<PAGE>
                                       
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                            -----------------------


                                   FORM 10-K


               [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] 
                 FOR THE FISCAL YEAR ENDED DECEMBER 26, 1997
                                      OR
               [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
            OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
                 FOR THE TRANSITION PERIOD FROM ..... TO .....

                         Commission file number 0-23024

                          BROTHERS GOURMET COFFEES, INC.
             (Exact name of registrant as specified in its charter)

               DELAWARE                                          52-1681708
     (State or other jurisdiction                             (I.R.S. Employer 
   of incorporation or organization)                         Identification No.)

           2255 GLADES ROAD
             SUITE 100 E
            BOCA RATON, FL                                          33431
(Address of principal executive offices)                          (Zip Code)
                                       
                                (561) 995-2600
              (Registrant's telephone number, including area code)

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

                                     NONE

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

                  BROTHERS GOURMET COFFEES, INC. COMMON STOCK
                (SECURITIES ARE LISTED ON NASDAQ NATIONAL MARKET)

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

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

         The aggregate market value of the voting stock held by 
non-affiliates of the registrant on December 26, 1997, was $12,878,907.

         The number of shares outstanding of each of the registrant's classes 
of common stock as of December 26, 1997, was 12,121,324.                      

                             ---------------------

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated herein by reference:

Part III - The registrant's definitive Proxy Statement for its 1998 Annual 
           Meeting of Stockholders or an Amended Annual Report filed on 
           Form 10-K/A, to be filed not later than 120 days after the end 
           of the registrant's Fiscal Year.

<PAGE>

                 SPECIAL NOTE ABOUT FORWARD LOOKING STATEMENTS

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM 
10-K FOR THE FISCAL YEAR ENDED DECEMBER 26, 1997, CERTAIN MATTERS DISCUSSED 
HEREIN INCLUDING, WITHOUT LIMITATION, PART I, ITEM 1. THE BUSINESS AND ITEM 
3. LEGAL PROCEEDINGS, AND PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND 
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAIN FORWARD 
LOOKING STATEMENTS BASED ON MANAGEMENT'S EXPECTATIONS REGARDING, AND 
EVALUATIONS OF CURRENT INFORMATION ABOUT, THE COMPANY'S BUSINESS THAT INVOLVE 
RISKS AND UNCERTAINTIES, AND ARE SUBJECT TO FACTORS THAT COULD CAUSE ACTUAL 
FUTURE RESULTS TO DIFFER, BOTH ADVERSELY AND MATERIALLY, FROM CURRENTLY 
ANTICIPATED RESULTS, INCLUDING, WITHOUT LIMITATION, THE EFFECT OF ECONOMIC 
AND MARKET CONDITIONS; INDUSTRY AND INDUSTRY SEGMENT CONDITIONS AND 
DIRECTIONS; WEATHER; COFFEE CROP AND GREEN COFFEE PRICE FLUCTUATIONS; FOREIGN 
LABOR PROBLEMS; FOREIGN COFFEE DELIVERY DIFFICULTIES; PRODUCTION COSTS; 
COMPETITIVE PRESSURES; THE COMPANY'S OWN FINANCING CONTINGENCIES AND 
RESTRICTIONS; MANAGEMENT LIMITATIONS; THE ABILITY AND WILLINGNESS OF 
PURCHASERS TO COMPLETE ACQUISITIONS OF THE COMPANY'S RETAIL COFFEE BARS AND 
THE GLORIA JEAN'S STORES; THE COMPANY'S ABILITY TO RESOLVE POST-CLOSING 
DIFFERENCES WITH THE PURCHASERS OF CERTAIN COMPONENTS OF THE COMPANY'S 
DISCONTINUED RETAIL OPERATIONS; LEGISLATION AND REGULATIONS; RESOLUTION OF 
PENDING LITIGATION IN WHICH THE COMPANY IS A DEFENDANT; THE ABILITY OF THE 
COMPANY TO CLOSE CONTRACTS WITH NEW ACCOUNTS AND TO RENEW EXISTING ACCOUNTS 
AS SUCH ACCOUNTS COME UP FOR RENEWAL; CHANGES IN CONSUMER TASTES AND 
PREFERENCES; AND THE SUCCESS OR LACK THEREOF OF THE COMPANY'S NEW PRODUCTS, 
NEW PACKAGING, DISPLAY MODELS AND PACKAGING LINES.




                                       1


<PAGE>
                                       
                                     PART I


ITEM 1.  BUSINESS


THE COMPANY


         Brothers Gourmet Coffees, Inc. ("Brothers" or the "Company"), is an 
integrated source, roaster and distributor of high quality gourmet coffee 
products. The Company distributes its product principally through grocery 
stores, supermarkets, mass merchandisers, drug stores, military commissaries, 
warehouse stores and specialty stores (the "wholesale distribution channel").

         The Company's predecessor companies, Nicholas Coffee Company and 
Elkin Coffee, Inc., were founded in 1919 and 1933, respectively. Both were 
principally involved in the wholesale distribution of gourmet coffees at the 
times of their respective acquisitions. Brothers Gourmet Products, Inc., and 
Boyer's International, Inc. (collectively, "BGP"), were founded in 1988. In 
December 1992, the Company recapitalized and merged with BGP, which, at the 
time, was the leading wholesaler of gourmet coffee products throughout the 
Rocky Mountain region of the United States. In November 1993, in separate 
transactions, the Company acquired Hillside Coffee of California, Inc. 
("Hillside"), a west coast wholesale coffee roaster and distributor, and 
Edglo Enterprises, Inc. ("Edglo"), a mall-based retailer of coffee and coffee 
products (the Gloria Jean's business being referred to herein as "Gloria 
Jean's").

         In 1994 and early 1995, the Company opened additional Gloria Jean's 
stores, bringing the total number of Gloria Jean's owned and franchised 
stores to approximately 230 (the "Gloria Jean's Stores"). In 1994, the 
Company also started opening its own street-front retail coffee stores under 
the name Brothers Gourmet Coffee Bars (the "Coffee Bars"). By early 1995, the 
Company and its subsidiaries had (1) signed leases for and opened 29 Coffee 
Bars and (2) signed leases for, but did not open, ten (10) more Coffee Bars 
("Dark Leases"). The Coffee Bars and Gloria Jean's Stores are collectively 
referred to herein as the "Retail Operations."

         During the first half of 1995, the Company conducted a detailed 
review of its Retail Operations. In June 1995, after concluding its review, 
the Company announced that it would be (1) focusing all of its attention and 
resources on expanding its wholesale business, (2) disposing of its Retail 
Operations (the "Disposition Plan") and (3) re-aligning its cost structure 
with its new wholesale focus, by reducing its workforce and consolidating its 
roasting, packaging and warehouse facilities into its Houston, Texas facility 
(the "Houston Plant") (the "Restructuring Plan").

         In connection with its Disposition Plan:

                  --   In November 1995, the Company sold Gloria Jean's to
                       The Second Cup, Ltd. ("Second Cup"), for $30 million.
                       The Company has received $27.6 million of the
                       purchase price. Approximately $1.0 million of the
                       purchase price was used to fund a portion of the
                       settlement of the Gloria Jean's Franchise Litigation.
                       See PART I, ITEM 3. LEGAL PROCEEDINGS -- GLORIA
                       JEAN'S FRANCHISE LITIGATION below. Another $0.44
                       million of the purchase price was distributed to
                       Second Cup in January 1998 in payment of certain
                       claims asserted by Second Cup against the Company for
                       post-closing obligations associated with certain of
                       the Company's representations and warranties
                       contained in the purchase agreement. The remaining
                       $0.97 million of the purchase is still being held in
                       escrow pending the resolution of



                                       2

<PAGE>

                       certain post-closing adjustments and claims. See PART I,
                       ITEM 3. LEGAL PROCEEDINGS -- SECOND CUP WARRANTY CLAIMS/
                       LITIGATION below.

                  --   In February 1996, the Company sold twelve (12) of its 
                       leased Coffee Bar sites located in Colorado and Texas 
                       to Diedrich Coffee ("Diedrich") for $1.29 million. The
                       Company has received all of the purchase price.

                  --   In March 1996, the Company sold five (5) of its leased 
                       Coffee Bar sites (and one (1) Dark Lease) located in 
                       Washington, D.C., to Foster Brothers Corporation ("Foster
                       Brothers") for $400,000, plus the assumption of 
                       approximately $440,000 in liabilities.  The Company has
                       received all of the purchase price.

                  --   In May 1996, the Company sold seven (7) of its leased
                       Coffee Bar sites (and four (4) Dark Leases) located
                       in Illinois to Foster Brothers for $650,000. The
                       Company has received $150,000 of the purchase price.
                       In December 1996, the Company agreed to permit Foster
                       Brothers to defer payment of the remaining $500,000.
                       Foster's payment obligation bears interest at the
                       rate of 9.5% per annum. The Company anticipates that
                       it will receive the entire remaining amount of the
                       purchase price in the first half of the current
                       fiscal year ("Fiscal Year 1998") (as defined below).

                  --   The Company is negotiating the sale of its two (2) 
                       remaining leased Coffee Bar sites located in 
                       New York City.

                  --   In 1995 and 1996, the Company settled its obligations 
                       with respect to six (6) of its eight (8) Dark Leases.

                  --   In February 1998, the Company and one of its
                       wholly-owned subsidiaries, settled the subsidiary's's
                       obligations with respect to one (1) of its two (2)
                       remaining Dark Leases located in Chicago, Illinois,
                       by agreeing to pay the landlord $250,000. The
                       landlord for the last remaining Dark Lease which is
                       located in New York City, (1) has obtained a judgment
                       against the Company for approximately $128,000 of
                       unpaid rents through February 1996 and other costs
                       and expenses and (2) has filed suit against the
                       Company for $270,000 of unpaid rents for the period
                       from March 1996 through June 1997. The Company is in
                       negotiations with the landlord to settle this
                       litigation. See PART I, ITEM 3. LEGAL PROCEEDINGS --
                       RETAIL STORE LITIGATION below.

         During Fiscal Year 1996 (as defined below), the Company 
substantially completed its Restructuring Plan. In connection therewith, the 
Company:

                  --   reduced its workforce from 843 persons at December 29, 
                       1995, to 401 persons at December 27, 1996;

                  --   reduced its administrative expenses by over $4 million 
                       (approximately 41%) from Fiscal Year 1995 (as defined 
                       below) levels; and

                  --   consolidated all of its roasting, packaging and warehouse
                       facilities into its Houston Plant.

         During Fiscal Year 1997 (as defined below), the Company:



                                       3
<PAGE>
                  --   following the acquisition of its Credit Facility by
                       Goldman Sachs Credit Partners, L.P. ("GSCP") in
                       December 1997, entered into an amendment and
                       restatement thereof, which, in addition to other
                       changes advantageous to the Company, increased the
                       Company's borrowing availability (see PART I, ITEM 1.
                       BUSINESS -- CREDIT FACILITIES below);

                  --   revised and upgraded the packaging for all of its 
                       coffee products (see PART I, ITEM 1. BUSINESS -- 
                       PRODUCTS below);

                  --   made substantial capital investments (totaling 
                       approximately $1.8 million) at its Houston Plant;

                  --   settled the Shareholder Class Action, Shareholder 
                       Derivative Action, the Gloria Jean's Franchise 
                       Litigation and the Adams & Wabash Coffee Bar Litigation
                       (see PART I, ITEM 3. LEGAL PROCEEDINGS below);

                  --   added two (2) independent directors, with substantial 
                       beverage industry and specialty foods experience, 
                       to its Board of Directors;

                  --   implemented its real time, on-line perpetual inventory
                       system at its Houston Plant (see PART I, ITEM 1. 
                       BUSINESS -- MANAGEMENT INFORMATION SYSTEMS below);

                  --   changed its method of accounting for green coffee and
                       finished goods inventories from last-in, first-out
                       ("LIFO"), to first-in, first-out ("FIFO"), with the
                       result that its green coffee costs and finished goods
                       inventories now more closely reflect current prices
                       (see PART I, ITEM 1. BUSINESS -- SUPPLY OF COFFEE
                       below);

                  --   further reduced its workforce from 401 persons at 
                       December 27, 1996, to 363 persons at December 26, 1997; 
                       and

                  --   rationalized its product offerings by eliminating
                       approximately 343 duplicative, slow moving or
                       outdated SKU's and introduced 78 SKU's.


FISCAL YEAR 1997 NET LOSS

         The Company reported a net loss of $12.7 million for the fiscal year 
ended December 26, 1997 ("Fiscal Year 1997"), compared to a net loss of $11.3 
million for the fiscal year ended December 27, 1996 ("Fiscal Year 1996"), and 
a net loss of $57.0 million for the fiscal year ended December 29, 1995 
("Fiscal Year 1995"). The net loss for Fiscal Year 1997 consisted of (1) a 
$4.9 million loss from operations, (2) a $4.6 million loss from other 
expenses (i.e., interest expense, net, and debt restructuring costs) and (3) 
a $3.2 million loss on disposal of discontinued retail operations (consisting 
of $1.4 million attributable to the Gloria Jean's Franchise Litigation 
settlement, $1.1 million attributable to Second Cup post-closing 
obligations and $.7 million of Coffee Bar obligations). See Note 2 to the
Consolidated Financial Statements.



                                       4

<PAGE>

PRODUCT CATEGORIES

         The gourmet coffee industry represents a portion of the overall 
coffee market. The industry is fragmented and, until recently, was 
characterized by local and regional competition.

         The U.S. coffee market consists of three distinct product 
categories: (1) commercial ground roast, mass-merchandised coffee, which 
includes brands such as FOLGERS and MAXWELL HOUSE; (2) specialty coffees, 
such as EIGHT O'CLOCK and DON FRANCISCO, which are slightly higher quality 
coffees; and (3) gourmet coffees, typically defined as super-premium, 
specialty coffees. The Company sells only gourmet coffees.

         Gourmet coffees use high grown arabica beans cultivated in Colombia, 
Brazil, Kenya, Indonesia, Mexico, Costa Rica, Guatemala and other Central 
American, South American, Asian and African countries ("Producing Countries"), 
and in Hawaii. As a result of their richer taste, lower acidity and lower 
caffeine content, arabica beans are considered to be superior to the robusta 
and low quality arabica beans typically used in commercial ground roast.

DISTRIBUTION CHANNELS

         The gourmet coffee industry is comprised of two principal 
distribution channels -- the wholesale distribution channel, consisting of 
grocery stores, supermarkets, mass merchandisers, drug stores, military 
commissaries, warehouse stores and specialty stores, and the retail 
distribution channel, consisting of retail coffee stores, coffee shops and 
coffee bars.

         In the wholesale distribution channel, the coffee distributor sells 
its coffee products to the retailer who in turn re-sells the products through 
to the ultimate consumer. The Company distributes its coffee products solely 
through the wholesale distribution channel.

         The Company sells its products throughout the United States. The 
markets in which the Company distributes its products represent approximately 
60% of total grocery store and supermarket sales nationwide.

PRODUCTS

         The Company roasts green arabica coffee beans to produce over 75 
different varietals, blends and flavors of coffee. In addition, the Company 
has been (and intends to continue to be) innovative in the introduction and 
marketing of new sizes and types of packaging designed to promote consumer 
convenience and trial purchases. To this end, in Fiscal Year 1996, the 
Company successfully (1) introduced its 8 ounce can and 1.75 ounce mini-can 
and (2) redesigned the packaging for all of its coffees. In Fiscal Year 1997, 
the Company introduced a fresh ground softpack and several new seasonal 
coffees and rationalized its product offerings by eliminating approximately 
343 duplicative, slow moving or outdated SKU's and introduced 78 new SKU's.

         BROTHERS is the Company's primary national supermarket brand and 
represents the vast majority of Company sales. The Company has consolidated 
most of its business under the Brothers brand. The Company still has some 
modest supplemental distribution under the HILLSIDE and COUNTRY MILLS brands. 
CAFE DU JOUR has been discontinued. The Company has been concentrating on 
consolidating its brands. According to Neilson Scantrac, the Brothers' brand 
38% all commodity value ("ACV") distribution is now equal to the Company's 
total 38% ACV distribution. In the gourmet specialty store channel, the 
Company's products are sold under the FAIRWINDS brand name. The Company also 
has a private label program. As discussed below, the Company is looking to 
expand its private label program in the future provided that the financial



                                      5

<PAGE>

terms of such private label programs with individual grocery 
stores/supermarkets are attractive to the Company and the arrangements do not 
injure the Company's own branded coffee programs.

COMPETITION

         The Company has two principal national wholesale competitors, Sark's 
Gourmet Coffee Company, which is owned by Nestle S.A., and Millstone Coffee, 
Inc., which is owned by the Procter & Gamble Company. During 1997, 
Starbuck's, the nationwide leader in the gourmet coffee retail distribution 
channel (principally through its own retail coffee stores and bars), started 
testing sales of its coffee in a limited number of grocery stores and 
supermarkets in selected cities around the country. Sales of the Company's, 
Sarks', Millstone's and Starbuck's gourmet coffee products are estimated to 
represent slightly more than 50% of the total gourmet coffee sales in the 
wholesale distribution channel. The remainder of the channel consists of 
private label sales and sales by local and regional coffee companies with 
limited geographic coverage and often smaller product lines. The Company does 
not compete directly in the retail distribution channel, but there is some 
degree of competition for the consumer's coffee dollar between the two 
distribution channels.

         The Company's coffee products also compete with the non-gourmet 
specialty coffee products on the market and with other related products, such 
as gourmet teas. The commercial ground roast and premium blend segment of the 
coffee industry is dominated by several large companies, many of which have 
significantly greater name recognition and financial resources than the 
Company. Some of these competitors have introduced premium coffee products in 
recent years. Premium coffees comprise one of the fastest growing segments in 
the coffee industry and are increasingly competing with gourmet coffees.

         The Company believes that the principal competitive factors among 
producers of gourmet coffee are quality of products, shelf space, packaging, 
distribution capabilities, access to green beans, brand name recognition 
(including the growth of private labels products offered by grocery stores 
and supermarkets), financial resources available to develop new products and 
promote/support new and existing products and the ability to operate 
efficient, low cost roasting and packaging facilities and distribution 
operations. There can be no assurance that other coffee companies with 
greater name recognition and financial resources than the Company will not 
enter the gourmet coffee market in the future.

THE COMPANY'S WHOLESALE DISTRIBUTION STRATEGY

         The Company's distribution strategy is to capitalize on, and to 
continue to support and expand, its position as one of the leading 
wholesalers of gourmet coffee in the United States by (1) maintaining a 
consistently high quality product, (2) providing customers with the freshest 
possible product, (3) increasing its penetration in the wholesale channel of 
distribution, (4) further developing its brand franchise and solidifying 
consumer loyalty and (5) when the opportunity presents itself, provided that 
the terms of such arrangements are attractive to the Company and the 
arrangements do not injure the Company's own branded coffee programs, 
entering into private label coffee programs with a select number of grocery 
store and supermarket customers.

         In order to maintain consistently high quality products for its 
customers, the Company sources, purchases, tests, roasts, packages, markets 
and distributes its own coffee products. The Company purchases high quality 
green arabica coffee beans from Producing Countries and Hawaii for use in its 
varietals and blended coffee products. The Company roasts the beans to its 
own stringent roasting standards and quality tests its products at each 
critical stage in the roasting and packaging process, including post-roasting 
classification of the beans.



                                      6

<PAGE>

         The Company has a national presence in the wholesale (principally 
grocery store and supermarket) distribution channel. The Company is actively 
seeking to expand that presence with stores that already carry its products, 
as well as with other stores. In the case of stores already carrying its 
products, the Company is seeking to expand its presence (and increase 
customer loyalty to the Company's products) by (1) obtaining larger and more 
preferred shelf space for its products already in the stores, (2) expanding 
the number of its products on the shelves, (3) expanding its direct store 
delivery ("DSD") program, (4) aggressively bidding on contract renewals, (5) 
supporting its products with co-branded programs in other distribution 
channels, such as its branded coffee program with Continental Airlines and 
Hallmark Cards, Inc. (which are discussed below), (6) improving the quality 
and attractiveness of its in-store product displays, (7) periodically 
refreshing/upgrading its product packaging, (8) tailoring the products it 
sells in a particular geographic region to the general customer tastes and 
preferences of that region and (9) targeted brand spending. The Company is 
seeking to expand its wholesale distribution presence with grocery stores and 
supermarkets ( as well as mass merchandisers, warehouse stores and specialty 
stores) that do not currently carry its products by aggressively bidding on 
new distribution contracts.

         The Company is also seeking opportunities to expand its presence in 
other non-retail distribution channels that complement the wholesale 
distribution channel. To this end, the Company is strongly supporting its 
branded coffee distribution arrangements with Hallmark Cards, Inc., 
Continental Airlines and Benjamin Books.

         As discussed above, one of the factors that affects the Company's 
ability to compete for new wholesale accounts and for renewals of existing 
wholesale accounts is the amount of financial resources available to the 
Company to develop new products and promote/support new and existing 
products. In recent years, particularly in the case of new grocery store and 
supermarket distribution contracts and renewals thereof, the amount of 
prepaid advertising, slotting fees, up-front promotional allowances and other 
rebates that the coffee distributor is willing to pay to the grocery store or 
supermarket has been a significant and, in some cases, the determinative 
factor in determining which distributor wins the contract. Millstone, Sarks 
and Starbucks, the Company's three principal competitors, have substantially 
greater resources than the Company. The Company's capital structure and 
liquidity constraints make it difficult for the Company to compete for new 
wholesale distribution contracts (or to renew existing contracts) when, all 
other things being generally equal, the decision by the grocery store or 
supermarket comes down to a financial one based principally on the magnitude 
of the slotting fees and other up-front fees offered by the bidders. See PART 
I, ITEM 1. BUSINESS -- Credit Facilities below. As an alternative to 
front-end loading its bids, the Company has, instead, structured its bids to 
include smaller up-front payments and larger rebates, advertising and 
promotional allowances and other financial incentives payable to the grocery 
store or supermarket over the life of the contract. Absent a significant 
change in the industry or in the way contracts are bid or the Company's 
capital structure, the Company does not expect to change its bidding strategy 
for new wholesale distribution accounts or renewals thereof. While the 
Company believes that its bids are competitive, it may lose certain new 
contracts or certain contract renewals because its package of financial 
incentives to the grocery stores and supermarkets is not as heavily 
front-end loaded as are the bids made by certain of its competitors.

