								(53 weeks)
	(in thousands)
Adjusted EBITDA:
Restaurant		$	37,427		$	35,277		$	42,318
Foodservice		16,182			11,563			12,983
Franchise		10,314			10,274			9,384
Corporate		(21,471		)	(19,609		)	(20,186		)
Gain on property and equipment, net		3,073			1,610			892
Restructuring expenses		—			—			(2,627		)
Gain on litigation settlement		—			—			3,644
Less pension expense (benefit) included in reporting segments		1,555			286			(2,116		)
Total		$	47,080		$	39,401		$	44,292
Interest expense, net-Corporate		$	20,491		$	20,924		$	22,295
Other (income) expense		$	—		$	(130	)	$	9,235
Depreciation and amortization:
Restaurant		$	16,221		$	16,845		$	15,636
Foodservice		2,882			3,216			3,376
Franchise		325			172			286
Corporate		3,485			3,202			3,294
Total		$	22,913		$	23,435		$	22,592
Other non-cash expenses (income):
Pension expense (benefit)		$	1,555		$	286		$	(2,116	)
Pension settlement expense		—			—			2,204
Write-downs of property and equipment.		719			2,478			91
Total.		$	2,274		$	2,764		$	179
Income (loss) from continuing operations before (provision for) benefit from income taxes:
Restaurant		$	21,206		$	18,432		$	26,682
Foodservice		13,300			8,347			9,607
Franchise		9,989			10,102			9,098
Corporate		(45,447		)	(43,605		)	(55,010		)
Gain (loss) on property and equipment, net		2,354			(868		)	801
Pension settlement expense		—			—			(2,204		)
Restructuring expenses		—			—			(2,627		)
Gain on litigation settlement		—			—			3,644
Total		$	1,402		$	(7,592	)	$	(10,009	)

F-49

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. SEGMENT REPORTING (Continued)

	For the Years Ended
	December 31,			January 1,
	2006			2006
	(in thousands)
Capital expenditures, including assets
acquired under capital leases:
Restaurant		$	16,068		$	14,674
Foodservice		4,306			1,516
Corporate		1,350			968
Total		$	21,724		$	17,158

	December 31,			January 1,
	2006			2006
	(in thousands)
Total assets:
Restaurant		$	119,787	$	131,810
Foodservice		40,875		38,609
Franchise		11,827		7,634
Corporate		47,678		40,189
Total		$	220,167	$	218,242

18. INSURANCE RECOVERY

On January 27, 2006, the Company initiated litigation against its insurance carrier to recoup defense expenses related to the Blake litigation. On September 27, 2006, the Company entered into a settlement agreement with its insurance carrier which provides, in part, for 1) a lump sum payment to settle past disputed expenses and 2) clarification of coverage of future defense expenses related to this matter.

During the year ended December 31, 2006, the Company received insurance recoveries of $1,596,000, of which $1,428,000 was pursuant to the settlement agreement with the Company’s insurance carrier, related to costs and expenses incurred related to the above matter. Additionally, the Company has recorded a receivable for insurance recoveries to the extent defense expenses have been incurred and realization of a related insurance claim is probable. As of December 31, 2006, the receivable for insurance recoveries totaled $170,000.

19. GAIN ON LITIGATION SETTLEMENT

In January 2004, the Company reached a settlement in a lawsuit filed against a former administrator of one of the Company’s benefit plans. The settlement was based on the administrator’s alleged failure to adhere to the terms of a contract and resulted in a one-time payment to the Company of $3,775,000, which was received on April 2, 2004. As a result of this lawsuit, the Company incurred professional fees of approximately $500,000 which were included in the consolidated statement of operations for the year ended December 28, 2003 and an additional $131,000 in professional fees that were offset against the payment in the accompanying consolidated statement of operations for the year ended January 2, 2005.