DISTRIBUTION

         The Company delivers its products to customers in three principal 
ways: (1) DSD, utilizing the Company's own trucks and route sales persons who 
deliver products to individual grocery stores and supermarkets, stock shelves 
with Company products and maintain Company in-store displays, (2) direct 
shipments to grocery store and supermarkets and their warehouses, in which 
case either third party merchandisers or the grocery store or supermarket 
employees stock shelves, and (3) shipments to specialty food distributors who 
are responsible for delivering the Company's products to the grocery stores 
and



                                      7

<PAGE>

supermarkets and arranging for product shelving and support. As of the end of 
Fiscal Year 1997, DSD accounted for approximately 38% of product sales 
(approximately a five (5) percentage point increase over Fiscal Year 1996), 
direct shipments to grocery stores and supermarkets accounted for 
approximately 36% of product sales and direct shipments to specialty food 
distributors accounted for approximately 26% of product sales. The Company 
anticipates that DSD will account for an increasing percentage of total 
product sales in future years.

ACCOUNTING AND MANAGEMENT INFORMATION SYSTEMS ("MIS")

         The Company's MIS operate from an upgraded IBM AS400 computer which 
allows for integrated processing of all accounting records, including 
integration of green coffee inventories, finished inventories at the Houston 
Plant, accounts receivable, production and back-office systems. The Company's 
MIS uses sophisticated software, including general ledger, accounts 
receivable and payable, sales order processing and product data management 
programs.

         During Fiscal Year 1996, the Company (1) installed and started 
testing its new software for inventory management that tracks all of the 
inventory through a bar code system, (2) began developing software that will 
assist it in maximizing efficiency at its Houston Plant, (3) acquired 
approximately 10% of its volume purchased using electronic data interchange 
and (4) updated several of its J.D. Edwards software modules, such as 
accounts receivable and accounts payable software. The Company spent 
approximately $400,000 on MIS upgrades in Fiscal Year 1996.

         The Company spent an additional $600,000 on MIS upgrades in Fiscal 
Year 1997. The Company (1) installed new software for EDI (Electronic Data 
Interchange) to expedite capture of customer orders, (2) installed and 
started testing its new software for standard costing, billing of materials 
and pick priority management in order to continue maximization of its Houston 
plant, (3) upgraded its net servers and home office personal computers to 
conform to a standardized platform so that Office '97 and Electronic Mail 
could be installed and utilized, and (4) distributed laptops and printers to 
all field sales personnel in order to permit them to retrieve e-mail, 
electronically transfer real-time documents and improve customer sales 
presentations.

YEAR 2000 COMPLIANCE

         Until recently, many computer programs were written using two digits 
rather than four digits to define the applicable year in the twentieth 
century. Such software may recognize a date using "00" as the year 1900 
rather than the year 2000. Utilizing both internal and external resources, 
the Company is in the process of defining, assessing and converting or 
replacing various programs, hardware and instrumentation systems to make them 
Year 2000 compatible. The Company's Year 2000 project is comprised of two 
components - business applications and equipment. The business applications 
component consists of the Company's business computer systems, as well as the 
computer systems of third-party suppliers or customers, whose Year 2000 
problems could potentially impact the Company. Equipment exposures consist of 
personal computers, system servers, telephone equipment and roasting and 
packaging equipment whose Year 2000 problems could also impact the Company. 
The cost of the Year 2000 initiatives is not expected to be material to the 
Company's results of operations or financial position.



                                      8

<PAGE>

MANUFACTURING AND QUALITY CONTROL

         At the end of Fiscal Year 1995, the Company had three (3) regional 
production facilities, located in Pennsylvania, Colorado and Texas. As part 
of its Restructuring Plan, and in order to reduce plant overhead costs, the 
Company closed its Colorado and Pennsylvania facilities in 1996 and 
consolidated all of its production facilities at its Houston Plant.

         The Company utilizes automated roasting, blending and packaging 
systems at its Houston Plant. Coffee specialists oversee these systems to 
ensure that the product is produced to exact specifications. The Company 
generally operates a single shift and runs a second shift when production 
warrants.

         The Company employs a quality control department, with quality 
checks made at critical stages of the coffee making process, including 
pre-roasting sampling of green beans, post-roasting classification and 
pre-shipment inspections of coffee beans. All coffees roasted by the Company 
are sampled to ensure consistency in blend, roast and taste. The quality 
control department also analyzes competing brands and frequently measures the 
Company's coffees against others in the marketplace. After the coffee has 
been packaged, a final check is made to ensure that there are no defects in 
the packaging which would affect the freshness or quality of the coffee beans.

         Grocery stores and supermarkets frequently conduct independent taste 
tests of coffee products as well as packaging tests (both for attractiveness 
and freshness) before signing a new distribution contract (or renewing an 
existing contract) with a particular coffee distributor. The Company 
participated in several of these tests during Fiscal Year 1997. The Company's 
products received high marks in general. The Company uses the results of 
these tests as a backup to its own manufacturing and quality control programs 
and as a comparative measure against its competitors' products and packaging.

SUPPLY OF COFFEE

         Coffee is the world's second largest traded commodity. Supply and 
price can be volatile. While most coffee trades in the commodities market, 
coffee of the quality level sought by the Company has a tendency to trade on 
a negotiated basis at a substantial premium above commodity coffee pricing, 
depending upon the supply and demand at the time of purchase. The supply and 
price can be affected by multiple factors, such as weather, politics, labor 
and economics in the Producing Countries.

         The International Coffee Organization, through the imposition of 
export quotas agreed upon by consumer and producer member nations, has in the 
past attempted to maintain the commodity prices of green coffees. The 
specific effect the cartel (the "ACPC") has had on coffee prices is difficult 
to determine in light of other occurrences such as weather problems, labor 
problems and political and currency instability in coffee producing 
countries. From time to time, the coffee cartel members have met and 
determined to withhold some percentage of their exportable green coffee bean 
crop in an effort to raise and sustain green coffee bean prices. This 
happened in 1994, 1995 and 1996. In January 1997, the ACPC agreed to extend 
its current limitations through 1998. The Company is unable to predict 
whether the ACPC will be successful in achieving its goals; however, the 
supplies of green coffees held by coffee roasters and buyers are currently at 
historical low levels.

         Brazil experienced frosts in 1994. The announcement of the Brazilian 
frost damage caused a substantial increase in green coffee bean prices and 
other coffee-product related prices worldwide. The Company purchases a modest 
amount of its green coffee beans from Brazil. Nonetheless, in the third and 
fourth quarters of Fiscal Year 1994, the Company experienced a significant 
increase in the price of green


                                      9

<PAGE>

coffee beans which carried into the first three quarters of Fiscal Year 1995. 
During the fourth quarter of Fiscal Year 1995, the Company's green coffee 
purchases and commitments returned to pricing levels closer to those that 
existed prior to the 1994 Brazilian frost.

         Green coffee prices remained relatively constant at historical 
levels throughout 1996. In the first and second quarters of 1997, green 
coffee prices increased dramatically. In response to such increases, the 
Company raised its prices to the grocery stores and supermarkets twice, once 
in April and again in July. The cost of green coffee started dropping in 
mid-1997. In response to those drops and competitive pressures, the Company 
reduced its prices to the grocery stores and supermarkets in October 1997. At 
the same time that it was raising coffee prices in the first half of Fiscal 
Year 1997, the Company (1) switched its method of accounting for green coffee 
from LIFO to FIFO, (2) started reducing its green coffee inventories and (3) 
sold approximately 5.6 million pounds of selected excess green coffee 
inventory.

         The Company is unable to predict weather, political, labor, or 
economic events that may adversely affect coffee supplies in particular 
countries. Until 1994, when green coffee bean prices increased, the Company 
was able to pass those price increases through to its customers, thereby 
maintaining its gross profit margins. The Company was not able to pass 
through to its customers all of the green coffee price increases in the third 
and fourth quarters of Fiscal Year 1994 following the Brazilian frosts. In 
the third and fourth quarters of Fiscal Year 1994 and the first quarter of 
Fiscal Year 1995, the Company experienced significant consumer resistance to 
price increases. The Company and gourmet coffee category experienced similar 
consumer resistance to the price increases put in place in early and 
mid-1997. The Company reduced coffee prices in October 1997 in response to 
falling coffee prices at that time. Because of the substantial swings in 
coffee prices in the past three years and consumer resistance to price 
increases, the Company cannot predict whether it will be able to pass future 
green coffee price increases through to its customers in full in the future.

         Green coffee is a large market with well-established brokers, 
importers and warehousemen through which the Company manages its 
requirements. A significant portion of the Company's green coffee supply is 
contracted for future delivery, generally between three and twelve months 
forward (with declining percentages of the supply being subject to future 
contracts in the latter portions of each year), to ensure both an adequate 
supply and reduced risk of short-term price fluctuations. During early and 
mid-1997, the Company sold at a profit excess coffee that it had acquired 
pursuant to forward commitments put in place at a time when coffee prices 
were much lower. In late 1997, the Company found itself with a greater than 
average amount of higher priced green coffee because of forward commitments 
acquired at times when coffee prices were higher. Substantial swings in green 
coffee prices and the resulting effect on category growth have made it more 
difficult for the Company (and its competitors) to manage its coffee 
inventory commitments. In addition to purchasing forward commitments, the 
Company keeps physical inventory in its production facility and third-party 
warehouses representing anywhere from four to ten weeks of supply 
requirements. All coffee purchase transactions are in U.S. dollars, the 
industry's standard currency. The Company believes that it is not dependent 
upon any one importer or broker for its supply of green coffee beans from any 
particular country.

DISCONTINUED RETAIL OPERATIONS

         As discussed above, the Company sold its Gloria Jean's operations in 
November 1995 and discontinued its own Coffee Bar operations in 1996. The 
Company and its subsidiaries originally signed leases for, opened and 
operated twenty nine (29) Coffee Bars and signed leases but did not open ten 
(10) more Dark Leases. In Fiscal Year 1996, the Company sold twenty-nine (29) 
Coffee Bar leases, bought out the leases for and closed six (6) more Coffee 
Bars and subleased two (2) Coffee bar locations. At December

                                      10

<PAGE>

26, 1997, the Company was operating only two (2) Coffee Bars, both of which 
are located in New York City. The Company is in negotiations currently to 
sell both stores.

         With respect to the twenty nine (29) stores sold in Fiscal Year 
1996, the landlords for twelve (12) stores released the Company from any further
obligations under the leases for such stores following their sale(s). The 
landlords for the remaining seventeen (17) stores did not release the 
Company. The Company remains as a co-lessee with the purchasers or as a 
guarantor on these seventeen (17) leases. The Company's total remaining rent 
obligation under these seventen (17) leases is approximately $5.1 million. 
The purchasers of these seventeen (17) leases have agreed to assume such 
obligations and to indemnify the Company from any and all post-sale liability 
with respect thereto. The purchaser of fourteen (14) of the leases was a 
newly-formed corporation with no substantial assets other than the stores it 
purchased. The individual owner of the purchasing entity, who does have 
substantial other assets, agreed to guarantee the purchaser's obligations. 
The newly-formed corporation also owes the Company $.5 million for the 
purchase of Coffee Bars for which the Company has established an allowance 
for possible uncollectability. The remaining rents under the two (2) New York 
City stores are approximately $1.5 million.

         At December 26, 1997, the Company had two remaining Dark Leases. 
Brothers Coffee Bars, Inc., a subsidiary of the Company ("BCBI"), was the 
lessee of one of the two remaining Dark Leases, located in Chicago, Illinois. 
In February 1998, the Company and BCBI settled BCBI's remaining obligations 
under this lease by agreeing to pay $250,000 to the landlord. The landlord 
for the last remaining Dark Lease, which is located in New York City, (1) has 
obtained a judgment against the Company for approximately $128,000 of unpaid 
rents through February 1996 and other costs and expenses and (2) has filed 
suit against the Company for $270,000 in unpaid rents for the period from 
March 1996 through June 1997. The Company is in negotiations with such 
landlord to settle this litigation. See PART I, ITEM 3. LEGAL PROCEEDINGS -- 
RETAIL STORE LITIGATION below.

         The Company has estimated future operating losses and incremental 
costs of disposal in its accrued losses and other costs for discontinued 
retail operations and allowances for uncollectible receivables for 
discontinued retail operations at December 26, 1997. Due to the subjective 
nature of such estimates, it is reasonably possible that these estimates may 
change in the future. Future changes in these estimates may have a 
significant impact on the Company's financial condition and results of 
operations.

DEBT FACILITIES

         In December 1997, Goldman Sachs Credit Partners, L.P. ("GSCP"), 
acquired from Sanwa Business Credit Corporation ("Sanwa"), by way of 
assignment (the "Assignment"), 100% of Sanwa's loans to the Company under the 
Company's Loan and Security Agreement, dated as of May 29, 1996 (the "Credit 
Facility"). Simultaneously with the closing of the Assignment, the Company 
and GSCP amended and restated the Credit Facility (the "Restated Credit 
Facility").

         At March 28, 1997, June 27, 1997, September 26, 1997 and December 
26, 1997, the Company was not in compliance with the cash flow-to-debt 
service covenants in the Credit Facility and the Company's $15 million 
unsecured senior subordinated note facility provided by Dilmun Financial 
Services ("Dilmun") (the "Subordinated Note") (collectively, the Company's 
"Debt Facilities"). Such non-compliance constituted continuing events of 
default under the Debt Facilities (the "Covenant Defaults"). The Company 
entered into a Forbearance Agreement (and amendments thereto) with Sanwa 
whereby Sanwa agreed to forbear from acting on the Covenant Default under the 
Credit Facility ("Sanwa's Forbearance"). Sanwa's Forbearance remained in 
effect through December 9, 1997, the effective date of the Assignment. The 
Company also requested a waiver and/or forbearance with respect to the 
Covenant Default, and certain related amendments to the Subordinated Note, 
from Dilmun. The Company and Dilmun have not been able to reach agreement



                                       11


<PAGE>

on the terms of such waiver and/or amendment. Consequently, the Covenant 
Default under the Subordinated Note is still continuing.

         The terms of the Restated Credit Facility and the status of the 
Covenant Default under the Subordinated Note are discussed in detail below.

         CREDIT FACILITY. On October 31, 1997, the Company obtained an 
extension of the Forbearance Agreement from Sanwa through November 28, 1997. 
On November 19, 1997, GSCP and Sanwa signed a Trade Confirmation setting 
forth, among other things, the principle terms of the Assignment. On November 
28, 1997, the Company obtained from Sanwa another extension of the 
Forbearance Agreement through December 12, 1997. The Company paid Sanwa 
$123,000 for the two extensions.

         On December 9, 1997, Sanwa and GSCP closed the Assignment, and the 
Company and GSCP executed the Amended and Restated Credit Agreement (the 
"Restated Credit Agreement"). At the closing of the Assignment, (1) GSCP 
purchased, by way of assignment, 100% of Sanwa's loans to the Company under 
the Credit Facility, (2) Sanwa resigned as Agent under the Credit Facility, 
(3) Sanwa assigned all of its security interest in the collateral under the 
Credit Facility to GSCP and (4) Sanwa executed (and delivered to GSCP and the 
Company) a release and termination agreement, releasing its interests in the 
Company's collateral and terminating all of its rights as lender and agent 
under the Credit Facility.

         RESTATED CREDIT FACILITY. On December 9, 1997, the Assignment 
closed, and GSCP and the Company entered into the Restated Credit Agreement. 
On March 27, 1998, GSCP and the Company entered into the First Amendment to 
the Restated Credit Agreement (the "First Amendment"), which modified certain 
of the covenants and definitions in the Restated Credit Agreement. From and 
after March 27, 1998, the term "Restated Credit Agreement," as used herein, 
means the Restated Credit Agreement, as amended by the First Amendment. The 
principle terms of the Restated Credit Agreement are as follows:


         The maximum amount of the Restated Credit Facility is $28 million, 
consisting of (1) a revolving loan facility in an aggregate amount not in 
excess of the lesser of $21.5 million or the Current Asset Base, as defined 
below (the "Revolving Loan"), plus (2) a term loan of up to $2.25 million 
("Term Loan A") plus (c) a second term loan of up to $4.25 million ("Term 
Loan B"). The Current Asset Base is an amount equal to (a) 85% of the face 
amount of eligible accounts receivable (less reserves, if any, as determined 
by GSCP), (b) the lesser of 70% of the book value of eligible inventory (less 
reserves, if any, as determined by GSCP) or $10 million and (c) the lesser of 
the sum of 65% of eligible slotting fees or $5 million. Each tranche of 
eligible slotting fees declines each month over the remaining term of the 
Restated Credit Facility (for purposes of its inclusion in the Current Asset 
Base) by 1/17th of the dollar amount of such tranche.

         The Restated Credit Facility matures and is payable in full on May 
29, 1999 (the "Maturity Date"). The Company may borrow, repay and reborrow 
under the Revolving Loan through the Maturity Date, at which time the entire 
outstanding amount of the Revolving Loan will be due and payable. Term Loan A 
is payable in (1) 17 equal monthly principal installments of $37,500, plus 
interest, and (2) one final principal installment of $1,612,500, plus 
interest and any accrued fees, on the Maturity Date. Term Loan B is payable 
in (1) 17 equal monthly principal installments of $100,000, plus interest, 
and (2) one final principal installment of $2,550,000, plus interest and 
accrued fees on the Maturity Date. If the Credit Facility is terminated for 
any reason prior to the Maturity Date, the entire outstanding balances of the 
Revolving Loan, Term Loan A and Term Loan B will be due and payable on the 
effective date of such termination.

         The Revolving Loan and Term Loan A bear interest at the greater of 
(1) the prime rate, as reported from time to time in the WALL STREET JOURNAL 
(the "Prime Rate"), plus 2.0%, or (2) 9%. Term Loan B bears interest at the 
rate of 11.75% fixed. So long as an event of default shall have occurred and 
be continuing, interest will be payable at the default rate, i.e., the 
otherwise applicable interest rate plus an additional 2%.

         At the closing of the Restated Credit Facility, the Company (1) paid 
GSCP an acquisition fee in the amount of $280,000, an initial line fee in the 
amount of $280,000, an initial slotting line fee in the amount



                                       12

<PAGE>

of $5,000, an initial loan servicing fee in the amount of $3,500 and a legal 
documentation review fee in the amount of $1,000, (2) granted the GSCP 
Warrant (as defined below) to GSCP and (3) paid Dabney Resnick Imperial LLC 
("DRI"), the Company's exclusive debt placement agent who introduced the 
Company to GSCP, a financing fee in the amount of $560,000. See SIENA AND 
BWHI WARRANTS below for a discussion of the additional compensation the 
Company paid to affiliates of DRI for services rendered by DRI in connection 
with the closing of the Restated Credit Facility. See GSCP WARRANT below for 
a discussion of the terms of the GSCP Warrant.

         During the term of the Restated Credit Facility, the Company has 
agreed to pay GSCP (a) an unused line fee in an amount equal to 0.5% per 
annum, payable monthly in arrears, (b) a monthly line fee, commencing on the 
first anniversary of the closing of the Restated Credit Facility, in an 
amount equal to $23,333, monthly in advance, (c) a monthly loan servicing fee 
in an amount equal to $3,500, payable monthly in advance, (d) a financial 
analysis fee in the amount of $650 per man day, plus reasonable expenses, 
payable on demand, (e) an appraisal fee in the amount of $1,000 per man day, 
plus reasonable expenses, payable on demand, (f) a legal documentation fee in 
the amount of $1,000, payable in advance on the first anniversary of the 
closing of the Restated Credit Facility and (g) all other fees, costs and 
expenses incurred by GSCP in connection with any matters contemplated in the 
Restated Credit Agreement.

         The Restated Credit Facility contains standard and customary 
representations, warranties and covenants for a debt facility of this type. 
The Company and GSCP made no material changes to the representations, 
warranties and covenants in the Credit Facility, except to amend and restate 
the financial covenants. The Company's minimum EBITDA covenant requirements 
were reset as follows: (1) no less than $1.2 million of EBITDA for the first 
two quarters of Fiscal Year 1998; (2) no less than $2.3 million of EBITDA for 
the first three quarters of Fiscal Year 1998; (3) no less than $5.7 million 
of EBITDA for Fiscal Year 1998; and (4) no less than $5.7 million of EBITDA 
for the first quarter of Fiscal 1999 plus the last three quarters of Fiscal 
Year 1998. The Company's Total Capital Funds ("TCF") covenant requirements 
were reset as follows: (a) no less than $62 million of TCF as of the end of 
the first quarter of Fiscal Year 1998; (b) no less than $62 million as of the 
end of the second quarter of Fiscal Year 1998; (c) no less than $62 million 
as of the end of the third quarter of Fiscal Year 1998; (d) no less than 
$62 million as of the end of the fourth quarter of Fiscal Year 1998; and 
(e) no less than $61 million as of the end of the first quarter of Fiscal 
Year 1999. The Company has agreed to deliver its revised business plan to 
GSCP on or before April 30, 1998. GSCP, in turn, has agreed to revisit the 
financial covenant requirements with the Company after it has reviewed the 
revised business plan.

         Immediately following the closing on December 9, 1997, the 
outstanding balance of the Restated Credit Facility was $15,565,061, 
consisting of (1) $9,065,061 of the Revolving Loan, (2) the full amount of 
Term Loan A (i.e., $2,250,000) and (3) the full amount of Term Loan B (i.e., 
$4,250,000). The Company paid $569,500 in fees and $226,511 in other closing 
costs and expenses.

         See SUBORDINATED NOTE below for a discussion of the subordination of 
Dilmun's right to be repaid under the Subordinated Note to GSCP's right to be 
repaid under the Restated Credit Facility.