F-50

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20. QUARTERLY FINANCIAL DATA (UNAUDITED)

	For the Quarters Ended
	April 2,			July 2,		October 1,			December 31,
	2006			2006		2006			2006(b)
	(in thousands, except per share amounts)
2006
Revenues	$	125,715		$	141,490	$	141,884			$	122,366
Operating income	$	984		$	9,382	$	7,385			$	3,808
(Loss) income from continuing operations	$	(4,436	)	$	3,985	$	2,003			$	(67	)
Income (loss) from discontinued operations, net of income tax effect	$	2,616		$	674	$	(32	)		$	203
Net (loss) income	$	(1,820	)	$	4,659	$	1,971			$	136
Basic (loss) income per share:
(Loss) income from continuing operations	$	(0.56	)	$	0.50	$	0.24			$	(0.01	)
Income from discontinued operations, net of income tax effect	$	0.33		$	0.09	$	—			$	0.03
Net (loss) income	$	(0.23	)	$	0.59	$	0.24			$	0.02
Diluted (loss) income per share:
(Loss) income from continuing operations	$	(0.56	)	$	0.50	$	0.24			$	(0.01	)
Income from discontinued operations, net of income tax effect	$	0.33		$	0.08	$	—			$	0.03
Net (loss) income	$	(0.23	)	$	0.58	$	0.24			$	0.02
Weighted average shares:
Basic	7,901			7,913		7,925				8,019
Diluted	7,901			8,044		8,044				8,160

	April 3,			July 3,			October 2,		January 1,
	2005			2005			2005		2006(a, b)
	(in thousands, except per share amounts)
2005
Revenues.	$	121,663		$	145,093		$	141,141		$	123,450
Operating income (loss)	$	1,928		$	9,041		$	7,718		$	(5,485	)
(Loss) income from continuing operations	$	(2,618	)	$	2,648		$	2,421		$	(30,045	)
(Loss) income from discontinued operations, net of income tax effect	$	(368	)	$	(131	)	$	986		$	(152	)
Net (loss) income	$	(2,986	)	$	2,517		$	3,407		$	(30,197	)
Basic (loss) income per share:
(Loss) income from continuing operations	$	(0.34	)	$	0.34		$	0.31		$	(3.80	)
(Loss) income from discontinued operations, net of income tax effect	$	(0.05	)	$	(0.02	)	$	0.12		$	(0.02	)
Net (loss) income	$	(0.39	)	$	0.32		$	0.43		$	(3.82	)
Diluted (loss) income per share:
(Loss) income from continuing operations	$	(0.34	)	$	0.34		$	0.31		$	(3.80	)
(Loss) income from discontinued operations, net of income tax effect	$	(0.05	)	$	(0.02	)	$	0.12		$	(0.02	)
Net (loss) income	$	(0.39	)	$	0.32		$	0.43		$	(3.82	)
Weighted average shares:
Basic	7,717			7,753			7,840			7,899
Diluted	7,717			7,893			7,988			7,899

F-51

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20. QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)

(a) During the fourth quarter of 2005, the Company entered a three-year cumulative loss position and revised its projections of the amount and timing of profitability in future periods. As a result, the Company increased its valuation allowance by approximately $26,729,000 ($22,184,000 to income tax expense and $4,545,000 to stockholders’ deficit) to reduce the carrying value of deferred tax assets to zero (Note 8).

(b) The fourth quarters in 2006 and 2005 included asset impairment write-downs of $198,000 and $2,190,000, respectively (Note 5).

21. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

FICC’s obligation related to the Senior Notes is guaranteed fully and unconditionally by one of FICC’s wholly owned subsidiaries. There are no restrictions on FICC’s ability to obtain dividends or other distributions of funds from this subsidiary, except those imposed by applicable law. The following supplemental financial information sets forth, on a consolidating basis, balance sheets, statements of operations and statements of cash flows for FICC (the “Parent Company”), Friendly’s Restaurants Franchise, Inc. (the “Guarantor Subsidiary”) and Friendly’s International, Inc., Restaurant Insurance Corporation, Friendly’s Realty I, LLC, Friendly’s Realty II, LLC and Friendly’s Realty III, LLC (collectively, the “Non-guarantor Subsidiaries”). All of the limited liability companies’ (the “LLCs”) assets were owned by the LLCs, which are separate entities with separate creditors which will be entitled to be satisfied out of the LLCs’ assets. Separate complete financial statements and other disclosures of the Guarantor Subsidiary as of December 31, 2006 and January 1, 2006 and for the years ended December 31, 2006 and January 1, 2006 and January 2, 2005 were not presented because management has determined that such information is not material to investors.

Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of the subsidiaries are, therefore, reflected in the Parent Company’s investment accounts and earnings. The principal elimination entries eliminate the Parent Company’s investments in subsidiaries and intercompany balances and transactions.

F-52

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

21. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (Continued)

Supplemental Consolidating Balance Sheet
As of December 31, 2006
(in thousands)

								Non-
	Parent			Guarantor				guarantor
	Company			Subsidiary				Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents	$	22,057			$	798			$	2,222			$	—			$	25,077
Restricted cash	—				—				517				—				517
Accounts receivable, net	9,593				1,842				7,776				(7,776		)		11,435
Inventories	17,059				—				—				—				17,059
Assets held for sale	896				—				—				—				896
Deferred income taxes	—				156				—				(156		)		—
Prepaid expenses and other current assets	3,181				(2		)		9				(61		)		3,127
Total current assets	52,786				2,794				10,524				(7,993		)		58,111
Deferred income taxes	928				288				—				(288		)		928
Property and equipment, net	96,850				—				40,575				—				137,425
Intangibles and deferred costs, net	15,759				—				2,024				—				17,783
Investments in subsidiaries	107				—				—				(107		)		—
Other assets	5,005				851				915				(851		)		5,920
Total assets	$	171,435			$	3,933			$	54,038			$	(9,239	)		$	220,167
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
Current maturities of long-term obligations	$	9,387			$	—			$	1,493			$	(7,776	)		$	3,104
Accounts payable	22,247				—				—				—				22,247
Accrued expenses	39,926				2,098				1,533				(217		)		43,340
Total current liabilities	71,560				2,098				3,026				(7,993		)		68,691
Long-term obligations, less current maturities	180,665				—				46,667				—				227,332
Other long-term liabilities	46,106				702				5,371				(1,139		)		51,040
Stockholders’ (deficit) equity	(126,896		)		1,133				(1,026		)		(107		)		(126,896		)
Total liabilities and stockholders’ (deficit) equity	$	171,435			$	3,933			$	54,038			$	(9,239	)		$	220,167

F-53

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

21. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (Continued)

Supplemental Consolidating Statement of Operations
For the Year Ended December 31, 2006
(in thousands)

								Non-
	Parent			Guarantor				guarantor
	Company			Subsidiary				Subsidiaries				Eliminations				Consolidated
Revenues	$	519,666			$	11,789			$	—			$	—			$	531,455
Costs and expenses:
Cost of sales	200,828				—				—				—				200,828
Labor and benefits	141,148				—				—				—				141,148
Operating expenses and write- downs of property and equipment	111,515				—				(6,766		)		—				104,749
General and administrative expenses	38,663				4,621				—				—				43,284
Depreciation and amortization	20,736				—				2,177				—				22,913
Gain on franchise sales of restaurant operations and properties	(3,927		)		—				—				—				(3,927		)
Loss (gain) on disposals of other property and equipment, net	1,612				—				(711		)		—				901
Interest expense, net	16,110				—				4,381				—				20,491
Other income	(334		)		—				—				—				(334		)
(Loss) income before benefit from (provision for) income taxes and equity in net income of consolidated subsidiaries	(6,685		)		7,168				919				—				1,402
Benefit from (provision for) income taxes	3,255				(2,939		)		(233		)		—				83
(Loss) income from continuing operations	(3,430		)		4,229				686				—				1,485
Income from discontinued operations, net of income tax expense	3,461				—				—				—				3,461
Income before equity in net income of consolidated subsidiaries	31				4,229				686				—				4,946
Equity in net income of consolidated subsidiaries	4,915				—				—				(4,915		)		—
Net income (loss)	$	4,946			$	4,229			$	686			$	(4,915	)		$	4,946