         SUBORDINATED NOTE. On December 27, 1996, the Company and Dilmun 
entered into the Subordinated Note facility and the Company drew down the 
full amount available under the Subordinated Note, i.e., $15 million.

         As discussed above, the Covenant Default under the Subordinated Note 
has existed since March 1997. The Company has asked Dilmun for (1) a waiver 
and/or forbearance with respect to the Covenant Default and (2) certain 
related amendments to the Subordinated Note. The parties have not been able 
to reach agreement on the terms of such waiver and/or amendment. 
Consequently, the Covenant Default under the Senior Subordinated Note 
Facility still exists. To date, Dilmun has not notified the Company of the 
occurrence of an Event of Default (as defined) under the Subordinated Note.


                                      13

<PAGE>

         In connection with the closing of the Subordinated Note in December 
1996, Dilmun and BIB Holdings (Bermuda) Ltd ("BIB") entered into a 
Subordination Agreement with Sanwa. Pursuant thereto, Dilmun and BIB agreed, 
subject to certain conditions and restrictions, that the Subordinated Note 
would be subordinated and subject in right of payment to the prior payment in 
full in cash of all of the Company's obligations to Sanwa (and its successors 
and assigns) and the other Senior Lenders under the Credit Facility. By 
reason of the structure of GSCP's acquisition of the Credit Facility as an 
Assignment and assumption of the Credit Facility and not as a refinancing 
thereof, GSCP has succeeded to all of Sanwa's rights, benefits and privileges 
under the Subordination Agreement.

         The Subordination Agreement provides that, upon the occurrence and 
during the continuation of a default by the Borrower under the Subordinated 
Note (other than by reason of a payment default or a blockage period), Dilmun 
may demand payment of any portion of the Subordinated Note then due but 
cannot take any action to enforce payment of such amount or take any other 
collection effort with respect thereto until the earliest to occur of certain 
events (a "Trigger Event"). The Covenant Default, Sanwa's assignment of the 
Credit Facility to GSCP and the closing of the Restated Credit Agreement were 
not (and are not) Trigger Events. Accordingly, Dilmun does not have the 
right, based solely on the occurrence of the Covenant Default and/or Sanwa's 
assignment of the Credit Facility to GSCP and/or the closing of the Restated 
Credit Facility, to take any action to enforce repayment of the Subordinated 
Note or to take any other collection action with respect thereto.

         In the absence of a waiver from Dilmun, there can be no assurance 
that Dilmun will not make demand for repayment of the Subordinated Note and 
attempt to collect the entire outstanding balance thereunder, notwithstanding 
the standstill provisions in the Subordination Agreement.

         SIENA AND BWHI WARRANTS. In September 1996, the Company borrowed $3 
million (the "Bridge Facility") from Siena Capital Partners, L.P., an 
affiliate of DRI ("Siena"). In connection with the closing of that 
transaction, the Company granted Siena four warrants (the "Siena Warrants"). 
The Company repaid the Bridge Facility with a portion of the proceeds from 
the Subordinated Note and, upon such repayment, the first Siena warrant, 
covering 100,000 shares of Company Common Stock (with an exercise price of 
$3.00 per share), vested and the other three Siena Warrants expired. In 
connection with the closing of the Restated Credit Facility, as additional 
compensation for services rendered by DRI in connection therewith, the 
Company agreed to reduce the exercise price of the Siena Warrant to $1.5625 
per share of Common Stock.

         In December 1996, in connection with the closing of the Subordinated 
Note, as compensation for services rendered by DRI in connection therewith, 
the Company granted Brothers Warrant Holdings I, an affiliate of DRI 
("BWHI"), a warrant to acquire up to 400,000 shares of Company Common Stock 
at an exercise price of $3.4375 per share (the "BWHI Warrant"). The BWHI 
Warrant is fully vested. In connection with the closing of the Restated 
Credit Facility, as additional compensation for services rendered by DRI in 
connection therewith, the Company agreed to reduce the exercise price of the 
BWHI Warrant to $1.5625 per share of Common Stock.

         GSCP WARRANT. In connection with the closing of the Restated Credit 
Facility, the Company granted GSCP a warrant (the "GSCP Warrant") to acquire 
up to 400,000 shares of Common Stock at an exercise price of $1.50 per share. 
The term of the GSCP Warrant is five years. The GSCP Warrant has standard 
anti-dilution protection. In addition, at GSCP's election, GSCP may require 
the Company to, and the Company has agreed to, redeem the GSCP Warrant at a 
redemption price of 50% of the warrant exercise price ($0.75 per GSCP Warrant 
share at December 26, 1997) upon the occurrence of (a) a change of control of 
the Company, (b) an early termination of the Restated Credit Agreement or (c) 
at any time within thirty days prior to the expiration of the GSCP Warrant.


                                      14

<PAGE>

         BIB WARRANTS. In connection with the closing of the Subordinated 
Note, the Company and BIB entered into a Warrant Agreement (the "BIB Warrant 
Agreement") entitling BIB to purchase up to 1,245,000 shares of Common Stock 
(the "BIB Warrant Shares"), at an exercise price of $.25 per share (the "BIB 
Warrant"). 265,600 BIB Warrant Shares vested on the closing date. Another 
265,600 BIB Warrant Shares vested on December 27, 1997. The remaining 713,800 
BIB Warrant Shares will vest in varying installments on the second through 
fifth anniversaries of the closing date if the Subordinated Note is not paid 
in full on or before each anniversary date.

TRADEMARKS

         The Company owns trademarks which are the subject of registrations 
or pending applications in the U.S. Patent and Trademark Office for many of 
the trademarks that it uses, including BROTHERS, HILLSIDE COFFEE, CAFE DU 
JOUR, COUNTRY MILL and FAIRWINDS. The Company believes that its common law 
and registered trademarks have significant value and goodwill and that some 
of its trademarks are instrumental to its ability to create demand for and 
market its products. From time to time, the Company files applications for 
new trademarks. There can be no assurance that the Company's pending 
applications will be granted or that the Company's other trademarks do not or 
will not violate the proprietary rights of others, that they would be upheld 
if challenged or that the Company would, in such an event, not be prevented 
from using the trademarks, any of which could have an adverse effect on the 
Company.

SEASONALITY AND FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

         The Company's business is seasonal, with increased sales during the 
colder months. As a result, in a typical year, a substantial portion of the 
Company's sales and operating results occur during the fourth quarter of each 
year. The Company's working capital requirements fluctuate each year, with 
its greatest needs during its third and fourth quarters. The Company's 
results of operations for any particular quarter may not necessarily be 
indicative of its results of operations for any other particular quarter or 
for the whole year. The timing of slotting fee payments, other similar 
payments and product introduction costs in connection with grocery store and 
supermarket accounts and the amount of revenue contributed by such new 
accounts may cause the Company's quarterly results of operations to fluctuate 
in the future. See PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, and PART I, ITEM 1. BUSINESS 
-- Supply of Coffee, and Note 1 to the Notes to Consolidated Financial 
Statements contained elsewhere herein.

REGULATION

         The production and marketing of the Company's products are subject 
to the rules and regulations of various federal, state and local health 
agencies, including the United States Food and Drug Administration (the 
"FDA"). The FDA also regulates the labeling of the Company's products. To the 
best of its knowledge, the Company is currently in compliance with all 
federal, state and local food and drug and labeling laws and regulations.

CUSTOMERS, SUPPLIERS AND RESEARCH AND DEVELOPMENT

         During Fiscal Year 1997, (1) two supermarket chains comprised 17% 
and 11% of the Company's net sales, respectively, (2) no supplier supplied 
10% of more of the Company's green coffee inventory and (3) the Company did 
not expend any funds for research and development ("R&D"). The company lost


                                      15

<PAGE>

certain customers in Fiscal Year 1997. However, none of those customers 
accounted for 10% or more of the Company's total gross or net sales in Fiscal 
Year 1997. It is customary in the wholesale distribution channel for coffee 
suppliers, such as the Company, to gain and lose customers each year. Every 
year, certain of the Company's arrangements with grocery stores and 
supermarkets come up for renewal. Each year the Company writes new 
distribution arrangements, loses certain existing distribution arrangements 
and renews certain existing distribution arrangements. See PART I, ITEM 1. 
BUSINESS -- COMPETITION and PART I, ITEM 1. BUSINESS -- THE COMPANY'S 
WHOLESALE DISTRIBUTION STRATEGY above.

EMPLOYEES

         As of December 26, 1997, the Company employed approximately 363 
persons, none of whom were represented by a union. The Company believes that 
its employee relations are generally good.

ITEM 2.  PROPERTIES

         The Company's headquarters are located in Boca Raton, Florida, and 
consist of approximately 22,500 square feet of office space. The space is 
leased by the Company pursuant to a lease which expires in May 1999. This 
space is used for sales, marketing and administration. In addition, the 
Company leases space at the following facilities:

<TABLE>
                           APPROXIMATE
                              SQUARE                                          LEASE
LOCATION                     FOOTAGE               TYPE                       EXPIRATION
--------                   -----------             ----                       ----------
<S>                        <C>             <C>                                <C>
Houston, TX                  233,000       Production/Warehouse               June 2006
Londonderry, NH               10,400       Warehouse/Administrative Office    November 1998
Fort Lauderdale, FL            6,900       Warehouse                          November 1998
Commerce City, CO              7,500       Warehouse                          February 2001
Lawrenceville, GA             10,000       Warehouse                          November 1999
</TABLE>

The Company also stores inventory and green coffee at approximately 25 small 
warehouses and 28 other small storage sites pursuant to storage contracts and 
bailment arrangements.

ITEM 3.  LEGAL PROCEEDINGS

         GLORIA JEAN'S FRANCHISE LITIGATION. In June 1994, a former 
franchisee filed suit against Edglo Enterprises, Inc., the parent of Gloria 
Jean's ("Edglo"). The former franchisee claimed, among other things, that 
Edglo made material misrepresentations and omissions and failed to provide 
appropriate expertise and support. The former franchisee was seeking damages 
of $3.9 million plus punitive damages of three time's actual damages as well 
as attorney's fees. The Company sold Edglo to Second Cup in 1995. In 
connection therewith, the Company agreed to indemnify Second Cup for any 
costs associated with the Gloria Jean's Franchise Litigation. In April 1997, 
the parties entered into a settlement agreement and Release, pursuant to 
which (a) the defendants agreed to pay $2,200,000 in cash, and to deliver 
76,667 shares of the Company's common stock, to the plaintiffs' in 
satisfaction of all of their claims. The $2,200,000 was funded as follows: 
(a) $2,015,000 came from the Company (of which approximately $992,000 was 
funded out of the escrowed purchase price from the sale of Gloria Jean's) and 
(b) $185,000 came from the other defendants and their counsel. The Company 
issued 76,667 shares of its common stock to the plaintiffs in January 1998.


                                      16

<PAGE>

         SHAREHOLDER LAWSUITS. The Company was a defendant in two different 
class action lawsuits, a federal securities class action and a state law 
derivative class action (collectively, the "Shareholder Lawsuits"). The 
federal securities class action alleged, among other things, violations of 
federal securities laws in connection with the Company's initial public 
offering ("IPO") and misstatements in certain of the Company's subsequent 
securities law filings. The state law derivative class action alleged, among 
other things, breach of fiduciary duty and waste of corporate assets. In 
April 1997, the court approved the settlement of the Shareholder Lawsuits on 
the following terms: (a) the plaintiff class received $3,000,000 in cash and 
the Company transferred to the plaintiff class 1,848,118 shares of its freely 
tradeable Common Stock, (b) the parties entered into mutual general releases 
and (c) the Shareholder Lawsuits were dismissed. The Company's insurance 
carrier and other defendants funded the $3,000,000 cash settlement. The 
Company issued 462,029 and 1,386,089 shares of its common stock to the 
plaintiffs' counsel and the plaintiffs in July 1997 and January 1998, 
respectively. In December 1997, the Company received 166,066 shares of the 
Company's common stock from one of the other defendants in the litigation in 
exchange for a release from the Company of all potential claims arising out 
of, or related to, the Shareholder Lawsuits.

         KONA COFFEE CLASS ACTION. In January 1997, the Company was named as 
a defendant in a class action lawsuit filed by a group of coffee producers 
(the "Kona Litigation"). The plaintiffs have alleged that the defendants, 
which includes various retailers, distributors and roasters of coffee, 
conspired to, and did in fact, flood the world wide markets with cheaper and 
inferior grades of coffee under the false label "Kona Coffee" and that such 
actions artificially depressed the price of the plaintiffs' coffee crops, 
damaged the reputation enjoyed by Kona Coffee and wrongfully allowed the 
defendants to achieve extraordinary profits which should be disgorged to the 
plaintiffs. In January 1998, the Court approved a magistrate's ruling, which 
granted the defendants' motion to deny class certification of the litigation. 
The plaintiffs are in the process of appealing this ruling.

         In January 1998, the Company's insurer notified the Company that it 
had agreed to assume defense of the case, subject to its standard reservation 
of rights. The insurer is reviewing the legal and other litigation-related 
bills paid to date by the Company for the purpose of determining which bills 
it will reimburse to the Company.

         The defendants, including the Company, are in negotiations with the 
plaintiffs to settle this litigation. In the meantime, pending the results of 
those negotiations, the Company intends to continue to defend vigorously this 
litigation. It is not possible at this time to predict the outcome of this 
litigation.

         ADAMS & WABASH COFFEE BAR LITIGATION. In December 1996, the landlord 
for the Adams & Wabash Coffee bar sued the Company, as guarantor on the lease, 
for the unpaid rents, other damages, expenses and attorney fees. In June 
1997, the landlord obtained a judgment against the Company for $350,000. In 
January 1998, the Company and the landlord settled the claim for $250,000, 
and the landlord dismissed the suit and terminated the lease with the 
Company. At December 26, 1997, the claim was included in accrued loss and 
other costs for discontinued retail operations.

         NASSAU & LIBERTY DARK LEASE LITIGATION. In 1997, the landlord for 
the Nassau & Liberty Dark Lease sued and obtained a judgment against the 
Company for unpaid rents through February 1996, costs and attorney's fees 
totaling $128,000. The landlord has filed another action against the Company 
for unpaid rents from March 1996 through June 1997 totaling $270,000. The 
Company is appealing the court decision and has posted a bond to stay 
collection of any part of the judgment pending the decision on the appeal. 
The Company has estimated $111,000 to settle this claim and has reserved for 
this contingency in accrued loss and other costs for discontinued retail 
operations.

         EMPLOYEE LITIGATION.  A former officer has sued the Company in 
Florida State Court for (1) $375,000 in fees allegedly owed to him for 
consulting services that he rendered to the Company in 1995, (2)



                                      17

<PAGE>

approximately $18,000 of out-of-pocket expenses incurred by him in rendering 
such consulting services and (3) attorneys' fees and costs. The lawsuit 
alleges breach of an oral consulting contract, detrimental reliance by the 
former officer and quantum merit. The Company believes that it agreed to pay 
the consulting fees sought by the former officer only if it successfully 
completed a strategic alliance transaction in 1995. Such a transaction never 
occurred. The Company has offered to pay the former officer $30,000 in 
complete settlement of all of his claims (consisting of the former officer's 
out-of-pocket expenses plus $12,000; any remaining amounts being referred to 
herein as the "Disputed Claims"). The former officer has not responded to the 
Company's offer. In the meantime, the parties have continued to conduct 
discovery. In the event the former officer does not accept the Company's 
settlement offer, the Company intends to continue to defend vigorously the 
Disputed Claims. It is not possible at this time to predict the outcome of 
this litigation.

         SECOND CUP WARRANTY CLAIMS/LITIGATION. In connection with the sale 
of Gloria Jean's, the Company indemnified Second Cup for representations and 
warranties under the purchase agreement. In January 1998, the Company agreed 
to pay $441,000 of the sales proceeds held in escrow to Second Cup for the 
settlement of certain of the outstanding claims. The Company and Second Cup 
are currently negotiating the settlement of claims totaling an additional 
$1,319,000. The amount of certain other claims is not determinable at 
December 26, 1997. The Company disputes certain claims and amounts of certain 
claims. The Company has provided $400,000 in accrued loss and other costs for 
discontinued retail operations for such claims. Sales proceeds of $967,000 are 
still being held in escrow to pay any remaining obligations under the 
purchase agreement.

         OTHER LITIGATION. The Company is also involved in routine legal 
proceedings incidental to the conduct of its business. Management believes 
that none of these routine legal proceedings will have a material adverse 
effect on the financial condition or operations of the Company.

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

      No matters were submitted to a vote of security holders of the Company 
during the fourth quarter of Fiscal Year 1997.

      In May, 1997 at the annual meeting of stockholders of the Company, the 
stockholders approved an amendment to the Company's Restated Certificate of 
Incorporation to increase the authorized number of shares of Common Stock 
from 15,000,000 to 25,000,000.



                                      18

<PAGE>

                               PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      Brothers' Common Stock is listed on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") National Market, trading under the symbol
"BEAN." Information on sales prices for the Common Stock is set forth below:

<TABLE>
                                         HIGH              LOW
                                         ----              ---
<S>                                      <C>               <C>
First Quarter 1996                       4-1/4             3-1/2
Second Quarter 1996                      4-1/2             3-7/16
Third Quarter 1996                       3-9/16            2-5/16
Fourth Quarter 1996                      3-3/8             2-1/4

First Quarter 1997                       4-5/8             2-1/2
Second Quarter 1997                      3-1/4             2-1/16
Third Quarter 1997                       2-7/8             1-1/2
Fourth Quarter 1997                      2                 15/16

First Quarter 1998 (1)                   1-3/16            1/2
</TABLE>
--------------------
      (1)  Through March 23, 1998.

      As of December 26, 1997, there were approximately 302 holders of record
and in excess of 2,500 beneficial owners of the Company's Common Stock.

      The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain its earnings to provide funds for the
operation and expansion of its business and, therefore, does not anticipate
declaring or paying cash dividends in the foreseeable future. Any payment of
future dividends will be at the discretion of the Board and will depend upon,
among other things, the Company's earnings, financial condition, capital
requirements, level of indebtedness, contractual restrictions with respect to
the payment of dividends and other relevant factors. Further, pursuant to the
terms of its existing debt facilities, the Company is, and will be, restricted
in its ability to pay cash dividends on its Common Stock.
See PART I, ITEM 1.  BUSINESS -- CREDIT FACILITIES.


ITEM 6.   SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

      The following selected financial data for Fiscal Years 1993, 1994, 1995, 
1996 and 1997 are derived from the Company's consolidated financial 
statements. The operating results of discontinued operations, including 
provisions for estimated losses during the phase-out period, have been 
segregated from continuing operations and reported as a separate line item on 
the statement of operations for Fiscal Years 1993, 1994, 1995, 1996 and 1997. 
The data should be read in conjunction with the consolidated financial 
statements, selected notes and other financial statements included herein.

                                       19
<PAGE>

<TABLE>
                                                                      (In thousands, except per share data)

                                                       1993(1)        1994            1995             1996             1997
                                                       ----           ----            ----             ----             ----
<S>                                                  <C>             <C>             <C>              <C>             <C>
STATEMENT OF OPERATIONS DATA:
  Sales                                              $ 74,879        $114,165        $ 95,005         $ 72,577        $ 70,122
  Cost of goods sold                                   37,306          58,675          56,460           39,716          37,626
                                                     --------        --------        --------         --------        --------
    Gross profit                                       37,573          55,490          38,545           32,861          32,496
  Distribution, selling and
   marketing expenses                                  23,185          33,604          35,164           26,186          28,700
  Administrative expenses                               4,965           8,705           9,694            5,640           5,997
  Amortization of intangibles                           3,184           3,785           3,373            2,784           2,676
  Restructuring charges                                 7,000              --             945              291              --
                                                     --------        --------        --------         --------        --------
  Operating income (loss) from
   continuing operations                                 (761)          9,396         (10,631)          (2,040)         (4,877)
  Other (income) expenses
    Interest expense, net                               4,541           1,625           2,523            2,140           4,059
    Litigation settlement                                  --              --              --            5,500              --
    Debt restructuring costs                               --              --              --               --             453
    Other (income) expenses                              (173)           (538)             47               76              84
                                                     --------        --------        --------         --------        --------
  Income (loss) from continuing
   operations                                          (5,129)          8,309         (13,201)          (9,756)         (9,473)
  Income (loss) from discontinued
   operations                                           1,782            (810)        (43,794)          (1,400)         (3,200)
  Extraordinary item--loss from early
   extinguishment of debt                              (4,472)             --              --             (156)             --
                                                     --------        --------        --------         --------        --------
  Net income (loss)                                    (7,819)          7,499         (56,995)         (11,312)        (12,673)

  Preferred stock dividend                                850              --              --               --              --
                                                     --------        --------        --------         --------        --------
  Net income (loss) applicable to
   common shares                                     $ (8,669)       $  7,499        $(56,995)        $(11,312)       $(12,673)
                                                     --------        --------        --------         --------        --------
                                                     --------        --------        --------         --------        --------
Loss per common share and loss per
common share -- assuming dilution:
  Income (loss) from
   continuing operations                             $  (0.67)       $   0.70        $  (1.18)        $  (0.87)       $  (0.75)
                                                     --------        --------        --------         --------        --------
                                                     --------        --------        --------         --------        --------
  Income (loss) before
   extraordinary item                                $  (0.44)       $   0.63        $  (5.10)        $  (1.00)       $  (1.01)
                                                     --------        --------        --------         --------        --------
                                                     --------        --------        --------         --------        --------
  Net income (loss)                                  $  (1.13)       $   0.63        $  (5.10)        $  (1.01)       $  (1.01)
                                                     --------        --------        --------         --------        --------
                                                     --------        --------        --------         --------        --------
OTHER DATA:
  Earnings before interest, income
   taxes, depreciation and amortization
   ("EBITDA", as defined)(2)                         $ 15,285        $ 24,219        $  4,980         $ 10,028        $  7,210
 Cash used in operating
  activities                                           (8,970)        (12,051)         (4,331)          (5,254)           (747)
 Cash (used in) provided by investing
  activities                                          (78,870)         (8,197)         20,104            1,664          (5,368)
  Cash provided by (used in) financing
   activities                                          90,851          15,569         (15,773)           3,590           6,115
BALANCE SHEET DATA (AT END OF PERIOD):
  Working capital(3)                                 $ 17,238        $ 22,530        $ 13,687         $ 12,164        $ 11,974
  Total assets                                        165,417         186,297         110,325          109,205          99,013
  Long-term debt(4)                                    19,370          35,035          19,004           21,785          29,556
  Stockholders' equity                                122,000         129,461          72,757           64,932          57,760
</TABLE>
                                             20
<PAGE>

--------------------------------
(1) See PART I. ITEM 1. BUSINESS - THE COMPANY above for a discussion of 
    acquisitions by the Company during fiscal year 1993.