F-54

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

21. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (Continued)

Supplemental Consolidating Statement of Cash Flows
For the Year Ended December 31, 2006
(in thousands)

								Non-
	Parent			Guarantor				guarantor
	Company			Subsidiary				Subsidiaries				Eliminations				Consolidated
Net cash provided by operating activities	$	18,887			$	18			$	3,892			$	(1,090	)		$	21,707
Cash flows from investing activities:
Purchases of property and equipment	(20,805		)		—				(865		)		—				(21,670		)
Proceeds from sales of property and equipment	11,797				—				1,563				—				13,360
Return of investment in subsidiary	1,496				—				—				(1,496		)		—
Net cash (used in) provided by investing activities	(7,512		)		—				698				(1,496		)		(8,310		)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit facility	8,000				—				—				—				8,000
Repayments of obligations	(9,476		)		—				(2,054		)		—				(11,530		)
Payments of deferred financing costs	(675		)		—				—				—				(675		)
Stock options exercised	1,143				—				—				—				1,143
Tax Benefit from exercise of stock options	145				—				—				—				145
Reinsurance payments made from deposits	—				—				(1,090		)		1,090				—
Dividends paid	—				—				(1,496		)		1,496				—
Net cash used in financing activities	(863		)		—				(4,640		)		2,586				(2,917		)
Net increase (decrease) in cash and cash equivalents	10,512				18				(50		)		—				10,480
Cash and cash equivalents, beginning of period	11,546				780				2,271				—				14,597
Cash and cash equivalents, end of period.	$	22,058			$	798			$	2,221			$	—			$	25,077
Supplemental disclosures:
Interest paid	$	15,808			$	—			$	4,330			$	—			$	20,138
Income taxes (refunded) paid	(2,727		)		2,615				172				—				60
Non-cash dividend paid to parent	8,500				(8,500		)		—				—				—
Capital lease obligations incurred	54				—				—				—				54

F-55

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

21. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (Continued)

Supplemental Consolidating Balance Sheet
As of January 1, 2006
(in thousands)

							Non-
	Parent			Guarantor			guarantor
	Company			Subsidiary			Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents	$	11,546			$	780		$	2,271			$	—			$	14,597
Restricted cash	—				—			2,549				—				2,549
Accounts receivable, net	9,036				1,721			—				—				10,757
Inventories	15,775				—			—				—				15,775
Assets held for sale	933				—			—				—				933
Deferred income taxes	(131		)		26			—				105				—
Prepaid expenses and other current assets	7,571				2,565			7,785				(12,877		)		5,044
Total current assets	44,730				5,092			12,605				(12,772		)		49,655
Deferred income taxes	(276		)		381			—				(105		)		—
Property and equipment, net	101,004				—			42,510				—				143,514
Intangibles and deferred costs, net	16,808				—			2,255				—				19,063
Investments in subsidiaries	5,188				—			—				(5,188		)		—
Other assets	5,095				5,118			915				(5,118		)		6,010
Total assets	$	172,549			$	10,591		$	58,285			$	(23,183	)		$	218,242
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
Current maturities of long-term obligations	$	9,253			$	—		$	1,368			$	(7,776	)		$	2,845
Accounts payable	24,968				—			—				—				24,968
Accrued expenses	37,237				4,258			1,825				(4,844		)		38,476
Total current liabilities	71,458				4,258			3,193				(12,620		)		66,289
Long-term obligations, less current maturities	182,221				—			48,846				—				231,067
Other long-term liabilities	60,708				930			6,461				(5,375		)		62,724
Stockholders’ (deficit) equity	(141,838		)		5,403			(215		)		(5,188		)		(141,838		)
Total liabilities and stockholders’ (deficit) equity	$	172,549			$	10,591		$	58,285			$	(23,183	)		$	218,242

F-56

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

21. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (Continued)

Supplemental Consolidating Statement of Operations
For the Year Ended January 1, 2006
(in thousands)

								Non-
	Parent			Guarantor				guarantor
	Company			Subsidiary				Subsidiaries				Eliminations				Consolidated
Revenues.	$	520,369			$	10,978			$	—			$	—			$	531,347
Costs and expenses:
Cost of sales	205,332				—				—				—				205,332
Labor and benefits	143,973				—				—				—				143,973
Operating expenses and write-downs of property and equipment	115,239				—				(6,952		)		—				108,287
General and administrative expenses	34,126				4,620				—				—				38,746
Depreciation and amortization	21,230				—				2,205				—				23,435
Gain on franchise sales of restaurant operations and properties	(2,658		)		—				—				—				(2,658		)
Loss on disposals of other property and equipment, net	1,030				—				—				—				1,030
Interest expense, net	16,345				—				4,579				—				20,924
Other income	(130		)		—				—				—				(130		)
(Loss) income before provision for income taxes and equity in net income of consolidated subsidiaries	(14,118		)		6,358				168				—				(7,592		)
Provision for income taxes	(17,175		)		(2,607		)		(220		)		—				(20,002		)
(Loss) income from continuing operations	(31,293		)		3,751				(52		)		—				(27,594		)
(Loss) income from discontinued operations, net of income taxes	(1,517		)		—				1,852				—				335
(Loss) income before equity in net income of consolidated subsidiaries	(32,810		)		3,751				1,800				—				(27,259		)
Equity in net income of consolidated subsidiaries	5,551				—				—				(5,551		)		—
Net (loss) income	$	(27,259	)		$	3,751			$	1,800			$	(5,551	)		$	(27,259	)

F-57

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

21. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION (Continued)

Supplemental Consolidating Statement of Cash Flows
For the Year Ended January 1, 2006
(in thousands)

								Non-
	Parent			Guarantor				guarantor
	Company			Subsidiary				Subsidiaries				Eliminations				Consolidated
Net cash provided by (used in) operating activities	$	14,482			$	(580	)		$	1,356			$	(813	)		$	14,445
Cash flows from investing activities:
Purchases of property and equipment	(16,902		)		—				—				—				(16,902		)
Proceeds from sales of property and equipment	5,375				—				2,870				—				8,245
Purchases of marketable securities	(665		)		—				—				—				(665		)
Proceeds from sales of marketable securities	1,643				—				—				—				1,643
Return of investments in subsidiaries, net	1,367				—				—				(1,367		)		—
Net cash (used in) provided by investing activities	(9,182		)		—				2,870				(1,367		)		(7,679		)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit facility	16,250				—				—				—				16,250
Proceeds from issuance of mortgages	1,115				—				8,500				—				9,615
Repayments of obligations	(21,786		)		—				(10,261		)		—				(32,047		)
Payments of deferred financing costs.	(243		)		—				(186		)		—				(429		)
Stock options exercised	1,037				—				—				—				1,037
Reinsurance deposits received	—				—				114				(114		)		—
Reinsurance payments made from deposits	—				—				(927		)		927				—
Capital contributions	—				—				503				(503		)		—
Dividends paid	—				—				(1,870		)		1,870				—
Net cash used in financing activities	(3,627		)		—				(4,127		)		2,180				(5,574		)
Net increase (decrease) in cash and cash equivalents	1,673				(580		)		99				—				1,192
Cash and cash equivalents, beginning of year	9,873				1,360				2,172				—				13,405
Cash and cash equivalents, end of year.	$	11,546			$	780			$	2,271			$	—			$	14,597
Supplemental disclosures:
Interest paid	$	15,517			$	—			$	4,652			$	—			$	20,169
Income taxes (refunded) paid	(2,118		)		2,594				215				—				691
Income tax benefit of stock options exercised	450				—				—				—				450
Capital lease obligations incurred	256				—				—				—				256
Capital lease obligations terminated	51				—				—				—				51