(2) Excludes restructuring charges, litigation settlement, debt restructuring
    costs and extraordinary items. Amortization includes amortization of
    intangible as well as amortization of prepaid promotional expenses. EBITDA
    is not intended to represent cash flow from operations as defined by
    Generally Accepted Accounting Principles ("GAAP") and should not be
    considered as an alternative to net income as an indicator of the
    Company's operating performance or to cash flows as a measure of
    liquidity. EBITDA is included in this table as it is a basis upon which
    the Company assesses its financial performance. In addition, certain
    covenants in the Company's borrowing arrangements are tied to similar
    measures.

(3) Excludes current maturities of long-term debt.

(4) Includes current maturities of long-term debt.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS

         The following discussion and analysis should be read in conjunction 
with the information set forth under PART II, ITEM 6. SELECTED HISTORICAL 
CONSOLIDATED FINANCIAL DATA and the consolidated financial statements and 
notes thereto for the Company included elsewhere herein. The following 
discussion of financial data for Fiscal Years 1997, 1996 and 1995 are derived 
from the Company's consolidated financial statements.

         The operating results of discontinued operations, including 
provisions for estimated losses during the phase-out period, have been 
segregated from continuing operations and reported as a separate line item on 
the statement of operations for Fiscal Years 1997, 1996, 1995, 1994 and 1993.

         The data set forth below should be read in conjunction with the 
consolidated financial statements, selected notes and other financial 
statements included herein.

FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996

         The information set forth below compares the Company's operating 
results for Fiscal Year 1997 with its operating results for Fiscal Year 1996.

         NET SALES. Net sales decreased by $2.5 million, or 3.4% in Fiscal 
Year 1997 compared to Fiscal Year 1996. The decrease was due principally to a 
$6.5 million reduction in volume (1.4 million pounds) as a result of the loss 
of certain customers and decreased consumer demand for gourmet coffee due to 
higher retail coffee prices. The decrease was offset in part by $4.0 million 
of improved sales price realization ($.29 per pound) due to higher wholesale 
coffee prices.

         COST OF GOODS SOLD. Cost of goods sold decreased by $2.1 million, or 
5.3%, in Fiscal Year 1997 compared to Fiscal Year 1996. The decrease occurred 
principally as a result of (1) a 1.4 million decline in pound volume 
resulting in a $3.6 million reduction in cost of goods sold, (2) a $2.1 
million reduction due to the sale of green coffee and (3) a $.7 million 
decrease in packaging and plant labor and overhead costs. These reductions 
were offset in part by a $4.3 million increase in green coffee costs ($.33 
per pound).

         DISTRIBUTION, SELLING AND MARKETING EXPENSES. Distribution, selling 
and marketing expenses increased by $2.5 million, or 9.6%, in Fiscal Year 
1997 compared to Fiscal Year 1996. The increase was due principally to 
increased customer expenses of $1.6 million in the area of rebates and 
advertising allowances, specifically for new customer agreements and customer 
renewals. Direct store delivery ("DSD") costs increased $.8 million as a result 
of the increase in the number of DSD routes and related

                                     21
<PAGE>

vehicle, rent and payroll costs. The number of new routes increased by 10, or 
20.4%, since the third quarter of Fiscal Year 1996. Advertising expenses 
increased by $.1 million due to an increase in consumer promotions. 
Distribution, selling and marketing expenses, as a percentage of sales, 
increased to 40.9% in Fiscal Year 1997 compared to 36.1% in Fiscal Year 1996.

         ADMINISTRATIVE EXPENSES. Administrative expenses increased by $.4 
million, or 6.3%, in Fiscal Year 1997 compared to Fiscal Year 1996. The 
increase was due principally to a $.3 million increase in legal expenses 
associated with the Kona Coffee Class Action.

         AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased 
by $.1 million, or 3.9% in Fiscal Year 1997 compared to Fiscal Year 1996 due 
to reductions in amortization of non-compete agreements.

         RESTRUCTURING CHARGES. Restructuring charges decreased by $.3 
million, in Fiscal Year 1997 compared to Fiscal Year 1996. The decrease was 
due principally to the Company's implementation of its 1995 Restructuring 
Plan, the closing of its Denver, Colorado and Pittsburgh, Pennsylvania 
roasting and packaging facilities, the payment of certain severance costs and 
the payment of other related restructuring costs.

         OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS. As a result of 
the above mentioned factors, the operating loss from continuing operations 
increased by $2.8 million in Fiscal Year 1997 compared to Fiscal Year 1996.

         INTEREST EXPENSE. Interest expense increased by $1.9 million, or 
89.7%, in Fiscal Year 1997 compared to Fiscal Year 1996. The increase was due 
principally to higher outstanding borrowings and higher effective interest 
rates under the Company's outstanding indebtedness.

         DEBT RESTRUCTURING COSTS. During the third quarter of Fiscal Year 
1997, the Company expensed $.5 million of debt restructuring costs. These 
costs included $.2 million of increased costs due to Covenant Defaults under 
the Credit Facility and Subordinated Note, $.2 million for bank commitment 
fees associated with a restructuring of the Credit Facility that was not 
finalized and $.1 million of debt costs associated with the Credit Facility 
that was written off at the closing of the Restated Credit Facility.

         INCOME (LOSS) FROM DISCONTINUED OPERATIONS. Loss from discontinued
operations increased by $1.8 million, in Fiscal Year 1997 compared to Fiscal
Year 1996. During 1997, the Company accrued an additional $1.4 million for the
Gloria Jean's Franchise Litigation, plus an additional $1.8 million for
remaining obligations associated with the sale of the Gloria Jean's business and
the closing of its Coffee Bars.

         EXTRAORDINARY ITEM. Extraordinary item decreased by $.1 million in 
Fiscal Year 1997 compared to Fiscal Year 1996. No extraordinary items were 
recorded in Fiscal Year 1997.

         NET INCOME (LOSS). Net loss increased by $1.4 million, or 12.1%, in
Fiscal Year 1997 compared to Fiscal Year 1996. The increase was due principally
to decreased gross profit, higher operating expenses, higher interest and loss
on discontinued retail operations, partially offset by the decreased litigation
settlement.

FISCAL YEAR 1996 COMPARED WITH FISCAL YEAR 1995

         The information set forth below compares the Company's operating 
results for Fiscal Year 1996 with its operating results for Fiscal Year 1995.

         SALES.  Sales decreased by $22.4 million, or 23.6%, in Fiscal Year 
1996 compared to Fiscal Year 1995, principally due to a 4.3 million decline 
in pound volume.  The decline resulted from (1)  the loss of certain 
customers (approximately $10.8 million), (2) reductions in sales due to 
pricing pressures (approximately $2.0 million) and (3) same store sales 
declines (approximately $9.6 million).  Competitive

                                     22
<PAGE>

pressure to provide unprofitable promotional contracts, principally in the 
form of product placement costs, was the primary reason for the loss of 
customers. Also, liquidity constraints limited the Company's ability to 
increase its marketing and promotional spending on its products.

         COST OF GOODS SOLD. Cost of goods sold decreased by $16.7 million, 
or 29.7%, in Fiscal Year 1996 compared to Fiscal Year 1995. The decrease 
occurred principally as a result of (1) a 4.3 million decline in pound volume 
resulting in a $10.8 million reduction in cost of goods sold, (2) a $0.32 per 
pound decline in green coffee and other material costs resulting in a $4.9 
million decline in cost of goods sold (3) and a reduction in plant labor and 
overhead costs resulting in a $1.0 million reduction in cost of goods sold.

         GROSS PROFIT AND GROSS PROFIT MARGIN. Gross profit decreased by $5.7 
million, or 14.7%, in Fiscal Year 1996 compared to Fiscal Year 1995. Lower 
sales volume of 4.3 million pounds reduced gross profit by $11.6 million 
partially offset by a $4.9 million decline in green coffee and material costs 
and a $1.0 million reduction in plant labor and overhead costs.

         Gross profit margin as a percentage of sales improved from 40.6% in 
Fiscal Year 1995 to 45.3% in Fiscal Year 1996, principally due to lower green 
coffee and material costs, and lower plant overhead costs.

         DISTRIBUTION, SELLING AND MARKETING EXPENSES. Distribution, selling 
and marketing expenses decreased by $9.0 million, or 25.5%, in Fiscal Year 
1996 from Fiscal Year 1995 due to lower marketing, advertising and 
promotional expenses, product placement costs, distribution costs and 
salaries. Distribution, selling and marketing expenses, as a percentage of 
sales, decreased to 36.1% in Fiscal Year 1996 from 37.0% in Fiscal Year 1995 
principally due to the same factors.

         ADMINISTRATIVE EXPENSES. Administrative expenses decreased by $4.1 
million, or 41.8%, in Fiscal Year 1996 compared to Fiscal Year 1995, 
principally due to (1) $1.2 million in lower salaries and payroll expenses, 
(2) $1.5 million in reduced professional fees and (3) $1.4 million in reduced 
bad debt expense. Administrative expenses decreased from 10.2% of sales in 
Fiscal Year 1995 to 7.8% of sales in Fiscal Year 1996.

         AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased 
by $.6 million, or 17.5%, in Fiscal Year 1996 compared to Fiscal Year 1995 
due to reductions in amortization of non-compete agreements.

         RESTRUCTURING CHARGES. Restructuring charges decreased by $.7 
million, or 69.2%, in Fiscal Year 1996 compared to Fiscal Year 1995 due to 
the Company's implementation of its 1995 Restructuring Plan, the closing of 
its Denver, Colorado and Pittsburgh, Pennsylvania roasting and packaging 
facilities, the payment of certain severance costs and the payment of other 
related restructuring costs.

         OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS. As a result of 
the above mentioned factors, the operating loss from continuing operations 
decreased by $8.6 million, or 80.8%, in Fiscal Year 1996 compared to Fiscal 
Year 1995.

         INTEREST EXPENSE. Interest expense decreased by $.4 million, or 
15.2%, in Fiscal Year 1996 compared to Fiscal Year 1995 due to lower 
outstanding borrowings under the Company's revolving credit facilities.

         LITIGATION SETTLEMENT. Litigation settlement expense increased $5.5 
million during Fiscal Year 1996 compared to Fiscal Year 1995. In late 1996, 
the Company agreed to settle the Shareholder Class Action and Shareholder 
Derivative Action. The combined settlement aggregated $8.5 million, $3.0 
million of which was paid by the Company's insurance carrier and other 
defendants. The Company agreed to pay the remaining $5.5 million in the form 
of freely tradeable common stock to be issued by the Company.

                                   23
<PAGE>

               INCOME (LOSS) FROM DISCONTINUED OPERATIONS. Loss from 
discontinued retail operations and loss on disposal of discontinued retail 
operations decreased by $42.4 million in Fiscal Year 1996 compared to Fiscal 
Year 1995.

               EXTRAORDINARY ITEM. Extraordinary item increased $.2 million 
in Fiscal Year 1996 compared to Fiscal Year 1995. The Company incurred a $.2 
million extraordinary loss from early extinguishment of debt during Fiscal 
Year 1996.

               NET INCOME (LOSS). Net loss decreased by $45.7 million, or 
80.2%, in Fiscal Year 1996 compared to Fiscal Year 1995 due primarily to 
decreases in cost of goods sold, lower operating expenses and decreased loss 
from discontinued retail operations partially offset by the litigation 
settlement.

YEAR 2000 COMPLIANCE

         Until recently, many computer programs were written using two digits
rather than four digits to define the applicable year in the twentieth century.
Such software may recognize a date using "00" as the year 1900 rather than the
year 2000. Utilizing both internal and external resources, the Company is in the
process of defining, assessing and converting or replacing various programs,
hardware and instrumentation systems to make them Year 2000 compatible. The
Company's Year 2000 project is comprised of two components - business
applications and equipment. The business applications component consists of the
Company's business computer systems, as well as the computer systems of
third-party suppliers or customers, whose Year 2000 problems could potentially
impact the Company. Equipment exposures consist of personal computers, system
servers, telephone equipment and roasting and packaging equipment whose Year
2000 problems could also impact the Company. The cost of the Year 2000
initiatives is not expected to be material to the Company's results of 
operations or financial position.


LIQUIDITY AND CAPITAL RESOURCES

         In December 1997, GSCP acquired, by way of assignment, 100% of the 
Company's loans under the Credit Facility, and, in connection therewith, the 
Company and GSCP amended and restated the Credit Facility. The Restated 
Credit Facility consists of (1) up to a $21.5 million Revolving Loan, (2) a 
$2.25 million Term Loan A and (3) a $4.25 million Term Loan B. Immediately 
following the closing, the outstanding balance of the Restated Credit 
Facility was $15.565 million consisting of (1) $9.065 million of the Revolving 
Loan, (2) all $2.25 million of Term Loan A and (3) all $4.25 million of Term 
Loan B. The Company paid $.6 million in fees and $.2 million in other closing 
costs and expenses. The Restated Credit Facility matures on May 29, 1999. The 
Revolving Loan and Term Loan A bear interest at prime plus 2%. Term Loan B 
bears interest at 11.75% fixed.

         In December 1996, the Company entered into the Subordinated Note
financing with Dilmun. The Subordinated Note is in the principal amount of $15
million, matures on December 26, 2002 and bears interest at 11.25% fixed. At
December 26, 1997, the Company was not in compliance with the cash flow to debt
service covenants in its Subordinated Note agreement. Pursuant to the terms of
the Subordinated Note, management has determined that the lender does not have
the right to accelerate repayment of the Subordinated Note solely because of the
covenant defaults and, accordingly, the Company has continued to classify the
outstanding borrowings as long-term.

         As of December 26, 1997, the Company had outstanding $32.7 million of
institutional indebtedness, consisting of $17.7 million under its Restated
Credit Facility and $15.0 million under the Subordinated Note.

         During Fiscal Year 1997, the Company's weighted average interest
expense was 9.4%.

                                   24
<PAGE>

         During Fiscal Year 1997, the Company used the proceeds from its debt 
facilities, proceeds from operations and proceeds from sales of discontinued 
operations to fund (1) $5.8 million of capital expenditures and (2) $.8 
million of cash used in continuing and discontinued operations.

         During Fiscal Year 1997, the Company's net cash provided from 
continuing operating activities was $1.6 million principally due to decreases 
of (1) $4.3 million in accounts receivable and (2) $4.3 million in inventory.

         The Company expects that its Fiscal Year 1998 expenditures and slotting
payments for customer contracts will not exceed $6.0 million principally due 
to (1) decreases in plant and customer display equipment expenditures and (2) 
fewer major customer contracts coming up for renewal during Fiscal year 1998. 
Also, recent declines in green coffee prices during the first quarter of 
Fiscal Year 1998 will translate into reduced inventory working capital 
requirements. Reductions in capital expenditures, slotting payments and 
inventory working capital requirements are expected to improve the Company's 
liquidity position. Uncertainty regarding the collection of certain 
receivables and potential liabilities related to the guarantee of certain 
lease obligations associated with discontinued retail operations may have an 
adverse effect on the Company's liquidity.

         Based on available resources, the Company will be able to fund its 
current and long-term capital needs and maintain its commitment to on-going 
operating growth strategies, which include product promotional expenditures 
(slotting payments) and capital expenditures for new and existing customers, 
capital expenditures at the Company's roasting and packaging facility and 
certain obligations related to discontinued retail operations. At December 26, 
1997, borrowing availability under the Revolving Loan was $4.6 million.

SUBSEQUENT EVENTS

         In January 1998, the Company issued the remaining 1,386,089 shares 
of Common Stock to the plaintiffs in the Shareholder Class Action pursuant to 
the terms of the settlement agreement executed by the parties during the 
first quarter of Fiscal Year 1997.

         In January 1998, (a) the Company and Second Cup settled certain of 
Second Cup's remaining indemnity claims, (b) the Company agreed to release 
$0.44 million from escrow to Second Cup and (c) Second Cup agreed to withdraw 
or reduce its remaining claims by $0.12 million and to pay to the Company 
$0.17 million, all of which was paid directly by Second Cup outside of the 
escrow.

         In January 1998, The Hartford Insurance Company, one of the 
Company's insurers notified the Company that it had agreed to assume the 
defense of the Kona Litigation, subject to its standard reservation of rights.

         In January 1998, the Company and the landlord agreed to settle the 
Adams & Wabash Coffee bar Litigation. The Company has agreed to pay the 
landlord $.25 million and, in exchange therefore, the landlord has agreed to 
drop all of its claims against the Company, to dismiss its lawsuit and to 
terminate the lease and release the Company from all further obligations 
thereunder.

         In March 1998, the Company announced that it had retained the 
investment banking firm of Schroder & Co., Inc. ("Schroder") to help it 
evaluate the Company's brand, business and growth strategy and to identify 
potential methods and opportunities to enhance shareholder value. The Company 
has formed a special committee of the Board to evaluate potential 
transactions and opportunities presented by Schroder. In connection with the 
retention of Schroder, the Board has approved management stay bonus 
arrangements for certain key employees to retain their services in the event 
the Company enters into a transaction. At this time, the Company is exploring 
possible transactions and has not entered into, and is not obligated to enter 
into, any agreement with any third party to proceed with any transaction.

         On March 27, 1998, GSCP and the Company entered into the First 
Amendment to the Restated Credit Agreement, which modified certain of the 
covenants and definitions in the Restated Credit Agreement. See PART I, 
ITEM 1. BUSINESS--DEBT FACILITIES above.

                                  25
<PAGE>

IMPACT OF INFLATION

          During Fiscal Year 1994, green coffee cost increases to the Company 
were not materially related to inflation, but were caused by the effects of 
weather-related price increases. See PART I, ITEM I. BUSINESS -- SUPPLY OF 
COFFEE. Recently, green coffee prices have increased over 50%, but these 
increases do not appear to be inflation related. Such price increases may 
have an adverse effect on the Company's operating results and profitability 
in the future. See PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          The financial statements and supplementary financial data required 
by this ITEM 8. are set forth in ITEM 14. of this Form 10-K.  All information 
which has been omitted is either inapplicable or not required.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
          FINANCIAL DISCLOSURE

          The Company had no disagreements with its accountants during Fiscal 
Year 1997 and during the first quarter of Fiscal Year 1998.

          During the fiscal quarter ended June 27, 1997, the Company changed 
its method of accounting for inventories from the last-in, first-out (LIFO) 
method to the first-in, first-out (FIFO) method. The Company believes the 
change is preferable because (1) due to recent operating losses and demands 
on liquidity, users of the Company's consolidated financial statements are 
principally interested in understanding the Company's current financial 
position, and the FIFO method better illustrates that position, (2) the FIFO 
method provides a better matching of current costs with revenues and (3) the 
FIFO method is the predominant method used by the Company's competitors and 
peer group.

          The change in method of inventory costings has been applied 
retroactively by restating the prior years' consolidated financial statements. 
The effect of the change was an increase in net loss of $1,131,000 and 
$3,509,000 during Fiscal Year 1996 and 1995, respectively. The net effect on the
balance sheet as of December 27, 1996, was to decrease inventory and increase 
accumulated deficit by $98,000.

                                  PART III

          The information required by ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT; ITEM 11. EXECUTIVE COMPENSATION; ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT"; and ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, is incorporated herein by reference to any amendment
filed hereto on Form 10-K/A or, alternatively, to the Company's definitive Proxy
Statement for its 1998 Annual Meeting of Stockholders, which shall be filed with
the Securities and Exchange Commission within 120 days from the end of Fiscal
Year 1997.

                                    26
<PAGE>

                                  PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K


(a) AND (d) FINANCIAL STATEMENTS AND SCHEDULE

         The financial statements and schedule listed in the accompanying Index
of Financial Statements and Schedule (starting on Page F-1) are filed as part of
this Annual Report.


(b) REPORTS ON FORM 8-K

         1.       Form 8-K filed with the Securities and Exchange Commission
                  (the "SEC") on December 17, 1997, announcing the closing of
                  the Restated Credit Facility.

         2.       Form 8-K filed with the SEC on March 2, 1998, announcing the
                  Company's engagement of Schroder & Co., Inc.

                                        27
<PAGE>

(c) EXHIBITS

         All exhibits listed hereunder, unless otherwise indicated, have
previously been filed as exhibits to Registration Statement No. 33-70236
(effective December 9, 1993) and/or subsequent Forms 10-Q, 10-Q/A, Forms 10-K
and/or Forms 8-K, when and as so indicated. Such exhibits have been filed with
the Securities and Exchange Commission ("Commission") pursuant to the
requirements of the Acts administered by the Commission. Such exhibits are
incorporated herein by reference under Rule 24 of the Commission's Rules of
Practice and Investigations. Certain other instruments which would otherwise be
required to be listed below have not been so listed because such instruments do
not authorize securities in an amount which exceeds 10% of the total assets of
the Company and its subsidiaries on a consolidated basis and the Company agrees
to furnish a copy of any such instrument to the Commission upon request.

Exhibit
Number                            Description
------                            -----------
3.1      Restated Certificate of Incorporation.

3.2      Certificate of Amendment to Restated Certificate of Incorporation
         (incorporated by reference to the Company's Report on Form 10-Q, filed
         August 11, 1997).

4        Specimen of Common Stock Certificate.

4.1      Restated Bylaws (incorporated by reference to the Company's Current
         Report on Form 8-K, filed March 2, 1995).