F-58

ANNUAL REPORT ON FORM 10-K
ITEM 15(c)

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2006, JANUARY 1, 2006 and JANUARY 2, 2005
(in thousands)

Column A	Column B			Column C							Column D			Column E
	Balance at			Charged to			Charged to							Balance at
	Beginning			Costs and			Other							End
Description	of Year			Expenses			Accounts				Deductions			of Year
2006
Reserve for restructuring costs		$	72		$	—		$	—			$	72		$	—
Allowance for doubtful accounts— accounts receivable		$	758		$	522		$	30			$	—		$	1,310
Allowance for doubtful accounts— notes receivable		$	263		$	—		$	48			$	263		$	48
2005
Reserve for restructuring costs.		$	1,078		$	—		$	—			$	1,006		$	72
Allowance for doubtful accounts— accounts receivable		$	539		$	222		$	(3	)		$	—		$	758
Allowance for doubtful accounts— notes receivable		$	263		$	—		$	—			$	—		$	263
2004
Reserve for restructuring costs		$	441		$	2,627		$	—			$	1,990		$	1,078
Allowance for doubtful accounts— accounts receivable		$	696		$	88		$	(245	)		$	—		$	539
Allowance for doubtful accounts— notes receivable		$	313		$	—		$	—			$	50		$	263

F-59

EXHIBIT INDEX

3.1		Restated Articles of Organization of Friendly Ice Cream Corporation (the “Company”) (Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, Reg. No. 333-34633).
3.2		Amended and Restated By-laws of the Company (Incorporated by reference to Exhibit 3(II) to the Company’s current report on Form 8-K filed September 2, 2003, File No. 001-13579).
4.1		Rights Agreement between the Company and The Bank of New York, a Rights Agent (Incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1, Reg. No. 333-34633).
4.2		Indenture dated as of March 8, 2004, among Friendly Ice Cream Corporation, Friendly’s Restaurants Franchise, Inc. and The Bank of New York, as Trustee. (Incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2004, File No. 001-13579).
10.1		Amended and Restated Revolving Credit Agreement dated as of March 15, 2006 (Incorporated by reference to Exhibit 4.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006, File No. 001-13579).
10.2		Amendment Number One to Amended and Restated Revolving Credit Agreement dated as of August 1, 2006 (Incorporated by reference to Exhibit 4.10 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 2, 2006, File No. 001-13579).
10.3		Loan Agreement between the Company’s subsidiary, Friendly’s Realty I, LLC and G.E. Capital Franchise Finance Corporation effective as of December 19, 2001 (Incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2001, File No. 001-13579).
10.4		Loan Agreement between the Company’s subsidiary, Friendly’s Realty II, LLC and G.E. Capital Franchise Finance Corporation effective as of December 19, 2001 (Incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2001, File No. 001-13579).
10.5		Loan Agreement between the Company’s subsidiary, Friendly’s Realty III, LLC and G.E. Capital Franchise Finance Corporation effective as of December 19, 2001 (Incorporated by reference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2001, File No. 001-13579).
10.6		Loan Agreement between the Company’s subsidiary, Friendly’s Realty I, LLC and G.E. Capital Franchise Finance Corporation effective as of December 30, 2005. (Incorporated by reference to Exhibit 4.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006, File No. 001-13579).
10.7		The Company’s 1997 Stock Option Plan (Incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1, Reg. No. 333-34633).*
10.8		The Company’s 1997 Stock Option Plan (as amended effective March 27, 2000) (Incorporated by reference to Exhibit 10.1(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2002, File No. 001-13579).*
10.9		The Company’s 1997 Stock Option Plan (as amended effective October 24, 2001) (Incorporated by reference to Exhibit 10.1(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2002, File No. 001-13579).*
10.10		The Company’s 1997 Restricted Stock Plan (Incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-1, Reg. No. 333-34633).*