4.2      Rights Agreement between the Company and Chemical Bank, dated as of
         March 31, 1995, which includes the Certificate of Designation in
         respect of the Series A Preferred Stock as Exhibit A thereto, the form
         of Right Certificate as Exhibit B thereto and the Summary of Rights to
         Purchase Series A Preferred Stock as Exhibit C thereto (incorporated by
         reference to the Company's Current Report on Form 8-K, filed April 11,
         1995).

10.1     Form of Indemnification Agreement.

10.2     Stock Purchase Agreement among the Company, Chock Full O'Nuts
         Corporation and Hillside Holding Corporation dated October 8, 1993.

10.3     Stock Purchase Agreement among the Company and all of the stockholders
         of Edglo Enterprises dated October 6, 1993.

10.4     Amended and Restated Stock Option Plan, dated March 1993, as amended.*

10.5     Management Incentive Stock Option Plan dated June 5, 1990, as amended.*

10.6     Non-Qualified Stock Option Plan dated June 5, 1990, as amended.*

10.7     Registration Rights Agreement among the Company and Several Investors
         dated as of December 30, 1992.

10.8     Registration Rights Agreement among the Company, J.H. Whitney & Co., 
         Whitney 1990 Equity Fund, L.P. and Whitney Subordinated Debt Fund, L.P.
         dated as of December 30, 1992.

10.9     Registration Rights Agreement among the Company and Several Investors
         dated as of November 19, 1993.

                                      28
<PAGE>

10.10    Registration Rights Agreement between the Company and Steven Shulman
         dated as of November 18, 1993.

10.11    First Amendment to Amended and Restated Executive Employment Agreement
         between the Company and Dennis Boyer, dated as of April 17, 1995
         (incorporated by reference to the Company's Quarterly Report filed on
         Form 10-Q for the fiscal quarter ended March 31, 1995).

10.12    Severance Agreement between the Company and Michael J. Carlin, dated as
         of April 26, 1995 (incorporated by reference to the Company's Quarterly
         Report filed on Form 10-Q for the fiscal quarter ended March 31, 1995).

10.13    Stock Purchase Agreement by and between Brothers Retail Corp. and The
         Second Cup Ltd., dated October 16, 1995, as amended by that certain
         Amendment to Stock Purchase Agreement, dated November 9, 1995, by and
         between Brothers Retail Corp. and Gloria Jean's Inc., as assignee of
         The Second Cup Ltd. (incorporated by reference to the Company's
         Quarterly Report filed on Form 10-Q for the fiscal quarter ended
         September 30, 1995).

10.14    Agreement of Sale by and among Diedrich Coffee (as Purchaser) and
         Brothers Coffee Bars, Inc. and Brothers Gourmet Coffees, Inc. (as
         Sellers), dated as of February 23, 1996 (incorporated by reference to
         the Company's Annual Report on Form 10-K for the fiscal year ended
         December 29, 1995).

10.15    Executive Employment Agreement by and between the Company and Mr.
         Donald Breen, dated as of January 18, 1996 (incorporated by reference
         to the Company's Annual Report on Form 10-K for the fiscal year ended
         December 29, 1995).

10.16    Agreement of Sale by and among Foster Brothers Corporation and Brothers
         Coffee Bars, Inc., Brothers Gourmet Coffees, Inc., and Brothers Retail
         Corp., and joined in by Kent Foster, dated as of March 27, 1996
         (incorporated by reference to the Company's Quarterly Report filed on
         Form 10- Q for the fiscal quarter ended March 28, 1996).

10.17    Loan and Security Agreement, by and among Brothers Gourmet Coffees,
         Inc., as borrower, and Sanwa Business Credit Corporation, as agent and
         lender, dated as of May 29, 1996 (incorporated by reference to the
         Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
         June 28, 1996).

10.18    Agreement of Sale by and among Foster Brothers Corporation and Brothers
         Coffee Bars, Inc., and Brothers Gourmet Coffees, Inc., and joined in by
         Kent Foster, dated as of May 30, 1996.

10.19    Credit Support Agreement, by and among Brothers Gourmet Coffees, Inc.,
         J.H. Whitney & Co. and J.P. Bolduc, dated as of May 29, 1996
         (incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the fiscal quarter ended June 28, 1996).

10.20    Securities Purchase Agreement, by and among Brothers Gourmet Coffees,
         Inc., as borrower, and Siena Capital Partners, L.P., as lender, dated
         as of September 20, 1996 (incorporated by reference to the Company's
         Quarterly Report on Form 10-Q for the fiscal quarter ended September
         27, 1996).

10.21    First Amendment and Consent to Loan and Security Agreement, by and
         among Brothers Gourmet Coffees, Inc., as borrower, and Sanwa Business
         Credit Corporation, as agent and lender, dated as of September 20, 1996
         (incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the fiscal quarter ended September 27, 1996).

10.22    Second Amendment and Consent to Loan and Security Agreement, by and
         among Brothers Gourmet Coffees, Inc., as borrower, and Sanwa Business
         Credit Corporation, as agent and lender, dated as of December 27, 1996
         (incorporated by reference to the Company's Report on Form 8-K, dated
         January 10, 1997).

                                       29
<PAGE>


10.23    Senior Subordinated Note Agreement, by and among Brothers Gourmet
         Coffees, Inc., as borrower, and Dilmun Financial Services, as lender,
         dated as of December 27, 1996 (incorporated by reference to the
         Company's Report on Form 8-K, dated January 10, 1997).

10.24    Forbearance Agreement, by and between the Company and Sanwa, dated as
         of May 15, 1997 (incorporated by reference to the Company's Report of
         Form 10-Q/A, dated June 13, 1997).

10.25    Second Amendment to Forbearance Agreement, by and between the Company
         and Sanwa, dated as of August 15, 1997 (incorporated by reference to
         the Company's Report of Form 10-Q, dated November 14, 1997).

10.26    Third Amendment to Forbearance Agreement, by and between the Company
         and Sanwa, dated as of October 31, 1997 (incorporated by reference to
         the Company's Report of Form 10-Q, dated November 14, 1997).

10.27    Fourth Amendment to Forbearance Agreement, by and between the Company
         and Sanwa, dated as of November 28, 1997 (incorporated by reference to
         the Company's Report of Form 10-Q, dated November 14, 1997).

10.28    Amended and Restated Loan and Security Agreement, by and among the
         Company (as borrower), the Lenders named therein and Goldman Sachs
         Credit Partners, L.P. as agent and Lender, dated as of December 9,
         1997.**

10.29    Subordination Agreement, by and among Sanwa, Dilmun and BIB Holdings
         (Bermuda) Ltd, dated as of December 27, 1996.**

10.30    First Amendment to (Mr. Breen's) Executive Employment Agreement.

10.31    Letter from Ernst & Young LLP regarding Change of Accounting Method
         (incorporated by reference to the Company's Report on Form 10-Q, dated
         August 11, 1997)

10.32    Common Stock Purchase Warrant between the Company and Brothers Warrant
         Holdings I, dated as of December 27, 1996.**

10.33    Amendment to Common Stock Purchase Warrant between the Company and
         Brothers Warrant Holdings I, dated as of December 9, 1997.**

10.34    Common Stock Purchase Warrant between the Company and Siena Capital
         Partners, L.P., dated as of September 20, 1996.**

10.35    Amendment to Common Stock Purchase Warrant between the Company and
         Siena Capital Partners, L.P., dated as of December 9, 1997.**

10.36    Common Stock Purchase Warrant between the Company and Goldman Sachs
         Credit Partners, L.P., dated as of December 9, 1997. **

10.37    Form of Senior Management Stay Bonus Letter.  **

10.38    Form of Key Employee Stay Bonus Letter. **

10.39    First Amendment to Amended and Restated Loan and Security Agreement, 
         dated as of March 27, 1998.**

21       List of Subsidiaries.**

23       Consent of Ernst & Young LLP.**

27       Financial Data Schedule.**

                                     30
<PAGE>

--------------------

*  Compensatory plans in which directors and officers participate and which are
   not available to all employees.

** Filed herewith.

                                     31
<PAGE>

                                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.

                             BROTHERS GOURMET COFFEES, INC.


                             By: /s/ DONALD D. BREEN
                                 ----------------------------------
                                 DONALD D. BREEN
                                 PRESIDENT, CHIEF EXECUTIVE OFFICER
                                 AND CHIEF FINANCIAL OFFICER

                             Date: April 7, 1998


      Pursuant to the requirements of the Securities Exchange Act of 1934, 
this report has been signed by the following person on behalf of the 
registrant and in the capacities and on the dates indicated.

     SIGNATURES                      TITLE                           DATE
     ----------                      -----                           ----

/s/ DONALD D. BREEN       President, Chief Executive Officer,     April 7, 1998
-----------------------   Chief Financial Officer, Treasurer 
DONALD D. BREEN           (Principal Executive Officer and
                          Principal Financial Officer)
                          and Director

/s/ BARRY BILMES          Vice President of Finance and           April 7, 1998
------------------------  Administration (Principal Accounting
BARRY BILMES              Officer)

/s/ ELIAS F. ABURDENE     Director                                April 7, 1998
------------------------
ELIAS F. ABURDENE

/s/ J. P. BOLDUC          Director                                April 7, 1998
------------------------
J. P. BOLDUC

/s/ JAMES L. MOORE, JR.   Director                                April 7, 1998
------------------------
JAMES L. MOORE, JR.

RAY E. NEWTON, III        Director                                April 7, 1998
------------------------
RAY E. NEWTON, III

/s/ RAYMOND B. RUDY       Director                                April 7,1998
------------------------
RAYMOND B. RUDY

                                        32
<PAGE>

                 INDEX OF FINANCIAL STATEMENTS AND SCHEDULE

<TABLE>
                                                                                      PAGE
                                                                                      ----
<S>                                                                                   <C>
    Report of Independent Certified Public Accountants...............................  F-1
    Consolidated Balance Sheets as of December 26, 1997 and December 27, 1996........  F-2
    Consolidated Statements of Operations for the Fiscal Years ended                   
       December 26, 1997, December 27, 1996 and December 29, 1995....................  F-4
    Consolidated Statements of Changes in Stockholders'                                
       Equity for the Fiscal Years ended December 26, 1997, December 27, 1996 and      
       December 29, 1995.............................................................  F-5
    Consolidated Statements of Cash Flows for the Fiscal Years ended                   
       December 26, 1997, December 27, 1996 and December 29, 1995....................  F-6
    Notes to Consolidated Financial Statements.......................................  F-7
                                                                                       
    Financial Statement Schedule:                                                      
                                                                                       
    II.  Valuation and Qualifying Accounts...........................................  S-1
</TABLE>

    All other schedules for which provision is made in the applicable 
accounting regulations of the Securities and Exchange Commission are not 
required under the related instructions or are inapplicable, and therefore 
have been omitted.


<PAGE>

             REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Shareholders and Board of Directors
Brothers Gourmet Coffees, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Brothers 
Gourmet Coffees, Inc. and subsidiaries as of December 26, 1997 and December 
27, 1996 and the related consolidated statements of operations, changes in 
stockholders' equity and cash flows for each of the three years in the period 
ended December 26, 1997. Our audits also included the financial statement 
schedule listed in the Index at Item 14(a). These consolidated financial 
statements and financial statement schedule are the responsibility of the 
Company's management. Our responsibility is to express an opinion on these 
consolidated financial statements and financial statement schedule based on 
our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above 
present fairly, in all material respects, the consolidated financial position 
of Brothers Gourmet Coffees, Inc. and subsidiaries as of December 26, 1997 and 
December 27, 1996, and the consolidated results of their operations and their 
cash flows for each of the three years in the period ended December 26, 1997 
in conformity with generally accepted accounting principles. Also, in our 
opinion, the related financial statement schedule, when considered in relation 
to the basic consolidated financial statements taken as a whole, presents 
fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, in fiscal 
year 1997, the Company changed its method of accounting for inventories from 
the last-in, first-out ("LIFO") method to the first-in, first -out ("FIFO") 
method. The change in method of inventory costing has been applied 
retroactively by restating prior years' consolidated financial statements.

                                               Ernst & Young LLP


West Palm Beach, Florida
March 28, 1998
------------------------
                                      F-1
<PAGE>

                           CONSOLIDATED BALANCE SHEETS
                          BROTHERS GOURMET COFFEES, INC.
                                 (in thousands)

<TABLE>
                                                            December 26,           December 27,
                                                                1997                   1996
                                                            ------------           ------------
                                                                                    (Restated)
<S>                                                         <C>                    <C>
ASSETS


CURRENT ASSETS
 Trade receivables, less allowances of $1,542
   for 1997 and $1,766 for 1996                              $ 11,118               $ 15,717
 Receivables from the sale of discontinued retail 
  operations                                                    1,818                  3,795
 Inventories                                                    9,516                 13,826
 Prepaid expenses and other current assets                        836                  1,225
                                                             --------              ---------
     TOTAL CURRENT ASSETS                                      23,288                 34,563


PLANT AND EQUIPMENT, NET                                       15,839                 14,814


OTHER ASSETS
  Excess of cost over net assets acquired, net                 50,991                 52,470
  Noncompete agreements, net                                       --                  1,197
  Prepaid promotional expense                                   5,070                  3,694
  Other assets                                                  1,066                    778
  Debt acquisition costs, net                                   2,759                  1,689
                                                             --------              ---------


     TOTAL ASSETS                                            $ 99,013               $109,205
                                                             --------              ---------
                                                             --------              ---------
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-2

<PAGE>



                    CONSOLIDATED BALANCE SHEETS (Continued)
                         BROTHERS GOURMET COFFEES, INC.
                      (in thousands, except share amounts)

<TABLE>
                                                                     December 26,     December 27,
                                                                         1997             1996
                                                                     ------------     ------------
                                                                                       (Restated)
<S>                                                                  <C>              <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Current maturities of long-term debt and capital lease 
    obligations                                                       $  1,779         $  1,648
  Accounts payable                                                       4,419            8,247
  Accrued expenses                                                       5,477            6,498
  Accrued litigation settlement                                             --            5,500
  Accrued losses and other costs of discontinued
    retail operations                                                    1,389            1,781
  Accrued restructuring costs                                               29              373
                                                                      --------         --------
     TOTAL CURRENT LIABILITIES                                          13,093           24,047

LONG-TERM DEBT, less current maturities                                 27,777           20,137
MINORITY INTEREST                                                           83               89

REDEEMABLE WARRANTS                                                        300               --

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Preferred Stock--10,000,000 shares authorized:
    $1.00 par value; no shares issued and
     outstanding at December 26,1997 and
     December 27, 1996                                                      --               --
  Common Stock--25,000,000 shares and 15,000,000 shares
      authorized at December 26, 1997 and December 27, 1996,
      respectively: $.0001 par value; 12,324,890 and 10,400,105 shares
      issued and outstanding at December 26, 1997 and December 27,
      1996, respectively                                                     1                1
  Common Stock, Class B--2,000,000 shares authorized:
     $.0001 par value; 839,332 issued and outstanding at
     December 26, 1997 and December 27, 1996, respectively                  --               --
  Additional paid-in capital                                           151,693          145,992
  Accumulated deficit in earnings                                      (93,484)         (80,811)
  Treasury stock-- 203,566 and 37,500 shares, at cost at December
    26, 1997 and December 27,1996, respectively                           (450)            (250)
                                                                      --------         --------
      TOTAL STOCKHOLDERS' EQUITY                                        57,760           64,932
                                                                      --------         --------
      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                      $ 99,013         $109,205
                                                                      --------         --------
                                                                      --------         --------
</TABLE>
See accompanying notes to consolidated financial statements.

                                       F-3

<PAGE>

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                         BROTHERS GOURMET COFFEES, INC.
                    (in thousands, except per share amounts)

<TABLE>
                                                   Year Ended         Year Ended         Year Ended
                                                  December 26,       December 27,        December 29,
                                                      1997               1996               1995
                                                  ------------       ------------        ------------
                                                                      (Restated)          (Restated)
<S>                                               <C>                <C>                 <C>
Sales                                               $ 70,122            $ 72,577           $ 95,005
Cost of goods sold                                    37,626              39,716             56,460
                                                    --------            --------           --------
      GROSS PROFIT                                    32,496              32,861             38,545

Operating expenses:
  Distribution, selling and marketing                 28,700              26,186             35,164
  Administrative                                       5,997               5,640              9,694
  Amortization of intangibles                          2,676               2,784              3,373
  Restructuring charges                                   --                 291                945
                                                    --------            --------           --------
      OPERATING LOSS                                  (4,877)             (2,040)           (10,631)

Other expenses:
  Interest expense, net                                4,059               2,140              2,523
  Litigation settlement                                   --               5,500                 --
  Debt restructuring expense                             453                  --                 --
  Other expense                                           84                  76                 47
                                                    --------            --------           --------
      LOSS BEFORE DISCONTINUED
      OPERATIONS AND EXTRAORDINARY ITEM               (9,473)             (9,756)           (13,201)

Loss from discontinued retail operations                  --                  --             (5,368)
Loss  on disposal of retail operations, 
  including provision of $6,108 for operating 
  losses during phase-out period in 1995              (3,200)             (1,400)           (38,426)
                                                    --------            --------           --------
      LOSS BEFORE EXTRAORDINARY ITEM                 (12,673)            (11,156)           (56,995)

Extraordinary item--loss from early 
  extinguishment of debt                                  --                (156)                --
                                                    --------            --------           --------
      NET LOSS                                      $(12,673)           $(11,312)          $(56,995)
                                                    --------            --------           --------
                                                    --------            --------           --------
Loss per common share and loss per common 
  share--assuming dilution:
      Loss from continuing operations               $  (0.75)           $  (0.87)          $  (1.18)
      Loss before extraordinary item                $  (1.01)           $  (1.00)          $  (5.10)
      Net loss                                      $  (1.01)           $  (1.01)          $  (5.10)

Weighted average common shares outstanding            12,601              11,202             11,184
                                                    --------            --------           --------
                                                    --------            --------           --------
</TABLE>

See accompanying notes to consolidated financial statements.

                                       F-4

<PAGE>

            CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                          BROTHERS GOURMET COFFEES, INC.
                       (in thousands, except share amounts)
<TABLE>
                                                             Additional  Accumulated                        Total
                                       Preferred   Common     Paid-in     Deficit in        Treasury    Stockholders'
                                         Stock     Stock      Capital      Earnings          Stock          Equity
                                        -------    -----      -------      --------         -------        --------
<S>                                    <C>         <C>        <C>          <C>            <C>           <C>
Balance at December 30, 1994
(restated)                              $   --     $    1     $142,214     $(12,504)       $ (250)       $129,461
 Issuance of 47,558 shares of        
  common stock in exercise 
   of options                               --         --          291            --           --             291
 Net loss for the year (restated)           --         --           --      (56,995)           --         (56,995)
                                        ------     ------     --------     --------        ------        --------
Balance at December 29, 1995         
(restated)                                  --          1      142,505      (69,499)         (250)         72,757
 Issuance of 1,848,626 warrants      
  to purchase shares of common       
  stock                                     --         --        3,487            --           --           3,487
 Net loss for the year (restated)           --         --           --      (11,312)           --         (11,312)
                                        ------     ------     --------     --------        ------        --------
Balance at December 27, 1996         
(restated)                                  --          1      145,992      (80,811)       $ (250)       $ 64,932
 Issuance of 1,924,785 shares of     
  common stock in settlement of 
   litigation                               --         --        5,701           --            --           5,701
 Value of contribution of 166,066           --
   shares of common stock                              --           --           --          (200)           (200)
 Net loss for the year                      --         --           --      (12,673)           --         (12,673)
                                        ------     ------     --------     --------        ------        --------
Balance at December 26, 1997            $   --     $    1     $151,693     $(93,484)       $ (450)       $ 57,760
                                        ------     ------     --------     --------        ------        --------
                                        ------     ------     --------     --------        ------        --------
</TABLE>
See accompanying notes to consolidated financial statements

                                     F-5
<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                         BROTHERS GOURMET COFFEES, INC.
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                   Year Ended      Year Ended      Year Ended
                                                                    December        December        December
                                                                    26, 1997        27, 1996        29, 1995
                                                                    --------        --------        --------
                                                                                   (Restated)      (Restated)
<S>                                                                <C>             <C>             <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
  Net loss                                                          $(12,673)       $(11,312)       $(56,995)
  Adjustments to reconcile net loss to net cash provided
   by (used in) operating activities:
      Discontinued retail operations                                   3,200           1,400          43,794
      Accrued litigation settlement                                       --           5,500              --
      Depreciation                                                     4,755           4,861           6,198
      Amortization of prepaid promotional expenses                     4,741           4,208           5,142
      Other amortization                                               3,553           3,397           3,730
      Provision for doubtful accounts                                    626             892           6,186
      Noncash debt restructuring costs                                   137              --              --
      Noncash restructuring charges                                       --             291             267
      Other                                                             (104)           (151)             48
      Gain from sale of plant and equipment                               --              --            (14)
      Extraordinary loss on early extinguishment of debt                  --             156              --
      Changes in operating assets and liabilities:
        Trade receivables                                              3,630          (2,255)          1,218
        Receivables from sale of discontinued retail 
         operations                                                       --              --          (6,271)
        Inventories                                                    4,310          (6,403)         10,517
        Promotional expenses                                          (5,974)         (2,853)         (3,404)
        Prepaid expenses and other current assets                        389            (301)           (350)
        Accounts payable                                              (3,828)          1,803          (3,067)
        Accrued expenses                                                (849)            614          (2,621)
        Accrued acquisition costs                                         --              --            (303)
        Accrued restructuring costs                                     (344)         (1,106)           (758)
                                                                    --------        --------        --------
          NET CASH (USED IN) PROVIDED BY OPERATING
           ACTIVITIES
            Continuing Operations                                      1,569          (1,259)          3,317
            Discontinued Retail Operations                            (2,316)         (3,995)         (7,648)
                                                                    --------        --------        --------
                                                                        (747)         (5,254)         (4,331)
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
  Purchases of plant and equipment                                    (5,780)         (3,256)         (3,581)
  Proceeds from sale of plant and equipment:
    Continuing Operations                                                 --              31             185
    Discontinued Retail Operations                                       412           4,889          23,500
                                                                    --------        --------        --------
      NET CASH (USED IN) PROVIDED BY INVESTING
       ACTIVITIES                                                     (5,368)          1,664          20,104

</TABLE>

                                      F-6
<PAGE>

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                         BROTHERS GOURMET COFFEES, INC.
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                    Year Ended        Year Ended        Year Ended
                                                                     December          December          December
                                                                     26, 1997          27, 1996          29, 1995
                                                                     --------          --------          --------
                                                                                       (Restated)        (Restated)
<S>                                                                  <C>               <C>               <C>
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
  Proceeds from subordinated debt                                          --             15,000                --
  Proceeds from term loan                                               6,500              7,500                --
  Proceeds from short term note payable                                    --              3,000                --
  Payment of short term note payable                                       --             (3,000)               --
  Debt issuance costs                                                  (1,569)            (2,253)               --
  Proceeds from revolving line of credit                               36,730             51,345           161,527
  Payment of revolving line of credit                                 (28,719)           (67,182)         (177,558)
  Payment of term loan                                                 (6,750)              (750)               --
  Issuance of common stock, net of costs                                   --                 --               258
  Payment of other debt                                                   (77)               (70)               --
                                                                     --------           --------         ---------
    NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                 6,115              3,590           (15,773)
                                                                     --------           --------         ---------
    DECREASE IN CASH                                                       --                 --                --
Cash, beginning of year                                                    --                 --                --
                                                                     --------           --------         ---------
CASH, END OF YEAR                                                    $     --           $     --         $      --
                                                                     --------           --------         ---------
                                                                     --------           --------         ---------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
  Issuance of common stock in settlement of litigation               $  5,701                 --                --
  Issuance of warrants in connection with debt agreements                 300              3,487                --
  Value of contributed treasury stock                                     200                 --                --
  Fixed assets acquired through capital lease                              97                297                --
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>
                                       
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        BROTHERS GOURMET COFFEES, INC.
                             December 26, 1997
                    (in thousands, except share amounts)

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

         PRINCIPLES OF CONSOLIDATION: The consolidated financial statements 
include the accounts of the Company and its majority-owned subsidiaries and 
partnership interests. All significant intercompany transactions and 
investments, including those related to the Company's former subsidiaries, 
have been eliminated in the Company's consolidated financial statements.

         NATURE OF BUSINESS, MAJOR CUSTOMERS AND CREDIT CONCENTRATION: The 
Company is an integrated source, roaster and wholesaler of high quality 
gourmet coffee products. The Company participates in the wholesale 
distribution channel through sales of gourmet coffee to supermarkets, grocery 
and drug stores, military commissaries, warehouse stores, mass merchandisers, 
and specialty stores. The Company markets a variety of brands throughout the 
United States. During Fiscal Year 1997, two supermarket chains comprised 17% 
and 11% of the Company's net sales. Credit is extended to customers based on 
an evaluation of their creditworthiness and collateral is not required. 
Credit losses are provided for in the consolidated financial statements based 
upon management's previous experience and expectations.

         FISCAL YEAR END: The Company's fiscal year consists of 52 or 53 
weeks ending on the last Friday in December. The years ended December 26, 
1997, December 27, 1996 and December 29, 1995 all consist of 52 weeks.

         REVENUE RECOGNITION: Net sales are recognized when products are 
shipped.  The Company establishes allowances for estimated returns, 
allowances and customer term discounts.  In addition, accruals for customers' 
contractual rebates and advertising allowances are recorded when revenues are 
recognized.

         INVENTORIES: During the fiscal quarter ended June 27, 1997, the 
Company changed its method of accounting for inventories from the last-in, 
first-out (LIFO) method to the first-in, first-out (FIFO) method. The Company 
believes the change is preferable because (1) due to recent operating losses 
and demands on liquidity, users of the Company's consolidated financial 
statements are principally interested in understanding the Company's current 
financial position, and the FIFO method better illustrates that position, (2) 
the FIFO method provides a better matching of current costs with revenues and 
(3) the FIFO method is the predominant method used by the Company's 
competitors and peer group.

         The change in method of inventory costing has been applied 
retroactively by restating prior years' financial statements. The effect of 
the change was an increase in net loss of $1,131, or $.10 per share, and 
$3,509, or $.31 per share, during Fiscal Years 1996 and 1995, respectively. 
The net effect on the balance sheet as of December 27, 1996, was to decrease 
inventory and accumulated deficit by $98.

         The Company's inventories are valued at the lower of cost or market 
using the FIFO method. The components of inventories at December 26, 1997 and 
December 27, 1996 were as follows:

<TABLE>
                                1997     1996
                               ------   -------
<S>                            <C>      <C>
Green Coffee                   $2,606   $ 4,844
Finished Goods                  5,851     6,900
Packaging and other supplies    1,059     2,082
                               ------   -------
                               $9,516   $13,826
                               ------   -------
                               ------   -------
</TABLE>

         PREPAID PROMOTIONAL EXPENSE: With the introduction or significant 
expansion of its products into new or existing customer markets, the Company 
incurs costs principally in the form of cash payments (slotting fees) and free 
product, in addition to making capital expenditures for customized product 
displays. Cash payments and free product costs are recorded as prepaid 
promotional expense, which are amortized over the terms of the written sales 
contract periods, or, in the absence of a written sales contract, a 
twelve-month period.

                                      F-8

<PAGE>
                                       
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        BROTHERS GOURMET COFFEES, INC.
                             December 26, 1997
                    (in thousands, except share amounts)

         ADVERTISING EXPENSES:  The Company expenses advertising costs as 
incurred.  Advertising expenses were $1,118, $1,242 and $2,983 during Fiscal 
Years 1997, 1996 and 1995, respectively.

         PLANT AND EQUIPMENT: Plant and equipment, which includes customized 
display sets at customer locations, are stated at cost. Depreciation and 
amortization are provided over the estimated useful lives of the assets which 
range from 2 to 30 years, and are computed using the straight-line method. 
The components of plant and equipment at December 26, 1997 and December 27, 
1996 were as follows:

<TABLE>
                                        1997       1996
                                      --------   --------
<S>                                   <C>        <C>
Leasehold improvements                $  2,962   $  2,869
Roasting and packaging equipment         7,103      6,032
Delivery, sales and other equipment     26,802     23,044
                                      --------   --------
                                        36,867     31,945
Less accumulated depreciation and
amortization                           (21,028)   (17,131)
                                      --------   --------
                                      $ 15,839   $ 14,814
                                      --------   --------
                                      --------   --------
</TABLE>

         DEBT ACQUISITION COSTS: Costs incurred to secure financing have been 
recorded as deferred charges and are being amortized, using the level yield 
method, over the lives of the underlying financing agreements.

         INTANGIBLE ASSETS: Costs incurred in connection with acquisitions 
that were allocated to noncompete agreements are amortized on a straight-line 
basis over five years, the terms of such agreements. At December 26, 1997 and 
December 27, 1996, accumulated amortization of noncompete agreements was 
$11,239 and $10,042, respectively. Excess of cost over net assets acquired 
(goodwill) is being amortized on a straight-line basis over 40 years. At 
December 26, 1997 and December 27, 1996, accumulated amortization was $7,887 
and $6,407, respectively.

         Goodwill is reviewed on a quarterly basis to determine if facts and 
circumstances suggest that it may be impaired. If this review indicates that 
goodwill will not be recoverable, as determined based on the remaining 
amortization period, the Company's carrying value of the goodwill will be 
reduced by the estimated shortfalls of cash flows.

         LONG LIVED ASSETS: On a quarterly basis, the Company evaluates the 
recoverability of the carrying amount of its long lived assets, including 
plant and equipment and intangible assets, by determining if any impairment 
indicators are present. If this review indicates that the carrying value of 
the assets will not be recoverable, as determined based on the estimated 
undiscounted cash flows over the assets' remaining estimated useful lives, 
their carrying values are reduced to fair value. Generally, fair value will be 
determined using valuation techniques such as expected discounted cash flows 
or appraisals, as appropriate.

         RETIREMENT PLANS: The Company has a retirement savings plan which 
covers all eligible full time employees. The plan permits employees to 
contribute between 2% to 15% of their salaries into their choice of a fixed 
income fund, money market fund or stock market fund. The Company matches 25% 
of employee contributions, up to 6% of the employee's salary. The Company's 
contributions to the plan during Fiscal Years 1997, 1996 and 1995 were $50, 
$49 and $38, respectively.

         INCOME TAXES:  The consolidated results of operations of the Company 
and its subsidiaries are included in its consolidated federal income tax 
returns.  Deferred income taxes are determined on the liability method in 
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.



                                      F-9

<PAGE>
                                       
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        BROTHERS GOURMET COFFEES, INC.
                             December 26, 1997
                    (in thousands, except share amounts)

         USE OF ESTIMATES: The preparation of financial statements in 
conformity with generally accepted accounting principals requires management 
to make estimates and assumptions that affect the amounts reported in the 
consolidated financial statements and accompanying notes. Actual results could 
differ from those estimates.

         FINANCIAL INSTRUMENTS: The carrying amounts of cash and cash 
equivalents, accounts receivable, trade accounts payable and accrued expenses 
approximate fair value because of their short duration to maturity. The 
carrying amounts of the Company's variable rate revolver and term loans 
approximates fair value because the interest rate is tied to a quoted variable 
index. The amount of the Company's fixed rate term loans approximate fair 
value based on current rates recently offered the Company for debt of similar 
maturities.

         NET LOSS PER COMMON SHARE: In 1997, the Financial Accounting 
Standard Board issued Statement No. 128, "Earnings per Share." Statement 128 
replaced the calculation of primary and fully diluted earnings per share. 
Unlike primary earnings per share, basic earnings per share excludes any 
dilutive effects of options or warrants. Diluted earnings per share is very 
similar to the previously reported fully diluted earnings per share. All 
earnings per share amounts for all periods have been presented, and where 
appropriate, restated to conform to the Statement 128 requirements.



                                      F-10

<PAGE>
                                       
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        BROTHERS GOURMET COFFEES, INC.
                             December 26, 1997
                    (in thousands, except share amounts)

         The following table sets forth the computation of basic and diluted 
loss per share:

<TABLE>
                                                1997         1996        1995
                                              --------     --------    --------
<S>                                           <C>         <C>          <C>
Numerator:
   Loss before discontinued operations
     and extraordinary item                   $ (9,473)    $ (9,756)   $(13,201)
   Loss before extraordinary item             $(12,673)    $(11,156)   $(56,995)
   Net loss                                   $(12,673)    $(11,312)   $(56,995)
Denominator:
Denominator for basic and dilutive
   earnings per share-weighted
   average shares                               12,601       11,202      11,184
Basic and Diluted loss per share:
   Loss from continuing operations            $  (0.75)    $  (0.87)    $ (1.18)
   Loss before extraordinary item             $  (1.01)    $  (1.00)    $ (5.10)
   Net loss                                   $  (1.01)    $  (1.01)    $ (5.10)
</TABLE>

         Shares underlying options and warrants totaling 3,637,504, 3,372,120 
and 2,832,561 are not included in the computation for Fiscal Years 1997, 1996 
and 1995, respectively, because the effect is antidilutive. For additional 
disclosures regarding stock options and warrants, see Notes 3, 6 and 7.

         During July 1997 and January 1998, the Company issued 462,029 and 
1,462,756 common shares, respectively, in the settlement of the Shareholder 
Class Action and Gloria Jean's Franchise Litigation. Such shares have been 
included in the calculation of weighted average shares beginning April 1997, 
as of the settlement dates of the Shareholder Class Action and Gloria Jeans 
Franchise Litigation. See Note 9.

         FINANCIAL STATEMENT RECLASSIFICATIONS:  Certain amounts in the prior 
years' financial statements have been reclassified to conform to the Fiscal 
Year 1997 presentation.

NOTE 2 - DISCONTINUED RETAIL OPERATIONS

         In June 1995, the Company's Board of Directors (the "Board") adopted 
a plan (the "Disposition Plan") to dispose of all of its retail operations, 
consisting of the Gloria Jean's specialty retail business ("Gloria Jean's") 
and the Brothers Gourmet Coffee Bars (the "Coffee Bars"). Accordingly, the 
operating results of discontinued retail operations, including provisions for 
estimated losses during the phase-out period, have been segregated from 
continuing operations and reported as a separate line item on the



                                      F-11

<PAGE>
                                       
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        BROTHERS GOURMET COFFEES, INC.
                             December 26, 1997
                    (in thousands, except share amounts)

statement of operations. Sales from discontinued retail operations were $627, 
$2,466 and $24,693 during Fiscal Years 1997, 1996 and 1995, respectively.

         On October 16, 1995, the Company and The Second Cup, Ltd. ("Second 
Cup"), signed a stock purchase agreement (the "Purchase Agreement"), whereby 
Second Cup agreed to purchase all of the issued and outstanding stock of the 
Company's subsidiary, Edglo Enterprises, Inc. ("Edglo") (which held 
substantially all of the Gloria Jean's assets and liabilities), and certain 
other assets of the Company for an aggregate purchase price of $30,000 (the 
"Gloria Jean's Sale"). On November 9, 1995, the Company closed the Gloria 
Jean's Sale, effective as of September 30, 1995. Pursuant to the terms of the 
Purchase Agreement, (1) the Company received in Fiscal Year 1996 $27,600 of 
the purchase price and the remaining $2,400 continued to be held in escrow , 
(2) in Fiscal Year 1997 $992 of the purchase price was released from escrow 
to fund a portion of the settlement of the Gloria Jean's Franchise 
Litigation, (3) in January 1998, $441 was released from escrow to Second Cup 
in payment of certain claims made by Second Cup against the Company for 
breaches of representations and warranties and (4) the remaining $967 of the 
purchase price is still being held in escrow pending the resolution of 
certain post-closing adjustments and claims. See Note 9 for more information 
concerning the settlement of the Gloria Jean's Franchise Litigation and the 
remaining Second Cup indemnity claims.

         During Fiscal Year 1996, the Company sold or closed (1) all of its 
Coffee Bars located in Colorado, Texas and Washington D.C., (2) all of its 
Chicago Coffee Bars and (3) all but two of its New York Coffee Bars for 
$2,400 of which $1,665 and $235 was received in Fiscal Year 1996 and Fiscal 
Year 1997, respectively. In December 1996, the Company agreed to permit the 
purchaser of the seven (7) Chicago Coffee Bars to defer payment of the 
remaining $500. The remaining $500 receivable bears interest at the rate of 
9.5% per annum. The Company accrued $25 of interest during Fiscal Year 1997. 
At December 26, 1997, the Company recorded a reserve of $300 on the 
receivable from the sale of the Chicago Coffee Bars. At December 26, 1997, 
$225 of proceeds from the sale of Coffee Bars is included in the receivable 
from sales of discontinued retail operations. See Note 9 below.

         During Fiscal Year 1997, the Company incurred $3,200 of losses on 
the disposal of discontinued retail operations related to the Gloria Jean's 
Franchise Litigation of $1,400, claims associated with the sale of Gloria 
Jean's of $1,100, and obligations related to the closing of its Coffee Bars 
of $700. During Fiscal Year 1996, the Company incurred $1,400 of losses on 
the disposal of discontinued retail operations in connection with the Gloria 
Jeans Franchise Litigation.

         As of December 26, 1997, the Company was the lessee under five (5) 
remaining non-cancelable operating leases for Coffee Bar stores of which two 
are operating, which expire on varying dates through 2006. Future commitments 
under these non-cancelable lease agreements at December 26, 1997 are as 
follows: Fiscal Year 1998--$730; Fiscal Year 1999--$753; Fiscal Year 
2000--$770; Fiscal Year 2001--$802; Fiscal Year 2002--$831 and thereafter 
$2,711. The Company has obtained sublease agreements on two (2) of the five 
(5) remaining non-cancelable operating leases. Future minimum sublease income 
under these sublease agreements at December 26, 1997 is as follows: Fiscal 
Year 1998 - $293; Fiscal Year 1999 -$341; Fiscal Year 2000 - $347; Fiscal 
Year 2001 - $375; Fiscal Year 2002 - $384; and thereafter - $1,526. The 
Company is negotiating to terminate its obligations under all of the 
remaining leases and estimates that the total costs relating to the 
assignment and termination of these leases will be approximately $375. This 
incremental cost has been included in the estimated loss on disposal.  In 
February 1998, the Company negotiated a settlement to terminate its lease 
obligations under one of the seventeen (17) remaining leases that the 
Company previously sold but remained as guarantor. The total costs relating 
to the termination of the lease was approximately $250 in addition to legal 
fees incurred by the Company.

                                      F-12

<PAGE>
                                       
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        BROTHERS GOURMET COFFEES, INC.
                             December 26, 1997
                    (in thousands, except share amounts)

The Company remains as guarantor on sixteen (16) leases sold and assigned to 
third parties with future commitments under these agreements at December 26, 
1997 as follows: Fiscal Year 1998 -- $897; Fiscal Year 1999 -- $915; Fiscal 
year 2000 -- $845; Fiscal Year 2001 -- $845; Fiscal Year 2002 -- $422; and 
thereafter -- $577 through the year 2006.  See Note 9.

NOTE 3 - DEBT

         A summary of indebtedness outstanding under various credit 
arrangements at December 26, 1997 and December 27, 1996 is as follows:

<TABLE>
                                       1997       1996
                                      -------    -------
<S>                                   <C>        <C>
Revolving Credit Facility (a)(d)      $11,177    $ 3,166
Term Loan(s) (b)(d)                     6,500      6,750
Subordinated Note(c)                   15,000     15,000
Capital lease obligations                 150        228
                                      -------    -------
                                       32,827     25,144
Less value ascribed to warrants        (3,271)    (3,359)
Less current maturities                (1,779)    (1,648)
                                      -------    -------
                                      $27,777    $20,137
                                      -------    -------
                                      -------    -------
</TABLE>

(a) Represents, in 1996, a maximum $15,000 revolving line of credit (the 
    "Revolver") which bears interest at the Company's choice of either prime 
    plus 1.0% (9.25% at December 27, 1996) or LIBOR plus 2.5% (8.1% at 
    December 27, 1996).  Interest is payable monthly and the Revolver matures 
    on May 29, 1999.  The Revolver carries an unused commitment fee of .5% of 
    the average daily unused balance.  Borrowings under the Revolver are 
    collateralized by eligible inventory and receivables.   In connection 
    with certain shareholders having previously guaranteed a portion of the 
    borrowings under the Revolver, the Company issued warrants to purchase 
    103,626 shares to certain shareholders of its common stock at an exercise 
    price of $3.00, the then quoted market price.  These warrants were fully 
    vested as of December 27, 1996. 

    Represents, in 1997, a maximum $21,500 Revolver which bears interest at 
    the prime rate plus 2.0% (10.5% at December 26, 1997). Interest is 
    payable monthly and the Revolver matures on May 29, 1999. At December 26, 
    1997, the Company had available borrowings under the Revolver of $4,629. 
    The Revolver carries an unused commitment fee of .5% of the average daily 
    unused balance. Eligible inventory, receivables and slotting fees 
    collateralize borrowings under the Revolver.

(b) Represents, in 1996, a maximum $7,500 term loan facility (the "Term 
    Loan") which bears interest at the Company's choice of either prime plus 
    1.5% (9.75% at December 27, 1996) or LIBOR plus 3.0% (8.6% at December 
    27, 1996). The Term Loan is payable in monthly installments of $125 plus 
    interest through May 2001. The Term Loan is subject to a demand payment 
    on May 29, 1999 if the Revolver is not refinanced. Borrowings under the 
    Term Loan are collateralized by certain plant and equipment. 



                                       F-13

<PAGE>
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        BROTHERS GOURMET COFFEES, INC.
                             December 26, 1997
                    (in thousands, except share amounts)

    Represents, in 1997, a maximum $6,500 term loan facility (the Term Loan), 
    consisting of two components, (a) a term loan in the amount of $2,250 
    ("Term Loan A") and (b) a second term loan in the amount of $4,250 ("Term 
    Loan B"). Term Loan A bears interest at the prime rate plus 2.0% (10.5% 
    at December 26, 1997) and is payable in seventeen monthly installments of 
    $37.5 each plus accrued interest and one installment of $1,612.5 plus 
    accrued interest payable at maturity. Term Loan B bears interest at a 
    fixed rate of 11.75% and is payable in seventeen monthly installments of 
    $100 each plus accrued interest and one installment of $2,550 plus 
    accrued interest payable at maturity.

    In connection with the acquisition and amendment of the 1996 Revolver and 
    Term Loan on December 9, 1997, the Company issued warrants to purchase 
    400,000 shares of its common stock at an exercise price of $1.50 per 
    share. The 400,000 warrants are fully vested. Also, the Company is 
    obligated to repurchase the 400,000 warrants from the lender upon the 
    occurrence of certain events, as defined in the loan agreement. As of 
    December 26, 1997, these warrants have a carrying value of $0.75 per 
    warrant, which approximates their redemption amount.

(c) Represents borrowings under an unsecured $15,000 subordinated note (the 
    "Subordinated Note") which bears interest at 11.25% per annum.  Interest 
    is payable monthly and the Subordinated Note matures on December 26, 
    2002.  In connection with the closing of the Subordinated Note, the 
    Company issued warrants to purchase 1,245,000 shares of its common stock 
    at an exercise price of $0.25 per share and 400,000 shares at an exercise 
    price of $3.44 per share.  The 400,000 warrants are fully vested.  In 
    connection with the acquisition and amendment of the 1996 Revolver and 
    Term Loan on December 9, 1997, the exercise price of the 400,000 warrants 
    was reduced to $1.56.  The 1,245,000 warrants vest in various amounts 
    over the next six years if the Company continues to have borrowings 
    outstanding under the Subordinated Note, as of December 26, 1997, 265,600 
    of the 1,245,000 warrants had vested.