10.11		The Company’s 2003 Incentive Plan (as amended May 10, 2006) (Incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8, Reg. No. 333-135438).*
10.12		Form of 1997 Stock Option Plan Award Agreement for Officers. (Incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006, File No. 001-13579).*
10.13		Form of 1997 Stock Option Plan Award Agreement for Directors (Incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006, File No. 001-13579).*
10.14		Form of 2003 Incentive Plan Stock Option Award Agreement for Officers (Incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006, File No. 001-13579).*
10.15		Form of 2003 Incentive Plan Stock Option Award Agreement for Directors (Incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-13579).*
10.16		Form of 2003 Incentive Plan Restricted Stock Unit Award Agreement for Directors (Incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006, File No. 001-13579).*
10.17		Key Executive Stock Option Award Agreement between the Company and George M. Condos as of January 8, 2007 (Incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-13579).*
10.18		The Company’s 2005 Annual Incentive Plan for Corporate Employees (Incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006, File No. 001-13579).*
10.19		The Company’s 2005 Annual Incentive Plan for Corporate and Company Restaurants Group (Incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006, File No. 001-13579).*
10.20		The Company’s 2006 Annual Incentive Plan for Corporate Employees (Incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-13579).*
10.21		The Company’s 2006 Annual Incentive Plan for Corporate Officers (Incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-13579).*
10.22		The Company’s 2006 Annual Incentive Plan for Officers of the Corporate and Company Restaurants Group (Incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-13579).*
10.23		Summary of Board of Directors Compensation (Incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-13579).*
10.24		Form of Change of Control Agreement between the Company and each of Messrs. Hoagland, Green, Pastore, Ulrich and Hopkins (Incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2005, File No. 001-13579).*
10.25		Form of Franchise Agreement (Incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-13579).

10.26		Form of Franchise Development Agreement (Incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-13579).
10.27		Purchase Agreement between Realty Income Corporation as buyer and the Company as seller dated December 13, 2001 (Incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2001, File No. 001-13579).
10.28		Sublease between SSP Company, Inc. and the Company, as amended, for the Chicopee, Massachusetts Distribution Center (Incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1, Reg. No. 333-34633).
10.29		Domestic Relocation Policy for Executives and Regional Directors (Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 3, 2005, File No. 001-13579).*
10.30		Memorandum of Agreement Between Michael A. Maglioli and Friendly Ice Cream Corporation effective March 25, 2004 (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2004, File No. 001-13579).*
10.31		Memorandum of Agreement between Lawrence A. Rusinko and the Company effective May 31, 2005 (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 3, 2005, File No. 001-13579).*
10.32		Amendment to Memorandum of Agreement between Lawrence A. Rusinko and the Company effective as of September 2, 2005 (Incorporated by reference to Exhibit 10.16 to the Company’s Current Report on Form 8-K filed with the Commission on September 9, 2005).*
10.33		Memorandum of Agreement between Allan J. Okscin and Friendly Ice Cream Corporation effective January 23, 2006 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on 8-K filed with the Commission on January 26, 2006).*
10.34		Memorandum of Agreement between the Company and John L. Cutter effective as of September 28, 2006 (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 1, 2006, File No. 001-13579).*
10.35		Memorandum of Agreement between the Company and George M. Condos as of January 8, 2007. (Incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-13579).*
21.1		Subsidiaries of the Company (Incorporated by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2002, File No. 001-13579).
23.1		Consent of Ernst & Young LLP. (Incorporated by reference to Exhibit 23.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 001-13579).
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by George M. Condos.
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Paul V. Hoagland.
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by George M. Condos and Paul V. Hoagland.

*Management Contract or Compensatory Plan or Arrangement