(d) On December 9, 1997, a new lender acquired, by way of assignment, 100% of 
    the 1996 Revolver and 1996 Term Loan, and the new lender and the Company 
    amended and restated the 1996 Revolver and Term Loan  agreement (the 
    "Restated Credit Agreement"). On March 27, 1998, the new lender and the 
    Company entered into the First Amendment to the Restated Credit Agreement, 
    which modified certain of the covenants and definitions in the Restated 
    Credit Agreement.

         On March 28, 1997, the Company was not in compliance with the cash 
flow-to-debt service covenants constituting events of default under the 
Revolver and the Term Loan with Sanwa Business Credit Corporation ("Sanwa") 
and the Subordinated Note with Dilmun Financial Services ("Dilmun"). The 
Company entered into a forbearance agreement with Sanwa whereby Sanwa agreed 
to forbear from acting on the covenant defaults until October 31, 1997. On 
October 31, 1997, the Company obtained an extension of Sanwa's forbearance 
agreement through November 28, 1997. On November 19, 1997, Goldman Sachs 
Credit Partners, L.P. ("GSCP"), and Sanwa agreed to the principal terms of an 
assignment of the Company's Revolver and Term Loan. Sanwa provided another 
extension of the forbearance agreement through December 9, 1997, the 
effective date that GSCP acquired, by way of assignment, from Sanwa the 
Company's Revolver and Term Loan (the "Credit Facility"). Simultaneously with 
the closing of the assignment, the Company and GSCP amended and restated the 
Credit Facility. In connection with the amended and restated Credit Facility, 
the Company incurred $453 of debt restructuring costs during Fiscal Year 1997 
related to the write-off of previously recorded debt acquisition fees and 
forbearance fees.

         In connection with the closing of the Subordinated Note in December 
1996, Dilmun entered into a subordination agreement with Sanwa. Pursuant 
thereto, Dilmun agreed, subject to certain conditions and restrictions, that 
the Subordinated Note would be subordinated and subject in right of payment 
to the prior payment in full in cash of all of the Company's obligations to 
Sanwa (and its successors and assigns) and the other Senior Lenders under the 
Credit Facility. By reason of the structure of the GSCP's acquisition of the 
Credit Facility as an assignment and assumption of the Credit Facility and as 
a refinancing thereof, GSCP has succeeded to all of Sanwa's rights, benefits 
and privileges under the Subordination Agreement.

         In September 1996, the Company entered into a $3,000 bridge loan 
facility (the Bridge Facility) which had a one year term. Borrowings under 
the Bridge Facility were repaid upon the closing of the Subordinated Note in 
December 1996 and the agreement was terminated. As a result, the Company 
recorded

                                      F-14
<PAGE>
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        BROTHERS GOURMET COFFEES, INC.
                             December 26, 1997
                    (in thousands, except share amounts)

a loss on early extinguishment of debt related to unamortized debt issue costs 
of $156. In connection with the closing of the Bridge Facility, the Company 
issued warrants to purchase 100,000 shares of its common stock at an exercise 
price of $3.00. In connection with the acquisition and amendment of the 1996 
Revolver and Term Loan in December 1997, the exercise price of these warrants 
was reduced to $1.56. These warrants are fully vested.

         The fair values of the above warrants were recorded as original 
issue discount and are amortized over the lives of the underlying financing 
agreements. The fair values were estimated by using the Black-Scholes 
valuation model as prescribed under Statement of Financial Accounting 
Standards (SFAS) No. 123 utilizing the following weighted average 
assumptions: risk free rate of return of 7.0%; dividend yield of 0%; 
volatility factor of .505 and a weighted expected average life of the 
warrants of three years. The fair value of any warrants with reduced exercise 
prices, as previously, were revalued at the time of such reductions, and it 
was determined that such reductions did not have an impact on the original 
issue discount.

         The Company's debt agreements contain various financial and 
non-financial covenants. These covenants require the Company (1) beginning 
with the first quarter of 1998, to maintain total capital funds, as defined in 
the Revolver and Term Loan agreement, at various quarterly amounts, (2) 
beginning with the second quarter of 1998, to maintain earnings before 
interest expense, taxes paid, depreciation and amortization ("EBITDA"), as 
defined in the Revolver and Term Loan agreement, at various quarterly amounts, 
(3) to maintain cash flow to debt service and consolidated tangible net worth, 
both as defined in the Subordinated Note agreement, at specified levels, (4) 
beginning in the first quarter of 1998, to limit capital expenditures to 
$5,000 and (5) at all times during 1998, to restrict the payment of dividends. 
At December 26, 1997, the Company was not in compliance with the cash flow to 
debt service covenants and consolidated tangible net worth covenants in its 
Subordinated Note agreement. Pursuant to the terms of the Subordinated Note, 
management has determined that the lender does not have the right to 
accelerate repayment of the Subordinated Note Facility solely because of the 
covenant defaults and, accordingly, the Company has continued to classify the 
outstanding borrowings as long-term. The Company also requested a waiver or 
amendment of certain covenant defaults under the Subordinated Note from 
Dilmun. The Company and Dilmun have not been able to reach agreement on the 
terms of such waiver or amendment.

         Maturities of long-term debt in each of the five Fiscal Years 
commencing December 27, 1997, and thereafter, are as follows: 1998--$1,779; 
1999--$16,049; 2000--$-0-; 2001--$-0-; 2002--$15,000.

         The Company made interest payments of $2,730; $2,227; and $2,524 in 
Fiscal Years 1997, 1996 and 1995, respectively.

NOTE 4 - RESTRUCTURING CHARGE(S)

         During Fiscal Year 1993, the Company recorded a restructuring charge 
of approximately $7,000 as a result of significant changes contemplated in 
the operations of the Company associated with the acquisitions of Hillside 
and Edglo. The restructuring charge included costs associated with brand 
conversion, re-alignment of production facilities, reconfiguration of 
distribution channels, elimination of duplicative functions and other costs 
associated with the operational changes resulting from the acquisitions. Cash 
expenditures relating to the Fiscal Year 1993 restructuring accrual of 
approximately $305 were made during Fiscal Year 1995.

                                      F-15
<PAGE>


                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          BROTHERS GOURMET COFFEES, INC.
                                 December 26, 1997
                       (in thousands, except share amounts)

     During the first quarter of Fiscal Year 1995, the Board of Directors of
the Company (the "Board") permanently curtailed the Company's Fiscal Year 1993
restructuring plan, which resulted in the reversal of $1,000 of accrued
restructuring costs. The reversal of the accrued restructuring costs related
principally to the termination of further re-alignment of production facilities
and other operational changes associated with previous acquisitions. In
addition, in connection with the fourth quarter Fiscal Year 1995 sale of Gloria
Jean's, the Company disposed of certain leasehold rights, which were included in
the Fiscal Year 1993 restructuring accrual. Accordingly, the Company offset
remaining accrued restructuring costs of $440 against the loss on the disposal
of retail operations.

     In connection with the Disposition Plan, described in Note 2 above, the
Company accrued $291 and $1,945 of restructuring costs during Fiscal Years 1996
and 1995, respectively. The Company did not make an accrual during Fiscal Year
1997. The Company reduced its sales, marketing and administrative staff by 25%
during Fiscal Year 1995 and consolidated production and warehouse facilities.
The $291 accrual for restructuring costs during Fiscal Year 1996 was for
severance costs of 59 manufacturing personnel related to the closing of the
Denver, Colorado and Pittsburgh, Pennsylvania roasting and packaging facilities.
The $1,945 accrual for restructuring costs during Fiscal Year 1995 was for
severance of $1,070 for certain personnel (three corporate executives and 34
sales, marketing and administrative personnel) and plant consolidation of $875.
Cash payments related to restructuring of approximately $342 and $1,106 were
made during Fiscal Years 1997 and 1996, respectively.

A summary of accrued restructuring costs during Fiscal Years 1997, 1996 and 1995
are as follows:
<TABLE>
                                                  1997         1996         1995
                                                  ----         ----         ----
<S>                                              <C>          <C>          <C>
Beginning Balance                                $   373      $ 1,539      $ 2,470
Cash payments                                      (342)       (1,106)        (758)
Suspension of 1993 restructuring
 plan                                                 --           --       (1,000)
Restructuring charges                                 --          291        1,945
Elimination of certain costs due to
 discontinued retail operations                       --           --         (440)
Restructuring charges affecting
 noncurrent assets                                   (2)        (351)           --
Non-cash change in accounting
 estimate                                             --           --         (678)
                                                 -------      -------      -------
Ending Balance                                   $    29      $   373      $ 1,539
                                                 -------      -------      -------
                                                 -------      -------      -------
</TABLE>

NOTE 5 - INCOME TAXES

     Due to the Company's federal net operating loss position at December
26, 1997, December 27, 1996 and December 29, 1995, there were no provisions for
income taxes from continuing operations for such years. Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax


                                     F-16
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         BROTHERS GOURMET COFFEES, INC.
                                December 26, 1997
                      (in thousands, except share amounts)

purposes. Significant components of the Company's deferred income tax assets and
liabilities at December 26, 1997 and December 27, 1996, are as follows:
<TABLE>
                                                       1997        1996
                                                       ----        ----
<S>                                                  <C>          <C>
Deferred tax assets:
  Allowance for doubtful accounts                    $    784     $   632
  Accrued restructuring costs                              11         144
  Other accrued liabilities                               174         150
  Noncompete agreements                                 1,527       1,232
  Inventories                                             445         819
  Accrued litigation settlement                            --       2,123
  Net operating loss carry forwards                    13,797       7,669
  Other                                                   366          79
                                                     --------     -------
                  Total deferred tax assets            17,104      12,848
    Valuation allowance for deferred tax assets       (14,504)     10,752)
                                                     --------     -------
Net deferred tax assets                                 2,600       2,096
                                                     --------     -------
Deferred tax liabilities:
 Plant and equipment                                    1,830       1,491
 Other                                                    770         605
                                                     --------     -------
    Total deferred tax liabilities                      2,600       2,096
                                                     --------     -------
                  Net deferred taxes                 $     --     $    --
                                                     --------     -------
                                                     --------     -------
</TABLE>

     Included in the tax benefit relating to net operating loss carry
forwards is a $2,356 benefit that will be credited to stockholders' equity in
the period in which the benefit is recognized.

     At December 26, 1997 the Company had consolidated net operating loss
carry forwards of approximately $54,738, which expire in Fiscal Years beginning
2005 through 2012, and capital loss carry forwards of approximately $5,860,
which expire in Fiscal Years beginning 2000 through 2001.

     SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
After consideration of all the evidence, both positive and negative, management
has determined that a $14,504 valuation allowance at December 26, 1997 is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The change in the valuation allowance for the current 
year is $3,752.

     The reconciliation of income tax rates on loss before extraordinary
item, computed at the U.S. federal statutory tax rates, to reported income tax
expense is as follows:
<TABLE>
                                          1997         1996         1995
                                          ----         ----         ----
<S>                                      <C>          <C>          <C>
Tax at U.S. statutory rates              (34.0%)      (34.0%)      (34.0%)
State income taxes, net of
  federal tax benefit                    ( 4.6%)      ( 4.6%)      ( 4.6%)
Valuation allowance adjustments           38.6%        38.6%        38.6%
                                         -----        -----        -----
                                            --%          --%          --%
                                         -----        -----        -----
                                         -----        -----        -----
</TABLE>


                                     F-17
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         BROTHERS GOURMET COFFEES, INC.
                                December 26, 1997
                      (in thousands, except share amounts)


NOTE 6 - STOCKHOLDERS' EQUITY

     The terms of a subordinated note, dated December 30, 1992, provided for
the issuance of warrants by the Company enabling the holders of the warrants to
acquire 1,146,024 shares of the Company's common stock at a purchase price of
$8.67 per share. As of December 26, 1997, none of these warrants have been
exercised.

     The terms of the Subordinated Note provided for the issuance of a
warrant to purchase up to 1,245,000 shares of the Company's common stock. In
connection with the closing of the Subordinated Note, the Company also issued a
warrant to an affiliate of its investment banker to acquire 400,000 shares of
the Company's common stock at a purchase price of $3.44 per share, which was
subsequently reduced to a purchase price of $1.56 during Fiscal Year 1997. Also,
in connection with the closing of the Bridge Facility, the Company issued a
warrant to the lender to acquire 100,000 shares at a purchase price of $3.00 per
share, which was subsequently reduced to a purchase price of $1.56 during Fiscal
Year 1997. Finally, as part of the closing of the 1996 Revolver and Term Loan,
the Company issued warrants enabling the holders to acquire 103,626 shares of
the Company's common stock at an exercise price of $3.00 per share. See Note 3
for warrant terms and valuation considerations. The Company recorded additional
paid in capital and original issue discount for the estimated fair value of the
above-mentioned warrants. At December 26, 1997, none of these warrants had been
exercised.

     On December 9, 1997, following the acquisition of its Credit Facility by 
GSCP, the Company issued warrants to purchase 400,000 shares of the Company's 
common shares at a purchase price of $1.50 per share. At December 26, 1997, 
none of these warrants had been exercised. See Note 3 for warrant terms and 
valuation considerations

     At December 26, 1997, there were 4,119,687 shares of the Company's common 
stock reserved for issuance upon the exercise of stock options (see Note 7 
below) and warrants outstanding.

NOTE 7 - STOCK OPTION PLANS

     The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123 requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.

     1990 NON-QUALIFIED PLAN: This plan provided for grants to certain
former members of the Board of options to purchase shares of the Company's
common stock. The term of such options is ten years from the date of grant. In
March 1993, the Non-Qualified Plan was suspended and no additional options may
be granted thereunder. During Fiscal Year 1995, options to purchase 24,858
shares of the Company's common stock were exercised, resulting in net proceeds
to the Company of $35.

     1990 MANAGEMENT INCENTIVE STOCK OPTION PLAN: Options granted under the
1990 Management Incentive Stock Option Plan, a qualified plan (the "1990 Plan"),
are exercisable at prices equal to the quoted


                                     F-18
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         BROTHERS GOURMET COFFEES, INC.
                                December 26, 1997
                      (in thousands, except share amounts)

market value of the Company's common stock on the date the option is granted
(110% for eligible employees owning more than a 10% voting interest in the
Company). The term of the options is ten years (five years for employees holding
more than a 10% voting interest in the Company) from the date of the grant.

     AMENDED AND RESTATED STOCK OPTION PLAN: In March 1993, the Company
adopted an Amended and Restated Stock Option Plan, a qualified plan (the "1993
Plan"). The 1993 Plan provides for the reservation of a total of 1,050,000
shares of the Company's common stock. The 1993 Plan provides for the grant of
incentive stock options, nonqualified stock options and common stock awards.
During Fiscal Year 1995, options to purchase 22,700 shares were exercised under
the Plan, resulting in proceeds of $223 to the Company.

     OTHER PLAN:  The Company may grant additional options to key employees, 
officers, directors and consultants of the Company not covered under one of 
the above plans.

     Pro forma information regarding net loss and loss per share is required
by SFAS No. 123, which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS No. 123. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996 and 1995, respectively: risk free interest rates of 7.0%; a dividend yield
of 0%; volatility factors of the expected market price of the Company's common
stock of .56, .505 and .556; and a weighted average expected life of the option
of four years.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
                                          1997            1996            1995
                                          ----            ----            ----
<S>                                    <C>              <C>             <C>
     Pro forma net loss                $(12,749)        $(11,409)       $(57,155)

     Pro forma loss per share          $  (1.01)        $  (1.02)       $  (5.11)

</TABLE>


                                     F-19

<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         BROTHERS GOURMET COFFEES, INC.
                                December 26, 1997
                      (in thousands, except share amounts)

A Summary of the activity with respect to the various stock option plans
follows:
<TABLE>
                                        WEIGHTED             WEIGHTED                WEIGHTED                WEIGHTED
                                         AVERAGE              AVERAGE                 AVERAGE                 AVERAGE
                              NON       EXERCISE             EXERCISE                EXERCISE                EXERCISE
                            QUALIFIED   PRICE PER    1990    PRICE PER     1993      PRICE PER     OTHER     PRICE PER
                              PLAN        SHARE      PLAN      SHARE       PLAN        SHARE      OPTIONS      SHARE
                             -----------------------------------------------------------------------------------------
<S>                         <C>         <C>         <C>      <C>         <C>         <C>          <C>        <C>
Balance at
December 30, 1994            114,845      $1.40     35,250     $10.00     953,500      $12.39     995,000      $14.38
Granted                           --         --         --         --     100,000      $ 6.50          --          --
Exercised                     24,858      $1.40         --         --     (22,700)     $10.00          --          --
Forfeited/expired                 --         --         --         --    (464,500)     $12.02          --          --
                             -------                ------               --------                 -------
Balance at
December 29, 1995             89,987      $1.40     35,250     $10.00     566,300      $11.74     995,000      $14.38
Granted                           --         --         --         --     458,000      $ 3.62          --
Exercised                         --         --         --         --          --          --          --
Forfeited/expired                 --         --         --         --    (367,667)     $10.51    (420,000)     $19.03
                             -------                ------               --------                --------
Balance at                                                        
December 27, 1996             89,987      $1.40     35,250     $10.00     656,633      $ 5.91     575,000      $10.98
Granted                           --         --         --         --     103,384      $ 2.71          --          --
Exercised                         --         --         --         --          --          --          --          --
Forfeited/expired                 --         --         --         --    (238,000)     $ 7.74          --          --
                             -------                ------               --------                --------      ------
Balance at                                                        
December 26, 1997             89,987      $1.40     35,250     $10.00     522,017      $ 4.37     575,000      $10.98
                             -------                ------               --------                --------
                             -------                ------               --------                --------
Options exercisable at:                                             
December 29, 1995             89,987      $1.40     35,250     $10.00     349,333      $11.95     725,000      $12.29
December 27, 1996             89,987      $1.40     35,250     $10.00     352,333      $ 7.43     575,000      $10.98
December 26, 1997             89,987      $1.40     35,250     $10.00     271,233      $ 5.20     575,000      $10.98
Weighted average fair                        
  value of options granted                   
Fiscal Year 1995                             --                    --                  $ 1.60                      --
Fiscal Year 1996                             --                    --                  $ 1.69                      --
Fiscal Year 1997                             --                    --                  $ 1.36                      --
</TABLE>

                                     F-20
<PAGE>
                                       

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         BROTHERS GOURMET COFFEES, INC.
                                December 26, 1997
                      (in thousands, except share amounts)
<TABLE>
                                                            WEIGHTED     WEIGHTED                    WEIGHTED
                                                             AVERAGE      AVERAGE                     AVERAGE
                              RANGE OF           NUMBER     EXERCISE     REMAINING     NUMBER OF    EXERCISABLE
                              EXERCISE         OF OPTIONS   PRICE PER   CONTRACTUAL   EXERCISABLE    PRICE PER
     PLAN                      PRICES         OUTSTANDING     SHARE        LIFE         OPTIONS        SHARE
     ----                      ------         -----------     -----        ----         -------        -----
<S>                       <C>                 <C>           <C>         <C>           <C>           <C>
Non Qualified Plan        $           1.40       89,987       $ 1.40     2.4 years       89,897        $ 1.40
                                                                                                     
1990 Plan                 $          10.00       35,250       $10.00     2.4 years       35,250        $10.00
                                                                                                     
1993 Plan                 $  2.44 to $3.75      473,384       $ 3.44     8.3 years      227,000        $ 3.64
                          $          10.00       18,300       $10.00     5.6 years       18,300        $10.00
                          $          15.50       30,333       $15.50     6.2 years       25,933        $15.50
                                                                                                    
Other options             $           8.67      112,500       $ 8.67      5 days        112,500        $ 8.67
                          $10.00 to $11.00      350,000       $10.57      4 years       350,000        $10.57
                          $          14.57      112,500       $14.57      5 days        112,500        $14.57

</TABLE>

                                      F-21

<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         BROTHERS GOURMET COFFEES, INC.
                                December 26, 1997
                      (in thousands, except share amounts)

NOTE 8 - COMMITMENTS

     LEASE COMMITMENTS - CONTINUING OPERATIONS: The Company has entered into
several non-cancelable operating leases for office space, manufacturing and
distribution facilities and vehicles which expire at varying dates through 2006.
Future commitments under these agreements at December 26, 1997 are as follows:
Fiscal Year 1998--$958; Fiscal Year 1999--$673; Fiscal Year 2000--$139; Fiscal
Year 2001--$59; Fiscal Year 2002--$53 and thereafter--$184. See Note 2 for a
discussion of the Company's non-cancelable operating lease obligations for its
remaining Coffee Bars.

     Rental expense for Fiscal Years 1997, 1996 and 1995 was $1,395, $1,136
and $1,701, respectively.

     PURCHASE COMMITMENTS: The Company contracts for the future purchase and
delivery of green coffee beans to ensure an adequate supply of quality green
coffee beans necessary to support planned production schedules. Purchase
commitments are generally for three to twelve months into the future. Purchase
commitments for certain varieties of green coffee beans are price fixed at the
time the commitment is made. The Company also contracts for future delivery of
green coffee beans where the price floats at a fixed differential to the spot
market for green coffee beans. At December 26, 1997, the Company had purchase
commitments of $7,821 and $5,361 under fixed and variable price contracts,
respectively.

     The Company believes, based on relationships established with its 
suppliers, that the risk of non-delivery on purchase commitments is remote. 
There can be no assurance that the Company's forward purchase commitments will 
successfully protect the Company against the risk of higher coffee prices or 
that such activities will not result in the Company having to pay 
substantially more for its coffee supply than it would have been required to 
pay absent such activities.

     PROMOTIONAL FEE COMMITMENTS: The Company has entered into non-cancelable 
agreements which expire through Fiscal Year 1999 for expansion of its product 
into new markets. At December 26, 1997, the Company had commitments under 
these non-cancelable agreements totalling $1,456.

     The Company has a contractual commitment with a major customer to 
increase the customer's sales for the Company's products by certain minimum 
percentages over the life of the three-year contract which commenced in April 
1997. If these minimum growth requirements are not met, the Company will be 
required to pay the major customer for the profit shortfalls up to $1,000.

NOTE 9 - CONTINGENCIES

     GLORIA JEAN'S FRANCHISE LITIGATION: In June 1994, a former franchisee
filed suit against Edglo Enterprises, Inc., the parent of Gloria Jean's
("Edglo"). The former franchisee claimed, among other things, that Edglo made
material misrepresentations and omissions and failed to provide appropriate
expertise and support. The former franchisee was seeking damages of $3.9 million
plus punitive damages of three time's actual damages as well as attorney's fees.
The Company sold Edglo to Second Cup in 1995. In connection therewith, the
Company agreed to indemnify Second Cup for any costs associated with the Gloria
Jean's Franchise Litigation. In April 1997, the parties entered into a
settlement agreement and release, pursuant to which (a) the defendants agreed to
pay $2,200 in cash and to deliver 76,667 shares of the Company's common stock
to the plaintiffs' in satisfaction of all of their claims. The $2,200 was funded
as follows: (a) $2,015 from the Company (of which approximately $992 was funded
out of the escrowed purchase price from the sale of Gloria Jean's), and (b) $185
from other defendants and their counsel. The Company issued 76,667 shares of
its common stock to the plaintiffs in January 1998.

     SHAREHOLDER LAWSUITS: The Company was a defendant in two different
class action lawsuits, a federal securities class action and a state law
derivative class action (the "Shareholder Lawsuits"). The federal securities
class action alleged, among other things, violations of federal securities laws
in connection with the Company's initial public offering (IPO), and
misstatements in certain of the Company's subsequent securities law filings. The
state law derivative class action alleged, among other things, breach of
fiduciary duty and waste of corporate assets. In April 1997, the court approved
the settlement of the Shareholder Lawsuits on the following terms: (a) the
plaintiff class received $3,000 in cash and the Company agreed to transfer to
the plaintiff class 1,848,118 shares of its freely tradeable Common Stock, (b)
the parties entered


                                     F-22
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         BROTHERS GOURMET COFFEES, INC.
                                December 26, 1997
                      (in thousands, except share amounts)

into mutual general releases and (c) the Shareholder Lawsuits were dismissed.
The Company's insurance carrier and other defendants funded the $3,000 cash
settlement. The Company issued 462,029 and 1,386,089 shares of its
freely-tradeable common stock to the plaintiffs' counsel and the plaintiffs in
July 1997 and January 1998, respectively. In December 1997, the Company received
166,066 shares of its common stock from one of the other defendants in the
litigation in exchange for a release from the Company of all potential claims
arising out of, or related to, the litigation.

     KONA COFFEE CLASS ACTION: In January 1997, the Company was named as a
defendant in a class action lawsuit filed by a group of coffee producers. The
plaintiffs have alleged that the defendants, which includes various retailers,
distributors and roasters of coffee, conspired to, and did in fact, flood the
world wide markets with cheaper and inferior grades of coffee under the false
label "Kona Coffee" and that such actions artificially depressed the price of
the plaintiffs' coffee crops, damaged the reputation enjoyed by Kona Coffee and
wrongfully allowed the defendants to achieve extraordinary profits which should
be disgorged to the plaintiffs. In January 1998, the Court approved a
magistrate's ruling, which granted the defendants' motion to deny class
certification of the litigation. The plaintiffs are in the process of appealing
this ruling.

     In January 1998, the Company's insurer notified the Company that it had
agreed to assume defense of the case, subject to its standard reservation of
rights. The insurer is reviewing the legal and other litigation-related bills
paid to date by the Company for the purpose of determining which bills it will
reimburse to the Company.

     The defendants, including the Company, are in negotiations with the
plaintiffs to settle this litigation. In the meantime, pending the results of
those negotiations, the Company intends to continue to defend vigorously this
litigation. It is not possible at this time to predict the outcome of this
litigation.

     ADAMS & WABASH COFFEE BAR: In December 1996, a landlord sued the
Company, as guarantor on the lease, for the unpaid rents, other damages,
expenses and attorney fees. In June 1997, the landlord obtained a judgment
against the Company for $350. In January 1998, the Company and the landlord
settled the claim for $250, and the landlord dismissed the suit and terminated
the lease with the Company. At December 26, 1997, the claim was included in
accrued loss and other costs for discontinued retail operations.

     NASSAU & LIBERTY COFFEE BAR: In 1997, a landlord sued and obtained a
judgment against the Company for unpaid rents through February 1996, costs and
attorney's fees totaling $128. The landlord has filed another action against the
Company for unpaid rents from March 1996 through June 1997 totaling $270. The
company is appealing the court decision and has posted a bond to stay collection
of any part of the judgment pending the decision on the appeal. The Company has
estimated $111 to settle this claim and has reserved for this contingency in
accrued loss and other costs for discontinued retail operations.

     EMPLOYEE LITIGATION. A former officer has sued the Company in Florida
state court for (1) $375 in fees allegedly owed to him for consulting services
that he rendered to the Company in 1995, (2) approximately $18 of out-of-pocket
expenses incurred by him in rendering such consulting services and (3)
attorneys' fees and costs. The lawsuit alleges breach of an oral consulting
contract, detrimental reliance by the former officer and quantum merit. The
Company believes that it agreed to pay the consulting fees sought by the former
officer only if it successfully completed a strategic alliance transaction in
1995. Such a transaction never occurred. The Company has offered to pay the
former officer $30 in complete settlement


                                     F-23

<PAGE>



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         BROTHERS GOURMET COFFEES, INC.
                                December 26, 1997
                      (in thousands, except share amounts)

of all of his claims (consisting of the former officer's out-of-pocket expenses
plus $12; any remaining amounts being referred to herein as the "Disputed
Claims"). The former officer has not responded to the Company's offer. In the
meantime, the parties have continued to conduct discovery. In the event the
former officer does not accept the Company's settlement offer, the Company
intends to continue to defend vigorously the Disputed Claims. It is not possible
at this time to predict the outcome of this litigation.

     SECOND CUP WARRANTY CLAIMS/LITIGATION: In connection with the sale of
Gloria Jean's business, the Company indemnified Second Cup for representations
and warranties under the Purchase Agreement. In January 1998, the Company agreed
to release $441 of the sales proceeds held in escrow to Second Cup for the
settlement of outstanding claims. The Company and Second Cup are currently
negotiating the settlement of claims totaling $1,319. The amount of certain
claims is not determinable at December 26, 1997. The Company disputes certain
claims and amounts of certain claims. The Company has provided $400 in accrued
loss and other costs for discontinued retail operations for such claims. Sales
proceeds of $967 are still being held in escrow to pay any remaining obligations
under the Purchase Agreement.

     COFFEE BAR RECEIVABLES/OBLIGATIONS: In December 1996, in connection
with the sale of its seven (7) Chicago coffee bars, the Company permitted the
purchaser to defer payment of a receivable for the remaining $500 of sales
proceeds at an annual interest rate of 9.5%. The Company is currently
negotiating with the purchaser for the collection of these proceeds. In
addition, the Company remains as guarantor on thirteen (13) of the coffee bar 
leases sold and assigned to this purchaser. Future commitments under these
non-cancelable lease agreements at December 26, 1997 are as follows: Fiscal Year
1998 -- $801; Fiscal Year 1999 -- $813; Fiscal Year 2000 -- $742; Fiscal Year
2001 -- $742; Fiscal Year 2002 -- $373; and thereafter $563. The Company could
be required to honor its guarantee of these leases which could have a material
adverse affect on the Company's results of operations and its financial
condition.

NOTE 10 - RELATED PARTY TRANSACTIONS

     The Secretary and Special Counsel to the Company's Board of Directors is 
a shareholder of one law firm and was a partner of another legal firm that the 
Company paid legal services and reimbursement of expenses totaling $508, $231, 
and $585 during Fiscal Years 1997, 1996, and 1995, respectively.

NOTE 11 - MANAGEMENT'S PLANS

     The Company (1) reported a net loss of approximately $12,673 for the 
year ended December 26, 1997, (2) incurred cumulative losses for the three 
years ended December 26, 1997 aggregating approximately $80,980 and (3) 
reported negative cash flows from operations for the year ended December 26, 
1997 of $747.  At December 26, 1997, the Company had (a) working capital of 
approximately $10,195, (b) borrowing availability under its restated credit 
facility of $4,629 and (c) shareholders' equity of approximately $57,760.  
The loss of certain customers, higher costs of green coffee, resulting in 
decreased demand for gourmet coffee, and additional loss provisions to exit 
retail operations, adversely affected the Company's results of operations and 
financial condition in 1997.  The Company's 1998 operating plan contemplates 
focusing activities on expanding net sales through new and existing channel 
development and new and existing customers.  Green coffee costs have 
decreased and it is anticipated that consumer demand will increase.  The 
Company's plan also contemplates implementing additional cost controls.  
Although management believes that it will be successful in implementing its 
1998 operating plan, there can be no assurance that the Company will be able 
to do so.

NOTE 12 - SUBSEQUENT EVENT

     In March 1998, the Company announced that it had retained the investment 
banking firm of Schroder & Co., Inc., ("Schroder") to help it evaluate the 
Company's brand, business and growth strategy and to identify potential 
methods and opportunities to enhance shareholder value. The Company has formed 
a special committee of the Board to evaluate potential transactions and 
opportunities presented by Schroder. In connection with the retention of 
Schroder, the Board has approved stay bonus arrangements for certain key 
employees to retain their services in the event the Company enters into a 
transaction. At this time, the Company is exploring possible transactions and 
has not entered into, and is not obligated to enter into, any agreement with 
any third party to proceed with any transaction.


                                     F-24

<PAGE>

                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                        BROTHERS GOURMET COFFEES, INC.
                                (in thousands)
<TABLE>
                                                      CHARGED
                                         BALANCE AT   TO COSTS     CHARGED                    BALANCE AT
                                         BEGINNING       AND       TO OTHER                     END OF
DESCRIPTION                              OF PERIOD    EXPENSES     ACCOUNTS     DEDUCTION       PERIOD
-----------                              ---------    --------     --------     ---------       ------
<S>                                      <C>          <C>          <C>          <C>           <C>
Year ended December 29, 1995: 
Deducted from asset accounts:
  Allowance for doubtful accounts         $ 2,055      $6,186       $  678(3)     $7,174(1)     $ 1,745
  Reserve for obsolete inventory              353                                     53(2)         300
  Valuation allowance for deferred
   tax assets                               4,656                    3,336                        7,992
                                          -------      ------       ------        ------        -------
    Totals                                $ 7,064      $6,186       $4,014        $7,227        $10,037
                                          -------      ------       ------        ------        -------
                                          -------      ------       ------        ------        -------
Year ended December 27, 1996: 
  Deducted from asset accounts:
  Allowance for doubtful accounts         $ 1,745      $  892       $             $  871(1)     $ 1,766
  Reserve for obsolete inventory              300         353                        382(2)         271
  Valuation allowance for deferred
   tax assets                               7,992                    2,760                       10,752
                                          -------      ------       ------        ------        -------
    Totals                                $10,037      $1,245       $2,760        $1,253        $12,789
                                          -------      ------       ------        ------        -------
                                          -------      ------       ------        ------        -------
Year ended December 26, 1997: 
  Deducted from asset accounts:
  Allowance for doubtful accounts         $ 1,766      $  626       $   --        $  850(1)     $ 1,542
  Allowance for doubtful proceeds         
   from sale of discontinued retail       
   operations                                  --         300           --            --            300
  Reserve for obsolete inventory              271       1,074           --           971(2)         374
  Valuation allowance for deferred        
   tax assets                              10,752          --        3,752            --         14,504  
                                          -------      ------       ------        ------        -------  
    Totals                                $12,789      $2,000       $3,752        $1,821        $16,720 
                                          -------      ------       ------        ------        -------
                                          -------      ------       ------        ------        -------
</TABLE>

(1) Uncollectible accounts written off, net of recoveries. 
(2) Unsalable inventory written off during the year. 
(3) Change in accounting estimate associated with restructuring expense.

                                     S-1
<PAGE>


                           BROTHERS GOURMET COFFEES, INC.
                        EXHIBITS TO ANNUAL REPORT ON FORM 10-K
                     FOR THE FISCAL YEAR ENDED DECEMBER 26, 1997

     All exhibits listed hereunder, unless otherwise indicated, have 
previously been filed as exhibits to (1) Registration Statement No. 33-70236 
(effective December 9, 1993) and/or (2) subsequent Forms 10-Q, 10-Q/A,  Forms 
10-K and/or Forms 8-K, when and as so indicated.  Such exhibits have been 
filed with the Securities and Exchange Commission ("Commission") pursuant to 
the requirements of the Acts administered by the Commission.  Such exhibits 
are incorporated herein by reference under Rule 24 of the Commission's Rules 
of Practice and Investigations.

Exhibit
Number                        Description
------                        -----------
3.1     Restated Certificate of Incorporation.

3.2     Certificate of Amendment to Restated Certificate of Incorporation
        (incorporated by reference to the Company's Report on Form 10-Q, filed
        August 11, 1997).

4       Specimen of Common Stock Certificate.

4.1     Restated Bylaws (incorporated by reference to the Company's Current 
        Report on Form 8-K, filed March 2, 1995).

4.2     Rights Agreement between the Company and Chemical Bank, dated as of 
        March 31, 1995, which includes the Certificate of Designation in respect
        of the Series A Preferred Stock as Exhibit A thereto, the form of Right
        Certificate as Exhibit B thereto and the Summary of Rights to Purchase
        Series A Preferred Stock as Exhibit C thereto (incorporated by reference
        to the Company's Current Report on Form 8-K, filed April 11, 1995).
 
10.1    Form of Indemnification Agreement.
        
10.2    Stock Purchase Agreement among the Company, Chock Full O'Nuts 
        Corporation and Hillside Holding Corporation dated October 8, 1993.

10.3    Stock Purchase Agreement among the Company and all of the stockholders
        of Edglo Enterprises dated October 6, 1993.

10.4    Amended and Restated Stock Option Plan, dated March 1993, as amended.*
        
10.5    Management Incentive Stock Option Plan dated June 5, 1990, as amended.*
        
10.6    Non-Qualified Stock Option Plan dated June 5, 1990, as amended.*
<PAGE>

                           BROTHERS GOURMET COFFEES, INC.
                        EXHIBITS TO ANNUAL REPORT ON FORM 10-K
                     FOR THE FISCAL YEAR ENDED DECEMBER 26, 1997

10.7    Registration Rights Agreement among the Company and Several Investors 
        dated as of December 30, 1992.

10.8    Registration Rights Agreement among the Company, J.H. Whitney & Co.,
        Whitney 1990 Equity Fund, L.P. and Whitney Subordinated Debt Fund, L.P.
        dated as of December 30, 1992.

10.9    Registration Rights Agreement among the Company and Several Investors 
        dated as of November 19, 1993.

10.10   Registration Rights Agreement between the Company and Steven Shulman
        dated as of November 18, 1993.

10.11   First Amendment to Amended and Restated Executive Employment Agreement
        between the Company and Dennis Boyer, dated as of April 17, 1995
        (incorporated by reference to the Company's Quarterly Report filed on
        Form 10-Q for the fiscal quarter ended March 31, 1995).

10.12   Severance Agreement between the Company and Michael J. Carlin, dated
        as of April 26, 1995 (incorporated by reference to the Company's
        Quarterly Report filed on Form 10-Q for the fiscal quarter ended
        March 31, 1995).

10.13   Stock Purchase Agreement by and between Brothers Retail Corp. and The
        Second Cup Ltd., dated October 16, 1995, as amended by that certain
        Amendment to Stock Purchase Agreement, dated November 9, 1995, by and
        between Brothers Retail Corp. and Gloria Jean's Inc., as assignee of
        The Second Cup Ltd. (incorporated by reference to the Company's
        Quarterly Report filed on Form 10-Q for the fiscal quarter ended
        September 30, 1995).

10.14   Agreement of Sale by and among Diedrich Coffee (as Purchaser) and
        Brothers Coffee Bars, Inc. and Brothers Gourmet Coffees, Inc. (as
        Sellers), dated as of February 23, 1996 (incorporated by reference to
        the Company's Annual Report on Form 10-K for the fiscal year ended
        December 29, 1995).

10.15   Executive Employment Agreement by and between the Company and Mr.
        Donald Breen, dated as of January 18, 1996 (incorporated by reference
        to the Company's Annual Report on Form 10-K for the fiscal year ended
        December 29, 1995). 
<PAGE>

                           BROTHERS GOURMET COFFEES, INC.
                        EXHIBITS TO ANNUAL REPORT ON FORM 10-K
                     FOR THE FISCAL YEAR ENDED DECEMBER 26, 1997

10.16   Agreement of Sale by and among Foster Brothers Corporation and
        Brothers Coffee Bars, Inc., Brothers Gourmet Coffees, Inc., and
        Brothers Retail Corp., and joined in by Kent Foster, dated as of 
        March 27, 1996 (incorporated by reference to the Company's Quarterly 
        Report filed on Form 10-Q for the fiscal quarter ended March 28, 1996).

10.17   Loan and Security Agreement, by and among Brothers Gourmet Coffees,
        Inc., as borrower, and Sanwa Business Credit Corporation, as agent and
        lender, dated as of May 29, 1996 (incorporated by reference to the
        Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
        June 28, 1996). 

10.18   Agreement of Sale by and among Foster Brothers Corporation and
        Brothers Coffee Bars, Inc., and Brothers Gourmet Coffees, Inc., and
        joined in by Kent Foster, dated as of May 30, 1996.

10.19   Credit Support Agreement, by and among Brothers Gourmet Coffees, Inc.,
        J.H. Whitney & Co. and J.P. Bolduc, dated as of May 29, 1996
        (incorporated by reference to the Company's Quarterly Report on
        Form 10-Q for the fiscal quarter ended June 28, 1996). 

10.20   Securities Purchase Agreement, by and among Brothers Gourmet Coffees,
        Inc., as borrower, and Siena Capital Partners, L.P., as lender, dated
        as of September 20, 1996 (incorporated by reference to the Company's
        Quarterly Report on Form 10-Q for the fiscal quarter ended
        September 27, 1996).

10.21   First Amendment and Consent to Loan and Security Agreement, by and
        among Brothers Gourmet Coffees, Inc., as borrower, and Sanwa Business
        Credit Corporation, as agent and lender, dated as of September 20,
        1996 (incorporated by reference to the Company's Quarterly Report on
        Form 10-Q for the fiscal quarter ended September 27, 1996).

10.22   Second Amendment and Consent to Loan and Security Agreement, by and
        among Brothers Gourmet Coffees, Inc., as borrower, and Sanwa Business
        Credit Corporation, as agent and lender, dated as of December 27, 1996
        (incorporated by reference to the Company's Report on Form 8-K, dated
        January 10, 1997).

10.23   Senior Subordinated Note Agreement, by and among Brothers Gourmet
        Coffees, Inc., as borrower, and Dilmun Financial Services, as lender,
        dated as of December 27, 1996 (incorporated by reference to the
        Company's Report on Form 8-K, dated January 10, 1997).
<PAGE>

                           BROTHERS GOURMET COFFEES, INC.
                        EXHIBITS TO ANNUAL REPORT ON FORM 10-K
                     FOR THE FISCAL YEAR ENDED DECEMBER 26, 1997

10.24   Forbearance  Agreement, by and between the Company and Sanwa, dated as
        of May 15, 1997 (incorporated by reference to the Company's Report of
        Form 10-Q/A, dated June 13, 1997).  

10.25   Second Amendment to Forbearance Agreement, by and between the Company
        and Sanwa, dated as of August 15, 1997 (incorporated by reference to
        the Company's Report of Form 10-Q, dated November 14, 1997).  

10.26   Third Amendment to Forbearance Agreement, by and between the Company
        and Sanwa, dated as of October 31, 1997 (incorporated by reference to
        the Company's Report of Form 10-Q, dated November 14, 1997).  

10.27   Fourth Amendment to Forbearance Agreement, by and between the Company
        and Sanwa, dated as of November 28, 1997 (incorporated by reference to
        the Company's Report of Form 10-Q, dated November 14, 1997).

10.28   Amended and Restated Loan and Security Agreement, by and among the
        Company (as borrower), the Lenders named therein and Goldman Sachs
        Credit Partners, L.P. as agent and Lender, dated as of December 9,
        1997.**

10.29   Subordination Agreement, by and among Sanwa, Dilmun and BIB Holdings
        (Bermuda) Ltd, dated as of December 27, 1996.**  
 
10.30   First Amendment to (Mr. Breen's) Executive Employment Agreement.**

10.31   Letter from Ernst & Young LLP regarding Change of Accounting Method
        (incorporated by reference  to the Company's Report on Form 10-Q,
        dated August 11, 1997)

10.32   Common Stock Purchase Warrant between the Company and Brothers Warrant
        Holdings I, dated as of December 27, 1996.** 
 
10.33   Amendment to Common Stock Purchase Warrant between the Company and
        Brothers Warrant Holdings I, dated as of December 9, 1997.**

10.34   Common Stock Purchase Warrant between the Company and Siena Capital
        Partners, L.P., dated as of September 20, 1996.**  

10.35   Amendment to Common Stock Purchase Warrant between the Company and
        Siena Capital Partners, L.P., dated as of December 9, 1997.**  
<PAGE>

                           BROTHERS GOURMET COFFEES, INC.
                        EXHIBITS TO ANNUAL REPORT ON FORM 10-K
                     FOR THE FISCAL YEAR ENDED DECEMBER 26, 1997

10.36   Common Stock Purchase Warrant between the Company and Goldman Sachs
        Credit Partners, L.P., dated as of December 9, 1997.** 

10.37   Form of Senior Management Stay Bonus Letter.**

10.38   Form of Key Employee Stay Bonus Letter.**

10.39   First Amendment to Amended and Restated Loan and Security Agreement, 
        dated as of March 27, 1998.**

21      List of Subsidiaries.**

23      Consent of Ernst & Young LLP.**

27      Financial Data Schedule.**

----------------------
*    Compensatory plans in which directors and officers participate and which
     are not available to all employees.

**   Filed herewith.